SCHN

Schnitzer Steel Industries, Inc. (SCHN)

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0.90
3.92%
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Exchange: NASDAQ
Industry: Consumer Durables
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Executives

Alexandra Deignan - IR

Tamara Lundgren - President and CEO

Richard Peach - SVP and CFO

Analysts

Luke Folta - Jefferies

Timna Tanners - Bank of America/Merrill Lynch

Timothy Hayes - Davenport & Company

Brent Thielman - D.A. Davidson

David Lipschitz – CLSA

Presentation

Operator

Good day ladies and gentlemen, and thank you for standing by. Welcome to the Schnitzer Steel First Quarter Fiscal 2012 conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference is being recorded.

I’d like to introduce our host for the day Ms. Alexandra Deignan, Vice President of Investor Relations. Ma’am, please go ahead.

Alexandra Deignan

Thank you, Karren, and good morning everyone. I’m Alexandra Deignan, the Company’s Investor Relations contact. I’d like to thank everyone for taking the time to join us today. In addition to today’s audio comments, we have prepared set of slides that you can access on our website at www.schnitzersteel.com or www.schn.com.

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-Q – 10-K, excuse me. These statements and summary, said 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.

In addition, we have guidance regarding our outlook for the second quarter of 2012 in our press release and in this presentation. After this call, we will not be under any obligation to update our outlook.

Finally, 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, and welcome everyone to our earnings call for the first quarter of our 2012 fiscal year. As we did in the past, I will start it off with a review of the consolidated results for our first quarter which ended in November. And Richard will then discuss the detail results for our three segments and review our cash flow and our capital structure.

I’ll conclude with an outlook for our second quarter and then we will open up the call for questions. So let’s get started by turning to slide four.

As we highlighted when we gave our first quarter preliminary results in December, our Q1 results were negatively impacted by an interruption in global buying patterns for recycled metals, followed by a sharp decline in sales prices. For a period of about three weeks our customers have spend in purchases of ferrous scrap due to high in concerns about a global recession driven by the European debt crisis.

When buying resumed it did so a significantly lower prices and at lower volumes. Although we achieved ferrous sales volumes consistent with the first quarter of last year, our volumes were significantly lower than the run rate we’ve been achieving in the last two quarters of fiscal 2011.

Our non-ferrous sales volumes were higher than the first quarter of last year, were also lower than the last two quarters of fiscal 2011 due to the same macroeconomic uncertainties.

Our operating margins compressed primarily due to the effect of average inventory costs. Although we do adjust price, purchase price is downward because our inventory cost reflects a moving average, they declined more slowly than the decline in sales prices.

As you know, we’re impacted by average inventory accounting cost every quarter. However, the effects are more significant with a sharp and sustained movement in market prices, which is what occurred when buying returned at the end of October and carry through November. Since then, prices have risen substantially for shipments being made in January.

So, let’s turn to slide five to take a look at our financial results. Well, our first quarter EBITDA at $35 million and our EPS at $0.25 were the result of the very unusual interruption in demand and sharp fall in prices. We’ve said many years that it’s best to look at our performance over multiple quarters in order to smooth out the impact of average inventory costs, timing of shipments and the volatility in sales prices and to better understand the longer term trends driving our business.

Looking at year-over-year, trailing 12-months, operating income for our Metals Recycling, Auto Parts and Steel Manufacturing businesses, you can see a consistent pattern of growth, and the EPS numbers tell us similar story.

Digging a little deeper, our first quarter is typically our weakest quarter. The suspension in buying that we experienced this quarter though was highly unusual. We haven’t seen this type of buyer uncertainties since the fall of 2008, but it’s important to note that we did not experience in this quarter either the customer credit contraction or the contract cancellation issues that occurred in 2008 in order we see the non-cash inventory write-downs that we experienced last year.

The suspension in buying, we believe was driven by the fear of another global financial crisis and by concerns that there would be continued downward adjustments in prices.

As I mentioned earlier, both demand and prices began to rebound in December for January shipments. While our Q2 will feel the residual impact from the lower prices for December shipments, we’ve seen a healthy rebound in prices and demand in January, which we expect to remain into February.

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