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Schnitzer Steel Reports Record Quarterly Earnings

01/06/2004 - Schnitzer Steel Industries, Inc. reported record net income of $42.9 million on revenues of $199.0 million for its fiscal 2005 first quarter that ended November 30, 2004.

Schnitzer Steel Industries, Inc. reported record net income of $42.9 million on revenues of $199.0 million for its fiscal 2005 first quarter that ended November 30, 2004.

Schnitzer’s First Quarter
Segment Results

Schnitzer’s Steel Manufacturing Business reported an operating profit of $12.8 million, which compares to an operating loss of $0.1 million in the first quarter of fiscal 2004. The improved profitability was primarily caused by increased consumption and higher average selling prices. Higher selling prices were offset in part by lower sales volumes and higher raw material costs, including the cost of alloys and scrap metal.

Despite strong consumption, sales volumes were low due to abnormally high customer inventory levels driven by rising prices through much of 2004. In anticipation of seasonal declines in consumption, many distributors and fabricators reduced their steel purchases to balance their inventories. Sales volumes of certain products were also adversely affected by rising levels of Japanese steel imports. As a result, first quarter sales volumes amounted to 126,000 tons, which compares to 163,000 tons shipped during the first quarter of fiscal 2004.

The Metals Recycling Business' operating income amounted to $33.8 million in the first quarter of fiscal 2005 compared to $9.9 million earned in the first quarter of fiscal 2004. The improved operating margin was caused by strong worldwide demand for finished steel, growing consumption of recycled ferrous metal and higher selling prices. Sales volume was 15% above the first quarter of fiscal 2004 due to timing. Higher average selling prices and increased sales volumes were partially offset by increased cost of sales.

First quarter 2005 operating income from joint ventures amounted to $20.5 million, which compares to $5.9 million reported for last year's first quarter. The profit improvement was principally caused by higher average selling prices as well as a 38% increase in sales volumes driven by increased raw material intake and timing of export orders. Sales volume in last year's first fiscal quarter was adversely affected by delays in securing ocean charters. Higher average selling prices and sales volumes were offset in part by significant increases in the amounts paid to procure unprocessed metal as well as increases in the cost of ocean charters.

The Auto Parts Business reported operating income of $7.3 million, a 25% increase over the prior year amount. The earnings growth was partially due to the addition of three new stores in Canada as well as from higher wholesale revenues caused by increasing recycled metal prices. Improvements were offset in part by higher costs to procure inventory and increases in general and administrative expenses incurred to support the anticipated growth of the Auto Parts Business.

Results—Net income of $42.9 million ($1.38 per diluted share) compares to net income of $12.2 million ($0.39 per diluted share) for the fiscal 2004 first quarter. Revenues of $199.0 million compares to revenues of $128.4 million for the fiscal 2004 first quarter.

Comments—"I am very pleased with Schnitzer Steel's excellent first quarter financial performance," said Robert W. Philip, Chairman and CEO. "Our net income exceeded our previous record high that was reported for the third quarter of fiscal 2004 and our operating income finished near the high end of our guidance given in our previous earnings release. The strong financial performance was again the result of good market conditions for all of our business segments; in particular we continued to experience excellent pricing for our products, which is directly a result of strong worldwide consumption of both recycled metal and finished steel products. What is especially pleasing is that the market fundamentals remain healthy, which should bode well for our businesses in the quarters to come."

Second Quarter 2005 Outlook— During the second fiscal quarter of each year, demand for finished steel declines due to the seasonal nature of the construction industry. It is also expected that fabricators and distributors will continue to reduce inventory levels and purchases of finished steel. Importers of finished steel are anticipated to continue to aggressively compete for certain product categories. Also, as planned, in December 2004 the company's steel mill temporarily shut down its meltshop to replace its electric arc furnace. The furnace replacement, completed in late December, reduced the production of billets and caused production costs to rise. Raw material costs, including the costs of alloys, are expected to increase modestly relative to the first quarter of 2005.

Based on the company's wholly-owned Metals Recycling Businesses' current order backlog, contracted average selling prices that are expected to be shipped in the second quarter of fiscal 2005 approximate price levels reported in the first quarter of fiscal 2005 and remain well ahead of the averages realized during the second quarter of fiscal 2004. The Metals Recycling Business' ferrous sales volume is anticipated to be in the 430,000 to 475,000 ton range. Ocean freight rates remain high from an historical context and are expected to approximate first quarter 2005 levels. The cost of unprocessed ferrous metal remains very competitive and is anticipated to generally follow the trend of selling prices.

The joint venture processors in the metals recycling business are expected to experience similar market trends as described above; however, their financial results may vary depending on geographical locations, competition and other factors.

The Auto Parts Business generally experiences its weakest period for retail sales in the second quarter of the fiscal year due to cold and wet weather conditions slowing demand. The Auto Parts Business has experienced increasing costs to procure inventory due to rising ferrous metal prices. This trend is expected to continue into the second quarter of fiscal 2005 and may impact margins.

The company estimates its second quarter 2005 operating income to be in the $50 to $56 million range. This amount compares to operating income of $24.2 million reported for the second quarter of fiscal 2004.

Schnitzer Steel Industries, Inc. is one of the nation's largest recyclers of ferrous metals, a leading self-service used auto parts retailer with 26 locations in the U.S. and Canada, and manufacturer of finished steel products. The company, with its joint venture partners, processes approximately 5.2 million tons of recycled ferrous metals per year as well as brokers nearly 3.0 million tons through various brokerage arrangements. The company's steel mill — Cascade Steel Rolling Mills — has an annual production capacity of approximately 700,000 tons of finished steel products. The company and its joint venture partners operate primarily along the West Coast and Northeastern seaboard of the United States.