SCHN

Schnitzer Steel Industries, Inc. (SCHN)

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

F4Q07 Earnings Call

October 29, 2007 11:30 am ET

Executives

John Carter - President and Chief Executive Officer

Greg Witherspoon - Chief Financial Officer

Analysts

John Rogers - D.A. Davidson

Sal Tharani - Goldman Sachs

Eric Glover - Canaccord Adams

Jeffrey Cole - Cardinal Partners

Presentation

Operator

(Abrupt Start)

…we need to remind you that the company's presentation and discussion today contain forward-looking statements subject to the Safe Harbor provisions of the federal securities laws including estimates of future performance and views on future market trends.

Actual results may differ materially from those projected in the forward-looking statements. Examples of factors that could cost actual results to differ materially from current expectations are listed in our earnings press release issued this morning and are described in detail under the heading factors that could affect future results and the management's discussion and analyst section of the company's most recent quarterly report on Form 10-Q and most recent annual report on Form 10-K.

I would now like to turn the call over to Mr. John Carter, President and Chief Executive Officer. Please proceed sir.

John Carter

Thank you and good morning. Welcome to Schnitzer Steel Industries' 2007 fourth quarter earnings webcast and conference call. I'm joined on the call this morning by Greg Witherspoon, our CFO. After a few introductory remarks we will be available to answer your questions. We put out a press release this morning with the details of our fourth-quarter results.

Before we go through the highlights of the quarter and provide you with our outlook for the first quarter and fiscal 2008 I'd like to take a few minutes to review 2007. We had another very good year, our sixth consecutive year of record revenues. We increased our consolidated revenues 39%. Operating income was up 12%, and earnings per share were up 9%, both have been adjusted for unusual items, which occurred in 2006.

At this point I'd be remiss, if I didn't acknowledge the contribution of our 3,500 employees to this year's success, and I'd like to personally thank each and every one for their hard work. During the year we continued to see the benefits of our uniquely vertically integrated business model. Benefits we believe have continued to increase with our emphasis on acting as one company with a unified management team.

We've talked in the past about how 2006 was a transformational year for the company as we completed and integrated a number of major acquisitions, which established the foundation for our future.

In 2007 we took that foundation and made it even stronger by investing in an infrastructure that significantly expanded our production capacity and allowed us to become more operationally efficient.

Our metals recycling business reported a 49% increase in revenues and a 30% increase in operating income compared to 2006. Our ferrous processing sales volumes were up 1 million tons or 30% and our nonferrous volumes were up 27%.

During the year we installed three new mega-shredders and upgraded our back-end nonferrous recovery systems. We now have four higher capacity, more efficient mega-shredders operating at our export facilities in Oakland, Portland, Tacoma, and Boston. The higher volumes are primarily the result of achieving our objective of working our assets harder by increasing our throughput.

As we continue to gain efficiencies from the investments we're making in technology our ability to compete for new sources of supply is being enhanced. We continue to leverage the competitive advantage provided by our access to deepwater port facilities and we took steps to improve our ability to reach the export markets through container shipments.

Throughout the year the demand for scrap metal around the world was strong. Our sales remained diversified as we sold to 19 different countries including sales for the first time to Indonesia and for the first time in a few years to Japan.

We also continued our disciplined approach to strategic expansion in the metals recycling business by completing three tuck-in acquisitions, which together will add about 300,000 tons of ferrous metal annually.

In what continues to be a consolidating industries we intend to remain an active player, focused on acquisitions, which meet our strategic objectives while creating value for our shareholders.

Turning to the steel manufacturing business, we completed the second-best year financially in our history despite higher cost for scrap another raw materials used in the steel making process. Volumes increased 1% even with a five-week shutdown for capital projects, projects, which have increased capacity and improved efficiencies at the mill. As a result of these capital improvements annual capacity at the mill is now in excess of 750,000 tons.

In the auto parts business revenues increased by 22% primarily due to our emphasis on increasing the purchases of scrap vehicles and getting more out of each vehicle. Purchases increased 6% despite very competitive market conditions and improved yields from the extraction of cores helped offset expenses related to improving the information technology platform in this business.

The full-service distribution network also showed good year-over-year growth in operating income. In 2007 we demonstrated our ability to effectively manage our shareholders' capital. Our return capital employed was nearly 16%, well in excess of our cost of capital.

We put in place guidelines governing returns on capital expenditures that target an ROI of greater than 30% and a payback of less than three years, unless those projects were associated with safety, environmental requirements or equipment replacement.

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