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Schnitzer Reports Third Quarter 2020 Financial Results

Positive Segment Operating Performance and Cash Flow Demonstrate Resilience

Schnitzer Steel Industries, Inc. (NASDAQ: SCHN) today reported results for its fiscal third quarter ended May 31, 2020. Reflecting the impact of the COVID-19 pandemic, the Company reported a loss per share from continuing operations for the quarter of $(0.18) and adjusted earnings per share of $0.05, compared to second quarter reported and adjusted earnings per share of $0.14 and $0.31, respectively. Comparatively, prior year third quarter reported and adjusted earnings per share from continuing operations were $0.56 and $0.65, respectively.

Auto and Metals Recycling (AMR) achieved operating income in the third quarter of $3 million or $3 per ferrous ton and adjusted operating income of $5 million or $6 per ferrous ton, both of which include an adverse impact from average inventory accounting of approximately $3 per ferrous ton. The COVID-19 pandemic and subsequent measures introduced by local and national governments resulted in an economic slowdown which reduced supply flows and caused a sharp decline in scrap prices before prices partially recovered later in the quarter. Reflecting the success of AMR’s global sales diversification strategy, AMR’s ferrous and nonferrous sales were shipped to 21 countries despite the weaker global markets.

Cascade Steel and Scrap (CSS) achieved operating income in the third quarter of $7 million, almost double the operating income achieved in the second quarter. The improved CSS operating performance was primarily driven by margin expansion due to the lower cost of raw materials, higher utilization and the benefits of productivity initiatives. Construction demand in the West Coast markets continued to show strength during the quarter despite the negative impact of COVID-19 on general economic activity.

"Our team has worked tirelessly through this pandemic, serving our customers and communities, and supporting our suppliers, demonstrating the critical and essential role of our business. Early on, we deployed health, safety, and wellness protocols in all our facilities in order to protect the health of our employees and all who visit our sites. I am very proud of how our employees have responded to the COVID-19 crisis, and our results can be attributed to their swift actions and agility," said Tamara L. Lundgren, Chairman and Chief Executive Officer.

"During one of the most challenging quarters in recent times, we kept our focus on optimizing our sales, both wholesale and retail, aligning our operating costs with supply and production volumes, and moving ahead with our strategic investments. As a result, CSS almost doubled its operating income sequentially, and AMR delivered solid results in a market environment where ferrous scrap prices dropped to levels not seen since 2016," she added. "We kept a strong focus on our strategic priorities, delivering ahead of schedule the full run rate on the targeted productivity initiatives we announced last October, and achieving early benefits from the ongoing transition to our One Schnitzer model that we will be completing in the fall. In addition, effective working capital management enabled us to deliver strong operating cash flow and reduce our net debt. While the near-term environment remains subject to uncertainty, we are encouraged by the gradual re-start of economic activity in the U.S. and globally."

The Company announced last quarter that it is transitioning from its multi-divisional organizational structure to a functionally-based, integrated operating model. This reflects the culmination of a multi-phase organizational development strategy over the last several years. The Company will consolidate its operations, sales, services and other functional capabilities at the enterprise level. This new structure will result in a more agile organization and solidify the productivity improvement and cost reduction initiatives announced at the start of this fiscal year that have been substantially implemented. The Company expects to complete this transition and report its financial results in a single operating segment in the first quarter of fiscal 2021.

Summary Results

 

($ in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quarter

 

 

 

3Q20

 

 

2Q20

 

 

3Q19

 

Revenues

 

$

403

 

 

$

439

 

 

$

547

 

Operating (loss) income

 

$

(4

)

 

$

8

 

 

$

24

 

Restructuring charges and other exit-related activities

 

 

3

 

 

 

5

 

 

 

 

Asset impairment charges

 

 

2

 

 

 

 

 

 

 

Charges for legacy environmental matters, net(1)

 

 

2

 

 

 

 

 

 

1

 

Business development costs

 

 

1

 

 

 

1

 

 

 

 

Charges related to the settlement of a wage and hour class action lawsuit

 

 

 

 

 

 

 

 

2

 

Adjusted operating income(2)

 

$

4

 

 

$

14

 

 

$

27

 

Net (loss) income attributable to SSI shareholders

 

$

(5

)

 

$

4

 

 

$

16

 

Net (loss) income from continuing operations attributable to SSI shareholders

 

$

(5

)

 

$

4

 

 

$

16

 

Adjusted net income from continuing operations

attributable to SSI shareholders(2)

 

$

1

 

 

$

9

 

 

$

18

 

Diluted (loss) earnings per share attributable to SSI shareholders

 

$

(0.18

)

 

$

0.14

 

 

$

0.56

 

Diluted (loss) earnings per share from continuing operations

attributable to SSI shareholders

 

$

(0.18

)

 

$

0.14

 

 

$

0.56

 

Adjusted diluted earnings per share from continuing operations

attributable to SSI shareholders(2)

 

$

0.05

 

 

$

0.31

 

 

$

0.65

 

(1)

Legal and environmental charges for legacy environmental matters, net of recoveries. The prior year period has been recast for comparability. Legacy environmental matters include charges (net of recoveries) related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies.

(2)

See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.

Auto and Metals Recycling

 

Summary of Auto and Metals Recycling Results

 

 

 

 

 

($ in millions, except selling prices and data per ton)

 

 

 

 

 

 

 

Quarter

 

 

 

 

 

 

 

3Q20

 

 

2Q20

 

 

Change

 

 

3Q19

 

 

Change

 

Total revenues

 

$

300

 

 

$

338

 

 

 

(11

)%

 

$

429

 

 

 

(30

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous revenues

 

$

190

 

 

$

222

 

 

 

(15

)%

 

$

280

 

 

 

(32

)%

Ferrous volumes (LT, in thousands)

 

 

779

 

 

 

850

 

 

 

(8

)%

 

 

938

 

 

 

(17

)%

Avg. net ferrous sales prices ($/LT)(1)

 

$

232

 

 

$

253

 

 

 

(8

)%

 

$

293

 

 

 

(21

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonferrous revenues

 

$

79

 

 

$

88

 

 

 

(10

)%

 

$

113

 

 

 

(30

)%

Nonferrous volumes (pounds, in millions)(2)

 

 

111

 

 

 

113

 

 

 

(2

)%

 

 

154

 

 

 

(28

)%

Avg. net nonferrous sales prices ($/pound)(1)(2)

 

$

0.54

 

 

$

0.55

 

 

 

(2

)%

 

$

0.62

 

 

 

(13

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cars purchased (in thousands)

 

 

74

 

 

 

85

 

 

 

(13

)%

 

 

102

 

 

 

(27

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

3

 

 

$

19

 

 

 

(87

)%

 

$

29

 

 

 

(91

)%

Operating income ($/LT)

 

$

3

 

 

$

23

 

 

 

(86

)%

 

$

31

 

 

 

(90

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted operating income(3)

 

$

5

 

 

$

20

 

 

 

(76

)%

 

$

29

 

 

 

(84

)%

Adjusted operating income ($/LT)

 

$

6

 

 

$

23

 

 

 

(74

)%

 

$

31

 

 

 

(80

)%

 

LT = Long Ton, which is equivalent to 2,240 pounds

(1)

Price information is shown after netting the cost of freight incurred to deliver the product to the customer.

(2)

Excludes platinum group metals (PGMs) in catalytic converters.

(3)

See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.

AMR achieved operating income in the third quarter of $3 million or $3 per ferrous ton and adjusted operating income of $5 million or $6 per ferrous ton, including an adverse impact from average inventory accounting of approximately $3 per ferrous ton. The COVID-19 pandemic resulted in an economic slowdown and ferrous selling prices fell sharply through mid-April before prices partially recovered in the second half of the quarter. Supply flows also declined significantly during the quarter amid the lower levels of economic activity. On a sequential basis, average ferrous selling prices and ferrous sales volumes both fell by 8%, while average nonferrous selling prices and sales volumes both decreased by 2%. AMR’s sequential performance also reflected higher revenues from retail sales and benefits from productivity initiatives implemented during FY20, which offset the sequential decline in the price of platinum group metal products.

Export customers accounted for 73% of total ferrous sales volumes for the quarter, with Bangladesh, Turkey and Vietnam representing the top export destinations for ferrous shipments.

Cascade Steel and Scrap

 

Summary of Cascade Steel and Scrap Results

 

 

 

 

 

($ in millions, except selling prices)

 

 

 

 

 

 

 

Quarter

 

 

 

 

 

 

 

3Q20

 

 

2Q20

 

 

Change

 

 

3Q19

 

 

Change

 

Steel revenues

 

$

83

 

 

$

86

 

 

 

(2

)%

 

$

97

 

 

 

(14

)%

Recycling revenues

 

 

21

 

 

 

19

 

 

 

14

%

 

 

25

 

 

 

(15

)%

Total segment revenues(1)

 

$

105

 

 

$

104

 

 

 

%

 

$

121

 

 

 

(14

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

$

7

 

 

$

4

 

 

 

97

%

 

$

8

 

 

 

(15

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finished steel average net sales price ($/ST)(2)

 

$

633

 

 

$

627

 

 

 

1

%

 

$

703

 

 

 

(10

)%

Finished steel sales volumes (ST, in thousands)

 

 

124

 

 

 

129

 

 

 

(4

)%

 

 

130

 

 

 

(4

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rolling mill utilization

 

 

91

%

 

 

72

%

 

 

26

%

 

 

98

%

 

 

(7

)%

 

ST = Short Ton, which is equivalent to 2,000 pounds

(1)

May not foot due to rounding.

(2)

Price information is shown after netting the cost of freight incurred to deliver the product to the customer.

CSS achieved operating income in the third quarter of $7 million, compared to $4 million in the second quarter. On a sequential basis, operating performance benefited from margin expansion as a result of lower costs for steel-making raw materials, coupled with slightly higher average net selling prices for finished steel products. Finished steel sales volumes in the quarter were only 4% lower sequentially, as the impact on construction demand in our West Coast markets from COVID-19 was limited. Higher utilization and benefits from productivity initiatives also contributed to the sequentially improved operating performance.

Corporate Items

In the third quarter of fiscal 2020, consolidated financial performance included Corporate expense of $10 million and adjusted Corporate expense of $8 million, compared to $10 million and $9 million, respectively, in the second quarter of fiscal 2020. The Company’s effective tax rate for the third quarter of fiscal 2020 was a benefit of 28%.

The Company has substantially implemented ahead of schedule the productivity initiatives announced in October 2019 targeting realized benefits of $15 million in fiscal 2020 and annualized benefits of $20 million. Consolidated results in the third quarter reflected an estimated $6 million of benefits from these measures, with total benefits achieved through the first nine months of fiscal 2020 of approximately $12 million. In connection with ongoing productivity initiatives, the Company incurred restructuring charges and other exit-related costs of approximately $3 million in the quarter.

In the third quarter, the Company generated positive operating cash flow of $39 million. Total debt at the end of the quarter was $428 million and debt, net of cash, was $121 million (for a reconciliation of adjusted results and debt, net of cash, to U.S. GAAP, see the table provided in the Non-GAAP Financial Measures section). The Company has a revolving credit facility of $700 million and CAD$15 million which matures in 2023. In order to preserve financial flexibility in light of uncertainties resulting from the COVID-19 outbreak, during the quarter the Company increased its borrowings under the revolving credit facility by $250 million, contributing to its cash position of $308 million as of May 31, 2020.

During the third quarter, the Company returned capital to shareholders through its 105th consecutive quarterly dividend. Capital expenditures were $22 million in the quarter and $59 million year to date, including investments for advanced metal recovery technologies and other growth projects.

Analysts’ Conference Call: Third Quarter of Fiscal 2020

A conference call and slide presentation to discuss results will be held today, July 1, 2020, at 11:30 a.m. Eastern and will be hosted by Tamara L. Lundgren, Chairman and Chief Executive Officer, and Richard Peach, Executive Vice President, Chief Financial Officer and Chief Strategy Officer. The call and the slide presentation will be webcast and accessible on the Company’s website under Company > Investors > Event Calendar at www.schnitzersteel.com/events.

Summary financial data is provided in the following pages. The slide presentation and related materials will be available prior to the call on the above website.

About Schnitzer Steel Industries, Inc.

Schnitzer Steel Industries, Inc. is one of the largest manufacturers and exporters of recycled metal products in North America with operating facilities located in 23 states, Puerto Rico and Western Canada. Schnitzer 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 50 stores which sell serviceable used auto parts from salvaged vehicles and receive approximately 5 million annual retail visits. The Company’s steel manufacturing operations produce finished steel products, including rebar, wire rod and other specialty products. The Company began operations in 1906 in Portland, Oregon.

SCHNITZER STEEL INDUSTRIES, INC.

FINANCIAL HIGHLIGHTS

($ in thousands)

(Unaudited)

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

May 31,

2020

 

 

February 29,

2020

 

 

May 31,

2019

 

 

May 31,

2020

 

 

May 31,

2019

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Auto and Metals Recycling:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ferrous revenues

 

$

189,783

 

 

$

222,465

 

 

$

280,362

 

 

$

604,720

 

 

$

836,662

 

Nonferrous revenues

 

 

78,858

 

 

 

87,901

 

 

 

112,785

 

 

 

256,571

 

 

 

316,450

 

Retail and other revenues

 

 

31,736

 

 

 

27,303

 

 

 

35,876

 

 

 

89,512

 

 

 

98,388

 

Total Auto and Metals Recycling revenues

 

 

300,377

 

 

 

337,669

 

 

 

429,023

 

 

 

950,803

 

 

 

1,251,500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cascade Steel and Scrap:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steel revenues(1)

 

 

83,414

 

 

 

85,539

 

 

 

96,626

 

 

 

246,278

 

 

 

271,988

 

Recycling revenues

 

 

21,136

 

 

 

18,620

 

 

 

24,805

 

 

 

56,697

 

 

 

70,227

 

Total Cascade Steel and Scrap revenues

 

 

104,550

 

 

 

104,159

 

 

 

121,431

 

 

 

302,975

 

 

 

342,215

 

Intercompany sales eliminations

 

 

(2,244

)

 

 

(2,346

)

 

 

(3,058

)

 

 

(6,029

)

 

 

(8,734

)

Total revenues

 

$

402,683

 

 

$

439,482

 

 

$

547,396

 

 

$

1,247,749

 

 

$

1,584,981

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING (LOSS) INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AMR operating income

 

$

2,503

 

 

$

19,304

 

 

$

29,189

 

 

$

19,375

 

 

$

73,947

 

CSS operating income

 

$

6,931

 

 

$

3,524

 

 

$

8,116

 

 

$

14,692

 

 

$

25,802

 

Consolidated operating (loss) income

 

$

(3,706

)

 

$

7,691

 

 

$

24,459

 

 

$

(3,925

)

 

$

66,184

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted AMR operating income(2)

 

$

4,730

 

 

$

19,688

 

 

$

29,189

 

 

$

23,566

 

 

$

74,010

 

CSS operating income

 

 

6,931

 

 

 

3,524

 

 

 

8,116

 

 

 

14,692

 

 

 

25,802

 

Adjusted segment operating income(2)

 

 

11,661

 

 

 

23,212

 

 

 

37,305

 

 

 

38,258

 

 

 

99,812

 

Adjusted corporate expense(2)

 

 

(7,542

)

 

 

(9,198

)

 

 

(9,670

)

 

 

(24,757

)

 

 

(28,802

)

Intercompany eliminations

 

 

54

 

 

 

(36

)

 

 

(269

)

 

 

192

 

 

 

50

 

Adjusted operating income(2)

 

 

4,173

 

 

 

13,978

 

 

 

27,366

 

 

 

13,693

 

 

 

71,060

 

Restructuring charges and other exit-related activities

 

 

(2,710

)

 

 

(4,633

)

 

 

(75

)

 

 

(7,810

)

 

 

(813

)

Asset impairment charges

 

 

(2,227

)

 

 

(402

)

 

 

 

 

 

(4,321

)

 

 

(63

)

Charges for legacy environmental matters, net(3)

 

 

(2,078

)

 

 

(451

)

 

 

(502

)

 

 

(3,822

)

 

 

(1,670

)

Business development costs

 

 

(791

)

 

 

(801

)

 

 

 

 

 

(1,592

)

 

 

 

Charges related to the settlement of a wage and hour class action lawsuit

 

 

(73

)

 

 

 

 

 

(2,330

)

 

 

(73

)

 

 

(2,330

)

Total operating (loss) income

 

$

(3,706

)

 

$

7,691

 

 

$

24,459

 

 

$

(3,925

)

 

$

66,184

 

(1)

Steel revenues include primarily sales of finished steel products, semi-finished goods (billets) and manufacturing scrap.

(2)

See Non-GAAP Financial Measures for reconciliation to U.S. GAAP.

(3)

Legal and environmental charges for legacy environmental matters, net of recoveries. The prior year periods have been recast for comparability. Legacy environmental matters include charges (net of recoveries) related to the Portland Harbor Superfund site and to other legacy environmental loss contingencies.

SCHNITZER STEEL INDUSTRIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

($ in thousands, except per share amounts)

(Unaudited)

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

May 31,

2020

 

 

February 29,

2020

 

 

May 31,

2019

 

 

May 31,

2020

 

 

May 31,

2019

 

Revenues

 

$

402,683

 

 

$

439,482

 

 

$

547,396

 

 

$

1,247,749

 

 

$

1,584,981

 

Cost of goods sold

 

 

356,217

 

 

 

380,520

 

 

 

474,598

 

 

 

1,101,497

 

 

 

1,379,418

 

Selling, general and administrative

 

 

45,544

 

 

 

46,426

 

 

 

48,575

 

 

 

138,744

 

 

 

139,483

 

(Income) from joint ventures

 

 

(309

)

 

 

(190

)

 

 

(311

)

 

 

(698

)

 

 

(980

)

Asset impairment charges

 

 

2,227

 

 

 

402

 

 

 

 

 

 

4,321

 

 

 

63

 

Restructuring charges and other exit-related activities

 

 

2,710

 

 

 

4,633

 

 

 

75

 

 

 

7,810

 

 

 

813

 

Operating (loss) income

 

 

(3,706

)

 

 

7,691

 

 

 

24,459

 

 

 

(3,925

)

 

 

66,184

 

Interest expense

 

 

(2,656

)

 

 

(1,320

)

 

 

(2,294

)

 

 

(5,399

)

 

 

(6,267

)

Other (expense) income, net

 

 

(90

)

 

 

(98

)

 

 

29

 

 

 

18

 

 

 

373

 

(Loss) income from continuing operations before income taxes

 

 

(6,452

)

 

 

6,273

 

 

 

22,194

 

 

 

(9,306

)

 

 

60,290

 

Income tax benefit (expense)

 

 

1,804

 

 

 

(1,770

)

 

 

(5,762

)

 

 

2,568

 

 

 

(13,733

)

(Loss) income from continuing operations

 

 

(4,648

)

 

 

4,503

 

 

 

16,432

 

 

 

(6,738

)

 

 

46,557

 

(Loss) income from discontinued operations, net of tax

 

 

(69

)

 

 

1

 

 

 

8

 

 

 

(40

)

 

 

(202

)

Net (loss) income

 

 

(4,717

)

 

 

4,504

 

 

 

16,440

 

 

 

(6,778

)

 

 

46,355

 

Net income attributable to noncontrolling interests

 

 

(278

)

 

 

(621

)

 

 

(750

)

 

 

(1,329

)

 

 

(1,585

)

Net (loss) income attributable to SSI shareholders

 

$

(4,995

)

 

$

3,883

 

 

$

15,690

 

 

$

(8,107

)

 

$

44,770

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per share from continuing operations

 

$

(0.18

)

 

$

0.14

 

 

$

0.57

 

 

$

(0.29

)

 

$

1.63

 

Net (loss) income per share

 

$

(0.18

)

 

$

0.14

 

 

$

0.57

 

 

$

(0.29

)

 

$

1.63

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) income per share from continuing operations

 

$

(0.18

)

 

$

0.14

 

 

$

0.56

 

 

$

(0.29

)

 

$

1.60

 

Net (loss) income per share

 

$

(0.18

)

 

$

0.14

 

 

$

0.56

 

 

$

(0.29

)

 

$

1.59

 

Weighted average number of common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

27,724

 

 

 

27,721

 

 

 

27,510

 

 

 

27,653

 

 

 

27,548

 

Diluted

 

 

27,724

 

 

 

28,139

 

 

 

28,074

 

 

 

27,653

 

 

 

28,184

 

Dividends declared per common share

 

$

0.1875

 

 

$

0.1875

 

 

$

0.1875

 

 

$

0.5625

 

 

$

0.5625

 

...

SCHNITZER STEEL INDUSTRIES, INC.

SELECTED OPERATING STATISTICS

(Unaudited)