Schnitzer Steel (SCHN) is trading higher today (+4%) after reporting 3Q17 (May) earnings this morning. In case you're not familiar with Schnitzer Steel, the company is a bit different than most other steel producers. For one thing, it's based in Portland, OR while most steelmakers are in the Midwest, near the automotive manufacturers.
The other thing is that 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. It then processes the scrap and sells it to other steelmakers so they can make steel or SCHN uses it in its own steelmaking operations.
Schnitzer operates two segments: Auto and Metals Recycling Business (AMR) and Steel Manufacturing Business (SMB). Its AMR segment is by far SCHN's larger segment. This segment does what we describe above. About 60% of segment revenue is ferrous sales and 30% is non-ferrous. The remaining 10% is other sales. In addition to recycling, the AMR segment also includes its auto parts business which sells used auto parts through its self-service facilities in 16 states.
Not to get too technical, but the difference between ferrous metals and non-ferrous is that ferrous metals contain iron and non-ferrous materials do not. Ferrous metals include steel, carbon steel, stainless steel, cast iron, and wrought iron. These metals are good for automobiles, construction, industrial containers, cooking utensils, appliances, railroads etc. Also, most ferrous metals have magnetic properties which makes them good for industrial uses. Examples of non-ferrous metals include aluminum, brass, copper, nickel, tin, lead and zinc, as well as precious metals like gold and silver. Non-ferrous metals are strong but are much lighter and more malleable than ferrous metals. This makes them good for airplanes and canned food as they do not rust.
Besides AMR, Schnitzer Steel also operates its Steel Manufacturing Business (SMB). This segment represents 20% of revenue and it includes facilities with an annual capacity of 800,000 tons. This segment produces rebar and wire rod for construction purposes.
Of note, since the end of MayQ, the company integrated its SMB segment with AMR's Oregon metals recycling operations, forming a new division, Cascade Steel and Scrap (CSS). Schnitzer expects to report the results of CSS operations as a single reportable segment beginning 4Q17 (Aug).
Turning to the MayQ results, SCHN reported adjusted EPS of $0.56 per share, at the higher end of its June 15 guidance of $0.52-0.56, and a good bit better than the $0.46 earned in the prior year period and the $0.37 earned in 2Q17 (Feb). Revenue rose 35.5% year/year to $477 mln.
In both segments, higher volumes and operating leverage drove increased operating income. Through the first nine months of this year, SCHN has achieved its best earnings performance since fiscal 2012. Its balance sheet continued to strengthen as the company generated strong operating cash flow, driven primarily by higher profitability and also by lower working capital as compared to FebQ. This enabled SCHN to reduce debt while continuing to invest in its operations.
In sum, investors seem to be quite pleased with the MayQ results as the final EPS number came in at the high end of prior guidance. Of note, this stock traded 7% higher on Friday as investors appear to have been pretty optimistic about the MayQ report and they were not disappointed. The stock has been slowing climbing higher since its April lows below $18, but investors hope this report can kick start the stock.