Defying the Odds

Portland, Ore.-based Schnitzer Steel Industries Inc. can be considered a standout among many publically traded metals recyclers. While Sims Metal Management and Metalico ended 2010 basically flat compared with the start of the year, Schnitzer posted a 177 percent increase in income for continuing operations in 2010.

The company has caught the attention of Motley Fool contributor Christopher Barker, who writes in a Jan. 10 column, “I have taken a shining to Schnitzer Steel on the basis of a business model that extracts value at every step in the supply chain.”

The company’s performance is due in no small part to Schnitzer President and CEO Tamara L. Lundgren. She joined Schnitzer Steel in September 2005 as vice president and chief strategy officer. In April 2006 she was promoted to executive vice president, strategy and investments, and president of shared services. Before 2006 concluded, she was elected to the post of executive vice president and COO. In December of 2008, she took her current position as president and CEO.

Lundgren brings to her tenure at Schnitzer Steel experience in banking and finance as well as law. She has served as managing director at JPMorgan Chase in London as well as managing director at Deutsche Bank AG in New York and London. Before joining Deutsche Bank, Lundgren was a partner at the Washington, D.C.-based law firm of Hogan & Hartson LLP.

In an interview conducted in late 2010, Lundgren discusses taking her current role with Schnitzer as the bottom fell out of the world economy. She also talks about the company’s strategy going forward and her outlook for scrap metal markets in 2011.

Recycling Today (RT): You took the helm of Schnitzer Steel Industries during the third quarter of 2008 as our economy was becoming unhinged. What were your thoughts about assuming leadership at this time? What challenges did the decline in commodity prices present to you and the company heading into 2009?

Tamara Lundgren (TL): Schnitzer Steel has been in operation for more than a century, and my first priority was to make sure we stayed the course despite the commodity market turmoil. In 2005, we began an aggressive program to grow the platform through investments in technology and processes as well as acquisitions and we never wavered from that plan. We continued to make significant investments in capital expenditures and acquisitions while simultaneously establishing best-in-class metrics for our continuous improvement programs. It was a difficult time that I hope does not occur again, except for the fact that the worst of times tends to bring out the best in people, and that was certainly true of our 3,200 employees. Through their dedication and hard work, we made the necessary cutbacks in spending but managed to keep our vision and culture intact.

We still face headwinds from the weak U.S. economy and its impact on the cost and availability of raw materials, but our metals recycling business is driven by broad-based demand from the export markets and, in particular, infrastructure-related growth in our primary markets in Asia. Our fiscal 2010 performance demonstrated that our investments and commitment to operational excellence are generating returns which we believe will continue to expand profitability longer term.

RT: Schnitzer managed to double its operating cash flow in 2009 relative to 2008, despite the recession, reinvesting a good deal of it into the business. Why did you feel this was important and how have these investments positioned the company for additional growth?

TL: While we were not immune to exogenous shocks to the global financial system, our quick actions to reduce costs and to cut production output and purchase prices enabled us to generate strong cash flows and to strengthen our balance sheet. We continued to strategically invest in technology to improve operating efficiencies and also completed five acquisitions which expanded our access to supply and added additional deep-water export capability.

RT: Schnitzer has reported a 29 percent year-on-year increase in revenue in 2010 and a 21 percent year-on-year increase in revenue for the fourth quarter of 2010. What do you credit these increases to? Are they a sign of overall economic improvement or are they related to specific management decisions at Schnitzer?

TL: While the industry as a whole benefited from higher demand for scrap globally during fiscal year 2010, our financial performance is not just about better markets. It is a clear reflection of strategic alignment with higher growth export markets and our commitment to investment and continuous improvement programs.

Starting with our unique bi-coastal platform, which includes seven deep-water ports, we have the flexibility to deliver our product to wherever demand is greatest at any point in time. Second, our acquisition strategy enables us to enhance our supply networks, sourcing product at the earliest stage of disposal to minimize costs. Finally, our investments in technology enable us to maximize the recovery of valuable scrap through our collection and shredding operations.

RT: Of Schnitzer’s three business segments—metals recycling, auto parts and steel manufacturing—which holds the most growth potential in the next five years? What are the factors influencing that segment?

TL: Both our MRB (Metals Recycling Business) and our APB (Auto Parts Business) have significant roadway on which to accelerate their growth. MRB continues to expand its supply network in the United States through acquisitions and through investments in shredding and separation technologies, which improve the yield of processed scrap while reducing the amount sent to landfills. In addition, we have built a national nonferrous sales collection effort to augment our ferrous volumes.

APB has focused on a core self-service model and a retail strategy that is providing significant value-added performance. As we look to grow this highly profitable business, we anticipate balanced contributions from acquisitions and organic growth in key regions. The recent acquisition of six stores included four in our core Portland region as well as two in the highly populated Dallas-Fort Worth area where we had targeted growth.

RT: What benefits have you been able to realize by having these three integrated business units?

TL: We leverage the full cycle of the reclamation process—sourcing product through a wide network at the earliest stages of disposal, maximizing amount of valuable scrap recovered through our innovative shredding and sorting technologies and producing finished steel products with our own recycled scrap.

At the earliest stage, our APB generates multiple value streams for the end-of-life cars it purchases by selling used parts through its retail network, separating valuable nonferrous metals and core parts, and ultimately selling the crushed auto bodies to metals recyclers, such as our own MRB.

APB is the largest single supplier to our MRB business in California, but MRB also hosts it own network of 44 facilities that collect scrap within the continental U.S. as well as Alaska, Hawaii and Puerto Rico.

Finally, our Steel Manufacturing Business (SMB) sources 100 percent of the scrap metal it uses through our MRB to produce a wide range of products, including reinforcing bar (rebar), coiled rebar, wire rod, merchant bar and other specialty products. While the mill pays competitive export pricing for its scrap, it benefits from availability and proximity to our MRB, and the close relationship between the businesses helps MRB to improve the size and purity of the products it provides both to SMB and customers globally.

RT: Many steel companies are taking a vertically integrated approach to their businesses. How does your approach vary from your competitors?

TL: There is a fairly large misconception about our business—that we compete with the domestic steel companies. While we may have some similar aspects, such as our single steel mill, that segment reflects just over 10 percent of our consolidated sales. We are predominantly a metals recycling company with more than 70 percent of our sales exported to developing countries. Approximately 90 percent of our sales are generated by MRB and APB, which are not limited by the weak domestic market dynamics, benefiting instead from strong demand in the export markets.

Our integration is truly about getting closer to sources of supply, processing it more efficiently and with higher quality, and ultimately delivering it to wherever demand is greatest.

RT: What is the outlook for ferrous scrap markets heading into 2011? What role will China and other overseas consumers play in the market?

TL: We think we will continue to see demand strengthen as higher GDP growth in the world’s developing nations increases infrastructure and industrial demand. While we are not China-centric, their efforts to reduce dependence on iron ore imports and CO2 emissions both support increased demand for scrap, the availability of which is predominantly in the U.S. and Europe. Those drivers can be applied almost unilaterally as countries look to preserve natural resources and improve their environmental footprint.

RT: What is Schnitzer’s outlook for finished steel markets heading into 2011? Are there any bright spots in the area of domestic demand or do you expect it to remain weak?

TL: Unfortunately most predictions for domestic GDP growth remain below 3 percent in the near-term. While we can sustain our scrap inflows at that level and generate growth in our MRB and APB markets, it does not provide much positive momentum for traditional steel manufacturing, which is dependent on domestic demand. We see the longer-term horizon being brighter due to the planned stimulus projects which we believe will take hold eventually, but to date the rate of implementation has lagged the very public rhetoric.

RT: What influence did the Cash for Clunkers program have on your auto parts business? What is the outlook for this business segment in 2011?

TL: As government stimulus spending goes, this was actually a pretty good program for us. It drove higher car purchases for our APB during the first quarter of fiscal 2010, which we were able to maintain through the development of our supply channels, our retail focus, improved buying practices and acquisitions.

RT: What business concerns occupy your thoughts as we head into 2011?

TL: We continue to be concerned with the slow rate of recovery in the U.S., but we believe that the export markets provide a unique and compelling opportunity for growth in light of our geographic footprint and global sales reach.