Steelmaker Steel Dynamics Inc. (SDI), headquartered in Fort Wayne, Indiana, has announced net sales of $2.8 billion and net income of $194 million, or 87 cents per diluted share, for the second quarter of 2019. Comparatively, prior-year second-quarter net income was $362 million, or $1.53 per diluted share, with net sales of $3.1 billion. Sequential first quarter 2019 net income was $204 million, or 91 cents per diluted share, with net sales of $2.8 billion.
"Our second-quarter 2019 consolidated operating income was $285 million and adjusted EBITDA (earnings before interest taxes depreciation and amortization) $365 million," says Mark D. Millett, the company’s president and chief executive officer. "The team delivered a solid second-quarter performance in a challenging steel pricing environment. A weakening scrap price environment coupled with steel inventory destocking led to steel buying hesitancy. Despite these challenges, supported by the addition of United Steel Supply and the continued ramp-up of Heartland, our steel platform shipments improved.”
Millett adds, “As underlying steel demand remains constructive and scrap prices have steadied, we have recently seen stabilization and improvement in flat-roll steel prices, resulting in increased flat-roll order activity and improved order backlogs. However, structural, merchant bar and reinforcing bar steel pricing remain pressured from domestic and import market competition.”
Activity remains “positive” across most steel-consuming sectors, he says. “Additionally, as evidenced by our strong steel fabrication backlog, strength continues in non-residential construction.”
SDI generated strong cash flow from operations of $361 million during the second-quarter 2019 and increased liquidity to $2.3 billion. The company says it paid cash dividends of $54 million and repurchased $93 million of its common stock during the second quarter of 2019.
Second-quarter 2019 operating income for SDI's steel operations was $295 million, or 6 percent lower than sequential first-quarter 2019 results. The decline in earnings resulted from metal spread compression, which more than offset the 3 percent increase in overall steel shipments related to the ramp-up of the Heartland facility in Terre Haute, Indiana, and the recent addition of United Steel Supply, Austin, Texas. The sequential earnings decline was primarily driven by lower shipments and product pricing within SDI’s long-product steel operations, SDI says. The second-quarter 2019 average external product selling price for SDI’s overall steel operations decreased $23 sequentially to $879 per ton. The average ferrous scrap cost per ton melted at the company's steel mills decreased $22 to $316 per ton.
SDI’s steel processing locations (Heartland, Techs, United Steel Supply and Vulcan) represented 16 percent of the shipment mix in the second quarter compared with 13 percent in the sequential quarter and 9 percent in the second quarter of 2018. These locations use steel products as their primary raw material, and associated steel procurement costs represented 18 percent of the steel operations cost of goods sold for the second quarter 2019, 15 percent for the sequential quarter and 9 percent for the prior year’s second quarter, the company says.
SDI reports that its second-quarter 2019 operating income from SDI’s metals recycling operations decreased to $11 million compared with $20 million in the sequential first quarter as a result of lower nonferrous shipments and ferrous selling values. Prime and obsolete scrap indices fell almost $90 per gross ton from March to June 2019. As scrap flows started to slow based on lower procurement values, scrap pricing appears to have stabilized in July, the company says.
Second-quarter 2019 operating income from SDI’s steel fabrication operations was a strong $31 million, or 49 percent higher than sequential first-quarter results. Earnings improved as higher shipments and lower raw material steel input costs resulted in expanded profit margins, the company says. The steel fabrication platform order backlog remains strong, and customers remain optimistic concerning nonresidential construction projects.
For the six months ended June 30, net income was $399 million, or $1.78 per diluted share, with net sales of $5.6 billion as compared with net income of $590 million, or $2.49 per diluted share, with net sales of $5.7 billion for the same period in 2018. Although net sales remained consistent, first-half 2019 operating income decreased 30 percent from record-high 2018 results of $825 million to $577 million. SDI says the decline in earnings was driven by decreased product pricing at the company's Butler, Indiana, and Columbus Flat Roll in Columbus, Mississippi, divisions as hot-roll coil price indices fell approximately $200 per ton, or more than 25 percent, since December 2018.
Compared to the first half of 2018, the external selling price for the company's overall steel operations increased $11 to $890 per ton average in the first half of 2019 based on additional volumes from the company's Heartland and United Steel Supply locations. The average first-half 2019 ferrous scrap cost per ton melted at SDI’s steel mills decreased $7 to $327 per ton.
The company generated strong cash flow from operations of $543 million, paid cash dividends of $96 million and repurchased $177 million of its common stock during the first half of 2019.
"Based on domestic steel demand fundamentals, we are constructive concerning second-half 2019 North American steel market dynamics," Millett says. "We believe steel consumption will experience modest growth and will be supported by further steel import reductions and the end of steel inventory destocking. There have been recent trade actions that we believe 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 nonautomotive flat roll steel coater in the U.S.”
Millet continues, "In combination with our existing and newly announced expansion initiatives, we believe there are firm drivers for our continued growth. We are excited about our planned flat roll steel mill and the anticipated long-term value creation it will bring through geographic and value-added product diversification. We plan for the new steel mill to have product capabilities beyond existing electric-arc-furnace flat-roll steel producers today, competing even more effectively with the integrated steel model and foreign competition. We have targeted regional markets that represent over 27 million tons of relevant flat roll steel consumption, which includes the growing Mexican flat roll steel market. This facility should have a meaningful competitive advantage in those regions.
"We continue to strengthen our financial position through strong cash flow generation and the execution of our long-term strategy. We are well-positioned for growth and remain focused on delivering long-term shareholder value through organic and transactional growth opportunities," Millett says.