Operator: Good day, ladies and gentlemen, and welcome to the Schnitzer Steel Second Quarter 2016 Earnings Release Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for this conference call, Ms. Alexandra Deignan. You may begin, ma'am.

Alexandra Deignan: Thank you, Kevin. Good morning. I'm Alexandra Deignan, the company's Vice President of Investor Relations. Welcome to Schnitzer Steel's Second 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 release of today and in the company's Form 10-Q, which we expect to file by tomorrow.

These statements, in 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.

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 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.

Tamara Lundgren: Good morning, everyone, and welcome to our second 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 the market trends which impacted our second quarter and the improving market conditions which are expected to benefit our third quarter. Richard will then provide more details on our segment performance and capital structure, and I'll conclude with a few summary remarks and then we'll take your questions.

So let's start now on Slide 3. This morning, we announced our financial results for the second quarter. Similar to the first quarter, market conditions continued to be very challenging. Both the metals recycling and steel manufacturing industries were impacted by weak demand, a high level of steel imports and customer destocking in the face of falling prices. These headwinds, combined with the seasonal slowdowns we typically experience in our Q2, significantly impacted selling prices and volumes in both our operating businesses.

During the quarter, our ferrous prices were down over 40% from last year's second quarter, reaching their lowest level in a decade. Nonferrous prices also reached multiyear lows and were down, on average, more than 20% year-over-year.

As you can see on the top graph, during the first half of our fiscal '16, ferrous export prices have been below $200 per ton. This is a level that we had not seen on a sustained basis since 2004. The extended period of severely low prices significantly inhibited scrap flows, contributing to margin compression.

In our Steel Manufacturing Business, during the quarter, market prices for finished steel products declined over 20% primarily due to rising steel imports and lower scrap input costs. In December, domestic steel mill utilization rate fell to 60%, reaching a 6-year low.

As you can see on the bottom graph on this slide, during the second quarter, market prices for long products were approximately $100 per ton lower than 6 months ago. Similar to ferrous export prices, these were levels that we had not seen on a sustained basis since 2006.

The price pressure on finished steel products during the first half of fiscal '16 reflected the significant impact from increased imports. But it's important to recognize that in the face of these headwinds, we were still able to make significant positive advances. Our continued focus on productivity improvements and cost reductions enabled us to improve our results compared to last year's second quarter.

In addition, towards the end of February, demand for ferrous and nonferrous scrap increased, with export prices rising approximately $50 per ton and with the domestic markets following in March and April. Nonferrous prices have similarly recovered from multiyear lows, although like ferrous, they still remain low. Nonresidential construction spending continues to increase, and recently, several price hikes for rebar have been announced. These positive trends support our third quarter outlook. And if we turn now to Slide 4, we can review the drivers of our third quarter outlook in more detail.

3.5 years ago, we began a $130 million multiyear cost reduction and productivity improvement program. The first 2 phases were completed in fiscal 2014 and represented $65 million of savings. The third and fourth phases are underway. The focus has been on SG&A cost reduction, capacity adjustments, organizational restructuring, efficiencies in transportation and logistics, contract savings in procurement and synergies from integrating our Metals Recycling and Auto Parts businesses. Some of the benefits can be clearly seen. For example, our consolidated SG&A is on a run rate decline by over $60 million or approximately 30% since the end of fiscal '11. However, the market headwinds have effectively masked the full bottom line benefits of our overall program savings. The fact is that since fiscal 2011, ferrous selling prices have dropped 60% and ferrous sales volumes have dropped 30%. The power of our cost reduction and productivity program in creating operating leverage, however, can be seen when we experience stabilization or improvement in market prices as we saw as recently as the fourth quarter of fiscal '15 and as we anticipate seeing in the third quarter. And by taking the actions that we have taken, we've been able to consistently deliver positive operating cash flow through the cycle, support our CapEx program, sustain our dividend and reduce our borrowings by $206 million or more than 50% since 2011.

In the early part of Q3, ferrous prices have gained significant momentum. We are anticipating higher sequential sales volumes and improved profitability, and we expect that the benefits from our extensive and comprehensive cost savings and productivity initiatives, including the new actions we began implementing in the second quarter, which Richard will discuss in more detail, will show through in our third quarter results.

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

Richard Peach: Thank you, Tamara. I'll begin on Slide 5 with a review of our Auto and Metals Recycling Business. As some of you will recall, back in April 2015, we announced the $60 million annual cost saving initiative, which we then topped up to $65 million in the first quarter of this fiscal year. Of this total, the AMR component is 90%, which equates to a quarterly run rate of around $14 million, split 50% in SG&A and the other half in production expenses, which are accounted for in cost of goods sold.

By the end of the second quarter, we had substantially completed the savings program and the SG&A benefits are clearly visible, down by $15 million in the first half of fiscal '16 compared with the same period in the prior year. However, these benefits, together with those from productivity improvements in production areas, have only partly mitigated the strength of the market headwinds that we have faced in the first half of fiscal '16, with average ferrous selling prices down 43% and ferrous sales volumes down by 13% year-over-year. These offsetting factors led to a second quarter AMR result which was slightly positive, with adjusted operating income of $1 million. With the improved market since late February, our third quarter outlook for AMR's operating income is expected to be more than double the $5.5 million of adjusted operating income AMR achieved in the same quarter of fiscal 2015. We anticipate approximately 10% higher ferrous sales volumes, which we expect will come primarily from increased shipments to export markets.

AMR's third quarter will also include benefits from our new round of cost reductions, which we expect will contribute $5 million to the quarter. These efficiencies are again coming from a number of areas, which include reduced headcount in production and processing, closure of 4 feeder yards, lower IT costs, increased leverage of shared services and more savings in several procurement cost categories.

AMR's outlook for adjusted operating income is in the range of $13 to $15 per ton, with the high end approaching the $17 per ton we achieved in the fourth quarter of fiscal '15, which was before the markets dropped in the first half of the current fiscal year. This again demonstrates the earnings power we are creating through our efficiency programs and indicates the potential for significant operating leverage when price and volume trends improve.

Now moving to Slide 6. I will review the second quarter results of our Steel Manufacturing Business. SMB's operating performance was slightly below breakeven, which was mainly due to the increased competition from imports of finished steel products. Although West Coast construction markets continued to show strength, the level of import competition led to finished steel sales volumes decreasing by 11% sequentially and by 15% compared to the prior year quarter. Average sales prices of $504 per ton were also lower by 9% sequentially and by 23% from the prior year quarter. Rolling mill utilization of 61% reflected the flow through to production of lower sales and a planned maintenance outage which took place in December. In early February, we implemented additional efficiency measures to adjust production resources and related expenses to match with the current levels of demand.

Since the end of the second quarter, several price increases have been announced for rebar in the market, and we also anticipate that third quarter sales volumes will be up sequentially due to a seasonal increase in construction demand, albeit against the backdrop of still strong competition from imports. As a result, our third quarter outlook for SMB is for positive operating income, which is currently anticipated to be up to $2 million.

Now moving to Slide 7. I'll review our cash flow, capital expenditures and our net debt. Second quarter operating cash flow of $7 million continued a positive trend, and the year-to-date amount of $47 million is well up on the first half of last year, which reflects our focus on maximizing cash metal spreads, further improving our cost efficiency and ongoing tight management of working capital, in particular, turning inventory and collecting our receivables. Capital expenditures were $6 million and are $16 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 to $40 million, which is near to the level of the previous fiscal year.

During the second quarter, we also returned capital to shareholders by paying our 88th consecutive quarterly dividend. Leverage ended the quarter at 28%, and net debt of $189 million was up slightly on the first quarter but still down by $16 million since the end of the last fiscal year. The effective tax rate was just over 3%, and subject to performance for the full year, we currently expect a tax rate of just under 2%. These rates are low as we expect to use losses from prior year periods to offset new tax expense on 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. Although markets remain uncertain, looking ahead to our third quarter, we are anticipating improved market conditions and significantly improved profitability, reflecting benefits from cost savings, stronger retail activity and higher selling prices and volumes. We also expect to continue to deliver positive operating cash flow, supporting our CapEx investments and quarterly dividend while continuing to reduce leverage. We remain focused on what we can control, reducing our costs, maximizing our metal spreads, finding new markets and driving synergies between our businesses. These strategies are intended to deliver operational and economic benefits through the cycle, providing long-term value for all of our stakeholders.

Now I'd be remiss if I didn't close by thanking all of our employees for their extraordinary dedication and ability to execute in these very volatile and challenging markets. And I'm very proud to note that for the second consecutive year, we were selected by the Ethisphere Institute as one of the world's most ethical companies. Schnitzer is the only metals recycling company to be chosen for this globally competitive award.

Thank you to all of our employees for your commitment to our values of safety, environmental stewardship and operational excellence, which underpin our relationships with our customers, our communities and each of our stakeholders.

Operator, let's open up the call for questions.

Operator: [Operator Instructions] Our first question comes from Brent Thielman with D.A. Davidson.

Brent Thielman: Tamara, there's some that said that ferrous prices are still too low to draw enough inventory to processors. And I'm curious, are you at a point today where you're unable to fulfill all your customers' needs because the inventory simply isn't there?

Tamara Lundgren: Well, I think that the increase in selling prices that we've seen, that we saw in March and we're seeing continue into April, is definitely helping supply flows come back because clearly, the levels that they reached in the last 6 months, or the first 6 months of our fiscal year, September through February, were at the lowest levels that we've seen in a decade. So the increase in price is driving supply back, but what I would consider it to be is the beginning of a recovery, not back to where it had been.

Brent Thielman: Okay. And it sounds like the bulk of the ferrous volume improvement is coming from export markets into Q3. Where exactly are you seeing it coming from, just based on what you sold forward today?

Tamara Lundgren: Well, export jumped in March, and the demand is actually quite broad-based. In Turkey, which is driving a lot of the demand off the West -- or I'm sorry, off the East Coast, their domestic demand is underpinning a lot of that. And on the West Coast, the demand is broad-based.

Brent Thielman: Okay. And at this point, are you beginning to sell as far forward as fiscal Q4?

Tamara Lundgren: Well, typically, our forward sales are 4 to 6 weeks, and we're staying within that range.

Brent Thielman: Okay, okay. And then just last one for me. On the increase or expected increase in profit in AMR for Q3, does that include an assumption for some improvement in the legacy Auto Parts Business? Or is it all recycling?

Richard Peach: Brent, it's Richard. Yes, it does include an improvement in the Auto part of the AMR overall business.

Operator: Our next question comes from Phil Gibbs with KeyBanc.

Philip Gibbs: How do you feel like you're positioned right now in terms of the feeder yard network and the shredder capability relative to the demand levels that you're seeing right now and after these recent rounds of cost reductions? Do you feel like the business right now is in a spot where you feel comfortable with it moving forward?

Tamara Lundgren: Yes, we do. As I mentioned earlier in the remarks, is that we are continuing to harvest the benefit and reap the benefits from the cost reduction and productivity improvement initiatives that are still underway. And that creates the ability for us to grow organically while markets stabilize and improve. And it also provides the foundation for us to grow in other ways, whether that's through technology or inorganically, when those investment opportunities make economic sense.

Philip Gibbs: Okay, perfect. And then the cost benefits that you're looking for, this $13 million piece, is all of that going to be incremental to where we're coming out of in the second quarter, meaning those start in the third quarter?

Richard Peach: Yes. These are additional cost savings that will benefit the third and the fourth quarter and into next year. The total is $30 million annual cost savings. That will include $13 million in the second half of fiscal '16, split roughly equally between Q3 and Q4. Over 50% of those savings will be in SG&A and the remainder through COGS. And of the total, AMR is roughly 80%, with the remainder split between corporate and SMB.

Philip Gibbs: Okay. So it's essentially $6.5 million in Q3, similar rate in Q4, and then that will start to phase in at a higher level in 2017. Is that based on the timing of attrition or new supply procurement contracts? Any thoughts on that?

Richard Peach: Well, there's a variety of initiatives here. As I said in my prepared remarks, we've reduced the resource levels in our production areas through the identification of further productivity improvements. We also idled 4 feeder yards in our network, where we believe we will not lose market share due to the proximity with other yards. We've cut back on some of our IT expenditures. And then we've also, across a number of procurement areas, identified contract savings in areas as widespread as professional and outside services, travel costs, marketing costs and other areas. So it's a broad program, but we're very confident in our ability to execute in line with our plan.

Philip Gibbs: Okay, that's great. And then lastly, I know historically that you've been, majority if not totally, bulk shipments on the ferrous side. Are you still 100% or near 100% bulk? Or are you doing any container -- containerized shipments in that piece of the business?

Tamara Lundgren: On the ferrous side, we're bulk, and obviously, our nonferrous goes through container.

Operator: Our next question comes from Evan Kurtz with Morgan Stanley.

Evan Kurtz: I just had a couple of questions on the guidance. So I was a little surprised to see that there's going to be no material impact from average inventory accounting in the next quarter. And just given the inflationary environment we're in, I would expect there to be some tailwinds from average inventory accounting coming in at some point. Maybe if you could just walk me through the timing. Is that something that we can begin to see in this fiscal year?

Richard Peach: Yes, there's a potential for a small upside from average inventory accounting in the third quarter, in line with movements on purchase prices but not assumed in our quarter 3 outlook.

Evan Kurtz: Right, okay. And why is it taking so long for that to kick in? Is there something I'm missing? I mean, it seems like buy prices are coming up pretty quickly right now that there should be a fairly significant benefit. Or is it just timing? And how does that work?

Richard Peach: It's really just a timing of turning through previously purchased inventories.

Evan Kurtz: Okay. And then the guidance didn't change really from the prerelease, I guess it was last Monday or so. But surprisingly, expectations for this month's scrap price seem to be climbing day by day, and I've heard as high as $60 to $70 as of late. And it didn't seem like anyone was talking about that when you first put out this guidance. And I know that most of your sales are on the export market, but it does seem like there could be a significant change in domestic pricing in April here. And I'm just wondering if that's factored into your guidance at this point, or maybe there's some potential upside there.

Tamara Lundgren: Well, we set our guidance, obviously, through just the very beginning of April. Domestic hasn't settled yet in April, Evan, and there's still a couple of months left to go fundamentally in the quarter. So the domestic market probably will not settle for another week, and then export is obviously continuing to show strength.

Operator: Our next question comes from David Lipschitz with CLSA.

David Lipschitz: I just want to follow up on Evan's question about the average inventory. Is that because you had basically no -- you drew down your inventories extremely low, so you've just been buying and selling to a certain extent? Is that why there's no adjustment this next quarter for the average inventory?

Richard Peach: Well, we haven't built any assumption of average inventory effects into our outlook. If there is going to be an average inventory effect in the third quarter, at this stage, it's more likely to be a benefit than a detriment. And I think that's all we'll say at this time.

David Lipschitz: Right. No, no, I agree. I think we're all thinking it's going to be a benefit. But basically, what it's been recently in the negative side with this big switch in pricing, you would have thought it would be a bigger benefit on the positive side. So I think that's what [indiscernible].

Richard Peach: Yes, it's really a timing issue, David. You're correct in your assumption that when the market moves up, you should get -- you benefit from it, so it's a timing issue in terms of working through existing inventories. And as I said, we've not included an assumption of a benefit in our outlook. So it is a potential upside to our outlook if there's a benefit that comes through in the third quarter.

David Lipschitz: And how would that come about in terms of like -- does that mean prices have to go higher than you expect?

Richard Peach: How it would come about would be if the cash purchase cost of inventory moved up but the average cost of inventory lagged behind the cash purchase cost because it's the average cost that goes into our income statement, so if that lags the cash purchase costs, you get a benefit in your income statement, just in the same way that the converse happens when the market is moving down.

Tamara Lundgren: I think the important thing to note here is we didn't put it in our assumptions. Obviously, it's an accounting implication, and what our guidance was really focused on were on volumes, increased volumes, benefits from our cost reduction program and higher prices. To the extent that we see rising prices through the quarter, it's more likely than not that we'll have an average inventory positive effect, but it's not reflected in the guidance.

David Lipschitz: Okay. Because you said minimal in the -- okay. I think that was confusing people. So basically, whatever the number you're giving us, there's probably going to be one, the number should be higher than what you're basically forecasting if things continue to go. Would you agree with that assessment?

Richard Peach: We didn't put anything significant into our outlook. I think I just want to repeat that. So if the market continued to move up, there is a possibility of an upside. But I would go back and say there is a timing issue in terms of how quickly it takes to turn ourselves through our inventories before that starts hitting our numbers.

Operator: Our next question comes from Phil Gibbs with KeyBanc.

Philip Gibbs: My question was just on the inventory position as it stands right now, $146 million at the end of the quarter, with volumes improving. How much inventory do you have right now in terms of months on hand? Does the inventory feel low to you? Do you have to go out -- effectively go out and find inventory to effectuate some of these export sales? I'm just trying to get a sense of the absolute kind of volumes out there right now.

Richard Peach: Well, I think the first thing, Phil, is that we're constantly turning our inventories. Throughput is very important to us, and that is why that in these volatile markets, you have not seen any inventory write-offs from us because we very carefully manage that to avoid exposures in volatile markets. Our overall inventories are within historical norms but at the low end of that, which you would expect given the tightness of supply. We manage the interaction of our selling process and our purchasing processes very, very carefully so that our long or short position on inventory is always in a very narrow band so as not to leave our sales exposed on either the sales or the purchasing side.

Tamara Lundgren: We are seeing, as a result of higher prices and seasonality, supply flow increase on both coasts, as you might expect.

Philip Gibbs: That makes sense. But relative to your current inventory position, your inventory position effectively, you're saying, is at the low end of normalized -- okay. I think I got it.

Operator: This concludes the question-and-answer portion of today's call.

Tamara Lundgren: Thank you, operator. And thank you, everyone, for joining us on our call today and for your interest in our company. We look forward to speaking with you again when we announce our third quarter results in June. Operator, back to you.

Operator: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Tamara Lundgren: Thank you.

Operator: You're welcome.