Operator: Good day, ladies and gentlemen and welcome to the Schnitzer Steel’s Second Quarter 2017 Earnings Release Call. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Ms. Alexandra Deignan, Vice President of Investor Relations. Ma’am, please begin.

Alexandra Deignan: Thank you, Dan. Good morning. I am Alexandra Deignan, the company’s Vice President of Investor Relations. Welcome to Schnitzer Steel’s second quarter fiscal 2017 earnings presentation. In addition to today’s audio comments, we have prepared a set of slides that you can access on 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 2, which are also included in our press release of today and in the company’s Form 10-Q, which will be filed later today. As we note on Slide 2, we may make forward-looking statements on our call today, such as statements about our outlook and targets for growth. Our actual results may differ materially from those projected in our forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Slide 2 as well as in our press release issued today and our Form 10-Q. 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 to 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 and Chief of Corporate Operations.

Tamara Lundgren: Thank you, Allie. Good morning, everyone, and thank you for joining us on our fiscal ‘17 second quarter conference call.

This morning, we issued our press release which is posted along with our slides on our website. At our call today, I will review our second quarter results and the market and macroeconomic trends underlying our quarterly performance and our outlook for growth. Richard will then provide more details on our segment performance and capital structure. I will wrap up with some closing remarks and then we will take your questions. Let’s start now on Slide 4.

Earlier this morning, we reported our second quarter financial results. We reported $0.40 of earnings per share, representing significantly improved performance versus last year and versus the first quarter. Our year-over-year improvement was driven by our auto and metals recycling division and was underpinned by increased ferrous volumes, higher prices, and the continued benefits from our multiyear cost savings and productivity initiatives. AMR’s operating income reflects its best second quarter performance in the last 5 years. Our steel manufacturing business continued to face challenging market conditions.

While operating performance improved sequentially, the operating loss was driven by a combination of elevated levels of low cost imports, seasonally slower demand, and the higher cost of goods sold. Productivity initiatives, cost savings, and cross divisional synergies are underway in SMB to partially offset the market challenges facing the business. During the quarter, on a consolidated basis, we achieved approximately $6 million in additional annual benefits from cost savings and productivity initiatives, primarily in AMR. We have now achieved nearly all of the $30 million of initiatives announced in the second quarter of last year and we expect to achieve the remainder by the end of fiscal ‘17. So, now let’s turn to Slide 5 to review metal market pricing trends underlying our second quarter performance.

As the ferrous chart in the upper left-hand corner illustrates, the second quarter was relatively volatile. Both domestic and export pricing increased through December before falling in January. By February, however, prices rallied to close the quarter on an upward trend. While we experienced volatility during the quarter, exports sales traded within a narrow $20 to $30 range off both coasts. In the nonferrous scrap market, pricing trended upward during the quarter reflecting a combination of improved global demand and a tightness in the copper market, primarily related to supply outages.

Iron ore pricing also continued on an upward trend during Q2, hitting multiyear highs with prices in excess of $90 per ton. While iron ore pricing has come down since the end of the quarter and is currently trading around $80 per ton, this level is nearly 150% higher than this time a year ago. During the quarter, met coal prices also retreated from the multiyear highs reached at the end of November as mines came back into production and supplies increased. However, even though met coal prices have come down since the end of Q2 and are currently trading over $200 per ton, this level is more than double the prices of a year ago. As a result, scrap has continued to remain attractive relative to both iron ore and met coal, leading to less purchases of billets by steel mills and higher demand for scrap.

It is also worthwhile to note that execution of supply side reforms in China is a positive change. China’s overcapacity remains an issue, but the country’s exports appear to be trending downwards with February’s levels marking a 3-year low. Now, February is a shorter month and it also included the Chinese New Year holiday, so we may not be able to fully extrapolate from the Feb numbers. But there are several positive trends worth watching, including the removal of induction furnaces, along with production curtailments to lower emissions. China’s desire to obtain market economy status also serves as an important foundation underlying their commitment to reduce overproduction.

Together, these trends, if sustained, will help to strengthen the global steel markets. If we now move to Slide 6, we will review the ferrous sales trends. During the second quarter, global demand for recycled ferrous metals increased as did our ferrous sales volumes. Demand was broad-based and we exported ferrous materials to 9 different countries, which comprised approximately two-thirds of our total shipments for the quarter. Both export and domestic ferrous sales are on increasing trends with total ferrous sales volumes up 16% compared to last year’s second quarter and up 9% for the first half of the year.

In the second quarter, our largest export destinations were to Turkey, South Korea, and Bangladesh. There are several drivers underpinning our year-over-year improved volumes, including strengthening export and domestic demand, diversified sales activity, improving supply flows, higher raw material prices, which includes iron ore and met coal, Chinese supply side reforms, and an improved economic outlook in the U.S. and overseas. On a longer term basis, industry experts expect that there will be an increased usage of scrap as EAS become a larger component of the global steel sector. The attraction of a lower, more nimble cost base, together with increased environmental compliance requirements have the potential to increase the proportion of EAFs from approximately one-third of global capacity today towards 50% over the longer term.

So let’s move to Slide 7 to review key domestic macroeconomic trends. This slide illustrates many of the key leading indicators for the generation of scrap and/or the demand for steel, all of which are showing positive momentum. The U.S. industrial production index, which includes among others, the energy, automotive, and construction industries, has moved into positive territory for the last 3 months after several years of negative momentum. Growth in personal consumption expenditures has increased for the fourth consecutive month at a slightly stronger pace than anticipated.

Consumer confidence and housing starts are also up year-over-year. In fact, consumer confidence measures for March rose sharply to their highest levels since December 2000, which reflects growing consumer optimism for business, employment, and income prospects. This strength is also observed in the housing market as February starts were up over 8% compared to the prior year. At the bottom of this slide, you can see more tangential support for increasing scrap flows. White good appliance shipments are on a strong growth trajectory and auto sales continued to remain near record levels.

Both are good indicators for steadier and stronger flows into the recycling pipeline in the near-term and medium-term. So now let’s turn to Slide 8. Over the course of the last several years, we have successfully executed on $160 million of cost savings and productivity initiatives and transformed our business by merging our two largest divisions, increasing the flexibility of our operating platform and implementing new technologies, which have led to more agile decision making. The results of these initiatives can clearly be seen in our operating trends. AMR’s operating income per ton has averaged $25 over the last four quarters and volumes are up about 10% for the first half of the year.

The execution of our cost reduction programs, our achievement of consistently higher margins, and the more positive macroeconomic environment have created an inflection point and enabled us to transition our strategic priorities to growth. Looking ahead, we aim to steadily grow our volumes, further expand our margins and invest in technologies and systems to enhance our products, increase our service offerings to our customers and operate more efficiently. We believe our retained capacity and the operating leverage that we have created should enable us to significantly expand volumes and margins from fiscal ‘16 levels on our existing platform, assuming current positive trends continue. We are already making progress along this path if we look at our performance year-to-date in fiscal ‘17 and over the last four quarters. If current macroeconomic and industry trends continued to improve, we expect that together with progress on our own initiatives, we can grow our ferrous volumes by approximately 25% to 30% over the next 3 years from the base of 3.3 million tons we sold in fiscal ‘16.

Moreover, under this 3-year scenario, as our volumes increase, we anticipate the benefits from operating leverage should enable additional tons to be added at higher incremental margins and lead to AMR achieving an annual operating margin per ton increase of at least 40% over the average operating margins of the last 12 months. While macroeconomic and industry indicators are moving steadily upward, of course political and economic uncertainties could impact the timing and trajectory of this growth. So now, let me turn it over to Richard for a more detailed review of our segment performance and our capital structure.

Richard Peach: Thank you, Tamara. I will start with a review of the volume and price trends for our Auto and Metals Recycling business.

Compared to last year, average ferrous selling prices and sales volumes were up by 47% and 16%, respectively. These increases were driven by improved market conditions and our sales activity to diversify our customer base and increase our global reach. Our flexible operating platform and our logistics expertise also enabled us to increase sales to customers, both overseas and here in the U.S. On a sequential basis, average ferrous selling prices improved by 27% and volumes were up by 2%. And on a year-to-date basis, volumes were up by 9%.

These positive volume trends were supported by improved supply flows, which benefit from a higher price environment, increased collection activity and our commercial buy program. Non-ferrous average sales prices were 10% higher year-over-year on comparable sales volumes and sequentially prices rose by 12%, which more than offset 10% lower volumes due to the timing of shipments. However, on a year-to-date basis, non-ferrous volumes are up by 10%, which reflects our diversified sales activity, higher supply flow and improvements in market conditions. The improving volume trend is a contributor to our increased operating margins, which I will cover on Slide 10. AMR’s adjusted operating income of $26 million was up significantly year-over-year and also sequentially compared to the previous quarter.

The primary drivers were the strong export and domestic demand, which increased our volumes and expanded our metal spreads, together with $4 million in additional AMR cost savings compared to last year’s second quarter. The rising market prices during February also led to a benefit of $4 million or $5 per ton from average inventory accounting, which compared favorably to an adverse impact of $1 million in the prior year quarter. Additional cost efficiencies have come from a variety of sources. These include savings in transportation and logistics, beneficial non-scrap procurement contractual arrangements, increased use of shared services, other labor cost productivity improvements and the monetization of surplus equipment and other non-core assets. Adjusted operating income per ton for the quarter was $30 and over the last four quarters, adjusted operating income per ton has averaged $25.

This is more than double our margins in fiscal ‘13, which was the first full year of our multi-year cost reduction program. The sustainable improvement in our margins reflects a combination of the benefits from cost and productivity initiatives, the recent trend of higher volumes and expanded metal spreads from the improving market conditions. We believe the more positive economic and market environment, combined with operating leverage from cost reductions and our transformation of the AMR business provides an opportunity to increase future earnings and long-term value from growing our volumes and from further margin expansion. Looking ahead to the third quarter, we currently anticipate that ferrous sales volumes will be approximately 10% higher year-over-year with operating income per ton within the range of our average for the last four quarters and the level we achieved in the second quarter. Now moving to Slide 11, I will cover trends in the markets – sorry, I will cover trends in the markets for finished steel.

Looking at the price trends for long products, rising raw material costs contributed to Q2 market prices, which were higher for domestic wire rod and rebar, up sequentially by 7% and 10%, respectively. However, the rising price environment and the strong dollar coming in for the quarter also contributed to a significant surge in rebar imports, which in January spiked to levels which compared to the high import volumes seen last summer. Although domestic demand for long products should increase seasonally with the onset of strong construction activity, the current level of imports and rising domestic production means greater competition for sales and for the time being, a continuation of challenging market conditions for the domestic mills making long products. Let’s move to Slide 12 to discuss SMB’s quarterly operating trends. SMB’s adjusted operating loss was $2 million, an improvement sequentially, which was driven by slightly higher volumes and average selling prices, both of which were up by 5%.

The mill’s overall result for the quarter was impacted by several adverse factors, which included low priced imports, seasonally lower construction activity, raw material cost rising at a faster rate than selling prices and higher inventory costs at the start of the quarter due to our production ramp up following the major equipment upgrades in the previous quarter. A new round of SMB productivity initiatives is underway, which together with seasonally higher volumes is expected to contribute positively to performance during the remainder of fiscal ‘17. The new initiatives include further savings in transportation and logistics, optimization of warehouse facilities, targeted material handling efficiencies, enhanced equipment utilization and other cost related measures to improve productivity. Looking ahead to the third quarter, we currently anticipate SMB’s results to improve sequentially, but to remain below breakeven. Moving on, let’s proceed to Slide 13 to review our capital structure.

At quarter end, the leverage was 28% and net debt of $200 million was more than a third less than the levels of 2 years ago. Sequentially, net debt increased by approximately $20 million due mainly to higher working capital as the rising price environment increased our inventory costs and accounts receivable, which combined to offset the cash benefits of a greater profitability in the second quarter. These contrasting trends led to quarterly operating cash flow of just about breakeven. During the second quarter, we invested $11 million in capital expenditures, which primarily included equipment replacement and environmental projects. For the fiscal year as a whole, we expect CapEx to be in the range of $45 million.

We also paid our 92nd consecutive dividend, which returned $5 million of capital to our shareholders. Now, I will turn the remainder of our presentation back over to Tamara for her summary remarks.

Tamara Lundgren: Thank you, Richard. Over the last several quarters, we have highlighted favorable industry trends that they are watching. Leading indicators have improved and industry dynamics, such as industrial production, consumer confidence and expenditures, housing starts and appliance and light vehicle sales are all strengthening.

Other trends, such as China’s supply side reforms, environmental regulations leading to increased usage of scrap and EAF technology, continued developing market urbanization, and the potential for significant infrastructure investment in the U.S. are also creating the foundation for improving scrap and steel markets. Our fiscal year is off to a strong start with the first half performance that reflects the benefits from our cost savings and productivity initiatives as well as our focus on increasing our volumes and expanding our margins. We will continue our focus on growing our market share, increasing our profitability, and investing in technologies and systems to enhance our products, increase our service offerings to our customers, and operating our company even more efficiently. With the low leverage, our balance sheet provides a foundation for our growth, our disciplined reinvestment in our business, and our continued ability to return capital to our shareholders.

In closing, I would like to thank our employees, many of whom I know are listening into the call this morning. For the third consecutive year, we have been named one of the world’s most ethical companies by the Ethisphere Institute. Combined with our recent financial and operational performance, you have again illustrated your ability to successfully execute our strategy without wavering from our core values of integrity, safety, environmental stewardship, quality, and customer service. You have shown your commitment to excellence and to best-in-class operations as we continue to raise the bar. My thanks go to each of you as you have truly demonstrated why we have continued to be a leader in the recycling industry for well over a century.

Now operator, let’s open up the call for questions.

Operator: Thank you. [Operator Instructions] Our first question is from Philip Gibbs of KeyBanc Capital Markets. Your line is open.

Philip Gibbs: Good morning.

Tamara Lundgren: Good morning, Phil.

Philip Gibbs: I had a question on the 3-year outlook that you provided relative to the 2016 baseline and some of your aspirations for growth and where in terms of the, maybe the geographic penetration that you are expecting that and what macro assumptions maybe underlie that, I think you said that maybe 30% expectation over the next 3 years?

Tamara Lundgren: Okay. Well, let me see if I can start with the foundation. We start with the foundation of looking at the macroeconomic and industry leading indicators that I pointed out in the slide, and we have seen positive momentum on all of these fronts. We also see reasonably strong GDP or positively trending GDP in many of the markets to which we sell.

And we layer on top of that a look back of what we have been able to achieve from the 4 years of cost reduction and productivity initiatives that we have undertaken. And if you look back at the last four quarters, we have been able to consistently deliver an average $25 operating income per ton margin. And in that consistency, in an environment where prices are still in the lower tier of historical prices for ferrous, we have been able to begin to grow our volumes back to a level where we can really start to see us deliver the leverage, and you have seen it this quarter and I think that you have seen it consistently if you look back four quarters. So that’s really what underpins the 3-year perspective.

Philip Gibbs: And how much of that do you think is going to be driven by the export side versus the domestic side?

Tamara Lundgren: That’s always very difficult to tell.

Obviously, the GDP growth is stronger on an absolute basis in the export markets than it is in the U.S., but the U.S. has an ambitious – has ambitious road ahead of it in terms of what the new administration has outlined as their objectives. What I think is really important though is that if you look at the domestic and export markets right now, they trade very much in parity, obviously domestic prices at the beginning of the month and export is spot, but they tend to converge much more often than they used to do historically. So I think that our platform allows us to shift fairly easily between the two markets and our objective is to expand our customer base on both the domestic and the export side.

Philip Gibbs: Thank you.

And a follow-up and this is the question on the guidance for the third quarter. Are you anticipating that you are going to have inventory accounting benefits or headwinds in the quarter and what’s implicit in basically that $25 a ton expectation? Thank you.

Richard Peach: Hi, Phil. It’s Richard. Well, we have actually given guidance, which is within the range of the $25, which is our last four quarters, and the Q2 operating income per ton, which was $30.

So we are expecting somewhere in that range. In the second quarter, as you know, we had an upside from average inventory accounting of $4 million. We are expecting something based on current market conditions around a neutral effect in the third quarter, but that does not impact on the guidance range that we have given.

Philip Gibbs: Okay. So I should be thinking about something between $25 and $25 and $30.

Okay, thanks very much.

Tamara Lundgren: Thank you.

Operator: Thank you. At this time, I see no other questions in queue. I will turn it back to management for closing remarks.

Tamara Lundgren: Thank you everyone for joining us on our call today. We look forward to speaking with you again in June when we report our third quarter results.

Operator: Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program. You may now disconnect.

Everyone have a great day.