Higher Realized Prices Boost U.S. Steel’s Q1 Results

U.S. Steel (NYSE:X) announced its first quarter earnings on April 29 and conducted a conference call with analysts on April 30. As expected, higher realized prices for its Flat-Rolled Products segment boosted the company’s results. U.S. Steel reported a net income of $52 million as against a loss of $73 million in the corresponding period a year ago. Quarterly revenue declined to $4.45 billion as compared to $4.60 billion a year ago. This was due to lower steel shipments year-over-year.

The company gave updates about its cost saving and efficiency enhancement efforts under its Carnegie Way initiative. It highlighted research and development as a major focus area for the company. The management also gave its outlook for Q2 as well as its expectations for the rest of the year.

You can check out our full analysis for U.S. Steel here:

Operational Performance

Income from operations for the Flat-Rolled Products segment rose to $85 million this quarter as against a loss of $13 million in the corresponding period a year ago. The increase in income from operations is due to higher realized prices and lower repair, maintenance and other operating costs, offset by higher energy costs and lower shipment volumes. The Flat-Rolled Products segment reported an average realized price per tonne of $761 as against $719 in the corresponding period a year ago. This is in line with expectations due to improved market conditions in North America.  Quarterly steel shipments stood at 3.67 million tonnes as against 4.02 million a year ago. The decline in shipment volumes is attributed to weather-related issues.

Income from operations for the European segment declined slightly from $38 million in Q1 2013 to $32 million this quarter. Lower realized prices and shipment volumes were mainly responsible for this. The effects of these factors were partially offset by favorable effects related to sales and swaps of emission allowances, a weakening of the U.S. Dollar against the Euro, as well as lower raw material maintenance and repair costs. Realized prices declined to $710 per tonne against $718 per tonne a year ago. Quarterly shipment volumes declined marginally to 1.03 million tonnes against 1.05 million tonnes a year ago.

Income from operations for the Tubular Products segment fell to $24 million this quarter from $64 million in the corresponding period a year ago. This decrease was mainly because of lower realized prices and shipment volumes. Realized prices were lower due to a high level of low-priced oil country tubular goods (OCTG) imports. Realized prices stood at $1,479 per tonne against $1,556 per tonne in the corresponding period a year ago. OCTG imports along with weather-related issues accounted for lower quarterly shipment volumes of 4.19 million tonnes against 4.28 million tonnes a year ago.((U.S. Steel Q1 2014 10-Q, SEC))

Carnegie Way

The company management provided updates on The Carnegie Way, an ongoing initiative that is aimed at creating value by enhancing efficiency, reducing costs and boosting profitability. The management provided some details about the methodologies it has adopted to drive value enhancement. Under the Carnegie Way transformation, the company benchmarks various functional areas in the company with best practices both in the steel industry and outside it. It tries to develop robust business processes and drive improvements by the application of Lean Six Sigma methodologies across manufacturing, supply chain, commercial, procurement, innovation and support functions like HR, IT, legal and accounting.

Projects undertaken under this initiative in Q1 are expected to result in improvements in manufacturing processes, supply chain and logistics and additional SG&A reductions. These projects are expected to improve margins by around $140 million in Q1. The total benefits from The Carnegie Way initiative are now expected to be $290 million for 2014.((U.S. Steel Q1 2014 8-K, SEC))

Outlook

The company expects lower income from operations in Q2 as compared to Q1. Weather related logistical issues are expected to lower production and shipment volumes.

The company expects the Flat-Rolled Products segment to report a loss in the second quarter. Weather-related issues are expected to cause operational difficulties. These would result in a reduction in production and shipments and higher operating costs. Average realized prices are expected to be comparable to the first quarter.

The company expects shipment volumes and realized prices to be comparable with those in the first quarter. However, the effect of sale and swap of carbon emission allowances which boosted Q1 results is expected to be missing in Q2. Thus, results are expected to worsen in Q2.

The Tubular Products segment is expected to see a rise in shipment volumes in Q2 due to increased drilling activity. Average realized prices are expected to be in line with those in Q1.

The company expects stronger demand for its Flat-Rolled Products segments year-over-year primarily due to stronger demand from its customers in the automotive and construction sectors. It remained bullish on the demand for its Tubular Products segment for the whole year due to the continued strength in drilling activity. Realized prices are expected to be subdued due to competition from low-price imports. For its European operations, the company expects the favourable outlook for manufacturing and construction sectors to translate into stronger demand for steel. However, demand may not pick up substantially in the near term.

The company stressed upon its commitment to research and development in order to develop innovative products that keep up with customer requirements. The management noted the threat from competing lightweight materials in the automotive market. It stressed upon its efforts at developing lightweight advanced steel solutions that better cater to customer requirements. For the Tubular segment, the company is focusing upon developing proprietary premium and semi-premium connections.

The company aims to deploy a substantial chunk of its cash savings from its cost reduction efforts in research and development. To support this new cash deployment strategy, the company also announced the creation of a new role of Chief Technology Officer. ^[1]

We have a price estimate of $22.66 for U.S. Steel. We will revise this in light of the earnings announcement.

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1. U.S. Steel’s Q1 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]