A.M. Castle & Co.
Transtar Acquisition Leads to Record Sales
The completed acquisition of Transtar Metals contributed to record quarterly sales for A.M. Castle & Co.
The Franklin Park, Ill.-based company posted record net sales of $300.8 million during the quarter ended Sept. 30. The figure was 28.2 percent better than the $234.5 million recorded during the same period a year earlier.
Year-to-date sales totaled $855.6 million, 16.9 percent better than the first nine months of 2005.
“We continue to experience strong demand for our products and services,” President and CEO Michael Goldberg told analysts and investors during Castle’s third-quarter conference call. “Of the 28 percent increase in our third-quarter revenues, 8 percent was attributable to volume, 12 percent to price increases and 8 percent to our acquisition of Transtar.”
Net income for the third quarter was $15.3 million, a 50 percent increase compared to $10.1 million in the third quarter of 2005. Year-to-date net income was $45.2 million, compared to $34.9 million for the same period of 2005.
In the company’s metals segment, Castle reported 30 percent sales growth for the third quarter and 18 percent on a year-to-date basis.
“Sales of nickel alloy products were particularly robust, with tonnage in that product family growing 60 percent compared to the third quarter of last year, reflecting the strong oil and gas market. Year-to-date revenues were 17 percent ahead of last year, of which 7 percent was attributable to volume, 7 percent to price and 3 percent to Transtar.”
On Sept. 5, the company completed its acquisition of Transtar, a distributor of high-performance alloys to the aerospace and defense industries worldwide. The total purchase price was $173.3 million plus the assumption of $1 million of foreign debt.
With the Transtar acquisition, Castle’s business in the aerospace sector now represents more than 30 percent of total revenue. The strength of that market, plus Castle’s limited participation in the softer automotive and residential construction markets, suggests strong revenue growth potential in 2007, Goldberg said.
Goldberg affirmed Castle’s plans to allow Transtar to continue to operate as it had been leading up to the acquisition.
“Much of Transtar’s success is due to its dedicated focus on the aerospace market. We don’t fully intend to merge the two businesses, but there are a number of benefits that can be derived from integration. Some are longer term. In the short term, we are working together to look at our international platform, both in Europe and maybe even more significantly in Asia.”
Like many service centers, Castle experienced some inventory build during the third quarter, increasing to 122 days. Part of that increase was planned, as the company was hedging against the possibility of failing to reach a labor agreement with the United Steelworkers representing employees at its Chicago, Cleveland and Kansas City, Mo., facilities.
With the ratification of the contract, Goldberg said, the company anticipates reducing inventory levels in the fourth quarter to 120 days or less.
Metals USA
Inventory Increases Not a Major Concern
While rising inventory levels are a source of anxiety across the steel supply chain, Metals USA President and CEO Lourenco Goncalves is not overly concerned.
Goncalves pointed to the company’s Plates and Shapes Group as an example. When the third-quarter ended in 2005, Metals USA held 240,436 tons of material. At the end of the most recent third quarter, the company held 308,135 tons. But the inventory for both time frames represented 4.3 months of supply, Goncalves told investors and analysts at the company’s third-quarter conference call.
“We are not in the business of reducing inventory because things are falling apart. No. 1, things are not falling apart,” Goncalves said. “We believe we buy extremely well. Fluctuations in market prices can be absorbed by our deep and wide inventory.”
Additionally, Goncalves has much greater confidence in the rest of the industry acting to avoid dramatic shifts in inventory levels. “While material movement between mills and service centers will never be in perfect sync, and there will always be fluctuations in inventory levels at different points of the cycle, the current supply-chain management implemented by major mills and responsible service centers is the best we’ve ever seen. It is at the root of these great times of improved and reliable profitability we have been living in.”
That profitability was evident in Metals USA’s third-quarter results. The company reported sales of $478 million, an increase of 20.7 percent over the same three months in 2005. Additionally, the company’s sales were up $20 million compared to the second quarter of 2006.
Income for the quarter totaled $43 million, more than 200 percent better than the $20 million posted during the third quarter of 2005.
Metals USA enjoyed solid performances from all three of its divisions—Plates and Shapes, Flat-Rolled and Building Products. Goncalves announced that the Flat-Rolled Group would be known as the Flat-Rolled and Non-Ferrous Group going forward, representing the company’s mix toward more stainless and aluminum products.
Goncalves is now overseeing the company’s Building Products division, which he believes offers the biggest prospects for growth and is the one that most differentiates Metals USA from other service center companies.
“Building products is the division with the biggest potential in this company. The business we’re in, home remodeling, has never had a down year since 1990. It’s all growth.”
Looking forward, Goncalves was encouraged by several developments, such as increasing metals consumption in several regions of the United States, including the upper Midwest, while the Gulf Coast and South Central U.S. regions “continue to have very strong demands with extended backlogs for the foreseeable future.”
More important, he said, is the overall shift in the approach by all members of the metals supply chain.
“Our financial results, as well as those of our peers, show that the industry has shifted to a new paradigm where volume is not the metric of performance,” Goncalves said. “Profitability is driving the sustaining performers.”
Olympic Steel
Overcomes Softness in Automotive Market
Demand from the industrial equipment market offset automotive softness as Olympic Steel posted improved third-quarter sales and income.
Cleveland-based Olympic reported sales of $259.9 million in the third quarter, a 24.7 percent increase from the same period in 2005. Net income totaled $10.9 million, a jump of almost 500 percent from the $2.2 million recorded during third-quarter 2005.
Tons sold increased 2.6 percent to 313,000 during the quarter. For the year-to-date, tons sold were up 1.0 percent vs. 2005.
Industrial equipment was the chief driver, said Michael Siegal, Olympic chairman and CEO, while demand from the Big Three automotive companies was lagging. Despite continued weakness in the automotive market, Siegal added, overall market conditions remain positive heading into 2007.
“The industry’s consolidation and the production discipline exhibited by steel producers, combined with an encouraging outlook for demand in non-residential construction, are favorable dynamics for a healthy steel market in 2007.”
Like many service centers, Olympic saw a bump in inventories in the third quarter due to the delayed receipt of some foreign product. Even with the bump, Siegal said, Olympic still moved material at a five-turn level.
Market-wide, improved discipline from producers and service centers, coupled with a slowing of foreign imports, suggested that inventory levels were already beginning to recede in the third quarter. Overall, Siegal believes inventories will be back in balance by the middle of the first quarter, a far more rapid return to level than the 2004-05 build, which lasted 11 months.
While many service centers are seeking to acquire, or be acquired, Olympic is not actively pursuing such deals at the moment. “The financial markets are loaded with money. There are any number of parties that are interested, and there’s clearly high valuation,” Siegal said. “With those factors, a number of service centers out there are peeking to see if they can get value for their business. There’s no shortage of people looking to sell.”
While not ruling out strategic distribution acquisitions, Olympic has shifted its attention toward acquiring downstream facilities and adding capacity at its existing fabrication operations. “In terms of our focus, there are better returns on more downstream applications than just traditional cut-to-length,” Siegal said.
In 2006, Olympic added six new laser processing lines, including two each at facilities in Winder, Ga., and Minneapolis, plus one in Cleveland and one
in Bettendorf, Iowa. The additions brought Olympic’s total to 23 lasers company-wide, with plans for further additions in 2007.
Russel Metals
All Three Segments Profitable in 3rd Quarter
Russel Metals Inc., Mississauga, Ontario, reported third-quarter 2006 net earnings of $45 million (Canadian). Net earnings were 72 percent above third-quarter 2005 net earnings of $26 million.
In the third quarter of 2006, revenues increased by 7 percent to $672 million, up from $629 million in the third quarter of 2005. All three of the company’s business segments—metals service centers, steel distributors and energy tubular products—recorded higher revenues and operating profits in the third quarter compared with the third quarter of 2005.
Net earnings for the first nine months of 2006 were 55 percent higher than the same period last year, and both the energy tubular products and steel distributor segments produced year-to-date record earnings. Net earnings for the nine months ended Sept. 30 were $128 million, up from $83 million for the same period in 2005.
“All three business segments experienced continued strong results in the third quarter, and we are on track to have our second best year of earnings,” Bud Siegel, president and CEO, told investors and analysts during the company’s third-quarter conference call.
Siegel said the steel distributor and energy tubular products segments were responsible for the 7 percent growth in revenues for the nine months, as service center revenues remained unchanged. Revenues for the first nine months of 2006 were $2.1 billion vs. $2.0 billion in 2005.
“The industry finds itself in a similar scenario to the fourth quarter of 2004. Steel prices have peaked for most products, the inventory pipeline in the service center sector is overstocked and carbon flat-rolled steel prices have started to decline. Fortunately for the company, carbon flat-rolled steel only represents approximately 7 percent of our total product mix,” Siegel said.
“The steel producers have experienced further consolidation within the industry since 2004, which is a positive development,” he added. “There is a strong indication that the major steel producers will curtail production levels, which should help to keep supply and demand in balance.”
Ryerson
Reaction to Swing Not Quick Enough
Trouble with inventory management led to declining quarterly income for Ryerson Inc. despite fairly strong market demand and high metal prices.
Net income for the Chicago-based service center fell 29.6 percent to $21.6 million from $30.7 million in the third quarter of 2005, despite an 8.6 percent increase in net sales to $1.54 billion.
Ryerson’s net income for the first nine months of 2006 was $76.2 million, down 17 percent from a year earlier. Net sales were $4.49 billion, up slightly from $4.48 billion in the first nine months of 2005.
At the company’s quarterly conference call, Executive Vice President and CFO Jay M. Gratz said inventory levels increased by $304 million on a current value basis during the third quarter to $1.6 billion, with about one-third of the increase attributed to higher prices. Inventory levels remain too high, he said.
“When the tight conditions experienced in the first half of the year changed rather suddenly, the mills began catching up on past-due orders and shipping material earlier than expected,” Gratz said. “As a result, inventories throughout the industry have expanded.
“We did not react quickly enough to the reversal in the carbon and stainless markets. We kept our safety stocks too high and continued to order aggressively as the market began to swing from tight supply to excess supply. We are currently addressing these problems and improving our inventory management. Our goal remains to achieve inventory turns of five times [per year] by the end of 2007.”
Anticipating trends and rapid swings in inventory levels by communicating with customers is the best defense for Ryerson, he said, “but all of those efforts are offset when typical lead times change dramatically as you go from feast to famine.”
Looking product by product, Gratz noted that supply of carbon flat-roll now exceeds demand due to a number of factors, including slowing automotive production and rising imports. “An inventory correction will probably take several months to work through the system,” he said.
Likewise stainless flat-roll has shifted from a tight, allocated market to excess supply, and inventories at service centers, domestic mills and import depots have been climbing. Even the carbon plate market, which has been strong for three years, is showing some signs of weakening.
“While market fundamentals remain positive, excess inventory at the service center level and near-term softening of demand have created concerns about fourth-quarter volumes and prices,” Gratz said.
On the positive side, strong metals pricing during the quarter, especially in stainless steel, helped Ryerson. “We were able to pass through all of the higher costs and even more. As a result, our gross profits per ton increased in the third quarter compared with the second quarter and the year ago period,” said Neil S. Novich, chairman, president and CEO. Ryerson’s gross profit was $267 per ton in the third quarter, vs. $265 in the second quarter and $241 a year earlier.
In general, Ryerson expected a typical seasonal slowness in the fourth quarter. “However, it will be exacerbated by high inventories throughout the supply chain. But for 2007, despite softness in certain markets, we remain optimistic,” Novich said. “Our customers are optimistic with the economy expanding at a moderate pace.”
Novich said Ryerson has made progress in acquisitions and joint ventures during the quarter, including purchasing companies that complement its existing operations in North America—such as its acquisition of Lancaster Steel in October—and pursuing international joint ventures that provide access to faster growing markets—such as its VSC-Ryerson China Ltd. joint venture in China, which was formalized Oct. 31.
Steel Technologies
Company Posts 35th Straight Profitable Year
Steel Technologies Inc., Louisville, Ky., reported its 35th consecutive year of profitability with the close of its fiscal year, though excitement was muted among company executives.
“Our sales and earnings in 2006 were below the record levels achieved in 2005 as a more competitive environment in the steel processing sector and reduced automotive schedules put pressure on our operating margins,” Chairman and CEO Bradford T. Ray told investors and analysts during the company’s quarterly conference call. “While our fourth-quarter earnings were significantly above the weak year-earlier period, they remain well below our internal expectations, and we are working hard to improve
our results. In the short term, we see similar volumes for our first fiscal quarter of 2007.
For the three months ended Sept. 30, sales increased 5 percent to $202.3 million from $193.1 million in the same period a year ago. Net income for the quarter was $3.2 million. For the fiscal year, sales declined 8 percent to $876.3 million from $957.7 million in the same period last year. Net income for fiscal 2006 was about $15.1 million.
“While we are far from satisfied with our 2006 results, we are pleased with how we are positioning our people, our operating platform and our company for success,” said Michael Carroll, chief operating officer.
The positioning includes $19 million in capital expenditure projects planned for 2007. The biggest outlay will be $8.6 million to complete the new greenfield operation in Juarez, Mexico. The project is expected to be finished in April 2007.
Ray also announced that $3 million was allocated to add capacity and enhance value-added strip products at its annealing facility in Ottawa, Ohio.
Capital expenditures completed in 2006 totaled $17 million.
Shipments in fiscal year 2006 totaled 237,000 tons, off 3 percent from 2005 and down 19 percent from the previous quarter. The drop was only somewhat anticipated and had some impact on inventory, Ray said.
“Seasonal softness typically experienced in our fiscal fourth quarter was more pronounced than anticipated, due to reduced schedules primarily in our automotive book. The resulting volume reduction pressured operating margins at several facilities and increased inventory positions throughout the supply chain,” Ray said. “We anticipate similar pressure on our first quarter 2007 operating margins as inventory levels are worked off. We do expect improved performance moving into 2007 on the strength of our marketing activities and as forecasts improve.”
