Sims scraps dividend

The world’s largest listed metal recycler, Sims Metal Management (ASX: SGM), last week reported full year results to 30 June 2013. The results were mixed, with greater than expected operational cost savings improving earnings in North America, but weak overall conditions resulted in group revenue falling 20%.

The company reported a net loss of $466.1 million for FY13, including $304 million in goodwill and other charges, while the underlying net profit after tax of $17.1 million was down 76% on the previous corresponding period.

Sims noted that the decline in revenue and profit was largely attributed to lower average scrap prices in Europe, Australia and North America, and 12% lower sales volumes over the year. Earnings before interest, tax, depreciation and amortisation (EBITDA) for North America rose 30% to $102.3 million, as higher margins and cost savings of $48.4 million offset the negative impact of lower scrap prices.

EBITDA for Australasia fell 13% to $78.9 million, with the result helped by $10 million in cost savings, while European EBITDA of $10.2 million was 88% lower than FY12. Sims attributed the European result to ongoing economic weakness in the region resulting in less scrap metal, and lower prices received.

Sims did not declare a final dividend for 2013, as the company wisely chose to focus on capital management and debt reduction. In FY13 net debt was reduced by $138.4 million to $153.8 million, bringing gearing to 7.4% of total capital.

The single biggest challenge the company must overcome in the year ahead is subdued economic conditions in Australia, Europe, and North America. Scrap metal demand is largely dependent on production levels of structural beams and long steel products usually required in non-residential construction, while scrap supply is often correlated to consumer confidence as large household purchases increase with improving confidence. Growth in non-residential construction has not yet experienced the same rally as residential construction in the above regions; however consumer confidence is at a five-year high in North American and improving in Australia and Europe.

Additionally, while cost savings initiatives in the past year have been successful, more will be required to ensure the company remains profitable until the domestic and overseas markets for scrap metal improves.

Foolish takeaway

For long term investors looking for exposure to the economic recovery of Australia, Europe and North America, Sims metal management is a solid, established business with room for growth as the economy improves. It is aggressively paying down debt and cutting costs to improve margins to whether the current challenging market conditions. This should leave the company well placed to benefit from the ongoing economic recovery in the next two to five years.

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned in this article.

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