Schnitzer Steel Industries, Inc. (NASDAQ: SCHN)
is a steel recycling and scrap manufacturing company based in Portland, Oregon. The company announced its third quarter financial results on May 31, 2022.
-The results were better than expected as the company benefited from domestic sales of non-ferrous metals.
– Net income was $75 million, compared to $65 million in the third quarter of fiscal 2021, up 15% yoy.
-Diluted earnings per share came in at $2.52 compared to $2.16 in the year-ago quarter.
-Revenues increased to $1010 billion, up from $821 million in the first quarter of 2021.
– Acquired two full-service facilities, bringing total facilities to 24.
– Processed 90,000 ferrous tons and 14 million non-ferrous pounds in FY21.
-Domestic demand increased from 37% to 52% of sales for the quarter.
Schnitzer Steel continued to see mixed results across its business. The ferrous metals segment was down 7% yoy as market volatility weighed on results. On the other hand, demand for non-ferrous metals continued to grow strongly, with revenues for the segment up 29% yoy. The main driver of the increased demand for the segment was the easing of supply chains. In addition, ferrous and non-ferrous prices rose by 35% and 15% respectively. Finally, finished steel volumes grew 12% yoy but sequentially by 27% as shipping backlogs began to clear. Prices were 41% for finished steel products. Meanwhile, the occupancy rate remained high at 96% for the year. Finally, SSI volumes for the quarter came in at 1129,000 LT.
Profit, margin, balance sheet and cash flow:
Gross margins were flat yoy at 17.5% and net income also flat at 7.5%. Net income per tonne of ferrous material increased from $54 per tonne to $67 per tonne. The operating result amounted to 9.7%. Operating cash flow for the quarter was $45 million and capital expenditures were $29 million. Total debt was $322 million and debt to equity is currently 0.28.
Outlook for the metals market:
The metals market remains tight despite the global macroeconomic backdrop. Demand for recycled metals and scrap is expected to reach $368 billion by 2030, at a CAGR of 5.2%. China remains the main producer of iron ore, producing 1.3 billion tons per year and capacity is unlikely to increase significantly. Demand is expected to be primarily driven by the developing market as more and more metal is used for everything from most consumer goods to infrastructure etc. Stronger demand pushed prices to $600/tonne. Demand for metals remains strong due to the need for non-ferrous metals, while demand for ferrous metals remains less intense. The critical source of demand remains primarily in the energy transition industry. Moreover, Asia remains the main source of growth for metals demand.
Management wants to improve throughput of high-value metals as it wants to capitalize on the demand for these metals from key industries. It has set a sales target of 5.3 million for FY23.
China has recently become the largest consumer of steel and metals. While the government has set high growth targets, analysts believe those targets cannot be achieved without substantial incentives. China continues to try to get out of the recession, which could be positive for the industry, but demand is still likely to be impacted. The main source of the sudden growth was the North American and European markets. Rather, metal-heavy industries continue to demand at a rapid pace, but are also slowing down rapidly as capital-intensive industries are witnessing a pullback to higher rates.
The stock is down 35% from a 52-week high and is trading at a very low P/E of 4.5. Metals recycling is in a slow to low-growth market, and investors are particularly concerned that prices could fall quickly as a result of their recent gains. Demand risks and a history of poor earnings continue to weigh on the stock. Current domestic demand may not hold up and despite the low valuation, market sentiment could quickly turn negative. Until there is a clear understanding of where the market is headed, investors are likely to sit on the sidelines.