Schnitzer Steel Reports Continued Improvement in Steel and Recycling Businesses
04/03/2014 - Despite volatile market conditions and severe winter weather, Schnitzer Steel Industries reported solid demand and stable pricing in its Steel Manufacturing Business during its fiscal second quarter, reflecting continued improvement in the West Coast construction markets.
Schnitzer Steel Industries Inc. reported adjusted earnings per share of US$0.13 and earnings per share of US$0.07 for its fiscal 2014 second quarter ended 28 February 2014. Adjusted results for the second quarter exclude US$3 million, or US$0.06 per share, of restructuring, other exit-related and asset impairment charges. In the second quarter of fiscal 2013, the company reported adjusted earnings per share of US$0.36 and earnings per share of US$0.32 which included a release of deferred tax valuation allowances and other discrete tax benefits.
Our Metals Recycling Business delivered a substantial increase in adjusted operating income per ferrous ton of US$11 compared to US$1 in the previous quarter. Stronger ferrous selling prices early in the second quarter, and benefits from our productivity improvement and cost reduction programs more than offset the adverse impacts of weaker export demand and severe winter weather. Our Auto Parts Business experienced seasonally weaker retail sales which were further impacted by extreme weather conditions in the Midwest and on the East Coast. Our Steel Manufacturing Business achieved a sequential increase in profitability as it continued to benefit from steady demand for construction products on the West Coast and from production efficiencies.
The company previously announced a target of US$30 million of savings, 70% of which were to be achieved by the end of fiscal 2014. These savings are tracking ahead of schedule with US$6 million achieved in the second quarter. The company has identified an additional US$10 million of annualized savings, primarily within selling, general and administrative activities, which increases our overall savings target to US$40 million, of which we expect to achieve 70% by the end of fiscal 2014.
“We are pleased to see the benefits of our productivity improvement and cost reduction programs reflected in our second quarter results," said Tamara Lundgren, President and Chief Executive Officer. "Despite volatile market conditions and severe winter weather, strong operational performance in our Metals Recycling Business enabled us to increase sales volumes sequentially. In our Auto Parts Business, second quarter performance reflected a seasonal decline in retail sales, particularly in regions which were impacted by the harsh winter weather conditions. In our Steel Manufacturing Business, solid demand and stable pricing for our finished steel products reflected continued improvement in the West Coast construction markets. Through our overall business performance and our disciplined focus on working capital management, we delivered another quarter of positive operating cash flow."
Key business drivers during the second quarter of fiscal 2014:
Sales Volumes: Ferrous sales volumes of 1 million tons in the second quarter increased 5% sequentially and nonferrous volumes of 136 million pounds increased 10%.
Export customers accounted for 68% of total ferrous sales volumes in the second quarter. Our ferrous and nonferrous products were shipped to 14 countries, with South Korea, Turkey and Indonesia being the top ferrous export destinations.
Pricing: Export selling prices were strong at the beginning of the second quarter, but decreased approximately US$30 per ton during the second half of the quarter. The strong domestic market and higher export prices for shipments in December and early January led to higher average net ferrous selling prices as compared to the previous quarter. Nonferrous prices began to decline in January, resulting in slightly lower average prices sequentially.
Margins: Adjusted operating income of US$11 per ferrous ton improved from US$1 per ton reported in the first quarter, reflecting benefits from stronger market conditions early in the quarter, productivity improvements and cost reductions, and a favorable impact from average inventory accounting.
Auto Parts Business
Revenues: Revenues in the second quarter declined slightly sequentially, reflecting lower commodity prices in the second half of the quarter and the seasonally weaker retail sales.
Margins: Operating margins of 7%, excluding the impact of new sites added in the last twelve months, reflected seasonally weaker retail sales compared to the first quarter. During the second quarter, APB incurred US$1 million of operating losses related to these new sites which lowered the reported operating margin to 6%. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 115 thousand tons were lower compared to the first quarter due to seasonally slower construction activity.
Pricing: Average net sales prices for finished steel products of US$676 per short ton increased on a sequential basis.
Margins: Operating income of US$4 million reflects higher average prices and benefits from ongoing production efficiencies which offset lower shipped volumes on a sequential basis.
Productivity Initiatives and Other Cost Reductions
We have increased targeted savings from our productivity improvement and cost reduction programs announced at the beginning of fiscal 2014. Our new savings target is US$40 million, of which 70% is expected to be achieved by the end of fiscal 2014 and the remainder in fiscal 2015. Of the total, approximately US$30 million represents expected benefits from productivity improvement initiatives with the remaining US$10 million primarily benefiting selling, general and administration expenses. The productivity initiatives are primarily occurring in our Metals Recycling Business through a combination of headcount reductions, implementation of operational efficiencies, reduced lease costs, and other productivity improvements. The savings in selling, general and administration expenses will be achieved across Metals Recycling and Auto Parts Businesses and Corporate. Through the first half of fiscal 2014, we achieved an aggregate US$10 million of benefits, which include US$6 million in the second quarter. During the second quarter, we incurred US$2 million of restructuring charges and other exit-related costs, or US$0.04per share, in connection with our productivity improvement and cost reduction programs.
Corporate Items
The company's full year tax rate for fiscal 2014 is anticipated to be approximately 39%. The tax rate in the second quarter was 27.2%. This compares to a tax rate of 2.7% in the second quarter of fiscal 2013 which included a release of deferred tax valuation allowances of US$2 million as well as US$1 million in other discrete tax benefits.
The company generated US$46 million in operating cash flow during the first half of fiscal 2014, including US$20 million in the second quarter. Net debt of US$359 million at the end of the second quarter approximated the end of the first quarter in fiscal 2014. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
Schnitzer Steel Industries Inc. is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with operating facilities located in 14 states, Puerto Rico and Western Canada. The business has seven deep water export facilities located on both the East and West Coasts and in Hawaii and Puerto Rico. The company's integrated operating platform also includes its auto parts and steel manufacturing businesses. The company's auto parts business sells used auto parts through its self-service facilities located in 16 states and Western Canada. With an effective annual production capacity of approximately 800,000 tons, the company's steel manufacturing business produces finished steel products, including rebar, wire rod and other specialty products. The company commenced its 108th year of operations in 2014.
Our Metals Recycling Business delivered a substantial increase in adjusted operating income per ferrous ton of US$11 compared to US$1 in the previous quarter. Stronger ferrous selling prices early in the second quarter, and benefits from our productivity improvement and cost reduction programs more than offset the adverse impacts of weaker export demand and severe winter weather. Our Auto Parts Business experienced seasonally weaker retail sales which were further impacted by extreme weather conditions in the Midwest and on the East Coast. Our Steel Manufacturing Business achieved a sequential increase in profitability as it continued to benefit from steady demand for construction products on the West Coast and from production efficiencies.
The company previously announced a target of US$30 million of savings, 70% of which were to be achieved by the end of fiscal 2014. These savings are tracking ahead of schedule with US$6 million achieved in the second quarter. The company has identified an additional US$10 million of annualized savings, primarily within selling, general and administrative activities, which increases our overall savings target to US$40 million, of which we expect to achieve 70% by the end of fiscal 2014.
“We are pleased to see the benefits of our productivity improvement and cost reduction programs reflected in our second quarter results," said Tamara Lundgren, President and Chief Executive Officer. "Despite volatile market conditions and severe winter weather, strong operational performance in our Metals Recycling Business enabled us to increase sales volumes sequentially. In our Auto Parts Business, second quarter performance reflected a seasonal decline in retail sales, particularly in regions which were impacted by the harsh winter weather conditions. In our Steel Manufacturing Business, solid demand and stable pricing for our finished steel products reflected continued improvement in the West Coast construction markets. Through our overall business performance and our disciplined focus on working capital management, we delivered another quarter of positive operating cash flow."
Key business drivers during the second quarter of fiscal 2014:
- Metals Recycling Business (MRB) generated US$12 million of adjusted operating income, or US$11 of adjusted operating income per ton. The sequential improvement reflects higher average ferrous selling prices, increased volumes, productivity savings and benefits from average inventory accounting.
- Auto Parts Business (APB) delivered operating income of US$5 million and margin of 7%, excluding new sites operating for twelve months or less. Performance was primarily impacted by lower seasonal retail sales on a sequential basis. New sites added in the last twelve months incurred operating losses of US$1 million.
- Steel Manufacturing Business (SMB) operating income of US$4 million reflected steady demand in the West Coast markets and solid execution on productivity initiatives.
Sales Volumes: Ferrous sales volumes of 1 million tons in the second quarter increased 5% sequentially and nonferrous volumes of 136 million pounds increased 10%.
Export customers accounted for 68% of total ferrous sales volumes in the second quarter. Our ferrous and nonferrous products were shipped to 14 countries, with South Korea, Turkey and Indonesia being the top ferrous export destinations.
Pricing: Export selling prices were strong at the beginning of the second quarter, but decreased approximately US$30 per ton during the second half of the quarter. The strong domestic market and higher export prices for shipments in December and early January led to higher average net ferrous selling prices as compared to the previous quarter. Nonferrous prices began to decline in January, resulting in slightly lower average prices sequentially.
Margins: Adjusted operating income of US$11 per ferrous ton improved from US$1 per ton reported in the first quarter, reflecting benefits from stronger market conditions early in the quarter, productivity improvements and cost reductions, and a favorable impact from average inventory accounting.
Auto Parts Business
Revenues: Revenues in the second quarter declined slightly sequentially, reflecting lower commodity prices in the second half of the quarter and the seasonally weaker retail sales.
Margins: Operating margins of 7%, excluding the impact of new sites added in the last twelve months, reflected seasonally weaker retail sales compared to the first quarter. During the second quarter, APB incurred US$1 million of operating losses related to these new sites which lowered the reported operating margin to 6%. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 115 thousand tons were lower compared to the first quarter due to seasonally slower construction activity.
Pricing: Average net sales prices for finished steel products of US$676 per short ton increased on a sequential basis.
Margins: Operating income of US$4 million reflects higher average prices and benefits from ongoing production efficiencies which offset lower shipped volumes on a sequential basis.
Productivity Initiatives and Other Cost Reductions
We have increased targeted savings from our productivity improvement and cost reduction programs announced at the beginning of fiscal 2014. Our new savings target is US$40 million, of which 70% is expected to be achieved by the end of fiscal 2014 and the remainder in fiscal 2015. Of the total, approximately US$30 million represents expected benefits from productivity improvement initiatives with the remaining US$10 million primarily benefiting selling, general and administration expenses. The productivity initiatives are primarily occurring in our Metals Recycling Business through a combination of headcount reductions, implementation of operational efficiencies, reduced lease costs, and other productivity improvements. The savings in selling, general and administration expenses will be achieved across Metals Recycling and Auto Parts Businesses and Corporate. Through the first half of fiscal 2014, we achieved an aggregate US$10 million of benefits, which include US$6 million in the second quarter. During the second quarter, we incurred US$2 million of restructuring charges and other exit-related costs, or US$0.04per share, in connection with our productivity improvement and cost reduction programs.
Corporate Items
The company's full year tax rate for fiscal 2014 is anticipated to be approximately 39%. The tax rate in the second quarter was 27.2%. This compares to a tax rate of 2.7% in the second quarter of fiscal 2013 which included a release of deferred tax valuation allowances of US$2 million as well as US$1 million in other discrete tax benefits.
The company generated US$46 million in operating cash flow during the first half of fiscal 2014, including US$20 million in the second quarter. Net debt of US$359 million at the end of the second quarter approximated the end of the first quarter in fiscal 2014. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
Schnitzer Steel Industries Inc. is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with operating facilities located in 14 states, Puerto Rico and Western Canada. The business has seven deep water export facilities located on both the East and West Coasts and in Hawaii and Puerto Rico. The company's integrated operating platform also includes its auto parts and steel manufacturing businesses. The company's auto parts business sells used auto parts through its self-service facilities located in 16 states and Western Canada. With an effective annual production capacity of approximately 800,000 tons, the company's steel manufacturing business produces finished steel products, including rebar, wire rod and other specialty products. The company commenced its 108th year of operations in 2014.
