The steel business has been especially tough over the past few years, despite the slow and relatively steady recovering U.S. economy, making Nucor's (NYSE: NUE) second quarter earnings beat on Thursday even that much more of a surprise. And while the profit side of the ledger was solid, total sales actually fell from last year, so there remains some weakness in the overall market. Here are the highlights:
- Earnings per share of $0.39, well above the company's $0.20-$0.25 guidance, and Wall Street estimates of $0.26.
- Sales of $4.36 billion, down 18% from last year, a decline from Q1, and well off Wall Street's $4.54 billion estimate.
- Earnings included a $0.19 per share gain on inventories due to a $95.5 million value credit.
- Operating rates up from last year; energy and scrap costs down.
Overall, the quarter was less about a recovery in the steel business, and more about better operating efficiency and lower input costs. Let's take a closer look at the details.
Steel business remains tough
While there has been some improvement in the past year, competition from abroad steel producers -- especially state-owned operations -- continues to put pricing pressure on domestic manufacturers, even as tariffs have helped provide some relief. According to Nucor's release, imports accounted for 32% of finished steel sales in the U.S. in the first half of 2015, up from 27% last year.
Through the first half of the year, Nucor's total sales are down 16%, while its total tons of product shipped to customers is down 7%. While the mix has changed some, this is largely a reflection of how much prices have fallen, as well as increased competition. In short, Nucor is selling less product, and selling it cheaper, than it was last year.
Focusing on efficient operations
Nucor is routinely one of the most efficient steelmakers out there, managing its fixed-costs and keeping its plants running as efficiently as possible. Operating rates at its steel mills was 73% in the quarter, which is up from 65% in the first quarter. The Q1 rate was largely related to the repairs at its Louisiana DRI facility, which was down for repairs for most of that quarter. The company said that the DRI plant is now running at closer to 85% efficiency.
However, as long as volumes continue to decline, the company will have a hard time improving operating efficiency rates.
Input costs are down
Nucor, which is one of the largest steel recyclers in the U.S., has seen scrap and scrap substitute costs fall dramatically this year. Last quarter's $271 per ton cost was down 16% from the first quarter of the year, and 29% lower than the year-ago quarter. So far this year, the company has paid 24% less per ton than in 2014.
Energy costs are also down, almost entirely due to falling natural gas prices. The energy input cost per ton fell by $4 versus both last year and the first quarter of 2015.
Cash and capital position in solid shape
The company produced nearly $1.2 billion in cash from operations in the first half of the year, almost triple the $443 million from the first half of 2014. This is impressive considering that total sales have fallen, but it's important to understand that this is partly about timing and inventory management. Total inventory is down almost $500 million over the past year, so a big portion of the jump is due to selling though existing inventory and not replacing it.
This isn't necessarily a sustainable way to produce long-term cash flow, but it's one way an asset-heavy business like Nucor's can manage its capital when the market environment is less-than-ideal.
It also helps guarantee that the company's dividend won't be at risk while the market shakes out.
Taking the long view
As much as the U.S. economy has improved, the steel business has remained relatively challenging. There has been strength in the automotive business for the past few years, and before the recent downturn in oil prices, the domestic energy sector had been a major growth market for steelmakers. The residential construction business has also shown some growth, though it is still far from where it could be in a few years.
But the downturn in oil prices has severely slowed demand for steel pipe and other items in that market, and the nonresidential construction market has yet to fully rebound from the recession. Factor in the huge impact of steel imports -- which continues to affect pricing, profits, and the size Nucor's slice of the pie -- and American steelmakers are swimming upstream.
But while much of the competition continues to struggle, Nucor continues to find ways to keep costs in line and produce profitable results. This quarter was another example of that.
The company also announced it would pay a $0.3725-per-share dividend in August, a slight increase from last quarter, keeping its streak of "regular" dividend increases alive, though not by enough to excite many folks. It may not be exciting, but it's dependable, and the company's steps to maintain a strong cash position should keep it from being at risk of being cut, even if the increases have become downright paltry.
