Operator: Good day, ladies and gentlemen, and welcome to Schnitzer Steel Third Quarter Fiscal 2016 Earnings Release Conference Call. [Operator Instructions]

As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Alexandra Deignan. Please go ahead.

Alexandra Deignan: Thank you, Jonathan. Good morning. I'm Alexandra Deignan, the company's Vice President of Investor Relations. Welcome to Schnitzer Steel's Third Quarter Fiscal 2016 Earnings Presentation.

In addition to today's audio comments, we've 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 releases today and in the company's Form 10-Q, which we expect to file later today.

These statements, in summary, say that in spite of management's good faith, opinions on various forward-looking matters, circumstances can change, and not everything we think will happen, always happens.

Please note that we will be discussing some non-GAAP measures during our presentation today. We've 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: Good morning, everyone, and thank you for joining us on our third quarter conference call. This morning, we issued our press release, which is posted along with our slides on our website. I'll start off our discussion today with a review of our third quarter performance, the market trends which influenced our results and the positive impact our strategic initiatives, cost reductions and productivity improvements have had in creating significant operating leverage and earnings power. Richard will then provide a more detailed review of our segment performance and capital structure. I'll conclude with a few summary remarks. And then we'll open up the call for questions.

Let's start now on Slide 3. This morning, we reported third quarter earnings per share of $0.41 and adjusted earnings per share of $0.46, which excluded certain charges. Our results reflect the successful execution of our strategic initiatives. Our third quarter results clearly demonstrated the significant operating leverage we continue to generate in our platform. On both a sequential and year-over-year basis, AMR delivered a substantial increase in adjusted operating income per ton, its best quarterly performance since fiscal 2011. And year-over-year, our adjusted EBITDA improved 52% despite a ferrous sales volume decrease of 17%. These results reflect the bottom line benefits from the strategic and sustainable actions we have taken to reduce our SG&A and other costs, actions we have taken to improve our productivity and actions we have taken to achieve internal synergies. We'll discuss all of these in more detail later in this presentation.

But first, let's turn to Slide 4 to look at ferrous market trends which affected our third quarter performance. During our third quarter, ferrous sales orders for scrap metal increased versus Q2 on seasonally stronger demand and lower steel mill inventory level. Domestic demand was driven primarily by the flat rolled mills, with Turkey and Asia further increasing the momentum as the quarter progressed. We exported our ferrous and nonferrous products this quarter to 14 countries, with Turkey, India and South Korea the top export destinations for ferrous shipments. Optimizing our sales across the globe and broadening our reach to take advantage of markets, whether export or domestic, to access demand wherever it is strongest remains a key operating principle.

In the early part of Q3, ferrous export prices rose by nearly $140 per ton from the near-decade lows in February, driven by demand in both the domestic and export markets. During June, export selling prices retreated approximately $100 per ton from the Q3 peak and have recently stabilized. Our ability to effectively manage through these swings, together with the productivity improvements that we've implemented over the last few years, contributed to the significant margin expansion we achieved the during the quarter.

Now let's turn to Slide 5 to review the results of our strategic initiatives, including our cost reduction and productivity improvement actions that have enabled us to deliver significant operating leverage. Almost 4 years ago, we began a $160 million multiyear cost reduction and productivity improvement program. We had several goals. First, to reduce our overall cost structure. Second, to undertake sustainable productivity improvements to enable our operating businesses to more quickly adapt to volatile market conditions. And third, to more fully integrate our operating platform and unlock internal synergies by combining our 2 largest operating divisions.

The first 2 phases were completed in fiscal 2014, representing $65 million in benefits. The third phase was substantially completed earlier this year and delivered an additional $65 million. Our fourth phase, which was announced in April 2016, is on track to deliver an additional $30 million by the end of fiscal '17. During the third quarter of fiscal '16, this new plan generates a quarterly run rate of $6 million in benefits.

Since the commencement of this multiyear program, our consolidated SG&A has declined by about 25% or $50 million, and we've reduced our staffing level by approximately 30%. These actions, together with production-related productivity initiatives and capacity reductions, have reduced our cost of goods sold and have created a trend of increasing operating leverage. By taking these actions, we've also been able to consistently deliver positive operating cash flow, support our CapEx program, return capital to our shareholders through our dividend and reduce our borrowings by $200 million or more than 50%.

Now I'll turn it over to Richard, who'll provide a more detailed review of our segment performance and our capital structure. Richard?

Richard Peach: Thank you, Tamara, and good morning. I'll begin on Slide 6 with a review of our Auto and Metals Recycling Business. As you can see on the top left-hand graph, AMR's third quarter adjusted operating income was $27 million, a result which demonstrates our earnings power and stronger markets from the operating leverage we've created through a number of efficiency, productivity and other strategic initiatives implemented over the past few years.

In the third quarter, there were several drivers to the improved profitability. First, I will go over the sequential increase from Q2 to Q3, and then I'll explain the improvements in year-over-year. The increased export and domestic demand led to ferrous market prices moving up significantly from February through early May. And as a consequence, our average ferrous selling prices were up sequentially by 27%. This higher price environment improved the scrap flows which supported a sequential increase of 13% in ferrous sales volumes and contributed to the expanded margins. Productivity improvements mean we could process higher volumes, while at the same time reducing unit production costs which created further operating leverage to benefit the quarter. AMR's operating income also included seasonally improved part sales in our Pick-n-Pull stores and increased nonferrous contributions as we used our sorting technology to extract and yield more saleable material from the higher scrap flow and from the increased supply of end-of-life vehicles.

In addition to taking advantage of the strengthening market conditions, the quarter benefited significantly from our own actions to optimize our cost structure. Our new cost reductions generated approximately $5 million of realized benefits in AMR plus a further $1 million in corporate. These actions included the closure of 4 recycling yards without impacting our market share, the consolidation of 2 Pick-n-Pull stores, reductions in operational and sales labor, lower IT expenditures and further benefits in nonscrap procurement.

The rising ferrous price environment generated a benefit from average inventory accounting of an estimated $3 million. The benefit was less than previous periods of sharp price movements, mainly due to the low beginning inventories, which reduced the lagging effect between the average inventory costs and cash costs of scrap.

Now if we move to looking at year-over-year performance, AMR's adjusted operating income approved -- improved by $21 million from last year's Q3. If we bridge this improvement, the impact of average inventory accounting was adverse by $15 million in last year's results and the benefit of $3 million in this year's performance, which was a positive swing of $18 million. While this leaves only $3 million to explain, it is important to note that compared to last year, ferrous and nonferrous volumes were down by 17% and 15%, respectively, which together with other factors, had a negative impact of $7 million. But AMR more than offset the downside with a $10 million increase in quarterly run rate benefits from cost reductions and productivity improvements leading to the year-over-year improvement in AMR's adjusted operating income.

Looking ahead to the fourth quarter. We currently anticipate ferrous sales volumes to be similar to the third quarter, subject to the timing of shipments. We anticipate providing our outlook on expected fourth quarter performance towards the end of the quarter or shortly thereafter.

Now moving to Slide 7, I'll review the third quarter results of our Steel Manufacturing Business.

SMB returned to profitability and generated operating income of $1 million. This positive result was against the backdrop of continuing competition from low-priced steel imports and rising raw material costs for much of the third quarter. Sequentially, a seasonal increase in demand led to finished Steel sales volumes being higher by 21%, while average net sales prices approximated the second quarter.

Sales volumes decreased by 6% year-over-year, and average selling prices were down by 19%, which reflected the continued pricing pressure from imported steel, driven by the strong U.S. dollar and global overcapacity.

Operating income was lower year-over-year due to the reduction in sales volumes as well as the adverse impact of selling prices which fell by more than cost of goods sold in a declining price environment. We are still early in our fourth quarter, but as West Coast demand remains steady, we currently anticipate sales volumes will approximate the third quarter. We also expect utilization to be higher sequentially, which we anticipate will contribute to improved operating income compared to the third quarter.

Now moving to Slide 8, I'll review our cash flow, capital expenditures and our net debt. Third quarter operating cash flow was $4 million, which although modest, demonstrates that in stronger markets, we generate EBITDA improvements which more than offset increased working capital from a higher price environment. This continued our positive trend, and the year-to-date operating cash flow of $51 million reflects strong focus on cash metal spreads, cost efficiency and turning inventory.

Capital expenditures were $6 million, and are $21 million year-to-date from a combination of maintenance CapEx, environmental projects and safety-related programs. For fiscal 2016 as a whole, we expect total CapEx in the range of $35 million, which is around the same level of the previous fiscal year.

During the third quarter, we also returned capital to shareholders by paying our 89th consecutive quarterly dividend. At quarter end, our leverage was 29%, and net debt was $196 million.

In April, we renewed our credit facility at $350 million and extended the expiry date to 2021. The effective tax rate was around 1%. And subject to performance for the full year, we currently expect a tax rate of approximately 2%. These rates are very low as we expect to use losses from prior year periods to offset new tax expense from this year's performance.

Now I'll turn the remainder of our presentation back over to Tamara for her summary remarks.

Tamara Lundgren: Thank you, Richard. We continue to experience volatility in demand and selling prices, stemming from lower global growth, overcapacity in iron ore productions, Steel Manufacturing and Metals Recycling and a strong U.S. dollar. Against these headwinds, we have remained focused on what we can control, reducing our costs and improving productivity, maximizing our metal spreads, pursuing new markets and driving synergies between our businesses. Our Q3 financial performance represents another quarter of increasing operating leverage and earnings power.

For the many of our employees listening to the call today, I want to take a moment to note that this third quarter marks the first anniversary of our Auto Parts and Metals Recycling integration. This internal merger is delivering on its objectives of generating significant synergies, and we expect to capture more of these in fiscal '17. I also want to take a moment to note that we recently posted on our website our second annual sustainability report that includes key quantitative metrics which underscore the fundamental sustainability of our business. And lastly, I want to take this opportunity to thank our employees for the teamwork, the determination and the unrelenting passion for our business that you have shown. Throughout the considerable changes we have identified and implemented together, your focus on safety first, environmental stewardship and operational excellence has not wavered. It's your commitment to excellence and to delivering value to all of our stakeholders that enables us to succeed.

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

Operator: [Operator Instructions] Our first question comes from the line of Evan Kurtz from Morgan Stanley.

Piyush Sood: This is Piyush Sood filling in for Evan Kurtz. I just had a couple of questions for you guys. So we've been reading in the trade tracks that U.S. scrap flows to Turkey have been weak over the last 2 months or so. Anything you can say about that? And if you see that trend reversing? And second question is, how has scrap flows shaping up as prices have kind of softened a bit recently?

Tamara Lundgren: Sure. With respect to Turkey, we did see a pause in the market toward the end of May and through most of June. But over the course of the last week or so, Turkey's interest and activity in the market has come back. And we're also seeing broad-based interest from Asia. So I think that the trading levels are moving back to more normalized levels than what we saw between the end of May and through the first 2 to 3 weeks of June. With respect to scrap flows, what I would say is the following: in our Q2, you saw that prices hit a low that really constrained scrap supply. And you saw as prices picked up in Q3, that those flows came back much more strongly. And while prices, as I mentioned, have fallen off their Q3 peak, we're seeing steady scrap supply flows at the prices where we are seeing trading activity.

Operator: Our next question comes from the line of Brent Thielman from D.A. Davidson.

Brent Thielman: Tamara, just given the stronger export demand in Q3, why were the export volumes, why did it represent a smaller percentage of total volume relative to Q2 and Q1?

Tamara Lundgren: Well, they're in the same range to be perfectly -- when we look at it, it's 39%, 40%. That's been pretty steady now for I would say probably the last couple of years that we've seen a step up into a 35% to 40% range. So I wouldn't really draw any real conclusions by that differential.

Brent Thielman: Okay. And then, when I think back to early April, you guys gave some assumptions for Q3. And I'd fully understand those were based on what you knew at the time and could see at that time. Clearly, operating income came in substantially better than what you anticipated then, but the volume upside in Q3 was relatively more modest. And my question is, as prices accelerated during the quarter? Were lead times on shipments longer than you would've expected because prices were coming off such a low base and the inventory build took a little longer than usual?

Tamara Lundgren: No. I wouldn't say that. I'll have Richard go through some of the analysis, but I would say that actually the lead times are -- have shortened, if you look at it historically over the last couple of years. So I wouldn't say that at all. I really would say it's a 2-part drive. One was the momentum of increasing prices and the second was the benefit of all of the cost reductions and productivity initiatives that we've undertaken over the course of the last year -- a couple of years, including as most recently as the second quarter. And those were the 2 big drivers. But Richard, you might want to add something?

Richard Peach: Yes, I agree with that. And Brent, the time in early April when we provided our outlook for the third quarter and that was before a more significant ramp-up in selling prices during April and early May. We also said at that time we expected our ferrous volumes to be up about 10% and they ended up, up about 13%. And to a lesser extent, we had a benefit from average inventory accounting of $3 million, which was not included in our outlook. And I would reiterate what Tamara said on the benefits of our productivity and cost reductions that when we see volumes showing life, we get benefits in multiple areas because our unit cost go down because we're able to absorb these higher volumes without increasing costs. Our spreads generally widen in a rising market. We get more benefits from nonferrous content from our shredding process. So we get multiple benefit choices that mean these are the contributing reasons or significant contributing reasons to the large expansion and our margins during the course of the third quarter.

Brent Thielman: Okay. And then looks like auto purchase volumes were steady year-on-year, but was actually on fewer stores. Is that reflective of an improving demand for parts or more traffic at the stores? Or is this kind of an effort to get some volumes in, in front of the commodity price increases?

Richard Peach: I think what the market moving up in the quarter, it loosened up some supply of end-of-life vehicles. And that was really the main driver of the increase and getting to the same level of cars on fewer stores. It was mainly the market improvements.

Brent Thielman: Okay, and last one, if I could. Would you guys happen to have the U.K.'s portion or share of what the global scrap market is?

Richard Peach: No. That's not something that we have right now but we will contact you straight after that -- this call with that information.

Operator: Our next question comes from the line of Andrew Lane from Morningstar.

Andrew Lane: I wanted to ask about the industry landscape for ferrous scrap. It seems it's likely to change significantly over the next decade and beyond as Chinese scrap availability rises exponentially. So from just kind of a longer-term perspective, what actions are you doing in taking to prepare Schnitzer for success in this changing landscape?

Tamara Lundgren: Well, it's a good question. And I think it has a couple of legs to it. I think that one is that long-term industrialization and urbanization and growth will support stronger metals demand. And x China, the majority of new steel-making production is coming through EAF. So we haven't been exporting to China ferrous metal for really quite a long time, really since the -- probably since the '08, '09 type of -- or '07, '08 type of time periods. And -- but new markets continue to develop. And it takes quite a long time for countries to industrialize and become net exporters of scrap. And at this point, as you know, it's really just the U.S., Europe and Japan who are net exporters of scrap. So we believe that demand around the world will continue, and we're seeing that even in this environment of low and quite weak global GDP growth where we continue to uncover new sources of demand as countries develop their steel industry.

Andrew Lane: Okay, great. And then kind of as a follow-up to your response there, could you highlight any specific countries that you can cite as attractive export growth opportunities going forward? I know this quarter you mentioned Turkey and India as a couple, but maybe looking 2, 3 years out, do you see any particular sources of strength from an export perspective?

Tamara Lundgren: Certainly. I mean, we continue to expand into Central and South America. We continue to expand into the Mid East. I would identify those as 2 most recent areas where we're seeing demand and new customers.

Andrew Lane: Okay, great. And just one final housekeeping question, if I may. Given all the cost cutting and how your footprints changed in recent years, could you provide an update on just your maintenance CapEx going forward?

Richard Peach: Sure. Yes. This year's CapEx, as you know was -- is going to be in the range of last year's, so it would be somewhere around $35 million. And that is mainly made up of maintenance CapEx environmental projects. So I would say that from a maintenance point of view, $20 million to $30 million is probably the right level.

Operator: Our next question comes from the line of Phil Gibbs from KeyBanc Capital Markets.

Philip Gibbs: I had a question on AMR's sort of intermediate-term profit targets. I think you said in the past, low -- high teens to low 20s in terms of EBIT per ton for the AMR segment. Has that -- do you like that number right now or at these levels and what you've done in terms of productivity enhancements? Is there upside to that figure at current volume -- volumes?

Richard Peach: Yes, I -- you'll note in our slides, Phil, that we've included a 7-quarter trend at -- on the operating income per ton of AMR. And if you look at that, you can see that over the last 7 quarters, ignoring Q1 and Q2 when prices fell to near-decade lows, the other quarters have been in the range of $16 to $29 per ton, excluding average inventory accounting. So -- and we've been on an increasing trend during that period, thanks to our cost reductions and productivity initiatives fall into bottom line. So we believe we're moving up that trend in terms of our earnings per [indiscernible] operating leverage we've created. So in broad terms, that's the range we're operating in and we're heading up certainly in stable to strong markets towards the top end of that range.

Philip Gibbs: So you're maintaining that view as of right now but feel good about -- you're feeling better about that range based on what...

Richard Peach: We feel good about that range in terms of the underlying performance of our business. Obviously, there's some volatility from quarter-to-quarter. But that's the purpose of publishing the 7-quarter trend so you can see that the underlying momentum has been up in terms of the operating income per ton as we seek to demonstrate all the actions we've taken are increasing our earnings power.

Philip Gibbs: Okay, I appreciate that. And is there anything incremental that we should assume in terms of incremental SG&A or cost of goods sold benefits meaning relative to this quarter? Anything more that you're likely to see here as the heavy, I'm not saying more announcements, I'm just saying relative to the announcements you've already made, is there more -- is there a longer tail into what could be incremental to this quarter?

Richard Peach: Well, we've -- as you know, we're in the early stages of our $30 million cost-reduction program. We've produced $6 million in Q3, and we expect $13 million over the second half of fiscal '16 with the balance to come in fiscal '17. I'd also mention something else, although SG&A. Our SG&A in the third quarter was relatively high. And the reason for that is there are strong, very strong Q3 performance that lead to some additional incentive accruals, which included approximately $3 million catch-up to get the year-to-date accrual to the right level. And as we don't believe that catch-up will be repeated in Q4, we should expect that SG&A will be slightly less in Q4, both consolidated and corporate than it was in Q3. And overall, looking at our fiscal '16 SG&A, we do expect that to be more than 10% down on where it was in fiscal '15.

Operator: Our next question comes from the line of David Lipschitz from CLSA.

David Lipschitz: Just a couple of quick housekeeping issues. Richard, in terms of what you said the tax rate in the fourth quarter or for the year, I should say. Going forward into next year and beyond, what would you say with the NOLs, your effective tax rate, if you start to make money, would be?

Richard Peach: We expect that in fiscal '17, our tax rate will continue to be very low because of the valuation allowances that we continue to carry in our balance sheet. And I wouldn't like to look much further that. But certainly in the coming year, we'll continue to be very low.

David Lipschitz: And then, just a second question, as somebody pointed out, you gave guidance for this past quarter. I'm just wondering why no attempted guidance for the next quarter -- for the next quarter, why one quarter and then no guidance the next quarter?

Richard Peach: Yes. I think we need to recognize, Dave, that we're very early -- we're early in the fourth quarter and we report our third quarter results and the earlier date than we do for the other quarters during the year. And that is the reason and that's why we're saying we do expect to provide an update late in the quarter or shortly thereafter. So that's the reason.

Operator: And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Tamara Lundgren: Thank you, all, very much for joining us today on our call and for your interest in our company. We look forward to speaking with you again when we announce our fourth quarter and fiscal 2016 results in October. Thank you.

Operator: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.