SCHN

Schnitzer Steel Industries, Inc. (SCHN)

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Exchange: NASDAQ
Industry: Consumer Durables
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Schnitzer Steel Industries, Inc. (SCHN)

F1Q 2013 Earnings Call

January 8, 2013 11:30 am ET

Executives

Alexandra Deignan - Vice President of Investor Relations

Tamara Lundgren - President and Chief Executive Officer

Richard Peach - Senior Vice President and Chief Financial Officer

Analysts

Arun Viswanathan - Longbow Research

Brent Thielman - D.A. Davidson

Phil Gibbs - KeyBanc Capital Markets

Martin Engler - Jefferies & Company

Timna Tanners - Bank of America

Chris Olin - Cleveland Research

Tim Hayes - Davenport & Company

Sal Tharani - Goldman Sachs

Evan Kurtz - Morgan Stanley

Bridget Freas - Morningstar

Presentation

Operator

Good day, ladies and gentlemen and welcome to the Schnitzer Steel First Quarter 2013 Earnings Release 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, today's conference is being recorded.

I would now like to introduce host for today's conference call, Ms. Alexandra Deignan. You may begin ma'am.

Alexandra Deignan

Thank you, Kevin. Good morning. I'm Alexandra Deignan, the company's Vice President of Investor Relations.

Welcome to Schnitzer Steel's first quarter of fiscal 2013 earnings presentation and we thank you for taking your time to join us today. In addition to today's audio comments, we have a prepared a 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-K and in the 10-Q, which will be filed later today.

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 happen.

Please note that we will be discussing some non-GAAP measures during our presentation today. We've 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 back from the holiday break. Today, we'll be reviewing our first quarter performance for fiscal 2013. As we normally do, I'll provide some commentary on our consolidated performance and on the macroeconomic and market trends impacting our businesses and Richard will provide the segment and financial review. I'll make some closing comments and then we'll open up the call for Q&A.

But before we begin, let me take some time to make some general comments. Calendar year 2012 was another tough year for the metals recycling and steel industry (Inaudible) growth in the U.S. and throughout the world led to muted demand. The fiscal cliff issue in the U.S., the European economic crisis and the slowdown of China's economy and many emerging market economies came together to create some of the strongest headwinds our industry has faced in over a decade, depressing private sector confidence and inhibiting growth.

While we had hoped that by the end of 2012, the fray in fiscal cliff would have disappeared from our horizon, it appears that we may lurch from partial resolution for at least the next several months. If however, the U.S. successfully navigates its fiscal challenges, and if Europe continues to stabilize and Chinese and emerging markets due to key growth reaccelerate, 2013 could be the beginning of a steadier environment and an upwards cycle in the metal recycling and steel industries.

We have started to see some improvement in demand and in pricing in the ferrous and non-ferrous markets. Some of that is seasonal as winter weather may drop its character and drive prices higher, and some of that relates to recovery in iron ore prices and the infrastructure commitments in China. However, customer inventories are still at low levels. One of the indicators of the return of private sector confidence will be higher customer inventory level which should also reduce some of the price volatility that we have been seeing so much of this year.

In a scrap constrained environment, (inaudible) customers results insignificant peaks and drops in pricing. Putting it all together, demand and pricing for ferrous and non-ferrous scraps could improve as 2013 progresses and scrap supply should then improve on the back of higher prices in advance of a recovery in domestic GDP growth.

With that commentary, let's turn to slide four and take a look at some of the highlights of our first quarter of fiscal 2013 that ended on November 30. While our financial performance was adversely impacted during the quarter by falling prices and soft global markets, we remained steadfastly focused on maximizing operational efficiency and investing in future growth.

All three of our business segments generated positive operating income despite tougher market conditions in Q1 of fiscal 2013 versus Q4 of fiscal 2012. Our consolidated SG&A is 14% lower in Q1 as compared to the prior year. We have been able to significantly reduce our cost base through the cost reductions, efficiency and synergy initiatives we announced in August in connection with our restructuring as well as through the continued improvement programs we undertake in each of our businesses and functional areas.

In addition, we continue to (inaudible) our growth to inherit operational synergies. Since the end of the first quarter, our auto parts business has completed a number of acquisitions and commenced several Greenfield developments which will in the aggregate add 10 new Pick-n-Pull stores for franchise. If you look at our facility map, the green dots represent our new locations. We are increasing our APB stores by 20% and these new sites support the core markets in which our metals recycling business has existing operations or strengths in our APB presence in an existing region.

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