RELY - Real Industry

[wjsco]

Thanks for the detailed comment, Wjsco. I'm still not quiet sure how you get to a 20-30 FCF yield. Could you post your estimate of 2016 Ebitda as well as projected interest and maintenance capex? They did 81m adjusted Ebitda in ten months of 2015, but I have them pegged at 30m in interest and 30m maintenance capex for FY16.

 

I agree that they do seem to deliver on their SixSigma-program, but did they buy something that was extremely bloated or what? Was there any indication of that? It seems incredible if they can take out as much cost as they say they're striving for. What exactly are they doing? It can't be that they're just getting a helping hand from lower energy and transportation prices? I took a position yesterday, but there's still a couple of things I need to get my head around, your insight is much appreciated.

 

81 in ebitda annualized for 12 months gets us to 97. 17m out of COGS (CEO challenge) gets us to 114 - im giving them this, b/c they did beat their CEO challenge goal in 2015. it could come in short of 17 for 2016, but who cares if it's 17 or 15. point is, COGS is coming out.

 

If volumes increase 5%, that will add 5% to gross profit. could be a bit lower, i really dont know what volume growth will be, but that's another mid single digits addition to earnings...4-5m?

 

And lastly, if scrap spread increases from 675 kmt to 800 kmt, e.g.-if the scrap spread reverts to historical norm, that's an 18% increase in ebitda/ton on 30% of their tonnage volumes, or a 5.5% increase on firmwide ebitda/ton (before improvements from CEO challenge). If 97m was our annualized ebita for the firm, and we get +5% volume, firmwide ebitda before CEO challenge is maybe 100-105. Take 100-105, add another 5.5% from scrap spread expansion, we get to 105-110m ebitda before ceo challenge. ceo challenge gets another 17m, which brings us to 122-127 ebitda. 30 interest, 30 capex gets us to 62-67 FCF before Cash from working capital.

 

I doubt it will actually work out that well in the headlines, and hell i could be off by 10 or even 15 million, but that's kind of what i think the business's earnings power is. even if im off by 15m, and we use the low end of our fcf estimate (62) - so, deduct 15 from 62, and you get 47 - that's still a 24% fcf yield at today's price. LORD - you could cut my estimate in half, and it would still be at a 15% fcf yield ($30m FCF). And all of this is before cash from WC - i suspect theyll generate alot of cash here. Obviously, there's a limit to how much cash u can generate from working capital, but the point is, the faster they can convertt wc to cash, the faster they'll pay down debt, the faster the debt component of EV should be replaced by equity value (e.g., market cap should go up as debt is paid down).

 

Regarding the six sigma stuff - yeah, it probably wasn't the most efficiently run organization. aleris was in BK until a few years ago, and considered recycling/spec alloy to be non-core. so i dont think it got alot of attention - i think volumes sold declined slightly since 2010/2011, which further reinforces this view. But, if you read "CEO Insights" on RELY investor relations page, i think he goes into depth on their initiatives...they have like 25 projects going at any given time, and each one saves like 500k-1m or something like that. this whole japanese thing and six sigma is an entire profession in and of itself. you literally have to be certified to do this - six sigma black belt, etc. And then, within that group of black belts, there's obviously more and less talented individuals - just from preliminary research, knowing that John Miller was a big boy at 3M, and knowing bouchard's background with both the Kochs and Sam Zell, I would imagine that John Miller is beastly at doing what he does. you'll notice they don't say "we'll get 17m in 2016, and that's it." it's a continuous process kind of thing, as in, you can always find costs to take out. that's how theyre treating it. so theyre going to be reducing cogs every year, and it's not some big consolidation intiative, it's just persistently seeking out little inefficiencies and correcting them...

 

6/2 EDIT: Looks like the $81m for 2015 was the annualized number. So you don't want to annualize that. Our ebitda number looks like it should be $105-110, and then subtract interest and capex of 60 total, and you get $45-50m in FCF before working capital changes. And yeah, you could cut this in half and still be above a 10% FCF yield before changes to working capital

[wjsco]

just sort of came together for me. you have their base ebitda annualized to 12 months, which is roughly 100. from there, there's only 3 more factors: 1) CEO Challenge/1% of COGS per year, 2) scrap spread expansion, and 3) volume growth. It's not a growth investment in the short term, despite the auto supercycle - the auto recycling thing won't be a boon until the cars with more aluminum are scrapped, 5-10-15 years down the road or whatever (the scrap from manufacturing won't be handled by RELY - that'll be novelis and others, and it's a closed loop recycling operation. i think).

 

This isn't a vehicle to burn NOLs, it's a cash cow. And it kinda makes sense as the first acquisition for your platform - it's going to generate a ton of cash that you re-deploy to other acquisitions.

[wjsco]

Think it was someone on seeking alpha, or maybe here...they interviewed Bouchard in 2015, and sent me the notes. Basically, more or less confirmed my thoughts on cash generation. Bouchard said that mgmt pays more attn to cash flow than anything else, and investors should, too. If you look at their incentive pay, 80% is EBITDA, and 20% is the CEO Challenge, e.g., expanding margins. So, they get paid based on how much cash they generate.

 

Also, regarding a previous question about six sigma, I think besides the 25+ projects that target .5-1m in savings, the variable portion of their COGS is the buy/sell portion of the N Am business (EU buy/sell is hedged). So, if you can reduce inventory exposure, by turning inventory more quickly, that would be a way to expand gross margin. Also, they buy scrap and sell finished metal products. They have a huge scrap sourcing operation. If you can improve the efficiency of scrap sourcing, by either 1) sourcing more cheaply (maybe more data analytics? or just by improving communication across your scrap logistics infrastructure? both of these things seem like they'd be doable, especially if previous mgmt hadn't been paying much attention to the biz), or 2) sourcing better scrap, that has more of the alloys you need in your finished product (e.g., reduce the amount of alloying agents or primary aluminum you need to buy to add to your melter), those would be additional levers you could pull to reduce COGS.

[Guest roark33]

The one thing about cyclical companies is that is it very hard to build wealth.  For example, the steel company that Bouchard sold went bankrupt a few years later.  He may have sold at the exact top, which isn't something that is easily repeatable. 

 

 

[Sionnach]

The one thing about cyclical companies is that is it very hard to build wealth.  For example, the steel company that Bouchard sold went bankrupt a few years later.  He may have sold at the exact top, which isn't something that is easily repeatable.

 

 

*** Ding ding ding! ***

[accutronman]

http://www.barrons.com/articles/this-sam-zell-favorite-could-double-in-value-1464866824?mod=BOL_hp_highlight_2

[wjsco]

The one thing about cyclical companies is that is it very hard to build wealth.  For example, the steel company that Bouchard sold went bankrupt a few years later.  He may have sold at the exact top, which isn't something that is easily repeatable.

 

Which is why it's so important that they're buying counter-cyclical companies. Aleris's recycling and specification alloy business was like the only cash flow positive metals company in the US in 08/09.

 

Also, when Esmark acquired Wheeling-Pittsburgh, Wheeling had a "going concern" conditional from their auditor. So it was already over-levered when Bouchard bought it - 70% of the cap structure was debt at the time of the acquisition. Post acquisition, they'd gotten debt down to 40% of the capital structure. But then, yes, Bouchard sold it to an Indian company. And I bet the Indian company made the acquisition with debt, and that's why it went bankrupt.

 

Case and point - Aleris's recycling/specification alloy business was like the only steel/aluminum company to generate positive cash flow in 2009. But, management had taken it private with billions of dollars in debt, and they went bankrupt. So, yes, if you're over-leveraged, and operate in a cyclical industry, you're clearly going to have bankruptcy risk. But also, in this particular instance with Aleris, the recycling company was only part of their operations - they had extrusion and rolling segments, as well. And those were not cash flow positive in 2008/2009.

 

I think you gotta be careful when painting with such a broad brush

[wjsco]

The one thing about cyclical companies is that is it very hard to build wealth.  For example, the steel company that Bouchard sold went bankrupt a few years later.  He may have sold at the exact top, which isn't something that is easily repeatable.

 

 

*** Ding ding ding! ***

 

Yeah I'd just point out that steel service centers and steel production isn't exactly the same profile as this recycling business. Also, I'd point out that, we're already in the trough of the cycle. LME prices were $2550 in mid-2011, and they're roughly $1500 today. Oh, and even with LME aluminum at $1500, they generated like $90 million in FCF in 10 months w/ Real Alloy. So, esmark and rely's business economics aren't very similar at all - the only similarity is that they're both basic materials/metals companies, which is a fairly superficial similarity. and also, in 2007, we were at the peak of the cycle, and now we're in the trough. And despite that, $90m in FCF in 10 months.

[gfp]

What did I miss that caused today's share price increase?  Wasn't the barron's mention last week?

[wjsco]

What did I miss that caused today's share price increase?  Wasn't the barron's mention last week?

 

Yeah but folks probably read up on it over the weekend, and then make their decision...that's kinda what I figured

[gfp]

They filed a presentation with the sec ->

http://www.sec.gov/Archives/edgar/data/38984/000156459016020411/rely-ex991_6.htm

[kab60]

Seems like Alcoa surprised positively with its earnings report. 0.15 eps vs. expected 0.09 and keeping guidance for global demand growth of 5 pct. in 2016.

[kab60]

Ebitda down y/o/y and Q3 is supposed to be worse. Let's say they get to 80m adj. Ebitda for FY2016 (100+ seems far away) less 30m interest and 30m capex that's 20m FCF before working capital changes (not sure if they can squeeze more out of that). There's a lot of leverage (operating as well as financial), so I think the risk is high.

[kab60]

CEO was fired. I lucked out and sold last week for a decent gain, but this was another mistake of mine. My above comment still stands; 80 adj Ebitda less 30m capex and 30m interest = 20m FCF before WC. This can get bad with debt maturities in 2019. High leverage plus commodity risk and macro risk.

[slkiel]

A bit shocking, to be honest. It was clear from the call today that the board (and probably Ross) wanted to focus future acquisitions related to Real Alloy, while Bouchard always wanted to form a diversified holding company. They also made the point several times that they would be more careful with share issuances. That seemed to be a point of contention since the company had two prior instances were they issued shares in a sub-optimal way.

 

I view the company now as less risky as they will focus on acquisitions that can be easily integrated and will focus on continuing to pay down debt. In the long term, the potential isn't as high though. 

[brendanb22]

Stock has been getting crushed since the Bouchard exit -- anybody in here still confident in their long term prospects?

 

I get that Bouchard is a great capital allocator and the upside has been reduced, but even if the core alloy business returns to $80m in EBITDA, the valuation is too compelling to pass up here. On top of that, you get the added optionality of $900mm in NOL's and a competent mgmt team.

[KJP]

Stock has been getting crushed since the Bouchard exit -- anybody in here still confident in their long term prospects?

 

I get that Bouchard is a great capital allocator and the upside has been reduced, but even if the core alloy business returns to $80m in EBITDA, the valuation is too compelling to pass up here. On top of that, you get the added optionality of $900mm in NOL's and a competent mgmt team.

 

 

Putting the NOLs aside for a minute, how much free cash flow does $80 million in EBITDA convert into, after including all corporate expenses?

[kab60]

Not much per my earlier post.

 

But I'm not so sure firing Bouchard is a negative (less overhead). He told a good story, but buying a cyclical commodity business with +10% yield debt that can't really use the NOLs hasn't convinced me.

[KJP]

Not much per my earlier post.

 

But I'm not so sure firing Bouchard is a negative (less overhead). He told a good story, but buying a cyclical commodity business with +10% yield debt that can't really use the NOLs hasn't convinced me.

 

Yes, I don't see much FCF either.  If EBITDA is $80 million, it's also trading at the same multiple at which Real Alloy was bought (6.25x LTM EBITDA). 

[brendanb22]

A few points in response:

 

1. Even at a levered FCF of $20mm, you're still just paying 9x for a best in class operation with a strong moat around their niche, best-in class operation, and macro tailwinds. If you'll remember, Aleris was positive cash flow in 08/09 so I think the debt concerns are overblown

2. EBITDA has the potential to be significantly greater than $80mm, primarily from their cost cutting initiatives,

3. I don't think you can discount the NOL's altogether. I get that they are less likely to be consumed now that Bouchard is out, but it still provides for significant optionality

[brendanb22]

Mgmt. finally made an acquisition on 11/1 of Beck Aluminum and a minority stake in prime aluminium broker. As described when Bouchard stepped down, the company is focusing more on the aluminium business. I definitely view this as a large positive that they are bolstering their core business and starting to utilize those NOLs, but hopefully they will continue to do more as this is a relatively small move (Beck shipped 55,000 metric tonnes to its customers compared to 1.2 million metric tonnes for RELY)

 

https://www.sec.gov/Archives/edgar/data/38984/000156459016026762/rely-ex991_19.htm

[kab60]

Just read the latest CC. Management is talking about acquisitions while their currency, their stock, is in the dumpster and the balance sheet is waaay overleveraged. Took a large impairment on Real Alloy and must be very close to cash flow negative. High leverage plus cyclical business - ouch. If aluminium spreads rise sharply, they'll be printing money, but if they have operational issues and prices keep cratering  (to be fair it seems it rebounded a bit in 2017, but what if auto crashes/falls a bit?) they might get into deep(er) shit with debt coming due in 2019.

[wjsco]

Just read the latest CC. Management is talking about acquisitions while their currency, their stock, is in the dumpster and the balance sheet is waaay overleveraged. Took a large impairment on Real Alloy and must be very close to cash flow negative. High leverage plus cyclical business - ouch. If aluminium spreads rise sharply, they'll be printing money, but if they have operational issues and prices keep cratering  (to be fair it seems it rebounded a bit in 2017, but what if auto crashes/falls a bit?) they might get into deep(er) shit with debt coming due in 2019.

 

I think, at the least, excl working capital, theyre cash flow neutral. the asset's great though. they have like $10m or something of corporate costs that use cash flow, and they also pay about $30m in interest per year. So, at cash flow breakeven, at the trough of the cycle, those assets are still generating $40m unlevered FCF.

 

I think spreads are going to expand, potentially rapidly. On the pricing side, that directionally follows LME, which is up alot and rising. On the cost of scrap side, steel prices are jumping. but used/scrap car values have still been on the decline (LKQ and FENX have the info on this). Eventually, high prices for finished steel will drive scrap steel prices higher, and you'll have more people scrapping their old cars. Now, each car has alot of scrap aluminum, too (just not nearly as much as steel). So as the supply of scrap steel increases, so does the supply for scrap aluminum, which means scrap aluminum prices decrease. And China's buying of scrap aluminum has declined alot. So spread outlook seems to be constructive.

 

the other thing is that volumes have been declining forever. It's just a little bit every year, but it does add up, and these things have high fixed costs. I'm not sure what the catalyst for higher volumes will be, or if it will ever happen, but if it does, the contribution margin from additional volumes is high.

 

i sold this when brouchard was forced out, because he was basically the thesis, and it seems like he was doing his job exceptionally well in that he wouldnt overpay for a target, even if that meant sitting on his laurels. so the board disagreed, which means what? they just want to make another acquisition? that was what frightened me. but also, assets can be sells at one price and buys at another, and this thing has declined from like $7 to $2.5...i'm fairly confident that's called an overshoot

[kab60]

That went fast. Equity probably worthless. Hope people for out in time. Couple of similarities with Horsehead. I was lucky but learned my lesson.

[Green King]

This looks interesting now.

Pricing due tp Possible technical default and  Asset-based cyclical business in an uptrend.

Did anyone get some? Am I correct in reading that senior debt is recourse to the operating business?

And the parent company has the NOL and some cash. Anyone know who controls this thing now?