March 28th 2011 Earnings Call
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Industrial Services of America
Moderator: Harry Kletter
March 28, 2011
2:00 p.m. ET
Operator: Good afternoon, my name is (Debbie) and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the ISA year-end earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a 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 would like to withdraw your question press the pound key, thank you. Mr. Harry Kletter Chairman and Chief Executive Officer, please go ahead.
Harry Kletter: Good afternoon and thank you for joining our call today. We’re happy to present to you another year of record of results. Our highlights include an increase in revenue of 89 percent over last year, increase in net income of 52 percent over last year, increase in earnings per share of 33 percent over last year. We ended the year with current assets to current liabilities of 3.6 to one. This all started really two years ago right after the difficult end to 2008. Of course beginning in 2009, we started to rebuild ourselves after the market crash of the last quarter of 2008.
As we discussed before, we purchased the assets of Venture Metals in January 2009 and got into the stainless business. I’ve always been in the stainless business but not to this level. Later that year we completed the construction of our shredder so we could process more types of ferrous scrap. We then moved Venture operations to our 45 acres headquarters facility in Louisville, Kentucky in January 2010. Now ISA has become three times the size it was in 2008. Not many companies grew like we did during the severe recession and I have to say we did it organically. Now it’s time for us to focus to internally on operations. Our strategy in 2011 is to focus on operating efficiency. We will also look carefully at ways to improve our margins.
After two years of record revenue growth we’re now ready to pursue record earnings and margins. For example, in 2010 we invested in additional manufacturing facilities. We enhanced the non-ferrous separation system at our shredder. Non-ferrous products generated by our shredder operation are ISA’s most profitable product. With this improvement to our eddy system we should be able to produce higher margin products in 2011. We also took advantage of several tax strategies during 2010. These included accelerated depreciation that was on our tax return but not on our operating report.
The rise in commodity prices drove our sales to record levels in the fourth quarter but that does not always translate into higher margins right away. We also have to pay more for our scrap. It’s just like paying more for gas at the station. The station does not make all the extra money; in the commodities business such as ours that’s true to a certain extent. Commodity prices are very high right now and continue to rise. Copper is over four dollars a pound and at the beginning of my career, which was many years ago it was ten cents a pound. We need to manage our cost now, which is a key focus for 2011.
We summarize our strategies for 2011 we will focus on process efficiency, streamline our operating cost, increase our margin. Lastly, I would like to point out if you want to know more about our company we just had an article I wrote that is in the March edition of Recycling Today. It discusses the benefit of being a public company, I was public once before in the waste business in 1969, same facility but brought the waste company public at that time. Feel free to call me if you would like to discuss this or you can see it on the website at www.isa-isc.com. Now I’m going to turn this over to Brian Donaghy for a review of 2010.
Brian Donaghy: Good afternoon. While 2010 was a year filled with growth, record volumes and profit it was also spent developing a growing workforce, new customer relationships and acclimating a new management team to ensure ISA’s successful future. Our management team accomplished the primary objectives of the growth strategy we put in place in early 2008. These initiatives have represented new goals for us and 2011 will be a year of refining our operations both internally and externally to optimize ISA’s performance going forward.
During 2010 we operated our shredder at near capacity at margins that we felt were acceptable. We found ways to extract more non-ferrous from our waste stream at the shredder by adding specialized sorting equipment. We expect to reap the rewards of this investment in 2011 and beyond. There are additional investments we can make in this area to cultivate additional profit and you’ll hear more about this in the future calls.
In addition to this enhancement, management also decided to increase the size of our shredder from 3000 to 4000 horsepower. This minimal investment will be online in late 2011 and will add capacity that will equate to higher volumes and bottom line and top line growth. Strong orders of bulk stainless steel drove our overall revenue growth at ISA in 2010 as we look for this strength to continue and feel we are well positioned in this space for 2011 and beyond. We have recently promoted Terry Hancock, a 30-year veteran of the stainless business who we hired in 2010, to lead that position.
We have started 2011 with an ambitious budget and strong emphasis on the following: Marketing on both the buy side and sell side of our business, reduction in our unit operating cost achieved by operating efficiencies and expense management, better margins in all divisions and identify a new growth opportunity. I’ll now hand it over to Rudy Scarito for some of the financial highlights of 2010.
Rudy Scarito: Thanks Brian. As Harry mentioned 2010 was another record year with high year-over-year percentage increases across the board. Revenue increased 89 percent from 181 million in 2009 to 343 million in 2010. Net income was up 52 percent from 5.3 million in 2009 to 8.1 million in 2010. Basic earnings per share increased 34 percent from $0.91 to a $1.22 and diluted EPS increased 33 percent from $0.91 to $1.21 in 2010 and those percentage increases were in spite of about 15 percent incrementally more shares in 2010 on a fully diluted basis versus 2009.
The shares resulted primarily from the full-year effect or the full-year weighting of the shares in 2010 that ISA issued in the fourth quarter, actually the end of the third quarter of 2009 in exchange for property on which it operates, so the company purchased two tracts of land on which it operates and in exchange for the land issued shares but the full effect of the shares are in the 2010 share count and were not in the 2009 share count. And then we also issue shares in connection with our earn-out arrangement with Venture Metals. There are earning thresholds that the company needs to meet in order for those shares to be earned and this year those shares were earned just as they were last year.
Looking at the fourth quarter of 2010 versus the fourth quarter of 2009 we had 164 percent increase in revenue, revenues increased from 38 million in 2009 to 100 million in 2010 and that is the largest quarter in the company’s history. Net income was up 31 percent from 1.5 million in 2009 to 2.0 million in 2010. Basic EPS increased 24 percent from $0.24 in 2009 to $0.30 in 2010 and diluted EPS increased 23 percent from $0.24 in 2009 to $0.29 in 2010 and again that is in spite of a six percent increase in diluted shares outstanding.
Harry mentioned the current ratio at the outset of the call, that’s an indication of our improved liquidity. Essentially it points out that we have a lot of current assets which we will in the very near future convert into cash so it’s cash that we can use to fund our continuously growing company. In addition to that, our balance sheet strengthened in light of the fact that we moved the majority of our debt from short term debt to long term debt so virtually all of our debt is now long term in nature, which again frees up cash that we don’t need to divert to debt service. We can use that to fund our operations so our balance sheet continues to strengthen as you’ve heard us talk about in the past. And then finally our shareholders’ equity increased by $8 million as a result of our retained earnings. That’s a 36 percent increase - again another source of cash for us to use as we continue to grow.
One of the things we’re looking at is, as we always do, we’re in ongoing discussions with our lenders to make sure we have adequate liquidity to address our growth requirements so that that’s been an initiative that’s been ongoing as you know, if you’ve listened to past calls for all of last year, and we continue to look at ways to make sure we have the adequate growth capital.
Finally, I’ll mention that our return on capital exceeds what we estimate to be our actual cost of capital. We are about 500 basis points better than our cost and we also have a very favorable working capital to sales ratio. For every dollar of working capital that we use, we generate approximately $9 of sales so we’re efficient in that regard but as you heard Harry and Brian both mention, we continue to look at ways to become even more efficient and increase that ratio. That concludes my comments, I’ll turn it back over to Harry and Brian to take any questions you have.
Harry Kletter: One of the things that I think I wanted to say, of course, I’ve been in this industry a long time and one of the – you have to get these things in order. I remember when I first went public as a major beginner of the waste business. We have to come up with concepts and are going to come up with concepts that will enable us to grow.
This will be later news as it develops, and also the most important thing is we made profits all the time and yet I’m not a young man and I’m still around and I’m quite shocked that the ability of the employees, our marketing, all the things necessary for this organic scrap business now 45-50 acres next door to UPS in Louisville, Kentucky, and we had a winning team yesterday with Kentucky playing basketball so we’re also good basketball players. I came from Detroit and I would like to open this to any questions that anyone would like to ask.
Operator: At this time, I would like to remind everyone to ask a question please press star one on your telephone keypad. Your first question comes from the line of Matt Stratford from Sidoti and Company.
Matt Stratford: A little more color on exactly what cost initiatives you’re planning on implementing to kind of drive margins a little bit more in the future?
Harry Kletter: Well the margins definitely aren’t going to be – with having all this growth over the last two years you can imagine where our time head has been spent on things such as organizing the people, organizing the facility, organizing our daily work schedules, educating our people to the growth and, you know, we have a large target ahead of us and therefore it takes investment. We invested as well as we made profit for the markets and I think we’ve shown that we’re effectively a very efficient company. Our initiatives (inaudible) in the future will be given out to you and I hope that everybody will be happy with what we are.
Matt Stratford: All right fair enough. Just one more question, in this case – about input cost; what you guys are paying for the raw scrap and where you see those prices trending from here.
Harry Kletter: Well we all know that the scrap market is short. Commodities started short many years ago only now I think with the two markets of Europe and the markets of Asia, more and more the scrap is leaving us with the Japanese situation that happened with the possibility a lot of that scrap can’t go anywhere because it may be contaminated. The availability is going to be difficult, very, very difficult and I’m talking ferrous scrap. The rest of the materials we got to get our economy up; our economy will create more and it’s going to take a lot of very serious because competition is very keen today and you have to be a good marketing team, very ambitious and very hard at working at it, does that help you.
Matt Stratford: Yes absolutely, thanks I appreciate it.
Operator: Your next question comes from the line of Juan Noble with Taglich Brothers.
Juan Noble: Good morning, how are you? A great year, congratulations. Just a couple of questions for you. On your fourth quarter growth margin compression, was that simply a matter of, you know, you’re cost getting ahead of selling prices or, you know, were there other efficiency issues involved there. In connection with that, what is your outlook for, you know, growth margins let’s say in the first half of the year. Second question is regarding your ferrous inventory, you know, the aging schedule that’s under 10K was surprising in the sense that it shows almost 50 percent of your ferrous inventory is more than 90 days old. Now, you know, why is it ageing so much? I guess why isn’t it moving and is this just an aberration or you think you’re going to clear it up sooner and are there any margin implications for that.
Harry Kletter: Well the first one I’m going to answer by this is saying that we all know the commodity market in the last quarter of the year and this year have just exploded. Therefore the margins are increasing but not commensurate as I said earlier about the ability of taking it all, you know, you have to buy it so therefore we would like to take it all but we can’t be too greedy, we have to also give to the people that are bringing it to us on a competitive basis. So I think in answer to that is, the scrap margins on your volumes for all of us that are in this business is going to be maybe lower in percentage but that will match up to your ability of being a good marketing – to build your volumes up so you have more margins, does that help you in that question.
Juan Noble: Yes it does Harry. Now on the inventory?
Harry Kletter: Now what was the second question?
Juan Noble: Inventory – your ferrous inventory? Your inventory that’s older than 90 days seems pretty high like it’s almost 50 percent of your total year on ferrous inventory, how did that happen. How come, you know, none of it moved or it didn’t move quickly as it did last year let’s say.
Brian Donaghy: In the first business in particular it’s customary to build a first inventory in the fourth quarter of the year to, you know, snow and weather and everything and the slow downs at the mills and then come out in January with a large inventory that’s ready to sell that’ll ship in the first quarter.
Juan Noble: Oh I see, OK so you’ll move that in the first quarter.
Brian Donaghy: Yes.
Juan Noble: All right, that’s very helpful so thanks very much Harry.
Harry Kletter: Thank you.
Operator: Your next question comes from the line of Alan Gildenberg with Falcon Global Partners.
Alan Gildenberg: Hello Harry. Do you have a strategy to continue to build the sales volumes. You were talking about – something about building volumes?
Harry Kletter: I was a watching the program called Starbucks the other day and Starbucks is 40 years old, they finally said we’re going to do things other than sell coffee and I would have to say that that’s been my traditional goals ever since I’ve been in business. We have marketing and fortunately the ideas of my visionary yes we have ideas and we know they will possibly work and then we will push forward and that’s where the group will come. We’re not going to be so much in a hurry of doing other things. We have a good base and we’re going to increase our base according to the strategy I just said, does that help you.
Alan Gildenberg: Yes, thank you.
Operator: Your next question comes from the line of Sam Healey with Lamassu Holdings.
Sam Healey: Hi gentlemen, I just – a couple of quick questions. When you pre-announced your Q4 you mentioned the shredder was down, you finished the eddy constructions, can you give us a little color on how long it was down at the end of December and if it was running on January 1st of this year.
Harry Kletter: No the shredder never went down, it was the eddy system that was down because we added our new expansion into our eddy system, we didn’t (run) our eddy system for about two months so we kept shredding of course and we had to build up and we’re still into the buildup processing because it was almost two and half three months of building up of course now the commodities are more valuable so it wasn’t too big a mistake, does that help you.
Sam Healey: Yes it does and the eddy system is running today right, it’s up and running now?
Harry Kletter: Oh yes we never stopped.
Sam Healey: OK. Then another question I have, just as you all realize the accelerated depreciation expense and take advantage of some of those rules, you also had 3.5 million annual depreciation and amortization, you think, can I use that number for 2011 is that sort of a run rate or will that decline, what do you see in that?
Harry Kletter: Well the initiatives that we’re getting now are ones that we built into as we were growing and these initiatives right now are going into effect and during our growth period you know the assets were being bought, finished but that’s off our tax statement that’s not the one we’ll be having in our operating. What we see in our operating is not the tax we pay of course but it is the tax that we always list. Of course we’d be like the rest of the people in the country look for tax advantages of all sorts. Now if you have looked at our tax return I think you may see some different results.
Sam Healey: OK. There’s no doubt that the company is running great, I just have to build this model so I’m trying to put it together and then lastly, are we through with earn out payments or are there left over or is there 2011 (inaudible) Venture also.
Harry Kletter: They’re all growing. I mean I’ll tell you what, I’m 84 and I wanted to retire but I don’t have time but I’ll let Rudy answer that one.
Rudy Scarito: We have earn out payments through 2014 I believe in equal amounts and they’re all dependent upon the achievement of certain profit thresholds. They’re all in the form of shares, which was how they impacted us this year as well.
Sam Healey: The SG&A was up I think three million this year and the majority of that was share based and I assume that was tied to the earn out so I’m just trying to get a sense of just that the SG&A as it was in 2010 is a workable number for 2011 also?
Rudy Scarito: Yes.
Sam Healey: OK thank you very much.
Operator: We have a follow-up question from the line of Juan Noble, Taglich Brothers.
Juan Noble: Yes hi, just a macro question here, you know, I’m looking at monthly crude steel production figures and for the U.S. I mean it looks like it’s kind of peaked in May and June of last year and since then except for a brief spike in the month of December I mean it’s sort of been rattling around in a 6.5 million metric tons. You know, it doesn’t – there is no clear trend here and I was just wondering what your perspective is on, you know, where you as a crude production is going to go, you know, later this year. I’m mindful of what you said about Japan leaving the field because of their problems but can you help us understand what might be going on there.
Harry Kletter: I think the steel business has a harder problem with us because it is difficult today to predict it with all these things going on. One, we have this uprising in Europe, we have the Japanese situation, we have parts that maybe missing and all of that. I don’t think it’s going to affect our commodity market but it’s going to have an effect on manufacturers and people to buy steel.
I don’t think we’ve reached a point of even knowing where steel is going. It’s going to go up but to what degree we don’t know because we’re still in a, you know, as I told you before I’m a depression baby so maybe I did say that before, I’ve never seen anything so erratic and not setting a pattern and we’re now global so I don’t know how anyone can tell you what the steel – I will tell you this, scrap’s not going to go down because there’s no scrap.
Juan Noble: All right that’s a fair answer, thank you Harry.
Operator: Again, to ask a question please press star one. At this time there are no further questions.
Harry Kletter: OK, I want to thank all of you and tell you again our employees want to thank you too because today was quite an exciting day for us. We reached the highest increase on the NASDAQ and I wasn’t planning on that happening but I’ll take it and I want to appreciate all you people for your support and have a good day, watch Kentucky.
Operator: This concludes today’s conference call, you may now disconnect.
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