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Following the Record Q1, Steel Fundamentals Remain Strong, Buybacks Continuing, Backlog High

There were numerous operational and financial updates from various steelmakers last week. Capitalizing on a recurring theme of being able to pass through the raw material price increases to the end customer, results and/or guidance surprised on the upside. Though domestic prices (HRC, CRC and Rebar) have been weakening recently ($1,250/t, $1,715/t and $1,130/t respectively, down from an average of $1,451/t, $1,783/t and $1,130/t last month), the outlook for the rest of the year remains strong – as was communicated by the various management teams. Ahead of the upcoming Q2/2022 earnings results, updates from Steel Dynamics and United States Steel were both positive on the macro front and better than expected on the quarterly figures. Commercial Metals was one of the first to report fiscal Q3/2022 financial results which happened to handily beat consensus estimates. Note that all the mentioned companies below reported record calendar Q1/2022 results.

Steel Dynamics (STLD) provided a Q2/2022 mid-quarter update with EPS revised higher and expected to reach record quarterly territory. As such, Q2/2022 adjusted EPS was revised to between $6.61-$6.65 per diluted share compared to guidance expectations calling for $5.72 (and a Q1/2022 print of $5.71). That said, though profitability from the steel operations are expected to remain “historically strong”, they will be sequentially lower due to lower earnings from the flat rolled steel operations. More than making up for this, the steel fabrication and recycling operations are expected to be significantly higher than the Q1/2022 figures. Management continues to see broad steel demand led by the automotive, construction and industrial sectors. On the buyback front, the company repurchased $397M, or over 2.5% of its outstanding common stock during the quarter. Since the record Q1/2022 net sales of $5.5B, cash flow from operations of $819M and steel shipments of 2.9M tons as announced on April 20, 2022, the shares have dropped by nearly 15% to date.

United States Steel (X) provided a market update which surprised to the upside when it released its Q2/2022 EBITDA guidance estimate of $1.6B, compared to previous consensus expectations for $1.5B. Moreover, management pointed out that flat rolled volumes were “meaningfully higher” Q/Q while tubular volumes were also higher Q/Q. Improvement was also seen with European volumes Q/Q as higher costs were offset by higher prices. Internally, the share buyback program was accelerated in Q2 with $320M of common stock re-purchased thus far in the quarter (prices not disclosed but it would imply approximately 11.0M shares representing approximately 3.7% of the shares outstanding). Since the record Q1/2022 adjusted EBITDA print of $1.337B and record adjusted EPS of $3.05 per share as announced on April 28, 2022, the shares have dropped by 40% to date.

Commercial Metals (CMC) reported fiscal Q3/2022 financial results (for the three month period ended May 31, 2022) which were highlighted by core EBITDA of $483.9M (consensus $389.0M, $230.5M in Q3/2021) and adjusted EPS of $2.61 (consensus $1.90, $1.03 in Q3/2021). The quarter was highlighted by strength in North America and in Europe which led to margin gains. As total finished steel shipments amounted to 1.65M tons (1.43M tons in the previous quarter and 1.60M tons in Q3/2021) core EBITDA per ton of finished steel shipped reached $293 (compared to $226 in the previous quarter and $144 in Q3/2021). Management highlighted that they expect continued strong support into fiscal Q4/2022, given “growing downstream backlog and solid levels of new work entering the project pipeline”. For FY/2023, the structural foundations are expected to remain strong – contract backlog is at a historically high level with additional activity expected to flow in from the infrastructure bill and reshoring trends. Operationally, the Tensar acquisition contributed nearly $7.0M to EBITDA for five weeks of inclusion, while the Arizona 2 micro mill remains on target for a startup sometime next year. During the quarter, the company repurchased 1.0M shares ($38M) representing approximately 0.8% of the outstanding amount. A further $294M remains on the planned buyback. Note that since the record Q2/2022 fiscal result of $383.3M in earnings from continuing operations as announced on March 17, 2022, the shares have dropped by nearly 10% to date.


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