SDI feels the effects of declining aluminum demand, value
Falling scrap metals prices affect SDI's overall earnings in the third quarter.
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SDI feels the effects of declining aluminum demand, value

Operating income at SDI’s metal recycling operations was reduced by nearly two-thirds in Q3.

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October 17, 2019

Steel Dynamics Inc., the electric arc furnace (EAF) steelmaker headquartered in Fort Wayne, Indiana, has reported that its third-quarter 2019 net sales totaled $2.5 billion, while its net income was $151 million, or 69 cents per diluted share. The company’s net sales for the comparable quarter of 2018 were $3.2 billion, with net income of $398 million, or $1.69 per diluted share, which included charges related to fair value purchase accounting adjustments of 4 cents per diluted share and a tax benefit of 4 cents per diluted share. The company’s sequential second-quarter 2019 net sales totaled $2.8 billion, with net income of $194 million, or 87 cents per diluted share.

"Our third quarter 2019 consolidated operating income was $228 million and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) $315 million," says Mark D. Millett, SDI president and chief executive officer. "The team delivered a solid third-quarter performance in a challenging steel pricing environment, as average steel pricing declined in the quarter, more than offsetting the benefit of lower scrap costs.”

He adds, “Steel customer inventory destocking has subsided, and underlying domestic steel demand remains principally intact for the primary steel-consuming sectors, with particular strength in construction, as supported by our continued seasonally strong steel fabrication backlog."

SDI reports that it generated $444 million in cash flow from operations during the third quarter of 2019 and increased liquidity to a record-high $2.4 billion. The company paid cash dividends of $53 million and repurchased $115 million of its common stock during the quarter, as well.

"We are pleased by the recent rating upgrades to an investment-grade credit by all three credit rating agencies," says Theresa E. Wagler, executive vice president and chief financial officer. "This is a natural progression of our growth and recognition of our strong balance sheet profile and through-cycle free cash flow generation capability. Due to the strength of our liquidity profile, capital structure and free cash flow generating business model, we have the flexibility for continued growth and responsible shareholder distributions while also being committed to maintaining investment-grade credit metrics,” she adds.

SDI’s steel operations’ operating income totaled $240 million for the quarter, which was 19 percent lower than sequential second-quarter 2019 results. The sequential earnings decline was driven by lower realized product pricing and decreased shipments in the company's sheet steel operations, which more than offset the benefit of lower scrap costs in the quarter, the company says. Its average external product selling price for its steel operations decreased $70 sequentially to $809 per ton, while the average ferrous scrap cost per ton melted at the company's steel mills decreased $41 to $275 per ton in the quarter.

The company's steel processing locations represented 17 percent of the shipment mix in the third quarter of this year compared with 16 percent in the sequential quarter and 12 percent in the third quarter of 2018. These locations use steel products as their primary raw material, and the associated steel procurement costs represented 17 percent of the steel operations’ cost of goods sold in the third quarter of 2019, 18 percent in the sequential quarter and 9 percent in the third quarter of 2018, SDI says.

Third-quarter 2019 operating income from its metals recycling operations decreased to $3 million, compared to $11 million in the sequential second quarter, which SDI says was primarily a result of the declining aluminum demand and selling values. SDI shipped 20 million fewer pounds of nonferrous scrap in the third quarter of 2019 versus the same time in 2018.  

Ferrous shipments and selling values also declined in the quarter, with prime scrap indices falling almost $30 per gross ton from July to September. According to the slides that accompanied SDI’s Q3 2019 earnings call, 66 percent of the ferrous scrap volume the company sold in the quarter was to its own steel mills.

Operating income from SDI’s steel fabrication operations for the quarter was $35 million, or 15 percent higher than sequential second-quarter results. Earnings improved as higher shipments and lower raw material steel input costs resulted in expanded profit margins, according to SDI. The steel fabrication platform's order backlog remains strong, and customers remain optimistic concerning nonresidential construction projects, the company adds.

For the nine months ended Sept. 30, net income was $550 million, or $2.47 per diluted share, with net sales of $8.1 billion, as compared to net income of $988 million, or $4.17 per diluted share, with net sales of $8.9 billion for the same period in 2018. Net sales decreased 9 percent, while operating income of $805 million decreased 41 percent from record-high 2018 year-to-date results of $1.4 billion, SDI notes. The decline in earnings was driven by decreased sheet steel product pricing, as hot-roll coil price indices fell approximately $185 per ton, or 25 percent, since December 2018.

Compared with prior year results, the average year-to-date external product selling price for SDI’s overall steel operations decreased $53 to $863 per ton. The average year-to-date ferrous scrap cost per ton melted at the company's steel mills decreased $31 to $309 per ton.

SDI generated cash flow from operations of $987 million, paid cash dividends of $148 million and repurchased $292 million of its common stock during the first nine months of 2019.

"Based on domestic steel demand fundamentals, we are constructive regarding 2020 North American steel market dynamics," Millett says. "We believe North American steel consumption will experience modest growth and will be supported by further steel import reductions and the end of steel inventory destocking. We believe current trade actions could have a positive impact in further reducing unfairly traded steel imports into the United States, including coated flat-roll steel, which could have a significant positive impact for Steel Dynamics as we are the largest non-automotive flat roll steel coater in the United States.”

Millett continues, “In combination with our existing and newly announced expansion initiatives, there are firm drivers in place for our continued growth.”

He mentions the company’s Sinton, Texas, flat-roll steel mill project, which he says will bring “long-term value creation … through geographic and value-added product diversification.”

Millett adds, “This facility is designed to have product size and quality capabilities beyond that of existing electric-arc-furnace flat-roll steel producers, competing even more effectively with the integrated steel model and foreign competition.”

SDI has targeted regional markets that represent more than 27 million tons of flat-roll steel consumption, he says, including Mexico. “This facility is located and designed to have a meaningful competitive advantage in those regions.”