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Executives

Rob Stone – VP & Treasurer

Tamara Lundgren – President & CEO

Richard Peach – SVP & CFO

Analysts

Eric Glover – Unspecified Company

Brent Thielman – D.A. Davidson

Timna Tanners – UBS

Torin Eastburn – CJS Securities

Sal Tharani – Goldman Sachs

Rob Moffett – Longbow Research

Mark Liinamaa – Morgan Stanley

Lloyd O’Carroll – Davenport & Company

Schnitzer Steel Industries, Inc. (SCHN) Q2 2010 Earnings Call April 7, 2010 5:00 PM ET

Operator

Welcome to the Schnitzer Steel Industries second quarter earnings call. (Operator Instructions) And now I’d like to turn the conference over to Rob Stone, Vice President, and Treasurer.

Rob Stone

Good afternoon everyone, as the operator indicated I’m Rob Stone, the company’s Treasurer and primary Investor Relations contact. I would like to thank everyone for taking time out of their busy afternoon to join us today.

In addition to the audio comments that we’re making we have prepared a set of slides which were made available concurrently with our earnings release. You can access those slide through our website at www.schn.com.

Before we get started I’m obligated to call your attention to the detailed Safe Harbor statements included in our press release of today, in the slides accompanying this presentation, in the company’s Form 10-K for the fiscal year ended August 31, 2009, and in the Quarterly Report on Form 10-Q which will be filed later.

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.

In addition we have guidance regarding our outlook for the third quarter of 2010 in our press release and in this presentation and subsequent to this call we will not be under any obligation to update our outlook.

With that let me turn the call over to Tamara Lundgren, our Chief Executive Officer. She is going to be joined on the call today by Richard Peach, our CFO.

Tamara Lundgren

Thank you Rob, and good afternoon everyone. We’re pleased to share with you today our strong second quarter results. We saw improvements in all of our businesses and as we look ahead, our outlook is positive.

As you review these results I’d like to emphasize three points. First, global demand for recycled scrap metal, our largest product, is strong. During 2009 a year that included some of the worst economic conditions since the Great Depression, the US exported 3.3% more scrap metal than it did in 2008.

And our company’s exports exceeded this increase in growth. This demand was driven by infrastructure projects throughout the developing world, and has continued despite the downturn. We believe the underlying drivers of this demand are likely to remain in place for the foreseeable future.

Second, we’re positioned to continue to outperform the market just as we did this quarter and during the downturn. Our very strong operational performance helped up capitalize on the favorable macroeconomic trends that I just mentioned.

And third, we have a track record of translating this outperformance into shareholder value. But before I get into the details of the quarter, I want to take a moment to thank our employees for continuing their record of strong performance and productivity.

Their focus and their dedication enabled us to achieve our highest earnings since the downturn began. Now let me turn to the results and then Richard will take you through the financials. We’ll follow the slides that we’ve posted on our website and we’ll start with slide number four.

We generated our third consecutive quarter of income and our highest level of earnings since Q4 of our fiscal 2008. We also set a new record for sales volumes of ferrous metals for any second quarter in our history.

The results demonstrate that global demand for recycled metals remains broadly based. Its not just about China. Its about supplying steel makers in emerging economies around the world, from Thailand to Turkey. This was also a good quarter for our other businesses.

Our auto parts business generated record second quarter operating income and our steel manufacturing business which continued to face a very weak domestic market moved closer to break-even thanks to improved pricing, and cost containment programs.

Now, let’s go through the operating results for each of our businesses and we’ll start with our metals recycling business on slide six. This business accounted for more than 80% of our revenues and delivered an operating profit in the second quarter of $29 million, nearly double our first quarter results.

We set a record, a record for second quarter ferrous sales volumes and exports accounted for 79% of those sales. We expanded our operating profit margins by 15% to $24.00 per ferrous tons, up from $21.00 in the first quarter. And lastly, we continued to maintain a steady intake of raw materials.

You can see the details of this performance starting on slide seven. Here on slide seven it shows that in the second quarter of 2010 our metals recycling revenues were essentially in line with the second quarter of fiscal 2007.

That’s important because that shows that we’re at the levels before the surge in demand and pricing occurred in 2008. And importantly we improved our operating margins quarter over quarter. We expanded these margins through improved productivity, through our continued focus on cost containment, and by optimizing the spread between our selling prices and the cost of acquiring raw materials.

We also continued to benefit from our investments in technologies and process improvements that make us a low cost producer. And finally our margins benefited from the structural advantages that are unique to our company.

In particular through our seven deep-water ports we have direct access to customers around the world. We have deliberately pursued this strategy which gives us the flexibility to sell our materials to the strongest markets wherever they exist at each point in time.

Now why don’t we turn to slide eight, slide eight traces the trends in our sales prices and volumes for both ferrous and nonferrous metals. Our ferrous and nonferrous sales prices strengthened during the quarter reflecting the strong broad based demand we’re seeing around the world.

On the ferrous side prices started to rise in late November and they continued their upward trend throughout the quarter. These prices are in the range we saw during the last industry up cycle from 2006 until just before the market rose sharply in 2008.

We also saw improved nonferrous pricing which contributes to higher revenues and operating profitability. On slide nine we show our global reach. While Asia remained our largest export destination, our customer base is very diverse with shipments in the second quarter to 10 countries.

China was our largest country of destination for the quarter representing about 28% of our export sales volumes. This diversity of worldwide market demand demonstrates what we’ve been saying since the middle of last year, that worldwide demand is broad based.

And it is this worldwide demand and our ability to access whichever market are strongest that drive our business. Meanwhile as we show in the chart at the bottom of this slide, our freight costs remained at low levels compared with the prices we’ve seen in the past, both on an absolute basis as well as on a percentage of growth sales prices.

On slide 10 we summarize our outlook for our metals recycling. In short we see signs of further improvement in the third quarter. Compared with the second quarter we expect to see average selling prices for both ferrous and nonferrous scrap to show continued improvement.

We also expect volumes to increase slightly from the strong levels we saw in the second quarter. And we expect operating margins to approximate or to improve slightly from the $24.00 for ferrous tons we saw in the second quarter.

And now on slide 12 let’s take a look at our auto parts business. Our auto parts business achieved record second quarter operating income of $13 million. This was double the old record we set in 2008 and it was our fifth consecutive quarter over quarter increase in operating income in this division.

The drivers were improvements in metal spreads, strong parts sales, and continued improvements in operating efficiencies. The results also reflect the benefits of our investments in productivity and technology, and in growing our footprint through acquisitions.

Turning to slide 13, revenues for the auto parts business in the second quarter were in line with our first fiscal quarter despite the normal seasonal decline in parts sales. Our Q2 2010 revenues however exceeded the second quarter revenues from continuing operations in fiscal 2009 by 75%.

During the second quarter of fiscal 2010 our operating profit margin improved to 23%, an increase from the already strong 19% margins achieved in the first quarter. On this slide you can also see that our car purchases in the second quarter were down slightly from the first quarter, but if you exclude the vehicles we purchased under the federal cash for clunkers program, our vehicle purchases approximated the levels achieved in the first quarter representing the third consecutive quarter of strong levels of vehicle purchases.

Now turning to the outlook on slide 14, as we look to the third quarter of fiscal 2010 we expect continuing improvements in our auto parts business. We expect revenue to rise by 10% to 20% from the second quarter and we expect the drivers to be higher prices for scrap as well as normal seasonal improvements in parts sales.

We expect our operating margins in the third quarter to approximate the strong margins we achieved during the second quarter. And now turning the steel manufacturing business on slide 16, our steel mill continues to feel the effects of the weak demand in its markets on the West Coast.

Finished steel volumes in the second quarter fell slightly from first quarter levels although they were still higher than they were a year ago. The steel manufacturing business took further steps to improve its performance. Its operating loss of $2 million represented a 75% improvement from Q1.

And we believe the business is on a path to break-even. Although demand remains weak this business is among the few manufacturers of steel products for the West Coast markets and it remains well positioned to capitalize on the higher spending for stimulus and infrastructure projects when they occur.

As you can see on slide 17 our steel manufacturing revenues in the second quarter were up slightly from levels a year ago. They were down 19% from the first quarter of fiscal 2010, however revenues from finished products were in line with Q1. The steel manufacturing business was able to improve its operating margin because of an improved pricing environment and a continued focus on cost containment.

It was able to realize price increases that offset higher raw material costs, something it had been unable to do in Q1. And it implemented a new round of cost containment initiatives in the second quarter which contributed to the narrower loss and improved our outlook.

For the second quarter as we show on slide 18, sales volumes for finished steel were down 3% from the first quarter, compared with last year’s second quarter sales volumes were up 18%. Also our average net sales prices increased by nearly 7% over the average for the first quarter of 2010.

And on slide 19 we summarize our outlook for steel manufacturing. As we look to the third quarter of fiscal 2010 we expect the demand for our steel finished goods to remain weak. We expect however to be in an environment of rising commodity prices so we anticipate further price increases for finished steel products.

As a result we expect to see higher average net sales prices in the third quarter. In addition we expect a slight seasonal improvement in demand leading to higher sales volumes which we expect to be about 10% to 20% higher than in the second quarter.

The higher sales prices and volumes along with our continued focus on managing costs are expected to allow our steel manufacturing business to return to break-even levels in the third quarter. Now I’m going to turn the call over to Richard, to review our financials.

Richard Peach

Thank you Tamara, and good afternoon, I’ll discuss the financial highlights for the second quarter including the performance trends on profit, cash flow, capital expenditures, and our capital structure.

I’ll start on slide 22, in the second quarter we delivered $0.62 of earnings per share which represented our best quarter since the fourth quarter of fiscal 2008 and our third profitable quarter in a row. Operating income of $29 million was over three times what we achieved in the first quarter and our operating margin from continuing operations in quarter two was 5.1%, more than double the 2.4% margin we achieved in quarter one.

On the next three slides I’d like to review the business performance trends that underpinned our results. As shown on slide 23, each of our businesses had an improving financial trend for the last several quarters. This track record in a challenging economy demonstrates our strong focus on operational performance, maximizing the spreads between selling prices and the purchase cost of raw materials, and a disciplined control of costs in all areas of our business.

In particular our metals recycling and auto parts divisions have each benefited from higher volumes and margin expansion. In metals recycling, the second quarter operating profit was $29 million which represents a $13 million improvement sequentially and was driven by strong export sales performance and an improving trend in the operating profit per ton.

In auto parts the second quarter operating profit of [$30 million] represented a sequential improvement of $3 million. Operating margins improved again in the quarter and the business is benefiting from our sole focus on self-service since the disposal of Greenleaf.

In steel manufacturing we continued to optimize performance while awaiting improvements in demand. In the second quarter the operating loss was $2 million, an improvement of $6 million from quarter one. It should be noted that as the steel mill represents less than 15% of our revenues until business improves its performance will not be a primary driver of our consolidated results.

Moving to slide 24 I’d like to review our margins in more detail and the drivers of the improved performance. In metals recycling our second quarter operating profit per ton reached $24.00. This represented a 14% improvement sequentially and continued the trend over the past five quarters. Several factors have been driving the improvement, export demand continues to be strong, particularly in Asia, with nearly 80% of our ferrous sales volumes in the second quarter going overseas.

We’ve also benefited from increased selling prices for both ferrous and nonferrous material driven by the strength in demand and higher commodity prices. And although supply conditions remain challenging we’ve used our network to obtain the raw materials we need and in addition we’ve achieved operating efficiencies through processing more with less people than before the downturn, and by using our sorting technology to maximize the value we achieve from the shredding process.

Now moving to slide 25, in auto parts our operating margins in the second quarter reached 23%, again our fifth consecutive quarter of improvement in continuing operations. The drivers of these higher operating margins were a combination of improved commodity markets benefiting the value from scrap vehicles and cars, strong underlying car purchase volumes, steady parts sales despite seasonal factors, and continued improvements in operational performance.

And in addition we’ve grown the size of our self-service business and now have 45 stores, which is six more than we had at the start of our fiscal year. Moving on, I’d like to discuss cash flow on slide 26. Our operating cash flow was strongly positive in the second quarter at $106 million.

The key drivers were higher profit and lower inventory from an increased number of shipments. We also benefited from a tax refund of $41 million received in February. Free cash flow is now positive for the year to date with acquisition activity in the second quarter reflecting the completion of the purchase from LKQ of two self-service stores in Dallas.

And even though we’ve spent $29 million year to date on acquisitions, we are still cash positive on completed transactions due to the sale of Greenleaf in quarter one. Turning to capital expenditures, I’ll discuss that on slide 27.

As you can see on the right hand side of this chart in the remainder of fiscal 2010 we expect to spend a further $30 to $50 million in capital expenditures on top of the $22 million invested in the year to date. Broadly speaking our capital program can be split between maintaining and growing our business.

CapEx to maintain the business covers depreciation and includes equipment replacement, product critical expenditures, development of IT infrastructure, and ongoing advancements in environmental compliance and safety performance.

Beyond spending to maintain the business our growth CapEx program includes investments in technology to create growth and to increase returns. In previous years that has included mega shredders and installation of back end sorting technologies. As a result both ferrous and nonferrous sales volumes have grown, with the latter now representing over 15% of total revenues from metals recycling.

And this year we are continuing to invest in technologies which will increase separation and recovery of nonferrous materials. Its our strong operating cash flow which enables us to make these investments and still maintain a comfortable leverage ratio as shown on slide 28. The strong second quarter cash flow reduced net debt to $68 million and leveraged to 7%.

Our strong balance sheet and low leverage continues to support the growth and expansion of our business. We have a credit facility of $450 million which does not expire until 2012 and at the end of the second quarter, we had $360 million of headroom to draw if we need to.

Now with that let me turn the call back to Tamara.

Tamara Lundgren

Thank you Richard, we’ve just completed a quarter which reflects our highest earnings since the downturn began about 18 months ago. We’ve maintained our strong balance sheet throughout this period and we’ve generated strong levels of cash.

This enables us to continue to make acquisitions and to invest in technology, improving the operating efficiencies of each of our businesses. The macroeconomic fundamentals supporting our business strategy were evident throughout the last 18 months and we expect them to further strengthen over time.

Our productivity, our platforms, and our vertical integration in the aggregate are unique in the industry and our performance reflects our ability to react nimbly and effectively to changing market conditions. In summary, our outlook for the third quarter is for continuing improvement in each of our businesses and our expectations are for continued growth in our platforms.

We can now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Eric Glover – Unspecified Company

Eric Glover – Unspecified Company

Congratulations on the results, my first question is on the scrap flows, you mentioned in the press release that you were able to maintain a steady inflow and I was wondering if you could describe that in a little more detail, say talk about the West Coast versus the East Coast and how the two are maybe different.

Tamara Lundgren

Our scrap flows as we said last quarter and as we continued to comment on this quarter have remained steady and they’re improving. They’re improving probably for a combination of reasons. You’ve got normal seasonality. We had a tough winter around the country. I think there was a day there where there was snow in 49 of 50 states.

And so there’s normal seasonality improvement that is driving it. I think that there’s also improved economic activity in the US and better prices than a year ago. So we’re seeing flows improving at the same time that we’re seeing demand is improving and that is on both Coasts.

Eric Glover – Unspecified Company

And then it looks like the metals recycling operating margin was 5.9%, up from 5% in the prior quarter, wondering if you could outline a scenario in which that metals recycling margin improved to more historical levels which was sort of low double-digits or even around 10%.

Tamara Lundgren

That really leads off from one of things that I just mentioned, which is flows are improving at the same that demand is improving and demand is strong. And we saw our margins expand and we anticipate seeing continued margin expansion because of our platforms, because of our productivity, because of our vertical integration with pick and pull, and because we’re able to acquire and attract the scrap flows.

So we’re continuing to buy smart, we’re continuing to produce more efficiently through our technology investments and just our overall operating productivity and as they say in Central Oregon and Scotland we’re getting more wool off the sheep. And that’s really what’s driving our margins.

Eric Glover – Unspecified Company

So you remain confident that over time that you can get back to more historical levels.

Tamara Lundgren

Well, as what we’ve said in the past is that it’s the US economic activity that’s really going to drive the increase in scrap flows and we’ve already seen the benefits of that as the US economy is slightly improving. We’re seeing the scrap flows improve and so that’s what is going to drive to an important degree historical margins.

Operator

Your next question comes from the line of Brent Thielman – D.A. Davidson

Brent Thielman – D.A. Davidson

Maybe just a follow-up to some of the previous questions but as you get into the third quarter here, are you starting to see the spread between your buying costs and your selling prices open up a little bit more.

Tamara Lundgren

Yes we are.

Brent Thielman – D.A. Davidson

And then I guess with improving demand as you talked about overseas and perhaps maybe some customers trying to get in front of the increases in scrap, are you finding yourself maybe selling a little further out than what would be typical for Schnitzer or I guess what you’ve seen in recent quarters.

Tamara Lundgren

I think that we are seeing ourselves selling a little bit further out than what we’ve seen in the past couple of quarters but clearly inside of what our normal forward sale periods are. I’m not sure that that’s driven so much by people trying to get ahead of prices as much as we think that its driven by customers who are getting more normalized levels of inventory.

They’re no where near the same levels of inventory that we saw historically but its showing a higher confidence level and approaching more normalized levels of inventory as opposed to just in time restocking.

Brent Thielman – D.A. Davidson

And then just lastly on the steel manufacturing business, we’ve heard from some other mills discussing some benefit from some pre-buy behavior I guess out of some anticipated price increases, have you seen any of that at the mill or do you expect to see more of that in Q3.

Tamara Lundgren

I think that is more relevant and more apparent on the steel side of the business the purchasing in advance of price increases, particularly because we’ve seen in the market, seeing steady price increases.

Operator

Your next question comes from the line of Timna Tanners – UBS

Timna Tanners – UBS

I think what we’re all kind of asking the same question here and I’m sorry to repeat it but I think you just said a couple of different ways that you’re seeing flows improve and so that can help your costs, prices are going up, and yet in your stated guidance you’re talking about operating margins on page 10 being approximate to slightly improved. So are you saying it would be flat to slightly up or would it be more up I guess is the question.

Tamara Lundgren

I’m laughing because this is a very regular question for me, our guidance is what our guidance is. We’re less than half way through the quarter and so we can only give guidance to what we’re seeing today and what we’re seeing is for it to approximate or be slightly up.

Timna Tanners – UBS

Because listening to you sounds like more of a margin expansion so I’m wondering is there a reason why maybe, are you seeing costs come down for scrap yet I guess is a more direct question, are flows starting to improve and you said that will happen eventually but are you starting to see much of it, if you could talk about that.

Tamara Lundgren

What we’re seeing on the flows is what I said before, that they’re steady and improving. The interesting thing that we’re seeing from a pricing perspective is that while up until just a couple of weeks ago domestic and export prices were in parody. We’re now seeing a differentiation and probably in the range of $25.00 to $50.00 in favor or export markets.

Timna Tanners – UBS

So the Chinese have been somewhat out of the market lately, we’re hearing a little price sensitive, can you give us an update on what you’re hearing on the Chinese market in particular, knowing its not your total market of course.

Tamara Lundgren

The Chinese market, the Chinese have been out of the market since about the new year. We are seeing very broad based demand though. A lot of strength in Southeast Asia, heavy Eastern Mediterranean buys. So as you know people are in and out of this market on a very regular basis. The Chinese have been very much in this market recently but they’re lack of buying now isn’t working to the detriment at all of the rest of the market.

Timna Tanners – UBS

And finally when you talk about the mill I was curious there’s a pretty big improvement year over year, can you just give us a little bit more color on both the volume story, what’s happening in demand and also a little bit more on the cost containment efforts.

Richard Peach

Maybe I can start with the cost containment, but cost containment, we are operating at the mill now with about 25% to 50% less staff than we had at the end of fiscal 2008 so we’ve gone through a fairly significant restructuring of our operations there. Recently the types of things we’ve been doing over the last quarter or two have been consolidating back office functions with a corporate center, providing some early retirement, restructuring or shifting in warehouse operations.

So it really has been cutting down to the bare bones there consistent with the current operating environment.

Tamara Lundgren

And on the volume side a year ago we were destocking ourselves and so that impacted volumes and we are seeing a slight increase in volumes since we would expect to from a seasonal perspective.

Timna Tanners – UBS

And just talking year over year from your presentation, so it looked like you had, well no I guess year over year you’re talking about seasonal improvement whereas Q3 you had things declining and that was just I guess overall economy was still worsening and you were destocking, is that right.

Tamara Lundgren

That’s correct, we were working off our own inventories this time last year.

Operator

Your next question comes from the line of Torin Eastburn – CJS Securities

Torin Eastburn – CJS Securities

There have been some reports in the media recently about high metals inventories in China, I think maybe copper in particular, do you have any anecdotal insight into what the scrap inventories there might look like.

Tamara Lundgren

Not particularly beyond what’s been generally in the press and so nothing really to add to that.

Operator

Your next question comes from the line of Sal Tharani – Goldman Sachs

Sal Tharani – Goldman Sachs

On the steel mill side, is there any labor contract coming or have you just settled one.

Tamara Lundgren

We just agreed a deferral of the, of a salary increase with the union which was a very much a win win for us and for our union. I think as we discussed before with you and others we’ve had some great relationships with the union in the past so we were able to provide certainty and extend the contract for a year for the union.

We were able to keep our costs where they needed to be for this year so it was a good outcome for both sides.

Sal Tharani – Goldman Sachs

Would you be interested if there is another rebound in California from the for sale, [this morning] there was some news that some of the large shareholders of [Pamco] have sent a letter to the management that they would like to sever that business or sell that business.

Tamara Lundgren

We don’t comment on specific companies that are or may be rumored to be for sale in the market at any point in time.

Sal Tharani – Goldman Sachs

Where would your growth be, would you be looking at steel division for growth or you will continue to grow in the other two divisions.

Tamara Lundgren

What you’ve seen in the past is over the course of the last four and a half years we’ve done 15 acquisitions and those have been in our metals recycling business, and in our auto parts business.

Sal Tharani – Goldman Sachs

And very quickly on auto parts margin, when you talk about margin expansion that’s I believe you were talking about in percentage other than dollar per service per center, is that correct.

Richard Peach

Yes, its in percentage terms.

Sal Tharani – Goldman Sachs

You said margin will be stable so expecting that percentage on a higher revenue because you’re expecting higher revenue is that correct to say.

Richard Peach

That’s correct.

Sal Tharani – Goldman Sachs

And just lastly what are you seeing in the freight market for scrap right now over the last let’s say a month or so.

Tamara Lundgren

We’re seeing good prices there, steady prices for bulk freight.

Operator

Your next question comes from the line of Rob Moffett – Longbow Research

Rob Moffett – Longbow Research

Just two quick ones here, first was there any shipment carry over from the first quarter.

Richard Peach

Yes, I think as we said in our quarter one announcement there was a couple of ships that [slipped] over from Q1 into Q2.

Rob Moffett – Longbow Research

Is there any way to quantify that, on a tonnage basis or actually number of cargos.

Richard Peach

No, but we do use mainly [handirack] ships so you’re in the 30 to 40,000 tons per ship.

Rob Moffett – Longbow Research

Second, its seems that domestic mill restarts kind of added some support to scrap prices over the last couple of quarters and now with the domestic restarts and subsequent scrap restocking more or less over, do you see that as a risk to domestic and/or export prices in the coming quarter.

Tamara Lundgren

Right now what we’re seeing is that the domestic supply and demand are more closely balanced and so but what we are seeing is that export prices are rising at a faster rate than domestic prices so we’re not seeing this is a risk at all.

Rob Moffett – Longbow Research

And if demand is balanced and maybe hypothetically let’s say if scrap prices were to stabilize or even pull back slightly would that give you an opportunity to lower buy prices and maybe expand margins.

Tamara Lundgren

That historically has been what has happened in the US pre the downturn, stable or weaker domestic prices and stronger export prices have driven higher margins.

Operator

Your next question comes from the line of Mark Liinamaa – Morgan Stanley

Mark Liinamaa – Morgan Stanley

We’ve talked in the past about the potential to maybe grow export scrap volumes, based on your guidance the third quarter is going to be the best of the last four that you have on the chart and the last three, the previous three, what, can you talk about the broad based demand. Is there anything out there that leads you to believe that that time for growth is now and what would it take to do it.

Tamara Lundgren

What we are seeing is and I’ve used this word a lot so I, forgive me here, but we continue to see that its broad based and there is [inaudible] around the world. One of the drivers of the increased volumes were the Eastern Mediterranean was back in the market and that started about five weeks ago. And part of that was caused by lack of buying previously.

Part of it is driven by improved product prices, but even the Turkish economy I think last quarter was growing at around 5%. So you’ve got that going on in the Atlantic right now. We see improved activity in the Mid East. We see India buying heavily as well.

And on the Pacific we see Malaysia, Thailand, Indonesia, and really throughout Asia where their underlying growth is 5% to 6%. But I guess I can conclude there.

Mark Liinamaa – Morgan Stanley

Do you get any sense that there’s increased demand because of how tight the iron ore situation is.

Tamara Lundgren

Well there’d always be the opportunistic buying and use by blast furnaces of scrap when there’s a good arbitrage in favor of scrap versus iron ore.

Operator

Your next question comes from the line of Lloyd O’Carroll – Davenport & Company

Lloyd O’Carroll – Davenport & Company

[break in audio]

Tamara Lundgren

[break in audio] has historically had very high margins and what I would say today in terms of what is driving the very strong performance is that and this may be a tortured analogy but its moving from a four cylinder to an eight cylinder operation.

Traditionally its performance has been driven by scrap prices, by core yields, by part sales, by admissions and what we’ve been seeing over the last couple of quarters is the improvement as a result of the dedicated focus on the self service business, the significantly improved productivity which is a function of both of just operating efficiencies as well as some technology investments we’ve made.

And improved program, and then of course, very importantly the larger geographic platform where we’ve gone from 39 stores to 45 stores. So we do think that that is operating on a sustainable basis.

Lloyd O’Carroll – Davenport & Company

And then can you also just talk about competition in your scrap export business, what are you seeing there and what are the risks that that competition could start to push prices on the export either prices or margins on the export side lower.

Tamara Lundgren

What kind of competition are you talking about.

Lloyd O’Carroll – Davenport & Company

Competition for exporting scrap to Asia, Turkey and so forth, are you, is there a lot of competition out there.

Tamara Lundgren

The constraint has been and continues to be supply, not competition on the customer side. What we can say in terms of our operation is that the access that we have to seven deep-water ports is something that’s not replicable and I think that together with the balance sheet strength that we’ve had to make, that has enabled us to make the significant investments in things like our mega shredders and our back end sorting systems has enabled us to be the low cost producer, that and our geographic platform give us we think a highly competitive advantage in terms of selling to the markets wherever prices are strongest and as I said, it’s a market that clears and the constraint is supply not export demand.

Operator

Your next question is a follow-up from the line of Brent Thielman – D.A. Davidson

Brent Thielman – D.A. Davidson

I just had sort of a bigger picture question, but I wanted to get your perspective on the move to quarterly indexing for iron ore prices versus sort of the traditional annual benchmarks and any implications if any how that might [happen] for the scrap market.

Tamara Lundgren

The iron ore prices and scrap prices have always been highly correlated and I think that correlation is in the high 70’s, low 80’s. So its always been highly correlated. The scrap prices are always spot prices and up until recently iron ore prices were contract prices, so given that annual, if the iron ore market moved from annual to quarterly, the correlation might get tighter but its really more directional than it is day to day, week to week, or month to month price driven.

Operator

Your final question is a follow-up from the line of Sal Tharani – Goldman Sachs

Sal Tharani – Goldman Sachs

Can you give us some color on your business you acquired in Puerto Rico in terms of size and in terms of are you largest, other competitors, and what are you doing with the scrap over there, where are you sending it to.

Tamara Lundgren

What we bought in January of 2009 was an operation that had several facilities plus a shredder. It is the largest operation in Puerto Rico and we have been, I don’t think we identify where we sell our scrap specifically from any of our sites but it is an East Coast site so it sells similarly to our other East Coast operations.

Sal Tharani – Goldman Sachs

What size is that, is it, can you quantify what kind of volume that place can generate.

Tamara Lundgren

You know, we don’t disclose that on a site-by-site basis.

Sal Tharani – Goldman Sachs

And in terms of historically West Coast has always been better for you in terms of less competition and buying [inaudible] is better, is Puerto Rico something similar to that or is it more of an East Coast, or more competitive region.

Tamara Lundgren

I think in terms of its sales markets its much more similar to the East Coast. It is part of the East Coast sales network versus the West Coast.

Sal Tharani – Goldman Sachs

And I know you mentioned that where the growth is going to come from but there was news recently that there is a steel mill being considered, I think a rebar mill in Puerto Rico, would that be [inaudible] to you or would that change any dynamics of your scrap over there.

Tamara Lundgren

Again we don’t comment on specific companies that are in the market discussing acquisitions or green field developments. What I will say is that we are largest scrap operator on the island.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Tamara Lundgren

Well thank you everyone for joining our call today. We look forward to speaking with you in June.

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Source: Schnitzer Steel Industries, Inc. F2Q10 (Quarter End 02/28/10) Earnings Call Transcript
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