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Stefano Gaggini

Thank you, Tamara, and good morning. I'll start with our review of the performance drivers in the third quarter, and we'll then cover progress on our cost reduction and productivity plan.
Consolidated adjusted EBITDA in the third quarter improved to $9 million compared to $3 million in the prior quarter, driven by higher sales volumes, stronger non-ferrous demand, our cost reduction and productivity program, and recognition of insurance recoveries. These benefits more than offset the impact of the weaker ferrous market conditions.
In the third quarter, as part of an impairment test required by accounting standards, we recognized a non-cash impairment charge of $216 million on goodwill allocated to three reporting units within our recycling operations. The impairment charge was triggered by the combination of the lower current financial performance of our recycling operations due to the challenging market conditions, including tight scrub generation and compressed metal spreads, coupled with the decrease in our market capitalization.
The value of goodwill associated with our growing recycling services business remains supported. The non-cash goodwill impairment charge is adjusted out of our non-GAAP financial measures.
In the third quarter, we also reached final settlement with insurers for our claim related to the shredder outage at our Everett facility that occurred in prior years. As a result, we recognized a final $7 million in insurance recoveries in the period compared to $2 million in the second quarter. Our claim for this matter is now completed.
As shown on the slide, cost savings and productivity measures are critical levers within our control to mitigate the current market conditions, inflationary headwinds, and operating margin pressure. We are focusing upon structural initiatives capable of generating sustained benefits independent of changes in market conditions or volumes.
During the current fiscal year, we identified initiatives with annual run rate benefits aggregating to $70 million, including a reduction of SG&A expense by 10%. These initiatives are primarily comprised of production cost reductions, yield increases, optimization of transportation and logistics, decreases in non-trade procurement spend, adjustments in headcount and other employee-related expenses, and a reduction in discretionary activities such as travel and use of professional and other outside services.
In the third quarter, we made significant progress with our plan and achieved approximately $13 million of benefits, an increase of $5 million sequentially. We expect to achieve substantially the full run rate by the end of our fiscal year. We incur restructuring charges and other exit related costs of approximately $3 million in connection with these measures during the third quarter.
Now let's move to slide 9 to discuss ferrous sales and the market dynamics. Export and domestic demand for ferrous recycled metals was softer sequentially. As Tamara mentioned, the surge in Chinese steel exports continued to negatively impact global demand. In the first five months of calendar year 2024, China's finished steel exports increased 23% year-over-year, impacting both steel production and ferrous scrap demand, particularly in Asia and the Middle East.
Domestic scrap prices started the quarter higher than export but then declined more significantly during the quarter. As a result of these dynamics, average net selling prices declined 9% sequentially and led to compression in metal spreads. The decline in ferrous prices in the quarter also created a detriment from average inventory accounting of $3 per ferrous ton in the third quarter. Ferrous sales volumes were up 13% sequentially and the share of domestic ferrous shipments was 48%. Our top sales destinations for ferrous exports were Bangladesh, Turkey, and India.
Now let's move to slide 10 to discuss non-ferrous sales and the market dynamics and provide an update on our non-ferrous investments. Average net selling prices for recycled copper, aluminum, and other non-ferrous products were up 10% sequentially, reflecting a strengthening global demand throughout the quarter. Non-ferrous sales volumes were up 4% sequentially. We sold our non-ferrous products to 14 countries with the major export destinations being Malaysia, India, and China.
We continue the deployment of our advanced primary non-ferrous recovery systems, which drive the incremental metal recovery and the majority of the expected contribution from our investments in advanced recovery technologies. We made headway in the ramp-up activities on several of these primary systems during the quarter. We continue to work closely with our technology vendors and project completion of construction of the currently permitted primary systems. By the end of the summer, we'd ramp up to full operations to be reached by calendar year end 2024.
We have two primary systems left to start construction on the West Coast subject to permitting approval. We also have operational advanced separation systems that give us the option to process Zorba into a higher-grade Twitch and other furnace ready materials when market dynamics are supportive.
Overall, the contribution to performance from these systems was positive in the third quarter. We believe we are at an inflection point in the ramp up phase of several of these systems and expect to see a trend of increasing returns from these investments in the remainder of calendar 2024. Once fully operational, we continue to expect substantial returns from our investments of approximately $10 EBITDA per ferrous ton.
Now let's move to slide 11 to discuss our steel mill performance. Finished steel sales volumes of 126,000 tons in the third quarter were up 11% sequentially as we benefited from a solid pickup in seasonal construction activity after a slow start in early spring due to the lingering impact of rain in the west. Average mill utilization was 88%, up from 81% in the prior quarter, a reflection of sound demand from non-residential construction in our western markets. Average net selling prices for finished steel were approximately flat sequentially. We believe our mills tend to benefit from the anticipated demand associated with the US infrastructure bills.
Now let's move to slide 12. Operating cash flow for the third quarter was near breakeven, reflecting a significant improvement sequentially. The impact on working capital of higher volumes in the quarter substantially offset the benefit from shipment and collection of certain bulk cargoes that had been delayed at the end of the prior quarter. Based on current levels of sales activity and demand, we expect the fourth quarter cash flow from operations to be positive.
Capital expenditures were $16 million during the third quarter. We project capital expenditures for fiscal '24 as a whole to be in the range of $75 million to $80 million. Approximately one-fourth will be for growth projects, including for our non-ferrous technology initiatives and investments to support recycling services expansion, with the remaining spend for maintaining the business and the environmental related capital projects.
The effective tax rate for the third quarter was a benefit of 18% on reported pre-tax results. Our tax rate in the quarter reflected a detriment directly related to the goodwill impairment charge as it led to the recognition of a valuation allowance charge of $6 million on deferred tax assets. Excluding the impairment charge and its related tax impact, the tax rate on our non-GAAP results was a benefit of 27% in the third quarter.
Net debt was $386 million at the end of the third quarter, and net leverage was 37%. Subsequent to the end of the quarter, we amended our existing revolving credit facility, which has a borrowing capacity of up to $800 million and matures in August 2027. The amendment provides for a relaxation of certain financial covenants for the four fiscal quarter end periods through the end of the second quarter of fiscal 2025. The size of the credit facility and its maturity date were not changed as a result of the amendment.
Our capital priorities are focused on reinvesting in the business and supporting our strategic initiatives, including completing the deployment of our technology investments and growing our recycling services business. Returning capital to shareholders through our quarterly dividend also is an important part of our balanced capital allocation. Given the quarter has just started, it is too early to provide a fourth quarter quantitative outlook at this time.
And with that, I'll turn the call back over to Tamara.

Tamara Lundgren

Thank you, Stefano. Today's market conditions won't last forever. And as we've discussed earlier, we are well positioned to benefit from demand trends associated with decarbonization, infrastructure investment, stronger global manufacturing activity, and declines in interest rates. We have more than 100 operating facilities producing annual fares volumes of over 4 million tons, non-ferrous volumes of over 700 million pounds, and more than 500,000 tons of low-carbon and net-zero carbon emission green finished steel products.
There is a legacy at our company of facing challenges head on and navigating through the toughest of times. Our team is experienced in managing what we can control in the short-term while continuing to execute on our longer-term initiatives. Before we open the call for questions, I'd like to thank our team for their dedication and our customers, suppliers, and the communities in which we operate for their partnership. Working together, we continue to demonstrate the critical and essential role of our business and our local economies and across the globe.
And now, operator, let's see if there are any questions.

Question and Answer Session

Operator

(Operator Instructions) Martin Englert, Seaport Research Partners.

Tamara Lundgren

Good morning.

Martin Englert

Well, good morning. How are you?

Tamara Lundgren

Good.

Stefano Gaggini

Good.

Martin Englert

Thank you. Question of market fundamental trends persist over the foreseeable future, what are their levers and options that the company have to address this? If we look forward and we're in an environment 12-months from now where fundamentals just haven't changed for whatever various reasons, I guess, how do you think about your options? Have you considered if some of the ferrous facilities aren't inherently profitable, potential temporary idling of them until the market turns around?

Tamara Lundgren

So let me take that to start. And then Stefano, why don't you add in as well?
So when we think about what is the path to expand our margins, there are really three major areas that we consider to be near-term. One is our AMRTS, advanced metal recycling technology investments, which as I mentioned before, the majority of the benefits are still to come and should be material when fully deployed, adding a significant amount of EBITDA.
And we're through the bulk of it. We still have a couple of projects to get permitted, but that is one area that I would -- that we're focusing on and that I would recommend that you look at because it is so aligned with the increasing demand for non-ferrous metals. And so both near-term and strategically, I think it is a very powerful investment program.
The second is the completion of obtaining the benefits from the cost reduction and productivity program that we announced at the beginning of the year. As we mentioned earlier, we've achieved about three quarters of the run rate through Q3, and we expect substantially the full benefit by year-end. And I think that program is going to be particularly helpful to margins now that the inflationary pressure is lower.
And then third, I would focus on the investments we're making in our recycling services business line. Our 3PR, which stands for third-party recycling, which is our take on third-party logistics, where we are providing services to customers to help them manage their recycling operations. So we're investing in that. It's contributing to increased volumes. And we're continuing to invest in digital tools in our Pick-n-Pull franchise in order to access previously untapped sources of supply.
So I'd focus the attention on that, and then Stefano, you might want to just mention our process for asset monetization.

Stefano Gaggini

Correct, Martin. We look at our operating platform and evaluate our portfolio on ongoing basis. That includes looking at various metrics from a performance perspective, as well as looking at asset monetization opportunities, if that were to be the case.

Martin Englert

Any more color on the asset monetization? Are these maybe smaller businesses that you're evaluating or something higher level that's larger like the steel mill business?

Tamara Lundgren

We routinely -- sorry, Stefano.

Martin Englert

No, go ahead.

Tamara Lundgren

Okay, we routinely look at our portfolio to see whether our sites are still in the best places. And so we see that particularly in our Pick-n-Pull franchise where over the years we have monetized certain assets and moved development to other places. So it is something that we look at routinely. And when you mention in your question underperforming sites or idling sites, that is something that we've done also in the past that's very focused on where our supply flows coming, what are we pushing through with those sites, and are they long-term holds or should they be monetized and repositioned elsewhere.

Martin Englert

The reported export ferrous price seemed a bit weak relative to the benchmark indices in the quarter. Can you maybe touch on in some more detail the markets you were selling into -- if you feel like you had to sell at maybe more competitive prices versus the benchmarks on average to secure volumes across the assets?

Stefano Gaggini

I'll take that one, Martin. As you know, benchmark index prices for recycled metals are published on a growth basis before freight costs. So when you compared to our average net selling prices, those are on a net basis, net of freight. So the net selling price is a reflection of where we sell to in which geography, meaning that the mix of sales destinations can create some deviations compared to growth benchmark prices.
As I mentioned in my remarks, our top sales destination in the quarter were Bangladesh and India on the West Coast and Turkey from the East Coast. And overall, markets on the sales side are highly competitive. We sell to where demand is greatest. And we view those freight rates as a pass through.

Martin Englert

Can you touch on what was happening with freight rates in particular East Asia? I know that there's been -- in the container market, there's been some serious inflation there in recent history. In the bulk market, it could be a little bit different. But maybe how the freight rates are today over the last quarter looking at the West Coast to get it to the consumers in East Asia and how that compares to history whether they're inflated or not?

Tamara Lundgren

So I'll start with saying that our freight rates for bulk were pretty much flat sequentially, Q3 to Q2 this year. They're up year-over-year due primarily to the situation in the Panama and Suez Canals, but as you're aware, they're pass-throughs for us. So we didn't really see any impact sequentially. And the canal situations are -- the rates have been adjusted for that over the course of the last 12 months.

Martin Englert

Okay. When you look at your footprint, is there anything unique about the regional markets on ferrous recycling where the assets are operating and located within that makes scrap collections more challenging with the lower margins versus the broader US market as a whole?

Tamara Lundgren

The one thing that I would say is that there are certainly different regulatory environments across regions. So if you look at, for example, the West Coast regulatory environment versus other regions in the US, that could impact operating costs. Not so much necessarily actual scrap collection costs, but when you look at what it costs to get to a product ready for sale, you do see regional differences from a regulatory perspective. But as you know, Martin, scrap collection is very local, not national. So really, it's the sub-regional market levels that are typically the best benchmarks.

Martin Englert

Understood. Could you share some color on the underlying profitability EBITDA per ton of the steel mills business, maybe some goalposts or how that looks to the quarter and the trailing 12 months?

Stefano Gaggini

I'll take that one, Martin. As you know, we report our results on one segment, and that's on a consolidated basis. So we do not provide the steel mill contribution separately. Obviously, we have said before in the current market the contribution of our steel mill and from the sale of finished steel of this integrated mill that we have remains.
The mill remains a significant contributor to our consolidated performance. And spreads remain healthy in historical contexts. Although obviously they are lower, they have declined from the all-time highs that we had seen in fiscal '22 and early '23. And I'll leave it at that.

Martin Englert

Qualitatively, are you able to discuss going through the business --? You provide various metrics across the business lines. I understand that it's just a consolidated group result. But a ferrous business, a steel mills business, auto parts business, non-ferrous business, of all the major and services business, too -- but of all the major businesses, how many of them were EBITDA profitable over current quarter trailing 12 months?
I'm trying to get a sense. I mean, I suspect that the steel mills business embedded in there is probably a large portion of the positive EBITDA contribution. Non-ferrous probably improved. I would guess ferrous is probably negative. I'd be a little bit unsure on the auto body business and assume that services is probably positive.

Stefano Gaggini

Again, I think that the answer I gave you before, as far as not breaking apart the results in the way they are describing, we have one integrated platform, so all these businesses are integrated, including the mill. As we said before, we look at our portfolio very focused on making sure that actually from a valuable contribution perspective, every business that we have is contributing positively to results and all of them aware. So I think that, that's the level of detail we can provide at this time.

Martin Englert

Okay. I appreciate the call. Thank you and good luck. It was nice to see the cost reduction efforts seem to be running a little ahead of the initial plan as far as timing. So nice job there.

Tamara Lundgren

Thank you.

Stefano Gaggini

Thank you.

Operator

Samuel McKinney, KeyBanc Capital Markets.

Samuel McKinney

Hi, Tamara and Stefano. How are you? Good morning.

Stefano Gaggini

Good.

Samuel McKinney

Good. I'll start on again on the fairest export market. Despite headwinds from domestic consumption rates in Turkey and the impact of Chinese exports you cited, your export volumes were solid quarter-over-quarter. Any way to frame up the impact that those delayed cargo ships had in your fiscal third quarter and how dynamics of that market have developed over the course of this summer?

Stefano Gaggini

Yes, I'll start Sam here and just from the perspective of the volumes, which were up 13% on the ferrous side sequentially. Really two drivers there, one is the seasonality that we see on flows that came through. Despite the fact that flows remain, when we look at prior years, they remain tight from a sequential perspective, compared to the winter they went up. And I would say that that's probably the majority of what makes up the increase. And the rest is from the delayed cargoes that we had at the end of Q3, which we shipped in Q3. With the higher volumes, we have also higher inventories. And so we look for those sales to continue into Q4.

Samuel McKinney

Okay. Any way to frame up the volume on those delayed cargo ships? How much they benefited the quarter?

Stefano Gaggini

I would say it's more around one-third of that increase sequentially.

Samuel McKinney

Okay, thanks. That's helpful. And then moving into non-ferrous, global Zorba pricing remains pretty frothy. And you've mentioned before that the tight premium of Twitch over Zorba can make conversion less attractive? How do you view that market as Zorba prices remain high?

Stefano Gaggini

Yes, I'll start on that one. So obviously, with higher Zorba prices, right? Irrespective of whether we process the Zorba into higher value, Twitch and other furnace-ready materials, the higher value of Zorba flows through our margins, and that's a positive contributor to the higher Zorba price, the better the margin.
From the perspective of the processing itself, obviously we look at what we are able to generate in additional contribution from the processing, compare that to the processing cost, and if the market conditions, which is mainly driven by that Twitch to Zorba premium. If that is high enough and beneficial, we will process the Zorba. And if not, we are going to forego that option.
So it’s truly about the product optionality. That's what our advanced aluminum separation systems that are currently operational allow us to have is the product optionality which comes in handy, and we can toggle between processing and not. So in the current environment those market conditions and compression in that premium lead us to not processing the absorbent to Twitch.

Samuel McKinney

Yes. Lastly for me, this year's CapEx of $75 million to $80 million, should we expect a similar sort of low range next year as well?

Stefano Gaggini

Yes, Sam. We have that range for the current year. What we have not provided, a target for next year. In the current environment with compressed spreads and lower performance. Clearly, our CapEx is part of our bank's capital allocation. Our CapEx is something that we look at. And we have the ability to adjust our CapEx expense to align with those market conditions and company performance and cash flow trends and reprioritize certain projects. Clearly the adjustments or tweaks in that spend does not impact our investments to complete the advanced non-ferrous recovery systems. We continue full steam on that and we also continue to grow our recycling services.
So when I step back and I look at those levels of CapEx, one way is to look at what we're saying today and continue to think about that this ability to flex. The other way to look at it, I do that from a depreciation perspective. We have depreciation around $95 million to $100 million on an annual run rate currently. That's another way to kind of look at a longer term, you know, CapEx spend potential.

Samuel McKinney

Okay, great. That's it for me.

Tamara Lundgren

Thank you.

Stefano Gaggini

Thank you.

Operator

Thank you. This concludes our question-and-answer session. And I would now like to turn it back to Tamara Lundgren for closing remarks.

Tamara Lundgren

Thank you, and thank you, everyone, for your time today. We look forward to speaking with you again when we report our fourth-quarter results in October. In the interim, stay safe and stay well.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.