U.S. Steel CEO optimistic about second half of 2015

30 July 2015

U.S. Steel shares rallied for a third day Wednesday after the Pittsburgh steel producer maintained its full-year guidance despite the $261 million second quarter loss it reported late Tuesday.

President and CEO Mario Longhi told analysts that accelerating benefits from the company’s Carnegie Way cost-cutting campaign and improving market conditions in the second half are the reason the company is sticking to its forecast.

U.S. Steel shares closed Wednesday at $20.04, up $2.31. They have risen 23 percent since Friday, but are down 25 percent for the year.

The steelmaker’s full-year guidance is based on earnings before interest, income taxes, depreciation and amortization, or EBITDA, one accounting yardstick that analysts use to measure a company’s performance. Despite posting EBITDA of only $130 million in the first half, Mr. Longhi told analysts the company expects to report 2015 EBITDA of $700 million to $900 million.

Cost cuts are expected to account for much of the second half improvement. Mr. Longhi said the company now expects to realize $590 million in Carnegie Way benefits this year, up from $340 million at the end of the first quarter. He also said the company is taking short-term, temporary measures that will generate another $175 million in second half savings.

The company’s decision to stick to its outlook surprised some analysts.

“I think the steel industry almost always does worse in the second half than they do in the first,” independent analyst Charles Bradford said. “Through August, things are going to be soft.”

He expects prices and demand will improve in the fall, but said the company’s forecast also assumes there won’t be problems when the steelmaker’s contract with the United Steelworkers union expires Sept. 1. Mr. Longhi said little about contract talks other than, “Our relationship with our partners in the union is really good.”

Morningstar analyst Andrew Lane was also surprised by the company’s guidance.

“That’s a key factor in why the shares rallied,” he said. “It appears that management has been more successful than even they expected in cutting costs.”

The second quarter loss, which amounted to $1.79 per share, compares with a loss of $18 million, or 12 cents per share, in the year-ago quarter. Sales fell 34 percent during the quarter to $2.9 billion while steel shipments fell 23 percent to 3.9 million tons. The company’s U.S. mills that produce flat-roll steel used in cars, appliances and other products operated at 58 percent of capacity during the quarter.

Results for the quarter included a non-cash charge of $136 million, or 93 cents per share, for writing down the value of U.S. Steel’s remaining interest in its bankrupt Canadian operations, as well as a non-cash charge of $10 million, or 7 cents per share, for restructuring and other items. They also reflect a $186 million tax benefit related to its iron ore operations.

Excluding the two non-cash charges, U.S. Steel said its adjusted loss for the quarter was $115 million, or 79 cents per share.

Analysts had forecast an adjusted loss of 68 cents per share on sales of $2.97 billion.