What Effect Would The Asset Revitalization Program Have On US Steel’s Q1 2019 Results?

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United States Steel

United States Steel Corp (NYSE: X) is set to release its Q1 2019 results on May 02, 2019, with a conference call with analysts the following day. Total revenues for US Steel have largely trended higher, increasing from $3.15 billion in Q1 2018 to $3.73 billion in Q3 2018, due to robust demand from end-market such as automotive, industrial equipment, construction, and pipe and tube. However, revenue decreased marginally to $3.69 billion in Q4 2018 due to much lower than expected growth in the European flat-rolled and tubular segment, though it was still higher on a y-o-y basis. The trend is expected to reverse in Q1 2019 with the company’s revenue expected to decline by about 6% (y-o-y) due to lower volume in European operations and loss of revenue due to the planned outage at the Great Lakes Works facility. Market expectations is for the company to report adjusted earnings of $0.22 per share in Q1 2019 compared to $0.32 per share in the year-ago period. Lower earnings would likely be driven by a higher effective tax rate, partially offset by gains under the $2 billion asset revitalization program.

We have summarized the key expectations from the announcement in our interactive dashboard – How is US Steel expected to fare in Q1 2019 and what is the outlook for the full year? In addition, here is more Materials data.

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A] Revenue Trend

US Flat Rolled Segment

  • With a contribution of 68% to total revenues, the US flat-rolled segment has seen a steady rise in revenues over recent quarters due to robust demand from end markets, such as automotive, industrial equipment, construction, and pipe and tube.
  • However, revenue decreased in Q4 due to domestic mill shipments to the tin plate segment remaining flat, exacerbated by a decline in global steel prices with China’s winter cuts being less severe than 2017, which led to supply being higher than earlier expectations.
  • Revenue is likely to see a dip in Q1 2019 due to subdued price realization and loss of volume from repairs at Great Lakes Works facility.

US Tubular Segment

  • Revenue from the segment steadily increased over the last couple of quarters, driven by increase in shipments and higher oil prices, as this segment is directly related to oil markets.
  • We expect this trend to continue in Q1 2019, driven by strong demand conditions and oil prices remaining at elevated levels.

European Tubular and Flat-Rolled Segment

  • After increasing in Q2 2018, revenue from the segment decreased in the following two quarters due to uncertainty around economic growth in the European region.
  • Lower demand and stronger dollar is expected to adversely affect revenue from the segment in Q1 2019.

B] Expense Trend

Total expenses increased steadily till Q3 2018 on the back of higher revenues and increasing effective tax rate. Q4 2018 saw total expenses decline due to tax benefits received during the quarter, along with lower interest expense.

  • COGS as % of Revenue: COGS as a % of revenue continuously declined due to benefits from the asset revitalization program. However, in Q4 2018, the metric saw a marginal increase due to significant temporary idling charges, restart and related costs associated with Granite City Works.
  • Interest Expense: Interest expense has been decreasing due to early debt repayment by the company. Additionally, in December 2018, the company redeemed all of its outstanding Senior Notes due 2020 ($356 million aggregate principal amount). This is expected to be reflected in lower interest expense and finance costs for 2019.
  • Effective Tax Rate: After a low tax expense in the initial part of the year, the company received major tax benefits in Q4 2018 due to the TCJ Act, leading to negative effective tax rate for the quarter. We expect the tax rate to be higher in Q1 2019 in the absence of any tax benefits to be received.

Full Year Outlook

  • Total revenue for the year is expected to decline by 1.5% to $13.97 billion in 2019 from $14.18 billion in 2018, on the back of loss of volume from ongoing repair works at Great Lakes Works facility and under performance of the European segment. This is likely to be exacerbated by the subdued pricing environment.
  • After net income margin increased sharply to 7.9% in 2018, margins are expected to decline to about 7% in 2019 in the absence of large tax benefits, unlike 2018. However, margins would still be higher than 2016 and 2017, primarily driven by lower interest expense following early debt repayment, coupled with benefits from lower costs and increased productivity from the $2 billion asset revitalization program.

Trefis has a price estimate of $25 per share for US Steel’s stock. We believe that increasing profitability and long-term benefits from the asset revitalization program would provide support to growth in the stock price.

 

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