SCHN

Schnitzer Steel Industries, Inc. (SCHN)

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Schnitzer Steel Industries (SCHN)

Q4 2012 Earnings Call

October 25, 2012 11:30 am ET

Executives

Alexandra Deignan

Tamara Adler L. Lundgren - Chief Executive Officer, President and Director

Richard D. Peach - Chief Financial Officer and Senior Vice President

Analysts

Joe Krawczak

Brent Thielman - D.A. Davidson & Co., Research Division

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Luke Folta - Jefferies & Company, Inc., Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Evan L. Kurtz - Morgan Stanley, Research Division

David A. Lipschitz - CLSA Asia-Pacific Markets, Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Arun S. Viswanathan - Longbow Research LLC

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome the Schnitzer Steel's Fourth Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Ms. Alexandra Deignan. Ma'am, you may begin.

Alexandra Deignan

Thank you, Mary. Good morning. I'm Alexandra Deignan, the company's Vice President of Investor Relations. I'd like to thank everyone for taking the time to join us today. In addition to today's audio comments, we've 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 2, which are also included in our press release 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 to 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 Adler L. Lundgren

Thanks, Ally. Good morning, everyone, and welcome to our fourth quarter and fiscal 2012 earnings call.

Before I begin the review of our financial and operating results, I'd like to take a moment to thank all of our employees for their unwavering focus and their commitment to our company during what has clearly been one of the most challenging years in a decade for the Metals Recycling industry.

We faced a lot of headwinds this year from the effects of the European financial crisis and the economic slowdown that has been occurring throughout the world. This is not the first time that we've been faced with a tough economic environment. And just as we've done in the past, our team has exhibited the strength of purpose and the resiliency that we've shown for over a century.

During the year in which we saw a softening in demand and pricing across all of our markets, we streamlined our operations to generate significant SG&A savings and synergies. We increased our nonferrous volumes. We maintained a strong balance sheet. We generated significant cash flow. And we returned capital to our shareholders through share repurchases and an increase in our dividend, while ending our year with 30% less net debt.

With that introduction, let's turn to Slide 4, and I'll provide some further details on our consolidated performance and some macroeconomic and market trends before turning it over to Richard, who will provide the segment and financial review. And then we'll open up the call for some Q&A.

As you may have seen in this morning's press release, we reported adjusted earnings per share of $0.10 for Q4. Our adjusted EPS number excludes a $5 million pretax charge associated with corporate restructuring initiatives that we announced on August 28. These initiatives were primarily targeted at reducing SG&A, streamlining our operations and generating cross-divisional synergies between our Metals Recycling and Auto Parts businesses. Together, these changes are expected to result in annual pretax savings of $25 million.

As we noted in the market outlook that we provided in August, our fourth quarter performance was adversely impacted by a sharp drop in ferrous sales prices, which occurred in early June. The downward pricing environment also constrained the supply of scrap during the fourth quarter. Slower global growth rates, economic and political uncertainty in the world's largest economies and a stronger U.S. dollar have all led to falling prices, lower demand and lower scrap availability.

As a result, we've seen unusually low inventories being held at the mills. But as we've seen before, when mill inventories are unusually low, a slight uptick in demand can result in a sharp upward move in prices.

And as we turn to Slide 5, we can see the movements in export sales prices more clearly. As you can see on this chart, ferrous export prices have declined throughout our fiscal year, which began in September 2011, and coincided with the escalation of the European financial crisis. Weakness in consumer consumption and in construction and manufacturing activity, has led to an excess supply of finished steel globally, and together with the prolonged political and economic uncertainties continue to weigh on customer buying activity. As a result, our customers are holding very low levels of scrap inventory. If history is a guide, which amidst uncertain economic environment is not a given, we typically see a push-up in pricing as restocking occurs in anticipation of winter weather challenges. Pricing could also receive a boost from an improvement in global steel demand following policy stimulus.

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