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Service center executives were almost giddy about their universally strong results for the second quarter and first half of 2006. Following is a roundup of their latest conference calls with analysts and investors.
By the Staff of Metal Center News
Sidebars
and Tables:
A.M. Castle
Reports Record Sales, Earnings Performance
A.M. Castle & Co., Franklin Park, Ill., reported record sales and earnings performance for the second quarter and first half of 2006. Consolidated net sales for the second quarter totaled $275.6 million, an increase of 9.8 percent from second-quarter 2005. For the first half, net sales totaled $554.8 million, an 11.6 percent increase from the same period last year.
“Excluding material price increases, we achieved 5 percent sales growth in the second quarter and 7 percent sales growth for the first half of the year,” said Michael Goldberg, president and CEO.
Net income for the second quarter was $14.1 million, up from $13.2 million in second-quarter 2005. First-half net income of $29.9 million was up from $24.8 million in the first half of last year.
“We continue to experience strong demand in the markets we serve, particularly aerospace, oil and gas, and mining and heavy industrial equipment,” said Goldberg, who acknowledged that a moderate increase in metals pricing contributed to the company’s results.
A.M. Castle’s new Birming-ham, Ala., facility—part of the company’s planned expansion of its metals business into the southern U.S. manufacturing region—ship-ped its first customer orders last month. The $6 million upgrade of its information system is on track for completion by early 2008.
The company reported 12 percent sales growth in its metals business, and 8 percent growth in its plastics business, during the first half. “We continue to explore various growth opportunities in both our metals and plastics segments, Goldberg said. “Our excellent balance sheet has us well-positioned for both organic growth and potential strategic acquisitions that complement and enhance our existing product offerings, as well as expand our geographic reach.”
A.M. Castle officials remain optimistic about customer demand in the second half, though they expect sales to moderate due to typical seasonal patterns.
Metals USA
Operating Income Up 37 Percent
Metals USA Inc., Houston, announced second-quarter sales of $458 million, which exceeded sales in the prior quarter and second-quarter 2005 by about 6 percent. Operating income during the quarter was $37 million, or 37 percent higher than the $27 million recorded during second-quarter 2005.
“We are very pleased with our performance this quarter as we continue to maximize our profitability and maintain strong inventory control,” said Lourenco Goncalves, chairman, president and CEO of Metals USA. “Our recent acquisitions have been adding to our results from day one and, as our identified synergies are realized, their contributions will be even more rewarding.”
The company’s adjusted EBITDA of $42 million for the second quarter was $11 million better than the first-quarter 2006 figure of $31 million and $14 million higher than second-quarter 2005.
Metals USA’s total debt of $576 million at the end of June was $102 million higher than at the end of 2005, partially due to a $25 million dividend payment, $46 million in cash paid for the Port City Metal Services and Dura-Loc Roofing Systems acquisitions, $7 million in capital expenditures and a net change in working capital.
Commenting on recent market conditions, Goncalves noted that metals prices rose through the second quarter and stabilized at high levels in late June, where he expects them to stay. “Many believe that since prices are unusually high, there is an inevitable price decline in the near future. This is not the case, as I believe prices have merely returned to real value. Prices are stable at these levels because domestic supply and demand remain in balance,” he said.
Metals USA’s Plates and Shapes Group continues to experience a “fantastic year,” with a 31 percent increase in sales volumes, combined with a 6 percent increase in prices vs. second-quarter 2005. “Overall revenues are up almost 28 percent compared to a year ago, and we fully expect to experience this type of performance in the third quarter,” Goncalves said.
The company’s Flat-Rolled Division has shifted its product mix toward more stable nonferrous products, Goncalves said. Though the division’s total second-quarter revenues were down from the prior-year quarter, income per ton jumped to $61 vs. last year’s $34, which is an important measure of the company’s progress, he added. Nonferrous sales in June represented more than 40 percent of division revenues for the first time.
In second-quarter 2006, the company’s Building Products Group generated operating income of $6.7 million on sales of $54 million, compared to operating income of $7.1 million on sales of $55 million in second-quarter 2005. Moderating sales and profit were due primarily to markets that have returned to normal volumes after the 2005 surge in hurricane damage remediation. “We continue to see significant year-over-year sales growth in our roofing products as we introduce them into new markets,” Goncalves added.
He expressed further confidence about prospects for metals moving forward. “At this point we don’t see any reason for prices to go down. The economy is good, demand is good, the exchange rate has been insulating the U.S. from an avalanche of low-priced imported materials. All things considered, if Mr. [Fed Chief Ben] Bernanke does not screw up with interest rate hikes and slow the economy to a point customers will not buy, I can only see prices stable or even higher in the future.”
Olympic Steel
Processing Strategy Pays Off
Olympic Steel announced net sales for second-quarter 2006 totaling $256.2 million, a 6.1 percent increase from the $241.5 million for second-quarter 2005. Tons sold increased 7.5 percent to 343,000 vs. last year’s second quarter. Second-quarter 2006 net income totaled $8.4 million, up from $3.0 million in last year’s quarter.
Net income for the first half of 2006 was $16.4 million vs. a net income of $12.6 million in first-half 2005. Tons sold in the half increased slightly to 681,000, though net sales for the first half were down 5.9 percent to $495.0 million.
“We are pleased to report a strong second quarter led by a 7.5 percent increase in tons sold and a 6.1 percent increase in sales revenues. We experienced strong demand from customers, especially in the industrial equipment sector, and we remain optimistic about demand in the second half,” said Michael D. Siegal, chairman and CEO.
Olympic’s strategy is to grow its tons sold and value-added services by migrating into more downstream processing, such as tempering, laser processing and fabrication. In 2006, the company completed the purchase and startup of a second facility in Chambersburg, Pa., to process and fabricate steel plate. In June, it completed the acquisition of PS&W, a fabrication operation serving large manufacturers of heavy construction equipment from two facilities in North Carolina. Olympic also installed six new laser processing lines in Cleveland, Minneapolis, Iowa and Georgia this year, bringing Olympic’s total to 23 lasers. Last month, it began installation of a new Steelman Software Solutions information system that will combine three existing systems into one integrated system, to provide a platform for growing the company’s distribution and processing businesses. The project will take 30 months and $14 million to implement.
“In summary, we are pleased with our position in the marketplace,” Siegal said. “Our strong balance sheet has positioned us to continue executing our strategies. We will continue to invest in downstream capabilities such as machining, shot blasting, welding and painting, while exploring additional locations to expand our tempering capabilities.”
Reliance
Another Record Performance
Notable strength in aerospace, energy and nonresidential construction helped Reliance Steel & Aluminum Co., Los Angeles, achieve record sales and earnings for both the second quarter and the first half of this year.
The service center chain’s net income of $100.5 million in the second quarter was more than double the $49.0 million it earned a year earlier and was up 40 percent from the $71.9 million level in the first quarter of this year. Sales for the quarter were $1.56 billion, up 91 percent from $816.3 million in second-quarter 2005 and 58 percent from the $988 million in the previous quarter.
Reliance’s first-half earnings were $172.4 million, up 81 percent from $94.4 million in first-half 2005, on sales of $2.55 billion, up 56 percent from the $1.63 billion in the first six months of 2005.
The company’s expansion, both through the acquisitions of Chapel Steel in July 2005 and Earle M. Jorgensen Co. in April 2006, and through organic growth (Reliance has opened three new operations since November 2005), contributed to its strong financial performance. “Overall our volume increased 71 percent and average pricing increased 14 percent compared to the 2005 second quarter,” says David H. Hannah, Reliance CEO.
As a result of the two acquisitions, Reliance’s product mix has shifted a bit. Typically, nearly 60 percent of the service center’s sales dollars have come from carbon steel. In second-quarter 2006, carbon represented 51 percent of sales. Aluminum, typically around 20 percent of sales, fell to 17 percent, while stainless steel increased to 22 percent from 14 percent of sales.
With the addition of EMJ, Reliance’s exposure in the aerospace industry came down to about 10 percent of revenues from 15.5 percent in the first quarter of 2006, said Gregg Mollins, Reliance president and chief operating officer. He views this as a positive step, fitting well with the company’s strategy to diversify its customer base. “We like the aerospace market, but we certainly understand it’s a cyclical market and we like to be a little more level in our end markets.”
One of the important markets that EMJ brought to Reliance, Hannah added, is the energy (oil and natural gas) market. “That added some good exposure for us.”
The EMJ acquisition also modestly decreased Reliance’s reliance on nonresidential construction business. “It’s still very, very large—probably our largest single sector,” Hannah said.
Reliance is continuing to make moves to grow the company. Early this month it finalized the acquisition of Yarde Metals Inc., Southington, Conn., a service center that specializes in the processing and distribution of stainless steel and aluminum plate, rod and bar products. “We are very excited about this transaction, which is our second largest acquisition in terms of revenues,” Hannah said, noting that Yarde will add significantly to Reliance’s geographic coverage in the northeastern U.S. Yarde, like Reliance, has a very diversified customer base, including electronics, marine and general manufacturing.
“We are excited about the challenges and opportunities that lie ahead,” said Mollins. “Demand in almost all of the industries that we support is strong, and prices have gone up in all of our major product lines. In our opinion the future looks bright.”
Russel Metals
Stable Prices Improve Earnings
A stable pricing environment led to a 97 percent improvement in quarterly earnings for Russel Metals.
Net earnings for second-quarter 2006 totaled $46.4 million (Canadian), nearly double the $23.5 million tallied during the same period in 2005. Quarterly revenues for the Mississauga, Ontario-based company increased by 6 percent to $686 million.
“The biggest difference between this year and last year is stable inventory pricing. We’re not getting the inventory losses we had last year in the service centers, and that’s impacting the earnings levels,” Executive Vice President Brian Hedges told investors and analysts during the quarterly conference call.
Net earnings for the first six months of 2006 were $84 million, up from $57 million in the first half of 2005, on revenues of $1.4 billion, a 7 percent increase from last year.
“Russel Metals has experienced 10 consecutive quarters of strong financial performance. The strong steel pricing environment led to further improvement of margins, which were already near record levels,” said Russel President and CEO Bud Siegel.
He sees no indication that stable pricing is in danger, despite repeated warnings of looming imports. “I’ve seen no change since the beginning of the year. If it was a concern, [the mills] would not be raising their prices. But they have, and they’ve been able to get the increases,” Siegel said.
Russel’s report was a good sign for not only its investors, but for all interested in the Canadian economy. “Much to our pleasant surprise, we’ve seen an uptick in both Ontario and Quebec on the manufacturing side,” Siegel said. “The Canadian economy, excluding the automotive industry, seems to be humming quite nicely despite the Canadian dollar issue.”
Ryerson
Income Down from 1Q Results
Net income for Chicago-based Ryerson Inc. dropped in the second quarter compared to both the first quarter of 2006 and the same period in 2005.
Net income for the second quarter totaled $22.2 million, down 31.5 percent from the $32.4 million posted during the first quarter and 13.6 percent behind the $25.7 million registered in the second quarter of 2005. The first quarter of 2006 included a $21 million gain on the sale of the company’s U.S. oil and gas, tubular alloy and bar alloy businesses.
“Our financial performance, excluding the gain on the sale of assets in the first quarter of 2006, improved sequentially due to continued strong demand, stable expenses, and greater synergy cost savings,” Neil S. Novich, chairman, president, and CEO of Ryerson told investors and analysts at the quarterly conference call.
Second quarter 2006 sales of $1.5 billion increased 4.2 percent, sequentially, from the first quarter of 2006, and decreased 0.8 percent from the second quarter of 2005. Compared to the first quarter of 2006, tons shipped increased 2.3 percent, while the average selling price increased 1.8 percent. Year-over-year, tons shipped declined 2.9 percent.
“This was due entirely to the loss of two major customers and the sale of the oil and gas business in the first quarter of 2006,” Novich said of the decline in tons shipped.
Ryerson executives reported that inventory turns remained flat at 4.2 percent, still short of the stated goal of 5.0 turns per year. Jay Gratz, executive vice president, said the higher inventory was dictated by market conditions.
“We were expecting 2006 to be a relatively weaker market, and we’ve been pleasantly surprised that market conditions have remained quite strong,” he said. “To take advantage of the strong demand, we built inventory.”
Besides the sale of its oil and gas business earlier in the year, Ryerson has been quiet on the acquisition front during 2006. But the company continues to look at opportunities for purchase.
“There are a fair amount of properties available, pretty much across the country, pretty much across products,” Gratz said. “We will tend to look at basically all of them that fit somewhere in our geography and/or product mix.”
The bigger stumbling block is price.
“Companies today are trying to sell them at fairly high prices, pricing them off recent earnings, and not just the natural back and forth between buyer and seller trying to come to a reasonable price,” Gratz said.
Going forward, Novich said all signs remain positive for a healthy second half.
“Other than the typical summer slowdown that effects the third quarter, we expect the business environment in the quarter to remain consistent with second quarter levels,” he said. “We generally expect metal prices to be higher in the third quarter than the second.”
Steel Technologies
Benefits from Kasle Acquisition
The acquisition of Kasle Steel highlights Steel Technologies’ increased focus on toll processing, Chairman and CEO Bradford Ray told investors during the company’s fiscal third-quarter conference call.
Steel Technologies completed the acquisition of Kasle Steel in May, and the purchase provided immediate dividends. Steel Technologies’ net income increased 33 percent in the most recent quarter vs. the same period a year earlier. Net income was $6.6 million, up from the $5.0 million posted in third-quarter 2005.
Tons sold improved 2 percent to 292,000 tons in the quarter, while toll processing tonnage increased 69 percent from the previous year’s period. “The addition of the Kasle operation and its related joint-venture companies add substantial value to our North American processing and sales platform” Ray said. “Toll processing is becoming a more significant part of our growth strategy.”
Kasle Steel has wholly owned operations in the U.S. and Canada, plus joint venture operations, including a 50 percent interest in RSDC of Michigan LLC, Holt, Mich.; a 50 percent interest in Kasle Metal Processing LLC, Jeffersonville, Ind.; and a 49 percent interest in Kelaco-Kasle LLC, Woodhaven, Mich.
Looking ahead to the next quarter, Ray expects toll processing to be a key growth area. “We anticipate tonnage sold to be flat with a year ago, but toll processing tons to be up. Toll processing growth will continue to be a focus and bottom-line contributor.”
Altogether, Steel Technologies is now processing 3.5 million tons annually.
Also contributing to the improved quarterly performance was the expansion of Steel Technologies’ Mexican operations. “We continue to build our team and add resources to this important and strategic growth market,” he said.
Steel Technologies’ year-to-date net income for fiscal 2006 was $12.8 million, down from $35.5 million in the first nine months of fiscal 2005. For the first nine months of fiscal 2006, sales from continuing operations totaled $674.0 million, down from a nine-month total of $764.6 million in the same period last year. n
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