| June 2006 |
| First-Quarter Report and Outlook |
| Service
Centers Carry Momentum into 2nd Quarter |
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With almost all reporting strong sales and earnings in the first quarter, service center executives appear optimistic about the metals market’s mid-year prospects. Following is a roundup of industry companies’ first-quarter conference calls with analysts and investors. Sidebars and Tables:
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The
company reported net income for the first quarter totaling over
$16.0 million, up 36.4 percent from a year earlier on net sales
of $279.2 million, a 13.4 percent increase, of which about 4 percent
was due to the rising price of materials sold and the remaining
9 percent due to increased volume, company officials said. The company’s quarterly metal sales of $250.6 million showed a 13.9 percent gain from a year earlier—or a 10 percent gain with the impact of pricing factored out. Goldberg said sales might have been restricted by the tight supply of aluminum and nickel-based products, which are used in key A.M. Castle markets such as oil and gas exploration, power generation and aerospace. Approximately
one-third of A.M. Castle’s business comes from aerospace and
oil and gas customers. Sales of carbon alloy bar and plate products
to the mining and construction equipment markets were also very
strong in the quarter, he added. Revenues
from A.M. Castle’s plastics business increased 9 percent vs.
a year earlier. Its small Mexican distribution business—aimed
at leveraging relationships with U.S. customers who have facilities
in Mexico—reported a 36 percent increase in sales. Goldberg
said A.M Castle’s inventories are generally where the company
wants them to be, though some products remain in tight supply. “We
would love to get more aluminum or nickel products, but lead times
are very long (exceeding a year for some nickel-based alloys), so
we are somewhat restricted. But otherwise our inventories are in
good shape.” Looking
ahead to the second quarter, Goldberg is very optimistic. “We
don’t anticipate any significant softening in our key markets.
Pricing, as always, remains volatile and seasonal factors typically
impact the second half of the year, but we still see the fundamentals
of the business remaining good.” Discussing
growth opportunities, Goldberg noted that A.M. Castle’s new
Birmingham, Ala., facility is on schedule and expected to be fully
operational by mid-summer. “This will enable us to capture
more of the durable goods market that continues to expand in the
Southeastern United States,” he says. In
addition, A.M. Castle is actively pursuing acquisitions in both
metals and plastics, Goldberg said. “Our focus is to look for
companies that are a good fit for us, companies that operate in
some of the same markets or sell some of the products we sell. In
other words, we would like strategic acquisitions that fit our long-term
growth goals and provide appropriate synergies.” Metals
USA “The
market in the last three months was substantially different from
a year ago. In the first quarter of 2005, we found prices strong
at the beginning but weakening throughout the period, and continuing
to trend downward until the end of the third quarter,” President
Lourenco Goncalves told investors at the company’s quarterly
meeting in late April. “This year, we find ourselves in the
second quarter still experiencing a strong market in which prices
have continued to move up as availability of materials has tightened.”
First-quarter
2006 sales of $430 million exceeded first-quarter 2005 sales of
$428 million and fourth-quarter 2005 sales of $389 million. The
$41 million increase over the past two quarters was the result of
a 10 percent overall increase in sales volume. Net profit for the
quarter was $2.1 million, down from $17.3 million in the same quarter
last year, the Houston-based company reported. A
wholly owned subsidiary of Flag Intermediate Holdings Inc., Metals
USA shipped 385,000 tons in the quarter, a 5 percent increase vs.
the prior year’s quarter. Goncalves
said the increased demand for steel is not surprising. “Metal
demand in the U.S. has continued to outpace available supply in
the U.S. even with imports coming from abroad. This is not a surprise,
as domestic consumption has outpaced domestic supply every year
for the last 20 years.” To
meet the rising demand, Metals USA boosted its inventory. The company’s
inventory tonnage at the end of March was 378,000 tons, 5 percent
higher than at the end of 2005. Goncalves
said the ability of the market to accommodate imports is a positive
sign for the industry. “Imports came but did not disrupt the
market. That’s exactly the type of maturity this business has
achieved in the last year,” he said. Metals
USA continues to invest in its business products group, a non-traditional
entity for service centers. The company has opened a new distribution
hub in Nashville, Tenn., and is in the process of establishing a
new distribution point in Southeast Florida. “We
feel very comfortable with our building products business. We are
delivering the results we planned for. It is not a typical metals
service center type operation, but it adds value to the overall
Metals USA footprint.” Canada’s
dollar had increased to nearly 91 cents vs. the U.S. dollar as of
mid-May. “We believe that ultimately the strong Canadian dollar
will impact the manufacturing sector in Ontario,” said Executive
Vice President Brian Hedges during the company’s first-quarter
conference call. Yet
Hedges and Russel President and CEO Bud Siegel are quick to point
out that anxiety about the fluctuating exchange rate is nothing
new. “If you went back two years ago and asked what our greatest
concerns were, they were the Canadian dollar and receivables. We
keep saying it, and thank goodness our fears have not come to fruition,”
Siegel said. The
currency situation didn’t hinder the performance of Mississauga,
Ontario-based Russel in first-quarter 2006, as the company reported
record net earnings of $37.4 million (Canadian)—a 12 percent
increase vs. first-quarter 2005. Sales increased by 7 percent to
$741 million during the period. Russel’s
first-quarter profits from continuing operations increased for the
fourth consecutive quarter to $61.3 million as both the energy tubular
and steel distributor segments experienced strong earnings. The
energy sector, which now represents 25 percent of Russel’s
business, delivered a record $18.4 million in profit during the
quarter. “The
first quarter strength in our energy tubular products was expected
as was the strength in our Western Canadian service centers,”
Siegel said. “The continued stability of steel prices contributed
to an outstanding quarter for the steel distributor segment and
strong operating profits in the balance of the service centers.” Siegel
noted that the energy sector historically has performed better in
the first and fourth quarters and slowed in the middle months, but
he expects improved performance even in the second and third quarters
because the market is so strong. Increasing
steel prices should benefit Russel and the rest of the service center
industry, but Siegel is not convinced the high prices will be long
lasting. “The mills have been operating at roughly 87 to 88
percent of capacity,” Siegel said. “If they run capacity
up to 92 percent, you can toss the increases they’ve announced.
The sustainability of the price increases really comes down to how
disciplined they’re going to be about pushing product into
the market.” Russel
has been quiet on the acquisition front. Siegel said that while
the company is always looking for M&A opportunities in the steel
business, he sees no attractive prospects at the moment. “Basically,
we will look at anything that is steel related. However, our criterion
is a 15 percent return on net assets across the cycle, and it must
be immediately accretive. It’s a little difficult hitting that
criterion if you’re going to pay the prices that are expected
out there.” Ryerson
Inc. For
the quarter, Ryerson reported net income of $32.4 million, down
8.5 percent from first-quarter 2005 earnings, but a five-fold increase
from earnings of $6.3 million in the previous quarter. First-quarter
2006 earnings included a $21 million gain from the sale of Ryerson’s
oil and gas assets to Energy Alloys. Net sales for first-quarter 2006 totaled $1.45 billion, down 6 percent from $1.54 billion a year earlier, but up 11 percent from $1.30 billion in fourth-quarter 2005. Sales
volumes were hurt by the loss of two large accounts, Novich said,
one large plate buyer that went back to purchasing metal mill direct
and a large stainless steel purchaser that took its manufacturing
offshore. He would not quantify the volume lost by these two customers,
but said that he is not aware of any other customers looking to
make similar moves. Novich
said the trend of U.S. companies moving manufacturing operations
to lower-cost countries such as Mexico or China “is just a
small drag on service center volume.” Ryerson’s Mexican
joint venture has benefited from the relocation of some large fabrication
operations, he added, “and we are looking for other investments
offshore, as well, so that we can follow our customers wherever
they go.” Ryerson
officials were pleasantly surprised with the strength of the metals
market in the first quarter, admitting that they weren’t entirely
prepared for this unexpectedly strong demand. “We had entered
the year assuming that the market would be relatively weak, so we
pulled back our order book and thinned out our inventory,”
Novich said. “As it happened the market was relatively strong,”
extending mill lead times as distributors like Ryerson attempted
to replenish their stocks. At
the same time, import availability was tight in the U.S. due to
strong demand in both Europe and China. “The combination of
those two factors created some shortages, but more for opportunistic
business. We serviced our regular program customers very well during
the quarter,” Novich said. Aluminum
prices were driven up by the continued rise in ingot costs, said
Jay Gratz, Ryerson executive vice president and chief financial
officer. Though domestic order books are full, material remains
readily available due to significant levels of imports, he added,
noting that the aluminum market could tighten further should workers
at Alcoa Inc. go on strike. [Editor’s note: Alcoa reached a
tentative labor agreement with the United Steelworkers on May 31.]
Ryerson
officials added they expect demand and pricing for carbon flat-roll,
carbon plate and stainless to increase in the coming quarter. Ryerson
has achieved higher-than-expected cost synergies through the integration
of its Integris acquisition, Gratz said. The company expects annual
savings of $50 million, of which half have already been realized.
The other half of the savings is expected by late 2007, which is
also when Ryerson will complete the upgrade of its companywide information
technology platform, Gratz added. Steel
Technologies Sales
for this year’s first quarter totaled $238.8 million, down
13 percent from the record $275 million reported in the same period
last year. Shipments
were up 20 percent from the final three months of 2005, however,
to 308,000 tons. Mike
Carroll, president and chief operating officer, told investors during
the company’s second-quarter conference call that fears of
a price drop created a competitive pricing environment in the flat-rolled
processor segment. “As a result, we did not have the success
we anticipated in moving our prices up in line with raw material
costs, and experienced tighter margins than we anticipated in the
quarter.” Carroll
said the pricing activity is further evidence of the need for more
consolidation in the processing sector. “We believe industry
consolidation in our sector is progressing and will continue over
the next few years. It is our intent to play a leadership role in
this regard.” Steel
Technologies has remained active on the acquisitions front with
the company’s purchase of Kasle Steel Corp., a leading provider
of automotive blanks in North America, said Steel Technolo-gies
Chairman and CEO Bradford T. Ray. “This
acquisition will expand Steel Technologies’ blanking capacity
and enhance our opportunities for growth with our current customers
and new customer base,” he said. Ray
also announced the completion of two major capital projects during
the quarter. A leveling line was installed at its pickling line
in Ghent, Ky., while multiblanking was added at the company’s
Berkeley, S.C., facility. The
anticipated completion of its third project, the greenfield construction
of a new facility in Juarez, Mexico, was pushed back due to difficulty
securing property. The project is now expected to open during first-quarter
2007. “With a base load of business already identified, we
expect this facility to be a positive contributor in its first year
of operation,” Ray added. Because of a stated commitment to consolidating the processing sector, Ray said greenfield projects such as Juarez would be limited to areas where no attractive acquisition target exists. Otherwise, he said, the company would prefer acquiring companies to assist in consolidating the market. Positive
Results Arcelor
Throughout
the quarter, Arcelor further strengthened the structural competitiveness
of its operations consistent with the Arcelor 2006-2008 Value Plan
targeting a normalized annual EBITDA of 7 billion euros, said Chairman
Joseph Kinsch. “This result, achieved while the company is
the target of a takeover attempt, is the best proof of the commitment
of all of Arcelor’s employees to create value for our shareholders
and to build the long-term future of Arcelor.” Arcelor
reported net earnings of 761 million euros, down from 949 million
euros in first-quarter 2005. “This solid performance compared
to last year’s exceptional quarter demonstrates the ability
of Arcelor to perform well in a context of massive materials cost
increases and lower spot prices,” said Arcelor CEO Guy Dolle.
The
company continued to pursue expansion opportunities in markets with
high growth potential. “The acquisition of Canadian steelmaker
Dofasco and the agreements to take significant stakes in Chinese
steel producer Laiwu and in Moroccan construction steel specialist
Sonasid, all in this quarter, illustrate well our external growth
strategy,” Dolle said. “These moves as well as organic
growth initiatives, such as the 50 percent increase of our slab
production capacity in Brazil to come on stream this year, continue
to strengthen our global industry leadership position.” Dofasco,
which has been consolidated from March 1, 2006, had no impact on
results in the first quarter, but should positively contribute to
Arcelor’s earnings at the end of the second quarter. Mittal Mittal’s
net income for first-quarter 2006 totaled $743 million, up from
the net income of $650 million in fourth-quarter 2005, but down
from $1.1 billion in first-quarter 2005. Consolidated
sales and operating income for first-quarter 2006 totaled $8.4 billion
and $1.0 billion, respectively, as compared with $7.1 billion and
$871 million for the previous quarter, and $6.4 billion and $1.7
billion for the comparable quarter last year. Mittal’s
total first-quarter steel shipments hit 15.6 million tons, up from
13.6 million tons in the previous quarter and 10.4 million tons
in the comparable quarter last year. “We
are pleased to report a good performance this quarter, despite bottom-cycle
market conditions in Africa and Asia. This performance has been
underpinned by over 50 percent quarter-on-quarter growth in operating
income of our American and European businesses,” said Lakshmi
Mittal, chairman and CEO. “We
expect the market recovery to continue in the second and third quarter
of 2006, supported by improvements in the Asian market. Mittal Steel
is well placed to capitalize on this trend, which should generate
further earnings momentum.” Meanwhile,
the market is watching to see if Mittal pursues its unsolicited
takeover offer of Arcelor (see related story in Metal Industry News).
“We are resolute in our determination to pursue this to a successful
conclusion,” Mittal said, prior to Arcelor’s purchase
of Severstal. Wheeling-Pitt
Among
the reasons for the optimism are ongoing discussions between Wheeling-Pitt,
Wheeling, W.Va., and Brazilian steelmaker Companhia Siderurgica
Nacional about a possible North American alliance that could result
in CSN acquiring a minority interest in Wheeling-Pitt. “While
no assurance can be given that a strategic alliance will be successfully
concluded, we are excited about these discussions and believe a
strategic alliance would provide long-term benefit for our company,”
Bradley told investors during the company’s first-quarter conference
call. Citing
the ongoing discussions, Bradley would divulge no other details,
nor confirm reports that service center company Esmark, Chicago
Heights, Ill., had made a bid to purchase the steel company. The
first-quarter loss represented a substantial improvement from the
previous quarter, when Wheeling-Pitt reported a loss of $21.4 million.
Still, Bradley said, the results were disappointing “in light
of the current market conditions, and reflect higher natural gas
and zinc costs.” Net
sales for first-quarter 2006 totaled $437.0 million as compared
to net sales of $399.5 million for first-quarter 2005. Net sales
of steel products for first-quarter 2006 totaled $422.2 million
on steel shipments of 620,668 tons, or $680 per ton. Net sales of
steel products for first-quarter 2005 totaled $386.6 million on
steel shipments of 522,803 tons, or $739 per ton. The increase in
net sales was due to higher steel shipments and higher sales of
excess raw materials, offset by a lower average selling price of
steel products, company officials said. Progress
is being made on the company’s Mountain State Carbon (Follansbee,
W.Va.) six-meter coke battery rebuild, though its anticipated completion
date was pushed back to mid-October due to deterioration of ovens
that remained in service. Once
completed, the coke battery “will meet its projected 15-year
life campaign and have costs of production competitive with any
U.S. producer,” said Harry Page, president and chief operating
officer. “The expected reduction in our coal conversion costs
from present levels will be about $35 per coke ton.” Other
factors contributed to officials’ optimism for the months ahead. “Customer
booking rates remain strong. Customer inventories are below traditional
levels and imports are not disrupting the domestic marketplace.
We don’t expect to experience the typical summer trough in
orders this year, and all signs are positive through the third quarter,”
Page said. Additionally,
Wheeling-Pitt is moving forward in its multi-million dollar lawsuit
against Central West Virginia Energy Company, a subsidiary of Massey
Energy Co. The suit, filed in April 2005, charges CWVEC with breaching
its long-term coal supply agreement beginning in late 2003 and continuing
through the present. The action, Wheeling-Pitt alleges, has caused
the company to purchase coal on the spot market at significantly
higher prices. “We’re well under way in pre-trial activities related to our Massey lawsuit and remain confident that damages are significant and that we will prevail,” Bradley said.
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