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INDUSTRIAL SERVICES OF AMERICA, INC.

 

Moderator:    Harry Kletter

November 10, 2010

9:00 a.m. CT

 

 

Operator:               Good morning, my name is (Patrick) and I will be your conference operator today.

 

                              At this time I would like to welcome everyone to the third quarter earnings conference call.  All lines have been placed on mute to prevent any background noise.

 

                              After the speakers’ remarks there will be question and answer session.  If you'd like to ask a question during this time, simply press star then the number one on your telephone keypad.  If you'd like to withdraw your question, press the pound key.

 

                              Thank you, Mr. Kletter you may begin the conference.

 

Harry Kletter:        OK, are you going to give the forward-looking statement?

 

                              Hello, everybody, this is Harry Kletter.  A long-time veteran of the scrap business and here to report that September was the seventh consecutive quarter of profitability for ISA.  And it all began the last quarter of 2008.

 

                              Everybody knows what happened in 2008.  And I know we're all living in the environment of the outcome.  But fortunately we don't have that problem.  We've had expansion, expansion, expansion.  We've issued more shares in many different ways to better our earnings and better our structure.  And today we're going to tell you all about how the 28 cents is a great number in our eyes.

 

                              Over the past two years we have invested in assets and equipment, expanded our operation and brought on the best team that you could have.  And the most important thing is investing in the people, including these high-level people, which has proven a success.  As I'm giving you this speech, I'm also looking at cameras that are showing the traffic coming in and out of our operation.  We have cameras here that we watch.  And in my whole career, and I have been in the business for 70 years, from the age of 13 years old in the depression.  And working with a father with a trailer, picking up scrap during the last depression and as I see the traffic and the structure of what we have in the central United States I realize we've made the cut.

 

                              In 2009 and 2010 we hired some of the top producers of the industry including two this year.  We've been able to attract this talent by issuing stock in our company.  At first it was cash, now it's stock.  This strategy has worked well and we have tripled our sales and our profitability since the end of 2008.

 

                              Year-to-date, our 2010 revenue is tracking 70 percent above 2009 levels.  And we are confident that our growth will continue as we are already into our fourth quarter and seeing exactly what we had planned.  We're very proud of the public noticing our success.  Especially this morning when we showed our 28 cents earnings as we had a nice value.  Of course they dropped the price but that’s the option that everybody has.

 

                              In attracting this talent and issuing the stock, the strategy has to be, why do these people want to work for us?  There are not too many people in the scrap industry that are public.  And therefore it's a little hard to explain all this.  And I'm going to have Brian Donaghy and also Rudy to explain the financials.

 

                              In October, and yesterday I happened to be sitting and looking at the Forbes Magazine because I'm going on a cruise with them down to a seminar, next week.  And as I was looking at it I notice that we're in the top 100 Best Small Companies in America.  And I didn't know it.  And I showed it to my wife; I said someone stole our name.  But, no, it was us.  The company was selected by a group of U.S. portfolio managers based on the following criteria:  Sales growth, earnings growth, return on equity and stock price performance over the last 12 months and over the last five years.

 

                              While we are pleased with the recognition, we continue to move the company forward.  Year-to-date, and we are a year-to-date company because of our shipping schedules, our order schedules and everything else.  So it's very hard for me to think quarter-to-quarter, I have to think, along with my people, about year-to-date.  We have increased the efficiency.  We've lowered our production costs because our shredder and our Eddy System and our stainless and our moving into a building and taking over the 15 acres has taken a lot of strategy for us to create this one-stop center in middle of the United States.

 

                              We've exploited synergies with all our operating divisions.  All our divisions have increased shipment and generated acceptable margins this year.  So, three divisions complement each other and we are realizing operational synergies such as cross-selling metals to key customers.  2010 should equate to another record year by the ISA team.

 

                              I think it's very important to note that scrap recycling is not a monthly or quarterly business.  When you look at the commodities and the recession situation we're in, we never know when the mills can take the scrap and we must meet their schedules.  So it's very hard for us to plan a quarter.  So we plan year-to-date.

 

                              We buy and sell our scrap in response to customer orders, as I've just said.  We can't time these orders or shipments.  And this makes our quarterly sales figures difficult to project.  I'm telling you this because it is a fact.  And this is a fact because we provide just-in-time service, located 50 to 75 miles from our three main customers here in Louisville, Kentucky.  But we do grow our business every year and 2010 is no different.

 

                              The main thing that I'm trying to bring out in my discussion, I think I'm the oldest veteran in the industry actively involved and in a public company.  And the one thing that I'm trying to say, I've reached my goal.  I never thought it would happen.  I had worked with the waste industries in the 60's but this was the same business I started here in 1953.  And the end is coming.  The end is coming because the personnel and the people in this can take it to whatever level we want to be and whatever level the stockholders want us to be.

 

                              So therefore what I'm going to do now, I'm not going to talk anymore because there will be Q&A and we can answer any questions.  So I'm going to turn it over now to Brian Donaghy who will discuss results in our ferrous, non-ferrous and alloy divisions.

 

Brian Donaghy:     Good morning, first just some operational highlights from our ferrous and our shredder operations.

 

                              In our ferrous division, third quarter shipments were up 90 percent over shipments in the third quarter of 2009.  This is due to increased efficiency in the yard from our shredder.  Also in the third quarter of 2010 we began an addition to our downstream non-ferrous recovery system.  This construction and upgrade is scheduled to be completed by the end of November or first week of December.  Once complete, we expect to see increased margins in our ferrous division.

 

                              We continue to look for ways to lower our cost and increase our production levels in our ferrous division.  Non-Ferrous:  Non-ferrous shipments for the third quarter of 2010 were up 3.1 percent over the same period as last year.  In addition, quarter three 2010 shipments were up more than 13 percent higher than the second quarter of 2010.  During the third quarter, industry veteran Danny Gascoyne joined the ISA team to lead our Non-Ferrous division.  With Danny's help I think ISA will identify opportunities for growth in the aluminum, copper and brass markets.

 

                              The ISA alloy shipments were down slightly for the third quarter of 2010 compared to the third quarter of last year.  Part of the reason was decreased demand brought on by a difficult nickel market earlier this year.  We feel that nickel was negatively affected by the Sovereign debt crisis in Europe in the spring of 2010.  Since then demand has rebounded and our stainless division is performing well from both a margin and capacity standpoint.

 

                              Our strategy is to continue to balance our growth across all three of our divisions: Ferrous, Non-Ferrous and Alloys.  We will continue to look for ways to improve our efficiency and our operations and lower our cost structure.  We will also continue to recruit and hire top talent.

 

                              I will now turn it over to Rudy Scarito for some of the quarterly and year-to-date financial highlights.

 

Rudy Scarito:        Thanks, Brian.  As Harry mentioned, the scrap business is not a quarterly business.  And he talked about shipments and how the timing of shipments varies.  So sometimes we have firm orders that don't ship until the following quarter.  This was certainly the case, to some extent, in the third quarter of 2010, although we have seen these orders ship during the current quarter.

 

                              In the third quarter of 2010 revenues were $76.6 million versus $80.0 million in the three months ending September 30th, 2009 or a decrease of 4 percent.  Net income was $1.9 million in the third quarter of 2010 versus $2.2 million in the third quarter 2009 or a decrease of 11 percent.

 

                              Basic and diluted earnings per share, which were the same, were 28 cents this quarter versus 37 cents last year's quarter – last year's third quarter.  And the primary reason for that as Harry mentioned, was that we have substantially more shares this year than we did last year.  Part of the reason is because net income was down 11 percent but more of the impact is a result of an increase share count.

 

                              And the increase in the share count is for three strategic reasons.  First of all, Harry pointed out that we have awarded shares to some key executives as part of their compensation.  Second reason is that there are additional shares that were paid in connection with our acquisition of Venture Metals which has contingent payments when certain performance metrics are met.  And those performance metrics were met this year.  And then the third reason is that a year ago, in the September quarter, ISA purchased two tracts of land that are important to its operations.  They're part of the facility on which we operate.

 

                              And so those shares – we used the shares to buy the land and the shares were issued in the early part of September so they were – they only impacted the third quarter of 2009 for 20 out of the 92 days in the quarter.  Whereas this year they're outstanding for the full third quarter and so they impacted all 92 of the 92 days.  So if you were to use the same share count and back out of earnings the shares given to the key executives, the earnings-per-share numbers would actually be about half a cent higher this year versus last year.

 

                              In terms of year-to-date, again, going back to what Harry said earlier, this isn't a quarterly business.  The year-to-date numbers tell a very strong growth story.  Revenue is $243.5 million for the nine months ending September 30th of 2010 versus $143.3 million for the nine months ending September 30th, 2009.  That’s a 70 percent increase year-over-year.  Net income was $6.0 million through the first nine months versus $3.7 million.  That is a 61 percent increase.  Basic earnings-per-share were 92 cents versus 67 cents a year ago, a 37 percent increase.  And diluted earnings per share were 91 cents versus 67 cents a year ago, or 36 percent increase.

 

                              And that 36 percent increase is in spite of a 19 percent increase in the share count on a year-over-year basis.  So again, scrap is not a quarterly business.  You can see that the company is continuing to have a strong year and that trend continues into the forth quarter.

 

                              In terms of the balance sheet at September 30th of 2010 we had $2.1 million in cash versus $713,000 at the end of December, 2009.  Total debt was $49.1 million versus $34 million at the end of December.  And I think it’s important to point out here that at the end of December more than half of the $34 million of debt was short-term debt maturing in less than a year’s time.

 

                              We refinanced our credit facility in July as many of you know.  And as a result of that, we shifted all but $1.5 million of our debt into long-term debt.  So now of the $49 million, about 47 and a half of it is long-term with a million and a half current.  Which is a much stronger financial position in our view. 

 

                              Shareholders’ equity was $30.5 million at September 30th, 2010 versus $21.9 million at the end of December, 2009.  And our ratios, our net debt to equity is 154 percent versus 153 percent at the end of December, so roughly unchanged.  Our net debt to total capital is 59 percent versus 60 percent at the end of December again, relatively unchanged.

 

                              So our balance sheet continues to strengthen.  We’re very happy with the credit facility we put in place.  We have it on favorable terms and it will satisfy our liquidity needs for our current level of business.

 

                              We’re also happy that we increased shareholders equity, because obviously that’s additional capital that we can use to fund our growth. 

 

                              So overall, we’re very happy with the growth.  We continue to grow rapidly as a result of our management team that we have in place, and the solid customer relationships that each of those management professionals has.  We’re very pleased with the results this quarter, that we believe that this business has a solid foundation and strong operating management to lead the organization into the future.  And now for anyone who has questions, we would be happy to take those.

 

Operator:               At this time, if you’d like to ask an audio question, please press star one on your telephone keypad.  Again, to ask an audio question, you may press star one on your telephone keypad.  We’ll go ahead and take our first question from the line of Juan Noble from Taglich.  Go ahead Juan, your line is open.

 

(Howard):             Good morning guys.  I’m actually (Howard), pinch-hitting for Juan, but he left me a few questions for you guys.  And our first question, I guess, is the installation and upgrade that, you know, is ongoing.  If you could add a little color to that, especially in terms of how many basis points and profit margin can you get from that upgrade to the non-ferrous recovery system?

 

Brian Donaghy:     The little color to it, it’s a – it’s basically an equipment upgrade.  We’re adding the latest non-ferrous recovery technology that’s available to us for our status of operation.  And to recover more non-ferrous from the way stream that’s created by shredding.  The numbers obviously we’re just basing it on the research that we did.  But we think our overall ferrous margin could increase by about $20 to $30 a ton.

 

(Howard):             Really?

 

Harry Kletter:        When Brian came to me on this point, I says look, let’s finish the mission.  And the mission is, let’s have the state of the art, which other the companies are doing.  And we in this industry must take as much as possible that doesn’t go out of here to our landfills.  And therefore we, environmentally, we have to keep it clean.  But, the material that is finally left over, because I can’t – I also had the waste business public in the prior years.  I had another company.  We started an environmental program a long time ago.  At least I have.  And one thing is, look now, the next move will be to cogeneration.  And you have to have clean – and you want to recover all these metals because it is copper at $4 a pound.  And I think it’s a very good investment.  In fact, I said if the company won’t do it, I’ll do it. 

 

                              And there’s one point that everybody needs to notice.  I’ve never sold any shares until just recently.  And they’re on planned sales.  I’m 83.  And I’ve used those shares to distribute among people for the best interest of the company and my family and charities.  But now it’s time, at 83, I think to dispose some of the business in an orderly manner.  And that’s what, if you see any sales, these are planned sales.  Any other questions?

 

(Howard):             Yes.  In terms of – I guess, this is more forward-looking but with, you know, industrial production sort of waning, you know, or maybe taking a step back over these past couple of months.  And with manufacturing the capacity utilization is sort of stuck in the low 70’s – 70 percent area.  How does this, you know, impact I guess your order flow, you know, or your growth prospects into 2011?

 

Harry Kletter:        I think only upward because for some reason, as I told you I have a camera here and I’m watching the scale.  And as I watch these trucks flow in, we did something different here.  Whatever it is, the state-of-the-art of the facility and the people and how we pay it and how we do it, I don’t see it.  I’ve gone through plenty of recessions and depressions and I do not see a dollar movement.  In fact, I remarked to my wife, I said, “this thing just doesn’t want to stop”. 

 

                              So I think, unfortunately, the commodity business is short in the world, especially ferrous scrap.  Therefore I don’t see a setback in our industry except we want everything to go up.  You can’t be all by yourself.  Does that answer that?

 

(Howard):             Yes, to some degree.  Also, I mean you had talked about, you know, this not really being a quarterly business and that orders may come in and not get shipped until the next quarter.  Has any of the orders that might have come in towards the end of Q3, you know, what kind of value are we talking about that maybe spilled into the forth quarter  that are just now being shipped?

 

Harry Kletter:        Very heavily being shipped, and compared to the prior two four quarters – forth quarters after the recession hit, we are at a very, very fast pace.  And I think others are doing it too.  But for some reason, our consumers in our area, and especially our stainless business, has been very upward.  And we look for a little different pattern, and that’s why it happens.

 

                              In each one of these quarters, it rolls over or it pulls back and it is based on the people.  And they’re not real busy, but they’re busy enough and they need on-time service.  And that’s why I think we’re getting the benefit of all this.  Does that answer it?

 

(Howard):             Yes.  And one last question.  How difficult is it to find, I guess, the metal to, you know, to purchase actually?  You know, has that gotten short in supply, too?

 

Harry Kletter:        No.  I think with the star player I have, that I stole from another world, Brian and his team have shown that they can produce more than I ever thought in my life.  And it rolls in and it keeps rolling in.  We have a team that, somehow are very good in marketing, it isn’t always price.  Its service and accessibility of getting in and out, and we're central United States where it’s a good point.  I have never seen 30,000 tons move in and out of one facility such as ours in my life, and I’ve been in this business all my life.

 

(Howard):             OK.  Well, congratulations and keep up the good work. 

 

Harry Kletter:        Thank you.

 

Operator:               And again, if you’d like to ask an audio question, you may do so by pressing star one on your telephone keypad.  Your next question comes from Eric Glover from Canaccord.

 

Eric Glover:           Hi.  Good morning.

 

Harry Kletter:        Hi, Eric.

 

Eric Glover:           It sounds like scrap flows are actually improving Harry, based on what you’ve been saying.  And I’m just wondering can you talk a little bit about why you think that’s occurring now and whether you expect that to continue through the end of the year?  And I’m talking about both ferrous and non-ferrous.

 

Harry Kletter:        I’m going to let Brian answer that.

 

Brian Donaghy:     The prices, I think, are – the prices being paid at the scale are in direct correlation obviously with our sales prices that we are receiving.  And the price we feel is kind of at a level that the dealers that are shipping to us are happy with.  You know, you’ve got copper at close to $4 a pound.  Stainless, you know, you’ve got nickel at close to $11 a pound.  So you’ve got prices that are forcing small dealers and other scrap guys not to hold their – not to hold their product in inventory.  So it’s creating buying opportunities for us.  I mean, they keep wanting to move their material.

 

Eric Glover:           OK and then on the ferrous side?

 

Brian Donaghy:     You know, we’re in that range where you’re able to pay over $200 dollars a ton for shredder feed so, I mean, at that level you see – you generally see good flows into your yard.

 

Eric Glover:           And you may have...

 

Harry Kletter:        Eric, one thing you’ve got to know that shredders now in the history of the company – the business, are predominantly the main supply.  We have, of course, scrap from the manufacturers, but very low amounts.  So therefore the shredders have created a very, very good flow stream for the people that are equipped properly, and they can get their material in and out.

 

                              And competitively it works well.  I’ve never seen it.  Well we know by how much money we’re making.  I mean, I’ve never seen this kind of money being made in my life.  And it’s because for some reason, the industry has changed over to a – being recognized as a commodity, not as a junkyard.  Not as a scrap yard, it is a commodity business.  And I’m very proud to be part of it.

 

Eric Glover:           OK and just following onto that last question.  Steel production has been heading down over the past month or so.  You’re still – are you still seeing strong enough demand for the shred that you’re processing?

 

Brian Donaghy:     In our geographical area, we’re surrounded by three to four steel mills, plus we’ve got the availability to ship by rail or barge.  So we are actually having an OK time selling the scrap that we produce.  We don’t – we’re not carrying a lot of ferrous inventory.  Actually, a very low amount of finished product, so we’re kind of hand to mouth as far as ferrous.  I mean, we’re managing to ship on a daily basis what we produce. 

 

Eric Glover:           OK, great.  Thank you.

 

Brian Donaghy:     Thank you.

 

Operator:               And again, if you’d like to ask a question, please press star one on your telephone keypad.  Again, star one to ask a question.  And presenters, at this time, there are no further questions in queue.

 

Brian Donaghy:     Thank you everybody. 

 

Operator:               And this concludes today’s conference call.  You may now disconnect.

 

END