Steel Dynamics Management Discusses Q2 2012 Results - Earnings Call Transcript

Steel Dynamics (STLD)

Q2 2012 Earnings Call

July 24, 2012 10:00 am ET

Executives

Theresa E. Wagler - Chief Financial Officer and Executive Vice President

Mark D. Millett - Co-Founder, Chief Executive Officer, President and Executive Director

Russel B. Rinn - Executive Vice President of Metals Recycling, Chief Operating officer of Omnisource Corporation and President of Omnisource Corporation

Richard P. Teets - Co-Founder, President of Steel Operations, Chief Operating Officer of Steel Operations and Executive Director

Gary E. Heasley - Executive Vice President of Business Development and President of New Millennium Building Systems

Analysts

Kuni M. Chen - CRT Capital Group LLC, Research Division

Michelle Applebaum - Steel Market Intelligence Inc

Luke Folta - Jefferies & Company, Inc., Research Division

Timna Tanners - BofA Merrill Lynch, Research Division

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Arun S. Viswanathan - Longbow Research LLC

Shneur Z. Gershuni - UBS Investment Bank, Research Division

David Olkovetsky

Evan L. Kurtz - Morgan Stanley, Research Division

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Aldo J. Mazzaferro - Macquarie Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Steel Dynamics' Second Quarter 2012 Earnings Conference Call. As a reminder, today's call is being recorded. At this time, it is my pleasure to turn today's call over to Ms. Theresa Wagler, Executive Vice President and Chief Financial Officer of Steel Dynamics Incorporated. Please go ahead, ma'am.

Theresa E. Wagler

Thank you, Andrea. Good morning, everyone. Welcome to Steel Dynamics' Second Quarter 2012 Earnings Conference Call. As a reminder, today's conference is being recorded and will be available on the company's website for replay later today.

Certain comments made today may involve forward-looking statements that by their nature are predictive. These are intended to be covered by the Safe Harbor protections of the Private Securities Litigation Reform Act of 1995. Such statements, however, speak only as of this date and involve risks and uncertainties related to our metals business or the general business and economic condition which may cause actual results to turn out differently. More detailed information about such risks and uncertainties may be found at the Investor Center Advisory Information tab on our Steel Dynamics website and our form 10-K annual report under the captions Forward-looking Statements and Risk Factors or as applicable in subsequently filed form 10-Q filed with SEC.

Joining me for today's call are Mark Millett, President and Chief Executive Officer of Steel Dynamics; and the company's Platfrom Executive vice Presidents including: Dick Teets, President and Chief Operating Officer for our steel operations; Russ Rinn, President and Chief Operating Officer for our metals recycling operations; and Gary Heasley, Business Development and President of our fabrication operations.

Now for opening remarks, I'm pleased to turn the call over to Mark.

Mark D. Millett

Well, thank you, Theresa, and good morning, everyone. I'd like to add my thanks for spending time with us this morning not only to discuss the quarter's results but to also talk about some of the near-term earnings catalyst that, I believe, we have at Steel Dynamics, and I consider them quite compelling.

In challenging times though, the true character of both individual and company becomes apparent. This is still a challenging political and economic global arena in which we operate today. Our industry is in a new era of greater volatility and less predictability than in years past.

But I believe there's good news. We continue at SDI to perform at the top of our peer group, maintaining our low-cost position, a key to our success. This is attributed to our employee culture and to our great team of some 6,500 employees, each of whom contributes each of the real impact, focusing on safety, bringing enhanced value to our customers and our innovation that will continue to differentiate ourselves from our competition. Thanks to each and everyone of them for their hard work and for their dedication.

Our overall performance was commendable in what remains a challenging environment. In the second quarter, we achieved stable sequential financial results from our steel and fabrication operations, although earnings in our metals recycling operations deteriorated as margins and volume compressed.

We reported net income of $44 million or $0.20 per diluted share on net sales of $1.9 billion for the second quarter of 2012. This matches the $0.20 reported in the first quarter this year, but is substantially lower than last year's second quarter results of $0.43 a share. It should be pointed out, I think, that the first half of 2011 was a time frame in which historically high margins and flat growth were achieved. This past quarter, the combination of increased domestic flat roll capacity and increased imports have stripped the demand of a slow U.S. economy that did not allow for that level of margin to be repeated.

Overall steel demand through the quarter remains steady, although the added burden from imports from the additional domestic flat roll capacity exerted downward pressure on flat roll pricing, muting second quarter sheet steel margins. However, long products operations did see some metal spread expansion in the quarter as product pricing decreased less than scrap roll material costs.

Our steel mills operated at 83% production utilization rate in the quarter, slightly lower than the 85% for the first quarter this year. This compares to the recent domestic industry rate of under 80%. Notably, even though nonresidential construction is still anemic, our Structural Rail division has operated at 53% utilization for the year. Rail production is held back. We increased our rail shipments over 12% this past quarter, shipping 38,200 tons. Dick and his team will continue to focus on increasing this number throughout the year.

Operating income per ton shipped for our steel operations decreased about 5% from the first quarter of $898 [ph] to a second quarter $893 [ph] a ton. Average combined steel pricing related to second quarter shipments declined $21 in the quarter, which is over 2%. And based on shipping mix, the decrease in flat roll pricing was the most prominent factor in the overall change. The cost of scrap used for the production for the second quarter declined $20 per ton charged into our furnaces.

From a current market perspective, the automotive manufacturing, energy and construction markets continue to be stable, while a slight tempering appears to exist in the transportation and agricultural sectors. Steel backlogs have drawn down to a small degree since the end of March. This has been principally, I think, procurement-driven as buyers stayed out of the market in anticipation of even lower scrap prices or taken the opportunity to realign their inventories, particularly in the SBQ arena. Underlying demand appears though to be stable. And with some capacity exiting the market, low sheet imports and a strengthening scrap market, positive momentum may begin.

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