Operator: Good day, ladies and gentlemen, and welcome to the Schnitzer Steel's Fourth Quarter 2018 Earnings Release Call and Webcast. 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] And as a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr.

Michael Bennett, Investor Relations. Sir, you may begin.

Michael Bennett: Thank you, Sandra. Good morning. I am Michael Bennett, the company's Senior Director of Investor Relations.

I'm happy to welcome you to Schnitzer Steel's fourth quarter and fiscal 2018 earnings presentation. In addition to today's audio comments, we have issued our press release and posted a set of slides, both of which you can access on our Web site 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 is also included in our press release and in the company's Form 10-K, which will be filed later today. As we note in slide two, we may make forward-looking statements on our call today, such as our statements about our outlook, targets for growth and future margin expansion. Our actual results may differ materially from those projected in our forward-looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in slide two, as well as our press release of today and our Form 10-K. 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, Michael, and good morning everyone. Thank you all for joining us on our fourth quarter and fiscal 2018 conference call. We appreciate your interest in our company, and we look forward to sharing our results with you this morning. On our call today, I'll review our quarterly and fiscal year performance, the market and macroeconomic trends underlying each of our businesses, and our strategic growth initiatives. Richard will then provide more details on our segment performance and our capital structure.

I'll wrap up, and then we'll take your questions. But before we start I would like to highlight a few key accomplishments by our teams in fiscal '18. First, we delivered our best fourth quarter and full-year performance in seven years. Second, we also delivered a year ahead of schedule on our three-year plan for volume growth and increased margins, hitting our fiscal '19 targets in fiscal '18 with company-wise ferrous volumes of 4.3 million tons and AMR adjusted operating income per ton of $45. We are on our way to achieving our accelerated volume target of 5 million ferrous tons by the end of fiscal 2020, which we expect will generate additional operating leverage.

Third, we delivered on our ability to reduce the impact from the disruptions in the non-ferrous market, increasing our non-ferrous sales volumes by 16% sequentially, and by 15% for the year as a whole. We have in place a focused non-ferrous business strategy that we believe will position us for success in this market. And lastly, we delivered $160 million of operating cash flow for the year. As a result, our strong balance sheet positions us to further build out our platform through investment and transactional growth. So now let's look at some of the details beginning on slide four.

Earlier this morning, we announced our fiscal 2018 fourth quarter adjusted earnings per share of $2.06, which included a discrete tax benefit of a $1.06. These results represent our best fourth quarter earnings since fiscal 2011 even when excluding that tax benefit. I can't say enough about the excellent performance of our team this quarter and throughout the year. Both divisions delivered strong operating results year-over-year notwithstanding the headwinds that were present this quarter in both the ferrous and non-ferrous markets. Our adjusted consolidated operating income of $38 million reflects an increase of more than 70% versus last year's fourth quarter.

AMR's ferrous sales volumes increased by 19% year-over-year as we continued to benefit from our commercial initiatives to expand our supply channels and diversify our sales. AMR's non-ferrous sales volumes also grew, increasing by 11% year-over-year and 14% sequentially. As our sales diversification strategy and investments in non-ferrous extraction processes reduced the impact from China's trade actions and tighter import restrictions. Driven by these volume increases and the operating leverage resulting from our ongoing productivity initiative, AMR's adjusted operating income per ton increased by 18% versus last year's fourth quarter, weakened [ph] $33 per ton. CSS also delivered excellent results in the quarter with operating income of $14 million.

In line with the guidance we provided with our third quarter results, finished steel sales volumes at CSS were down in the fourth quarter due to plant maintenance, including rolling mill upgrades geared to produce future gains and productivity. Despite the year-over-year lower volumes, operating income nearly doubled compared to last year underpinned by higher prices and demand, metal spread expansion, low levels of import, and benefits from productivity and efficiency investments. Now let's take a look at our full-year results on slide five. Just as the fourth quarter represented our strongest Q4 since fiscal '11, our full-year results also reflect our strongest EPS and adjusted operating income since fiscal '11. On a year-over-year basis, our consolidated adjusted operating income almost tripled, and our adjusted EBITDA almost doubled.

The combination of our increased profitability and effective working capital management enabled us to generate strong operating cash flow, which allowed to increase our investments in growth CapEx and return capital to our shareholders through both our dividend and share repurchases, while reducing our debt to its lowest level in the past eight years. Our working capital management reflects our very disciplined focus on cash metal spreads, cost efficiencies, and turning inventory, and was notably effective this year particularly in light of the rapidly-changing dynamics in the non-ferrous market in the last quarter. Our teams were nimble, focusing on moving material, optimizing metal spreads, and generating operating leverage, all of which contributed to our very strong financial and operating results. Let's turn now to slide six to review metal market trends. Although ferrous export prices weakened towards the end of the fourth quarter, driven primarily by economic volatility in Turkey, prices have since rebounded [ph] and are continuing to reflect steady and broad-based demand into October.

Overall, the ferrous export market exhibited significant strength in fiscal 2018, with U.S. exports up 24%. Just as importantly, steel scrap usage has significantly outpaced the growth in crude steel production through the first six months of calendar year 2018 in a number of key consuming countries, including China, the U.S., Japan, Turkey, and Russia. The long-term demand for recycled metals is expected to continue to grow, underpinned by several factors including the increased focus on environmental policies, lowering greenhouse gas emissions and reducing energy consumption. In the domestic market, ferrous prices decreased in October, I'm sorry, in August and September on the back of seasonal mill outages.

Recent domestic prices for October however are up versus September as demand from U.S. domestic mills remains healthy. Looking at the upper right-hand chart on this slide, prices from net coal and high-grade iron ore are trading at levels which are supportive of the continued competitiveness of ferrous scraps against semi-finished goods such as billets. This chart also illustrates the widening price differential between low-grade and high-grade iron ore which is being largely driven in part by Chinese enforcement of tighter environmental regulations. The first quarter was much more volatile for the non-ferrous markets, primarily Zorba.

So now let's turn to slide seven for a deeper dive into our non-ferrous activities and strategy. Much of the focus in the market during the quarter was on China's decisions to impose a 25% tariff on all scrapped imports, an additional 25% tariffs on imports of aluminum scrap from the U.S. stricter quality inspection procedures and their announcement of a ban on the import of certain non-ferrous materials effective January 1, 2019. All of these factors led to a significant weakening in Zorba pricing. While these actions were all new in 2018, this continued a trend which began in 2013 with China's introduction of their green sense program, followed by National Sword in 2017.

Both programs were intended to increase the quality of scrap metal products imported into the country. China began buying Zorba in the early 2000 and quickly became the largest importer of U.S. Zorba. China's move away from non-ferrous scrap for whatever reason, whether motivated by environmental concerns, retaliatory trade actions or their own supply has precedence in the fairest market. In 2009, China was the largest buyer of U.S.

ferrous scrap importing over 6 million tons. But by 2015, China's ferrous scrap imports fell below 700,000 tons. Yet global demand for ferrous scrap remains high. Similar to what happened with U.S. ferrous exports to China, the non-ferrous market is finding new outlets for material displaced by reduced shipments to China as there continues to be broad-based demand for this valuable product.

Demand in country such as India, Japan, South Korea, Malaysia, Taiwan, and Thailand have largely been able to offset the drop in China's imports of aluminum scrap from the U.S. While Zorba prices dropped from around $0.65 per pound to the mid-40s during Q4. Export pricing has recovered into the 50s depending on quality and destination. The surge in shipments to countries in Asia X China is helping the export market find a new equilibrium with increased competition, adding some price support, notwithstanding the volatility and non-ferrous pricing and the abrupt demand shifts during the quarter, we increased our non-ferrous sales volumes by 16% sequentially. We achieved our highest quarterly non-ferrous sales since 2012, while at the same time shipping only about a quarter of our non-ferrous volumes to China.

Our non-ferrous business has two main sources of supply, non-ferrous, purchased from third parties and non-ferrous, produced from our shredding operations. Our non-ferrous business strategy has been based on three principles. First, increasing the efficiency of our processes in order to produce a quality product for our customers on a cost-effective basis. As it relates to Zorba, we are highly focused on ensuring that the cost of increased processing to create a pure product does not outweigh the differential in price received for the product. Second, over the last eight years, we have continued to invest in non-ferrous extraction technology in order to recover more metal from the shredding process.

This reduces landfill cost and also provides us with more non-ferrous material from the unprocessed scrap that we have already purchased to shred. Most recently in fiscal '18, we rolled out additional copper separation technology utilizing wire choppers. We will continue to deploy this technology during fiscal '19 as well. And third, we are planning to continue to introduce additional processing technologies that will increase our throughput, lower processing costs, increased recovery rates and create products with the metallic content started by our various customers around the world. We expect these new technologies to be rolled out during fiscal '19 with the full-year run rate benefits by the end of fiscal 2020.

We have a great track record in this area and expect these investments to deliver returns well in excess of our cost of capital and to pay back within two to three years. Now let's turn to slide eight for a review of steel market trends. During the fourth quarter, the U.S. long products market continued to remain strong. Average domestic rebar pricing in the quarter was up approximately 34% year-over-year, supported by strong GDP growth and broad-based demand across multiple industry sectors, including transport, energy, and construction.

The rise in rebar prices continued to outstrip the rise in scrap prices leading to the highest rebar to scrap metal spreads in the past eight years. Lower imports have also continued to benefit domestic utilization and pricing. We expect CSS to continue to benefit from these macroeconomic and market conditions. Let's move now to slide nine to review the leading economic indicators impacting our industry. The key leading indicators for scrap generation and steel demand continue to display solid fundamentals.

The U.S. industrial production index continues that year-over-year rise on stronger durable goods orders and improved GDP growth. Personal consumption and consumer confidence in the U.S. continued to increase. The improved white goods appliance shipment trend, the high average age of vehicles on the road and the more aggressive pricing of both used and new light vehicle sales are all supportive of continued strong supply flows of scrap, including from end of life vehicles.

Furthermore, the lower tax rate environment and capital investment incentives are both spurring corporate and individual spending and benefiting the domestic steel market, barring long-term negative impacts from current and potential tariffs. These domestic economic trends along with prospects for continued global growth lend considerable support to greater supply and demand for recycled metals and finished steel products going forward. Let's now turn to slide 10, to discuss the progress of our strategic initiatives. Our three-year plan to increase our fiscal 2016 volumes by 30% and expand our margins was achieved a year early through a combination of excellent performance by our teams as well as positive market conditions that were stronger than we anticipated when we set these targets. Our companywide ferrous volumes grew to 4.3 million tons at the end of fiscal 2018 and AMR average adjusted operating income per ton for the fiscal year reached $45.

We are now targeting 5 million tons companywide by the end of fiscal 2020, which we expect will generate additional benefits from operating leverage. We have also commenced an efficiency initiative, which should deliver $10 million in annualized benefits over the course of fiscal '19. Our investments in additional non-ferrous extraction and processing technologies will also continue through 2020. Together with our sales diversification strategy and purchase price adjustments, these actions should continue to mitigate the impact of lower Zorba prices and supports our margins at levels consistent with our fiscal '18 average assuming stable market conditions. Political, economic, and regulatory uncertainties could of course impact the timing and trajectory of these goals.

Our strong balance sheet and operating cash flow also provide an opportunity for us to further build out our auto and metals recycling platform through a transactional growth. So now I'll turn the presentation over to Richard for a more detailed review of our financial performance and our capital structure.

Richard Peach: Thank you, Tamara. I'll start off with a review of our consolidated financial performance in fiscal '18. For the full-year, the strong operational performance in both our AMR and CSS businesses led to a consolidated adjusted EBITDA of $190 million, which represented an increase of 90%.

Both businesses delivered year-over-year improvements in operating income in every quarter throughout the entire fiscal year. Achieving less sustained performance improvement was driven by relentless focus on volumes, margins, and productivity. This approach is embedded in our culture and will continue in fiscal 2019 and beyond. Our return on capital employed also grew significantly in fiscal '18. Even excluding discrete tax benefits, we achieved and ROCE of over 15% well in excess of our cost of capital and which demonstrated the successful execution of our growth strategy.

Now let's turn the Slide 12 to discuss our Auto and Metals recycling business in more detail. AMR's adjusted operating income per ferrous ton was $33 in the fourth quarter which was 18% higher than last year. For fiscal 18 as a whole AMR had adjusted operating income per ton of $45, a 55% increase year-over-year. In the fourth quarter, the improved year-over-year profitability was driven by increased ferrous sales volumes, higher average ferrous and non-ferrous net selling prices, expanded metal spreads and are continuing focus on productivity. These positive factors were partly offset by a negative impact from average inventory accounting and higher SG&A expense including impacts from higher volumes year-over-year.

Compared to the third quarter AMRs operating margins were impacted by the fall in Zorba prices, lower ferrous export prices to Turkey, seasonally lower retail sales and then add their impact of average inventory accounting which compared to a benefit in Q3. In the fourth quarter, we continue to benefit from sales diversification and or commercial initiatives to increase supply. AMR's ferrous sales volumes were over 1 million tons representing year-over-year growth of 19% and a sequential increase of 5%. Despite the challenges in making sales to China, there are non-ferrous sales volumes were also higher up by 14% sequentially and by 11% compared to last year's fourth quarter. This demonstrated the flexibility of our sales distribution platform, their strong customer relationships and the quality of our non-ferrous products.

Average ferrous and non-ferrous net selling prices in the fourth quarter were up year-over-year by 23% and 8% respectively but done by 5% and 7% respectively on a sequential basis. Average inventory accounting had a negative impact in the quarter of $2 million which represented an adverse swing of $4 per ton sequentially and $5 per ton year-over-year. We're looking ahead to the first quarter of fiscal 2019 AMR's ferrous volumes and non-ferrous volumes are both expected to increase in a range of 10% to 12% year-over-year. We anticipate AMR's operating income per ferrous ton to include a modest adverse impact from average inventory accounting and to be at levels consistent with the fourth quarter of fiscal 2018. As the price drops which occurred in Q4 are still working their way through the first quarter of fiscal 2019.

Now let's move to slide 13 and discuss cascade steel and scrap. CSS fourth quarter adjusted operating income was $14 million, an increase of $7 million compared to last year and the best quarterly performance since 2008. That's significant improvement was primarily driven by the steady demand for finished products and lower imports which together led to expanded metal spreads as increases in selling prices, greatly outpaced the increase in costs for steel making raw materials. Even with finished steel, sales volumes were up by 5% for the few year, volumes in the fourth quarter were done year-over-year by 14% due to plant maintenance which included upgrades to a rolling mill to enable further gains in productivity. Average selling prices for finished deal were higher by 31% year-over-year which reflected the strong West Coast market environment, the reduced pressure from imports and higher cost for raw materials and consumables including the cost of graphite electrodes.

Productivity improvements for the two year totaled $6 million. As we continue to see synergy benefits from the integration of our steel mill and Oregon metal recycling operations which we completed at the end of fiscal 2017. Looking ahead to the first quarter, we expect to finish steel sales volumes to approximately last year's first quarter. Operating income is expected to benefit from expanded metal spreads and the higher by $3 million year-over-year. Moving on let's proceed to slide 14 to review our capital structure.

In the fourth quarter we generated operating cash flow of $106 million and for the few years we achieved operating cash flow of $116 million driven by our high probability and effective management of working capital. The strong cash flow allowed us to reduce net debt sequentially by $16 million and resulted in a net debt to adjusted EBITDA issue of only 0.5 times at fiscal year end. We also recently amended and extended our credit revolver and a new $700 million facility has a final maturity gain of August 2023 why we are targeting another year of strong operating cash flow in fiscal 2019. Our operating cash flow in the first quarter is expected to include higher working capital, primarily due to the timing of the cash payout of fiscal 2018 annual incentive compensation which we do each year in November. Capital expenditures in fiscal '18 totaled $78 million.

This included a combination of normal spend on maintaining the business, upgrades and replacement of mobile equipment to support growth, major environmental capital projects and further investment in non-ferrous processing technology. Looking ahead to fiscal 2019, we currently expect to invest a similar level excluding any further capital expenditure investments to support growth. In the fourth quarter we return capital to shareholders through our 19 consecutive quarterly dividends and the repurchase of 250,000 shares. During fiscal 2018 as a whole we repurchased 516,000 shares which represent almost 2% of the total shares outstanding. Turning to corporate items, corporate costs in the fourth quarter were a $11 million a sequential reduction of $4 million which primarily resulted from lower expense for professional services.

Looking ahead to the first quarter we expect corporate costs to be lowered by $3 million compared to the prior year first quarter. Their effective tax rate in the fourth quarter was a benefit of 65% as a result of a discrete tax benefit of $30 million associated with the release of valuation allowances uncertainty fair tax assets. In fiscal 2019, we expect to see a normalization of our effective tax rate in the range of 25%, although our actual tax rate will be subject to our level financial performance and other relevant factors in this complex area. I will now turn the presentation back over to Tamara for her summary remarks.

Tamara Lundgren: Thank you, Richard.

In the fourth quarter and for the full fiscal year we delivered another strong set of financial results. Despite challenges in the ferrous and non-ferrous markets, our robust performance can be attributed to the steps we have taken to improve our productivity, diversify our sales expand our supply channels and structurally reduce costs while generating synergies within our operations. Our balanced business model has consistently generated positive operating cash flow enabling us to continue to invest in organic and transactional growth return capital to our shareholders through our dividend and repurchase of shares and reduce our debt. In closing, I'd like to thank our employees many of whom I know are listening into our call this morning. I also want to call out specifically our colleagues and their families who live in the areas impacted by Hurricane Michael.

We are thankful that you are safe and are hopeful that our relief efforts are assisting you as you face the challenges brought on by this natural disaster. To all of you your operational excellence is one of the cornerstones of this company's foundation and our performance is directly related to your ability to drive best-in-class results without wavering from our core values of integrity, safety, environmental stewardship quality, and customer service. Thanks for your collective contributions we delivered our best annual operating performance since fiscal '11. My thanks go to each of you as you've truly demonstrated yet again why we have continued to be a leader in our community and the recycling industry for well over a century. Now, Operator, let's open up the call for questions.

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Phil Gibbs with KeyBanc. Your line is now open.

Phil Gibbs: Hey, good morning.

Tamara Lundgren: Good morning.

Phil Gibbs: I had a question, Tamara, just on some of the assumptions behind keeping the EBIT per ton and AMR in that $45 ZIP code given all the crosscurrents. Are you assuming that recent revisions to auto shreddable prices meaning the fact that they've come down quite a bit since the middle of the year, are you thinking that they're going to stay subdued or are you factoring in those coming back up a little bit to simulate flows, just kind of wanted to understand what your assumptions are there. And then also some of the $10 million benefits you're looking for from the investments that you're making this year on the non-ferrous side, when do those get fully absorbed and that is at an absolute $10 million level for '19 or is it stepping up to that annualized rate?

Tamara Lundgren: Sure. So let me start on the second one, on the productivity initiative. It's really based on increased throughput and lower processing cost, improved asset management and just better efficiencies throughout our operations.

The $10 million is for the full fiscal '19. So we expect to see that this fiscal year. In terms of being able to sustain our margins at fiscal '18 levels, we're really assuming there the things that I spoke about, increased sales diversification adjusting purchase prices, the efficiencies in our system, and any continued investment in non-ferrous technologies and we think with that keeping prices at about where they are and where they have been, you know, mid 300 levels depending on coast and destination, shouldn't enable us to deliver those results.

Phil Gibbs: So you're assuming then that recent feedstock prices hold as well in that scenario, or are you assuming…

Tamara Lundgren: There's obviously seasonality with respect to supply flows and prices, but over the course of the year, we're anticipating similar to last year.

Phil Gibbs: You're assuming that feedstock costs are similar to last year, you're saying?

Richard Peach: Especially, I mean we're assuming that over the course of the year, we can get back up to the $45 M per ton, I mean, it's a spread business.

So we look to adjust our purchase prices to reflect changes and selling prices together with the points that Tamara made about the operating leverage from increasing our volumes, the benefits from using the non-ferrous technology, the productivity improvements in combination, we believe, over the course of the year we can get back up to that level.

Phil Gibbs: Now, that I all understand, I'm just -- just the simple question was, are you expecting feedstock costs to be similar to where they are now or rise all else equal over the course of the year?

Tamara Lundgren: Right. So I think the distinction that you're making is you're taking a point in time and we're looking at this over the course of the year. So clearly, in Q4 and as Richard mentioned in his comments, which is bleeding into Q1, we saw a big drop in both ferrous and non-ferrous prices, which have since been rebounding, but it's bleeding into Q1. We're taking -- our comment is broader based than that in terms of taking today's point in time, because we don't talk about today's point in time in terms of prices.

But we're assuming what I said before, you know, ferrous prices in the mid 300s and we are -- the supply flows appear to be -- continue to be supported by strong GDP growth, industrial production, consumer confidence, consumer spend, CapEx spend, and the like. So we don't see a disruption over the course of the year to supply flows or prices. Obviously, it's impacted by seasonality.

Phil Gibbs: Okay. And if I could ask one more, strategically, it looks like the CapEx guide for this year is similar to '18, meaning $78 million it looks like.

I mean, how much of that is more related to addressing the -- kind of the non-ferrous getting to the smelter-ready product in that and how many more years of elevated, I guess, CapEx relative to depreciation should we expect, thanks?

Richard Peach: Hi, Phil, it's Richard. Yes, we said, we spent $77 million in fiscal '18 and expecting something at similar level next year but that would exclude additional growth investments including in non-ferrous technology. That would be on top of that. We're very fortunate, of course, we've got a very strong balance sheet to fund these projects and as we stand we expect growth capital investments to pay back within two to three years and have returns well in excess of our cost of capital. So we're moving ahead in that light.

Phil Gibbs: Thank you.

Tamara Lundgren: Thank you.

Operator: Thank you. [Operator Instructions] And our next question comes from the line of David Lipschitz with Macquarie. Your line is now open.

Tamara Lundgren: Good morning.

David Lipschitz: Good afternoon. Good morning. Just clarification after that first question, your first quarter you said it was going to be similar to fourth quarter of '18, correct, not the average for the year?

Tamara Lundgren: Correct.

David Lipschitz: Okay.

I just wanted to make sure. And in terms of your ferrous prices, you know, I think it was $0.69 in the quarter, do you think going where we are today, you think you should be slightly down from there as we stand here or sort of flattish heading into the first quarter. I know there was a down and then a little bit of up, but I was just wondering sort of an idea for your ferrous price -- non-ferrous…

Tamara Lundgren: Right. So what I said in the remarks were prices before the fall were around $0.65. They dropped to the mid $0.40s, and in October have come back to the $0.50s depending upon quality and destination.

Beyond that we don't put an outlook on prices.

David Lipschitz: Okay. Thank you.

Tamara Lundgren: Thank you.

Operator: Thank you.

And I'm showing no further questions at this time and I'd like to return the call to Ms. Tamara Lundgren for any closing remarks.

Tamara Lundgren: Thank you. Thank you all for joining us on our call today and for your interest in our company. We look forward to speaking with you again in January when we report our first quarter fiscal '19 results, thank you.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This has concluded the program, and you may all disconnect. Everyone, have a great day.