Schnitzer Steel Industries, Inc. has reported net income of $42 million, or $1.34 per diluted share, for the fiscal 2006 first quarter ended Nov. 30, 2005.
"Schnitzer Steel began its 100th year of operation with another solid quarter. The positive long-term fundamentals supporting all our business segments remain intact,” says John D. Carter, president and CEO. “We are currently working though a number of short-term steps to integrate our newly acquired businesses and build a foundation for the future, and we continue to look to that future with great optimism.”
Included in net income was an after-tax gain of $34 million related to the disposition of joint venture assets under the joint-venture termination agreement between Schnitzer and Hugo Neu.
Net income was also reduced by $11 million relating to a reserve Schnitzer took for the estimated amount to settle the ongoing SEC and Department of Justice investigations into the Company's past payment practices in Asia. Excluding the gain from the disposition of joint venture assets and the charge for the investigation reserve, net income was $19 million, or $0.61 per diluted share.
"We are moving closer to completion of the investigation of past payment practices in
Cater says that in the first quarter, Schnitzer completed transactions that nearly doubled the company’s revenues. “We also continued on a major capital spending program to upgrade and replace infrastructure and equipment across the Company. The acquisitions and capital improvements are expected to provide long-term benefits, although we continue to expect they will result in some short-term disruption to our operations," he adds.
Schnitzer’s Metals Recycling segment, which includes the operations of businesses acquired during the first quarter, continued to benefit from strong worldwide fundamentals for scrap metal producers. Revenues increased 95 percent from the first quarter of 2005 as a result of sales volume from Regional Recycling and the operations acquired in the Hugo Neu joint venture separation, which added revenues of $168 million. The increased revenue was partially offset by a $24 million decline in revenue from the company's previously owned West Coast processing facilities in light of the timing of export shipments and lower average net selling prices.
Although worldwide demand for scrap metal remains good, export markets have been unsettled since the second half of 2005, and this condition continued into the first fiscal quarter of 2006, according to Schnitzer.
The Metals Recycling Business reported a decline in first quarter operating income of 55 percent from the first quarter of 2005 as a result of lower sales volumes on the West Coast in light of the timing of shipments, lower average net selling prices and lower margins per ton on the materials sold. Schnitzer reports that domestic demand for scrap metal remained high, and as a result, purchase costs did not decline at the same rate as export sales prices, resulting in lower margins per ton sold.
East Coast processing volumes were negatively impacted by a two-month shutdown of the Rhode Island shredder to install a new, more efficient and environmentally friendly shredder motor as well as low beginning inventories at all the New England yards. Net East Coast sales prices, which reflected sales arranged prior to the closing of the Hugo Neu joint venture separation agreement, were lower than experienced in the company’s West Coast and Southeastern metals recycling locations. The low volumes contributed to higher incremental processing costs, and combined with the cost of raw materials, led the East Coast operations to record a small loss for the quarter.
In addition to the installation of the new shredder motor in
Schnitzer’s Auto Parts Business continued to benefit from the additional self-service stores acquired in January 2005 and reflected the results of the GreenLeaf acquisition completed during the first quarter of fiscal 2006.
Revenues for the Auto Parts Business increased 128 percent over the same period last year, primarily as a result of the four self-service stores acquired in January 2005 and the GreenLeaf acquisition, according to the company. Operating income increased 19 percent, which Schnitzer says reflects the impact of higher retail sales from the additional self-service stores, offset by higher purchase costs for inventory.
During the quarter, the operations acquired in the GreenLeaf transaction recorded a slight loss as Schnitzer began the process of implementing its integration strategy.
According to Schnitzer’s numbers, the Steel Manufacturing Business had another record quarter for operating income as it continued to benefit from a strong West Coast market for steel products.
Revenues for the Steel Manufacturing Business rose 27 percent. A 31 percent increase in sales volumes offset a 3 percent decline in average price per ton from the record levels recorded in the first quarter of last year.
Operating income was 26 percent higher than in the same period last year, primarily reflecting higher volumes, lower scrap costs and improved productivity, according to the company’s analysis. The steel mill continues to see the benefits from the new furnace installed last year, production incentives recently negotiated with the steelworkers union and other improvements in business practices, Schnitzer reports.
While average selling prices declined on a year over year basis, prices were up from the fourth quarter, reflecting price increases announced at the beginning of the first quarter as a result of strong West Coast demand for steel products, particularly rebar.
Schnitzer says that it expects the uncertainty in the Asian export markets that was experienced beginning in the second half of last year and into the first quarter to continue through the second quarter. Domestic markets are expected to remain stronger than export markets. Sales orders completed in the early part of the second quarter would indicate an average net price per ton of between $185 and $195.
Recent evidence of declines in scrap acquisition costs which are greater than the declines in export sales prices, suggests the potential for improved margins.
The Russian and Baltic region trading business generally purchases inventory in advance of making sales, has a lower overall margin on sales than the domestic metals processing business and thus can be impacted by small changes in price between the time of purchase and sale. During the second quarter, Schnitzer expects the trading business to sell inventory that is valued higher than current market prices. As a result, margins related to these sales are expected to be negative, absent strengthening of the market.
The company expects ferrous scrap volumes in the domestic processing business to rebound in the second quarter, primarily in light of the timing of export shipments. For the second quarter, volumes shipped from its domestic yards should increase from approximately 660,000 tons in the first quarter to between 800,000 tons and 850,000 tons.
Sales volumes in the Russian and
For the year, the company expects sales volumes to be approximately 3.5 million tons in the domestic processing business and 1.0 million tons in the Russian and
Retail demand in the self-service Auto Parts Business is affected by seasonal changes, with inclement winter weather in the second quarter expected to depress customer traffic and result in lower revenues when compared with the first quarter, according to Schnitzer. For the second quarter, the company expects margins to be affected by lower selling prices for scrapped cars and a higher cost basis of cars sold from existing inventory compared to the second quarter of 2005.
The integration of the GreenLeaf operation is expected to result in the conversion of one full-service location to a self-service store toward the end of the second quarter. The GreenLeaf operation is expected to post a modest loss during the quarter.
West Coast consumption of finished steel long products continues to remain strong and the Schnitzer sees good demand for rebar and merchant bar. Based on current market conditions, the company says it expects average prices for the second quarter to be slightly higher than both the first quarter of this year and the second quarter of last year. Higher prices on the West Coast relative to other markets could, however, result in an increase of foreign imports, putting downward pressure on pricing, according to the company.
Schnitzer reports that it typically sees a reduction in second quarter sales volumes in light of the impact of winter weather on construction projects. However, this year customer inventories remain low and Schnitzer says it expects demand to remain good through the quarter. As a result, second quarter sales volumes should be significantly higher than during the second quarter of 2005, but lower than the volumes in the first quarter of this year.