EXHIBIT 99.1
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SCHNITZER STEEL INDUSTRIES, INC.
Q3 2004 EARNINGS CONFERENCE CALL TRANSCRIPT
JULY 7, 2004, 2:00 PM PDT
OPERATOR
Good morning, ladies and gentlemen, and welcome to Schnitzer Steel's
third-quarter 2004 earnings conference call. My name is Brian and I will be your
conference call coordinator today.
As a reminder, this call is being recorded. During the presentation all
participants will be in a listen-only mode. After the speakers' remarks, you'll
be invited to participate in a question-and-answer session. Before we begin the
Company has asked me to read the following statement.
Today's presentation by management contains forward-looking statements within
the meaning of section 21E of the Securities Exchange Act of 1934 which are made
pursuant to the Safe Harbor provisions of the Private Securities Litigation
Reform Act of 1995. One can generally identify these statements as they do not
relate strictly to historical or current facts. Examples of factors affecting
both Schnitzer Steel Industries Inc. consolidated operations and its joint
ventures that could cause actual results to differ materially from current
expectations are the following. Volatile supply and demand conditions affecting
prices and volumes in the markets for both the Company's and its joint ventures
products and raw materials it purchases; world economic conditions; world
political conditions; changes in federal and state income tax laws; foreign
currency fluctuations; competition; seasonality; energy supplies; freight rates;
the predictability of joint venture operating results; and the inability to
complete expected large scrap export shipments in the current quarter.
One should understand that it is not possible to predict or identify all factors
that could cause actual results to differ from the Company's forward-looking
statements. Further information on these risk factors is included in the
Company's filings with the Securities and Exchange Commission. The Company does
not assume any obligation to update any forward-looking statements.
At this time for opening remarks and introductions I would like to turn this
call over to Chairman and Chief Executive Officer of Schnitzer Steel. Mr. Bob
Philip.
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
Good afternoon. I would like to welcome the listeners to Schnitzer Steel's
third-quarter 2004 earnings Web cast and conference call. We will begin the call
with some general comments about the third quarter and also what our views are
on the outlook for our business, then open the call up to answer a few questions
from analysts and investors.
The third quarter was another record quarter for Schnitzer Steel. In fact, the
quarter's results even exceeded the upward revision in our earnings guidance.
All of our business segments reported record results in the third quarter.
Fully diluted earnings per share for the third quarter of 2004 was $1.37, which
represents a 164 percent improvement over last year's third-quarter earnings of
52 cents per share. The record quarterly results were primarily attributed to
the following: record pricing for both ferrous scrap metals and finished steel;
continued strong consumption of recycled metal and finished steel; and our Auto
Parts Business performed at record levels during the quarter, which was due in
part to the recent addition of three stores in Canada.
Finally as our press release mentioned, Schnitzer is clearly benefiting from the
strong market conditions. However, this success was made possible by the
managers and employees of our Company and Hugo Neu joint venture businesses who
over the years have positioned the Company to enjoy this incredible success. To
these people, I am truly grateful.
Schnitzer's third-quarter earnings improvement was again led by the Company's
wholly owned scrap metal business. Operating margins per ton expanded in the
third quarter, due primarily to sharply higher average selling prices.
Third-quarter selling prices rose to a record $237 per ton which was 50 percent
above the average reported for the second quarter of this year and 78 percent
higher than the third quarter of last year.
Offsetting the higher prices were sharp increases in ocean shipping costs that
rose 80 percent above the levels we paid in last year's third quarter. We have
however seen ocean shipping rates moderate. Today, ocean rates are about 10 to
15 percent below the amounts paid in the third quarter. Also, the average cost
of unprocessed scrap metal increased significantly during the third quarter.
During last quarter's conference call, I mentioned we were beginning to see
scrap metal selling prices decline. This trend continued throughout the third
quarter. We understand that much of the decline was attributed to three primary
factors. Asian buyers -- primarily from China -- ordered ahead of their actual
consumption in an effort to hedge future rises in market selling prices. Two,
during the third quarter, the Chinese government announced its intention to
immediately implement plans to moderate the growth of their economy. And three,
we saw the continuation of a seasonal trend where ferrous metal selling prices
declined in the late spring and early summer, as small Asian-based steel mills
curtailed their production, due to electricity constraints.
Although new order demand slowed in the third quarter, the Company had built a
solid backlog of orders before the pricing declined, which allowed Schnitzer to
continue to enjoy strong sales volumes. Average prices paid for unprocessed
metal were at record highs during the third quarter of fiscal 2004.
As the third quarter closed, we were successful, however, in reducing our raw
material costs which also benefited our margins during the quarter.
Similar to our wholly owned scrap business, we saw our joint ventures in the
metals recycling business report record results. The processing joint ventures
were affected by similar factors as our wholly owned metal recycling business.
It's worth noting that the joint ventures shipped a record 1.8 million tons
during the third quarter of 2004. The record shipments were due in part to
increasing market share of our global trading joint venture, and our processing
joint ventures were able to sell additional inventory that temporarily built up
during the first six months of fiscal 2004.
Cascade Steel, our minimill, third-quarter 2004 results were in sharp contrast
to last year's third quarter. During the recent quarter, our steel business
reported a $7 million profit -- the best quarter in our history. Third-quarter
2004 selling prices averaged $448 per ton. This amount was $97 per ton or 28
percent above the second quarter of this year and $155 per ton or $53 above the
third quarter of last year.
Today, steel consumption remains strong and should remain so for the foreseeable
future.
As previously announced on March 8, we closed on the acquisition of three new
Pick-N-Pull Auto Parts stores in Canada. The integration of these new stores is
going very well which is due in part to a great team of motivated employees we
were able to retain. Further the financial performance of the acquisition is
meeting our expectations. During the third quarter of 2004 we saw both revenues
and operating income grow by 35 and 42 percent, respectively, over the third
quarter last year. Same-source, same-store sales and operating income grew
approximately 23 percent and 35 percent, respectively, over last year's third
quarter. Much of the improvement is directly attributed to the three new
Canadian stores, however, our existing stores also showed good growth in
revenues and margins.
We are anticipating another very strong quarter for Schnitzer Steel. Based upon
the information available today, we estimate that fourth-quarter's 2004
operating income will be in the range of 45 to $52 million, excluding the
effects of LIFO inventory valuation of our joint venture businesses. During last
year's fourth quarter, the Company reported operating income of 24.8 million,
which included a $2.2 million LIFO charge that lowered operating profits --
operating income during the quarter.
As mentioned earlier, during the third quarter of 2004 we saw prices decline
from the highs reported in late February and early March. However, even as
prices were declining, they continued to remain high from a historical
perspective. We continued to see the worldwide consumption of scrap metal
remaining strong.
I am pleased to report that since mid-June we have seen prices began to firm and
are again on the rise. In fact in the July 1st edition of the American Metal
Market, it was reported that factory bundle prices jumped $60 per ton from
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June 2004, which is in sharp contrast to the declines reported from March and
April of $40 and $20 per ton, respectively.
Fourth-quarter 2004 contracted selling prices for our wholly owned and joint
venture scrap businesses are expected to be lower than the average reported in
the third quarter but remain well ahead of the average selling prices received
during the first nine months of this year. In fact, if we exclude the third
quarter of this year, our fourth-quarter 2004 average ferrous selling prices are
anticipated to be at record levels.
As previously mentioned, the third quarter of 2004 selling price decline allowed
us to lower the cost of unprocessed scrap metal, which should enable us to
produce strong fourth-quarter margins. Domestic steel consumption continues to
improve and is strong. Fourth-quarter 2004 selling prices are expected to be
modestly higher than the third quarter of 2004 due, in part, to the timing of
when price increases took effect in the third quarter and also due to price
increases announced in the fourth quarter for wire rod products.
On average, raw material costs should be modestly lower than the third-quarter
2004 average. We anticipate significant margin expansion during the fourth
quarter.
In general, the Auto Parts Business traditionally experiences a modest decline
in retail sales in the warmer summer months. Although the three new Canadian
stores tend to have some of their better retail sales months during the summer
season, modestly lower scrap metal prices are anticipated to result in a slight
decline in wholesale revenue.
While speaking about the Auto Parts Business and its outlook, I would like to
again reiterate that Schnitzer Steel remains focused on the rapid expansion of
this highly profitable and less cyclical business segment. We believe this
business provides Schnitzer Steel with a very attractive and profitable business
model upon which we have a number of competitive advantages, including a
sophisticated information technology system, standard processes that give us the
ability to efficiently roll out our systems to new acquisitions, giving us the
ability to quickly transition an existing operation into our network of stores
and, finally, a core management team that understands the industry but also
developed many of the strategies that have made this business so successful.
Last, we believe this segment of the recycling industry is highly fragmented,
giving us ample opportunity to expand beyond our traditional geographic
boundaries. In fact, today, we have a number of expansion opportunities in
varying stages of negotiation. I will now pass the call over to Barry Rosen.
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BARRY ROSEN - SCHNITZER STEEL - CFO
Thank you, Bob. I would like to comment on a few more items contained in today's
press release. On March 26th, we completed a three-for-two stock split,
increasing our diluted shares outstanding to approximately 31 million shares.
The third-quarter 2004 general and administrative expenses increased by $4.9
million over the last year's third quarter. This increase is due to a number of
factors, including rising insurance cost, increases in professional fees -- some
of which was driven by the need to comply with Sarbanes-Oxley regulations,
increases in wages and benefits and higher accruals for the Company's EVA-based
bonus plan.
As many of you know, the Company implemented an EVA-based bonus plan in fiscal
2001 which positively changed the culture at Schnitzer Steel. In the last 12
months alone, we have improved our EVA by over $38 million. This bonus plan
directly ties variable base compensation of approximately 400 employees to the
financial performance of Schnitzer Steel.
As such, the recent record financial performance of our Company increased the
bonus accruals.
The third quarter of 2004's tax rate was approximately 35 percent, which is
significantly higher than last year's third-quarter rate of nearly 28 percent.
The higher 2004 tax rate was caused primarily by significantly higher pretax
income in fiscal 2004, which dilutes the impact of certain tax credits and
exclusions. And during the second quarter of this year the Company made the
determination to recognize, for GAAP purposes, the benefit of certain acquired
net operating loss carryforwards that have previously lowered the Company's
effective tax rate. We anticipate our fourth-quarter tax rate to approximate 35
percent.
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Depreciation expense was $5 million for the third quarter and $15 million for
the nine months of fiscal 2004. Year-to-date capital spending was approximately
$17 million which approximates last year's amount. Total 2004 capital spending
is currently estimated to be about $25 million, much of which will be spent on a
new mega-shredder in Oakland, California, and a new energy-efficient furnace for
our steel mill.
On May 5th, the Company announced it had retained Bear Stearns to explore
strategic alternatives for our steel manufacturing business. We are continuing
to work with Bear Stearns but have nothing new to report in this matter at this
time. I would now like to pass the call back over to Bob who will summarize the
call before opening the conference call up to questions.
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
As I have already stated, we are very pleased with the third quarter's
performance and continue to believe that the future is very bright for Schnitzer
Steel. On that note, we would be pleased to answer a few of your questions.
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JOHN ROGERS - D. A. DAVIDSON - ANALYST
Great quarter. Couple of just quick questions. Bob, in terms of the pricing that
you mentioned moving higher, I assume the benefits of that will show up for
Schnitzer in the first quarter of 2005?
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
Some of the benefits will show up in 2004.
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JOHN ROGERS - D. A. DAVIDSON - ANALYST
Okay. How far out are you sold now?
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
Sold out into August. There's still an opportunity to sell a little bit more
through this quarter. The interesting thing to note is that the price increase
that we saw last week based on the factory bundles of $60 is a record increase
and based on our information from Europe and from Asia, it appears that both
markets are firming up. In addition to the U.S. market being much stronger.
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JOHN ROGERS - D. A. DAVIDSON - ANALYST
But it doesn't sound as if you'll see that full $60 a ton increase or whatever
actually ends up in the export market in the fourth quarter.
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
We have seen prices in the fourth quarter increase. We probably won't see the
entire $60 in the fourth quarter. That is correct.
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JOHN ROGERS - D. A. DAVIDSON - ANALYST
Okay and then a couple of other questions. In terms of the Cascade mill. At what
point would you have to reclassify that as a discontinued operation?
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BARRY ROSEN - SCHNITZER STEEL - CFO
John, this is Barry Rosen. We haven't even received any proposals at this point
to even evaluate and it would have to be something that would have to get
approved as a transaction by our Board before we would be in a position to agree
to a transaction. So it would have to be through that point in the process
before we would even know whether it's something that is attractive enough to
pursue.
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JOHN ROGERS - D. A. DAVIDSON - ANALYST
Okay and Barry, in terms of the tax rate going forward, given your mix of
business, is the 35 percent a good rate to think about or does it depend on how
much you're actually exporting?
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BARRY ROSEN - SCHNITZER STEEL - CFO
Well, 35 percent is a good rate to think about for next year. Our tax, our cash
tax is of course -- is less than that.
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JOHN ROGERS - D. A. DAVIDSON - ANALYST
Right. Okay, but that's a good number going forward.
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BARRY ROSEN - SCHNITZER STEEL - CFO
Yes I think that's a good number.
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TRACE SNOW - PRIORITY CAPITAL - ANALYST
Hi Barry, great quarter. Could you tell us what the contribution was from the
three Canadian stores auto parts stores in terms of sales margin and even EPS if
you have it?
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BARRY ROSEN - SCHNITZER STEEL - CFO
We have it but we don't break it out or provide it.
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TRACE SNOW - PRIORITY CAPITAL - ANALYST
Even in terms of sales?
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BARRY ROSEN - SCHNITZER STEEL - CFO
Even in terms of sales.
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TRACE SNOW - PRIORITY CAPITAL - ANALYST
Will that be in the Q?
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BARRY ROSEN - SCHNITZER STEEL - CFO
No, we don't break them out, we will break out the segment but not the
individual stores or geographic locations.
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TRACE SNOW - PRIORITY CAPITAL - ANALYST
Okay okay. And as far as Cascade, with the pace of consolidation in the steel
industry being at a pretty forward pace, what do you think might be the delay in
getting any proposals? Is it lazy investment bankers or some structural issue
with Cascade or something else?
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BARRY ROSEN - SCHNITZER STEEL - CFO
No, I don't think it's either one of those. It's just following a normal process
and getting the information accumulated to get out in a meaningful way and
that's just beginning it to happen.
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TRACE SNOW - PRIORITY CAPITAL - ANALYST
Okay, great. Thanks.
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BARRY ROSEN - SCHNITZER STEEL - CFO
Thank you.
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JOHN HUDSON - BRICKARORE CAPITAL - ANALYST
Hi guys. There was some speculation in the trade press that despite the factory
bundles prices was kind of driven by one mill who had to go out and get scrap
quickly and I am just wondering. When spikes like this happen have you seen in
the past or have you seen this time it ripple through pretty quickly into what
it cost you to buy obsolete grades in the market?
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
The factory bundles price indicates to the steel industry or the scrap industry
is that there's a trend. And we have no factory bundles being offered on the
West Coast. And on the East Coast, the factory bundle price is not as much a
factor as in the Midwest but, certainly, it sent a ripple all the way to central
China. Because we are noticing that the Chinese buyers -- as well as some of the
Asian buyers -- are all indicating a strong willingness to pay higher prices
today from all over the world, including us. And so that factory bundle price is
a sort of a signal as to the trend. We've also seen prices increase in Europe,
so I can't expect that, having one steel mill, if that's true and I'd know if
that's true, short of scrap potentially send signals that would trigger the rest
of the world if that is the case.
The other interesting thing to note is we've had strong increase from steel
mills in the Midwest to try to find sources of scrap on the West Coast, which is
very unusual which would lead me to believe whether it's iron ore prices going
up, coke prices going up considerably, and scrap being a little short maybe that
they are now concerned about long-term suppliability for products particularly
for the value-added steel products such as hot rolled plate, hot rolled coil and
some of the specialty products.
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JOHN HUDSON - BRICKARORE CAPITAL - ANALYST
So you would expect that obsolete grades like heavy melt and stuff would also
rise similar amount?
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
All I know is that the heavy melt prices overseas have gone up in the last ten
days. That trend has actually continued for more than ten days. I mean the
prices were going up before the factory bundle price was announced and so we are
seeing a significant amount of inquiries from Asia today.
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JOHN HUDSON - BRICKARORE CAPITAL - ANALYST
Okay, thanks.
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GARY SHIMONO - SHIMONO GROUP - ANALYST
Congratulations on a record quarter. Could you address your comments as to the
slow down supposedly in Asia? And of course, the panic that ensued from the
press saying that they were going to slow down their economy and what you think
the consumption is over there for scrap?
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
That's a good question. Interesting to note that today's news from Asia
indicated that the second-quarter growth was 11.3 percent and that the -- versus
11 percent last year, so in spite of China Inc. trying to tap the brakes at
least in the second and third quarter would notice that the growth has
continued. Economists are saying now that for the year China's growth will be
9.2 percent. It's possible it could be higher. But I think the impression that
the Chinese government gave shortly after the second quarter began that they
were going to try and slow down the economy certainly has not happened. And
while the amount of scrap metal being purchased after February was reduced,
we've seen that inquiry pace come back and we've seen quite a few inquiries and
we've made a number of sales to China in the last four weeks. So I think it's a
good question that the Chinese government probably hoped they could slow down
the economy but 11.3 growth in 2004 versus 11 percent in 2003 is an indication
that they might have tried, but the economy is still very bullish, very hot.
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HEATH RITCHIE - DELPHI MANAGEMENT - ANALYST
Thanks. My question has been answered.
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FRITZ VAN KARPE - SAGE ASSET MANAGEMENT - ANALYST
Good afternoon, gentlemen, just -- forgive me if this is a basic question. In
your guidance you talked about the OP what? 50 million whatever it was,
excluding the LIFO gain or loss, maybe, I guess in the joint ventures. Could you
just explain to me just quickly how much that was in the third quarter? This
LIFO item? And if you could help me judge what to expect roughly for that in the
fourth quarter just for somebody new to the Company?
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BARRY ROSEN - SCHNITZER STEEL - CFO
We don't adjust for LIFO, but once a year at year-end so we didn't have any LIFO
adjustment at the end of the third quarter. More joint ventures than we've --
we're a FIFO -- our 100 percent-owned operations are a FIFO based company for
inventory valuation purposes, and a few of our joint ventures are still LIFO.
And so we don't make that adjustment until the end of the fiscal year and that's
why we can't give you any specific guidance until we know what those quantities
are and prices are at year end.
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FRITZ VAN KARPE - SAGE ASSET MANAGEMENT - ANALYST
Would I expect it to be, I guess I can take this through expected to be a
positive or negative number? Or you can't even say that?
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BARRY ROSEN - SCHNITZER STEEL - CFO
Yes, we would expect it to be a negative number. It's a non-cash number as you
know.
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FRITZ VAN KARPE - SAGE ASSET MANAGEMENT - ANALYST
And it's different, driven I guess ultimately by the difference in prices that
you over time for the metal so it could be a large number this year because of
the volatility we have seen in steel prices?
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BARRY ROSEN - SCHNITZER STEEL - CFO
Generally it's never, generally it's not been a large number. It's an interplay
between the cost and the volumes at year-end compared to LIFO layers and it's
fairly complicated but generally not all that material.
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FRITZ VAN KARPE - SAGE ASSET MANAGEMENT - ANALYST
But not too terribly material? Okay, thank you very much.
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MARK GASCOE - MKG FINANCIAL - ANALYST
Thank you. Congratulations on a great quarter. I just had a quick question. We
are hearing a lot about increased shipments and manufacturing of steel coming
out of places like Japan and other areas. Is there a lot of capacity out there
that can come on board as demand keeps rising?
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BOB PHILIP - SCHNITZER STEEL - CHAIRMAN AND CEO
I don't think so. I don't know where you're hearing or what you're hearing. The
Japanese have had a pretty steady production level for a number of years. They
have been exporting scrap. They are a net exporter of scrap. Most recent
quarter, we sold a cargo of scrap to Japan, which we'll deliver during our
fourth quarter which is just sort of unusual when they are exporting relative to
import. But we don't see any increase capacity ability in Japan. Certainly,
there are probably some increased capacity to pursue steel in China and we are
seeing most of what's being produced in China consumed in China. The demand in
China this last year exceeded the production capabilities. And there was in
excess of 40 million tons of new steel, finished steel imported into China to
support the growing infrastructure within the country.
So we don't see a negative that there are capacities around the world that are
not being utilized that could in any way put a damper on our U.S. steel
industry. I must reiterate that Cascade Steel, our steel mill, enjoyed the most
profitable quarter they've had since we've been an owner of Cascade and are very
optimistic about the next quarter as our backlog is considerable and the price
increases that were announced over the last three or four months are all now in
effect. And so we see a very strong quarter, which is what we described for
Cascade.
Our scrap business is, we're very optimistic about the demand of scrap both
overseas and the United States and we are -- the cream on the cake or the icing
on the cake would be the extremely strong demand in United States which has been
pushing up domestic pricing.
And the third leg of our stool is certainly our Auto Parts Business, which has
enjoyed steady growth and increases in profitability. And as I mentioned in my
comments, we are looking forward to increasing the number of stores in our
network and currently have a number of opportunities in the fire.
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MARK GASCOE - MKG FINANCIAL - ANALYST
Very good. Thank you very much. Again, congratulations.
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OPERATOR
As there are no more questions at this time, this does conclude the conference
call for Schnitzer Steel. Thank you for your participation today. You may now
disconnect your lines.
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