Gerdau Ameristeel Reports 2nd Quarter Results
08/09/2007 - Gerdau Ameristeel Corp. reported net income of $139.1 million on net sales of $1.3 billion for the second quarter, and net income of $272.7 million on net sales of $2.7 billion for the six months ended June 30, 2007.
Gerdau Ameristeel Corp. reported net income of $139.1 million on net sales of $1.3 billion for the second quarter, and net income of $272.7 million on net sales of $2.7 billion for the six months ended June 30, 2007.
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Gerdau Ameristeel 2Q Developments
On June 17, Pacific Coast Steel (PCS, a majority owned joint venture of the company) completed the acquisition of the assets of Valley Placers, Inc. (VPI), a reinforcing steel contractor in Las Vegas, Nev. In addition to contracting activities, VPI operates a steel fabrication facility and retail construction supply business in Las Vegas. VPI currently employs more than 110 field ironworkers and specializes in smaller commercial, retail and public works projects.
On July 10, the company announced that it signed a definitive merger agreement to acquire Chaparral Steel Co. for approximately $4.2 billion in cash. Chaparral operates two mini-mills, one in Midlothian, Texas, the other in Dinwiddie County, Va. Chaparral has an annual installed capacity of 2.6 million tons. The transaction, subject to customary closing conditions, is expected to close before the end of the year. The company has secured financing commitments of $4.6 billion to complete the transaction.
The company also reached an agreement with the United Steelworkers Union at the Joliet, Ill. mill. The contract is effective July 22, 2007 and expires July 22, 2011.
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Second Quarter Results—The $139.1 million net income ($0.45 per share fully diluted) compares to net income of $127.6 million ($0.42 per share fully diluted) for the three months ended June 30, 2006. Net sales of $1.3 billion compares to net sales of $1.2 billion for the three months ended June 30, 2006. EBITDA was $244.3 million, which compares to EBITDA of $222.1 million for the three months ended June 30, 2006.
Included in selling and administrative expense is a $9.2-million non-cash pretax expense to mark to market outstanding stock appreciation rights and expenses associated with other executive compensation agreements compared to a $5.7-million non-cash pretax expense for the three months ended June 30, 2006.
Six Month Results—The $272.7 million net income ($0.89 per share fully diluted) compares to net income of $216.5 million ($0.71 per share fully diluted) for the six months ended June 30, 2006. Net sales of $2.7 billion compares net sales of $2.3 billion for the six months ended June 30, 2006. EBITDA was $489.1 million, which compares to EBITDA of $395.5 million for the six months ended June 30, 2006.
Included in selling and administrative expense is an $18.0-million non-cash pretax expense to mark to market outstanding stock appreciation rights and expenses associated with other executive compensation agreements compared to a $32.1-million non-cash pretax expense for the six months ended June 30, 2006.
Second Quarter Operating Results—Excluding 50% owned joint ventures, the company shipped 1.7 million tons of finished steel, a decrease of 4.4% over the three months ended June 30, 2006. The company believes its customers had high levels of inventory at March 31, 2007 due to these customers buying steel in advance of the price increases that were announced during the three months ended March 31, 2007, which prompted a reduction in shipments for the recent quarter as customers reduced their inventory to more-normal levels.
Average mill prices increased $82 per ton (14.6%), compared to the three months ended June 30, 2006. Average fabricated steel prices increased $130 per ton (17.3%) compared to the three months ended June 30, 2006. This comparative increase in average prices was the effect of the company's acquisition of PCS in November 2006. PCS derives a significant portion of its revenue from the installation of reinforcing steel, which generates a higher average net selling price on a per ton basis.
Scrap raw material cost used in production increased $29 per ton (14.2%) compared to the three months ended June 30, 2006. Metal spread (the difference between mill selling prices and scrap raw material cost) increased $53 per ton (14.7%) compared to the three months ended June 30, 2006. Mill manufacturing costs were $255 per ton compared to $238 per ton for the three months ended June 30, 2006; primarily as a result of the reduced production at some of the mills to ensure production remained in line with demand.
Six-Month Operating Results—Excluding 50% owned joint ventures, the company shipped 3.6 million tons of finished steel, an increase of 5.5% over the six months ended June 30, 2006. This increase resulted from the incremental tons shipped from the Sheffield Steel Corp. and Pacific Coast Steel (PCS) operations that were acquired in June and November 2006, respectively.
Average mill prices increased $56 per ton (10.1%) compared to the six months ended June 30, 2006. Average fabricated steel prices increased $126 per ton (16.9%) compared to the six months ended June 30, 2006. This comparative increase in average prices was a result of the company's acquisition of PCS in November 2006. Scrap raw material cost used in production increased $30 per ton (15.5%) compared to the six months ended June 30, 2006. Metal spread (the difference between mill selling prices and scrap raw material cost) increased $26 per ton (7.2%) compared to the six months ended June 30, 2006. Mill manufacturing costs were $253 per ton compared to $242 per ton for the six months ended June 30, 2006.
50% Owned Joint Venture Results (Second Quarter)—Results of the company's portion of its 50% owned joint ventures primarily refers to Gallatin Steel, a flat rolled mill joint venture with Dofasco Inc.
Gerdau Ameristeel's income from operations was $199.8 million, and the company’s share of the income from operations was $15.0 million. Based on 1.9 million tons of finished steel shipped, the composite income from operations was $113 per ton. This compares to income from operations of $165.1 million and a $34.0-million share of the income from operations for the three months ended June 30, 2006. Based on 2.0 million tons of finished steel shipped, the composite income from operations was $100 per ton for the three months ended June 30, 2006.
50% Owned Joint Venture Results (Six Months)— Results of the company's portion of its 50% owned joint ventures primarily refers to Gallatin Steel, a flat rolled mill joint venture with Dofasco Inc.
Gerdau Ameristeel's income from operations was $395.5 million and its share of the income from operations of the 50% owned joint ventures was $33.1 million. Based on 4.0 million tons of finished steel shipped, the composite income from operations was $108 per ton for the six months ended June 30, 2007. This compares to $283.1 million income from operations and a $63.3 million share of the income from operations of the 50% owned joint ventures for the six months ended June 30, 2006. Based on 3.8 million tons of finished steel shipped, the composite income from operations was $91 per ton for the six months ended June 30, 2006.
CEO Comments—"We are very pleased with the results for the first six months of 2007 and we are optimistic that the markets can remain solid for the balance of the year,” commented Mario Longhi, President and CEO of Gerdau Ameristeel. “Metal spreads in the second quarter were at all-time record highs and we believe we are well positioned to continue to generate good cash flows from our operations.
“We are excited about the strategic impact of our recently announced acquisition of Chaparral Steel. The acquisition further expands our geographic footprint and solidifies our position as a leader in the North American long products sector, offering a full range of rebar, merchant, and structural products. We welcome the employees of Chaparral Steel to the Gerdau Ameristeel team and look forward to developing and effectively executing our integration plan, to share best practices, and realize all synergy opportunities.
We also applaud the US International Trade Commission's recent ruling to continue anti-dumping duty orders on rebar imports from seven countries including China. A significant portion of the US rebar market is serviced by imports—the decision from the ITC ensures that the market will not be injured by illegally dumped rebar from these countries."
The company notes that effective January 1, 2007, it has adopted Financial Accounting Standards Board (FASB) Staff Position # AUG-AIR-1, "Accounting for Planned Major Maintenance Activities". This guidance specifically precludes the use of the previously acceptable "accrue in advance" method of accounting for these activities. In compliance with this new guidance, the company has retroactively adjusted the Condensed Consolidated Statements of Earnings for the three months and six months ended June 30, 2006, resulting in an increase in net income of $1.7 million and $3.2 million, respectively. Additionally, the company also adjusted the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Changes in Shareholders' Equity for the year ended December 31, 2006, which resulted in an increase in shareholders' equity of $1.3 million.
Gerdau Ameristeel is the second largest minimill steel producer in North America with annual manufacturing capacity of over 9.0 million tons of mill finished steel products. Through its vertically integrated network of 17 minimills (including one 50%-owned joint venture minimill), 17 scrap recycling facilities and 52 downstream operations (including seven joint venture fabrication facilities), Gerdau Ameristeel serves customers throughout North America. The company's products are generally sold to steel service centers, to steel fabricators, or directly to original equipment manufacturers for use in a wide variety of industries.
