Schnitzer Steel Industries, Inc. Class A Earnings Call Nuggets: Recycling, Scrap Prices

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On Thursday, Schnitzer Steel Industries, Inc. Class A (NASDAQ:SCHN) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Recycling

Luke Folta – Jefferies: First I had a question kind of more of a longer term question. Now the (bare) case on Schnitzer right now, and I guess the recycling space as a whole is been that there’s been a lot of shredder capacity added and there’s sort of an intensifying competitive environment for input scrap and that because of these there’s been some structural shift in the industry that will result in margins being structurally lower this cycle than it were last cycle. I just want to try and understand what your view on this is looking forward and to the extent that you do expect to see margins come up from current levels what kind of gives you the confidence that that’s going to happen over time?

Tamara Lundgren – President and CEO: Sure. Well, let’s put (third) quarter in perspective, and remember that we absorbed some big externalities, the industry absorbs some big externalities which was really the European financial crisis which for us hit us both in Q1 and Q2 and that was a big driver obviously to supply flows to demand and the prices. So when we look at this, we look back at fiscal year ’11 and we look at what happened in January, February and March, and probably look at – we had a calendar quarter. You would have seen our margins clearly well below the average for fiscal year ’11 clearly would have been in the high/low range of fiscal year ’11. The European financial crisis was the big a shot to the market, but we don’t believe that the last two quarters signal a permanent shift in the business and what we are commenting on in March and the like is we’re seeing steady supply into our facilities and we are seeing improving demand and an increase in prices

Luke Folta – Jefferies: Richard, can give us some sense of what the monthly trend in margins were in the recycling business, and just looking forward into the third quarter, to the extent that we get a flat scrap prices in May I guess it would be – maybe it’ll looks like it’s down a bit, do you think your operating profit starts with a two on a per ton basis?

Richard Peach – SVP and CFO: We are actually not giving and going to this as you know. But what I can say about the second quarter is that most of our profit came into the last two months of the quarter and I think you could (indiscernible) arithmetic your sales there. That’s a good way of looking at it

Luke Folta – Jefferies: So December was kind of at around a breakeven number?

Richard Peach – SVP and CFO: We would like to comment on one single month. I’ll reiterate my comment. Most of the profit in the second quarter came in the last two months of the quarter.

Luke Folta – Jefferies: Just another one on the auto parts business, I heard I think about $2 million in legal expenses in the quarter. Is that something you think persists into the second half?

Tamara Lundgren – President and CEO: No we don’t. Those were legal expenses that randomly hit all of it in the second quarter.

Scrap Prices

Timna Tanners – Bank of America-Merrill Lynch: I want to maybe take a different path to Luke’s question on the margin per ton, as you point on Slide 10 which is super helpful, a year ago you had a sharp increase in scrap prices, so if we look at the second quarter of 2011 probably not representative at $36 a ton, but this quarter you know things drifted a bit, but a little bit more sideways and we had $14 a ton. So, we’d have to assume I think and correct me if I am wrong, it’s something in the middle as normal for the current environment at least and I just wanted to (indiscernible) $36 a ton represented a massive increases in scrap prices like you say here $353 to $419 but if you have a flat scrap price environment, think like it’s somewhere in the middle, how do we think about that? What other factors might I be missing?

Tamara Lundgren – President and CEO: Clearly that’s through the high low range that you saw in fiscal ’11 and a couple of things that we need to keep our eye on is still the overall economic environment, and that is probably the biggest driver Timna with respect to improvement in supply flows and you can really see that in today’s world in terms of looking at the supply flows for prime scrap for example PNS which is driven by improved manufacturing activity and some improved demolition and you still see higher supply shreddables which is driven by underlying DVP growth demand. So, I think the other things you need to keep your eye on is the improving economic environment.

Timna Tanners – Bank of America-Merrill Lynch: I mean we are hearing like really good demand for the auto side, machinery side, so demolition is definitely a piece that missing. What about the pig iron price coming down as well, can you talk about how that’s affected your business?

Tamara Lundgren – President and CEO: Well the pig iron imports affected primarily more than obsolete scrap and we saw that a bit in towards the end of the first quarter really in some deliveries and into the beginning of the second quarter. But it affects (supply) more than it affects the (shreddables).

Timna Tanners – Bank of America-Merrill Lynch: And then lastly I mean is there anything else that you are signaling with dividend increase because it seems like you are getting back it, more in line with peers and so it’s a good signal, but I mean does it say anything about where you expect growth to come from going forward. You are still talking about other source uses of cash but is there anything else that you would be signaling here with the dividend increase at this time?

Tamara Lundgren – President and CEO: What we are signaling with the dividend increase is that we have been through a variety of economic cycles over the past five years and we have shown that we can consistently generate cash while growing significantly and maintaining a healthy balance sheet. So the increased dividend just as you point out makes us more competitive in the market but it does not hamper or handicap at all our commitment to continuing to grow. And as I said in my formal remarks, we anticipate continuing to make acquisitions, continuing to invest in technology and continuing to buy back shares as well as to maintain and to increase this dividend as we continue to grow and performance improves.

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