Steel Dynamics Provides 4th Quarter, Full-Year Outlook
12/15/2008 - ABSTRACT: Despite an expected fourth-quarter loss of $0.35 to $0.40 per diluted share, Steel Dynamics says it expects to report full-year 2008 earnings in the range of $2.35 to $2.40 per diluted share, reflecting record annual revenues, operating income, and cash flow from operations.
Steel Dynamics' Chairman and CEO Keith E. Busse recently commented on the likelihood that Steel Dynamics would incur a fourth quarter loss for 2008.
The company now expects to report a loss of $0.35 to $0.40 per diluted share for the fourth quarter, resulting in full-year 2008 earnings in the range of $2.35 to $2.40 per diluted share, compared with earlier estimates of about $3.25. Despite the expected fourth-quarter loss, the company said it expects to achieve record annual revenues, operating income, and cash flow from operations during 2008.
The company now expects to report a loss of $0.35 to $0.40 per diluted share for the fourth quarter, resulting in full-year 2008 earnings in the range of $2.35 to $2.40 per diluted share, compared with earlier estimates of about $3.25. Despite the expected fourth-quarter loss, the company said it expects to achieve record annual revenues, operating income, and cash flow from operations during 2008.
"It is disappointing to report an expected fourth-quarter operating loss, detracting from our stellar performance during the first three quarters of the year," said Busse. "We are in the midst of a rapidly changing and very challenging global economic environment. We have seen a sharp drop in demand for all products: steel, recycled metals and fabrication. The global credit crisis has had a profoundly negative impact on what was already a weakening and very fragile world economy. Rising unemployment and low consumer confidence levels will likely prolong an anemic consumer environment into next year.
“In spite of these circumstances,” continued Busse, “entering 2009 Steel Dynamics will be well positioned to not only weather these challenges, but to prosper in this environment. This demonstrates our strong operational discipline and superior cost structure.”
He noted that the company's fourth quarter results would be negatively impacted by sharp declines in steel and recycled metal demand, including a particularly steep drop-off in end-user demand for flat rolled steel. Consumers also reduced and canceled orders to decrease their own higher-priced inventory positions in an effort to generate cash in response to the credit crisis and uncertain economic environment. Rapid declines in ferrous material costs will likely prompt the company's steel operations to decrease finished goods and work-in- process inventory values, causing a potential write-down in excess of $60 million during December.
In addition, in the metals recycling business the company enters into financial hedges to mitigate market risk associated with physical positions of certain commodities, such as copper, stainless steel and aluminum. The severe decline in copper values will likely cause the company to record non-cash, unrealized hedging losses approaching $35 million in the fourth quarter. In the recycling arena, heavy losses occurred as ferrous prices fell from approximately $850 per ton to $150 per ton and were principally realized in the fourth quarter, as higher-priced inventory worked through the system.
The company's combined steel operations are expected to operate at about a 50% utilization rate during the fourth quarter. Despite the low operating rates, the company’s highly variable cost structure could still allow it to maintain profitability as the higher-cost scrap inventories purchased earlier in the quarter are primarily eliminated. Although the company's current 2009 plan reflects a difficult market environment, the company expects to achieve a relatively strong performance and believes that 2009 financial results could approach (and possibly surpass) full- year 2008’s record earnings.
"We are cautiously optimistic about market conditions as we enter December," said Busse. "We believe that the precipitous decline in ferrous scrap prices has run its course, as prices rose slightly from November to December. A more stable recycled metallic market, combined with lower-cost ferrous scrap inventories at our flat and long product steel operations positions the company to achieve improved operating margins in the first quarter of 2009, as we believe that steel selling prices are at the bottom and could likely see modest increases.
"We believe our core strategy of being the lowest-cost steel producer and now metals recycler, along with the high variability of our manufacturing cost framework, enables us to achieve superior results in challenging as well as robust economic environments. These fundamental practices will sustain us and allow us to remain one of the most competitive companies in our markets," concluded Busse.
Liquidity Outlook—The company said it continues to focus on further reductions in leverage, while maintaining appropriate capital investment provisions, positioning for profitable long-term growth. The company has made significant reductions in working capital through the quarter to strengthen its liquidity position, and anticipates further improvements throughout 2009. Availability on the company's $874 million revolving credit facility could be as much as $450 million by the end of 2008. The company's first significant debt amortization occurs mid-2012 with the maturing of its senior secured revolving and Term A loan facility.
The company currently estimates 2009 capital spending to approach $350 million, including:
- $125 million to complete and commence operations at the Mesabi Nugget plant, which is expected to start up during the third quarter of 2009
- $75 million to begin construction of the iron ore mining and concentrating operations for the Mesabi Nugget project
- $50 million to complete and commence operations of the Structural Division’s second caster
- $35 million for the company’s metals recycling and substitute operations
- Approximately $65 million for various improvement and maintenance projects, many of which will be carried over from 2008.
The estimated capital spending program has not been fully committed. The company said it would continue to monitor and adjust its plans in correspondence with its current industry outlook and liquidity position.
