Schnitzer Reports Strong Numbers for Third Quarter

Schnitzer Steel Industries Inc. has reported a profit for the third quarter of this year, compared to figures for the same time last year.

“We delivered our best earnings performance since the downturn began, with improved operating profits in each of our three businesses,” says Tamara Lundgren, Schnitzer’s president and CEO. “Our sales volumes of ferrous metals in the first three quarters of fiscal 2010 have remained near the levels of the boom year of fiscal 2008, and we achieved record third quarter ferrous processing sales volumes, underscoring the long-term strength of the global demand for recycled metals. Our business model and platform allowed our Metals Recycling Business to respond nimbly to the swings in prices for recycled metals during the third quarter.

“Our Auto Parts Business achieved record operating income and increased its purchases of vehicles to the level of the first quarter without benefiting from the Cash for Clunkers program,” she adds. “Our Steel Manufacturing Business achieved operating profitability for the quarter, primarily driven by higher sales prices and increased mill utilization.”

Drivers of the results, by business unit, for the third quarter included:

•The Metals Recycling Business saw continuing strong demand and expanded margins. The business capitalized on higher average net sales prices and improved raw material flows. Operating profit margin expanded to $45 per ferrous ton, up from $24 in the second quarter of fiscal 2010. Operating income increased by 85 percent over the second quarter to $53 million.

•The Auto Parts Business grew quarterly operating income to $18 million, up 41 percent compared with the second quarter. It benefited from strong commodity markets, normal seasonal improvements in admissions and parts sales, positive performance from the six stores that were acquired earlier in the fiscal year, and improved operating efficiencies. Operating profit margins increased to 27 percent, up from 23 percent in the second quarter.

•The Steel Manufacturing Business achieved its best performance since the fourth quarter of fiscal 2008, with operating income of $4 million. This was primarily the result of higher sales volumes and sales prices, which offset higher raw material costs.

In discussing the metals recycling market, Lundgren says, “Selling prices for ferrous scrap fluctuated sharply in the latter part of the third quarter as the markets responded to broadly-based global demand. Our operating profit margin expanded during the third quarter reflecting increased selling prices, improved flows of raw materials and continued benefits from production efficiencies.”

As for sales volumes, she notes that third quarter volumes for ferrous scrap were in line with the volumes of the second quarter, while nonferrous volumes increased 18 percent over the second quarter.

Export customers accounted for about 71 percent of total ferrous sales volume. The top export destinations were South Korea, Malaysia and Egypt, with shipments to 10 countries.

Sales prices for ferrous scrap averaged $378 per ton in the third quarter of fiscal 2010, up 27 percent from the second quarter. Pricing for deliveries in the first part of the quarter reflected the steady rise in prices that began in November 2009. Prices rose sharply for deliveries in the second part of the quarter, reflecting the strong worldwide demand. Nonferrous prices also rose, consistent with the higher sales volumes.

The higher ferrous sales prices and volumes in the third fiscal quarter of 2010 drove revenues up 26 percent over the second quarter of fiscal 2010, and 95 percent over the third quarter of fiscal 2009.

Operating income margin was $45 per ferrous ton in the third quarter of fiscal 2010, up significantly from the $24 per ferrous ton margin in the second quarter and $6 per ferrous ton in the third quarter of fiscal 2009. This primarily reflected increased selling prices, improved flows of raw materials and continued benefits from production efficiencies.

Looking out, the company notes that ferrous sales volumes are expected to approximate or increase slightly from the strong volumes in the third quarter, reflecting continued export demand. Nonferrous sales volumes are expected to decline slightly from this year's third quarter.

Market prices for ferrous scrap have dropped sharply in recent weeks from the peaks achieved during the fiscal third quarter. Although the market tone has begun to improve, average ferrous net sales prices in the fourth quarter are expected to be between the average prices achieved in the second and third quarters of this fiscal year. Nonferrous average prices are expected to approximate the levels of the second quarter.

Fourth quarter margins are expected to be significantly lower than third quarter margins. Forward selling prices dropped sharply in the second part of the third quarter. Although average cash metal spreads are expected to remain strong, average inventory costs are expected to decline in the fourth quarter more slowly than ferrous scrap prices, narrowing margins. However, taken together with the third quarter, fourth quarter operating income is expected to result in margins for the second half of the fiscal year that are moderately higher than in the second quarter of fiscal 2010.

The Auto Parts Business recorded its sixth consecutive sequential increase in operating income from continuing operations and record-setting quarterly operating income.

"The record quarterly operating income of the Auto Parts Business reflects the benefits of our focus on the self-service distribution channel and our improved operating efficiencies,” Lundgren says.

Revenues from continuing operations increased $13 million, or 23 percent, over the second quarter of 2010, and 87 percent over the third quarter of fiscal 2009. The improvements reflected higher revenues across all major components of sales: cores, scrap, parts and admissions; increases in vehicle purchases; and a strong contribution from the six stores acquired in fiscal 2010.

Operating profit margins of 27 percent increased from 23 percent in the second quarter due to improved parts sales and admissions, stronger commodity markets and sales prices for scrapped vehicles which increased at a greater rate than inventory costs for purchased vehicles. Margins also continued to benefit from improved operating efficiencies.

Compared with the third quarter of fiscal 2010, revenues in the fourth quarter of fiscal 2010 are expected to decline slightly due to lower commodity prices and normal seasonal declines in admissions and parts sales.

Margins are expected to decline significantly from the third quarter. The drivers include lower revenues and a narrower spread between sales prices and the purchase costs for scrapped vehicles. Combined margins for the second half of fiscal 2010 are expected to approximate the strong margins in the first half of fiscal 2010.

The Steel Manufacturing Business delivered operating income of $4 million, its best performance since the fourth quarter of fiscal 2008.

“Although demand for manufactured steel products on the U.S. West Coast remained weak, our team was able to capitalize on the mill’s diversified product line to grow its sales volumes,” Lundgren notes. “The higher sales volumes allowed us to increase mill utilization to 64 percent in the third quarter from 51 percent in the second quarter, and our successful cost containment initiatives aided the efforts to meet our goal of operating profitability.”

Finished goods sales volumes increased 36 percent over the second quarter, primarily reflecting modest improvements in the business environment at the beginning of the quarter.

Average net sales prices for finished steel products increased by $79 per ton, compared with the second quarter and by 21 percent compared with the third quarter of fiscal 2009. The higher prices were the result of price increases that offset the higher costs of raw materials.

Margin improvement for the quarter resulted from higher capacity utilization, higher average sales prices and a full quarter’s impact of cost containment initiatives implemented during the second quarter.

Overall market demand is expected to remain weak in the fourth quarter of fiscal 2010. Sales volumes are expected to decrease slightly from the improved levels of the third quarter of fiscal 2010. The business remains one of the few West Coast producers of long steel products, leaving it well-positioned to capitalize on stimulus and infrastructure spending when it occurs.

The company expects average sales prices to approximate or decline slightly from the third quarter.

Fourth quarter fiscal 2010 operating profit margins are expected to approximate or be slightly below breakeven levels.