Schnitzer Steel Industries' CEO Discusses F2Q 2012 Results - Earnings Call Transcript

Schnitzer Steel Industries, Inc. (SCHN)

F2Q2012 Earnings Conference Call

April 5, 2012 11:30 AM ET


Alexandra Deignan - Investor Relations

Tamara Lundgren - President and Chief Executive Officer

Richard Peach - Senior Vice President and Chief Financial Officer


Luke Folta – Jefferies

Timna Tanners - Bank of America Merrill Lynch

David Lipschitz – CLSA

Brent Thielman - D.A. Davidson

Bridget Freas - Morningstar

Dan Whalen – Auriga USA



Good day ladies and gentlemen and welcome to the Schnitzer Steel Second Quarter 2012 Earnings Release. (Operator Instructions)

I would now like to introduce our host today Ms. Alexandra Deignan, Vice President of Investor Relations. Ma’am, please go ahead.

Alexandra Deignan

Thank you, Karren. 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 2, which are also included in our press release as 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 those 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 second quarter earnings call for fiscal 2012. I will start it off this morning by discussing some highlights from our Q2 results and our assessment of market trends and I will update you on our recent dividend announcement. Richard will then provide more detailed information on our segment performance and our financial metrics. I will conclude with some remarks about current market conditions.

So if you will join me by turning to slide 4 we can get started. As we noted in this morning’s press release, we delivered $0.35 of EPS this quarter, up nearly 40% from the first quarter but clearly reflecting the headwinds of uncertainty and weakness in the global markets. Export demand for recycled metals improved in the second quarter and we saw an increase in ferrous sales volumes of 10% and an increase in nonferrous sales volumes of 23%. We believe that the long-term demand for recycled metals remained strong and we are optimistic about the prospects for our business. But in the near term, our markets remained challenging; in particular, we continue to be impacted by tight supply conditions for raw materials driven by the low US GDP growth rate and flat selling prices.

As expected, December shipments were the trough for the quarter and reflected the lower priced shipments that carried over from the weak markets we saw in October and November as a result of the European financial crisis. Prices drove more than $50 on early January shipments but then weakened. Softer selling prices in the later part of the quarter reflected continued concerns over the global economy. The mild winter weather also contributed to the softer selling prices as customer concerns ease regarding the availability of materials for sale during the quarter.

Our operating income grew by 20% and our operating income per ton increased approximately 40% versus Q1, primarily driven by higher volumes and lower SG&A. Our operating income and margins however were both down from last year. Although average selling prices didn’t change much year-over-year, last year’s second quarter benefited from rising selling prices rather than the weakening that we saw this year. During the past quarter, in order to better leverage our platform across geographies and across divisions, we undertook a comprehensive SG&A review and as a result our SG&A levels are now running approximately 10% below the average run rates for the last three quarters.

So now let’s turn to slide 5 to take a deeper dive into our performance. Volumes improved in each of our segments during Q2, which is typically a seasonally weaker quarter due to winter weather condition. In our Metals Recycling Business, operating income increased more than 50% versus Q1 due to higher sales volumes and lower SG&A, but margins were compressed versus last year due to the weak market conditions and the supply issues we just discussed. In our Auto Parts Business we experienced strong year-over-year growth in revenues, mainly due to increased parts sales and admissions. However, we normally see a sequential decline in sales and admissions in our second quarter due to weather and holidays and this second quarter was no different. APB’s operating income and margins during the quarter were also impacted by softer commodity prices and higher legal expenses. Our Steel Manufacturing Business continues to be negatively impacted by weak demand on the West coast for construction related materials like rebar and wire rod.

During the quarter, our consolidated operating margins improved month-over-month, benefitting from higher volumes and lower variable cost as we leveraged our operating efficiencies across our expanded platform and reduced SG&A. We also generated strong operating cash flow which when coupled with our ability to access credit provides us with ample room for capital investments, acquisitions, dividends, and share repurchases.

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