SCHN 2017 Annual Report

SCHNITZER STEEL INDUSTRIES, INC. 11 / Schnitzer Steel Industries, Inc. Form 10-K 2017 Strategic Focus Use of our Operating Platform to Meet Both Domestic and Global Demand Our operating platform includes a wide-ranging network of locations that allows us to diversify our sales by directly accessing customers domestically and around the world to meet demand for recycled metal wherever it is greatest. Our seven deep water terminal facilities enable us to bulk load large vessels capable of trans-oceanic shipments, thereby allowing us to efficiently ship products globally.We achieve cost efficiencies becausewe own themajority of these terminal facilities, which reduces the likelihood of berthing delays often experienced by users of unaffiliated terminals, and because we are able to ship bulk cargoes of up to 50,000 tons, which generally have lower freight costs on a per-ton basis than containerized shipments that hold 20 to 30 tons per container. We also use an internal and third-party logistics network to transport both ferrous and nonferrous metals by truck, rail and barge to efficiently meet regional domestic demand in our North American market. Integrated Operations Maximize Opportunities for Synergies, Cost Efficiencies and Volumes We have historically focused on, and will continue to emphasize, continuous improvement programs, including productivity initiatives and technology investments which seek to maximize ferrous and nonferrous scrap metal recovery and to improve productivity in our steel manufacturing operations. The objective of these programs is to identify areas in existing processes that could be made more efficient, or where current performance could be improved, and to recommend and implement solutions that could increase revenues or reduce costs by increasing output, recovery and productivity. In recent years, we undertook a number of productivity improvements and restructuring initiatives designed to reduce operating expenses and improve profitability, including further integration among our operating platforms. In fiscal 2012, we implemented restructuring initiatives which achieved a reduction in annual pre-tax operating costs of $25 million and were completed by the end of fiscal 2013. In fiscal 2014, we implemented productivity improvement and restructuring initiatives which achieved a reduction in annual pre-tax operating costs of $40 million and were completed by the end of fiscal 2015. In fiscal 2015, we initiated and implemented restructuring initiatives including idling underutilized metals recycling assets and closing seven auto parts stores to more closely align our business to the prevalent market conditions. We also implemented measures focused on further reducing our annual operating expenses through headcount reductions, reducing organizational layers, consolidating shared services functions and other non-headcount measures. Additional cost savings and productivity improvement initiatives, including additional reductions in personnel, savings from procurement activities, streamlining of administrative and supporting services functions, and adjustments to our operating capacity through additional facility closures, were identified and initiated in fiscal 2016 as an expansion of the fiscal 2015 restructuring initiatives. Together, these fiscal 2015 and 2016 initiatives targeted an improvement in annual pre-tax operating results of approximately $95 million. In fiscal 2017, we achieved the approximately $95 million in combined benefits related to these measures, compared to $78 million and $28 million of benefits in fiscal 2016 and 2015, respectively. In total, we have achieved approximately $160 million in combined annual benefits to operating performance since announcing the initial phase of these cost savings and productivity initiatives at the end of fiscal 2012. See Note 8 - Discontinued Operations and Note 10 - Restructuring Charges and Other Exit-Related Activities in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for further details. In the fourth quarter of fiscal 2015, we combined our auto parts and metals recycling businesses into a single operating platform, AMR, to further optimize the efficiencies within the platform, enable additional synergies to be captured throughout our supply chain and global sales channel, and more effectively leverage our shared services functions. In the fourth quarter of fiscal 2017, we combined our steel manufacturing operations with our Oregon metals recycling operations, forming CSS, which is intended to enhance our flexibility, generate internal synergies, and enable us to more effectively adjust to market changes across our recycling and steel manufacturing operations. Through our integrated platforms, we seek to generate operational efficiencies through the use of regionally-based supply networks, automation, enhanced logistics, and national commercial market activities. During fiscal 2017, 2016 and 2015, we spent $45 million, $35 million and $32 million, respectively, on capital improvements. These capital expenditures primarily reflect our significant investments in modern equipment to improve the efficiency and capabilities of our businesses in order to further maximize our economies of scale and to comply with environmental regulations. Our capital expenditures in fiscal 2017 included costs to upgrade our equipment and infrastructure and expand on our investments in environmental and safety-related assets. We currently plan to invest in the range of $55 to $70 million in capital expenditures on similar projects in fiscal 2018, including approximately $20 million on environmental projects.