Schnitzer Steel (SCHN 34.95, +1.95, +5.91%) is trading modestly higher today after
guiding Q3 (May) EPS above market expectations. The company is a bit different
than most other steel producers. For one, it's based in Portland, OR while most
steelmakers are in the Midwest, near the automotive manufacturers.
Another distinguishing quality 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. 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.
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, and railroads. 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. In FY17, the company integrated its SMB segment with AMR's Oregon metals recycling operations, forming a new division, Cascade Steel and Scrap (CSS).
Turning to the guidance, Schnitzer Steel expects Q3 (May) non-GAAP EPS of $1.22-1.28, which is above market expectations. Auto and Metals Recycling (AMR) is expected to report operating income in the range of $53-55 mln vs $30 mln in the prior year period. AMR's MayQ performance is expected to benefit from expanded metal spreads, higher ferrous sales volumes, higher average ferrous and nonferrous net selling prices, benefits from commercial initiatives, and sustained contributions from productivity improvements.
In sum, this guidance is pretty much in-line with the nice upside guidance we saw from Nucor (NUE) yesterday and from Steel Dynamics (STLD) this morning.
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