Schnitzer Steel Industries, Inc. (Schnitzer) has reported revenues of $499 million for the first quarter of fiscal 2009, compared with the sales of $604 million in the year-ago quarter. It has also reported a net loss of $34 million, or $1.21 loss per share, for the first quarter of fiscal 2009, compared with the net income of $25 million, or $0.85 per share, in the year-ago quarter.
The pre-tax operating loss of $50 million included non-cash inventory write downs of $52 million for the quarter. During the quarter the company used cash from operations to reduce debt, net of cash, by $48 million, further strengthening its balance sheet.
During the first quarter we faced difficult market conditions, including an unprecedented drop in demand for recycled metals and finished steel products, said Tamara Lundgren, president and chief executive officer. The weak economic environment and the worldwide financial crisis resulted in a rapid and precipitous drop in both sales volumes and sales prices from those experienced in the previous quarter in all of our businesses.”
In the face of this environment, we undertook a series of actions to adjust our costs and production levels to meet the lower demand. We have implemented a cost containment program which includes reducing full time headcount by more than 10%, reducing production output, on average, by approximately 40%, and lowering our SG&A costs, all compared to levels at the end of the last fiscal year. These initiatives were put in place mid-quarter, and we expect to realize the full benefit going forward. We also reacted quickly to reduce our purchase costs for raw materials, allowing us to maintain positive cash metal spreads. Our lower production output will allow us to match our inventory with levels appropriate for the current market conditions.”
As a result of these actions, we believe we have appropriately adjusted the company’s cost base to reflect the current market environment, while preserving our ability to take advantage of stronger and sustainable future demand. In addition, through our continuous improvement program and other initiatives, we expect to achieve further cost reductions and efficiencies. During the quarter, we generated $70 million in cash from operations and further reduced our leverage. We continue to believe our strong balance sheet will allow us to pursue future opportunities which may arise, added Lundgren.
Revenues for the Metals Recycling Business declined 66% from the record revenues posted in the fourth quarter of fiscal 2008. The decline reflected the collapse in demand for recycled metals related to the worldwide economic and financial crisis which occurred during the quarter.
Average net ferrous sales prices fell 42% and ferrous volumes fell 48%, both on a quarter over quarter basis. Nonferrous volumes and prices were also lower. Compared to the first quarter of fiscal 2008, revenues declined 17% as lower ferrous sales volumes and nonferrous sales prices more than offset higher average net ferrous sales prices and higher nonferrous volumes.
Net sales prices declined throughout the first quarter, with average net ferrous prices during November at levels about 40% less than the quarterly average. Average price levels during the quarter were impacted by a number of shipments scheduled for November which were cancelled by customers and resold at lower prices than originally contracted.
Lower ferrous sales volumes on a year over year and quarter over quarter basis were driven by lower demand for the raw materials used in the production of steel products. In addition, quarterly sales volumes were also impacted by deferrals and cancellations of customer contracts.
The operating loss for the quarter of $19 million included the impact of contract cancellations that occurred in November, as well as a non-cash inventory write down of $29 million. During the quarter, the Metals Recycling Business was able to rapidly adjust purchase costs for raw materials and maintain positive cash spreads on its raw material purchases.
Revenues for the Auto Parts Business declined 35% compared to the record revenues reported in the fourth quarter of fiscal 2008, reflecting the significant decline in demand and pricing for recycled metals. All categories of revenue were lower. Compared to the first quarter of fiscal 2008, revenues declined 7%, as lower prices for cores and scrapped vehicles, lower sales volumes and lower full-service parts sales more than offset a slight increase in self-service parts sales.
The operating loss of $9 million was primarily attributable to the weak revenue environment and inventory costs which declined more slowly than prices for recycled metals. During the quarter the Auto Parts Business was able to maintain positive cash spreads on its purchases of scrapped vehicles, although that spread was lower than normal due to tight supply conditions which caused buy prices to lag the drop in the market for other recycled metals.
Revenues for the Steel Manufacturing Business declined 46% compared to the fourth quarter of 2008 as demand for finished steel products weakened considerably. Sales volumes dropped 46% to 98 thousand tons and sales prices fell 10% to $864/ton, although current market prices are significantly lower. Compared to the first quarter of fiscal 2008, revenues declined 10%, as a 44% drop in sales volumes more than offset a 44% increase in average sales prices.
The operating loss of $31 million included a non-cash inventory write down of $32 million. The lower operating income compared to the first quarter of fiscal 2008 reflected the impact of lower sales volumes caused by weaker economic conditions, a decline in inventory costs which lagged the reduction in selling prices during the quarter and lower anticipated future selling prices that resulted in the Steel Manufacturing Business recording the non-cash inventory write-down. In addition, the decrease in operating income reflected a $6 million charge for production and maintenance shutdown costs that could not be capitalized in inventory. The company’s strategy has been to reduce finished goods production to levels reflective of current market conditions and to reduce inventory levels.
Share Repurchase Program:
The company announced on January 9, 2009 that its board of directors has approved an increase in the shares authorized for repurchase by 3.0 million, bringing the total number of shares available for repurchase to 4.5 million. The company repurchased no shares during the first fiscal quarter of 2009.