Schnitzer Steel Industries, Inc.

Thank you for standing by and welcome to this Mr. Steele's fourth quarter 2021 earnings release call and webcast. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Michael Bennett, Investor Relations. Please go ahead, sir.

Thank you and good morning, Jonathan. I am Michael Bennett, the company's Vice President of Investor Relations. I am happy to welcome you to Schnitzer Steel's earnings presentation for the fourth quarter and fiscal year 2021. In addition to today's audio comments, we've issued our press release and posted a set of slides, both of which you can access on our website at schnitzersteel.com or schn.com. Before we start, let me call your attention to the detailed safe harbor statement 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 on slide two, we may make forward-looking statements on our call today, such as our statements about our targets, volume 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 statement 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'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 Chairman and Chief Executive Officer. She will host the call today with Richard Peach, our Chief Financial Officer and Chief Strategy Officer.

Thank you, Michael. Good morning, everyone, and welcome to our fiscal 21 fourth quarter earnings call. We appreciate your interest in our company, and we look forward to sharing our results with you this morning. The results that we will discuss today are Schnitzer's best operating results in a decade. They would not have been possible without all our employees, from our frontline workers to those who've been working remotely, living our core values of safety, sustainability, and integrity. I'd like to congratulate our employees on their fiscal 21 operating and financial achievements and to thank them for their extraordinary efforts over the past 18 months. Many of you are listening to this call today. Our success is the direct result of how you've embraced these values and your performance reflects the collaboration, innovation, and resilience that define our culture and our company. I'm very proud of what you've accomplished during these most challenging times. On our call today, I'll review our quarterly and full-year financial results and the market and macroeconomic trends affecting our business. I'll also provide an update on our strategic activities. Richard will then provide more detail on our financial performance, our capital structure, and our capital investments. I'll wrap up, and then we'll take your questions. So let's turn now to slide four to get started. I'm pleased to be able to share with you that fiscal 21 was the safest year recorded in our company's 116-year history. As you can see on this slide, this is our third consecutive year of achieving an historical best in our TCIR results and also a record year in our LTIR results. It's a testament to our team's commitment to safety training, hazard awareness, and continuous improvement that even in the face of all the disruptions this year, 93% of our facilities did not experience a lost time injury. We've made excellent progress in identifying and addressing potential hazards before they become injuries. While we still have work to do, our team's commitment to safety is clearly evident in these results. Thanks go to the entire Schnitzer organization for their dedication to creating a safe work environment and a sustainable safety culture. Now let's turn to slide five. Sustainability is at the core of what we do and how we operate and has been since our founding in 1906. As one of North America's largest metal recyclers, Schnitzer facilities acquire, process, and recycle over 4.4 million tons of ferrous metal and about 600 million pounds of non-ferrous metal annually. The material we recover and recycle represents increasingly critical feedstock for industries and infrastructure that need high-quality, low-carbon metal solutions to fuel the transition to a sustainable future. In addition, our Oregon steel mill is one of the very few whose primary energy source comes from hydroelectricity. Combined with the use of recycled metal as its primary raw material, the steel made in our electric arc furnace has an exceptionally low carbon impact as compared to the industry average. We expect to publish our eighth annual sustainability report in the coming weeks, but I'd like to take a moment to highlight a few examples of the significant progress we made this year against our goals, which are centered on our sustainability framework of people, planet, and profit. In addition to our safety performance, which I just described on the preceding slide, In fiscal 21, we became certified as a great place to work. We believe employee engagement, including initiatives focused on diversity, equity, inclusion, volunteering, and job satisfaction, contributes significantly to our operational performance, the achievement of our strategic goals, and the growth and development of our employees. We are also well on our way to achieving our commitment to reduce greenhouse gas emissions at our recycling operations by 25% by fiscal 25 against our 2019 baseline. We've also committed to achieving 100% net carbon-free electricity use by fiscal 22. We're meeting these goals primarily through significant investments in state-of-the-art emissions control systems for our metal shredding operations, and the replacement of operating equipment with newer, lower-emission models. Our upcoming sustainability report will provide more details regarding how we help conserve resources, how we innovate to use less water and energy and to generate less waste, how we create a safe, ethical, engaged, and inclusive workplace, and how we give back to the communities where we operate. So now let's turn to slide six to review our financial results. Earlier this morning, we announced our fiscal 21 fourth quarter adjusted earnings per share of $1.81, a significant year-over-year increase and our best fourth quarter since fiscal 11. Our full year adjusted EPS of $6.13 was our best since fiscal 08. The quarter was impacted by the dampening economic effects of the COVID-19 Delta variant, supply chain issues, and labor shortages. However, we continued to strengthen our core operations through productivity initiatives. We progressed our strategic investments in advanced metal recovery technologies, and we increased our sales volumes. Our Q4 adjusted EBITDA per ferrous ton was $69, far exceeding the $27 per ton a year ago. Our margins benefited from robust global demand for recycled metals, with average net selling prices reaching multi-year highs. Our ferrous and non-ferrous sales volumes also increased versus Q4 of last year, even though both were adversely impacted by logistics constraints. Due to the fire that occurred in our steel mill in mid-May, our finished steel sales volumes and rolling mill utilization were down significantly. However, by mid-August, several weeks ahead of schedule, we began ramping up mill operations and accepting orders for our full range of finished steel products. We delivered one of our strongest quarters of operating cash flow, which enabled us to reduce our debt to its lowest level since 2005, while continuing to return capital to shareholders through our 110th consecutive quarterly dividend and to invest in our strategic initiatives to deliver growth. Let's turn now to slide seven for a review of our full-year fiscal 21 results. As you can see on this slide, our team delivered outstanding financial and operational performance in fiscal 21. The year-over-year comparison is particularly strong, reflecting the initial adverse impact of the COVID-19 pandemic in fiscal 20. But our fiscal 21 performance against five-year average trends also shows significant strengthening. reflecting the benefits from the execution of our multi-year productivity initiatives, the implementation of our One Schnitzer operating platform, the operating leverage from higher sales volumes, and strong working capital management, which led to our highest operating cash flow since fiscal 12. Also important to note is our return on capital employed. Our fiscal 21 adjusted ROCE of almost 21% is our highest in over a decade, reflecting higher profitability driven by increased volumes, improved productivity, and positive market conditions. Let's turn now to slide eight for a review of pricing trends for recycled metals and finished steel products. As you can see on this slide, while weaker than in Q3, market prices for ferrous scrap during Q4 remained near multi-year highs. These favorable pricing levels are supported by cyclical and structural trends, including the post-pandemic economic recovery and the global focus on decarbonization. Export sales off the East Coast were broad-based during the quarter. The downward trend in market prices that we saw in August was largely due to a slowdown in demand from construction activity in Turkey and higher freight rates to Asia. This has leveled off, and recent reported prices to Turkey have strengthened. Turkey remains the largest importer of U.S. ferrous scrap metal. Prices for export sales off the West Coast during the quarter trended similarly to the East Coast with a dip in August, driven by lower steel prices, lower billet and scrap import demand from China, and higher freight costs. Prices have also rebounded since the end of the quarter. On the domestic front, ferrous scrap demand and prices remained high as steel capacity utilization reached 84 percent, exceeding pre-pandemic levels. Copper and aluminum scrap prices traded at or near multi-year highs, benefiting from tight supplies, shipping constraints, and deployment of low-carbon technologies. Zorba, which was trading as low as 34 cents per pound last year, has more than doubled in price. Prices for PGM metals, however, fell during the quarter, primarily due to reduced auto production and higher supply flows. Finished steel prices and demand continued to increase, reaching their highest levels since 2008. And as we return to full operations at our steel mill, we expect demand for our finished steel products to remain strong. So let's turn now to Slide 9 to discuss some of the longer-term demand trends for recycled products and services. Decarbonization is a powerful structural driver of demand for recycled metals. Investment in infrastructure to support the UN Sustainable Development Goals for clean energy, clean water, and industrial infrastructure has been estimated to run into the trillions of dollars. Increasing the use of recycled metals in these new product and infrastructure investments is a great example of how old economy tools will lead the way to decarbonization of the new economy. A low carbon economy and many low carbon technologies are widely acknowledged to be more metal intensive. Recycled metals require less carbon to produce than mined metals. The use of recycled metals is now an important strategic solution for companies, industries, and governments that are focused on carbon reduction. It's a differentiator for metal producers and fabricators and it is a critical part of every community's commitment to supporting a circular economy and reducing material going to landfills. We can see how some of these trends have translated into higher fair scrap metal usage in the U.S. and globally by looking at the charts on this slide. EAF steelmaking capacity, which uses scrap as its primary raw material, has been expanding in the U.S. and globally and is projected to increase even further. And scrap usage in China's steelmaking is expected to increase by up to 50% by 2025, driven by EAF replacement capacity, as well as by the increased use of scrap in their BOFs. Let's turn now to slide 10 to review the strategic actions we have underway, which are aligned with these long cycle trends. Decarbonization trends, customer demand, product optionality, productivity, and volume growth underpin our strategic initiatives. Extracting more nonferrous metals from our shredding activities is a significant value-added process and is directly aligned with global demand trends. During the quarter, we ramped up production on two of our new advanced metal recovery systems in California and in Georgia, with the remaining systems on track for commissioning by the end of the third quarter of fiscal 22. We expect the benefits from these projects to be substantial, and to increase our non-fares volumes and revenues, lower our operating costs and improve our margins, expand our product offerings and customer base, and support our sustainability objectives of increasing recycling and reducing waste. We also made significant progress this quarter on our objective of increasing our volumes when we closed on the acquisition of eight metals recycling facilities from Columbus Recycling. a leading provider of ferrous and non-ferrous recycled metal products and services in the southeastern U.S. The southeast is a region expected to see a significant increase in EAF steelmaking capacity in the coming years. Combined with our existing facilities, this acquisition increases our footprint to 22 operating facilities in the southeast and 102 across North America. This acquisition is expected to increase our annual ferrous sales volumes by about 7%, expand our platform and offerings in a robust regional market with meaningful synergies, and is consistent with our growth strategy to expand metals recycling operations to meet anticipated increases in steel and non-ferrous metals demand. We're excited to welcome the Columbus recycling team to Schnitzer, as both our organizations have fostered cultures focused on operating responsibly and sustainably for their customers and the communities in which they operate. So now let me turn it over to Richard for a more detailed review of these projects and our financial performance.