2. The Company
Recommendation: Buy Price Target - $17.31
Current Price 13.50
52-week range $14.58 – 8.76
Market Cap 546.3M
P/E (2013) 16.7
EV/EBITDA (2013) 5.3X
3. TMS is the largest provider of outsourced industrial services to steel mills in North America as measured by revenue.
They offer the most comprehensive suite of outsourced industrial services to the steel industry and over the past 80
years TMS has established long-standing customer relationships with an average length of service over 35 years.
TMS’s business model is characterized by long-term contracts and a highly variable cost structure, which enable them
to generate strong Discretionary Cash Flow.
TMS provides a broad range of services through two reporting segments
Mill Services Group
The services provided to our customers under this segment include:
• Scrap management and preparation
• Semi-finished and finished material handling
• Metal recovery and slag handling, processing and sales; and
• Surface conditioning
Raw Material and Optimization Group
The services provided under this segment include:
• Raw materials procurement and logistics
• Proprietary software-based raw materials cost optimization
• Formed by Onex in 2006
• IPO 2011
• Headquarters: Glassport, PA
• Raymond Kalouche, CEO
• locations in North America, Europe, Middle East/Africa,
Latin America, and Asia
• ~4,400 employees, ~3,700 are hourly employees.
• Sector: Industrial Service, steel sector
The Company
4. TMS allows customers (steel mills) to focus on their core business of steel making
The Company
8. Valuation
TMS International
Discounted Cash Flow Analysis
($ 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 $17.31 Implied EV/EBITDA 2.3x
Implied Equity Value and Share Price
Terminal Value
9. Valuation
Raw Material and Optimization Group generates Service Revenue by providing their proprietary
software-based raw materials cost optimization service
• Revenues are primarily generated from the sale of materials through raw materials procurement
activities using two alternative transaction models
1. In the first type TMS takes no title of the materials being procured and they record only their commission
as revenue
• During the year ended December 31, 2012, approximately 9% of the Company’s raw material procurement activity
by volume was transacted under this model
2. In the second type, TMS takes title to the material and sells it to a buyer, typically in a transaction where a
buyer and seller are matched, and TMS records Revenue from Sale of Materials for the full value of the
material based on the amount they invoice to their customer
• During the year ended December 31, 2012, approximately 91% of the Company’s raw material procurement activity
by volume was made under this transaction model
• “For the year ended December 31, 2012, approximately 8% of our Revenue from Sale of Materials was
generated by our Mill Services Group, and approximately 92% of our Revenue from Sale of Materials was
generated by the raw materials procurement activities of our Raw Material and Optimization Group.”1
– Because TMS does temporarily take tile of the scrap for their clients, GAAP accounting forces TMS to
recognize this on a gross rather than net basis
1: 10-K filed on Feb-19-2013
10. TMS International
Discounted Cash Flow Analysis
($ 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
11. 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
12. TMS vs. Comp’s:
• Trades at 5.7x TEV/EBITDA vs. Comps mean of 7.5x
• Trades at 10.6x TEV/EBIT vs. Comps mean of 13.9x
Valuation
P/EBITDA vs. Comps
13. 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 fromannual 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
14. 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
22. 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
23. 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
24. • 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
