Below is the Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) Q1 2015 earnings call transcript. The Schnitzer Steel Industries, Inc. reported overall performance and financial results for first quarter of fiscal 2015 ended November 20, 2014, including discussions on market trends, targeted productivity initiatives, business operations, capital structure, and strategic priorities for the year.
Schnitzer Steel Industries, Inc. (NASDAQ:SCHN) is a global leader in metals recycling industry with headquarters in Portland, Oregon with operations facilities in Puerto Rico, Hawaii, and Western Canada. Schnitzer Steel produces approximately 800,000 tons of finished steel annually, which is converted into rebar, wire rod, and other specialty products. This year, 2015, the Company celebrates its 110th year anniversary since it began its operations in 1906.
Host:
Alexandra Deignan – VP, IR
Company Representatives:
Tamara Lundgren – President, CEO
Richard Peach – CFO, SVP.
Analysts:
Timna Tanners – Bank of America Merrill Lynch
Sal Tharani – Goldman Sachs
Luke Folta – Jefferies
Brent Thielman – D.A. Davidson
David Lipschitz – CLSA
Phil Gibbs – KeyBanc
Andrew Lane – Morningstar
Operator
Good day, ladies and gentlemen, and welcome to the Schnitzer Steel First Quarter Earnings Release. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). Please note today’s conference is being recorded.
I would now hand the conference over to Alexandra Deignan. Please go ahead.
Alexandra Deignan, Vice President of Investor Relations
Thank you, Karen. Good morning, everyone. I am Alexandra Deignan, the Company’s Vice President of Investor Relations. Welcome to Schnitzer Steel’s first quarter 2015 earnings presentation. Thank you for joining us today. In addition to today’s audio comments, we have prepared a set of slides that you can access on our Web site at www.schnitzersteel.com or www.schn.com.
Before we get started, let me call your attention to the detailed Safe Harbor statements on Slide 2, which are also included in our press release of today and in the Company’s Form 10-Q, which will be filed later today. These statements in summary say that in spite of management’s good faith current opinions on various forward-looking matters, circumstances can change and not everything we think will happen always happens.
Please note that we will be discussing some non-GAAP measures during our presentation today. We have 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.
Tamara Lundgren, President, CEO
Thanks, [inaudible]. Good morning, everyone, and Happy New Year and welcome to our fiscal 2015 first quarter call. On our call today, we will take you through a review of our financial results. I will begin with some highlights and provide a perspective on market trends. I will also discuss the new cost reduction and productivity initiatives on our auto parts business that we announced this morning. Richard will then share with you further details on our segment operating performance and our capital structure. After that, we will open up the call for questions.
Let’s turn to Slide 4 to get started. This morning, we announced adjusted earnings per share from continuing operations of $0.08 for our first quarter. These results reflected improved performance in both our metals recycling and steel manufacturing businesses as compared to Q1 of fiscal 2014.
Before we go through the details, however, I think that it might be helpful to provide a bit of perspective on the quarter. Between September and November of this past year, ferrous export selling prices declined approximately $80 per ton, or 20 percent and ferrous domestic prices declined approximately $60 per ton or 15 percent. The market had not experienced this steep of a decline since 2012. Yet all three of our business segments generated positive operating income, largely due to benefits from their productivity initiatives.
Our metals recycling and auto parts businesses were both significantly impacted by the decline in ferrous selling prices. This resulted in an adverse impact from average inventory accounting, which we have estimated to be approximately $0.23 per share and which offset the benefits of productivity improvements and cost savings. In our steel manufacturing business, we continued to benefit from strong demand in the West Coast construction markets. SMB more than tripled its first quarter operating income versus last year.
We are continuing to take steps to improve business efficiency and reduce our cost base across our organization. We delivered ahead of schedule on our previously announced savings initiatives in our metals recycling business and we have identified further savings in our auto parts business, which should lead to improved financial and operating performance. We now anticipate annual benefits of $14 million in APB, which is up from the $7 million we previously announced. We believe these actions will continue to enhance our performance and should provide greater opportunity for margin expansion.
Now let’s turn to Slide 5 for a more detailed look into the ferrous pricing trends. This slide sets forth the publicly reported general market selling prices for ferrous scrap. As you can see, ferrous scrap prices remained fairly steady through the summer, which coincided with our fiscal year-end. From September through November, however, average ferrous export selling prices declined approximately 20 percent as global demand weakened, largely driven by the high volumes of low-priced steel exports from China, sluggish global growth, and a stronger U.S. dollar. Domestic selling prices were influenced by these softer export prices and declined approximately 15 percent during our first quarter, but maintained a premium over export prices due to stronger economic conditions in the U.S.
If we turn to Slide 6, we can review U.S. ferrous export volume. Looking at the left bar chart on this slide, you can see total U.S. ferrous exports declined 16 percent during the last 12 months, which was more than the decline in our own export volumes. Over the last 12 months, our total sales volumes dropped by just 6 percent, as we offset the decline in export sales with an increase in our domestic sales. In the last 12 months, our domestic shipments represented 33 percent of our total shipments, our highest level since 2008.
So let’s turn now to Slide 7 for a review of our quarterly sales activity. As you can see on the left bar chart, during our first quarter stronger domestic demand also offset weaker export demand. In the center pie chart, you can see the balanced distribution of our sales volume among Asia, the Mediterranean, and the domestic U.S. Including ferrous and non-ferrous products, we shipped to 16 countries this quarter. Our top ferrous export destinations were Turkey, Egypt, and Thailand. Our top non-ferrous destinations were the U.S., China, and South Korea. The right-hand bar chart shows that our non-ferrous volumes in Q1 were up year-over-year by 3 percent, reflecting higher non-ferrous extraction yields and timing of shipments.
So now let’s turn to Slide 8, and I’ll review the highlights of our progress on our productivity and cost-reduction initiatives.
In fiscal 2014, you will recall that we announced a $40 million productivity and cost-savings initiative, which was primarily focused on MRB and was scheduled to be achieved by the end of fiscal 2015. We have delivered on our target ahead of schedule. As you can see on the graph, we maintained a quarterly run rate of $10 million in benefits in the first quarter of 2015. Last quarter, we announced a productivity initiative in our auto parts business that was targeted to achieve annual savings of $7 million. Today, we are announcing an increase to this target of an additional $7 million, for a total annual benefit of $14 million. The completion of these initiatives is expected to yield higher earnings and increased efficiencies by centralizing and streamlining field support activities, reducing organizational layers, and achieving cost reductions.
The initiatives announced today are expected to reduce annual SG&A costs by $7 million. We anticipate a workforce reduction of approximately 4 percent of APB’s headcount and a restructuring charge of approximately $2 million. We expect to realize 50 percent of the annualized $14 million of savings by the end of fiscal 2015 and full realization of annualized savings during fiscal 2016. So now let me turn it over to Richard for an update on our operating segment performance and our capital structure.
Richard Peach, CFO, SVP
Thank you, Tamara. I will begin with a review of MRB’s performance on Slide 9. Ferrous sales volumes of 938,000 tons were slightly down year-over-year and 14 percent less than the fourth quarter of fiscal 2014. The sequential decrease was driven by the weaker export demand and the impact of the lower price environment on scrap supply. Compared to last year, exports were down by 8 percent, with total sales volumes only down by 4 percent due to a higher proportion of domestic sales.
Although the high to low on ferrous selling prices fell by $80, the average net selling price in the first quarter of $328 per ton was only down by $23 per ton sequentially. Our ferrous revenues are recognized on a shipped basis, so our first quarter average net selling price includes the beneficial impacts of selling some cargos at the higher prices which we saw in August and September. Generally, we are making sales for shipment four to six weeks after the order date.
Non-ferrous sales volumes of 127 million pounds were up 3 percent from the prior year quarter, but down by 18 percent sequentially mainly due to the adverse impact on production of lower ferrous volumes. The average net selling price for non-ferrous was in line sequentially but down by 4 percent year-over-year consistent with the general drop in commodity markets.
MRB’s adjusted operating income in the first quarter was $8 million or $8 per ton. These results represented an improvement on last year’s first quarter, mainly due to the continued implementation of MRB’s productivity improvements, which totaled $7 million in the quarter. The adjusted results excluded the adverse impact of $6 million arising from the resale or modification of certain previously contracted ferrous bulk shipments for delivery in the first quarter. The last time this happened was back in 2008 when the market collapsed. So the non-GAAP adjustment within our results is intended to provide comparability with other reporting periods and to give more insight to our overall performance in the quarter.
On a sequential basis, the substantial drop in ferrous markets also led to a significant impact from average inventory accounting. Even though we reduced our purchase prices for raw materials, both our reported and adjusted results include an estimated $7 million adverse impact of average inventory accounting, which was the main reason that our adjusted results were different from our fourth quarter.
It is important to note that because we have a high focus on managing our inventory turns and our buy program to quickly adjust to market changes, we did not incur a significant inventory valuation charge despite the large market drop. The productivity benefits in MRB’s results are arising from a combination of a 12 percent year-over-year reduction in the MRB’s headcount, the elimination of management layers, increased use of shared services, cutting transportation costs, and more efficient yard processes, which has reduced both overtime and use of outside contractors. The improvements are split between cost of goods sold and MRB’s SG&A, which in fiscal 2014 was down by 10 percent on the previous fiscal year. MRB’s productivity contribution was the majority of the $10 million consolidated total for the quarter, with the remaining $3 million of this total between our other two business segments and corporate.
Now moving to Slide 10, let’s turn to our steel manufacturing business. SMB continued to deliver higher performance year-over-year on improving demand in West Coast construction markets, which drove 4 percent higher average selling prices and continued contributions from productivity initiatives. Operating income of $6 million was $4 million higher year-over-year due to improved gross margins, driven by the strength in demand and a bad debt of $1 million in last year’s results.
Sales volumes of 127,000 based in tons were in line with the prior year first quarter but lower sequentially due to a planned maintenance outage. Rolling mill utilization in the quarter was 72 percent, up significantly from 65 percent in the prior year quarter.
Now let’s move to our auto parts business on Slide 11. Auto parts continued to generate strong car purchase volumes in Q1 of 97,000, up 7percent year-over-year on benefits from ramping up new stores and organic improvements. However, the sharply lower commodity prices had a significant impact on the first quarter results. Operating income was $2 million, compared to $6 million in the same quarter last year. Of the difference, $2 million was due to the estimated adverse impact of average inventory accounting, with the balance due to further margin compression arising from the lower price environment.
Compared to the fourth quarter, the lower results were due to the average inventory accounting effects, lower commodity prices, and a drop in parts sales. As we noted in the fourth quarter of fiscal 2014, we launched a major new productivity initiative in APB of $7 million focused on increasing our operating efficiency and improving our car yields. Since then, we have identified additional savings of $7 million focused on reducing SG&A, where we are aiming to achieve part-year savings of more than half in the remainder of this fiscal year. Of the SG&A savings amount, around two-thirds will come from headcount reductions, with the balance from non-car procurement areas including transportation, fuel, supplies, and marketing.
Now moving to Slide 12, I will discuss our capital expenditures and net debt. Capital expenditures in our first quarter were $10 million covering mainly maintenance, environmental, and safety-related projects. For fiscal 2015 as a whole, we expect CapEx to be no higher than fiscal 2014, which was $40 million. As of the first quarter, net debt leverage of 50 percent was approximately 200 basis points lower than the prior year first quarter due to strong working capital management and cash flow generation during fiscal 2014. In the first quarter of fiscal 2015, operating cash flow was a modest use of funds of $60 million due to timing of working capital movements. Now, I’d like to turn the presentation back over to Tamara for her summary remarks.
Tamara Lundgren, President, CEO
Thank you, Richard. While challenging market conditions prevailed during our first quarter, we continued to deliver on our goals. We completed our targeted savings initiatives ahead of schedule. We generated improved results year-over-year through productivity improvements. We maintained a strong balance sheet, and we returned capital to our shareholders through our quarterly dividend.
Our metals recycling business adjusted rapidly to changing market demand whether export or domestic, while offsetting price and volume headwinds with productivity initiatives and a restructured cost base. Our steel manufacturing business generated substantially higher year-over-year quarterly performance due to higher selling prices, increased rolling mill utilization, and contributions from productivity improvements.
As we look ahead, we are continuing to take steps to improve business efficiency and restructure our cost base across our organization. In our auto parts business, we have identified further savings initiatives and these actions are expected to yield improved performance. In our metals recycling business, we are taking steps to further reduce variable production costs in order to mitigate the current impact on volumes from the lower price environment.
In our steel manufacturing business, we expect to further optimize our performance with higher utilization levels from improving U.S. non-residential construction activity. Market conditions are expected to remain challenging in fiscal 2015. Our diligent focus on capital spending and maintaining a strong balance sheet will continue to provide a strong foundation for our shareholders, generating greater returns from our business, and consistent capital returns to our shareholders through our quarterly dividend.
Once again, thank you to everyone on the Schnitzer team for your continued focus on operational excellence and for making our Company a safe and productive place to work each and every day. Operator, let’s open up the call for questions.
Question and Answer Session:
Operator
Certainly. Ladies and gentlemen, if you have a question at this time, please press star (*) followed by the number 1 key on your touchtone telephone. If your question has been answered of if you would like to remove your line from the queue, you may press the pound (#) key. Again, if you do have a question, please press star (*) and then 1 at this time.
Our first question comes from the line of Timna Tanners from Bank of America Merrill Lynch.
Timna Tanners, Bank of America Merrill Lynch
Yes. Hey, good morning.
Tamara Lundgren, President, CEO
Good morning.
Timna Tanners, Bank of America Merrill Lynch
Okay. I just want to take a step back and talk about the export market a little bit and that’s always been Schnitzer’s bread and butter in terms of the primary business of exporting scrap. Shifting this quickly back to the domestic market has been a great way to hold onto volumes and I get it. But I’m just wondering, what does this mean for the Company’s business model? Is this something you can continue to do? How much more? Given the strong dollar and the competitiveness of iron ore, I am just wondering how you envision your business model going forward in terms of export versus domestic sales of scrap.
Tamara Lundgren, President, CEO
Well, I think the core fundamental of the business and the sector in general is that it’s a spread business. So export demand exists. The level of demand and prices is what changes from time to time, and we are a spread business. So we adjust prices for demand in connection with currency movements and in connection with volumes, and that’s what enables us to maintain positive cash metal spreads.
So I think that what we have shown over the last year is a flexibility to adjust the model and to serve domestic demand. As the U.S. economy continues to strengthen and you look at things like our steel manufacturing business, where utilization is 72 percent right now, so there is a fair amount of runway left going into a continued strengthening non-res market and also a market that may be responsive to infrastructure investment, which looks to be a best idea in Congress on the part of both parties and the President. I think that you should anticipate that we have got the opportunity to continue to increase the proportion of domestic sales.
Timna Tanners, Bank of America Merrill Lynch
Okay, that’s helpful. But I guess I was just trying to make sure I understand. Schnitzer in the past had avoided the domestic market and clearly tables have turned in a couple ways. So is it possible to see similar margins in the domestic market or attractive enough margins to make that switch?
Tamara Lundgren, President, CEO
I guess the way I would respond to that, Timna is I wouldn’t say that we avoided the domestic market. We sell where demand is strongest and prices are most beneficial. So right now the domestic market has a premium to export. So we are optimizing and maximizing domestic demand as a result of that. That’s how I would look at it as opposed to avoidance. We ship to where demand is greatest and where we can make the most money.
Timna Tanners, Bank of America Merrill Lynch
Okay. I will ask one more if I could and then get back in the queue. But on the MRB side and on exports, I asked some Chinese mill recently how their scrap mix was looking and they laughed at me. They just said, “We are not using scrap as much at all,” given where iron ore is and given that Chinese billet can be used in Turkey in lieu of scrap.
I’m just wondering, what are your customers saying about why they are still using scrap to the extent they are? Is there a need for it? Can they get by without it or is there a minimum level that they are still buying from you? Are you selling to blast furnaces at all or is it now just more electric arc furnaces? Thanks.
Tamara Lundgren, President, CEO
Well, as you know, blast furnaces can use up to 20 percent scrap and many of them arbitrage where where cost is most effective and yield is most effective, and it is driven by products that they are making. But our customers are buying scrap and EAS will use the scrap ore to the extent – billets from time to time. We’re selling scrap very consistently into EAS and into new markets as well as we expand our customer base.
Timna Tanners, Bank of America Merrill Lynch
Okay. Thank you.
Tamara Lundgren, President, CEO
Thank you.
Operator
Thank you. Our next question comes from the line of Sal Tharani from Goldman Sachs.
Tamara Lundgren, President, CEO
Good morning.
Sal Tharani, Goldman Sachs
Good morning. I want to understand this adjustment you have done for $6 million. Can you just explain to us again what was that about?
Tamara Lundgren, President, CEO
Sure.
Richard Peach, CFO, SVP
Yes, hi, Sal, it’s Richard here. What’s happened here is that the rapid drop in market prices has coincided with a couple of customers not honoring their commitments for certain bulk ferrous shipments where we had entered into contracts with them. As a consequence, we had to resell or reprice these cargos at a lower selling price. So the non-GAAP adjustment reflects the difference between the original price and the revised price. Because the last time this happened was actually as far back as 2008 when the market collapsed, we have made a non-GAAP adjustment to provide comparability with other reporting periods and to give more insight to our results and our overall performance in the quarter.
Sal Tharani, Goldman Sachs
What you are saying is that you had booked this at a different level – at a different price and then you finally shipped it at a lesser amount?
Richard Peach, CFO, SVP
We had expected it at the original contracted amount and eventually, we had to book it in our reported results at the revised, lower amount. So we have made a non-GAAP adjustment for the difference so that we can provide more of an insight to our overall results.
Sal Tharani, Goldman Sachs
So your fourth quarter result of $16 per ton operating income – I forgot what the number was $15 – did not have that – what I mean is should we correspondingly deduce your fourth quarter 2014 number by that amount because you had already…?
Richard Peach, CFO, SVP
No, no, no. These were contracts for shipment during the first quarter and we actually did still ship the tons during the fourth quarter – during the first quarter, rather. So both the original contract and the revised contract were within the first quarter, so there is no impact on fourth quarter numbers.
Sal Tharani, Goldman Sachs
Yes, because I’m a little confused. You expected to sell at a certain price, yet you sell it at a lesser price. Why would we adjust it? I just don’t understand that…
Richard Peach, CFO, SVP
Well, it’s because we’re adjusting it to provide comparability with previous reporting periods because, as I said, the last time this happened was as far back as 2008, which was a very long time ago. So it’s really an adjustment for comparability and to provide insight to our overall performance in terms of our expected and actual revenue trends.
Sal Tharani, Goldman Sachs
Got you. So we should not really add it back to your EPS number, should we? Because this was just an expectation versus what is realized? I know…
Richard Peach, CFO, SVP
We have added it back to our EPS number. Remember, we buy behind these sales, so we had an expectation of a level of profitability on those sales that was built into our expectations for our performance for the quarter. That did not happen so we are showing our results both on the reported and the adjusted results because remember these were actual sales contracts and purely our own internal expectations. The customers did not honor the commitments that were within these contracts.
Sal Tharani, Goldman Sachs
Okay, I understand. Thank you very much.
operator
Thank you. Our next question comes from the line of Luke Folta from Jefferies.
Tamara Lundgren, President, CEO
Good morning.
Luke Folta, Jefferies
Hi, good morning. First question I had was on APB margins, just trying to get a sense. If you add back the average inventory impact for the quarter, you still had a pretty – a sequentially weaker margin in that business. I was just hoping you can give us some more color on what’s going on there. Is it more of commodity prices have come down, non-ferrous prices have come down so you are extracting less value from what you are processing there or parts? Or is it more a function of competitive dynamics, getting the cars?
Richard Peach, CFO, SVP
There is two issues going on there, Luke, and you pointed out both of them. You are correct that sequentially, our operating income did reduce. It was $5 million in Q4 and it was $2 million in Q1 for auto parts. Of that difference, $2 million is the adverse impact of average inventory accounting. Because the market was falling so quickly, we were reducing our purchase costs for cars. But the average inventory cost that goes into our cost of goods sold lagged behind the reduction in cash purchase prices, about $2 million of it. The remainder of it is compression in cash metal spreads as a consequence of the lower ferrous and non-ferrous prices in the first quarter. So these are really the two reasons why the first quarter results are different from the fourth quarter results.
Luke Folta, Jefferies
Okay. The compression in spread is that more of – sort of an ongoing competitive dynamic, as opposed to…?
Richard Peach, CFO, SVP
It’s related to the lower price environment. When prices go down this low, it does affect the flow of vehicles, so even though – and you can see that compared to the fourth quarter, our car volumes are slightly down compared to the fourth quarter, so that it’s the impact of the overall lower price environment on cash spreads due to the flows.
Luke Folta, Jefferies
Okay. So it’s kind of similar to what happens in MRB when the offer prices come down, less cars come to the market?
Richard Peach, CFO, SVP
Yes, that’s correct.
Luke Folta, Jefferies
Okay. All right. Then on CapEx – so $40 million looks like the number for this year. I guess what happens at a $40 million CapEx run rate in terms of is that – is $40 million just covering the maintenance? Not covering the maintenance? Does that include a little bit of growth investments in there? I’m just trying to think about what happens internally at that sort of investment level.
Richard Peach, CFO, SVP
Yes. The $40 million is primarily focused on maintenance CapEx and environmental projects and safety-related projects. We are satisfied that at that level that includes our critical needs for maintaining our asset base.
Tamara Lundgren, President, CEO
There’s some small growth projects that are included in there, but the big difference between that level, which was last year’s and this year’s and what you have seen in previous years were the significant shredder activity that – your new CapEx, new growth projects.
Luke Folta, Jefferies
Okay. So conceivably, this is a level of CapEx that could be perpetual, if you want it to be.
Tamara Lundgren, President, CEO
Yes, yes, ex-large growth projects.
Luke Folta, Jefferies
Okay. All right. Then just lastly, just on steel – it’s a little early in the year, but I guess any insight in terms of backlogs and how this year’s construction season might be starting to look?
Tamara Lundgren, President, CEO
Well, the order books from our customers look strong. The non-res construction market in the West Coast continues to strengthen, and the possibility of an infrastructure program looks more and more likely as that’s fundamentally on the short list of best ideas for both parties in Congress in both houses of Congress and the President. So we think that the markets in which we operate on the West Coast for steel demand is quite strong.
Luke Folta, Jefferies
Okay. All right, if I could slip in one more, just on imports. I meant to ask on rebar. You benefited some from the Mexican case. I think you said last quarter maybe some of the other countries are starting to creep in that market, though, just sort of to take their place. Any color on what’s going on with that dynamic would be helpful. Thanks.
Tamara Lundgren, President, CEO
Well, the business on the West Coast, as well as nationally, is always going to be impacted by imports, but what you can see in the volumes and also in their productivity is that the demand on the West Coast non-res is offsetting impact from imports that have always existed and will continue to exist. The productivity initiatives – the productivity culture that has developed and taken hold in the steel manufacturing business is really leading to significantly improved performance. As I mentioned, year-over-year their operating income more than tripled.
Luke Folta, Jefferies
All right. Okay, thank you.
Tamara Lundgren, President, CEO
Thank you.
Operator
Thank you. Our next question comes from the line of Brent Thielman from D.A. Davidson.
Tamara Lundgren, President, CEO
Good morning.
Brent Thielman, D.A. Davidson
Richard, do you have an approximate dollar impact related to the outage on the quarter at Cascade?
Richard Peach, CFO, SVP
It was about $1 million.
Brent Thielman, D.A. Davidson
It was about the same last year as well?
Richard Peach, CFO, SVP
Yes.
Brent Thielman, D.A. Davidson
Okay, great. Then on auto parts, how would you characterize car purchase volumes without the help of these ramping new stores that you talked about?
Richard Peach, CFO, SVP
While car purchase volumes have held up very well in the auto parts business as a consequence of our business model there, our position, and our buying practices. So you can see that year-over-year, we have got this improvement, despite the lower price environment. You are correct to point out that part of it is the ramping up of new stores and the volumes for them, but there’s also, to a lesser extent, some organic improvements in there.
Brent Thielman, D.A. Davidson
Okay. Then as far as the cost-reduction program, I mean are you considering potential store closures included within that or would that be completely separate from what you announced today?
Tamara Lundgren, President, CEO
That would be separate from what we have announced. We obviously looked at the efficiency and efficacy of all of our operations on a regular basis. But if that were to happen, that would be separate from what we announced.
Brent Thielman, D.A. Davidson
Okay. Then just lastly, just given where the stock is today, how does share repurchases kind of fit within the capital allocation strategy right now?
Tamara Lundgren, President, CEO
Well, share repurchases and our quarterly dividend are the two main ways in which we deliver consistent returns to our shareholders. So we review that on a regular basis, and we have repurchase authority from the Board.
Brent Thielman, D.A. Davidson
Okay. Thank you.
Operator
Thank you. Our next question comes from the line of David Lipschitz from CLSA.
David Lipschitz, CLSA
Good morning, everyone, or good afternoon here
Tamara Lundgren, President, CEO
Good morning.
David Lipschitz, CLSA
Question following on from Timna’s question about the selling back into the domestic market. Historically speaking, obviously taking out the anomalies, do you take more on the export business in terms of your margins? So if you had to sell more here going forward as a business, that was the new lay of the land because of what’s going on in Asia and China especially? Would that mean the normalized margins would be lower than they had been in the last, say, 10 years, so to speak?
Tamara Lundgren, President, CEO
No, no, I wouldn’t think that at all. Again, we are a spread business. The flexibility of our platform allows us to meet demand wherever it is greatest, so we pursue all markets aggressively and direct our product to where it benefits the bottom line most effectively. So that means we look for and add new customers to the export market, we add new customers to the domestic market, and that’s true for both ferrous and non-ferrous products.
David Lipschitz, CLSA
But if you are buying here and then selling back into here, it’s just not – the spread is still similar to what – the spread I’m not saying is similar to what an export is, but you still can make as much as you did when export was booming to Asia and things like that?
Tamara Lundgren, President, CEO
At the end of the day, it all depends upon where prices selling prices are, how robust the U.S. economy is in terms of generating scrap because, remember, scrap can’t just be mined. Its existence is driven through consumer demand and industrial production. So it’s a combination of factors that drive metal spreads at any point in time.
David Lipschitz, CLSA
Okay. Then, a follow up question on the steel business. We have seen hot roll prices go down significantly. Rebar really hasn’t moved much. For the West Coast, in terms of prices, have prices held up? I know demand is strong, but have prices held up? Are you seeing any pressure on prices out there?
Operator
Thank you. Our next question comes from the line of Phil Gibbs from KeyBanc.
Phil Gibbs, KeyBanc
Good morning. Hello?
Operator
Your line is still connected, one moment. Ladies and gentlemen, we will now resume. Our next question comes from the line of Phil Gibbs.
Tamara Lundgren, President, CEO
But we have – we lost…
Richard Peach, CFO, SVP
Dave Lipschitz.
Tamara Lundgren, President, CEO
Yes. Dave, we will put you back in the queue. Good afternoon, good morning, Phil. We are not sure what happened. But we were disconnected.
Phil Gibbs, KeyBanc
I’m here.
Tamara Lundgren, President, CEO
Okay.
Phil Gibbs, KeyBanc
Good morning. Thanks for taking my other question. I have strong execution in a very tough environment.
Tamara lundgren, President, CEO
Thank you.
Phil Gibbs, KeyBanc
Question just on thoughts about rationalizing your export footprint to the extent that the demand environment stays weak for exports. I know that Sims has got some aggressive new management in place and maybe have taken some of their projects off the drawing board or scrutinized them a little bit more about adding capacity, just where that might fit in your thought process moving forward.
Tamara Lundgren, President, CEO
I am not sure I follow your question. What are you asking?
Phil Gibbs, KeyBanc
I’m asking about the potential for some of your facilities on the export side to be rationalized, given the fact that export demand is tepid. Also in light of the fact that I think Sims has more aggressive management in place now and they might not be as aggressive in looking to expand their business domestically.
Tamara Lundgren, President, CEO
Phil, we review the effectiveness, efficiency, and metrics of our projects – of our facilities on a very regular basis and that is what has driven the productivity initiatives and the very disciplined cost reduction moves that we have made over the last couple of years because we want to maintain the position of being the low-cost producer in all of the regions in which we operate.
So we have been quite disciplined, focused, and aggressive in making sure that we can effectively adjust our variable production costs and our metal margins in this business. So we don’t have plans to take out capacity. We have done a lot of work in restructuring our cost base and our focus has been on reducing fixed costs, adjusting resource levels, and shift schedules to match volumes. We have done portfolio optimization by adjusting asset and equipment utilization, and we’ve put a big focus on those assets that we believe can improve their performance.
So we’re not looking to take any of our major facilities offline. We were not in the position where we had shredders competing against each other, nor were we in the position where we were putting in new shredders that were going into markets that had a lot of capacity. Sso for example, if you look at our southeast region, we have never put a shredder in there because we thought that region of the country was over served by shredders.
Phil Gibbs, KeyBanc
Okay. I appreciate it and then just a couple follow-ups, if I may. As far as your outlook for net working capital or inventory levels moving into your next couple of quarters because I don’t know if your inventory is built this quarter, but certainly your cash went down a bit, so any color you could provide there?
Richard Peach, CFO, SVP
Yes. Hi, Phil. It’s Richard. Overall, our inventory levels are low, so we have been – we have got a strong focus on matching or buying to our selling and not building inventory levels and what is a fairly volatile market. So we have had very tight management of our working capital and our inventory. In fact, that’s one of the reasons why we do not have any significant inventory charges despite this very large drop in the market because we have been managing our inventory turns and our buy program very, very carefully to adjust to the market changes.
After seven quarters in a row of positive operating cash flow, in the last quarter – you are correct. We did have a modest use of funds of about $16 million. That is mainly just due to the timing of working capital movements. I think we have shown over time a strong track record of positive operating cash flows in good markets and in tough markets. I would expect as we move forward throughout this fiscal year that we will have some positive operating cash flow in the quarters to come, but we remain very focused on disciplined working capital management.
Phil Gibbs, KeyBanc
Okay. Tamara, wasn’t it the port congestion issues on the West Coast some of the demurrage that we were reading about? Did that impact you guys in the quarter?
Tamara Lundgren, President, CEO
Well, things are moving more slowly on the West Coast, but container shipments off the West Coast as a part of our whole portfolio is really quite small. So you wouldn’t really see it in our results, but things obviously are moving more slowly there.
Phil Gibbs, KeyBanc
Okay. Then just last one, Richard, on the resale or modification of the contract. Any insight you could provide us on how much volume was involved in that deal? Thanks.
Richard Peach, CFO, SVP
Well, the volumes are still in our results, so it was just really related to a small number of contracts with a couple of customers, but it didn’t affect the volumes in the quarter at all. It was really the pricing.
Phil Gibbs, KeyBanc
Yes, I just – you still there, Richard?
Richard Peach – CFO, SVP
Yes, I am.
Phil Gibbs, KeyBanc
I was just asking about how much – I realize that it was in the numbers, just asking how much of the volume was impacted. Thanks.
Richard Peach, CFO, SVP
It really was a small number of shipments, less than a handful.
PHIL GIBBS, Keybanc
Thank you.
Operator
Thank you. We will now resume our questions from David Lipschitz.
Tamara Lundgren, President, CEO
David, sorry about that. We’re not sure what happened.
David Lipschitz, CLSA
That’s okay. That’s okay. I’m used to it by now. I was just asking about – I know demand for non-res and infrastructure seems to be okay. I was just wondering with prices I know for hot roll has fallen, rebar has been more stable a little bit. Obviously, it’s down from first half of last year. I was just wondering in terms of pricing, are you seeing any pressure on prices coming into this quarter?
Tamara Lundgren, President, CEO
Well, again, there is always seasonality, obviously, but generally speaking, our customer order books are strong and the macro environment on the West Coast for non-res construction and infrastructure we see as strong.
David Lipschitz, CLSA
Okay. Thank you.
Tamara Lundgren, President, CEO
Thank you.
Operator
Thank you. Our next question comes from the line of Andrew Lane from Morningstar.
Andrew Lane, Morningstar
Hi, all, good morning.
Tamara Lundgren, President, CEO
Good morning.
Andrew Lane, Morningstar
You mentioned a capacity utilization increase for the SMB from 65 percent to 72 percent year-over-year, but it looks like shipment volumes were flat over that time period. This would seem to indicate you have reduced your production capacity. Is that accurate or is there something else at play here like a temporary capacity adjustment related to an outage?
Richard Peach, CFO, SVP
No, there’s no temporary – actually, what was happening here, Andrew, is that utilization will naturally change from quarter-to-quarter and even though our volumes were flat compared to last year’s Q1, but our utilization was up, the reason the utilization is up slightly is related to a generally stronger order book, so that higher production is probably already sold in the month of December.
Andrew Lane, Morningstar
Okay, understood. Then on a separate topic, I am curious if you could comment on the impact of falling oil prices on the scrap market and specifically on the supply side. As the U.S. rig count declines, would a large-scale decommissioning of oil and gas rigs add a meaningful quantity of scrap to the overall market or would this most likely not move the needle in terms of scrap availability in the coming quarters and months?
Tamara Lundgren, President, CEO
I don’t foresee that it’s going to change the availability of scrap in the immediate or short-term. Obviously, energy prices go through their peaks and troughs as well. So I wouldn’t anticipate that is going to affect the supply of scrap material.
Andrew Lane, Morningstar
Thank you.
Tamara Lundgren, President, CEO
Thank you.
Operator
Thank you. Our next question is a follow up from the line of Timna Tanners from Bank of America Merrill Lynch.
Timna Tanners, Bank of America Merrill Lynch
Yes. I was just thinking about the reason why maybe I had it stuck in my head that you had avoided the domestic market, and you made the point that you have been staying away from markets that are overly crowded like in the Southeast. So I guess I just wonder how you can compete moving more into the domestic market when your mega-shredders are all positioned for the ports?
So I am just wondering, is there something I’m missing on that because is there a transportation advantage maybe you have or is there something else because your locations of your mega-shredders are not located near very many of the mini-mills that are larger? So I am just wondering if there is a different advantage that maybe I am missing.
Tamara Lundgren, President, CEO
No. I mean we ship domestic from our East Coast operations and from our West Coast operations. In the Southeast, we don’t have a shredder, Timna, and that was because our view has been that there has been too much shredder capacity in the Southeast. But we sell domestic from West Coast and East Coast. One of the points I was making before is, obviously, we provide the scrap into our own mini mill in Oregon and that mini mill is – Cascade is operating right now at 72 percent utilization into what we view as a strengthening market.
So we anticipate that as that market continues to strengthen, their utilization goes up, the proportion of our domestic sales will go in as well – or will go up as well. But fundamentally, selling in the domestic market is a function of price and logistics, and we have been actually quite effective, for example on the East Coast, in terms of increasing the amount of material that we are selling domestic.
Timna Tanners, Bank of America Merrill Lynch
Okay, just wondering. Thanks.
Tamara Lundgren, President, CEO
Thank you.
Operator
Thank you. I have no further questions in the phones at this time.
Tamara Lundgren, President, CEO
Well, thank you very much and thank everyone on the call for joining us today and for your interest in our Company. We look forward to speaking with you again in April when we announce our fiscal 2015 second quarter results. Thank you very much.
Operator
Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone, have a good day.
