Schnitzer Steel Reports Strong Quarterly Performance
10/30/2014 - Schnitzer Steel Industries said its fourth quarter improvement reflects its strong focus on executing productivity improvements and maximizing market opportunities in a still challenging environment.
Schnitzer Steel Industries Inc. reported adjusted earnings per share from continuing operations of US$0.33 for the fourth quarter ended 31 August 2014, excluding charges attributed to restructuring. The company reported earnings per share of US$0.27 for the fourth quarter ended 31 August 2014, which included a benefit of US$0.03 per share from discontinued operations. This compares to third quarter of fiscal 2014 adjusted earnings per share of US$0.16 and reported earnings per share of US$0.12, both of which included discrete tax benefits of US$0.08 per share. Strong operating cash flow of US$141 million in fiscal 2014, including US$69 million in the fourth quarter, reduced total leverage to 29% as of 31 August 2014.
All three businesses delivered higher volumes sequentially in the fourth quarter and our Metals Recycling and Steel Manufacturing Businesses generated substantially higher profitability. Due to the successful execution of our cost reduction and productivity initiatives, combined with lower market price volatility and higher sales volumes, our Metals Recycling Business generated operating income of US$14 per ton, the highest quarterly performance since fiscal 2012. Accelerating demand from West Coast construction markets and the benefits of productivity initiatives drove significant operating leverage in our Steel Manufacturing Business, resulting in operating income of US$9 million, SMB’s highest quarterly operating income since fiscal 2008. In the Auto Parts Business, higher car purchase volumes in the fourth quarter were largely offset by seasonally lower retail sales, leading to operating income of US$5 million. Significant productivity initiatives currently in process within the Auto Parts Business are expected to drive favorable impacts beginning in the second half of fiscal 2015.
“Our fourth quarter improvement reflects our strong focus on executing productivity improvements and maximizing market opportunities in a still challenging environment,” Tamara Lundgren, president and chief executive officer, commented on the company’s results. “In our Metals Recycling Business, the benefits of this focus together with less volatile market conditions and increased ferrous and nonferrous volumes drove significantly higher operating income in the fourth quarter, which represented MRB’s best quarter since 2012. In our Steel Manufacturing Business, higher volumes, combined with significant continued production efficiencies, generated operating income which nearly doubled sequentially and was SMB’s best quarter since 2008.”
“Looking at our full fiscal year 2014 performance, we delivered substantially higher profitability year over year due to the successful implementation of our productivity initiatives and the flexibility of our operating platform. Our ability to maximize cash metal spreads and manage working capital efficiently resulted in strong operating cash flow which enabled us to fund capital investments and reduce leverage while returning capital to shareholders through our quarterly dividend. In fiscal 2015, we expect to benefit from the productivity initiatives put in place in early fiscal 2014 and a major initiative in our Auto Parts Business to maximize returns from the higher car volumes.”
Key business drivers during the fourth quarter of fiscal 2014:
Sales Volumes: Ferrous sales volumes of 1 million tons in the fourth quarter increased 7% from the third quarter, primarily due to stronger export demand. Nonferrous sales volumes of 156 million pounds increased 12% sequentially, primarily due to higher processed volumes and increased shipments.
Export customers accounted for 70% of total ferrous sales volumes in the fourth quarter. Our ferrous and nonferrous products were shipped to 19 countries, with Turkey, South Korea and Malaysia the top export destinations for ferrous shipments.
Pricing: Export demand strengthened slightly for July and August shipments, while domestic demand remained steady, resulting in average ferrous net sales prices increasing US$5 per ton, or 1%, from third quarter levels. Nonferrous prices in the fourth quarter were in line sequentially.
Margins: Operating income of US$14 per ferrous ton in the fourth quarter of fiscal 2014 was the highest since fiscal 2012, reflecting a combination of strengthening export market conditions, higher contributions from nonferrous processing, the solid execution of our productivity initiatives and the flexibility of our operating platform which enables us to maximize shipments to markets where demand is highest.
Auto Parts Business
Revenues: Revenues in the fourth quarter increased 5% sequentially resulting from record quarterly car purchase volumes and higher nonferrous processing yields, which more than offset seasonally lower parts sales.
Margins: Operating margins of 5% were lower sequentially, primarily due to seasonally lower parts sales.
Steel Manufacturing Business
Sales Volumes: Finished steel sales volumes of 156 thousand tons increased 16% sequentially and 13% from the prior year fourth quarter due to higher demand for long products on the West Coast.
Pricing: Average net sales prices for finished steel products increased slightly from third quarter levels, largely due to stable scrap prices and increasing demand for finished goods.
Margins: Operating income of US$9 million increased sequentially by 88%, reflecting higher sales volumes due to improved demand for finished steel products and increased operating leverage resulting from higher production levels.
Productivity Improvements
During fiscal 2014, we implemented productivity initiatives which delivered US$29 million of operating expense reductions. We expect the full annual benefit of approximately US$40 million to be achieved in fiscal 2015. These benefits were partially offset by the impact of volatile market conditions during the year, but contributed substantially to the improved results year over year. Related to these initiatives, we incurred charges attributed to restructuring of US$3 million, net of tax, or US$0.09 per share, in the fourth quarter of fiscal 2014, including US$2 million of allocated tax expense. During fiscal 2014, we incurred US$7 million, net of tax, or US$0.25 per share, of charges attributed to restructuring and other asset impairment charges. The restructuring charges consisted primarily of cash severance costs from headcount reductions, contract termination costs, and other exit-related costs.
Beginning in the fourth quarter, our Auto Parts Business launched productivity initiatives to drive improved profitability through a combination of revenue drivers and cost reduction initiatives. Our targeted annual improvements are approximately US$7 million with approximately 50% of that amount expected to benefit the second half of fiscal 2015 and the full annual run rate expected to be reached in fiscal 2016.
All three businesses delivered higher volumes sequentially in the fourth quarter and our Metals Recycling and Steel Manufacturing Businesses generated substantially higher profitability. Due to the successful execution of our cost reduction and productivity initiatives, combined with lower market price volatility and higher sales volumes, our Metals Recycling Business generated operating income of US$14 per ton, the highest quarterly performance since fiscal 2012. Accelerating demand from West Coast construction markets and the benefits of productivity initiatives drove significant operating leverage in our Steel Manufacturing Business, resulting in operating income of US$9 million, SMB’s highest quarterly operating income since fiscal 2008. In the Auto Parts Business, higher car purchase volumes in the fourth quarter were largely offset by seasonally lower retail sales, leading to operating income of US$5 million. Significant productivity initiatives currently in process within the Auto Parts Business are expected to drive favorable impacts beginning in the second half of fiscal 2015.
| Consolidated Summary Results | |||||||||||||||||||||||
| (US$ in millions, except per share amounts) | |||||||||||||||||||||||
| Quarter | Year | ||||||||||||||||||||||
| 4Q14 | 3Q14 | 4Q13 | 2014 | 2013 | |||||||||||||||||||
| Revenues | US$ | 692 | US$ | 638 | US$ | 657 | US$ | 2,544 | US$ | 2,622 | |||||||||||||
| Operating Income (Loss) | US$ | 16 | US$ | 2 | US$ | (348 | ) | US$ | 20 | US$ | (328 | ) | |||||||||||
| Goodwill Impairment Charge | — | — | 321 | — | 321 | ||||||||||||||||||
| Other Asset Impairment Charges | — | 1 | 13 | 1 | 13 | ||||||||||||||||||
| Restructuring Charges and Other Exit-related Costs | — | 3 | 3 | 7 | 8 | ||||||||||||||||||
| Adjusted Operating Income (Loss)(3) | US$ | 16 | US$ | 5 | US$ | (11 | ) | US$ | 29 | US$ | 14 | ||||||||||||
| Net Income (Loss) attributable to SSI | US$ | 7 | US$ | 3 | US$ | (289 | ) | US$ | 6 | US$ | (281 | ) | |||||||||||
| Net Income (Loss) from continuing operations attributable to SSI | US$ | 6 | US$ | 3 | US$ | (289 | ) | US$ | 5 | US$ | (281 | ) | |||||||||||
| Adjusted Net Income (Loss) from continuing operations attributable to SSI(2) | US$ | 9 | US$ | 4 | US$ | (14 | ) | US$ | 12 | US$ | (2 | ) | |||||||||||
| Net Income (Loss) per share attributable to SSI(1) | US$ | 0.27 | US$ | 0.12 | US$ | (10.82 | ) | US$ | 0.22 | US$ | (10.56 | ) | |||||||||||
| Net Income (Loss) per share from continuing operations attributable to SSI(1) | US$ | 0.24 | US$ | 0.12 | US$ | (10.82 | ) | US$ | 0.19 | US$ | (10.56 | ) | |||||||||||
| Adjusted diluted EPS from continuing operations attributable to SSI(2) | US$ | 0.33 | US$ | 0.16 | US$ | (0.51 | ) | US$ | 0.44 | US$ | (0.07 | ) | |||||||||||
| (1) Net income per share in the fourth quarter of fiscal 2014 includes a US$1 million benefit after tax from discontinued operations related to a reduction in environmental liabilities of previously disposed operations. |
| (2) See Non-GAAP Financial Measures for reconciliation to U.S. GAAP. |
| (3) May not foot due to rounding. |
“Looking at our full fiscal year 2014 performance, we delivered substantially higher profitability year over year due to the successful implementation of our productivity initiatives and the flexibility of our operating platform. Our ability to maximize cash metal spreads and manage working capital efficiently resulted in strong operating cash flow which enabled us to fund capital investments and reduce leverage while returning capital to shareholders through our quarterly dividend. In fiscal 2015, we expect to benefit from the productivity initiatives put in place in early fiscal 2014 and a major initiative in our Auto Parts Business to maximize returns from the higher car volumes.”
Key business drivers during the fourth quarter of fiscal 2014:
- Metals Recycling Business (MRB) generated US$15 million of operating income, a three-fold increase in profitability sequentially, driven by 7% higher ferrous and 12% higher nonferrous volumes, stable ferrous selling price levels and ongoing contributions from productivity savings.
- Auto Parts Business (APB) operating income of US$5 million benefited from record car purchase volumes of 106 thousand which increased 8% sequentially and 13% from the prior year fourth quarter. Initiation of a productivity program during the fourth quarter is expected to provide benefits to profitability in fiscal 2015.
- Steel Manufacturing Business (SMB) operating income of US$9 million increased 88% sequentially on 16% higher finished steel shipments, reflecting improving nonresidential demand in the West Coast markets and solid operational execution.
| Summary of Metals Recycling Business Results | |||||||||||||||||||||||||
| (US$ in millions, except selling prices; Fe volumes 000s long tons; NFe volumes M lbs) | |||||||||||||||||||||||||
| Quarter | Year | ||||||||||||||||||||||||
| 4Q14 | 3Q14 | 4Q13 | 2014 | 2013 | |||||||||||||||||||||
| Total Revenues | US$ | 560 | US$ | 517 | US$ | 535 | US$ | 2,103 | US$ | 2,210 | |||||||||||||||
| Ferrous Revenues | US$ | 416 | US$ | 387 | US$ | 398 | US$ | 1,581 | US$ | 1,677 | |||||||||||||||
| Ferrous Volumes | 1,092 | 1,024 | 1,088 | 4,122 | 4,310 | ||||||||||||||||||||
| Avg. Net Ferrous Sales Prices (US$/LT)(1) | US$ | 351 | US$ | 346 | US$ | 336 | US$ | 353 | US$ | 358 | |||||||||||||||
| Nonferrous Revenues | US$ | 137 | US$ | 123 | US$ | 129 | US$ | 495 | US$ | 502 | |||||||||||||||
| Nonferrous Volumes | 156 | 139 | 141 | 555 | 520 | ||||||||||||||||||||
| Avg. Net Nonferrous Sales Prices (US$/lb)(1) | US$ | 0.85 | US$ | 0.86 | US$ | 0.89 | US$ | 0.86 | US$ | 0.93 | |||||||||||||||
| Operating Income (Loss)(2) | US$ | 15 | US$ | 4 | US$ | (340 | ) | US$ | 30 | US$ | (312 | ) | |||||||||||||
| Goodwill Impairment | — | — | 321 | — | 321 | ||||||||||||||||||||
| Asset Impairment Charges | — | — | 13 | 1 | 13 | ||||||||||||||||||||
| Adjusted Operating Income (Loss)(3)(4) | US$ | 15 | US$ | 4 | US$ | (6 | ) | US$ | 31 | US$ | 23 | ||||||||||||||
| Adjusted Operating Income per Fe ton | US$ | 14 | US$ | 4 | US$ | (6 | ) | US$ | 8 | US$ | 5 | ||||||||||||||
| (1) Sales prices are shown net of freight. |
| (2) Operating income (loss) does not include the impact of restructuring charges and other exit-related costs. |
| (3) See Non-GAAP Financial Measures for reconciliation to U.S. GAAP. |
| (4) May not foot due to rounding. |
Export customers accounted for 70% of total ferrous sales volumes in the fourth quarter. Our ferrous and nonferrous products were shipped to 19 countries, with Turkey, South Korea and Malaysia the top export destinations for ferrous shipments.
Pricing: Export demand strengthened slightly for July and August shipments, while domestic demand remained steady, resulting in average ferrous net sales prices increasing US$5 per ton, or 1%, from third quarter levels. Nonferrous prices in the fourth quarter were in line sequentially.
Margins: Operating income of US$14 per ferrous ton in the fourth quarter of fiscal 2014 was the highest since fiscal 2012, reflecting a combination of strengthening export market conditions, higher contributions from nonferrous processing, the solid execution of our productivity initiatives and the flexibility of our operating platform which enables us to maximize shipments to markets where demand is highest.
Auto Parts Business
| Summary of Auto Parts Business Results | ||||||||||||||||||||||||
| (US$ in millions, except locations) | ||||||||||||||||||||||||
| Quarter | Year | |||||||||||||||||||||||
| 4Q14 | 3Q14 | 4Q13 | 2014 | 2013 | ||||||||||||||||||||
| Revenues | US$ | 88 | US$ | 84 | US$ | 79 | US$ | 328 | US$ | 313 | ||||||||||||||
| Operating Income(1)(2) | US$ | 5 | US$ | 7 | US$ | 3 | US$ | 21 | US$ | 25 | ||||||||||||||
| Car Purchase Volumes (000s) | 106 | 98 | 94 | 380 | 356 | |||||||||||||||||||
| Locations (end of quarter) | 62 | 61 | 61 | 62 | 61 | |||||||||||||||||||
| (1) Operating income does not include the impact of restructuring charges and other exit-related costs. |
| (2) See Non-GAAP Financial Measures for reconciliation to U.S. GAAP. |
Margins: Operating margins of 5% were lower sequentially, primarily due to seasonally lower parts sales.
Steel Manufacturing Business
| Summary of Steel Manufacturing Business Results | |||||||||||||||||||||
| (US$ in millions, except selling prices; volume in thousands of short tons) | |||||||||||||||||||||
| Quarter | Year | ||||||||||||||||||||
| 4Q14 | 3Q14 | 4Q13 | 2014 | 2013 | |||||||||||||||||
| Revenues | US$ | 117 | US$ | 102 | US$ | 96 | US$ | 389 | US$ | 352 | |||||||||||
| Operating Income | US$ | 9 | US$ | 5 | US$ | 2 | US$ | 19 | US$ | 7 | |||||||||||
| Avg. Net Sales Prices (US$/ST) | US$ | 688 | US$ | 686 | US$ | 667 | US$ | 677 | US$ | 680 | |||||||||||
| Finished Goods Sales Volumes | 156 | 135 | 138 | 533 | 488 | ||||||||||||||||
Pricing: Average net sales prices for finished steel products increased slightly from third quarter levels, largely due to stable scrap prices and increasing demand for finished goods.
Margins: Operating income of US$9 million increased sequentially by 88%, reflecting higher sales volumes due to improved demand for finished steel products and increased operating leverage resulting from higher production levels.
Productivity Improvements
During fiscal 2014, we implemented productivity initiatives which delivered US$29 million of operating expense reductions. We expect the full annual benefit of approximately US$40 million to be achieved in fiscal 2015. These benefits were partially offset by the impact of volatile market conditions during the year, but contributed substantially to the improved results year over year. Related to these initiatives, we incurred charges attributed to restructuring of US$3 million, net of tax, or US$0.09 per share, in the fourth quarter of fiscal 2014, including US$2 million of allocated tax expense. During fiscal 2014, we incurred US$7 million, net of tax, or US$0.25 per share, of charges attributed to restructuring and other asset impairment charges. The restructuring charges consisted primarily of cash severance costs from headcount reductions, contract termination costs, and other exit-related costs.
Beginning in the fourth quarter, our Auto Parts Business launched productivity initiatives to drive improved profitability through a combination of revenue drivers and cost reduction initiatives. Our targeted annual improvements are approximately US$7 million with approximately 50% of that amount expected to benefit the second half of fiscal 2015 and the full annual run rate expected to be reached in fiscal 2016.
