Good Industry Fundamentals Influence Schnitzer’s Financials

The company reported net income of $36 million, or $1.15 per diluted share, on revenues of $215.7 million for its second quarter, ended Feb. 28. This compares to net income of $18.5 million, or 60 cents per diluted share, on revenues of $161.6 million for the corresponding quarter in 2004. 

“The company’s strong financial results came from all three of its primary business segments. The most significant improvement came from our businesses that process and sell recycled ferrous and nonferrous metals,” Robert W. Philip, Schnitzer chairman and CEO, says. “These businesses continue to benefit from excellent industry fundamental as well as from strategic coastal locations that give us the ability to efficiently access both domestic and export markets. Our second quarter results were also supported by our Steel Manufacturing and Auto Parts Businesses that produced good operating income, despite normal seasonal declines in demand.”

Schnitzer’s wholly owned Metals Recycling business’s operating income was $39.5 million in the second quarter of ’05, an increase of $7.5 million from 2004’s second quarter. According to Schnitzer, the improvement resulted from significantly higher ferrous selling prices that averaged $240 per ton, $82 per ton higher than last year’s second quarter and $4 per ton higher than in the fist quarter of fiscal 2005. However, lower sales volumes and higher purchasing prices for unprocessed metal combined with an increase in ocean freight costs reduced the impact of these higher selling prices.  

Ferrous sales volumes for the company’s processing joint ventures increased 27 percent during the second quarter of fiscal 2005 when compared to the corresponding quarter in 2004. Schnitzer credits this growth to the combination of increased raw material intake and the timing of export orders. Again, scrap procurement prices mitigated the effect of higher selling prices and sales volumes.  

During the second quarter of fiscal ’05, Schnitzer’s Auto Parts unit reported operating income of $7.2 million, an increase of 42 percent from Q2 in 2004. Schnitzer credits the growth in part to the acquisition of seven new stores since the end of the second quarter in 2004. Operating margins also improved in light of increases in the stores’ wholesale revenues and, to a lesser extent, increases in retail sales.  

Schnitzer’s Steel Manufacturing business reported $5.4 million in operating income for the second quarter, which compares to $2.7 million for last year’s second quarter, thank to higher selling prices, which averaged $517 per ton in Q2 of 2005. Selling prices declined 3 percent on average from the first quarter of fiscal 2005, caused primarily by a change in product mix coupled with a decline in market selling prices, Schnitzer reports.  

Schnitzer’s steel mill completed the installation of a new electric arc furnace in December of 2004. The company anticipates that the furnace will improve the mill’s productivity and reduce operating costs, including the electricity consumption. Schnitzer estimates that the temporary shut-down and start-up costs for the new furnace reduced its operating income by nearly $5 million in the second quarter.  

Recycled metals markets continue to experience significant price volatility; however, consumption remains strong. Based upon the current order backlog for Schnitzer’s wholly owned Metals Recycling businesses, contracted average selling prices that are expected to be shipped in the third quarter of fiscal 2005 are anticipated to be slightly lower than those for its second fiscal quarter of fiscal 2005. The company expects its third quarter 2005 ferrous sales volume to be in the 430,000-to-475,000-ton range. Ocean freight rates remain high from a historical context and are expected to approximate second quarter 2005 levels. The cost of unprocessed ferrous metal also remains very competitive and volatile, which may adversely impact third quarter 2005 margins.  

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

The Auto Parts business generally experiences one of its strongest periods for retail demand during the third fiscal quarter in light of improving weather conditions allowing customers greater access to parts inventory. Howver, this segment continues to experience increasing costs to procure inventory due to rising ferrous metal prices. This trend is expected to continue into the third quarter of fiscal 2005 and may impact margins.