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Edited Transcript of SCHN earnings conference call or presentation 24-Oct-19 3:30pm GMT

Q4 2019 Schnitzer Steel Industries Inc Earnings Call

PORTLAND Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Schnitzer Steel Industries Inc earnings conference call or presentation Thursday, October 24, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michael Bennett

Schnitzer Steel Industries, Inc. - Senior Director of IR

* Richard Peach

Schnitzer Steel Industries, Inc. - Senior VP, CFO & Chief of Corporate Operations

* Tamara Lundgren

Schnitzer Steel Industries, Inc. - President & Chief Executive Officer

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Conference Call Participants

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* Tyler Lange Kenyon

Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Schnitzer Steel Fourth Quarter 2019 Earnings Release Call and Webcast. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. (Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. Michael Bennett, Investor Relations. Sir, you may begin.

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Michael Bennett, Schnitzer Steel Industries, Inc. - Senior Director of IR [2]

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Thank you, Crystal. Good morning. I am Michael Bennett, the Company's Senior Director of Investor Relations. I am happy to welcome you to Schnitzer Steel's earnings presentation for the fourth quarter and fiscal year 2019. 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 schnitzersteel.com or schn.com.

Before we start, 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-K, which will be filed later today. As we note on Slide 2, we may make forward-looking statements in our call today, such as our statements about our outlook, 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 statements is contained in Slide 2 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 have also 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.

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Tamara Lundgren, Schnitzer Steel Industries, Inc. - President & Chief Executive Officer [3]

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Thank you, Michael and good morning, everyone. Thank you all for joining us on our fourth 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 our quarterly and full-year financial results and the market and macroeconomic trends affecting our businesses.

I'll also provide an update on the initiatives and capital projects we have underway to address the evolving industry dynamics. Richard will then provide more detail on our segment performance, our capital structure and our capital investments. I'll wrap up and then we'll take your questions. But before we get started, please turn to Slide 4, as I'd like to highlight the safety performance of our team this year.

Fiscal 2019 was the safest year recorded in our company's history. Our recordable incidents declined steadily throughout the year. Our total recordable injury rate was 33% better than last year, and we have made excellent progress in identifying and addressing potential hazards before they become injuries.

I'm very proud of our team mates throughout the company, who've demonstrated the leadership necessary to achieve these results and to continue our commitment to a safe work environment and a sustainable safety culture.

Now let's turn to Slide 5 to review our quarterly financial results.

Earlier this morning, we announced our fiscal '19 fourth quarter adjusted earnings per share of $0.42.

Our Q4 results were impacted by a very challenging market environment for both AMR and CSS. During a quarter marked by sharp declines in ferrous and non-ferrous prices as well as in prices for finished steel products, our teams delivered solid results, both businesses were successful in expanding sales volumes sequentially and both benefited from the productivity initiatives we implemented earlier this year.

In both businesses, the forward sales executed earlier in the quarter enabled us to blunt the impact of the significant drops in ferrous and non-ferrous prices during August. We were also very pleased that our continued focus on inventory management led to another quarter of strong operating cash flow, which enabled us to continue to reduce our debt and to return capital to our shareholders through both our 102nd consecutive quarterly dividend and share repurchases.

Now let's turn to Slide 6 to look at the full year in perspective. Fiscal '19 was our second best performance since 2011, reflecting the success of our team in delivering higher sales volumes, implementing significant productivity improvements, generating strong cash flow and further strengthening our balance sheet by reducing our debt.

For the year as a whole, we experienced steadily declining prices in both recycled metals and finished steel products. AMR experienced margin compression as the drop in ferrous and non-ferrous scrap prices outpaced the change in purchase costs. The fall in non-ferrous prices and in particular, in zorba was the major contributor to the compressed margins. Zorba has now fallen by almost 50% since its most recent peak in the spring of 2018.

CSS's fiscal '19 results were the second highest since 2008, supported by prices that reached a multi-year high in the first fiscal quarter before falling significantly in the second half of the fiscal year. On a year-over-year basis, extended customer destocking and lower finished steel volumes including from severe winter weather conditions were the primary contributors to the decline in the full-year results.

Lastly, we delivered $145 million of operating cash flow for the year. As a result, our strong balance sheet positions us to further build out our platform through investment and transactional growth and to return more capital to our shareholders.

Let's turn now to Slide 7 for a more detailed review of market trends. As you can see in the upper left hand chart, ferrous scrap prices declined through most of fiscal 2019. In fact, ferrous prices have fallen in eight of the last 10 months and since the beginning of August, ferrous prices have decreased by almost 20% to levels that we last saw in 2016. And there are currently about $100 below the 10-year average of $330.

The primary drivers of this decline have been slower global growth, weaker export prices and demand and reduced mill purchases due to a combination of weaker order books, sufficient inventories and planned mill outages. Looking at the export market, scrap import prices into Turkey have declined by about 30% over the last 12 months and Turkish scrap import volumes are lower by approximately 15%. Although there has been some recent restocking into Turkey, it is still too early to tell whether this will lead to a sustainable uptick in prices and demand for the remainder of calendar 2019. Even at the most recently reported prices, overall levels are still hovering near 3-year lows.

Turning to non-ferrous prices, as you can see in the lower left hand chart, non-ferrous prices also trended down during the fiscal year and zorba prices have now reached levels last seen during the great recession of 2009. Prices have been impacted by trade and regulatory actions by China including tariffs, import quotas and higher metal content requirements as well as by declining global auto sales in key markets.

Not surprisingly, supply flows have been tightening as a result of these low ferrous and non-ferrous prices as they did in 2016, which was the last time that ferrous prices traded at these levels for a sustained period.

Zorba prices at that time, however, were significantly higher. Until the impact of the structural downward shift in demand for zorba is reflected in purchase prices for scrap or until ferrous sales prices recover to more normalized levels, we may see continued pressure on supply flows.

Looking at the upper right-hand chart, rebar and wire rod prices were relatively flat for most of the year but trended down sharply during the fourth quarter. West Coast demand continues to show resiliency in construction spending and has the potential to benefit longer term from increased state level support for infrastructure projects.

Now let's turn to Slide 8 to discuss some of the longer-term trends.

The long-term [demand] (corrected by company after the call) for recycled metals is underpinned by several trends. These include: the increased focus on the steel industry's environmental impact, the wide-ranging objective to lower greenhouse gas emissions and the economic and environmental benefits of reducing energy consumption.

Equally important is that a future lower carbon economy is widely acknowledged as more metal intensive. Whether it's driven by the demand for electric cars, the deployment of renewables or the efficiency and convenience of "smart cities", a green economy means a metal intensive economy.

A World Bank report released last year counted dozens of metals which could see a growing market with the rising use of wind, solar and batteries for power generation. In addition to steel, aluminum, copper and nickel were identified as being among the metals expected to be in highest demand, we expect these trends to accelerate and for the recycled metal industry to play an increasingly important role. And we can see how some of these trends have already been translated into higher ferrous scrap metal usage by looking at the chart in the upper left hand corner of this slide.

As this chart shows ferrous scrap usage has significantly outpaced the growth in crude steel production in some of the largest steel manufacturing countries. And as you can see in the charts on the bottom of the slide, the share of global steel production from electric arc furnaces continues to grow in China as well as in the U.S.

By 2020, Chinese steel production from EAF is expected to increase by 15% compared to 2018. Scrap consumption by the Chinese steel industry grew over 20% in the first 6 months of 2019, driven primarily by requirements to lower carbon emissions and by higher EAF production. China experts have also forecast that the proportion of scrap used in blast furnaces will rise from 20% in 2018 to 30% in 2025.

Let's turn now to Slide 9 to review the strategic actions we have underway.

Productivity improvements, investments in advanced metal recovery processing technologies and volume growth underpin the strategic actions that we have underway to leverage these positive long-term trends and to offset some of the current market headwinds that are impacting our business.

Let's focus first on what we are doing to offset the cyclical headwinds that we are facing. Our productivity improvement program is centered on delivering benefits from production and functional cost efficiencies, improved asset management, procurement and logistics. We are expanding the $35 million of productivity initiatives that we announced at the beginning of fiscal '19 by $15 million.

We have already achieved approximately $30 million of these combined savings and benefits in fiscal '19 and we expect to achieve the remaining $20 million in fiscal '20. These additional savings and benefits should enable us to partially offset the margin compression caused by the significant decline in ferrous and non-ferrous prices.

Second, as we've highlighted previously and that Richard will discuss in more detail, we are also rolling out a capital investment program that can eliminate our production of lower value mixed non-ferrous products such as zorba and enable us to produce a wide range of furnace-ready products. We believe that the benefits from this investment will deliver at least $8 per ton once fully operational. The benefits come from three sources:

First, improving the efficiency of our processes to enable us to meet global metal content and quality requirements on a cost-effective basis.

Second, increasing our throughput and extracting more materials from our shredding process.

Third, creating product optionality and furnace-ready materials that can be marketed globally and both broaden and deepen our customer relationships. Importantly, these investments will also support our sustainability objectives to increase recycling and reduce waste.

Lastly, let's review our volume growth and sales diversification initiative.

Profitable growth in our ferrous sales volumes has been a successful multi-year strategic focus for our company. Our financial performance has benefited from the increased flexibility provided by our investments to expand our ability to access the domestic market as well as by our focus on expanding our sales to additional export markets and customers.

Our volume initiative targets additional growth of 700,000 tons to reach 5 million tons annually based on our retained capacity and assuming supportive market conditions. We expect this growth to create operating leverage equal to approximately $7 per ton on overall margins. The timing and trajectory of this goal could, of course, be impacted if current market conditions extend materially into calendar year 2020 or by political, economic, and regulatory uncertainties.

Together, our productivity, technology investment and volume growth initiatives should enable us to significantly improve our margins and to continue generating strong operating cash flow, providing us with additional opportunities to grow and to return more capital to our shareholders.

Assuming some market recovery in the second half of fiscal '20, we expect these initiatives to benefit our margins in the range of $15 to $20 per ton, with up to half of the benefits in fiscal '20 and the full-year run rate achieved by the end of fiscal '21.

Now let me turn it over to Richard for a more detailed review of our segment performance and our strategic capital investments.

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Richard Peach, Schnitzer Steel Industries, Inc. - Senior VP, CFO & Chief of Corporate Operations [4]

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Thank you, Tamara, and good morning. I'll begin with a review of our ferrous volumes.

In the fourth quarter, our total ferrous volumes grew sequentially by 8% and for fiscal '19 as a whole, our volumes were stable compared to the previous year.

We achieved these higher volumes by using our global sales reach, our flexible operating platform and our ability to diversify sales even in a declining price environment which we experienced throughout most of fiscal 2019.

Pivoting between most economically advantageous markets allows us to focus on profitable volume growth. As the pie chart show, in the fourth quarter, we did this by increasing our ferrous sales to the export market which reflected higher selling prices compared to a weaker domestic price environment.

As the chart on the right side focuses on our annual volumes by destination, and shows that in fiscal 2019, weakness in the Turkish market led us to reduce our sales volumes to Turkey to 12% of total volumes and which we offset by expanding our sales to the domestic market and to additional export destinations in Asia.

Now, let's turn to Slide 11 for an update on non-ferrous.

The Chinese government has recently begun to implement quarterly quotas for Chinese scrap importers and are in the process of developing quality standards for imports of clean grades of recycled scrap. Recent reports have indicated that subject to more pronouncements, latest Chinese import quotas issued for the fourth calendar quarter will reduce permitted volumes of imported copper and aluminum scrap by 80% compared to the third calendar quarter.

These increasingly restrictive regulations have changed the demand patterns for recycled non-ferrous metals which we have adapted to in the following ways.

First, we've reduced our exposure to the Chinese market and in fiscal 2019 we shipped 75% of our non-ferrous to countries other than China.

Second, we've expanded our customer base and increased sales diversification. In the fourth quarter, we sold non-ferrous to 19 countries, including India, Japan, South Korea, Malaysia, Taiwan and Thailand.

Third, productivity improvements and higher yields from our shredding process contributed to a 6% increase in non-ferrous sales during fiscal '19 against the backdrop of a falling price environment.

And fourth, we make sure to sell a balanced mix of non-ferrous products from a combination of shredder production and purchased material.

Of the total volume, zorba is around one-third with the majority consisting of purer high-value products including copper, aluminum and other furnace ready metals. Finally, to create more value and continue to meet the needs of our customers. We are currently undertaking a major investment program to install advanced metal recovery and product enhancement technologies in several of our major yards. I'll discuss this initiative in more detail later in this presentation.

Now, let's turn to slide 12 to discuss the operating trends at AMR.

Despite declining ferrous and non-ferrous prices, AMR was able to deliver solid financial performance with quarterly operating income of $22 million, which represented operating income of $22 per ton.

However, compared to the third quarter, this was down sequentially, as benefits from higher sales volumes were more than offset by the impact of the declining prices on margins, seasonally lower retail sales and, to a lesser extent, higher environmental-related expenses. For the full year fiscal '19, AMRs average operating income per ton was $26.

As a top left hand chart shows, quarterly performance was relatively consistent over the year, despite the margin compression from falling prices. The two primary reasons for this consistency were operating leverage from sequentially improving volumes and an increasing trend of benefits from our productivity initiatives, which contributed $6 to AMR's per ton profitability for the year.

However, as the chart on the top right shows, we've recently seen ferrous prices at near 2016 levels and zorba prices are now at 10-year lows. The drop in zorba prices has adversely impacted AMR's profit per ton in fiscal '19 by around $15, compared to the margins being achieved before China imposed tariffs on aluminum scrap.

AMR's ferrous sales volumes in the fourth quarter increased by 9% sequentially, benefiting from seasonally improved supply flows, steady car purchase volumes, and contributions from commercial initiatives. Exports in the quarter were 74% of our ferrous volumes and we made sales to customers in 10 countries on several continents.

Average ferrous net selling prices in the fourth quarter were down by 8% sequentially and by 16% year-over-year. While our average selling prices were lower sequentially, the prices we achieved reflect our ability to sell ahead and the shipped prices we realized at the start of the fourth quarter were well above those that we achieved in August.

Non-ferrous sales volumes were up by 4% sequentially on higher production volumes and our successful sales diversification program. Average non-ferrous net selling prices decreased by 10% sequentially, reflecting the continued impact of Chinese retaliatory tariffs, import restrictions and slowing rates of auto production globally.

It's important to note that our forward sales made earlier in the quarter led to our average nonferrous selling prices falling by less than the drop in market prices during the fourth quarter. However, in our first quarter, we would expect to see a more direct impact of these lower market prices, in realized selling prices for our non-ferrous shipments.

And looking ahead to other aspects of AMR's first quarter, we anticipate ferrous sales volumes to be 5% to 10% less than last year's first quarter on supply flow impacts from the lower price environment.

Non-ferrous sales volumes are expected to be around 15% lower year-over-year, due to the impact of weaker demand, lower ferrous production and timing of sales, which had benefited last year's first quarter.

Ferrous market prices have fallen sharply by $70 per ton since August. To provide more context for our Q1 outlook, the last time ferrous prices were near current levels was back in fiscal 2016 and in the first two quarters of that fiscal year, AMR operated at near breakeven performance. Zorba prices are now a third lower than they were in 2016, which we have offset through productivity improvements and benefits of operating leverage since that time.

However, the recent sharp drop in ferrous prices is expected to result in an adverse impact of average inventory accounting of $8 per ton. The adverse accounting impact combined with reduced sales volumes, compressed metal spreads and lower zorba prices is expected to lead to breakeven performance in our first quarter of fiscal '20.

While the changes in ferrous prices and volumes are cyclical in nature, which we are offsetting through our productivity and volume initiatives, we are addressing the structural change in the market for zorba with our implementation of advanced metals recovery technology, which we expect to deliver benefits beginning in the second half of the current fiscal year.

Now let's move to slide 13 and discuss operating trends in CSS.

CSS's fourth quarter operating income was $6 million, which was a solid performance, albeit a sequential decrease of $2 million compared to the third quarter. Benefits from higher sales volumes were more than offset by an adverse impact on margins of the decline in selling prices for finished steel.

CSS's operating income for fiscal '19 was $32 million. This was the second best performance for CSS in a decade and, as the chart on the bottom left shows, reflects much higher profitability compared to fiscal '13 and '14 when rebar imports were at a similar level. While finished steel metal spreads were higher in fiscal '19, this improvement also demonstrates benefits from increasing productivity and from maximizing internal synergies between our steel mill and our Oregon recycling operations.

Our finished steel sales volumes were 4% higher sequentially and rolling mill utilization was 90% in the fourth quarter. Demand in West Coast markets remain steady and our sales activity benefited from a seasonal improvement. Average selling prices for finished steel were down sequentially by 4%, reflecting lower input costs, including for scrap and other consumables.

Looking ahead to the first quarter of fiscal '20, we expect CSS finished steel sales volumes to approximate the first quarter of the prior year. Due to lower contributions from recycling, we expect CSS operating income in the first quarter to be slightly below the fourth quarter of fiscal '19.

Moving on let's proceed to slide 14 to review our capital structure. Operating cash flow in the fourth quarter was a healthy $82 million, driven mainly by profitability and effective working capital management. Operating cash flow for fiscal '19 as a whole was $145 million, which continued a strong multi-year trend.

As the chart on the top right shows, our operating model provides for opportunities to generate positive operating cash flow through the cycle and in differing market conditions. This is because in strong markets increased profits can exceed a buildup in working capital and in weaker markets, benefits from releasing working capital, tend to exceed the adverse impact on profitability.

A strong fourth quarter cash flow enabled us to reduce net debt sequentially by $41 million and at the end of fiscal '19 or net debt of $93 million represents the lowest level in the past nine years. Our balance sheet remains strong with net leverage of only 12% and a net debt to adjusted EBITDA ratio of just 0.6x. We have an existing credit facility of $700 million with a 2023 maturity, and which provides us with financial plausibility as we pursue our strategies for growth.

Reducing debt is part of a balanced capital allocation strategy, which also includes investing in our business and returning capital to our shareholders. In addition to our quarterly dividend, in the fourth quarter we repurchased an additional 115,000 shares. For the full year, we have repurchased almost 2% of our total outstanding shares.

Capital expenditures in the fourth quarter totaled $34 million and included a combination of spend on maintaining the business, environmental capital projects and investments in growth. For fiscal '19 as a whole, our capital expenditures totaled $95 million. Corporate costs in the fourth quarter were $11 million, which was lower sequentially because the third quarter included a $2 million charge for a legal settlement.

Looking ahead to the first quarter of fiscal 20, we expect corporate costs to be $1 million dollars lower compared to the fourth quarter.

Our effective tax rate in the fourth quarter was an expense of 25% and we expect our tax rate in the first quarter to be the same although our actual tax rate will be subject to our level of financial performance and other relevant factors.

Now, let's talk in more detail about our capital investment plans for fiscal '20 including our advanced metal recovery and product enhancement technology strategy.

As I mentioned earlier, we have commenced a major capital investment program to replace, upgrade and add to our metal recovery technologies, including our existing downstream sorting equipment which we use in our major export facilities.

Our plan includes new wet and dry processing technologies, enhanced zorba separation capabilities, more advanced sorting equipment and a further rollout of our clean copper recovery program, which we had already started in 2018. Once implemented, these new technologies are expected to improve our yield of metal recovery from the production process and enable us to produce more furnace ready products consistent with the needs of our customers and the structural trends in our industry.

The new automated technology will allow us to convert zorba to higher value furnace ready products such as twitch, copper, brass, zinc stainless steel and other saleable metals. By early 2021, we expect to be in a position to eliminate zorba from our product set by converting to more valuable products.

Now. Let me provide you with some additional detail on the implementation schedule and our expected returns.

The new equipment will be installed in at least five of our major facilities on both the East and West Coast of the United States and is expected to create additional operating leverage as we target further growth in volumes over the next few years. As our projected implementation schedule shows and subject to receipt of applicable permits and order lead-times, our installations will take place in three phases.

The clean copper recovery installations will come first and continue a roll out we started in 2018 within our operations in the Southeastern U.S. We will be installing new clean copper equipment on both the West and East course and expect to complete our rollout by the fourth quarter of fiscal '20.

The second phase will be the rollout of advanced metal recovery equipment in four of our major export facilities. These installations will replace and upgrade our existing downstream processing and take place during the second half of fiscal 2020 and first half of fiscal 2021. And the third phase will be new heavy media zorba separation plants on both the East and West coasts which we expect to install during the second half of calendar year 2020.

We expect our aggregate investment to be in the range of $75 million to $85 million with $10 million already spent in fiscal '19, approximately $50 million of the remainder to be spent in fiscal '20 and the balance of the total in the first half of fiscal 2021.

The fiscal year 2020 amount for the advanced metal recovery and product enhancement projects will be the primary component of total expected growth capital expenditures of around $60 million in fiscal 20. This amount also includes investments to support volume growth and for platform expansion.

Once the new non-ferrous technology is fully implemented, we expect the benefit to operating income to be at least $8 per ferrous ton. We also expect to be achieving a run rate of around half of that amount by the end of fiscal 2020. The return on investment is expected to be significantly in excess of our cost of capital with an average payback of less than three years once we commence full operations with the new equipment in place.

In addition to our growth investments, we also expect to invest in the range of $65 million during fiscal '20 on capital expenditures for maintaining the business and on environmental capital projects.

In summary, our strong balance sheet provides us with the opportunity to invest in major growth capital projects at the same time as investing in necessary capital expenditures to maintain our business.

I'll now turn the presentation back over to Tamara.

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Tamara Lundgren, Schnitzer Steel Industries, Inc. - President & Chief Executive Officer [5]

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Thank you, Richard. As one of North America's largest metals recyclers, sustainability is at the core of what we do and how we operate. Advancing sustainable business practices and further integrating sustainability throughout our operations are key components of our long-term strategy. In fact, the advanced metal recovery technologies that you've just heard about have enormous sustainability benefits - most importantly, the ability to divert metals, which would otherwise go to landfills, reduce energy usage and increase the amount of recycled metals used in metal production.

Our commitment to sustainability is broad and also encompasses our commitment to delivering value to our customers, investing in our employees, dealing fairly and ethically with our suppliers, supporting the communities in which we work and generating long-term value for shareholders. We expect to publish our next sustainability report later this fall which will include a number of multi-year sustainability goals focused on our people, our planet and our profits.

So now let's turn to Slide 18 to conclude.

As you've heard this morning in the fourth quarter and for the full fiscal year we delivered a strong set of financial results despite challenges in both the non-ferrous and ferrous markets. Our performance can be attributed to the steps we have already taken and steps which are currently underway to continually improve our business performance.

While near-term market conditions are challenging, we have in place strategic initiatives to deliver growth. We expect our expanded productivity improvement program to deliver savings beginning in the second quarter and our advanced metal recovery investments to deliver benefits beginning in the second half of fiscal 2020. These initiatives together with our organic volume growth and sales diversification targets should improve our margins and enable us to continue our track record of delivering strong operating cash flow through the cycle, providing us with additional opportunities to grow and to return more capital to our shareholders. With the demand for recycled metals underpinned by multiple positive trends, the long-term outlook is strong.

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. 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 continue to be a leader in our communities and the recycling industry.

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

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions) And our first question comes from Tyler Kenyon from Cowen. Your line is open.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [2]

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Hey, good morning. So, Richard, I just wanted to be sure I heard you right, did you say breakeven, profitability in AMR, in the first fiscal quarter?

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Richard Peach, Schnitzer Steel Industries, Inc. - Senior VP, CFO & Chief of Corporate Operations [3]

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Yes, Tyler. And that includes negative $8 per ton expected impact from average inventory accounting.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [4]

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Okay. And is there -- is there any way to parse out how much of this compression quarter-over-quarter is transitory more or less just a function of spread compression because of what the cost is in inventory versus selling prices. I know you have the $8 per ton impact from average inventory accounting but just trying to think if there are any other transitory margin compressing factors that should revert moving into the fiscal second quarter?

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Richard Peach, Schnitzer Steel Industries, Inc. - Senior VP, CFO & Chief of Corporate Operations [5]

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Yes, Tyler. If you look at our fourth quarter AMR profit of $22 million compared to the breakeven we're expecting in Q1, you can really split what's happening here into four components. The first is the accounting effect of average inventory accounting which will be about a quarter of that change in total and of course that's a temporary factor that works its way out. Then we have the cyclical effects of the impact of lower ferrous volumes that we expect and the impact on spreads from the lower prices -- the drop in prices that we've talked about and together these are about half of the total change. And then the last thing is the continued drop in zorba prices, which is more structural in nature and which we are addressing through our new technology program.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [6]

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Okay, that's helpful. And with respect to zorba pricing lately, curious as to whether there is any way to determine if some of the recent labor issues with GM and some of what's been going on in the automotive sector here within North America are perhaps weighing on that, the pricing environment?

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Tamara Lundgren, Schnitzer Steel Industries, Inc. - President & Chief Executive Officer [7]

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What I would say with the GM situation is I don't think that has been a huge impact for what we've seen as a trend but if you look at overall auto production globally it is down significantly in Asia. It's down significantly in India and obviously it's down in the US. So that has been a big depressant if you will, on zorba prices.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [8]

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Okay and then just last one for me. With embarking on some capital expenditure programs here is there any way to couch exactly what you're thinking CapEx will look like in fiscal 20 and moving into fiscal 2021 at this stage?

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Richard Peach, Schnitzer Steel Industries, Inc. - Senior VP, CFO & Chief of Corporate Operations [9]

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Yes. Tyler we expect in fiscal 20 to be spending around $60 million on growth capital projects including and $50 million on our technology projects. And as you know, as we've said, we expect these technology projects to have returns well in excess of our cost of capital and have a short payback of less than three years. And in addition to that, we expect to spend $65 million of capital expenditures in 2020 on maintaining the business and environmental capital projects.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [10]

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Okay, so $125 million in fiscal 20.

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Richard Peach, Schnitzer Steel Industries, Inc. - Senior VP, CFO & Chief of Corporate Operations [11]

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Yes.

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Tyler Lange Kenyon, Cowen and Company, LLC, Research Division - VP of Industrials and Metals and Mining and Senior Equity Research Analyst [12]

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Okay, thanks very much. That's it from me.

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Tamara Lundgren, Schnitzer Steel Industries, Inc. - President & Chief Executive Officer [13]

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Thank you.

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Operator [14]

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Thank you. (Operator Instructions) And I am showing no further questions from our phone lines and I'd like to turn the conference back over to Tamara Lundgren for any closing remarks.

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Tamara Lundgren, Schnitzer Steel Industries, Inc. - President & Chief Executive Officer [15]

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Thank you, Crystal, 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 in January when we report our first quarter fiscal '20 results. Thank you.

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Operator [16]

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Ladies and gentlemen thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.