tms presentation final 2013 version

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TMS International (TMS) Seamus Sullivan

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Page 1: Tms presentation final 2013 version

TMS International (TMS)

Seamus Sullivan

Page 3: Tms presentation final 2013 version

TMS is the largest provider of outsourced industrial services to steel mills in North America as measured by revenue.

They offer the most comprehensive suite of outsourced industrial services to the steel industry and over the past 80

years TMS has established long-standing customer relationships with an average length of service over 35 years.

TMS’s business model is characterized by long-term contracts and a highly variable cost structure, which enable them

to generate strong Discretionary Cash Flow.

TMS provides a broad range of services through two reporting segments

Mill Services Group

The services provided to our customers under this segment include:

• Scrap management and preparation

• Semi-finished and finished material handling

• Metal recovery and slag handling, processing and sales; and

• Surface conditioning

Raw Material and Optimization Group

The services provided under this segment include:

• Raw materials procurement and logistics

• Proprietary software-based raw materials cost optimization

• Formed by Onex in 2006

• IPO 2011

• Headquarters: Glassport, PA

• Raymond Kalouche, CEO

• locations in North America, Europe, Middle East/Africa,

Latin America, and Asia

• ~4,400 employees, ~3,700 are hourly employees.

• Sector: Industrial Service, steel sector

The Company

Page 8: Tms presentation final 2013 version

Valuation TMS InternationalDiscounted Cash Flow Analysis($ in millions, fiscal year ending December 31) Operating Scenario Base

Operating Scenario 1

Mid-Year Convention N Historical Period CAGR CAGR

2009 2010 2011 ('09 - '011) 2012 2013 2014 2015 2016 2017 ('12 - '17)

Sales

Raw Materials $989.3 $1,632.8 $2,192.2 48.9% $1,995.0 $2,054.8 $2,137.0 $2,233.2 $2,333.7 $2,380.3 3.6%

Mills Services Revenue $309.1 $397.8 $469.3 23.2% 531.2 $547.2 $569.0 $594.7 $624.4 $636.9

Total Sales 1,298.3 2,030.6 2,661.5 2,526.2 2,602.0 2,706.1 2,827.8 2,958.1 3,017.2

% Growth 56.4% 31.1% (5.1%) 3.0% 4.0% 4.5% 4.6% 2.0%

Site Operatig Costs $233.1 $293.0 $356.2 396.4 404.9 421.1 440.0 462.0 471.3

Cost of Scrap Shipments 940.0 1,564.5 2,112.0 1,919.5 1,972.6 2,051.5 2,143.8 2,240.3 2,285.1

Total COGS 1,173.1 1,857.5 2,468.2 2,315.9 2,377.5 2,472.6 2,583.9 2,702.4 2,756.4

Gross profit $125.2 $173.1 $193.3 24.2% $210.3 $224.5 $233.4 $243.9 $255.7 $260.8 4.4%

Gross Profit Rev. After Raw Materials Costs $358.3 $466.1 $549.5 $606.7 $629.4 $654.5 $684.0 $717.7 $732.1

SG&A 44.6 53.1 58.6 64.1 78.1 81.2 84.8 88.7 90.5

EBITDA $80.6 $120.0 $134.6 29.3% $146.2 $146.4 $152.3 $159.1 $166.9 $170.3 3.1%

EBITDA Rev. After Raw Materials Costs $313.7 $413.0 $490.8 $542.6 $551.3 $573.3 $599.1 $629.0 $641.6

% margin 6.2% 5.9% 5.1% 5.8% 5.6% 5.6% 5.6% 5.6% 5.6%

EBITDA Rev. After Raw Materials Costs% margin 24.2% 20.3% 18.4% 21.5% 21.2% 21.2% 21.2% 21.3% 21.3%

Depreciation & Amortization 57.6 49.3 47.5 56.5 52.0 54.1 56.6 59.2 60.3

EBIT $23.0 $70.7 $87.1 94.6% $89.7 $94.4 $98.1 $102.5 $107.8 $109.9 4.2%

% margin 1.8% 3.5% 3.3% 3.5% 3.6% 3.6% 3.6% 3.6% 3.6%

Taxes 6.9 21.2 26.1 28.7 33.0 34.3 35.9 37.7 38.5

EBIAT $16.1 $49.5 $61.0 94.6% $61.0 $61.3 $63.8 $66.7 $70.1 $71.5 3.2%

Plus: Depreciation & Amortization 57.6 49.3 47.5 56.5 52.0 54.1 56.6 59.2 60.3

Less: Capital Expenditures (37.6) (39.8) (80.8) (110.5) (104.1) (108.2) (113.1) (118.3) (114.7)

Less: Increase in Net Working Capital 3.2 (2.9) (2.3) (2.5) (1.1)

Unlevered Free Cash Flow $12.4 $6.8 $7.8 $8.4 $16.0

WACC 17.4%

Discount Period 1.0 2.0 3.0 4.0 5.0

Discount Factor 0.85 0.73 0.62 0.53 0.45

Present Value of Free Cash Flow $10.6 $4.9 $4.8 $4.4 $7.2

Projection Period

Assumptions

Raw Materials Sales (% growth) NA 65.1% 34.3% (9.0%) 3.0% 4.0% 4.5% 4.5% 2.0%

Site Revenue (% growth) 28.7% 18.0% 13.2% 3.0% 4.0% 4.5% 5.0% 2.0%

Raw Materials Expences (% of Raw Material sales) 95.0% 95.8% 96.3% 96.2% 96.0% 96.0% 96.0% 96.0% 96.0%

Site Operating Cost (% of Site Revenue) 75.4% 73.7% 75.9% 74.6% 74.0% 74.0% 74.0% 74.0% 74.0%

COGS (% sales) 90.4% 91.5% 92.7% 91.7% 91.0% 91.0% 91.0% 91.0% 91.0%

SG&A (% sales) 3.4% 2.6% 2.2% 2.5% 3.0% 3.0% 3.0% 3.0% 3.0%

Depreciation & Amortization (% Sales) 4.4% 2.4% 1.8% 2.2% 2.0% 2.0% 2.0% 2.0% 2.0%

Capital Expenditures (% Sales) 2.9% 2.0% 3.0% 4.4% 4.0% 4.0% 4.0% 4.0% 3.8%

Tax Rate 30.0% 30.0% 30.0% 32.0% 35.0% 35.0% 35.0% 35.0% 35.0%

Working Capital (% Sales) 1.8% 1.9% 1.9% 1.9% 1.9%

Enterprise Value Implied Perpetuity Growth Rate

Cumulative Present Value of FCF $31.9 Enterprise Value $337.0 Terminal Year Free Cash Flow (2017E) $16.0

Less: Total Debt 316.4 WACC 17.4%

Less: Preferred Securities - Terminal Value $681.1

Terminal Year EBITDA (2017E) $170.3 Less: Noncontrolling Interest -

Exit Multiple 4.0x Plus: Cash and Cash Equivalents 26.9 Implied Perpetuity Growth Rate 14.7%

Terminal Value $681.1

Discount Factor 0.45 Implied Equity Value $680.3 Implied EV/EBITDA

Present Value of Terminal Value $305.0 Enterprise Value $337.0

% of Enterprise Value 90.5% Implied Share Price 39.3 LTM 9/30/2012 EBITDA 147.0

Enterprise Value $337.0 Implied Share Price $17.31 Implied EV/EBITDA 2.3x

Implied Equity Value and Share Price

Terminal Value

Page 9: Tms presentation final 2013 version

Valuation

Raw Material and Optimization Group generates Service Revenue by providing their proprietary

software-based raw materials cost optimization service

• Revenues are primarily generated from the sale of materials through raw materials procurement

activities using two alternative transaction models

1. In the first type TMS takes no title of the materials being procured and they record only their commission

as revenue

• During the year ended December 31, 2012, approximately 9% of the Company’s raw material procurement activity

by volume was transacted under this model

2. In the second type, TMS takes title to the material and sells it to a buyer, typically in a transaction where a

buyer and seller are matched, and TMS records Revenue from Sale of Materials for the full value of the

material based on the amount they invoice to their customer

• During the year ended December 31, 2012, approximately 91% of the Company’s raw material procurement activity

by volume was made under this transaction model

• “For the year ended December 31, 2012, approximately 8% of our Revenue from Sale of Materials was

generated by our Mill Services Group, and approximately 92% of our Revenue from Sale of Materials was

generated by the raw materials procurement activities of our Raw Material and Optimization Group.”1

– Because TMS does temporarily take tile of the scrap for their clients, GAAP accounting forces TMS to

recognize this on a gross rather than net basis

1: 10-K filed on Feb-19-2013

Page 10: Tms presentation final 2013 version

TMS InternationalDiscounted Cash Flow Analysis($ in millions, fiscal year ending December 31)

Operating Scenario 1

Mid-Year Convention N Historical Period CAGR

2009 2010 2011 ('09 - '011) 2012

x Sales

Raw Materials $989.3 $1,632.8 $2,192.2 48.9% $1,995.0

Mills Services Revenue $309.1 $397.8 $469.3 23.2% 531.2

Total Sales 1,298.3 2,030.6 2,661.5 2,526.2

% Growth 56.4% 31.1% (5.1%)

Site Operatig Costs $233.1 $293.0 $356.2 396.4

Cost of Scrap Shipments 940.0 1,564.5 2,112.0 1,919.5

Total COGS 1,173.1 1,857.5 2,468.2 2,315.9

Gross profit $125.2 $173.1 $193.3 24.2% $210.3

Gross Profit Rev. After Raw Materials Costs $358.3 $466.1 $549.5 $606.7

SG&A 44.6 53.1 58.6 64.1

EBITDA $80.6 $120.0 $134.6 29.3% $146.2

EBITDA Rev. After Raw Materials Costs $313.7 $413.0 $490.8 $542.6

% margin 6.2% 5.9% 5.1% 5.8%

EBITDA Rev. After Raw Materials Costs% margin 24.2% 20.3% 18.4% 21.5%

Depreciation & Amortization 57.6 49.3 47.5 56.5

EBIT $23.0 $70.7 $87.1 94.6% $89.7

% margin 1.8% 3.5% 3.3% 3.5%

Taxes 6.9 21.2 26.1 28.7

EBIAT $16.1 $49.5 $61.0 94.6% $61.0

Plus: Depreciation & Amortization 57.6 49.3 47.5 56.5

Less: Capital Expenditures (37.6) (39.8) (80.8) (110.5)

Less: Increase in Net Working Capital

Valuation

Page 11: Tms presentation final 2013 version

Mill Service Revenue is generated from a combination of:

1. Contractually committed base monthly fees

2. Fees for services based on customer production volumes; and

3. Revenue from the sale of steel manufacturing co-products sold for

TMS’s own account, less a royalty fee paid to the host mill

The vast majority of TMS’s Revenue After Raw Materials Costs and profitability is

tied to our customers’ production volumes

Valuation

31%

69%

EBITDA by Operating Segment

RMOG EBITDA

Mills Services EBITDA

88%

12%

Revenue By Segment

Mills Services

RMOG

Page 13: Tms presentation final 2013 version

Management Alignment Latest Holders

Holder Common Stock Equivalent Held % Of CSO Market Value (USD in mm) Change in Shares

Onex Corporation (TSX:OCX) 19,558,324 49.795 274.8 -

Tube City EI II Ltd. 3,345,575 8.518 47.0 -

Duncanson, Timothy A. R. (Director, Chairman of Compensation

Committee and Chairman of Nominating & Governance Committee)

562,492 1.432 7.9 -

Curtin, Joseph (Executive Chairman) 354,228 0.902 5.0 42,143

Aronson, J. David (President of The Raw Material and Optimization

Group and Chief Operating Officer of The Raw Materials and

Optimization Group)

320,712 0.817 4.5 (1,750)

Kalouche, Raymond S. (Chief Executive Officer and President) 220,158 0.561 3.1 -

Coslov, I. Michael (Former Chairman and Chairman of Tube City IMS

Corporation)

145,836 0.371 2.0 96,368

Lippard, Thomas E. (General Counsel Emeritus) 134,055 0.341 1.9 (14,872)

Rosati, Daniel E. (Chief Financial Officer, Executive Vice President and

Treasurer)

95,651 0.244 1.3 10,000

Osborne P.Eng, Colin (Director, Chairman of Audit Committee, Member of

Compensation Committee and Member of Nominating & Governance

Committee)

11,747 0.03 0.2 -

Tolbert, Patrick W. (Director) 5,367 0.014 0.1 -

Parker, Herbert K. (Director and Member of Audit Committee) 5,367 0.014 0.1 -

Connelly, John J. (Director, Member of Audit Committee, Member of

Compensation Committee and Member of Nominating & Governance

Committee)

5,367 0.014 0.1 -

Srivastava, Manish Kumar (Director, Member of Compensation Committee

and Member of Nominating & Governance Committee)

1,993 0.005 0 -

IMC Tube City Holdings, Inc 0 0 0 (701)

CSO denotes Common Shares Outstanding.

Reported Currency is the local currency of the equity listing.

Derivatives Ex. 60 Days data is only available from annual reports.

Market Value is calculated on Common Shares Held using the closing price 14.05 USD as of May-01-2013.

Ow nership data provided by

Page 14: Tms presentation final 2013 version

Catalysts

Increased Outsourcing, Especially in Developing Markets

• The provision of critical industrial services is generally not a core competency of steel producers, yet it is essential to the

efficient operation of their complex facilities

• TMS believes that steel producers will increasingly utilize outsourced service providers in order to reduce costs and

improve operational efficiency, enabling them to focus their human and capital resources on their core business of steel

making

• TMS believes that as the steel industries in developing markets mature, competition among steel producers will increase

and cost and operational efficiencies will become more important

Consolidation of Steel Producers Driving Outsourcing

• TMS sees many of their customers increasingly transferring best-practices, including the outsourcing of industrial services,

across their locations worldwide

Continued Growth in International Markets

• TMS believes they have substantial international growth opportunities which will be driven by expansion of existing

market share in Latin America and Europe

• In 2012, TMS won 17 new mill services contracts, seven of which were international contracts

End-Market sales drivers

• Non- Residential construction

• Autos

• Appliances – Consumer Appliances

Page 19: Tms presentation final 2013 version

Catalysts

Page 21: Tms presentation final 2013 version

f

Catalysts

Utilization to revert back to

mean

World Steel Association

projects 3% growth in 2013

Page 22: Tms presentation final 2013 version

Proof of expansion gaining traction

Growth Capital Exenditures 26.9 23.2 9.5 41.4 68.0

% of Total CAPEX 42.9% 59.5% 23.3% 51.1% 61.4%

Growth Maintenance Capital Expenditures 35.8 15.8 31.2 39.6 42.7

% of Total CAPEX 57.1% 40.5% 76.7% 48.9% 38.6%

Total CAPEX 62.7 39.0 40.7 81.0 110.7

Capital Expenditure (54.6) (62.9) (37.6) (39.8) (80.8) (110.5)

Catalysts

Page 23: Tms presentation final 2013 version

Risks to my call

• Onex controls the company

• Concentration of customers:

− Top 10 customers are 79% of revenues *(limited by site specific decision-making)

• Steel is a highly cyclical and unloved sector

− Competition from inexpensive foreign steel producers i.e. China

• Success in penetrating international markets

• Cross-selling may be more difficult in international markets due to competitors and in some

areas of the business, low barrier to entry

• Competition: Steel Mill Services market is a competitive, prices sensitive space, and many of

the larger competitors have been in existence for decades. Larger companies may have

advantage when bidding for contracts

• General Economic Conditions: North American and global steel production volumes and

demand follow regional and global economic conditions and demand in key markets. A large

portion of TMS revenue after raw materials costs is driven by the volume of steel production in

NA steel mills.

• Thinly traded stock: Average daily volume is 300k

Page 24: Tms presentation final 2013 version

• TMS has an attractive contracting structure, as pricing is tiered based on volume, providing a

cushion in the event that steel makers cut back on production. In other words, unit prices

increase as volumes decline, and/or minimum monthly fees kick in, stabilizing revenues

• Because TMS doesn’t take on pricing risk, it should theoretically be less risky than producers

• Misunderstood “Real” revenues and EBITDA

• TMS Trading at a discount to comparisons

– TEV/EBITDA 5.7x vs. average comp’s 7.5x

– TEV/EBIT 10.6x vs. average comp’s 13.9x

• Strong Cash Flow Yield

– PV of FCF out to 2017 ≈ 7%

• Management alignment

• Margin squeeze will push steel producers to reduce non-core business operations

• International expansion

• Recently announced quarterly dividend of $0.10 per share

• Yields 2.7% per year

Summary