Another earnings shock has seen shares in scrap giant, Sims Metals Management (SGM) plunge 19% yesterday.
The reason – a warning that the company will it only break even in the first half of 2015-16, just months after predicting profits would grow.
Shares in the company closed $7.76 following the trading update, which was delivered at Sims’ annual general meeting. The close was a 10 year low.
Sims said at its full year results in August that "despite external headwinds, due to the internal strategic initiatives, we anticipate continued underlying EBIT [earnings before interest and tax] improvement in FY16".
However CEO Galdino Claro told the meeting that a 30% fall in ferrous steel prices since the August results, and weaker demand in China had weighed heavily on the company.
He said the "sharp deterioration in market conditions" meant "underlying EBIT is currently expected to be around break even" for the December half.
"External market conditions and dynamics represent a ‘new-norm’ and are not expected to improve in the short term," Mr Claro said.
The company said it was accelerating a cost reduction program to “reset" its fixed cost base in an attempt to offset the poor market conditions.
"(T)he metals recycling industry is experiencing the most difficult conditions experienced in over a decade. These conditions have deteriorated further since the end of FY15. The deterioration has been so significant that we have commenced execution on a set of additional Streamline and Optimise initiatives,” the CEO told shareholders.
"We will not deviate from our strategy of internal improvement. Through the strengths of our superior business model, our execution discipline, and the quality of our people, we remain committed to increasing the return on capital for our shareholders.”
SGM 1Y – Sims trashed on earnings backflip
Mr Claro told the meeting that volumes and prices of secondary metals are at the lowest level of the last decade. External market conditions and dynamics represent a “new-norm” and are not expected to improve in the short term.
"Slowing Chinese finished steel demand resulted in lower steel, iron ore, and secondary metal domestic prices. In response, Chinese steel producers have increased exports of finished and semi-finished steel into the markets of many of our traditional customers, leading to lower global demand for secondary metal.
"During the first half of FY16, ferrous prices collapsed by 42% ($114/tonne), including a 30% drop ($66/tonne) since we reported our financial results in August.
"Lower ferrous scrap prices have jeopardised the economic appeal of collection of more marginal material by our suppliers. In turn, the metals recycling industry globally has experienced a further drop of intake volumes since the end of FY15.
"The sharp deterioration in market conditions experienced in 1H FY16 has placed significant downward pressure on underlying EBIT. Based on results to the end of October, 1H FY16 underlying EBIT is currently expected to be around break-even.
"To address these challenges, and to ensure an above cost of capital return is achieved by FY18, we are in the process of “resetting” our fixed cost base and operational footprint to the “new-norm”. The majority of these initiatives will be in progress during 1H FY16, and will be completed by the end of 2H FY16.
"The “resetting plan” includes the redesign, closure and divestment of facilities where an acceptable return on capital is unlikely to be achieved within a reasonable time-frame. In addition, we are accelerating the speed of implementation of our Optimisation initiatives and prioritising the delivery of the most impactful projects. We expect the majority of the benefits from these initiatives to be balanced towards 2H FY16,” Mr Claro said.
The company posted earnings before interest and tax of $142 million 2014-15.
With a dividend policy of paying out 45% to 55% to shareholders, there has to be doubt about the interim dividend next February, unless there’s a significant improvement by then, or the cost cutting plan works a miracle. The claimed benefits of the cost cutting in the June half year might just see a small interim dividend paid early next year.
