Schnitzer Steel Reports Results, Noting Steady Market Conditions in West Coast Steel Market
01/08/2014 - Schnitzer Steel Industries, Inc. announced a quarterly loss in its fiscal 2014 first quarter ended 30 November 2013.
The adjusted loss per share was US$(0.18) and the loss per share was US$(0.23) for its fiscal 2014 first quarter. Adjusted results for the first quarter exclude a US$2 million, or US$0.05 per share, restructuring charge associated with cost reduction initiatives. In the first quarter of fiscal 2013, the company reported an adjusted loss per share of US$(0.02) and a loss per share of US$(0.06).
All three business segments generated positive operating income during the first quarter of fiscal 2014. As anticipated, the Metals Recycling Business improved sequentially, delivering results slightly above break-even. The Auto Parts Business also improved compared to the fourth quarter of fiscal 2013, recording operating margins of 9%, excluding the impact of new stores added since the first quarter of fiscal 2013. The Steel Manufacturing Business was in line sequentially notwithstanding a bad debt expense of US$1 million, or US$0.03 per share. The first quarter results also include a charge for deferred tax valuation allowances of US$1 million, or US$0.04 per share.
Market conditions improved as the quarter progressed. Both prices and demand were relatively weak in the first half of the quarter which impacted shipments in September and October. In the second half of the quarter, demand strengthened which increased prices by approximately US$30 per ton. Consequently, performance in the last month of the quarter was significantly better than during the first two months. The softer demand at the start of the quarter resulted in an estimated adverse impact from average inventory costs of approximately US$6 per ton in the Metals Recycling Business. Based on current market conditions and cost reduction initiatives, the company anticipates improved results in each of its businesses in the second quarter.
“Market conditions improved as the quarter progressed and, consequently, performance in the last month of the quarter was significantly better than during the first two months. All three business segments generated positive operating income, including higher sequential performance for both our Metals Recycling and Auto Parts Businesses, and a continuing trend of profitability in our Steel Manufacturing Business," said Tamara Lundgren, president and chief executive officer. "We generated US$26 million in operating cash flow in the first quarter, our cost reduction initiatives are underway to deliver at least US$20 million of savings in fiscal 2014, and we continued to expand our Auto Parts Business platform by acquiring our fourth store in the greater Seattle-Tacoma metropolitan area which provides supply chain synergies with our Metals Recycling Business."
Key business drivers during the first quarter of fiscal 2014:
Sales Volumes: Ferrous sales volumes of 978,000 tons in the first quarter increased 2% and nonferrous volumes of 124 million pounds increased 4% compared to the prior year first quarter.
Export customers accounted for 67% of total ferrous sales volumes in the first quarter. The ferrous and nonferrous products were shipped to 14 countries, with China, South Korea and Turkey being the top ferrous export destinations.
Pricing: Export prices were soft in the first part of the first quarter, but increased by US$30 per ton toward the end of the quarter. The combination of improving export prices and the strong domestic market led to higher average net ferrous selling prices as compared to the previous quarter while nonferrous prices were stable.
Margins: Operating income of US$1 per ferrous ton, which included the estimated adverse impact of average inventory accounting of US$6 per ton, was partially mitigated by improving market conditions and benefits of US$3 million from implementation of cost reduction initiatives.
Auto Parts Business
Revenues: Revenues in the first quarter increased 14% from the prior year quarter due to incremental contributions from retail stores added since the first quarter of fiscal 2013.
Margins: Operating margins, excluding the impact of the stores added in fiscal 2013, increased sequentially to 9%. During the first quarter, APB incurred approximately US$1 million of operating losses related to the new stores added since the first quarter of fiscal 2013, including integration and start-up costs, which lowered APB's reported operating margin to 7%. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
New Sites: In November, APB acquired its fourth self-service retail store in the Seattle-Tacoma metropolitan area which expanded APB's presence in the Pacific Northwest market. This location will supply the Metals Recycling shredder in Tacoma, Wash., further enhancing synergies between operating segments.
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 128,000 tons approximated the prior year first quarter, reflecting steady demand for construction products on the West Coast.
Pricing: Average net sales prices for finished steel products of US$657 per short ton declined slightly from the prior year quarter due to the impact of lower raw material prices on selling prices to end customers.
Margins: Operating income of US$2 million approximated the fourth quarter of fiscal 2013 due to additional production efficiencies of US$1 million, partially offset by slightly lower sales volumes and a bad debt expense of US$1 million from a customer bankruptcy.
Cost Reductions
Cost reduction initiatives to further reduce annual operating expenses by US$30 million continue to progress. Approximately 70% of the reduction is expected to benefit fiscal 2014 results, with the full annual benefit expected to be achieved in fiscal 2015. The reduction in operating expenses will primarily occur in MRB and be achieved through a combination of headcount reductions, implementation of transportation efficiencies, reduced lease costs, and other productivity and non-trade procurement savings. The company achieved US$4 million of benefits in the first quarter. It anticipates achieving a quarterly run rate of US$6 million of benefits by the end of the second quarter. During the first quarter, it incurred a US$2 million restructuring expense, orUS$0.05 per share, in connection with this cost reduction program.
Schnitzer Steel Industries, Inc. is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with 60 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 61 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, operating as Cascade Steel Rolling Mills, produces finished steel products, including rebar, wire rod and other specialty products. The company commenced its 108th year of operations in 2014.
All three business segments generated positive operating income during the first quarter of fiscal 2014. As anticipated, the Metals Recycling Business improved sequentially, delivering results slightly above break-even. The Auto Parts Business also improved compared to the fourth quarter of fiscal 2013, recording operating margins of 9%, excluding the impact of new stores added since the first quarter of fiscal 2013. The Steel Manufacturing Business was in line sequentially notwithstanding a bad debt expense of US$1 million, or US$0.03 per share. The first quarter results also include a charge for deferred tax valuation allowances of US$1 million, or US$0.04 per share.
Market conditions improved as the quarter progressed. Both prices and demand were relatively weak in the first half of the quarter which impacted shipments in September and October. In the second half of the quarter, demand strengthened which increased prices by approximately US$30 per ton. Consequently, performance in the last month of the quarter was significantly better than during the first two months. The softer demand at the start of the quarter resulted in an estimated adverse impact from average inventory costs of approximately US$6 per ton in the Metals Recycling Business. Based on current market conditions and cost reduction initiatives, the company anticipates improved results in each of its businesses in the second quarter.
“Market conditions improved as the quarter progressed and, consequently, performance in the last month of the quarter was significantly better than during the first two months. All three business segments generated positive operating income, including higher sequential performance for both our Metals Recycling and Auto Parts Businesses, and a continuing trend of profitability in our Steel Manufacturing Business," said Tamara Lundgren, president and chief executive officer. "We generated US$26 million in operating cash flow in the first quarter, our cost reduction initiatives are underway to deliver at least US$20 million of savings in fiscal 2014, and we continued to expand our Auto Parts Business platform by acquiring our fourth store in the greater Seattle-Tacoma metropolitan area which provides supply chain synergies with our Metals Recycling Business."
Key business drivers during the first quarter of fiscal 2014:
- Metals Recycling Business (MRB) generated US$1 million in operating income, including the estimated adverse impact from average inventory costing of approximately US$6 per ton. The combination of improving market conditions, early benefits from a cost reduction program and non-recurrence of other cost items which impacted the previous quarter resulted in a sequential increase in MRB’s operating performance during the first quarter.
- Auto Parts Business (APB) operating income of US$6 million and margin of 9%, which excludes new sites added since the first quarter of fiscal 2013, represents sequential increases of US$1 million and 200 basis points, respectively. Including the new stores, car purchase volumes increased by 15% from the prior year first quarter, primarily reflecting contributions from those stores.
- Steel Manufacturing Business (SMB) operating income of US$2 million reflected steady demand in the West Coast markets but was partially offset by a bad debt expense of US$1 million from a customer bankruptcy.
Sales Volumes: Ferrous sales volumes of 978,000 tons in the first quarter increased 2% and nonferrous volumes of 124 million pounds increased 4% compared to the prior year first quarter.
Export customers accounted for 67% of total ferrous sales volumes in the first quarter. The ferrous and nonferrous products were shipped to 14 countries, with China, South Korea and Turkey being the top ferrous export destinations.
Pricing: Export prices were soft in the first part of the first quarter, but increased by US$30 per ton toward the end of the quarter. The combination of improving export prices and the strong domestic market led to higher average net ferrous selling prices as compared to the previous quarter while nonferrous prices were stable.
Margins: Operating income of US$1 per ferrous ton, which included the estimated adverse impact of average inventory accounting of US$6 per ton, was partially mitigated by improving market conditions and benefits of US$3 million from implementation of cost reduction initiatives.
Auto Parts Business
Revenues: Revenues in the first quarter increased 14% from the prior year quarter due to incremental contributions from retail stores added since the first quarter of fiscal 2013.
Margins: Operating margins, excluding the impact of the stores added in fiscal 2013, increased sequentially to 9%. During the first quarter, APB incurred approximately US$1 million of operating losses related to the new stores added since the first quarter of fiscal 2013, including integration and start-up costs, which lowered APB's reported operating margin to 7%. (See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.)
New Sites: In November, APB acquired its fourth self-service retail store in the Seattle-Tacoma metropolitan area which expanded APB's presence in the Pacific Northwest market. This location will supply the Metals Recycling shredder in Tacoma, Wash., further enhancing synergies between operating segments.
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 128,000 tons approximated the prior year first quarter, reflecting steady demand for construction products on the West Coast.
Pricing: Average net sales prices for finished steel products of US$657 per short ton declined slightly from the prior year quarter due to the impact of lower raw material prices on selling prices to end customers.
Margins: Operating income of US$2 million approximated the fourth quarter of fiscal 2013 due to additional production efficiencies of US$1 million, partially offset by slightly lower sales volumes and a bad debt expense of US$1 million from a customer bankruptcy.
Cost Reductions
Cost reduction initiatives to further reduce annual operating expenses by US$30 million continue to progress. Approximately 70% of the reduction is expected to benefit fiscal 2014 results, with the full annual benefit expected to be achieved in fiscal 2015. The reduction in operating expenses will primarily occur in MRB and be achieved through a combination of headcount reductions, implementation of transportation efficiencies, reduced lease costs, and other productivity and non-trade procurement savings. The company achieved US$4 million of benefits in the first quarter. It anticipates achieving a quarterly run rate of US$6 million of benefits by the end of the second quarter. During the first quarter, it incurred a US$2 million restructuring expense, orUS$0.05 per share, in connection with this cost reduction program.
Schnitzer Steel Industries, Inc. is one of the largest manufacturers and exporters of recycled ferrous metal products in the United States with 60 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 61 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, operating as Cascade Steel Rolling Mills, produces finished steel products, including rebar, wire rod and other specialty products. The company commenced its 108th year of operations in 2014.
