"The second quarter 2015 market environment remained extremely challenging
for our steel and metals recycling operations," said Mark D. Millett, Chief
Executive Officer. "The ongoing flood of steel imports continued to pressure
steel product pricing to a greater degree than the benefit realized from
lower scrap costs, compressing second quarter steel margins. However, due
to continued solid U.S. steel demand, our second quarter steel shipments
improved, which offset most of the margin compression. Steel pricing has
recently stabilized and domestic steel consumption from the automotive,
manufacturing and construction sectors should support a stronger domestic
steel industry in the second half of the year, predicated upon the
expectation of reduced levels of imported steel and sustainable lower raw
material costs.
"An important barometer for domestic steel consumption is the strength of
the construction industry. Historically, the construction industry has been
the largest single domestic steel consuming sector, and it is continuing to
strengthen this year," continued Millett. "For the second quarter 2015,
our fabrication operations achieved record profitability. Strong demand has
allowed for stable product pricing, while order inquiries and bookings
remain robust, confirming the positive trend in the non-residential
construction market.
"Despite the import headwinds, we achieved over a 20 percent improvement in
sequential second quarter 2015 adjusted operating income (excluding the
idled Minnesota Operations and the Iron Dynamics outage impact), based on
record fabrication performance and significantly improved metals recycling
results, as scrap pricing volatility subsided in the quarter. We believe
the key scrap supply factors of export activity and the strength of the U.S.
dollar will continue to mute extreme scrap pricing volatility," concluded
Millett.
The company generated strong cash flow from operations of $309 million
during the second quarter 2015, representing a 32 percent increase from the
sequential quarter. For the first six months of 2015, the company generated
$544 million of cash flow from operations, and after considering the impact
of capital expenditures, generated $488 million of free cash flow, or $2.02
per common share outstanding.
Additional Second Quarter 2015 Comments
While steel import levels remained high, continued strength in U.S. steel
consumption resulted in increased steel and metals recycling shipments.
Second quarter 2015 operating income for the company's steel operations
decreased 3 percent to $110 million, due to metal spread compression, which
was largely offset by a 15 percent increase in steel shipments. Steel metal
spread contracted in the second quarter 2015 as a function of the excessive
import levels, which caused steel product pricing to decline more rapidly
than scrap raw material costs. The average product selling price for the
company's steel operations decreased $101 to $662 per ton. The average
ferrous scrap cost per ton melted decreased $57 to $255 per ton.
Second quarter 2015 operating income attributable to the company's sheet
products decreased 15 percent when compared to the sequential quarter.
Although the company's flat roll shipments increased 24 percent, metal
spread contracted meaningfully, as flat roll products were the most
negatively impacted by high import volumes and existing customer inventory
levels. Operating income from long products increased ten percent, as
construction-related and rail volumes improved. Driven by stronger flat
roll volume, the company's steel production utilization rate significantly
recovered to 87 percent for the second quarter 2015, which is higher than
both the average U.S. domestic steel mill utilization rate and the company's
first quarter 2015 utilization rate of 73 percent.
The company's metals recycling operations recorded second quarter 2015
operating income of $12.3 million compared to a slight operating loss in the
first quarter 2015, based on both increased ferrous shipments and margins
as steel mill utilization improved and scrap price volatility subsided.
The company's fabrication operations continued to achieve record financial
performance. Second quarter 2015 operating income of $27.7 million
surpassed the fourth quarter 2014 previous record by 27 percent. Sustained
strong demand combined with lower raw material steel costs, supported metal
spread expansion.
As discussed in the company's May 26, 2015, press release, management and
the board of directors elected to idle the Minnesota Operations for an
initial twenty-four month period given the significant and sustained decline
in pig iron pricing, which resulted in the cost of iron nugget production
being meaningfully higher than product selling values. The strength of the
U.S. dollar and world iron ore supply support lower pig iron prices for the
foreseeable future. Given the company's Minnesota Operations were intended
to serve as a hedge against high priced pig iron and scrap, the indefinite
idle was a prudent and necessary response to the prevailing market
environment. While the lower raw material cost environment advantages the
company's steel operations, it has resulted in an uneconomic situation for
its Minnesota iron production operations.
Year-to-Date Comparison
For the first six months ended June 30, 2015, net income was $62 million, or
$0.26 per diluted share, on net sales of $4.1 billion, as compared to net
income of $111 million, or $0.48 per diluted share, on net sales of $3.9
billion for the six months ended June 30, 2014. Year-to-date consolidated
net sales increased four percent, primarily as a result of the acquisition
of the Columbus flat roll steel mill in September 2014, resulting in higher
first half 2015 steel shipments that more than offset the 26 percent decline
in metals recycling revenue. Year-to-date consolidated operating income
decreased $36 million, or 17 percent, as the result of both decreased steel
prices and the additional costs incurred in the second quarter 2015 from the
company's iron production facilities. Excluding the impact from idling the
Minnesota iron production facilities and the Iron Dynamics maintenance
outage, year-to-date adjusted consolidated operating income improved three
percent, to $220 million, based on improved fabrication results. The
average selling price for the company's steel operations decreased $125 per
ton. The average ferrous scrap cost per ton melted decreased $91 per ton.
Outlook
"Based on an expected reduction in steel import volume and sustained lower
scrap costs, we anticipate improved financial results in the second half of
2015," said Millett. "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 additional growth. The recently
announced paint line addition at our Columbus Flat Roll Division is an
example of an investment that provides an excellent financial return,
further diversifying our product capabilities into higher margin market
segments at this facility. Customer focus, coupled with our market
diversification and low-cost operating platforms, support our ability to
maintain our best-in-class performance. We believe we are poised to
capitalize on meaningful growth opportunities, both near-term and in the
future, that will benefit our customers, shareholders, employees and
communities," concluded Millett.
