Giant Steps

Daniel Dienst

The numbers for its completed fiscal year 2005 are impressive: $1.7 billion in revnue derived from the sale of more than 5.1
million tons of scrap metal.

But for investors in Metal Management Inc., Chicago, even more important than scale is the fact that the scrap recycling firm garnered $92.3 million in net income for a profit of $3.74 per common share of stock.

The results can be credited to a healthy global market and to a management team and philosophy guided by former investment banker and turnaround specialist Daniel W. Dienst, who has now been involved with the company’s management team for five years.

BRIDGING DIVIDES. In his role with Metal Management Inc., Dienst has drawn upon his banking background and combined it with a fondness for the scrap industry that could be described as a case of love at first sight.

"I was a turnaround investment banker and focused on the steel and metals industries for about 12 years," says Dienst. His banking work took him to his first scrap yard in 1997, and shortly after that he was part of a group that made a bid to purchase and salvage the former Recycling Industries Inc. of Englewood, Colo. "That bid was not successful, but I still fell in love with the scrap industry," says Dienst.

Part of his love for the business is practical, he says. "I used to walk into steel mills and see enormous amounts of capital tied up in the plant and equipment, but scrap processing consumes a lot less capital," Dienst remarks.

Just as important, Dienst says he has enjoyed the people he has met within the industry. "The people are great in this industry and have been very generous with their time."

Although he is not one of the second- or third-generation scrap family members common to the industry, Dienst has been able to learn from such industry veterans while linking that industry know-how with his investment banking experience.

He says he believes that by bridging those two worlds he has been able to turn around the company, helping it to regain solid fiscal health since emerging from Chapter 11 bankruptcy in July of 2001. Dienst was hired to help turn the company around in 2000 and was named to the Metal Management board in 2001. He became chairman of the company’s board in April of 2003 and CEO of the company in January of 2004 with the departure of long-time Metal Management officer Albert Cozzi. Dienst says he views himself as a "facilitator," empowering the talent at Metal Management.

From a banker’s perspective, Metal Management was saddled with "way too much leverage" when he joined the firm in 2000, says Dienst. The company correctly bought "a bunch of the best businesses available at the time," he adds. "Metal Management in the late 1990s was a great thesis, but the execution was not there, and markets clearly did not cooperate."

Another key bridge that Dienst is trying to build is between the ferrous and nonferrous sides of the business. "Formerly, we had parts of the business that were highly focused on iron; we’re now highly focused on making money regardless of the underlying business," says Dienst, referring to the additional revenue and income that can be earned by increasing the company’s nonferrous market presence.

"We have renewed our focus on nonferrous metals and stainless steel, re-educating our regions on the importance of these commodities," he says.

Metal Management’s employee team has made good on Dienst’s wishes. In the company’s 2005 fiscal year (which ended March 31, 2005), its nonferrous scrap shipments increased by 18 percent over the year before.

Scrap recycling facilities can no longer consider themselves "iron yards" only, says Dienst, because that mentality can mean passing up too many profitable opportunities. He praised the work of Metal Management officers, such as Joe Reinmann and Larry Snyder, for helping the entire company stay alert to the opportunities in nonferrous metals and stainless steel recycling and for having the "right" people regionally focused on the same opportunities.

An additional set of bridges that Dienst has worked to build are those connecting the several different regional scrap companies that were combined to form Metal Management Inc.

"An important priority for the organization under Dan has been to instill awareness that Metal Management is one company and not a group of subsidiaries in different states with different businesses," says corporate CFO Rob Larry. "Best practices now have a level playing field coast to coast."

FASTER PACE. Dienst joined Metal Management’s board of directors in 2001, a very challenging time for the scrap markets. He has vowed not to forget the dark days of 2001 and he knows that the company’s success in the publicly traded stock market will not lie with market timing.

Rather, says Dienst, the company can stay "out of the way" of volatile markets by quickly turning over its inventory. "I keep telling shareholders that our commitment to turning our inventory will spell out a big difference in being processors rather than speculators. There is but one use for scrap metal—to be melted in a furnace—not to be laid down."

By way of example, Dienst says, "Several years ago, this company carried 900,000 tons of inventory and nearly half-a-billion dollars in debt. The company was turning its inventory over five or six times per year, which created a couple of months worth of exposure" to falling prices.

"Now, we’re turning it over 14 to 16 times per year," he says. "We’re getting out of the way of markets. We’re not speculators, we’re processors. Our shareholders do not pay us to speculate," Dienst states, adding that Metal Management can take part in LME or Comex markets if it wishes to do that.

CFO Rob Larry says the approach offers clear benefits. "Our goal is to buy, process and sell 400,000 tons or more of scrap every month, good market or bad," says Larry. "This helps us to maintain profitability by keeping our investments in scrap metal priced into current markets."

The ongoing challenge will be to show shareholders that the company can "demonstrate real earnings and be nimble with the scales" says Dienst, while continuing to quickly sell the material it collects.

As Metal Management grows, another task will be to measure returns on capital of existing operations and of any acquired operations. "Our shareholders lend us capital and they expect a return on capital," says Dienst.

To that end, while running large shredding plants helps the company move its inventory through the system, the company will not demonstrate a bias toward shredding unless it makes fiscal sense. "We shred about 1.2 or 1.3 million tons of our 5 million tons per year of scrap—about 25 percent—and we think we have the best shredding expertise around the country in our company," he notes. "But to me, I don’t care if you’re using a toothbrush or a shredder, it’s all about return on capital. As it stands now, shredding is an important piece of our business, and I would anticipate running more rather than fewer shredders in our future."

EYES FORWARD. The improved scrap climate of 2004 and early 2005 helped Metal Management record profits, but the officers of the company are aware that investors will always be more concerned about the next quarter or fiscal year rather than the one just completed.