2-2008 Fourth-quarter Report and Outlook: Mills
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Mills Produce Record Results
Sluggishness in the U.S. economy wasn’t enough to keep some U.S. producers of steel, aluminum and specialty metals from reporting record sales and income during recent fourth-quarter and year-end financial reports to analysts and shareholders.

By Staff of Metal Center News

AK Steel
2007 Sales Eclipse $7 Billion for First Time

AK Steel topped $7 billion in revenues for the first time in company history in 2007. Net sales of $7.00 billion were more than 15 percent higher than the $6.07 billion recorded during the previous year.

The record sales contributed to a more profitable year for the West Chester, Ohio-based steel company. AK Steel reported net income of $387.7 million, a dramatic improvement from the $12.0 million totaled in 2006.

“Our management and employees delivered record results in every key metric, and we have taken another huge step toward realizing the potential of our company,” Chairman and CEO James Wainscott told investors and analysts during the company’s year-end conference call last month. “Importantly, shareholders were rewarded during the year with a substantial increase in the market value of AK Steel.”

Shipments were also up for the full year, a 5 percent increase to 6,479,000 tons. The company’s average selling price for the year was $1,081 per ton, 10 percent higher than the 2006 average of $984 per ton. AK averaged $103 per ton in adjusted operating profit, achieving a long-sought goal.

The fourth quarter was a driver in AK Steel’s record year. The company reported $106.7 million in net income in the quarter, compared to a net loss of $49.3 million during the same period of 2006. Net sales in the quarter totaled $1.69 billion, up 7 percent from the fourth quarter the previous year. The company’s shipments of 1.57 million tons were 3 percent ahead of the same period of 2006.

The strong finish to 2007 has AK Steel executives optimistic entering 2008.

“We are realizing the benefits in 2008 of our cost-reduction efforts, our capital investments and higher selling prices negotiated in our contract-sales agreement. Our fundamentals are improving. Things aren’t perfect, but they are better than they have been in a long time,” Wainscott said.

AK Steel announced five spot market price increases for carbon steel in the previous year, and three in the month prior to the conference call. AK’s carbon steel prices jumped $140 after the three increases.

“Each of these price increases has been in response to higher demand for carbon steel products, as well as the need to recover higher costs for steelmaking inputs,” Wainscott said. Prices may not have peaked, he added.

“Just about every steel producer around the world is experiencing rising input costs,” he said. “All of these factors—low inventory, low imports and rising input costs—support even higher steel prices in the months ahead.”

AK Steel expects shipments in the first quarter of 2008 to be comparable to the fourth quarter of 2007. The company anticipates that its first quarter 2008 average per-ton selling prices will be 5 to 6 percent higher than in the fourth quarter of 2007.

While acknowledging some softness in the automotive and appliance markets, Wainscott pointed to an expected pickup in orders from service centers, where inventories have dropped to their lowest levels since 1999.

The company held firm to its optimistic projections even with the plunge in worldwide markets in the days before the company’s conference call.

“While some are espousing views of a recession, or that we are already in one, we don’t subscribe to that theory,” Wainscott said. “We have built our business plan anticipating a slow growth scenario, with the operative word being growth, not recession.”

Additionally, the company is somewhat cushioned against a domestic recession through its increased presence around the globe. The company forecasts a 40 percent increase in international shipments in 2008.

Alcoa
Annual Records Set in Sales, Income, Expansion Continues

Aluminum giant Alcoa reported record results across the board for the full year 2007. Revenues in 2007 totaled $30.7 billion, slightly above the $30.4 billion recorded the previous year. Net income totaled $2.6 billion, a 19 percent increase compared to the $2.2 billion posted in 2007. Cash from operations was more than $3.1 billion, a 21 percent increase over 2006.

“For the second year in a row, Alcoa has achieved company all-time records in revenues, income from continuing operations and cash generation,” said Alain Belda, chairman and CEO of Pittsburgh-based Alcoa. “We battled substantially higher material input and energy costs, and currency impacts, while simultaneously continuing to execute on the largest capital investment program in our history.”

Fourth quarter income from continuing operations was $624 million, 141.9 percent more than the $258 million reported during the same period in 2006. Net sales for the quarter totaled $7.4 billion, 5.1 percent below the fourth quarter of the previous year.

Among operating segments, Alcoa experienced an after-tax operating income loss of $16 million in flat-rolled products during the quarter, down $77 million from the previous quarter. Weak performance in Russia and China, due in part to higher operational and energy costs and unfavorable currency values, accounted for 50 percent of the decline. The rest was attributed to general market weakness in the United States and Europe, weaker product mix and destocking by aerospace customers.

In contrast, the extruded and end products segment showed an increase of 23 percent to $16 million. Market and operating conditions were comparable to the prior quarter with margin improvements accounting for the increase.

In 2007, Alcoa completed major growth projects, including its first greenfield smelter in 20 years in Iceland, a new anode plant in Mosjoen, Norway, and its third flat-rolled products facility in China. In addition, the company claimed major progress was made on several other growth projects including the Juruti bauxite mine, the expansion of the Bohai rolling mill in China, and expansion of the Sao Luis alumina refinery.

“We have invested in new plants, expanded production at others, modernized operations, renegotiated long-term power agreements and built new energy facilities to extend our energy access at competitive rates, while also continuing to invest in growth markets such as Brazil, China and Russia,” Belda said.

Allegheny Technologies
ATI Sets Annual Highs Despite Dip in 4Q

Allegheny Technologies Inc. reported net income for the full year 2007 of $747.1 million on sales of $5.45 billion. Both figures were annual records for the Pittsburgh-based specialty metals company.

The company’s net income was 30.1 percent higher than the $574.1 million posted in 2006. Net sales jumped 10.5 percent from $4.9 billion in 2006.

Compared to 2006, shipments from ATI’s high performance metals segment featured increases of 12 percent in titanium alloys, 4 percent in nickel-based alloys and specialty alloys, and 20 percent in exotic metals. In the company’s flat-rolled products segment, shipments of titanium and ATI-produced Uniti titanium products grew nearly 25 percent to approximately 10.4 million pounds, while shipments of grain-oriented silicon electrical steel grew 5 percent.

In contrast to the full-year results, the company’s performance dipped during the fourth quarter. Net sales dropped 9.3 percent to $1.27 billion, while net income fell 8.7 percent to $148.9 million.

“As expected, the fourth quarter of 2007 turned out to be a difficult quarter for our standard grade stainless sheet shipments, primarily due to U.S. and European service center customers’ destocking actions,” said L. Patrick Hassey, chairman and CEO.

Though order entry for flat-rolled standard grade stainless sheet improved late in the fourth quarter and further improved in January, Hassey envisions first-quarter results similar to the fourth quarter of 2007. Beyond that, the picture is uncertain.

“While we remain steadfast in our long-term growth outlook, short-term visibility is unclear,” Hassey said. “Some customers are currently cautious due to the U.S. economy. We also see caution in the aerospace supply chain due to the uncertainty of the Boeing 787 Dreamliner build schedule and ramp-up, even though build rates for existing models are scheduled to increase significantly, and demand for jet engine spare parts remains robust.”

Carpenter Technology
Strong Energy Market Drives Record Quarter

Carpenter Technology Corp. reported record net sales and income during the company’s second quarter. The Wyomissing, Pa.-based producer of specialty alloys reported net sales of $446.4 million, a 6 percent hike from the same period in 2006.

Adjusted for surcharge revenue, however, sales decreased 1 percent from the same quarter in 2006, the result of a 9 percent decline in pounds shipped.

Net income from continuing operations for the quarter totaled $57.7 million, 26.5 percent higher than the second quarter of the 2007 fiscal year. The growth in net income was attributed to growth in the energy market coupled with increased international demand.

“Our record second-quarter results reflected the benefits of our end-use market diversification and international footprint,” said Anne Stevens, chairman and CEO. “We continued to experience strong demand from the energy market, which also contributed to the 33 percent jump in our international sales. Growth in these markets helped offset domestic weakness in our economically sensitive markets, including automotive, consumer and industrial.”

Sales to the energy market, which includes oil and gas and power generation, increased 55 percent from a year ago to $57.1 million. Excluding surcharge revenue, sales increased 65 percent. Energy market sales were strong in both oil and gas and power generation compared with the second quarter a year earlier.

Carpenter’s premium alloys operations generated a 15 percent increase in pounds shipped due largely to strong demand from the energy market. More than offsetting the increase was a 13 percent decline in pounds shipped by the advanced metals operations partly due to lower priced stainless material sold through distributors.

“As we look at the second half of our fiscal year, we remain on track for another record year. Our third-quarter performance might not surpass the exceptionally strong third-quarter results of a year ago due to softening U.S. economic conditions,” Stevens said. “While we expect continued strength in energy market sales and resumption in sales growth to the aerospace market for the third quarter, sales to our other end-use markets could offset this growth.”

Nucor
Earnings Strong, But Short of a Record

Nucor Corp., Charlotte, N.C., couldn’t match its record-setting earnings of 2006, though it remained hugely profitable in 2007. The company reported year-end earnings of $1.47 billion, a 16 percent decline from the $1.76 billion recorded in 2006.

In contrast, net sales for 2007 increased 12 percent to a record $16.59 billion from the $14.76 billion in 2006.

“In 2007, the Nucor team achieved the second best earnings year in our history,” Chairman and CEO Daniel DiMicco said during the company’s year-end conference call. “Our 2007 performance was highlighted by pre-tax profit per ton shipped at $104 per ton, net income of $1.5 billion and return on stockholders equity of 30 percent, and these strong results came while working against a severe headwind from a depressed U.S. market.”

DiMicco credits Nucor’s diversified product mix for its fourth consecutive year of strong earnings. Nucor’s sales mix in 2007 included 36 percent sheet, 27 percent bars, 14 percent beams, 11 percent plate and 12 percent downstream steel products.

“Weaker sheet mill profits were cushioned by earnings growth at our bar, beam and downstream businesses,” DiMicco said.

In the fourth quarter of 2007, Nucor’s net sales increased 27 percent to a quarterly record $4.40 billion, compared to $3.47 billion in the fourth quarter of 2006. Sales were also up 3 percent compared to the $4.26 billion recorded in the third quarter of 2007.

Net earnings of $364.8 million, however, represented a decline of 10 percent compared to the $405.1 million earned in the fourth quarter of 2006, and a 4 percent decline from the third quarter of 2007.

Nucor reported shipments of 5.9 million tons, an increase of 16 percent over the same three months the previous year. The average sales price per ton increased 9 percent from the fourth quarter of 2006.

Looking ahead, Nucor’s Chief Financial Officer Terry Lisenby said, “our outlook for the first quarter is positive. Bar, beam, plate and downstream should see continued strength. Market conditions for sheet have improved.” Risks to the forecast, Lisenby said, include scrap price volatility, further weakening in the economy and a reversal of import levels.

He also announced Nucor’s plans to spend close to $800 million in capital expenditures in 2008, well above the $520 million spent in 2007. More than $300 million of the 2008 total is budgeted for greenfield projects. Those projects include Castrip at Arkansas, a galvanizing line in Decatur, Ala., a building systems facility in Utah and completion of the new bar mill in Memphis.

The Memphis SBQ project is expected to begin production in the second quarter of 2008. The mill will have an estimated annual capacity of 850,000 tons.

“We are encouraged by the strong level of marketplace interest in what Memphis will be able to provide our customers,” said D. Michael Parrish, executive vice president, bar products.

In the third quarter, Nucor’s Decatur sheet mill facility will start up its galvanizing plant with 500,000 tons of capacity and the ability to galvanize up to 72-inch-wide sheet. The plant, Nucor’s fourth, increases its total capacity to more than three million tons.

Also in the third quarter, Nucor will complete work on a temper mill on its cut-to-length line in Tuscaloosa, Ala.

DiMicco expressed confidence in the company’s ability to weather the current economic difficulty. “Nucor has a long history of emerging economic downturns stronger than we entered into them,” he said.

Steel Dynamics Inc.
Diversification Fuels Record Annual Sales

Steel Dynamics Inc. posted record sales in the fourth quarter and for full-year 2007, driven in part by the acquisition of scrap supplier OmniSource Corp. last fall.

The Fort Wayne, Ind.-based company recorded sales of $4.4 billion, an increase of 35 percent over the $3.2 billion in 2006. Net income for the full year of $395 million was almost level with the $397 million recorded during 2006.

In the fourth quarter, net sales totaled $1.5 billion, 73 percent higher than the fourth quarter of 2006, fueled by the acquisition of OmniSource. Net income was down slightly on a year-over-year basis to $98 million from $105 million. Officials said the acquisition of OmniSource was, as predicted, dilutive to earnings.

“Our 2007 results are indicative of our success as it relates to diversification and growth strategies,” Keith Busse, chairman and CEO, said during the company’s quarterly conference call. “In a year when flat-rolled steel, the largest market segment in the U.S. steel industry, struggled, we experienced record consolidated results. Our strategy to diversify from the flat-rolled steel business that we started in the mid-1990s into a multi-product steel producer has resulted in five steelmaking operations, plus related steel processing, fabricating, scrap and virgin-iron resource operations.”

Despite the sluggish performance in the flat-rolled segment, SDI experienced a 4 percent increase in shipments from its three Indiana mills. Flat-rolled shipments declined 2 percent, but structural steel volume was up 15 percent and engineered bars increased 9 percent. Overall, including the company’s 2006-07 acquisitions, shipments were up 32 percent.

Besides OmniSource, SDI also acquired Elizabethtown Iron and The Techs in 2007. “The integration of these operations is proceeding well, and we anticipate further efficiencies to be realized throughout 2008,” Busse said.

In 2008, the company will commit nearly $400 million to capital expenditures. Projects to be completed in the year include the commissioning of the company’s second paint line at Jeffersonville this month and a second rolling mill at Columbia City that will ultimately double the mill’s production capacity to 2.2 million tons.

Additionally, the company is continuing to proceed with its efforts in the Mesabi Nugget project, including the construction of an iron-nugget production plant and preparations for mining and concentrating iron ore on the Mesabi Iron Range in Minnesota. Production of the scrap substitute is not expected to go online until 2009, though it portends even more growth for SDI.

Busse said the company would like to add a West Coast mill sometime in the future, a project that is dependent on the ability to deliver low-cost, high-grade resources to the facility.

“Clearly Nugget could be the primary driver for an effort on the West Coast of modest size. We’re going to be dealing with primary metals with a cost structure that would put us in a favorable position,” Busse said. “Having said that, we should probably quit talking about it, because it’s years away.”

In the more immediate future, SDI believes the outlook is good for the business in 2008, particularly with the rising price of steel. Part of the price increase can be traced to the higher costs of scrap and other inputs. Danny Rifkin, executive vice president and chief operating officer of OmniSource, said foreign demand has fueled the increase in scrap prices.

“Whatever scrap has been historically imported into the U.S. is not coming in. We’re running at a 16-million-ton export rate, probably three to four million tons more than on an annual basis. That makes a huge impact on a month-to-month basis on domestic prices,” Rifkin said.

But low inventories at the service center level and a lack of imports make the company confident the market will absorb the prices and demand for steel will remain solid, barring any major economic downturn.

“We see our earnings in the $1.10 to $1.20 range in the first quarter. It’s a little bit of an anomaly, growth in steel earnings in a time that we’re perceived to be in a recession or market weakness,” Busse said. “We had a situation where domestic pricing was far below world market prices, somewhere between $100 to $200 per ton, when you factor in the extensive cost of freighting products from other environments to the U.S. It was one of the only times I can remember where domestic prices were below other markets.”

Timken
Sales, Income Up Despite Divestment

The Timken Company, Canton, Ohio, reported sales of $5.2 billion for 2007, an increase of 5 percent from the previous year. Strong sales in industrial markets and the favorable impact of currency were partially offset by the impact of the strategic divestment of the company’s automotive steering and European steel tube manufacturing operations.

The company achieved income from continuing operations of $219.4 million, up from $176.4 million in 2006.

“Our financial results for 2007 reflect the strength of industrial markets and the progress we made on initiatives to shift our portfolio to markets where we can create greater shareholder value,” said James W. Griffith, Timken’s president and CEO. “We expect to see continued strong demand for our products and are committed to achieving improved financial performance through a combination of better execution and portfolio management.”

For the quarter ended Dec. 31, sales were $1.3 billion, an increase of 8.9 percent from the same quarter in 2006. Net income jumped 38.8 percent to $48.3 million.

In the fourth quarter of 2007, the company implemented a change to its management structure and now operates under two major business groups, the steel group and the bearings and power transmission group.

Sales for the steel group, including inter-segment sales, reached a record $1.6 billion in 2007, up 6 percent from 2006. Excluding divestment of the group’s European steel tube manufacturing operations earlier in 2007, sales increased 10 percent over 2006.

U.S. Steel
Fourth-Quarter Earnings Show Big Declines

United States Steel Corp., Pittsburgh, reported weak earnings during the fourth quarter, marked by double-digit income declines in each of its three major business segments. Nonetheless, the company is on the trajectory for improved results in the first quarter, according to Chairman and CEO John P. Surma.

He described 2007 as one of U.S. Steel’s best years from a financial perspective even though net income for the year was down 36 percent from 2006.

“It was a year of strategic actions, as we acquired Lone Star Steel in June, doubling the size of our tubular business. Then, at the end of October, we purchased Stelco and increased our production capability by 4.9 million tons to 31.7 million tons, making U.S. Steel the fifth largest steel producer globally. These acquisitions are expected to result in at least $200 million in combined annual run-rate synergies by the end of 2008. These savings, coupled with the savings of the U.S. Steel Kosice early retirement program, should significantly bolster each of our three main business segments,” Surma said.

While the steelmaker’s fourth-quarter net sales of $4.5 billion were up 4.2 percent from the third quarter and 20.2 percent from the fourth quarter of 2006, U.S. Steel’s fourth-quarter net income was only $35 million, down 87.0 percent from the previous quarter and 88.2 percent from a year earlier. Surma said several factors contributed to this, including $69 million in inventory transition effects related to its Lone Star and Stelco acquisitions and a $59 million charge associated with the retirement program at Kosice.

Additionally, there were also several planned and unplanned facility maintenance outages at both U.S. Steel Canada, formerly Stelco, and at Kosice, causing a significant decline in raw steel capability utilization rates. The rates were 82 percent in North America and 79 percent in Europe, down from 89 percent for both sectors in the third quarter.

U.S. Steel Canada lost nearly a month of production as a result of unplanned blast furnace outages, mainly at its Lake Erie plant. In Europe, the planned rebuilding of one of U.S. Steel’s two blast furnaces in Serbia took longer than expected and extended into the fourth quarter, in addition to an unplanned repair to a blast furnace in Slovakia.

These two business segments also faced other challenges during the quarter. The North American flat-roll segment experienced lower average realized prices vs. the third quarter largely due to a higher level of flat-roll and semi-finished steel with the addition of U.S. Steel Canada, as well as increased input costs. Surma said that U.S. Steel would be selling “a meaningful quantity” of the excess slabs it acquired from U.S. Steel Canada on the open market and using the rest at its U.S. facilities.

On a positive note, he said that North American steel market fundamentals continued to improve during the fourth quarter with inventories at service centers and flat-roll imports both declining. “North American spot prices have been increasing in response to these factors, as we expected, and we are realizing these increases in our spot business as the first quarter progresses,” Surma said.

Operating income for the flat-rolled segment, at $53 million, fell 68.8 percent from the third quarter. It was, however, up 71 percent from the fourth quarter of 2006.

The European operating income of $85 million was down 44.1 percent from the previous quarter and 53.3 percent from a year earlier. In addition to the outages, that segment saw a decline in Euro-based steel prices because of high imports, particularly from China, and high service center inventories.

The operating income in U.S. Steel’s tubular segment was $83 million, down 12.2 percent from the third quarter and 42.4 percent from the fourth quarter of 2006. The drop was caused by the inventory reductions undertaken by distributors and low-priced imports, mainly from China. Recently, however, U.S. Steel announced several price increases for most sizes and applications ranging from $50 to $200 a ton, which bodes well for this segment in the first quarter of 2008.

“We expect first-quarter results to continue to reflect the volatile cost and pricing dynamics in our three major segments, but overall we should be in a good position in 2008 to take advantage of favorable supply-side conditions, our expanded product and geographic locations in North America and our new galvanizing line at USS-K,” said Gretchen R. Haggerty, executive vice president and chief financial officer.




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