SCHN

Schnitzer Steel Industries, Inc. (SCHN)

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

F2Q08 Earnings Call

April 3, 2008 11:30 am ET

Executives

John D. Carter – President, Chief Executive Officer & Director

Richard D. Peach – Chief Financial Officer & Vice President

Analysts

John Rogers – D.A. Davidson & Co.

Eric Prouty – Cancaccord Adams

Bob Richard – Longbow Research

John Flannigan – Fundamental Equities

Presentation

Operator

Good morning and welcome to the Schnitzer Steel Industries second quarter 2008 earnings conference call. My name is Lacy and I’ll be your coordinator for today. At this time all participants are in a listen only mode. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. We need to remind you that the company’s presentation and discussion today contains forward-looking statements subject to the Safe Harbor provisions of the federal securities laws including estimates on future performance and views on future market trends. Actual results may differ materially from those projected in forward-looking statements. Examples of factors that could cause actual results to differ materially from 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 management’s discussions and analyst section of the company’s most recent quarterly report on Form 10Q and the most recent annual report on Form 10K.

I would now like to turn your presentation over to your host for today’s call John Carter, President & CEO.

John D. Carter

Thank you and good morning. Welcome to Schnitzer Steel Industries’ 2008 second quarter earnings webcast and conference call. I’m joined on the call today by Richard Peach, 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 second quarter results. On our call today we will be hitting the highlights of what occurred during the quarter and key trends in each of our businesses.

Within the quarter we had outstanding performance from all three of our businesses. Compared to the second quarter of last year the metal recycling, steel manufacturing and auto parts businesses all achieved increases in both revenues and operating income. On a consolidated basis earnings per share were a second quarter record. Our revenues and operating income increased 24% and earnings per share increased 34% when compared to the second quarter last year. Sequentially revenues were up 24% while operating income and earnings per share increased 42% and 47% respectively.

Let me spend a few minutes talking about each of our businesses. First, in the metal recycling business during the quarter the worldwide markets for ferrous scrap were very strong. The very [inaudible] long term supply and demand fundamentals which are driving the strong pricing environment remain in place. Demand for steel products overseas was robust creating pricing pressures on all the raw materials used to manufacture steel. Domestic demand remained strong as well. Consequently, the demand for raw materials continues to out step the relatively slow growth in supply especially for recycled scrap metal. This increase demand has been primarily forecast to come from the growth in usage of electric arc furnaces particularly outside China. That growth is due in part to environmental advantages of the EAFs which we have noted in the past specifically lower usage of energy, less air and water pollution and reduced greenhouse gas emissions. Additionally, we’re continuing to see [inaudible] of integrated metals, normally minimal users of scrap metal are starting to see the benefits of increase scrap usage to help lower their own carbon dioxide emissions. This is a trend which could put even further upward pressure on scrap prices going forward.

For the quarter average ferrous processing sales prices were a record $326 per ton net of freight costs, a $46 per ton increase over the first quarter. On our last call we talked about the rapid run off in export freight costs which had resulted in a squeeze in the first quarter margins. At that time we commented that in a scrap market where the demand is strong particularly overseas it is reasonable to expect that overtime those higher freight costs could be passed through to the customer. We also indicated we thought the increases in export freight costs would slow. During the quarter that expectation held true. As export freight costs moderated and gross sales prices for ferrous scrap increased to offset the increases in ocean freight that occurred early in the fiscal year. In addition, ship availability has improved.

There’s no question that we are benefitting from the strong markets for ferrous scrap but there are other elements in our business model that give us a competitive advantage. Without question none of this progress could have occurred without the expertise and dedication of all of our people. We continue to believe that our export platform scale and investments in technology position us well against the competitors in our various regions. We also continue to benefit from productivity enhancements and accumulative impact of strategic acquisitions. During the quarter we made bulk and container export shipments to customers located in 12 countries around the world. Our worldwide view provides us with the ability to sell to the region or customer group where demand is greatest at the time maximizing our revenues.

During the second quarter for example we were able to take advantage of periodic regional market differences and make shipments to Asia out of our northeastern operations, cargos which traditionally would have been headed for the Mediterranean. This flexibility continues to provide benefits to our operating margins and we were able to take advantage of the resin markets to increase those margins. Operating margin per processed ferrous ton excluding our trading business increased from $27 in the first quarter to $43 in the second quarter. The second quarter figure included five shipments originally scheduled for the first quarter which were under contract for lower margins due to the rapid run up of first quarter exported freight costs. Without those shipments our margins would have further expanded. During the quarter we shipped 1.1 million tons of ferrous from our processing operations and 96 million pounds of non-ferrous. With ferrous sales volumes approximating the second quarter of last year and the non-ferrous increasing by 7%.

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