AK Steel (AKS) posted its second-quarter results yesterday after markets closed, beating analysts’ expectation for a second straight quarter. However, it missed their top-line estimate and lowered its 2019 guidance due to US spot steel prices’ sharp decline. AK Steel earned revenue of $1.68 billion in the second quarter, compared with $1.69 billion in the first quarter and $1.75 billion in the second quarter of 2018. Analysts expected AK Steel to post revenue of $1.74 billion in Q2. However, as we have noted, the company’s revenue estimates looked aggressive given the automotive market’s weakness.
Key drivers of AK Steel’s Q2 earnings beat
AK Steel managed to beat its bottom-line estimates. The company reported adjusted EBITDA of $151 million in the quarter, compared with $161 million in the first quarter and $148 million in the second quarter of 2018. Iron ore derivative contracts were the key driver of AK Steel’s Q2 earnings beat. The company said, “Adjusted EBITDA in the recent second quarter included mark-to-market gains of $35.4 million from iron ore derivatives.”
In the second quarter, AK Steel’s EPS rose 18% YoY (year-over-year) to $0.21, beating expectations by a wide margin. However, its earnings estimates were quite conservative in the first place. Nucor (NUE) and Steel Dynamics (STLD) posted worse-than-expected earnings earlier this month, but both companies have an optimistic outlook for US steel prices.
Drilling deeper into earnings
In the second quarter, AK Steel’s flat-rolled steel shipments were flat sequentially but fell 3.3% YoY to 1.39 million tons. Its shipment profile continues to disappoint—te company’s Q2 average flat-rolled steel realized price was $1,102 per ton, down 0.89% sequentially. Nucor’s and Steel Dynamics’ average realized prices fell sharply in the second quarter. Since AK Steel has a much lower spot exposure, its average selling prices haven’t fallen in tandem with spot steel prices. However, the company’s 2020 contract pricing could be impacted by US steel prices’ deterioration.
AK Steel has lowered its 2019 guidance, reducing it to adjusted EBITDA expectation to $470 million–$490 million from $505 million–$525 million. The company lowered its EBITDA guidance during its first-quarter earnings call as well. Its 2019 guidance does not include the $77.4 million charge associated with the Ashland Works closure announced earlier this year. It has been idled since 2015. U.S. Steel Corporation (X) has also announced the idling of two US blast furnaces and one blast furnace in Europe. U.S. Steel is set to release its Q2 results on Thursday.