1 november 2006. 2 schnitzer steel business overview schnitzer steel business overview three...
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November 2006
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Schnitzer Steel Business OverviewSchnitzer Steel Business Overview Three Important Businesses Forming One Integral Company
Metals RecyclingMetals Recycling
Steel Steel ManufacturingManufacturing
Auto PartsAuto Parts
One of the country’s largest metals One of the country’s largest metals recyclersrecyclers
Sales volumes of >5 million ferrous Sales volumes of >5 million ferrous tons annuallytons annually
Non ferrous sales volumes of over Non ferrous sales volumes of over 300 million pounds annually300 million pounds annually
35 self-service stores35 self-service stores
17 full-service locations17 full-service locations
~250,000 cars processed per year~250,000 cars processed per year
~4mm of annual retail admissions~4mm of annual retail admissions
102% sales growth from FY05-FY06102% sales growth from FY05-FY06
700-800k tons annual capacity700-800k tons annual capacity
Record performance for last two Record performance for last two consecutive yearsconsecutive years
Favorable West Coast steel market Favorable West Coast steel market conditionsconditions
Vertically integrated Vertically integrated metals recycler with metals recycler with 81 operations in 22 81 operations in 22 states and Western states and Western CanadaCanada
Over 3,000 employeesOver 3,000 employees
Sou
rce
of
Sup
ply
Source of
Scrap S
upply
Growth Capital
3
Investor HighlightsInvestor Highlights
Significant 2006 accomplishmentsSignificant 2006 accomplishments
Dramatic increase in scale and geographic presenceDramatic increase in scale and geographic presence
Successful integration of acquisitionsSuccessful integration of acquisitions
Strong financial performanceStrong financial performance
Significant investments in technology to increase capacity and Significant investments in technology to increase capacity and improve productivityimprove productivity
Positive long-term fundamentals and competitive advantages Positive long-term fundamentals and competitive advantages underpinning business outlookunderpinning business outlook
Management optimistic about 2007 opportunities to create Management optimistic about 2007 opportunities to create shareholder valueshareholder value
Strong balance sheet and cash flows provide flexibility to pursue Strong balance sheet and cash flows provide flexibility to pursue further technological improvements, value creating acquisitions further technological improvements, value creating acquisitions and share repurchasesand share repurchases
4
Significant 2006 Accomplishments-Significant 2006 Accomplishments-ScaleScale Dramatic increase in scale and geographic presenceDramatic increase in scale and geographic presence
Successful integration of four acquisitionsSuccessful integration of four acquisitions
Doubling of ferrous processing volumes; 2.5X increase in non Doubling of ferrous processing volumes; 2.5X increase in non ferrous volumesferrous volumes
Doubling of auto parts revenue; 17% increase in self-service Doubling of auto parts revenue; 17% increase in self-service locations and entry into full-service marketlocations and entry into full-service market
100k ton increase in steel manufacturing sales volumes100k ton increase in steel manufacturing sales volumes
-50
50
150
250
350
2005 2006 2007 (E)
Ferrous Tons (Millions)
0
1
2
3
4
5
6
2005 2006 2007 (E)
Trading
Processing
Non Ferrous Pounds (Millions)
5
Significant 2006 Accomplishments-Significant 2006 Accomplishments-Successful IntegrationSuccessful Integration
Completed Four Acquisitions and Committed to FifthCompleted Four Acquisitions and Committed to Fifth
Three of Four Acquisitions Transformed the Business PlatformThree of Four Acquisitions Transformed the Business Platform Metals RecyclingMetals Recycling
Substantially expanded geographic footprintSubstantially expanded geographic footprint
Doubled revenuesDoubled revenues
Significantly increased volume of material processedSignificantly increased volume of material processed
Auto PartsAuto Parts
Doubled RevenuesDoubled Revenues
Increased investment in inventory to improve customer fill ratesIncreased investment in inventory to improve customer fill rates
Closed underperforming full service sitesClosed underperforming full service sites
Centralized administrative functionsCentralized administrative functions
Information TechnologyInformation Technology
Installed common platform for all businessesInstalled common platform for all businesses
Acquisitions accretive ahead of scheduleAcquisitions accretive ahead of schedule
Developed Core Competency In Integration, Setting Stage Developed Core Competency In Integration, Setting Stage for Future Acquisitions for Future Acquisitions
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Significant 2006 Accomplishments-Significant 2006 Accomplishments-Impressive Financial ResultsImpressive Financial Results
Strong Financial PerformanceStrong Financial Performance Second highest EPS ($4.65) in Company’s historySecond highest EPS ($4.65) in Company’s history Revenues increased by ~$1 billionRevenues increased by ~$1 billion Record operating income in Auto Parts and Steel BusinessesRecord operating income in Auto Parts and Steel Businesses Sequential increase in Metals Recycling Business operating Sequential increase in Metals Recycling Business operating
incomeincome
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
2003 2004 2005 2006
Revenues (Millions)
0
1000
2000
2003 2004 2005 2006
Earnings Per Share
7
Significant 2006 Accomplishments-Significant 2006 Accomplishments-Improved productivityImproved productivity
Capital investments in technology and infrastructure Capital investments in technology and infrastructure improvements resulted in improved productivity in steel improvements resulted in improved productivity in steel and metals recycling businesses……. and metals recycling businesses…….
Contributed to 17% reduction in processing costs Contributed to 17% reduction in processing costs from first to fourth quarterfrom first to fourth quarter
Resulted in 14% reduction in year over year cost per Resulted in 14% reduction in year over year cost per ton in the Steel Manufacturing Businesston in the Steel Manufacturing Business
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Growth Drivers for Metals Recycling BusinessGrowth Drivers for Metals Recycling BusinessStrong Industry FundamentalsStrong Industry Fundamentals
Source: 2006 World Steel Dynamics, IISI, and Wall Street ResearchSource: 2006 World Steel Dynamics, IISI, and Wall Street Research
Leads to scrap demand growthLeads to scrap demand growth
0%
20%
40%
60%
80%
100%
1930 1940 1950 1960 1970 1980 1990 2000 2010
Scra
p R
eco
very
Forecast
Demand is robust, Demand is robust, ……but supply remains tightbut supply remains tight
0
250
500
750
1,000
1,250
1,500
1995 2000 2003 2005 2010
Ton
s (m
m)
Total Steel Production EAF Production
Forecasted increase in steel productionForecasted increase in steel production
0
50
100
150
200
250
300
350
400
1975 1979 1991 1995 1999 2003 2007
Total Steel and Electric Arc Furnace (EAF) Production Worldwide Global Scrap Demand
Required Scrap Recovery Rates
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Growth Drivers for Metals Recycling BusinessGrowth Drivers for Metals Recycling BusinessStrategic Deep Water Ports LocationsStrategic Deep Water Ports Locations
Export FacilityExport Facility Ferrous Recycling FacilityFerrous Recycling Facility
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Growth Drivers for Metals Recycling Business:Growth Drivers for Metals Recycling Business:Competitive AdvantagesCompetitive Advantages
Strong market position in West Coast and Northeast markets; new Strong market position in West Coast and Northeast markets; new presence in manufacturing rich Southeast marketpresence in manufacturing rich Southeast market
Bi-coastal port facilities provide barrier to entry and ability to access Bi-coastal port facilities provide barrier to entry and ability to access diverse export marketsdiverse export markets
Significant investment in technology drives lower processing costsSignificant investment in technology drives lower processing costs
8.3%7.5%
11.2%
16.6%
0%5%
10%15%20%
Q1 Q2 Q3 Q4
2006 Operating Margin (1)
Average 11.7% (1) Excludes Trading Operation
Competitive advantages reflected in attractive operating margins
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Auto Parts Industry Drivers Underpin GrowthAuto Parts Industry Drivers Underpin Growth
Source: 2005 AAIA Factbook (* - 2005 Estimate)Source: 2005 AAIA Factbook (* - 2005 Estimate)
Aging US Vehicle PopulationAging US Vehicle Population Annual Miles Driven (in Trillions)Annual Miles Driven (in Trillions)
7.5
8.0
8.5
9.0
9.5
10.0
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Ag
e
Cars Light Trucks
Healthy growth projected for full service and self-service Healthy growth projected for full service and self-service automotive industry segmentsautomotive industry segments
Older vehicles are still on the road, driving more miles, resulting in Older vehicles are still on the road, driving more miles, resulting in higher demand for spare parts to service these older vehicleshigher demand for spare parts to service these older vehicles
2.40
2.50
2.60
2.70
2.80
2.90
3.00
3.10
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
E
20
06
E
Mil
es
(T
rill
ion
s)
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Schnitzer’s Auto Parts Market PositionSchnitzer’s Auto Parts Market Position
$82$108
$218
$0
$100
$200
2004 2005 2006
Schnitzer is well-positioned within two high growth Schnitzer is well-positioned within two high growth areas of the Used Auto Parts Industryareas of the Used Auto Parts Industry
4.00%
4.70%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Self Serve Full Serve
Full-Service$4-6 billion
Self-Service$1-2 billion
Segment Sales Growth Rates (a)Market Size
(a) Source: 2005 AAIA Factbook (* - 2005 Estimate)(a) Source: 2005 AAIA Factbook (* - 2005 Estimate)
2630
34
0 0
17
0
10
20
30
40
2004 2005 2006
Self-Serve
Full-Serve
Revenues (in millions) Locations
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2007 Strategic Focus--Continued Growth2007 Strategic Focus--Continued Growth
Increasing operating leverage through productivity improvementsIncreasing operating leverage through productivity improvements
Higher processing volumes to feed mega-shreddersHigher processing volumes to feed mega-shredders
More rapid inventory turnsMore rapid inventory turns
Using scale to drive down costsUsing scale to drive down costs
Focus on customer requirementsFocus on customer requirements
Growth through value-enhancing acquisitionsGrowth through value-enhancing acquisitions
Fragmented markets provide opportunity for further Fragmented markets provide opportunity for further consolidation—disciplined approach based on meeting key consolidation—disciplined approach based on meeting key criteria:criteria:
Strong franchisesStrong franchises
Opportunity to capture value through management or capital Opportunity to capture value through management or capital investmentinvestment
Synergies to existing Auto Parts or Metals Recycling BusinessesSynergies to existing Auto Parts or Metals Recycling Businesses
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2007 Strategic Focus--Technology2007 Strategic Focus--Technology
Continued investments in technology and improved logisticsContinued investments in technology and improved logistics
Completion of mega-shredder installations (Boston, Completion of mega-shredder installations (Boston, Oakland, Portland) to increase capacity and lower Oakland, Portland) to increase capacity and lower processing costsprocessing costs
Further installation of ferrous and non ferrous sorting Further installation of ferrous and non ferrous sorting systems to improve product quality and recovery of high systems to improve product quality and recovery of high value materialsvalue materials
Continued improvements to major facilities to upgrade Continued improvements to major facilities to upgrade equipment and improve processing flowequipment and improve processing flow
Modifications to reheat furnace and billet yard craneway at Modifications to reheat furnace and billet yard craneway at steel mill to increase capacity steel mill to increase capacity
Strict criteria applied to 2007 budget process to ensure Strict criteria applied to 2007 budget process to ensure discretionary projects provide attractive returnsdiscretionary projects provide attractive returns
33% ROI and 36 month pay-back33% ROI and 36 month pay-back
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Value Creating InvestmentsValue Creating Investments
Company’s strong balance sheet, operating cash flows and access to Company’s strong balance sheet, operating cash flows and access to capital provide flexibility to pursue multiple options to create valuecapital provide flexibility to pursue multiple options to create value
Accretive acquisitionsAccretive acquisitions
Investments in technologyInvestments in technology
Share repurchase-Board of Directors have approved repurchase of Share repurchase-Board of Directors have approved repurchase of up to 4.7 million shares. No repurchase activity since 2001up to 4.7 million shares. No repurchase activity since 2001
$0
$100
$200
$300
2004 2005 2006
EBITDA
Net Debt
Dollars in Millions
Net Debt/EBITDA
.3 x -- .29 x
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Overall Management ObjectivesOverall Management Objectives
Industry leader in creating shareholder valueIndustry leader in creating shareholder value
Metals Recycling: product differentiationMetals Recycling: product differentiation
Auto Parts: managing the automobile lifecycleAuto Parts: managing the automobile lifecycle
Steel Manufacturing: productivity and customer satisfactionSteel Manufacturing: productivity and customer satisfaction
Improve productivityImprove productivity
Integration of acquisitionsIntegration of acquisitions
Investment in infrastructureInvestment in infrastructure
Technological enhancementsTechnological enhancements
Seek growthSeek growth
Additional value-creating acquisitionsAdditional value-creating acquisitions
New technologiesNew technologies
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Investor Highlights-RecapInvestor Highlights-Recap
Significant 2006 AccomplishmentsSignificant 2006 Accomplishments
Positive long-term fundamentals and competitive advantages Positive long-term fundamentals and competitive advantages underpinning business outlookunderpinning business outlook
Management optimistic about 2007 opportunities to create Management optimistic about 2007 opportunities to create shareholder valueshareholder value
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Appendix: Detailed Business Appendix: Detailed Business Segment Overview Segment Overview
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Metals Recycling BusinessMetals Recycling Business
~4 million tons of ferrous scrap ~4 million tons of ferrous scrap processed and sold annuallyprocessed and sold annually
>1 million tons sold annually by >1 million tons sold annually by Global Trading Business through Global Trading Business through supplies obtained in Russian and supplies obtained in Russian and Baltic Sea regionBaltic Sea region
One of countries largest One of countries largest exporters of ferrous scrap. Six exporters of ferrous scrap. Six deep water port facilities provide deep water port facilities provide competitive advantage and competitive advantage and barrier to entrybarrier to entry
Bi-coastal operations in 28 cities Bi-coastal operations in 28 cities and 11 statesand 11 states
Strong industry fundamentals Strong industry fundamentals have resulted in a significant have resulted in a significant increase in average prices increase in average prices compared to prior cyclescompared to prior cycles
Positive outlookPositive outlook
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Used Auto Parts BusinessUsed Auto Parts Business
35 stores35 stores
250,000+ cars processed per year250,000+ cars processed per year
~4 million annual retail customers~4 million annual retail customers
attractive operating marginsattractive operating margins
Complementary to metals recycling Complementary to metals recycling business—source of scrap supplybusiness—source of scrap supply
Full-service Full-service Acquired in Oct 2005Acquired in Oct 2005
17 locations17 locations
Provides great locations and access Provides great locations and access to larger full-service sector of used to larger full-service sector of used parts marketparts market
Self-service
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Steel Manufacturing BusinessSteel Manufacturing Business
The steel manufacturing business serves as a source of demand for the The steel manufacturing business serves as a source of demand for the Company’s metals recycling business, contributing to vertical integration model Company’s metals recycling business, contributing to vertical integration model
700-800k tons annual capacity for rebar, wire rod and other long steel products700-800k tons annual capacity for rebar, wire rod and other long steel products
Near-term business outlook remains brightNear-term business outlook remains bright
Strong West Coast demand for steel Strong West Coast demand for steel productsproducts
Recent consolidation in West Coast Recent consolidation in West Coast capacity has improved capacity has improved supply/demand balancesupply/demand balance
New state of the art Electric Arc Furnace New state of the art Electric Arc Furnace has increased melt shop capacity and has increased melt shop capacity and improved productivityimproved productivity
Planned improvements in rolling mill will Planned improvements in rolling mill will improve output of finished products, improve output of finished products, provide greater flexibility to meet customer provide greater flexibility to meet customer demand and further improve productivitydemand and further improve productivity