Schnitzer Steel (SCHN 25.45, +0.57, +2.29%) is trading modestly higher today after
reporting what we would describe as a mixed quarter.
Schnitzer Steel is a bit different than most other steel producers. For one thing, it's based in Portland, OR while most steelmakers are centered in the Midwest, near major automotive manufacturers. Furthermore, SCHN is more of a metals recycler than a steel producer. It buys scrap steel and iron -- mostly from auto salvage yards, industrial manufacturers, and metals brokers -- and then processes the scrap and sells it to other steelmakers, or alternatively SCHN uses it in its own steelmaking operations.
Schnitzer operates two segments: the Auto and Metals Recycling Business (AMR) and Cascade Steel and Scrap (CSS). The AMR segment, which is engaged in the practices described above, is by far SCHN's larger segment. About 60% of segment revenue derives from ferrous (steel, carbon steel, stainless steel) sales and 30% from non-ferrous (aluminum, brass, copper, nickel). The remaining 10% is other sales. Its CSS segment represents 20-25% of revenue; it includes steel production facilities that make rebar and wire rod for construction purposes. Cascade Steel and Scrap was formed as a new division in FY17, when the company integrated its SMB segment with AMR's Oregon metals recycling operations.
Turning to the FebQ results, non-GAAP EPS fell yr/yr to $0.48, but that was a bit better than market expectations. Revenue fell 15.2% yr/yr to $474 mln, which was below market expectations. SCHN concedes that FebQ was a challenging environment that reflected declining prices for scrap during the winter months and severe weather in its West Coast and Pacific Northwest markets.
The good news is that AMR's results reflected benefits from some of the company’s productivity improvement initiatives, which are tracking ahead of schedule. AMR has also been seeking to optimize purchase volumes and to diversify sales. AMR ferrous sales volumes in FebQ decreased 4% yr/yr and 7% sequentially, primarily due to supply flows from unusually severe weather conditions, as well as from a lower price environment. Nonferrous sales volumes were 9% higher.
Regarding its CSS segment, it saw improved yr/yr operating and financial results despite weather-related construction delays that impacted sales volumes. CSS finished steel sales volumes were 25% lower yr/yr and down 21% sequentially, primarily due to weather-related construction delays in its West Coast markets resulting from prolonged periods of rain in California and unusually cold weather in the Pacific Northwest.
Schnitzer is always a tough one to get a handle on in the steel industry. Most of its business is the buying and selling of scrap, and this market is not widely publicized, so it's difficult for the average investor to get a feel for conditions in the industry. However, the market environment at present seems to be difficult.
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