U.S. Steel (X - commentary - Cramer's Take) reported its first-quarter 2008 results. While earnings increased by 585% sequentially, to $1.98 per share, the declined year over year by 14%. Of this figure, 38 cents per share was attributable to exceptional items involving setting aside tax reserves. Additionally, 59 cents per share was attributable to currency effects from the company's operations in Europe. Revenue increased by 15% and 38%, respectively, sequentially and year over year, to $5.2 billion.
The main story in today's call was how to deal with input costs, although U.S. Steel, being an integrated producer, is protected from some raw materials costs, especially scrap metal. Most of the positive results were mainly due to the company's being able to pass on costs into prices, more than due to volume effects.
Highlights from segment results include:
The most impressive performance of the company was reported in the company's main flat-rolled products, with 37% of income, where income increased by 126% sequentially and 60% year over year. Volume increased in this segment by 13% sequentially and 47% year over year.
U.S. Steel Europe (50% of income) reported a 90% sequential increase and 22% year-over-year decrease. Volume increased in this segment by 18% sequentially and was flat year over year.
Tubular products reported relatively disappointing results, with a 39% sequential drop and a 50% year-over-year drop, mainly due to costs outpacing prices. Volume increased in this segment by 1.4% sequentially and by 75% year over year.
In general, the positive results, especially in flat-rolled products originated from lower imports, lower inventory levels, strong export conditions and relatively high surcharges, especially in Europe.
Other positive highlights from this report include the following:
Flat-rolled operations operated at 92% of capacity compared to 82% sequentially, including results from U.S. Steel Canada. The Canadian operations, in particular, reported a higher proportion of hot-rolled and semi-finished products, where cost increases outpaced pricing increases. Higher spot prices and the above-mentioned price-to-cost relationship in this segment allowed U.S. Steel to increase prices here by only $19 per ton.
It was in Europe, however, where prices increased the most. U.S. Steel Europe managed to impose price increases of $39 per ton on its customers. The company also operated at 103% capacity in this region.
Tubular products reported a $250 per ton surcharge due to the high alloy component of these products.
There was some stability in the debt-to-equity ratio at 38%.
On the other hand, it should be noted that the following aspects might spoil the rosy picture:
Free cash flow declined by 51%, to $110 million.
Capex increased proportionately more in flat-rolled than U.S. Steel Europe, at increases of 66% and 6%, respectively.
The guidance for the second quarter foresees prices outstripping costs, with operating levels and shipments comparable to the first quarter for flat-rolled and considerable pricing improvements in tubular and U.S. Steel Europe. Iron ore operations, which reported a loss of $5 million this quarter, are expected to report seasonal improvements over the second quarter.
Overall, this quarter's results were crucially affected by U.S. Steel being able to continue to maintain pricing dominance, a questionable assumption.
For Vijayraghavan's preview heading into the U.S. Steel conference call, please click here.
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At the time of publication, Vijayraghavan had no positions in the stocks mentioned.
Vasu Vijayraghavan was an academic finance professor at the University of Paris who has now turned to a new career as a financial consultant. As an academic, she wrote on corporate governance issues, especially in the European context, and she believes in a long-run and balance sheet approach to stock picking.
Currently, Vasu is working as a consultant for lawyers, doing business valuation. She is a Level II CFA candidate and enjoys writing long/short and earnings calls pieces for TheStreet.Com.
Vasu holds a Ph.D. from the University of Michigan and a B.A. from Harvard University.
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