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Schnitzer Steel Industries Inc. (NASDAQ:SCHN)

F4Q2011 (Qtr End 09/31/2010) Earnings Call

October 20, 2011 05:00 pm ET

Executives

Alexandra Deignan - IR

Tamara Lundgren - President and CEO

Richard Peach - SVP and CFO

Analysts

Sal Tharani - Goldman Sachs

Luke Folta - Jefferies

Eric Glover - Canaccord

Torin Eastburn - CJS Securities

Tim Hayes - Davenport & Company

Brent Thielman - D. A. Davidson

Evan Kurtz - Morgan Stanley

Operator

Good day, ladies and gentlemen and thank you for standing by, and welcome to Schnitzer Steel’s Fourth Quarter 2011 earnings release conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference maybe recorded. And now, I will turn the call over to Alexandra Deignan. Please go ahead.

Alexandra Deignan

Thank you, Jerry. Good afternoon. I am Alexandra Deignan, the Company’s investor relations contact. I would like to thank everyone for taking the time to join us today. In addition to today’s audio comments, we have prepared set of slides, which were made available concurrently with our earnings press release. You can access slides through 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 two, which are also included in our press release of today and in the company’s most recent Form 10-K. These statements and 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 first quarter of 2012 in our press release and in this presentation. After this call, we will not be under any obligation to update our outlook.

Finally, 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 of 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 Lundgren

Thanks, Aly, and welcome everyone to our fourth quarter and fiscal year 2011 earnings call. It was another great quarter and what has been a transformational year for our company.

So before I start, let me first thank all our sincere teammates for delivering such excellent performance, who are working smart and working safely. Operational excellences begin and end with a culture of safety first and our employees have done a tremendous job in keeping their eye on the ball where safety is concerned.

In fiscal ’11, we delivered improved safety performance against all of our key metrics year-over-year to all our colleagues except who are listening to this call. Congratulations on a year of outstanding performance.

So now let’s take a look at our financial performance. I will start this off with a review of our quarterly and fiscal year consolidated results and the operating highlights for each of our businesses. Then Richard will discuss the detailed results for our segments and review our cash flow and capital structure.

I will conclude with an outlook for our first quarter, and then we will open up the call for questions.

So let’s get started by turning to slide four. As you can see in the press release, I think we are having a little bit of lag on our slide turnings, though it will start in any event. But, as you can see in our press release we issued earlier today, we delivered very strong performance against each of our key metrics in fiscal ’11. You may recall that in 2010, we recovered faster than normal from the impacts of the global financial crisis.

In 2011, we’ve continued to separate ourselves from the pack, adding substantial growth and profitability to an already strong foundation despite a faltering U.S economy, disruptions in the Middle East and natural disasters in Asia.

Our 50% growth in revenues, operating income, EPS and operating cash flow reflect the healthy combination of higher market demand, organic market share expansion and investment growth. Our ability to achieve growth straight down at the bottom line demonstrates our disciplined approach to operational performance and investment return, and our robust cash flow generation enables us to make further investments. So let’s turn to slide five to review the highlights of our fiscal 2011.

Our revenues, operating income and volumes all reflect significant growth. Global demand for steel continues to increase as well as demand for our products. However as we all know the US economic environment is still fragile, and so our strategy to invest in technology and to make the acquisitions that we did past year counter that weakness and delivered very strong results.

We added ten new businesses which increased our supply flows in each of our key regions and extended our geographic reach into Western Canada, which adds a substantial new growth platform to our footprint. We brought online new non-ferrous extraction technologies which contributed to our increased margin per ton and allowed us to be a better buyer of ferrous materials.

And we generated significant operating cash flow which enabled us to maintain a strong balance sheet to fund our growth investments and opportunistically repurchase shares. And the company closed the acquisitions over the course of fiscal year ‘11 and because our technology investments came online throughout the year we expect fiscal year ‘12 to benefit from the full year effect of these investments through growth in revenues and in earnings.

Despite the near-term softness in some of our end markets we are confident that in fiscal ‘12 the macroeconomic fundamentals underlying demand for our products will continue. So let’s turn to slide six and review these fundamentals.

The three long-term macroeconomic trends that have been driving our markets haven’t changed. First, the demand for our infrastructure investment in the developing world continues to be high. Second, the supply-demand balance of scrap continues to favor those platforms in the developed world that can source, process and export scrap most efficiently to meet worldwide demands wherever it is greatest at any point in time and third, electric arc furnace capacity additions and the focus by blast furnaces on their need to reduce energy cost and improve their environmental footprints continue to drive more demands for processed scrap.

So let’s review each of these macro trends in a little bit more details. While most forecast are now highlighting a reductions in growth in the developing world, that reduction in growth needs to be put in perspective. The IMF still expects emerging Asia, and that includes China and India to grow 7.7% next year which is down from 8% previously forecasted. So what does this mean for demand for our product? It means that the developing world is going to need more scrap next year than they do today. We believe that demand will continue to outstrip supply which is done consistently both before and since the onset of the global financial crisis, and we believe this demand will remain strong and steady.

And as we look solely at China, a lot of economists forecast China’s GDP to rise by about 9% in 2011 and 8% in 2012. While certain types of fixed asset investment and construction spending in China may decrease, their need for social housing and related infrastructure is projected to increase. In addition, China has announced the desire to increase their use of scrap in order to reduce energy consumptions and greenhouse gas emissions.

And it’s important to remember that it’s not just about China, we sell about 50% of our recycled metals to Asia and two-thirds of that amount to non-China destinations, Korea, Taiwan, Malaysia, Thailand and Indonesia to name a few. Add to that the rebuilding efforts in Japan and India’s growth expectation.

So while we had headlines in well respected publications crying loads for the emerging economies, we believe those words can’t be spread like peanut butter and that it’s important to look behind the headlines to determine those industries and those companies that will benefit from the growth that is continuing in the emerging markets. We believe that we are one of those companies.

It’s also important to remember that infrastructure development is the most important stimulant to steel demand. Steel production has increased in the emerging markets where they are short raw materials like scrap; the deepest source of scrap is the US which is where we operate.

And lastly in recent years, EAF capacity additions, energy efficiency goals and the pressure to reduce greenhouse gas emissions have all been significant forces driving higher demand for scrap. So while the equity markets are predicting and reacting to a near-term slowdown in growth, significant growth is still expected in the emerging markets, growth levels which support high demand are ferrous and non-ferrous scrap products. So let’s turn to slide 7 to look at the broad global demand.

The graph on the left shows where US scrap exports have gone during the first eight months of calendar 2011. The graph on the right shows that slightly more than half of our exports are destined for multiple countries in Asia and approximately 20% are delivered to the Eastern Mediterranean and the mid-east including Turkey and Egypt.

So now let’s turn to slide eight for a closer look at our recent quarterly results. During the fourth quarter our revenues increased 69% versus last year. Global demand continued to support high average ferrous prices, up about 30% from last year. But more importantly, our ferrous sales volumes increased by 36% versus last year and our nonferrous sales volumes increased by 18%.

Our Auto Parts Business, increased car purchase volumes and admissions during Q4 which drove record Q4 sales performance. And our steel mills sales volumes increased 7% and average sales prices increased 17% reflecting an improved market versus last year.

EBITDA growth in Q4 outpaced revenue growth increasing by 86% and our EPS increased 112% versus last year excluding a prior period tax benefit.

Now let's turn to slide nine and take a look at the full year performance for our fiscal 2011. Looking at the full year, our revenues, our operating income and our EPS each grew by nearly 50%. For the full year, it’s important to note that our increase in revenues was not just about higher prices. Volumes and operating income in each of our businesses increased.

This bottom-line performance affirms our strategy of expanding our platform to get closer to the sources of supply and of investing in technology to increase our yield and to contribute to our ability to increase our volumes. And as I mentioned before, fiscal year ’11 reflects only partial year results from our acquisitions and technology investments.

So let’s move to slide 10, and we’ll look at our use of capital during fiscal 2011. We invested $398 million during the year in a combination of capital expenditures and strategy acquisitions that enhanced our supply lines in each of our region and expanded geographic platform into Western Canada. These significant investments provided incremental and synergistic value during our partial year of ownership. And as Richard will discuss in more detail, our strong operating cash flow of $140 million enabled us to lower our net debt to total cap ratio versus Q3.

So let’s turn to slide 11 and take a look at the full year performance of each of our segments. For the full year, revenues in our Metal Recycling Business grew 55% driven by record shipments of both ferrous and nonferrous metals. Nearly 90% of this growth was organic which provides good opportunities for further growth in fiscal ‘12 from our acquisitions.

Our fiscal year 2011 ferrous sales volumes now exceed our previous peak level which was achieved in fiscal 2008. In the fourth quarter, we shift our ferrous and nonferrous products to 18 different countries. Our largest ferrous export destinations were China, Turkey, Malaysia and Egypt and on the nonferrous side, China and the U.S. continued to be our largest buyers.

For the full year, our operating income increased 39% reflecting strong volume growth, operating efficiencies and the partial year benefits of our acquisitions and technology investments.

So let’s now turn to slide 12 for a review of our Auto Parts Business. Revenues in our Auto Parts Business grew by 33% in fiscal 2011 and operating income increased by 25% despite very little GDP growth in the U.S., which demonstrates APB’s ability to deliver high performance in both strong and weak domestic economic environment. Our five new stores contributed meaningfully to APB’s growth and we intend to continue expanding our platform through acquisitions and Greenfield development.

So let’s turn to slide 13 to take a look at our Steel Manufacturing Business. At SMB, higher volumes, higher prices and continued benefits from operating efficiencies provided another quarter of operating income profit and a full-year profit of $3 million. On average, the mill operated at 56% utilization for fiscal 2011.

Although, the mill’s performance continue to reflect the weak demand in the U.S. construction markets through product diversification and our focused on operating efficiencies, we have been able to deliver profitable performance and are well situated to capitalize on the improvements and demand as they occur. We believe that there is the potential for a significant upside at SMB when the domestic economy recovers and demand increases leading to higher production levels.

So turn now to slide 14. In fiscal 2011, we expanded our market presence across all our major regions. Our strategic rationale is clear; to align ourselves with the supply and demand dynamics of the global scrap and steel industries, enhance our deep water ports to access demand wherever it is greatest.

We have both grown organically and acquired new sources of supply to meet the increasing demand for scrap from our end customers. In our view, it’s the combination of identifying new sources of supply in underserved and high growth regions and stay at the forefront of continuous improvement practices including the development and implementation of technology to improve yield that are the keys to sustainable growth and strong margins.

Before I turn it over to Richard, let me conclude by presenting a look at our key performance metrics. So we turn to slide 15; in a year worldwide volatility with steady and strong demand for all our products globally but a weak U.S. economy, we were able to achieve significant growth in every key metric. Revenues, profits and operating cash flow all grew by around 50%. Ferrous and nonferrous sales volumes and car purchase volumes all grew in the mid-teens or better and we expect continued growth in our platform in fiscal ’12, both due to the benefits of full year performance from our technology investments and our acquisitions and due to a continuation of our successful strategy of growth.

Now I’ll turn it over to Richard to highlight market trends in our segments and our current capital structure. Richard?

Richard Peach

Thank you Tamara and good afternoon everybody. I’ll start my presentation with Metal Recycling on slide 16th. As shown on the left, the average ferrous sales price for the fourth quarter was $443 net of freight. Compared to the same quarter of the prior fiscal year, this was an increase of 30%. On a sequential basis, selling prices were flat as the fourth quarter continues to stable price trends, we’ve seen in the last three quarters of this fiscal year.

Looking at the graph on the right, ferrous sales volumes in the fourth quarter were a record 1.5 million tons. On a full year basis, we shipped a record price point 3 million tons, an increase of 26% compared to the prior year. For the increased volumes, approximately 85% came from strong organic growth. This was driven by continuing high overseas demand, increased availability of supply and the success of our purchasing process. The remaining growth came from the partial year contributions from the acquisitions completed during fiscal 2011.

Turning to slide 17, I’ll review nonferrous. As the chart on the left shows, average nonferrous selling prices were $1.08 during the fourth quarter. This was an increase of 29% year-over-year and the slight decline on a sequential basis. On the right, you can see fourth quarter sales volumes were 191 million pounds. This represented a significant sequential increase of 32% and was up 37% compared to the same quarter in the prior year. Sales of nonferrous benefited in the fourth quarter from the higher intake of raw materials, increased nonferrous production and contributions from the acquisitions.

On a full-year basis, nonferrous sales volumes increased 90 million pounds or 19% from 69 million pounds. The main driver was acquisitions which contributed nearly 60% of the increase and the remainder came from a combination of higher nonferrous purchases and increased nonferrous yield from shredding process. Overall nonferrous revenues were 20% of MRB’s total revenues for fiscal 2011.

Turning to slide 18 I will now summarize MRB’s overall fourth quarter performance. Looking first at the graph on the left MRB’s fourth quarter operating income was $32 million. This continued to the upward trends and quarterly performance with operating income up 13% on a sequential basis. We also achieved a 148% increase in operating income versus the prior year fourth quarter which had been adversely impacted by a fall in the market.

Operating income per ferrous ton is graphed in the right and shows that we achieved $34 in the fourth quarter. This is 8% higher from the $31 we achieved from the third quarter and came from a combination of productivity benefits from higher ferrous volumes and higher relative levels of nonferrous production. On a full-year basis, we grew operating income per ton by 10% while at the same time we generated significantly higher volumes and also grew our business.

Moving onto slide 19 we will come to the fourth quarter performance of our Auto Parts business. Auto parts also delivered strong fourth quarter operating results increasing scrap and core sales as well as achieving higher inflows from car purchasing activities. As shown in the right, the fourth quarter car purchase volume of 97,000 cars was 7% higher year-on-year. This level was also 5% higher sequentially driven mainly by organic growth.

On a full year basis, we purchased 353,000 cars which was a growth of 7%. The increase was split equally between organic growth and a contribution from recent acquisitions. On an adjusted basis, the year-over-year growth was even higher at 14% when we exclude the one-time benefit of 19,000 cars from the Cash for Clunkers program in 2010.

APB’s fourth quarter operating income was $17 million which equates to a strong operating margin of 18%. Although car purchase volumes increased, the operating margin was slightly lower sequentially due to normal seasonal impact on part sales and the admissions. On a full-year basis, the operating margin was 20% which demonstrated our ability to achieve significant growth of volumes while at the same time maintaining high levels of profitability.

Moving to slide 20, we look at the performance of SMB. Demand for the steel mills products increased in the fourth quarter and sales volume of a 124,000 tons as shown in the right was a 7% increase from the prior-year quarter and up 5% sequentially. For the full-year sales volumes were flat at 459,000 tons as the market for long products on the US West Coast remains soft. Average selling prices of $721 per ton increased 17% as compared to the prior year quarter, but declined slightly on a sequential basis.

SMB’s operating income was $3 million in the fourth quarter and $3 million for the full year. The improvement from fiscal 2010 reflects increased ability to pass through higher scrap costs which had driven the increased selling prices we’ve seen in this last year. From a management perspective, we continue to exercise strong discipline on operating costs, inventory management and ongoing levels of capital expenditure.

And now turning to slide 21, we will take a look at our capital structure. During the fourth quarter, we reduced our total debt by $68 million. We had positive operating cash flow of $128 million which arose from our strong financial performance and our disciplined management of working capital. During fiscal 2011, we spent $293 million in cash on ten acquisitions and a $105 million of capital expenditures, all of which was funded from our existing credit facilities.

In addition, our strong fourth quarter cash flow enabled us to take the opportunity to spend $10 million on share repurchases. Our yearend leverage of 24% was down on 29% in third quarter and we continue to maintain a strong balance sheet and significant headroom beneath our credit facility of $650 million.

Now, I’d like to take a closer look at our operating cash flow trends on slide 22. In fiscal 2011, we generated healthy operating cash flows of $140 million. This year-over-year improvement of 57% reflects our increased level of profitability and strong focus on controlling working capital in a higher scrap price environment all while growing our business.

Turning back, our five year trend of operating cash flow demonstrates our track record of delivering strong cash flows in varying economic environments. It is this ability to turn our business performance into cash which allows us to continue to invest in growing our business at the same time as maintaining a strong balance sheet position.

Now, I’ll turn the call back over to Tamara, who will provide our outlook for first quarter 2012 and some concluding remarks.

Tamara Lundgren

Thank you, Richard. Before I dive into our outlook let’s step back and take a look at the current market dynamics impacting our business. During the last couple of weeks, the ferrous scrap markets have become cautious. Our customers have a need for scrap, but they are watching world events and keeping inventories low.

Ferrous prices have come down $30 to $40 from the recent peak levels, but that needs to be kept in perspective. This movement represents just about a 10% decline in net prices from recent peak levels, but the absolute price levels are still very strong.

As you know in our business, we are able to quickly adjust purchase prices to reflect forward sales movement and as I noted on previous calls this year, prices have been unusually stable for the last nine months. These current downward price movements are not at all unusual. The global demand for scrap continues to increase and we expect that it will ultimately continue to assert upward pressure on prices and volumes.

So let’s turn to our outlook for our Metals Recycling Business. Ferrous sales volumes are expected to approximate first quarter of fiscal ’11. It’s worth noting that the sequential decline in sales in Q1 versus Q4 is a reflection of current fluidity in the market. Nonferrous volumes are expected to increase 20% from the first quarter fiscal of ‘11 primarily due to incremental contributions from acquisition and technology investments.

Despite the recent drop in prices, ferrous average net selling prices are expected to be significantly higher than in the first quarter of last year and nonferrous average net selling prices are expected to be slightly higher than the first quarter of last year. Primarily, because we anticipate a negative impact from average inventory cost, MRB’s operating income per ferrous ton is expected to approximate the first quarter of fiscal 2011.

Turning now to slide 24, we will review the outlook for our Auto Parts Business and our Steel Manufacturing Business. In our Auto Parts Business, revenues are expected to increase 20% to 30% from last year’s first quarter due to higher prices and increased sales of parts, cores and scrap including incremental benefits from acquisitions.

First quarter operating margins are expected to decline sequentially from Q4 due to the impact of lower commodity prices on scrap and core sales, as well as a negative impact from average inventory costing.

And in our Steel Manufacturing Business, sales volumes are expected to increase slightly from the levels we saw in Q1 of last year. Average net sales prices are expected to approximate the levels we saw in Q4. First quarter operating margins are expected to improve versus last year and should approximate breakeven due to higher production levels.

So we can now conclude by turning to slide 25. As I said at the beginning of our call, fiscal 2011 was a year of significant accomplishments. Our results reflect confirmation of our strategy to profitably grow by expanding our geographic platform to serve the worldwide demand for scrap and by investing in technology to extract more metals and value from the materials we process. Our results also reflect our ability to increase our profits and generate positive operating cash flow by our consistent and disciplined focus on continuous improvement.

Looking ahead to 2012, we expect the positive benefits of the investments and acquisitions we’ve made, as well as the overall increasing demand for scrap metal to continue to result in enhanced earnings power. As you heard from our outlook, we are seeing the near-term softness in some of our end-markets. We’ve demonstrated time and again our nimbleness and ability to adjust purchase prices quickly to maintain the positive metal spreads and positive operating cash flow.

Global steel production continues to increase and borrowing any macroeconomic stocks, our end customers will need more scrap tomorrow than they do today and we are very well-positioned to deliver our products to meet that demand.

So now, we’ll open up the call for a few questions.

Question-And-Answer Session

Operator

Thank you, ma’am. (Operator Instructions). Our first question in queue is Sal Tharani with Goldman Sachs. Please go ahead.

Sal Tharani - Goldman Sachs

I want to just understand the guidance for the first quarter. You have a much higher pricing and higher volume, but margins will be flattish from last year. And you mentioned inventory, but I thought that you were short inventory already needless the scrap prices are coming down, you actually tend to benefit because you are buying fever, while you have booked lots of the orders at a higher price in the past?

Tamara Lundgren

Sal, I why don’t I ask Richard to walk you through the impact of average inventory cost, because that’s the primary driver of the margin performance.

Richard Peach

When the market changes really as and recently in terms of the fallen prices of course we adjust our purchase prices immediately to protect our cash spread. So when the market pull sharply, it means that the average inventory cost cannot come down as fast as the cash purchase for scrap does and as a consequence we have adverse hit to our results and that’s what we expect in the first quarter.

However, I would comment that last year’s Q1 fiscal ’10 which was up – fiscal ‘11 which was more of a flat to rising market did not have a negative inventory effect. So although we expect the margins for the first quarter of fiscal ’12 to approximate the first quarter of fiscal ‘11 from our cash perspective we should do better.

Sal Tharani - Goldman Sachs

Okay. And also one of the other companies, steel companies which have some scrap business mentioned that in September they saw heavy losses in their nonferrous business, because the prices of nonferrous dropped dramatically. Is that also accounted for in your guidance?

Tamara Lundgren

No, that’s not. As we forecasted, our sales are up and our performance has been driven by acquisitions and technology investments and our business is really quite different because it’s based on high steady turnover and our ability just like in our ferrous business, our ability to adjust purchase prices to align with market demand so no, that is not a similar performance.

Sal Tharani - Goldman Sachs

So you are not going to face that kind of issue in your nonferrous business.

Tamara Lundgren

No, we will not.

Operator

Our next question in queue is Luke Folta with Jefferies.

Luke Folta - Jefferies

I feel like I asked this question every quarter and I apologize, but are you able to talk about the magnitude of the difference between your reported margin in that cash spread that we are seeing, I am just trying to get a sense of, if we can quantify this inventory impact for the first quarter.

Richard Peach

Yeah, and I think we will give you the similar answer to last time and because it’s a non-GAAP measure, it’s not something that we are able to provide, however what I can say is the impact of average inventory costing will be a significant one in the first quarter relative to other factors that may impact the change in margins.

Luke Folta - Jefferies

And I appreciate the restrictions with GAAP, but I mean to the extent that you can in the future or maybe provide some sort of quantification on that, I think it will help people understand how your underlying business as opposed to some of these factors, but again I appreciate your comments but again just a follow-up on Sal’s question on nonferrous. So you are saying that there was zero inventory impact from the sharp fall that we saw in nonferrous prices.

Richard Peach

Well, I think one of the things that's different from us with others is we don’t have a hedging program for nonferrous in terms of financial hedges and therefore we are not impacted by the types of an unrealized losses on mark to market that some others maybe seeing in their business when prices fall. And what Tamara indicated is we really run our business on a cash basis and a cash spread basis. So when sales prices fall, we immediately draw our purchase prices from a cash point of view to protect the positive margin.

Luke Folta - Jefferies

Okay. But you are not saying that the fact that nonferrous prices had pulled back sharply, it didn’t have an impact on your business?

Richard Peach

No, we’re not seeing that. That’s one of the combination of factors that will lead to the decrease in margins from the fourth quarter for the first quarter, but it’s not as bigger reason as the average inventory costing effect.

Luke Folta - Jefferies

And then the other question I had was with regard to the acquisitions and with the recent pullback that we’ve seen in the market and the uncertainties, what sort of impact did that having on sellers, the willingness of some of your potential future acquisition targets to sell their businesses, is this pull, so that’s kind of off the market or you are actually starting to see maybe people willing to sell more because they are afraid of what might be coming?

Tamara Lundgren

Well, you know I would put this movement in context. I think that the change of movement as I mentioned is in the 10% range in terms of prices and most people do move with the market I mean most of acquisition Candidates that we speak too run their businesses similarly to how we run our business. So I don’t think this move, well it feels like it’s a big move because in the last nine months, prices really didn’t move very much and we had commented on that on the last few calls but the prices had stayed steady and hadn’t moved. A 10% move feels a lot more than what it is if you look at the context of price movements over the last five years in the scrap market. So this movement we’re not seeing impact our discussions with acquisition candidates and I think that you know you should expect to see us in fiscal year 2012 continue on our strategy of making acquisitions in both our Metals Recycling business and in our Auto Parts business.

Luke Folta - Jefferies

And just one last if I could. And if you’ve said in the prepared remarks, I didn’t catch it, but is share buyback somewhere on the list of potential uses of cash in the short-term?

Tamara Lundgren

Share buybacks have always been on our use of the cash. We did make some share repurchases in the fourth quarter. When we look at allocating our cash flow, we obviously look at growth first because we are a growth company, and that’s both in terms of growth CapEx and acquisitions. We look at paying down debt and we look at repurchasing shares both to offset dilution and opportunistically. So, we did do some buybacks in the fourth quarter, but over the last five years, we’ve bought back quite a bit of stock.

Operator

Our next questioner in queue is Eric Glover with Canaccord.

Eric Glover - Canaccord

I was wondering if you could comment on the operating margin performance in the Auto Parts business this quarter. I don’t believe that you mentioned it in the commentary, why it declined sequentially?

Richard Peach

Yes. It was 18% in the fourth quarter compared to 20% in the third and the reason is really a seasonal impact and due to hot weather and some of the regions where we are based it does have an impact seasonally on the amount of emissions in terms of folks coming into our yards and that then impacts the level of our part sales and during that 4th quarter which is the reason why our margin was slightly lower in the 4th quarter rather than that it’s seasonal. But I would reflect that it was a very strong result and if you compare that to the last year’s fourth quarter, it was a 15% margin. So we did a lot better than last year, so we were very pleased.

Eric Glover - Canaccord

Okay do you guys still think that that’s sort of the long term margin and that business is going to be sort of low 28% range?

Richard Peach

Well we are always seeking to improve and we have continuous improvement programs in all of our businesses, but we are very pleased with that 20% margin we have at the moment but we are always seeking to improve either through making more acquisitions or through further organic improvements in our existing operations.

Tamara Lundgren

And Eric I think as Richard was saying you will see it move from quarter to quarter from a seasonal perspective with weather being the primary impact or influence or on that, but that’s clearly around the range which we think is sustainable.

Eric Glover - Canaccord

The low 20% range you are referring to.

Tamara Lundgren

Well I think our average has been between 18 and 21% I think was in Q4 in that range.

Eric Glover - Canaccord

Then I would like to get your comments on Schnitzer’s expansion in to Rhode island. Previously I think you’ve said that there is shredding over capacity. It’s a problem in certain markets really not the markets that you operate in but so I am interested to know if you maintain that view now that Sim seems like they are going to install a mega strutter in Johnston, where you already have a facility?

Tamara Lundgren

Well, I think you’re right. I think you have heard from us that we aren’t experiencing over capacity in the markets or the regions where we operate and our strategy is obviously to grow in regions where we don’t create excess capacity. But as you’re relating to what’s going on in the Northeast, you know, we deal with competitors and that competitors as well everyday in almost every region and we obviously believe we deal with our competitors successfully as our financial and operational performance is best in class in our peer group.

In the Northeast, just to put it in context for you, we’ve got a network of 13 facilities, we’ve been there since the mid 60s, we’ve got a strong network of customers and community relationships and actually that region had some of our most advanced facilities.

So our strategy is based on entering regions that are undisturbed and that are high growth and adding to our franchise platforms for synergistic acquisitions which we’ve done in the Northeast quite successfully this past year. So we’ve been successful there and we expect that we’ll be continuing to be successful.

Eric Glover - Canaccord

And a follow-up, has the company ever had a well-capitalized contender like since install a new mega strutter in a market in which you already operate?

Tamara Lundgren

We have competitors install strutters in market – I mean we’ve got strong well-capitalized competitors in every region that we operate. So I am not sure I can draw any further distinction between some quite well-capitalized strong competitors we’ve got all over the country. It comes down to how do build your platform, how do you relate to your customers, how do you operate efficiently and you know we as I said we’ve been competing for 105 years and we think we’ve got a very strong business model and excellent theme and together we have been able to deliver very strong results.

Operator

Thank you, sir. Our next questionnaire in queue is Torin Eastburn with CJS Securities. Please go ahead.

Torin Eastburn - CJS Securities

My first question is on the volume guidance in MRB for ferrous. Can you provide any more detail on how the trend has been through the quarter and up to today and also if the trends you are seeing are any different by geography?

Tamara Lundgren

Yeah, I would happy to. If we take a look at what’s going on currently and maybe I’ll just walk around the country for you if you would like, if we start on the East Coast, Turkey and you have probably seen this report, Turkey after not buying has come back in the market and is active, I think there are report recently issued that pointed to five or six recent sales. Prices obviously dropped in October from recent peak, but inventories in Turkey are low. Their request is for prompt delivery which affirms the understanding that we have, that inventories are low.

And longer term, Turkey is growing their steel making capacity via EAS, electric arc furnaces and I think by 2015 their steel making capacity will specially increase by 20%. So they are in and out of the market, they were out, they are back in and we see that as an active market.

If I move to the West Coast, sales prices there started strong in September and they dropped in October. And we see our customers watching in the markets, but sales are occurring, when we’ve been selling to China all week, this week. There is slower buying and that is probably due to both the change in price at that 10% movement that I was talking about that steel is a lot stronger than it is analytically if you look over the last five or six years and that was probably impacted by the volatile currency movements that we've seen as well. But bottom-line is that business is being concluded on both sides of the market albeit at levels that are below what they were in the peak.

Torin Eastburn - CJS Securities

Second question, your guidance for APB margins which was you know declined, can you be anymore specific at all?

Richard Peach

Yes, I got a couple of comments here Torin. APB will also be impacted by average inventory costing just the drop in commodity prices means that we are dropping our purchase prices for vehicles and if that still lagging average impacts us so that together was the lower commodity prices on sales for scrap and cores are the reasons why we expect the margin to decline.

But I would add that relative to last year, we should see higher volumes coming through because of our acquisitions and consequently that will help to offset the declining margins in terms of our absolute profits.

Torin Eastburn - CJS Securities

And last quick question, nonferrous volumes this quarter were very good given accounting for the acquisitions, can you provide any detail on that? Thank you.

Richard Peach

Yeah, in terms of the nonferrous volumes in the fourth quarter they were up 46 million tons in Q3. In Q3 there was really two contributing factors for that; the first one was a continued incremental contribution from an acquisitions which was about 20% of our increase and in addition and as a consequence of the strong supply inputs on the ferrous side, that means that we got more yield, but more nonferrous yields from the shredding process which was the remaining 80% of that increase which then flowed through to these higher non-ferrous volumes.

Operator

Thank you, sir. Our next questionnaire in queue is Tim Hayes with Davenport & Company. Please go ahead.

Tim Hayes - Davenport & Company

Two questions; on the guidance for the ferrous sales volumes for Q1 of ‘12 approximately in Q1 of last year, and I guess it sounds like that that means that might suggest that demand from emerging markets have slowed down noticeably, is that true or what impact have you seen from a weaker Euro, could that be also a part of the reason for the you know sort of flattish ferrous sales volumes?

Tamara Lundgren

Well, let me address both of the – there are really two questions or two comments embedded in your question. I think first and we said this before and in other context, its really important to look at volume growth and demand over more than one reporting period, because you’ll get evident flows into the market at any point in time and that can effect timing of shipment, timing of orders and just what volumes look like.

So I think that you know while our Q1 outlook is always weaker, I mean the shape of our revenue and earning is always one that that has more power if you will in the second, third and fourth quarters, because customers keep their inventories low and since the global financial crisis, they’ve been keeping their inventories even lower and that’s probably expected, you know, through the calendar year-end for obvious reasons.

So I think that you shouldn’t – I wouldn’t draw a long-term conclusion by this issue of sort of weaker demand in the middle of this quarter and I take a look at what we’re saying in terms of what we expect in fiscal year ’12.

If I just to address your currency questioning or question, the strengthening of the dollar clearly had a short-term impact, but demand for ferrous scrap has to come to the U.S. to be filled both for quantity and for quality. And so the question isn’t whether you are in the queue and you probably heard me say this before, so I apologize. But the question isn’t whether you are in the queue, but where do you are in the queue. And our bottom-line vis-à-vis the currency movements, is that we think markets have adjusted to the new currency levels and we don’t see a significant impact from that.

Tim Hayes - Davenport & Company

Okay, and then second question is the recent rise in the freight rates, how is that sort of embedded into your, the first quarter guidance if it is and what impact do you expect of that?

Tamara Lundgren

Not a lot. I mean freight is up $1 or $2, ships are, there is a good availability. So, we’re not seeing big impacts from that.

Operator

Thank you, sir. Our next questionnaire in queue is Brent Thielman with D.A. Davidson. Please go ahead. Your line is now open.

Brent Thielman - D. A. Davidson

I guess just one more on that Q1 guidance for metals recycling. You know we are in mid October now, so presumably that you’ve got pretty good visibility on volumes for the quarter which you say there are still opportunities to fill some scheduling holes at this point so to speak which might potentially provide some upside to your expectation?

Tamara Lundgren

Well we have got sort of the same flow or same position that we normally have at this point. I think that we are giving you the guidance that we see at this point, the markets blew it and so it can turn pretty quickly and you know our guidance today is the best that we can see you know at this point in time. But you know what is interesting to us is what I mentioned before which is inventories are low up the east coast, we are looking at prompt delivery and we believe the inventories are low at many of our customers and moving into the winter month where scrap you know starts to tighten for weather reasons and you know there is obviously black sea in Russia, deliveries get curtailed. You know we anticipate that it would be onset of the winter that typically you know results in upward pressure on volumes and prices because of the impact on flows.

Brent Thielman - D. A. Davidson

I guess just given you know what I’d say sort of is a relatively optimistic view of what you are seeing out there, I guess how willing are you to sacrifice you know little market share right now as anticipation of may be little bit short-term pressure of the market, but may be some stronger pricing to come?

Tamara Lundgren

We don’t speculate I mean if that’s what you’re asking as to whether we’re going to take positions and speculate on the markets, we don’t speculate. We’re you know quite focused on high inventory turns, adjusting prices to align with market demand and so you see us returning a quite consistent improvement and revenues, profits, cash flow and earnings and that’s how we run our business and I think we’ve been quite successful in doing so for many years and I think you know, you saw us recovering more quickly than others since the global financial crisis and I think this year’s performance is a great reflection on our business platform and our business processes.

Brent Thielman - D. A. Davidson

Okay and then just on the auto parts business, any sort of feel for admissions trend at your stores in the last few months or customers responding any differently to the macro environment in any way?

Tamara Lundgren

Well, you know, admissions for fiscal year 2011 were about 5.5 million visits which is extremely strong and that business is a really interesting business because obviously in weaker economic environments, it drives admissions and part sales and in stronger economic environments that which usually means scrap prices and core prices are higher, you get that benefit. So we see continued growth in that business, strong margins and we’re looking to grow that business significantly.

Operator

Our next questioner in queue is Evan Kurtz with Morgan Stanley.

Evan Kurtz - Morgan Stanley

Just a question on sorting technology from your guidance in terms of like your nonferrous will be up 20% over the first quarter last year on technology and acquisitions. Is that ratio that were looking at now for ferrous and nonferrous in the first quarter, is that a run rate or is there still more improvements that we can see as we move forward.

Richard Peach

I think there’s more improvements we can see as we move forward Evan because as you know during fiscal 2011 we were actually bringing these new technologies online during the year and actually on average we had them online for only half a year. So when we stand back and look at growth in nonferrous sales from fiscal 2010 to fiscal 2011, they were actually up and around 90 million pounds of which around just over half of that came from the acquisitions which we also only had for around just over half a year about seven months on average and then of the remainder about half of that came from benefits from the new technology. So we are actually seeing quite a runway going forwards and because of this part (inaudible) we have had in fiscal 2011 we will get the two year benefit in fiscal in fiscal 2012.

Evan Kurtz - Morgan Stanley

Right now I get the average here certainly would be higher, is the first quarter representative of what you think the ratios would be for the full fiscal 2012 year as far as ferrous and nonferrous.

Richard Peach

Ferrous to nonferrous in terms of I do and think so in particular I think you need to look at the annual performance and fiscal 2011 versus fiscal 2010 and then you will need to look at the total increase in volumes from one to other and I can give you the figures and nonferrous just to repeat and of the 90 million increase in pounds, 50 million came from acquisitions and then the reminder came from additional nonferrous either through purchasing or from the new technology and on the ferrous side of things, in fiscal 2011 we had from our acquisitions 341,000 tons of which 180,000 were incremental to our business and if you remember from our previous call, we did see that in terms of our acquisitions we have purchased an annual amount of 625,000 ferrous tons of which 40% were incremental and we had purchased just short of a 100 million annualized nonferrous tons, all of which were incremental. So based on what we've delivered for the part year and fiscal 2011, we are feeling as if we are very much on track in terms of delivering these additional annualized volumes and we think that a good way to look at it rather than just focusing on Q1.

Evan Kurtz - Morgan Stanley

Also, just another question kind of on timing of price movements and I know there's a couple of earlier questions on this but just to be clear, when we see prices fall, both ferrous and nonferrous when does it actually start to impact earnings. I am assuming that you are arranging locking in prices, you don’t actually book them until your FOB, what's generally the timing on that?

Richard Peach

Well, in terms of well what we do as we adjust our purchase prices immediately against the forward market for sales and this is why we will see in the first quarter this adverse impact of averaging inventory costing because the accounting is based on the average and the average can fall as quickly as the actual cash prices and cash purchase prices fall. So the answer is we adjust cash prices immediately, but we have an earnings hit in the first quarter because the average inventory cost can fall so quick and I think if we go back to my slide and I showed earlier on our cash flow trends which shows that we’ve been fairly good at managing that type of thing over the years in varying economic environments because if you look in the five years, we’ve had fairly strong positive cash flows every year and as we know we’ve had varying economic environments during that time.

Operator

Thank you sir. And with that conclude our time for questions and answers. I would like to turn the program back over to Ms. Lundgren for any closing remarks.

Tamara Lundgren

Thank you, thank you everyone for joining our call today, we appreciate your questions and interest in our company and we look forward to speaking to you in January. Thank you.

Operator

Thank you ma’am. Ladies and gentlemen this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees you may log off at this time.

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