Schnitzer Steel Industries Class A Earnings Call Nuggets: Auto Parts Outlook, Restructuring Efforts & Canada

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

Auto Parts Outlook

Brent Thielman – D.A. Davidson: Just on the Auto Parts Business, it looks like a little over 200 basis points drag on margins related to the new sites, and sorry if I missed this but should this drag narrow in the coming quarters or is this about what you’d expect over the near term?

Richard Peach – SVP and CFO: It will narrow, but we will see in the third quarter, something similar in terms of startup costs in Auto Parts, because we’re converting some of the acquired stores to self-service facilities and we’re also developing our new greenfield locations, so we do have some costs associated with labor, supplies, building of inventory and the customer base in those locations, but that will quickly play its way over the system and as we said, we do expect after the integration is completed that we’ll see an increase in Auto Parts car purchase volumes by around 15% on an annualized basis.

Brent Thielman – D.A. Davidson: Richard, the greenfield sites will be up and going by Q4, did I hear that right?

Richard Peach – SVP and CFO: Correct.

Brent Thielman – D.A. Davidson: Then just on the Steel Business, can you just give us an update on the environment and opportunities you’re seeing there right now?

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Tamara Lundgren – President and CEO: Well, we are seeing strengthening of construction demand on the West Coast, and so, it’s interesting, this second quarter was the first second quarter that the Steel Manufacturing Business was profitable since the onset of the global financial crisis. So, we’re seeing those green shoots of construction demand strength on the West Coast and we think the mill is well positioned to benefit from that as that takes hold.

Brent Thielman – D.A. Davidson: Then just last one, the remaining $5 million in restructuring cost, is that going to be fairly spread out in the second half for a win toward Q3, any sense there?

Richard Peach – SVP and CFO: Well, we spread over both Q3 and Q4, Brent, I don’t have the exact split to hand here but it should all be going through by the end of the fiscal year.

Restructuring Efforts & Canada

Luke Folta – Jefferies: I guess, quickly, first on the restructuring efforts. Can you talk about how much of that on a run rate basis, kind of excluding the upfront costs, you think you’ve achieved in the second quarter and then how that – some sense to how that breaks out on the segment reporting side?

Richard Peach – SVP and CFO: There is 25 million of pre-tax savings that we are going for on an annualized basis and all of that amount – half of it is in the Metals Recycling Business and the other half is split roughly equally between Auto Parts and Corporate. We did see when we announced this back in August, as the initiatives were taking place throughout fiscal 2013 that we would see a part year benefit in this current fiscal year. We also said in terms of the split of 25 million that 18 million was (SG&A) on an annualized basis and about 7 million was in production costs which are in cost of goods sold. So, if you stand back and you look our (SG&A)for the first half of this fiscal year we spent $97 million which is actually $11 million less than we have spent at the same time in fiscal ’12. So, we are on a good run rate to obtain substantial portion of this full year savings in this current year, but we won’t get all the $25 billion this year but we’ll get a significant portion of it. One other thing to see here, in terms of looking out Metals Recycling, that $12 million that we are going for and then if you look at that in a per ton basis, on an annualized basis when we’ve achieved the full run rate that’s about $3 a ton there, so it’s making a significant difference to our earnings and future earnings. In the Auto Parts Business, as half of the remaining part of the $25 million then the $6 million or $7 million we’re aiming for in there is up to a couple of 100 basis points onto their operating margin. So, they are material to the performance of the businesses, especially in this current market environment.

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Luke Folta – Jefferies: So, it sounds like you are actually tracking ahead of where you thought you’d be when you announced the restructuring. I guess what I am trying to get a sense of…

Richard Peach – SVP and CFO: We’re very much on track with it. We’re very much on track with it, but we’re aggressively pursuing our cost reduction program.

Luke Folta – Jefferies: So, when we look at just the second quarter results, if we wanted to use that kind of as a base, has the things that you’ve done is that now fully reflected in that second quarter number kind of on a run rate basis?

Richard Peach – SVP and CFO: Well, there is a little bit more still to do and we’ve (indiscernible) a substantial portion of it and you can see, if you choose the 97 million of (SG&A) for the first half of the fiscal year and you double that and then took a little bit off that and that would give you a decent estimate I think of where (SG&A) could end for the year as a whole…

Luke Folta – Jefferies: Then you said a number of things regarding Canada and Tamara you said something about 17 facilities being kind of newer or something involving your strategy there and then there’s the new shredder coming online and there’s some new Auto Parts facilities there. Can you maybe just step back and give us kind of an overview of what’s going on in Canada these days and kind of what it’s going to look like when all that stuff is kind of ramped up? What you expect the benefit to be from that shredder in terms of tonnage or I guess anything that you could say to help put that into perspective that whole strategy up there?

Tamara Lundgren – President and CEO: Well, what we’re trying to do there is to create a differentiated buying and operating strategy where we take a base of business that we’ve had in the Auto Parts Business; Auto Parts Business has been in Western Canada for quite a number of years and we grow that business as a supply chain into the Metals Recycling Business where we’re putting up a shredder and actually just this last quarter, the first export of shredded material from British Columbia – in British Columbia’s history, took place. So, what we’re trying to do is to create an integrated structure up there. Canada’s got a good GDP outlook. It’s a growing economy and it is a place where the products and services that we undertake and do in the U.S. doesn’t take place there. So, the 17 facilities are a combination of Auto Parts facilities state-of-the-art and our shredder. We haven’t broken out, and you know that we don’t break out tons per shredder, so we can’t disclose that, but from a strategic perspective, we’re looking to create a true integrated franchise, not dissimilar to the integrated franchise that we have, for example, on the West Coast between APB and MRB.

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Luke Folta – Jefferies: Can you give us some sense at the end of say fiscal ’13 how many facilities you’ll have or how much – some sense of volume and how much volume you will be processing or whatever in Canada as a whole or in that region as a whole relative to the end of fiscal ’12?

Richard Peach – SVP and CFO: I think we said somewhere in our release that we’ve got around 17 facilities in Canada split between the Metals Recycling Business and the Auto Parts Business. So, we are creating a substantial operation out there. In terms of volumes I think in the current fiscal year it will be between 5% to 7% of the Metals Recycling volumes for the year, so it is not very significantly material the business (indiscernible). We think it is a very good group opportunity for us in the future given the network we are establishing up there and the new shredder and export capability…

Luke Folta – Jefferies: If I can sneak one more in too. Just on the steel side, you talked about some improvement in the West Coast. Commercial Metals the other day kind of was saying the same thing that they are starting to see some improvement in California as well. Are you seeing that in your backlogs? Should we see kind of the marked improvement when we look at the steel shipments in the spring construction period over the next couple of quarters relative to last year?

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Tamara Lundgren – President and CEO: The spring activity hasn’t really taken place yet, but construction activity in the spring – the season that we are going into right now tends to be the strongest and we are seeing order book strengthen from our customers, but we don’t operate on a backlog basis. So, this is really a function of seven months of strong ABI performance, input from our customers indicate high bidding activity and the pickup that we’ve seen in rebar sales.