Lengthy (phew!) summary of conference call follows. Enjoy. To others who listened in, any comments, corrections, additions?
Dan
The meeting started with Tom Wiens giving a summary opf the quarter and year, Pretty much a review of the press release. Some of his comments were:
They are confident of their ability to continues the dramatic trends into 1998 (almost exact words).
The acquisition pipeline is full.
Actions are sending a signal to the marketplace. As a result, high quality companies are seeking out RECY to be acquired. Acquisition activity is taking place in Colorado offices - they don't have to seek them out as much. Some of the companies are larger than they have acquired thus far.
The impact from acquisition is they have acquired some excellent management skills thay can apply to other acquisitions. Examples:
Frank Brenner (sp?) of North Carolina
Providdes more legs on the road for acquisitions, strong in analytical work, experience in the business, etc.
Central metals Marty Cogin - Provides management information system and expertise - believed best in industry (by RECY), will spread to other locations.
The plan is being executed, market risk of execution declining as they perform.
Opportunities to expand and implement beyond the 250M run rate is great.
Believe they will close more acquisitions in 1998.
Questions (summary of response and questions):
Will move brokerage strategy to a more consolidated effort. FOB value to the steel mill will be the same. Saving s to RECY via finaincing, transports, other items.
Last quarter showed a loss of one cent vs positive earning the prior quarters - why?
Complete managament change took place
Changes in operation due to corporate policy
Some expenses - all stabilized and then some (note "and then some").
First plants purchased were not as good as newer acquisitions. Last Q of 97 represented the older plants.
New acquisitions in operations only the last three weeks of December.
Next quarter or two, these problems will be gone
Yes, will be accretive
New facilities very good - meeting expectations.
In response to a question on need to more communication in laymen's terms, Luke Botica responded that they are prepared to take people through a layman version of SEC filings - The best way is on a one on one basis and they are prepared to do that. (Read call them to discuss).
Is management comfortable with analysts projections of a $1B to $1.5B revenue run rate for 1998?
Can't say. But "the GOAL for the end of CALENDAR year 1998 is for a $1B run rate"
A few balance sheet numbers were provided. I caught most of them, but missed a few. However, these were for 1997. They noted that the balance sheet today is quite different with the new financing, so I won't list these irrelevant numbers. If someone is interested, let me know and I'll post them.
Concerning number of acquisitions being looked at for 1998:
Depends on the configuration of facilities to reach goal of $1B run rate. Working an about 20 at a time, then focus on 2 to 4 based on seller motivation and other factors. The repeat the process.
There is a focus in key target areas such as a foothold in the upper midwest and Southeast.
They will be doing more financing this year and indicated debt is readily available. The financing resources available to them are better than those available a few months ago. Now in a better position to execute their plan.
Concerning metals pricing - felt that demand is strong, prices should hold up.
Concerning the Mindis acquisition - they are working on it, About 20 sites associated with it, which is good, but due diligence is tougher with more site to look at.
Revenue numbers: companies they are looking at as acquisition canditaes have form $1B to $2B in backlog.
Concerning competition for acquisitions, have ot seen it in past and do not expect it. Metals management has not been active in the SE. Phillips - believe may be a hold on acquisitions. RECY believes it is locked in from Virginia to Alabama, so might see less activity form other consolidators as a result.
Multiples on EBITDA
Typically - 4.1 to 4.9 or 5 on a net basis on the purchase price. On a total basis, may be 4.5 to 5.5 range. On the surface this may look like 6 or 7, but many have excess inventory which is considered about like cash, so with inventory factored in , the multiple becomes smaller as they can immediately sell the inventory for cash.
RECY inventory turns is 12 to 13 times. They are working to get it to 15. Some of the acquisitions are one-third of this.
On Sept 30, had 14,149,780 shares outstanding.
Now - 18 million.
A note that next major financing might include some equity so as not to over leverage the company (response to a Smith Barney question).
Concerning metals pricing - they can hedge margin and pricing.
Stock issued for acquisitions are restricted in some way. Eg., central based on a price of 12.5, with make good 2 years out.
Concerning current prices - They are not happy about it!
Does RECY anticipate moves into other areas - focus still seems to be on upper midwest and SE - areas that have many small heavy industries that generate scrap (IMHO - not bad - a lot of scrap into a supply and demand equation = lower cost)
The individual indicated they were with Smith Barney noted they were very interested in RECY in his closing comment. Don not know his position.
Why is the stock below the years high?
Don't know.
Trying to get it back.
Perhaps:
Perception of overhang on warrants - but this could be cleaned up in four trading days at RECY volume.
People unsure of 10K extension meaning - priority was acquisitions.
Competitors stock/group down a bit.
Believe they are in the right place at the right time.
One analysts noted that RECY relative strength compared to Metals management was greater, even if price is down recently.
Insiders own 25 to 30% of the stock. They are just as interested as all other shareholders in getting the price up.
Goal is to get the stok price up, but can't speculate when or on level.
Goal - communicate with the street, build into a large and profitable company.
Need a greater following on the street to create more demand for the stock.
Of the $1B to $2B backlog in the potential acquisitions, 90% is in existing or contiguous markets. This represents perhaps one-third of the market.
Capacity in 1997 - 280,000 tons (ferrous)
Now - 880,000 tons
96 to 97 - typical for industry is 3 to 5% same facility growth. They have some ideas based on one of their facilities that could increase same facility growth, perhaps to 7 to 8% range.
Capital expenditures -
1996 - 1.6M
1997 - 3.5M
1998 est, still being worked out, about 4M exclusing acquisitions.
In general, new facilities are very well maintained and don't require significant additional capital. Investment would be for revenue enhancement, not maintenance.
Equipment maintained on a regular schedule as this stuff gets eaten up by the process. (IHMO - most of the parts and rebuilds are expensed, not capitalized).
There was a discussion on cost improvements - the lead in question was not clear, but basically, they asked if the trends apparent in the last year would continue. Seems the answer was yes (someone else who listened in want to add here?) 1996 businesses not really on line - have seen cost and purchasing improvements.
An example - non-ferrous prices dropped 28%, but were able to lower purchase costs and got incremental improvements.
Looking at 10% to 13% EBITDA in the companies they are acquiring, then look for additional cost savings. Cost improvement is part of the plan.
Second quarter of this year will be the point we can really take a good look at the numbers. This will be the first full quarter with the past acquisitions on operations.
The End
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