SDI Reports Record Shipments, Improved Metal Spreads in Q2
07/22/2014 - Steel Dynamics Inc. said that despite elevated import levels, the strength of underlying demand coupled with its continued market diversification and customer focus allowed it to achieve record quarterly steel shipments in the second quarter of the year.
Steel Dynamics Inc. announced second quarter 2014 net income of US$72 million, or US$0.31 per diluted share, on net sales of US$2.1 billion. By comparison, prior year second quarter net income wasUS$29 million, or US$0.13 per diluted share, on net sales of US$1.8 billion; and sequential first quarter 2014 net income was US$39 million, or US$0.17 per diluted share, on net sales of US$1.8 billion.
"Our consolidated operating income increased 63% to US$132 million for the second quarter 2014, as compared to the first quarter," said chief executive officer Mark Millett. "All of our reporting segments achieved meaningfully higher profitability compared to the sequential quarter, improving beyond the negative inclement weather impact on the first quarter. Despite elevated import levels, the strength of underlying demand coupled with our continued market diversification and customer focus allowed us to achieve record quarterly steel shipments. We are optimistic heading into the second half of 2014 and so are our customers."
Compared to the first quarter 2014, operating income from the company's steel operations increased US$50 million, or 47%, driven by record shipments and improved metal spreads. Sheet and structural steel volumes were the primary contributors to the improved profitability. The automotive and manufacturing markets remain strong and the energy market appears to be strengthening, as evidenced in increased demand for engineered special bar quality steels. Continued modest growth in the nonresidential construction market benefited both the structural steel and fabrication operations. Compared to the first quarter 2014, operating income from the company's fabrication operations more than doubled.
"For our metals recycling operations operating income increased to US$18 million in the second quarter 2014, as compared to US$10 million in the sequential quarter, but the market environment remains challenging," stated Millett. "Ferrous scrap availability and volumes improved, but profitability margins compressed from first quarter levels. However, the quarterly decline in sequential ferrous profitability was more than offset by meaningful improvements in nonferrous volumes and metal spreads."
Second Quarter Review
Second quarter 2014 shipments increased across the company's platforms, as compared to the sequential quarter. Operating income for the company's steel operations increased toUS$158 million, or 47%, as compared to the sequential quarter, based on increased shipments of sheet, engineered bar and structural steel, combined with overall metal margin expansion in long products. The Flat Roll and Structural and Rail Divisions each achieved record quarterly shipments, as sheet steel increased 21%, structural steel beam increased 14%, and rail improved 22%, in comparison to the first quarter 2014. The average selling price for the company's total steel operations slightly decreased by US$2per ton. The average ferrous scrap cost per ton melted decreased US$16 per ton.
Second quarter operating income attributable to the company's sheet steel operations increased 40% when compared to the sequential quarter, and operating income from long product operations increased 59%. The company's steel mill production utilization rate was 90% in the second quarter 2014, compared to 86% in the sequential quarter.
Second quarter operating income from the company's metals recycling operations increased 17%, as the increase in nonferrous metal spread and four% increase in total shipments more the offset lower ferrous metal spread during the second quarter 2014, when compared to the sequential quarter.
The company's fabrication business increased second quarter 2014 operating income by US$4 million, to US$8 million, driven by record quarterly shipments based on both market share and overall demand improvement. According to the Steel Joist Institute, domestic year-over year joist shipments have increased 14% as of May 2014. Order inquiries and project bookings continue to strengthen, signaling further recovery in the nonresidential construction market.
The impact of losses from the company's Minnesota operations for second quarter 2014 consolidated net income was US$9.1 million, or US$0.04 per diluted share, as compared to US$8.9 million, or US$0.04 per diluted share in the first quarter 2014. During the second quarter, as the company indicated on the first quarter earnings teleconference, remaining operating trials were completed and a four week outage was taken to upgrade the rotary hearth furnace, and as anticipated these trials and the outage resulted in second quarter losses similar to those experienced in the first quarter 2014. The trials resulted in encouraging results related to improvement in yield, quality, volume and raw material input costs, resulting in a potential cost structure that we believe is competitive. This cost structure must be confirmed on a consistent ongoing basis over the coming months. In the meantime, as the operations ramp up, third quarter 2014 losses related to the company's Minnesota operations are expected to be meaningfully less than those incurred in the second quarter.
"We are pleased with the conversion of our 5.125% Convertible Notes, which matured June 15, 2014," stated Chief Financial Officer, Theresa Wagler. "The holders of US$272 million of the security exercised their option to convert the Notes into 15,893,457 shares of our common stock. The remaining US$16 million of outstanding Notes was paid in cash. This security provided an important component of our capital structure the past 5 years and its conversion to equity further strengthens our financial position for growth."
Year to Date Comparison
For the six months ended June 30, 2014, net income was US$111 million, or US$0.48 per diluted share, on net sales of US$3.9 billion, as compared to net income of US$77 million, or US$0.34 per diluted share, on net sales of US$3.6 billion for the six months ended June 30, 2013. Year-to-date 2014 consolidated net sales increased eight%, primarily as a result of higher average steel pricing and shipments. Year-to-date 2014 consolidated operating income increased US$47 million, or 29%, primarily as a result of improved steel metal spread. The average selling price for the company's total steel operations increased US$49 per ton. The average ferrous scrap cost per ton melted increased US$18 per ton.
Outlook
"We continue to remain optimistic," Millett said. "The improvement in our financial and operational performance is indicative of more than a mere weather recovery from the first quarter. The demand for our products continues to improve. The recent growth projects which began ramping-up in 2014 are also beginning to contribute to our earnings. The automotive and manufacturing markets remain strong, and we believe the increase in domestic energy investments is continuing to strengthen. We continue to have confidence that the broader U.S. economic recovery is strengthening, and that the non-service sector portion of the domestic GDP remains capable of growing at a faster rate than the overall GDP. We believe our diversified offerings of value-added products and our exceptional team, combined with our unique operating culture provides us a unique competitive advantage as we capitalize on the opportunities ahead.
"Our organic growth projects and latent steel capacity, coupled with our planned acquisition of the Severstal Columbus steel mill, and our belief that domestic steel consumption is on the upward trend—all point toward meaningful growth opportunities for Steel Dynamics' employees, customers and shareholders," concluded Millett.
Summary Second Quarter Operating Segment Information
The following tables highlight operating results for each of the company's primary operating platforms. References to operating income in the following paragraphs exclude profit-sharing expenses and amortization pertaining to intangible assets. Dollar amounts are in thousands, excluding per ton data.
Steel Operations
This segment includes five electric-arc-furnace steel mills and related steel finishing and processing facilities, including The Techs. The company's steel operations produce flat-rolled steel, structural steel, merchant bars, engineered special-bar-quality steel, rebar, rail, and specialty shapes.
Metals Recycling and Ferrous Resources Operations
This segment principally includes the company's metals recycling operations (OmniSource Corporation), a liquid pig iron production facility (Iron Dynamics), and the company's Minnesota iron producing operations.
Steel Fabrication Operations
Steel fabrication operations include New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of non-residential buildings.
Steel Dynamics Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.4 billion in 2013, over 6,800 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).
"Our consolidated operating income increased 63% to US$132 million for the second quarter 2014, as compared to the first quarter," said chief executive officer Mark Millett. "All of our reporting segments achieved meaningfully higher profitability compared to the sequential quarter, improving beyond the negative inclement weather impact on the first quarter. Despite elevated import levels, the strength of underlying demand coupled with our continued market diversification and customer focus allowed us to achieve record quarterly steel shipments. We are optimistic heading into the second half of 2014 and so are our customers."
Compared to the first quarter 2014, operating income from the company's steel operations increased US$50 million, or 47%, driven by record shipments and improved metal spreads. Sheet and structural steel volumes were the primary contributors to the improved profitability. The automotive and manufacturing markets remain strong and the energy market appears to be strengthening, as evidenced in increased demand for engineered special bar quality steels. Continued modest growth in the nonresidential construction market benefited both the structural steel and fabrication operations. Compared to the first quarter 2014, operating income from the company's fabrication operations more than doubled.
"For our metals recycling operations operating income increased to US$18 million in the second quarter 2014, as compared to US$10 million in the sequential quarter, but the market environment remains challenging," stated Millett. "Ferrous scrap availability and volumes improved, but profitability margins compressed from first quarter levels. However, the quarterly decline in sequential ferrous profitability was more than offset by meaningful improvements in nonferrous volumes and metal spreads."
Second Quarter Review
Second quarter 2014 shipments increased across the company's platforms, as compared to the sequential quarter. Operating income for the company's steel operations increased toUS$158 million, or 47%, as compared to the sequential quarter, based on increased shipments of sheet, engineered bar and structural steel, combined with overall metal margin expansion in long products. The Flat Roll and Structural and Rail Divisions each achieved record quarterly shipments, as sheet steel increased 21%, structural steel beam increased 14%, and rail improved 22%, in comparison to the first quarter 2014. The average selling price for the company's total steel operations slightly decreased by US$2per ton. The average ferrous scrap cost per ton melted decreased US$16 per ton.
Second quarter operating income attributable to the company's sheet steel operations increased 40% when compared to the sequential quarter, and operating income from long product operations increased 59%. The company's steel mill production utilization rate was 90% in the second quarter 2014, compared to 86% in the sequential quarter.
Second quarter operating income from the company's metals recycling operations increased 17%, as the increase in nonferrous metal spread and four% increase in total shipments more the offset lower ferrous metal spread during the second quarter 2014, when compared to the sequential quarter.
The company's fabrication business increased second quarter 2014 operating income by US$4 million, to US$8 million, driven by record quarterly shipments based on both market share and overall demand improvement. According to the Steel Joist Institute, domestic year-over year joist shipments have increased 14% as of May 2014. Order inquiries and project bookings continue to strengthen, signaling further recovery in the nonresidential construction market.
The impact of losses from the company's Minnesota operations for second quarter 2014 consolidated net income was US$9.1 million, or US$0.04 per diluted share, as compared to US$8.9 million, or US$0.04 per diluted share in the first quarter 2014. During the second quarter, as the company indicated on the first quarter earnings teleconference, remaining operating trials were completed and a four week outage was taken to upgrade the rotary hearth furnace, and as anticipated these trials and the outage resulted in second quarter losses similar to those experienced in the first quarter 2014. The trials resulted in encouraging results related to improvement in yield, quality, volume and raw material input costs, resulting in a potential cost structure that we believe is competitive. This cost structure must be confirmed on a consistent ongoing basis over the coming months. In the meantime, as the operations ramp up, third quarter 2014 losses related to the company's Minnesota operations are expected to be meaningfully less than those incurred in the second quarter.
"We are pleased with the conversion of our 5.125% Convertible Notes, which matured June 15, 2014," stated Chief Financial Officer, Theresa Wagler. "The holders of US$272 million of the security exercised their option to convert the Notes into 15,893,457 shares of our common stock. The remaining US$16 million of outstanding Notes was paid in cash. This security provided an important component of our capital structure the past 5 years and its conversion to equity further strengthens our financial position for growth."
Year to Date Comparison
For the six months ended June 30, 2014, net income was US$111 million, or US$0.48 per diluted share, on net sales of US$3.9 billion, as compared to net income of US$77 million, or US$0.34 per diluted share, on net sales of US$3.6 billion for the six months ended June 30, 2013. Year-to-date 2014 consolidated net sales increased eight%, primarily as a result of higher average steel pricing and shipments. Year-to-date 2014 consolidated operating income increased US$47 million, or 29%, primarily as a result of improved steel metal spread. The average selling price for the company's total steel operations increased US$49 per ton. The average ferrous scrap cost per ton melted increased US$18 per ton.
Outlook
"We continue to remain optimistic," Millett said. "The improvement in our financial and operational performance is indicative of more than a mere weather recovery from the first quarter. The demand for our products continues to improve. The recent growth projects which began ramping-up in 2014 are also beginning to contribute to our earnings. The automotive and manufacturing markets remain strong, and we believe the increase in domestic energy investments is continuing to strengthen. We continue to have confidence that the broader U.S. economic recovery is strengthening, and that the non-service sector portion of the domestic GDP remains capable of growing at a faster rate than the overall GDP. We believe our diversified offerings of value-added products and our exceptional team, combined with our unique operating culture provides us a unique competitive advantage as we capitalize on the opportunities ahead.
"Our organic growth projects and latent steel capacity, coupled with our planned acquisition of the Severstal Columbus steel mill, and our belief that domestic steel consumption is on the upward trend—all point toward meaningful growth opportunities for Steel Dynamics' employees, customers and shareholders," concluded Millett.
Summary Second Quarter Operating Segment Information
The following tables highlight operating results for each of the company's primary operating platforms. References to operating income in the following paragraphs exclude profit-sharing expenses and amortization pertaining to intangible assets. Dollar amounts are in thousands, excluding per ton data.
Steel Operations
This segment includes five electric-arc-furnace steel mills and related steel finishing and processing facilities, including The Techs. The company's steel operations produce flat-rolled steel, structural steel, merchant bars, engineered special-bar-quality steel, rebar, rail, and specialty shapes.
| Second Quarter | Year To Date | Sequential | ||||||||
| 2014 | 2013 | 2014 | 2013 | 1Q 2014 | ||||||
| Total Sales | US$1,370,995 | US$1,165,775 | US$2,560,928 | US$2,307,850 | US$1,189,933 | |||||
| External Sales | 1,265,104 | 1,091,015 | 2,382,703 | 2,152,327 | 1,117,599 | |||||
| Operating Income | 158,083 | 87,833 | 265,859 | 209,422 | 107,776 | |||||
| Total Shipments (tons) | 1,677,766 | 1,522,668 | 3,128,498 | 2,992,470 | 1,450,732 | |||||
| External Shipments (tons) | 1,518,882 | 1,396,380 | 2,857,455 | 2,740,812 | 1,338,573 | |||||
| Production (tons) | 1,708,252 | 1,500,224 | 3,227,818 | 3,065,291 | 1,519,566 | |||||
| Average External Sales Price Per Ton | US$833 | US$781 | US$834 | US$785 | US$835 | |||||
| Average Ferrous Scrap Cost Per Ton | US$364 | US$354 | US$371 | US$353 | US$380 | |||||
Metals Recycling and Ferrous Resources Operations
This segment principally includes the company's metals recycling operations (OmniSource Corporation), a liquid pig iron production facility (Iron Dynamics), and the company's Minnesota iron producing operations.
| Second Quarter | Year To Date | Sequential | ||||||||
| 2014 | 2013 | 2014 | 2013 | 1Q 2014 | ||||||
| Metals Recycling & Ferrous Resources | ||||||||||
| Total Sales | US$1,014,161 | US$ 893,116 | US$2,007,666 | US$1,807,684 | US$ 993,505 | |||||
| External Sales | 645,216 | 585,492 | 1,220,990 | 1,206,620 | 575,774 | |||||
| Operating Loss | (1,517) | (1,811) | (12,498) | (6,120) | (10,981) | |||||
| Unrealized Hedging Gain (Loss), Net | (2,499) | (2,220) | 1,567 | 134 | 4,066 | |||||
| OmniSource Standalone | ||||||||||
| Total Sales | US$ 891,627 | US$ 794,750 | US$1,772,245 | US$1,629,789 | US$ 880,618 | |||||
| External Sales | 580,509 | 554,996 | 1,103,633 | 1,164,914 | 523,124 | |||||
| Operating Income | 18,398 | 15,774 | 27,947 | 40,739 | 9,549 | |||||
| Unrealized Hedging Gain (Loss), Net | (2,371) | (1,583) | 359 | (892) | 2,730 | |||||
| Ferrous Shipments (gross tons) | 1,422,697 | 1,334,390 | 2,787,230 | 2,677,319 | 1,364,533 | |||||
| % Shipments to SDI Steel Mills | 46% | 39% | 49% | 41% | 52% | |||||
| Nonferrous Shipments (pounds 000's) | 288,233 | 254,495 | 559,211 | 534,151 | 270,978 | |||||
Steel Fabrication Operations
Steel fabrication operations include New Millennium Building Systems, which fabricates steel joists, trusses, and decking used in the construction of non-residential buildings.
| Second Quarter | Year To Date | Sequential | ||||||||
| 2014 | 2013 | 2014 | 2013 | 1Q 2014 | ||||||
| Total Sales | US$134,852 | US$ 104,159 | US$ 250,713 | US$ 198,534 | US$115,861 | |||||
| Operating Income | 7,590 | 2,330 | 10,716 | 3,860 | 3,126 | |||||
| Total Shipments (tons) | 105,188 | 86,371 | 199,855 | 163,954 | 94,667 | |||||
| Average Sales Price Per Ton | US$1,282 | US$1,206 | US$1,254 | US$1,210 | US$1,224 | |||||
Steel Dynamics Inc. is one of the largest domestic steel producers and metals recyclers in the United States based on estimated annual steelmaking and metals recycling capability, with annual sales of US$7.4 billion in 2013, over 6,800 employees, and manufacturing facilities primarily located throughout the United States (including five steel mills, six steel processing facilities, two iron production facilities, over 90 metals recycling locations and six steel fabrication plants).
