Schnitzer Steel Industries, Inc. First Quarter Fiscal 2019 Earnings Call (Corrected) January 9, 2019

Transcription

1 P a g e 1 Schnitzer Steel Industries, Inc. First Quarter Fiscal 2019 Earnings Call (Corrected) January 9, 2019 Operator Good day, ladies and gentlemen, and welcome to Schnitzer Steel's First Quarter 2019 Earnings Release Call and Webcast. (Operator Instructions) As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Michael Bennett, Investor Relations. Please go ahead, sir. Michael Bennett, Sr. Director Investor Relations Thank you, Jonathan. Good morning. I'm Michael Bennett, the company's Senior Director of Investor Relations. I'm happy to welcome you to Schnitzer Steel's earnings presentation for the first quarter of fiscal 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 website at or Before we get started, let me call your attention to the detailed safe harbor statement on Slide 2, which is also included in our press release and in the company's Form 10 Q, which will be filed later today. As we note on Slide 2, 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 2 as well as our press release of today and our Form 10 Q. 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 and Chief of Corporate Operations. Tamara Lundgren, President and Chief Executive Officer Thank you, Michael. Good morning, everyone. Thank you all for joining us on our first quarter fiscal 2019 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 the highlights of our quarterly performance, the market and macroeconomic trends underlying each of our businesses and new productivity initiatives we are implementing to address current market conditions. Richard will then provide more details on our segment performance and our capital structure, and I'll wrap up. And then we'll take your questions. So let's turn now to Slide 4 to get started. Earlier this morning, we announced our fiscal '19 first quarter adjusted earnings per share of $0.58, our second highest first quarter performance since fiscal Both

2 P a g e 2 divisions delivered strong operating results, and I'd like to start this morning by mentioning a few of their key accomplishments. First, CSS delivered its best first quarter performance since fiscal 2008 with operating income up by 41% year over year. This was achieved despite an adverse impact from a third party gas pipeline interruption as well as downtime related to the implementation of mill upgrades aimed at improving productivity. Second, in challenging market conditions that saw a significant decline in the net selling prices for our nonferrous products, AMR delivered solid year over year performance with a 15% increase in ferrous volumes and an 18% increase in nonferrous volumes, demonstrating the benefits of our sales diversification strategy and our commercial initiatives to expand our supply channels. And third, our strong balance sheet enabled us to continue to invest in our company's growth and return capital to our shareholders through both the repurchase of 150,000 shares of our common stock and the issuance of our 99th consecutive quarterly dividend. Our results in the quarter did, however, reflect the adverse impact from compressed margins, primarily due to a significant decline in nonferrous prices as well as diverging export and domestic ferrous prices that occurred towards the end of the quarter. The ferrous and nonferrous export markets have been adversely impacted over the past 6 months by uncertainty surrounding tariff and nontariff barriers, regulatory changes in China and expectations of slower economic growth, all of which have led to lower prices. The benefits from the productivity initiatives we implemented over the last several years, together with the operating leverage we have created through our focus on expanding our supply channels and increasing our sales volumes, have enabled us to partially offset these headwinds. Last quarter, we announced a productivity initiative aimed at delivering $10 million in benefits in fiscal '19. We are expanding that target to $35 million, which includes $25 million of new productivity initiatives to mitigate the weaker price environment in the ferrous and nonferrous markets. Let's turn now to Slide 5 to review the ferrous and nonferrous market trends and conditions. During most of the quarter, export ferrous prices were on an upward trend but began to weaken in November. Since the end of the quarter, ferrous export prices have continued to decline, dropping between $30 and $40 per ton depending on destination. Most recently reported export prices are in the range of $280 per ton off the East Coast and slightly above $300 per ton off the West Coast. In contrast to the export markets, domestic demand for ferrous scrap remained strong through the first quarter. This led to a significant divergence in export and domestic ferrous scrap prices, creating pressure on purchase prices and compressing margins. Since the end of the quarter, however, domestic prices have fallen sharply, influenced by the weaker export markets. Looking at nonferrous, after an initial uptick in zorba prices during the first part of the quarter, the market weakened, with average nonferrous prices during the quarter falling 19% year over year. The nonferrous markets have been primarily influenced by Chinese import restrictions, tariff and nontariff barriers and softer end product demand, including weaker auto sales in China and the rest of Asia.

3 P a g e 3 Price fluctuations in ferrous and nonferrous scrap are nothing new, and we are experienced in managing what we can control to mitigate, as much as possible, the adverse impacts from price volatility so that we are positioned to benefit from the longer term drivers of scrap demand. So let's turn now to Slide 6 for a deeper dive into these longer term trends. Demand for scrap has been underpinned by several trends, including the increased focus on the environmental impact from steelmaking, the wide ranging objective to lower greenhouse gas emissions and the economic and environmental benefits of reducing energy consumption. We can see how these trends have been translated into higher scrap usage by looking at the chart in the upper left hand corner of this slide. As the chart shows, steel scrap usage has significantly outpaced the growth in crude steel production through the first 6 months of calendar year 2018 in some of the largest steel manufacturing countries, including China, the U.S., Japan, Turkey and Russia. Equally as important, the share of global steel production from electric arc furnaces continues to grow even in China. By 2025, Chinese steel production from EAFs is expected to double compared to 2017, and China is aiming to increase its ratio of scrap consumption and steelmaking by 50% from current scrap input estimates of 20%. While U.S. ferrous scrap export levels have not yet been reported for calendar year 2018, global demand for ferrous scrap is projected to be high. Through October of 2018, U.S. ferrous exports had increased by 21%. Although exports eased toward the end of the year, primarily due to Turkey stepping back as its rebar market softened, U.S. exports should show significant full year growth. Now let's turn to Slide 7 for a review of our nonferrous volumes and destinations. As the top chart shows, we continue to find new outlets for nonferrous material which has been displaced due to Chinese import restrictions. Demand for nonferrous material has shifted to countries such as India, Japan, South Korea, Malaysia, Taiwan and Thailand, which have largely been able to offset the drop in China's imports of nonferrous scrap from the U.S. In the first quarter, we shipped almost 75% of our nonferrous products to countries other than China. The success of our sales diversification strategy can be seen in our increased volumes. In the first quarter, AMR's nonferrous sales volumes increased by 18% year over year. We are also utilizing a balanced approach to product mix, which aims to mitigate as much as possible adverse fluctuations in nonferrous pricing and demand. In late December, the Chinese government announced that beginning July 1, 2019, new regulations will re characterize certain scrap from solid waste scrap to raw or furnace ready materials. This change should allow China to deliver on its proposed 2020 solid waste import ban while still allowing Chinese industry to import needed clean grades of scrap. Although more clarity on the new regulations are required, our initial view is that this could be positive for recyclers, like ourselves, who produce high quality products. Let's turn now to Slide 8 to discuss our ferrous and nonferrous strategic priorities. Our ferrous and nonferrous strategic initiatives are focused on 3 main pillars: expanding our margins, deploying our capital to further grow our business and increasing our volumes. Clearly, Q1 reflected a softening price environment driven by continued uncertainty regarding trade, moderating global growth and regulatory disruption. As a result, we took action to identify an additional $25 million of productivity improvement measures, which are on top of the previously identified $10

4 P a g e 4 million we announced last quarter. We expect approximately 2/3 of the benefits from these measures to be realized in fiscal '19, with the remaining 1/3 in fiscal '20. A second pillar of our strategy is to expand the nonferrous products that we offer our customers. We are focused on increasing the efficiency of our processes to produce quality products on a cost effective basis. We expect to roll out advances to our nonferrous processing systems that will enable us to increase our throughput, lower our processing costs, increase recovery rates and create product optionality to meet our customers' needs around the world. We expect to begin implementation of these new technologies during fiscal '19, with the full year run rate benefits by the end of fiscal We also continue to focus on our third strategic objective: to grow our annual ferrous volumes to 5 million tons company wide. Our run rate over the past 12 months is 4.5 million tons. Our success in growing our volumes over the last 3 years has been driven by a dedicated focus on commercial initiatives, including analytics to expand our customer base and supply channels and logistics to enable us to expand our market access supported by positive market conditions. Political, economic and regulatory uncertainties could, of course, impact the timing and trajectory of this goal. So now let's turn to Slide 9 for a review of the trends in the finished steel market. During the first quarter, the U.S. long products market continued to remain strong. Average domestic rebar pricing in the quarter was up almost 30% year over year, supported by strong GDP growth and broad based demand across multiple industry sectors, including transport, energy and construction. Rebar to scrap metal spreads remain at the highest levels that we have seen in the past 8 years. Lower imports have also continued to benefit domestic utilization and pricing. We expect CSS to continue to benefit from these positive macroeconomic and market conditions. Now I'll turn the presentation over to Richard for a more detailed review of our financial performance and our capital structure. Thank you, Tamara, and good morning, everyone. I'll start off with a review of AMR's performance. In the first quarter, AMR's adjusted operating income was $23 million, which represented adjusted operating income per ferrous ton of $25. In challenging market conditions, AMR achieved strong volume growth year over year with these benefits partially offsetting the adverse impact of significantly lower selling prices for zorba and other nonferrous products. Our ferrous sales volumes were up 15%, and nonferrous sales volumes were up 18% compared to the first quarter of last year. We continued to benefit from our sales diversification strategy, our strong customer relationships, the quality of our products and our commercial initiatives to increase supply flows. Average ferrous net selling prices in the first quarter were up 5% year over year and down 5% on a sequential basis. Average nonferrous selling prices decreased significantly by 19% year over year and were down by 14% on a sequential basis. The primary driver of the nonferrous price weakness was import restrictions to China. And while we were successful in diversifying sales volumes to other countries, the fall in selling prices outpaced the reduction in purchase costs for scrap, which led to margin compression both sequentially and year over year.

5 P a g e 5 Average inventory accounting had a neutral impact in the first quarter, which was consistent with the same period last year and compared to adverse impact of $2 million in the fourth quarter of fiscal '18. Over the last 4 quarters, we have shipped our ferrous and nonferrous products to 24 countries. The flexibility of our operating platform also enables us to increase the percentage of ferrous sales to the domestic market when economically advantageous to do so. Sales to the domestic market in the first quarter increased to 37% of the higher year over year AMR sales volumes and this compared to 30% in the first quarter of last year. We continue to focus on actions that management can control and on pulling all available levers to maximize our performance. In light of lower zorba prices and weaker market conditions for ferrous, we are now targeting $27 million in annual productivity improvements in AMR, which represents the equivalent of $7 per ton based on AMR's ferrous sales volumes in fiscal '18. Of the total, we expect AMR to achieve benefits of $16 million in the remainder of fiscal These new AMR productivity improvements will be split 90% coming from production efficiencies in cost of goods sold and 10% in SG&A. Before going over our outlook for AMR for the second quarter, I want to provide further clarification on the drivers of the current challenges within our markets, the levers that management can pull on and other market dynamics we are watching for improvement. There are 3 major market factors which are currently impacting our margins. First, the market prices for zorba have fallen by almost 1/3 since China imposed tariffs on scrap aluminum in the spring of As we currently sell over 200 million pounds of zorba annually, this reduction in prices is impacting our margins by $10 to $15 per ton across all of AMR's ferrous tons. Second, in the ferrous market, there is currently a divergence between domestic and export prices for recycled metals, with domestic trading at approximately $40 per ton higher than export off the East Coast. As we purchase scrap in the U.S., the higher domestic market is currently compressing margins on our export sales of ferrous. And third, the drop in scrap markets is adversely impacting our auto business because car costs for endof life vehicles are less elastic and tend to lag the reduction in selling prices for recycled metals. As we are currently purchasing in the range of 90,000 end of life vehicles per quarter, this inelasticity is adversely impacting AMR's operating income per ton by somewhere around $5 per ton. In combination, these 3 factors, which at a minimum are impacting our margins by $15 to $20 per ton, have created a strong market headwind, which has materially impacted our margins compared to our average for fiscal 2018, which was $45 per ton. In terms of the levers we are pulling and actions that management can control, AMR's new productivity initiatives are expected to create a benefit of $7 per ton when the initiatives are fully implemented. Combined with more stable market conditions and even at current price levels, this will create an opportunity for AMR performance to exceed $30 per ton. We are also advancing plans to make further investments in nonferrous technology. We currently expect these investments to be in the range of $40 million to $50 million, split over fiscal 2019 and 2020, and to

6 P a g e 6 return well in excess of our cost of capital. When implemented, we anticipate benefits from additional throughput, enhancement of our products and reductions to our processing costs, all of which provide a further opportunity for margin improvement. Beyond actions that management can control, we are also closely watching for market improvement in the following 4 areas: First, resolution of current tariff uncertainties between the U.S. and countries which represent significant demand for scrap; Second, regulatory changes which can benefit scrap markets such as recent announcements from China on reclassification of higher quality metal products; Third, domestic and export markets for ferrous scrap moving back into equilibrium, consistent with historical norms; and fourth, normalization of spreads between purchase costs for end of life vehicles and selling prices for recycled metals. Now turning to the outlook for the second quarter. Despite weaker markets, AMR's ferrous volumes are still expected to approximate last year's second quarter and nonferrous volumes are expected to be up by over 5% on a year over year basis. We anticipate AMR's operating income per ferrous ton will be lower than the first quarter, reflecting an estimated $3 per ton negative impact from average inventory accounting. Now let's move to Slide 11 and discuss Cascade Steel and Scrap. CSS s first quarter operating income was $12 million, an increase of 41% compared to the prior year quarter. CSS benefited from expanded metal spreads for finished steel as increased selling prices year over year outpaced the increase in the costs of steelmaking raw materials and other consumables. West Coast demand for finished steel products remains steady and imports are low due to trade actions. The first quarter for CSS also benefited from higher ferrous sales volumes year over year for exports to third party customers. Finished steel sales volumes were down by 6% both sequentially and year over year. This was primarily due to lower production resulting from a combination of a temporary disruption to a major external natural gas pipeline and downtime related to the implementation of mill equipment upgrades aimed at improving productivity. The adverse impact of the disruption to natural gas supply was $1 million in the quarter. Due to the downtime, rolling mill utilization of 87% was down year over year but still up on a sequential basis. Average selling prices for finished steel were higher by 25% year over year, which reflected the steady West Coast market environment, the reduced pressure from imports and the higher costs of raw materials and other steelmaking inputs, including graphite electrodes. A strong focus on productivity continues at CSS with targeted annual improvements to cost of goods sold of $5 million from production efficiencies. This goal is part of our overall company wide productivity target of $35 million, and we expect to deliver all of the CSS benefits during fiscal year Looking ahead to the second quarter, we expect finished steel sales volumes to approximate the first quarter. Operating income in the second quarter is expected to be approximately 50% higher than last

7 P a g e 7 year's second quarter but lower than the first quarter of fiscal 2019 due to normal planned downtime, which took place over the holiday period. Moving on. Let's proceed to Slide 12 to review our capital structure. Operating cash flow in the first quarter was negative by $12 million, which was mainly due to the payout of fiscal '18 bonuses, which occurs each year in early November; and the timing of shipments at the end of the quarter, which resulted in the collection of receivables occurring after the quarter end. Together, these 2 factors more than offset the positive cash generated from our profitable operating performance. Looking ahead, we expect a return to positive operating cash flow for our fiscal second quarter. Capital expenditures in the first quarter totaled $27 million. This included a combination of normal spending on maintaining the business, upgrades and replacement of frontline mobile equipment and significant spend on major environmental capital projects. In fiscal '19 as a whole, we currently expect to invest up to $100 million in capital expenditures, including additional investments in nonferrous processing technology. Net debt increased by $54 million sequentially but decreased $19 million year over year. Our balance sheet remains strong with leverage of 19% and a net debt to adjusted EBITDA ratio of only 0.8x. Turning to corporate items. Corporate costs in the first quarter were $12 million, a $4 million decrease compared to the same period of the prior year, which included a charge of $4 million for a legacy environmental liability. As part of our productivity initiatives, we are targeting a $3 million annual reduction to current quarterly run rates on corporate expense, all of which will benefit SG&A. Looking ahead to the second quarter, we expect corporate cost to be less than the first quarter by $2 million. Our effective tax rate in the first quarter was an expense of 20%, which included a discrete tax benefit associated with higher tax deductions for share based compensation. Our expected tax rate for the remainder of the year is 23%, although our actual tax rate will be subject to our level of financial performance and other relevant factors. I'll now turn the presentation back over to Tamara. Tamara Lundgren, President and Chief Executive Officer Thank you, Richard. In mid December, we issued our fifth sustainability report, which shares our progress across 5 areas: integrity, ethics and compliance; safety, health and wellness; diversity, inclusion and cultural awareness; community engagement and partnerships; and environmental performance and protection. The report also describes the multiyear progress we have made in lowering our carbon emissions, energy consumption, water usage and process waste generated on a per ton basis. We estimate that based on our ferrous scrap volumes in fiscal '18, over 4 million metric tons of CO2 emissions were avoided compared to the use of new iron ore to manufacture steel. This is the equivalent of taking more than 900,000 cars off the road for 1 year. The key performance indicators that are described in the report are also tracked against the Global Reporting Initiative Framework. As one of North America's largest metals recyclers, sustainability is at the core of what we do and how we operate. Our commitment to sustainable business practices and further integration of sustainability

8 P a g e 8 throughout our operations are key components of our long term strategy. We invite you to visit our website and view our latest sustainability report. Let's turn now to our summary on Slide 14. As you've heard this morning, in the first quarter we delivered a strong set of financial results despite challenges in both the nonferrous and ferrous markets. Our performance could be attributed to the steps we have taken and steps which are currently underway to continually improve our business. These measures include a strong focus on productivity, systems, operational excellence, sales diversification, expanded supply channels and generating synergies within our operations. Our balanced business model has led to a strong balance sheet, which enables us to continue to invest in our business and return capital to our shareholders through our dividend and the repurchase of shares. In closing, I'd like to thank our employees, many of whom I know are listening to our call this morning. Our performance is the direct result of your ability to drive best in class results without wavering from our core values of integrity, safety, environmental stewardship, quality and customer service. Each of you continues to meet our opportunities and challenges with dedication, commitment and resolve, strengthening our company at every turn. My thanks go to each of you as you've truly demonstrated why we have continued to be a leader in our communities and the recycling industry. Now operator, let's open up the call for questions. Matthew Korn, Goldman Sachs So I had a question on the productivity enhancements, the new $25 million the incremental $25 million in particular. Can you elaborate a little bit more on what this will actually entail? Is this OpEx improvements you're aiming for in AMR from new automation? Is it overhead? Does this depend on reaching a certain level of volume, throughput in AMR itself? That's where I'd like to start. Richard Peach, President and Chief Executive Officer Matthew, it's Richard. Let me just go through the productivity initiatives. In AMR, we're looking to achieve the benefits that we've outlined from a variety of areas, including production cost efficiencies, enhancing our asset management, reducing our outside services and optimizing the use of logistics. And in CSS, the benefits will come from maintenance practices, improving our yields and enhancing our product quality and use of alternative consumables. And Corporate is SG&A, as you know. So we've developed a detailed plan which underpins the numbers we've disclosed today, and we feel, as in the past, we can successfully execute on this plan as we move forward. Matthew Korn, Goldman Sachs All right. Let me dig a little bit more into the investments that you're making in AMR. You outlined $100 million in capital spending for the coming year. What do you can you share the specific technologies that you're actually putting this money into? Help us understand. Is this choppers? Is this use of magnets? Is it air currents to help sorting, to help yields? Is this something that there's headroom across all of your facilities to bring them up to kind of a state of the art processing ability? How do we think about what this money is actually going into? And what is that technological improvement? How much does that represent of that $100 million?

9 P a g e 9 Richard Peach, President and Chief Executive Officer Yes. Matthew, it's Richard again. So we've said that we are going to invest $40 million to $50 million, split between fiscal '19 and fiscal '20. We expect the projects to start during fiscal '19 and that fiscal '20 will be a ramp up year and that we will achieve the full run rate of benefits by the end of fiscal '20. At present, what we can say is we expect returns well in excess of our cost of capital, and we expect a short payback on the investments. We also expect that we'll be deploying the technology in our major yards. Now this will be likely a significant upgrade to our current nonferrous processing technology. And as we said in our prepared remarks, we are looking to get benefits from really 4 real areas here: increasing our throughput of nonferrous material, increasing the amount of recovery of nonferrous, reducing our processing costs and increasing our optionality on the products we can make to meet the demand of our customers. So it really is a major upgrade for us. Matthew Korn, Goldman Sachs Appreciate it, Richard. Just one more for me. This is you spoke a lot about the market and the challenges in the market and your responses in terms of flexibility, optionality and quality. One thing where you've been successful has been in rotating from China as that market has changed and finding other homes for product. I think I read in a couple of reports, Reuters, Financial Times, the Vietnamese government, for example, isn't particularly happy, I hear that some of the scrap spill over, that they're receiving since China raised the threshold of what they'd accept. Is there do you think about any risk that there could be a cascade of barriers that emerge in other countries, perhaps politically, perhaps for environmental reasons, that would add difficulty here? Tamara Lundgren, President and Chief Executive Officer Thanks for the question, Matthew. I think that one thing that has come through very clearly is that high quality product from quality recyclers is in demand around the world, and that's one of the things that I think is being reflected in the new regulations that China announced just a couple of weeks ago in December. So I think that there may well be countries who are resisting poor quality, a higher waste content that is in the material that's being sent, but those concerns are not concerns that bother us because we've been very focused on selling a high quality product to our customers. So I just was noticing something here. So car purchase volumes were down almost 15% in AMR in the quarter versus last year. Your ferrous sales volumes were obviously up very strongly, 15%. I mean, I've expected historically that the purchase volumes and the sales volumes in the ferrous side align directionally. And just trying to understand here if your business model at all has changed in the last several quarters. Have you moved into any sort of brokerage model with international domestically with international markets getting soft? Just trying to understand that because I wouldn't have expected your purchase volumes to be down that much and your sales volumes up by 15%. It's definitely something to notice here. Yes. Phil, it's Richard. I can start with saying there's no change to the business model. As I explained in the prepared remarks our auto part of the business is experiencing some compression currently

10 P a g e 10 because car purchase costs tend to temporarily lag changes in the scrap markets. That's because the sellers of end of life vehicles tend to behave in a less elastic way than other scrap market players. So clearly, we manage our car buying to enable the car purchase cost situation to catch up over time. And that's the primary reason for that, and that affects the amount of cars that we're buying. And that's really what's going on there. So I mean, I think you are saying though that you've changed your model and practices given the current conditions. I mean, that's a pretty staggering difference between the one being down 13% and the one being up 15%. So where are you procuring your scrap now relative to how you're procuring it a year ago or 1.5 years ago? No, there's no change to the business model. It's really to do with a difference in behaviors between scrap market players, where the market's very tends to be more elastic, and in the auto business, where the sellers of end of life vehicles often don't have the same level of visibility that players in the scrap market have. So it leads to car purchase costs taking longer to adjust to changes in scrap markets. So it's more of a behavioral thing and not related to any change in our business model. No, I understand that part. I'm asking where your where would you be actually getting the feedstock that you're selling? I mean, where are you getting your feedstock now that the mix has changed obviously versus what you're procuring from the market on the auto shred side? So where do we think you should be getting your flows from, I guess? Well, we get our flows from a variety of scrap channels, and that continues. And that includes auctions and private parties and tow companies, and that continues. But what's happening here, as I said, is it's really to do with the length of time those channels take to adjust to changes in the scrap market, which is impacting the car flows. But I would also say that these end of life vehicles, in terms of relative to our scrap overall scrap volumes, 90,000 cars, which is around maybe 130,000 tons, is really only a singledigit percentage from a scrap perspective of our overall ferrous scrap volumes in the quarter. Okay. Well, that makes more sense. I appreciate the perspective there. And just kind of a secondary question here and I'll hop off. The steel business, February down versus November. It sounds like volumes are going to be the same sequentially. Spreads kind of look like they're holding in right now. So where is the added or incremental costs or margin pressure that you would be seeing to see a $3 million to $4 million drop off in Cascades' profitability in the second quarter? Or is it just some conservatism?

11 P a g e 11 It's a combination of the impact of the downtime on production levels and some impact from the projected spreads in that business. But as we noted, we're expecting steel to be 50% above last year's second quarter. So we expect it to be a strong quarter overall year over year. Tyler Kenyon, Cowen So Richard, just to clarify. You had mentioned you had expected a $3 per ton decline in AMR profitability associated just with the average inventory accounting. So does that imply that there would be more downside quarter over quarter excluding that impact? Well, that's we you heard us say earlier on that scrap prices have fallen since the quarter end, and that has an impact on expected changes in purchase prices. And where we have, again, sharp falls in the scrap market, what tends to happen, as you know, is it can have a knock on effect on our average inventory accounting effect because changes in the cash cost of scrap are they lead the change in the average inventory cost that goes into our cost of goods sold. So we projected, as part of our outlook, that we believe that will be around $3 a ton in the second quarter due to the fall in scrap market. Tyler Kenyon, Cowen Okay. But that $3 per ton is just the average inventory accounting impact? That's kind of what you're pointing to? Yes. Tyler Kenyon, Cowen Okay. And then, Tamara, just a question for you. I mean, I know there's certainly been a lot of volatility in the market; certainly, recent shifts particularly on the nonferrous side. And sticking to your 5 million ton ferrous volume system wide target by fiscal I was just wondering, if things were held constant at kind of where we are today and excluding timing related impacts from disjointed spreads on timing of cost versus pricing, is there any way to think about how you're viewing kind of the core profitability on a per ton basis in AMR when you're incorporating just your anticipated benefits from operating leverage? Tamara Lundgren, President and Chief Executive Officer Sure. Well, that's a good question. And it's obviously influenced by stability in the marketplace, a return to what is more of a convergence between export and domestic prices than what we've seen fundamentally over the last 6 months. So when we look forward, Tyler, we see more long term upside with stability coming back into the market, which it eventually does; with increasing scrap usage; with the success of our commercial initiatives, which has allowed us to grow our volumes over the last few years and continue, as you saw just in this last quarter, which was a challenging quarter. And then we look at other potential market movers, which we think have more upside than downside looking over the long term, which is resolutions on tariffs particularly in the countries that have high scrap demand, whether it's ferrous or nonferrous, like Turkey and China; the regulatory clarity in China; and this normalization of

12 P a g e 12 what Richard was alluding to, which is the temporary inelasticity that you see in end of life vehicles where purchase costs tend to lag aligning with ferrous. So when I look at all of those market mover factors, we feel good about the volume target and good about the long term improvement in performance. Richard, your guidance for the second quarter for AMR is saying that we were going to see a $3 a ton impact from inventory accounting, 3 to I think $3 million, excuse me, not $3 a ton, $3 million. Was that the guidance for the second quarter, you're saying $3 million lower than the first? Or did I miss something? Yes. We said we expected the earnings to be similar to the first quarter except for the impact of average inventory accounting, which we said will be about $3 million. And I just want to correct something I said earlier, Phil. On the cars, the 90,000 cars in the first quarter being around about 130,000 tons, that, of course, arithmetically is about 13% or 14% of our ferrous sales volumes. I think I'd said single digits, so I just wanted to clear that up. Okay. So if we're looking at $23 million of profits in the first quarter and you've got flattish it sounds like, flattish sales in ferrous volumes, we should think about the operating income somewhere around $20 million? That's kind of what you're trying to communicate here then? No. Let's just go back to the exactly what we said here because we said in our guidance that we expect AMR's operating income per ton to be lower than in the first quarter. Now that per ton, it was $25 in the first quarter, and we're expecting a $3 per ton negative impact. So that would suggest $22 per ton arithmetically. And we also said that we expected the ferrous volumes to approximate last year's second quarter and nonferrous volumes to be up like 5% on a year over year basis. Okay. So down a little bit but not that far off, so we're kind of in that ballpark. Okay. Yes. Operator This does conclude the question and answer session of today's program. I'd like to hand the program back to Tamara Lundgren for any further remarks. Tamara Lundgren, President and Chief Executive Officer

13 P a g e 13 Thank you, and 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 April when we report our second quarter fiscal '19 results. Operator Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.