13 Jun Schnitzer Steel: Riding High on the Recycled Metal Demand Wave
Schnitzer Steel Industries, Inc. (NASDAQ: SCHN) operates at the intersection of metals recovery, reuse, recycling, and manufacturing. As a vertically integrated organization, Schnitzer offers a range of products and services to meet the global demand for recycled ferrous and nonferrous metal.
Schnitzer Steel Industries, Inc. (NASDAQ: SCHN)
Market Cap: $879.11M; Current Share Price: $32.06
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The Company
Schnitzer Steel Industries, Inc. is one of North America’s largest ferrous and nonferrous metal recyclers, including end-of-life vehicles, and a manufacturer of finished steel products. It has operating facilities located in 25 states, Puerto Rico, and Western Canada. It has seven deep water export facilities on both the East and West Coasts and in Hawaii and Puerto Rico. The Company’s integrated operating platform also includes 51 stores selling serviceable used auto parts from salvaged vehicles and receiving over 4.1 million annual visits.
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We will discuss certain trends which make Schnitzer an interesting watch.
- Promising market conditions
Worldwide demand for recycled ferrous and nonferrous metal is driven primarily by production levels for finished steel and products using nonferrous metal. Recycled ferrous metal is the primary feedstock for steel mill production using electric arc furnace (EAF) technology and one of the raw materials utilized for steel manufacturing using blast furnace technology. Steel mills worldwide, including those in the North American domestic market, are the primary end markets for Schnitzer’s recycled ferrous metal products.
Over the last several years, Global EAF Steel Production has shown a rising trend.
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Moreover, long-term demand for recycled metals will continue to grow – driven by global economic growth and an increased focus on environmental policies promoting natural resource conservation, lower greenhouse gas emissions, and lower energy usage. Specifically, energy transition efforts to electric vehicles and solar and wind power generation sources are expected to support global copper demand growth.
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Compared to iron ore mined from natural resources, the significant environmental benefits and production efficiencies associated with steelmaking that maximizes the use of recycled metal as a raw material, will also positively contribute to long-term worldwide demand for recycled ferrous metal.
Further, decarbonization efforts by companies, industries, and governments around the world, including investments in low-carbon technologies that are more metal intensive and minimize carbon dioxide emissions from the use of fossil fuels, among other factors, support long-term global demand for recycled nonferrous metal such as aluminum and copper.
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Thus, over the long term, demand for recycled metals will grow on the back of factors such as
- Impactful Business Strategy
To benefit from the expected increase in global demand, Schnitzer is pursuing certain effective strategies. In this regard, the Company utilizes a four-pronged approach:
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The total investment for the above initiatives is expected to be $130 million, including approximately $125 million spent to date. The completion of installation is targeted by the end of the summer of CY2023, and achievement of full run-rate benefits is targeted by the end of CY2023.
The sustainability benefits from these initiatives would be higher metal recovery, increased material separation, greater waste diversion from landfills, reduction in air emissions, use of recycled water, and energy efficiency improvements. It would also lead to product enhancement and increased optionality in the form of more furnace-ready products, including brass, zinc, stainless steel, copper, and other metals.
- Impressive Financial Results
For Q2 FY23, ferrous sales volumes increased sequentially by 48%, benefiting from a drawdown of inventories, while nonferrous sales volumes were up by 1% sequentially. Average net selling prices for ferrous and nonferrous up sequentially by 8% and 10%, respectively.
The Company reported an Adjusted EBITDA of $32 million and an adjusted EBITDA per ferrous ton of $25. Net income stood at $4 million, and net income per ferrous ton was $3. Adjusted diluted earnings per share from continuing operations was $0.14.
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There was also a strong operating cash flow generation of $88 million.
It is to be noted that the Board of Directors declared a quarterly cash dividend of $0.1875 per common share, payable May 8, 2023, to shareholders of record on April 24, 2023. Schnitzer has paid a dividend every quarter since going public in November 1993.
Specifically for the ferrous market, the Company reported that global demand strengthened throughout 2Q23 – drivers of demand included strong rebar demand in Turkey and inventory restocking. The Company also reported a tighter scrap supply flow environment, driven by lower economic activity, winter seasonality, and inflationary pressure on collection costs.
For FY22, the Company reported that results were the second-best year in the Company’s history, driven by a combination of high demand for finished steel and recycled metals, increased ferrous and nonferrous sales volumes, two acquisitions, and benefits from productivity initiatives.
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Schnitzer achieved the second-highest adjusted EBITDA in the Company’s history, driven by strong demand and progress on multi-year strategic initiatives, which included volume growth, the addition of 10 recycling facilities in the Southeast, productivity improvement, and working capital management.
For FY22, the Company reported an Adjusted EBITDA of $313 million and diluted earnings per share from continuing operations of $5.72. Operating cash flow for the year was strong at $238 million. Total debt was $249 million at the end of FY22, and debt, net of cash, of $205 million.
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Going forward, Schnitzer expects a further improvement in results in the third quarter driven by an expansion of metal margins as the Company realizes the benefit of shipments contracted at higher prices and as supply flows improve seasonally.
Schnitzer expects the structural demand for recycled metals to remain positive, supported by the transition to low-carbon technologies, the increased focus on decarbonization, and the expected funding related to the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, including Buy Clean provisions. As a result, the Company’s performance should also continue to improve over the next few years, making it an interesting stock to track.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Reference:
https://www.schnitzersteel.com/documents/2023-q2-earnings-conf-call-presentation.pdf
https://www.schnitzersteel.com/documents/2023-april-investor-presentation.pdf
https://www.sec.gov/ix?doc=/Archives/edgar/data/912603/000095017022019904/schn-20220831.htm
https://www.sec.gov/ix?doc=/Archives/edgar/data/912603/000095017023012168/schn-20230228.htm
https://www.schnitzersteel.com/company/investors/news-release-details/22221
https://www.schnitzersteel.com/company/investors/news-release-details/21886
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