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Schnitzer Steel Industries, Inc. (SCHN)

F3Q12 Earnings Call

June 28, 2012 11:30 a.m. ET


Alexandra Deignan - Investor Relations

Tamara Lundgren - President and Chief Executive Officer

Richard Peach - Senior Vice President and Chief Financial Officer


Timna Tanners - Bank of America Merrill Lynch

Philip Gibbs - KeyBanc Capital Markets

Luke Folta - Jefferies

Brent Thielman - D.A. Davidson

Bridget Freas - Morningstar

Timothy Hayes - Davenport & Company

David Lipschitz - CLSA

Mark Parr - KeyBanc Capital Markets

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Good day, ladies and gentlemen, and welcome to the Schnitzer Steel Third Quarter 2012 Earnings Release Conference Call. At this time all participants are in a listen-only mode. Later we will have a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Alexandra Deignan. Ma’am you may begin.

Alexandra Deignan

Thank you, Marry. Good morning. I am Alexandra Deignan, the company's investor relations contact. I would like to thank everyone for taking the time to join us today. In addition to today’s audio comments, we have prepared a set of slides that you can access on our website at or

Before we get started, let me call your attention to the detailed Safe Harbor statements on slide two, which are also included in our press release of today and in the company’s most recent Form 10-K. These statements, in summary, say that in spite of management’s good faith, current opinions on various forward-looking matters, circumstances can change and not everything we think will happen always happens. Please note that we will be discussing some non-GAAP measures during our presentation today. We have included a reconciliation of these metrics to GAAP in the appendix of our slide presentation.

Now, let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She will host the call today with Richard Peach, our Chief Financial Officer.

Tamara Lundgren

Thanks, Ally. Good morning, everyone and welcome to our fiscal 2012 third quarter earnings call. I will begin this morning with a look at our Q3 results and recent market trends. Richard will follow with a more detailed review of the financial performance of each of our segments. I will wrap up with some comments on current market conditions and then we will open up the call for some Q&A.

So if you will join me by turning to slide four, we can get started. As we noted in this morning’s press release, we reported earnings per share of $0.40 for the third quarter. This reflects an increase of 16% over our second quarter performance. Our operating income also reflected significant sequential improvement. Q3 consolidated operating income was up 23% versus Q2. These results exceeded our third quarter market outlook, primarily due to better than anticipated performance in our metals recycling business towards the end of the quarter. All of the markets in which we operate continue to face challenging conditions.

Our earnings and margins have increased over the course of this fiscal year, yet they are still below where they were in fiscal 2011. Our consecutive quarters of sequential improvement over the last nine months, however, is a reflection of the strength and competiveness of our people and our operating platform because we face tougher market today than we did last year.

In our last fiscal year which ended August 31, the export markets experienced a steady increase in sales prices driven by rising demand. And as you may recall as well, in our last fiscal year, average ferrous and non-ferrous sales prices increased by about 30% during the year, which was one of the drivers of our expanded margins. This situation changed abruptly in the fall of 2011 with the onset of the European financial crisis, the slower growth projections in the developing world, and the uncertainty in the U.S. economy in the face of our nation’s fiscal clip.

Although year-to-date, export scrap volumes have stayed relatively flat versus 2011, the volatility from the month-to-month has been very significant. And export sales prices have also been quite volatile during the last nine months with a peak to trough difference of approximately $100, and with an overall trend downwards during this time period. Falling price environments typically act as a damper on supply flows, and our margins have compressed during this time period as purchase prices have not fallen as quickly as sales prices.

Notwithstanding these headwinds, we have been able to maintain our financial discipline by staying focused on the things that we can control. We remain highly focused on maintaining our positive cash metal spreads, extracting synergies between our MRB and APB divisions, reducing SG&A throughout the company, and strengthening our supply chain and our operating efficiencies. This has enabled us to generate strong operating cash flows and to execute a balanced capital allocation strategy. We have reduced our outstanding debt, we have returned capital to our shareholder through share purchases, we have substantially increased our annual dividend to $0.75 per share, and we have been able to continue to invest in the growth of our business.

Our capital allocation strategy is a reflection of the long-term strength of our business model. We have a uniquely positioned operating platform, which enables us to meet the fundamental demand that exists, and is expected to continue. The developing world is still growing and is still short of scrap. So let's turn to slide five to take a deeper dive into our sales and supply markets.

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