A.M. Castle
Company Sees Slower
Demand for All Products
Soft demand throughout its metals business contributed to a decline in third-quarter net income for A.M. Castle and Co., Franklin Park, Ill. The steel and specialty metals distributor reported net income of $12.9 million, a drop of 15.3 percent from the third quarter of 2006.

A.M. Castle’s sales, in contrast, were up 16.5 percent to $350.3 million, reflecting the company’s acquisition of Transtar Metals in 2006.

“We continue to experience softer demand across our business in general,” President and CEO Mike Goldberg told investors and analysts during the company’s third-quarter conference call. “This trend began during the second half of 2006 and it has continued through 2007 to date. The effect of this softer manufacturing demand cycle on our results has been somewhat mitigated through our acquisition of Transtar Metals in September of 2006 and higher pricing levels.”

Net sales for the nine-months ended Sept. 30 totaled $1.10 billion, an increase of 28.4 percent from 2006. Net income was $44.5 million, slightly behind the $45.2 million posted through the first three quarters of 2006.

Metal segment sales totaled $320.8 million in the third quarter, an increase of 17.9 percent vs. the third quarter of 2006. The acquisition of Transtar Metals contributed 17.1 percent of the 17.9 percent increase in sales. “Commodity metal prices declined during the quarter, but were still 14.4 percent higher than the third quarter of last year,” Goldberg said.

Even some of Castle’s aerospace business has slowed, though Goldberg believes that is because of excess inventory somewhere in the supply chain.

“We think [aerospace] demand is strong. We have no indications the build rates have declined. We have a large number of contracts where we’re the sole supplier of some aluminum that goes into the various components of an airplane,” Goldberg said. “When we see our contractual business slow down, while the build rates remain high, we know there’s a buildup of parts somewhere in the supply chain. That’s why we think this is a temporary phenomenon.”

With much of its focus now on stainless and other specialty metals, A.M. Castle felt the pinch of the declining price of nickel during the quarter. The company responded by reducing its inventory by $19 million during the quarter, with further reductions expected in the fourth quarter.

“Our challenge for the short term will be to continue to lower inventory levels while maintaining acceptable gross margin rates,” Goldberg said. “We feel our people know how to manage through fluctuations of commodity prices and demand.” 

During the quarter, A.M. Castle sold Metal Mart LLC to Metal Supermarkets Ltd. The company, which does business as Metal Express, was a small-order metal distribution business.

“It has an average order size of one-tenth of our core business. It did not provide strategic value in the longer run,” Goldberg added.

Looking forward, Goldberg expects some weakness in the fourth quarter. “Our fourth quarter is typically our slowest due to fewer effective shipping days. In addition, softer market conditions will likely continue through at least the end of the year. Our focus will continue to be on managing inventory and margins for the balance of 2007.”

Metals USA
Reports Dip in 3rd Quarter;
Postpones IPO Indefinitely
Though third-quarter results were down and investors have failed to get behind a planned stock offering, Metals USA Chairman, President and CEO Lorenco Goncalves remains bullish. Metals USA is in a buying mode, he told analysts and investors last month. “Metals USA does not follow the herd mentality. At this point in time, I am restocking. Q1 will be a great quarter. We need to be prepared.”

Metals USA Inc., Houston, reported sales of $469.6 million for the third quarter, $8.0 million lower than third-quarter 2006 sales. Operating income was $29.3 million, $13.6 million lower than in last year’s third quarter.

“The third quarter was a challenging quarter in the service center industry with tight metal supply, declining surcharge values in stainless and soft demand in certain sectors of the economy, particularly affecting our Building Products business. Despite these challenges, Metals USA was still able to deliver decent results in Q3,” said Goncalves.

“We continue to see deficits in the availability of steel raw material inputs worldwide, and this should keep steel supply relatively low for the foreseeable future. Additionally, the weak dollar should continue to limit the presence of imports in the U.S. All things considered,” he added, “we are confident the inconsistent movement of indicators is just noise associated with a market in transition, and that consistent profits will continue in Q4 and beyond.”

Sales revenue for the quarter was 2 percent below both the previous quarter and the same quarter last year, while net income declined by 13 percent vs. third-quarter 2006.

“Without a doubt our Building Products division has been hampered by the weak home remodeling market nationwide. Homeowners have clearly stepped away from remodeling projects as consumer confidence and home resale activity have dropped dramatically from year-ago levels,” Goncalves said. “As a result, our revenues in Building Products are almost 18 percent below third-quarter 2006 revenues. Our EBITDA of $2 million was 63 percent below last year. We continue to look for ways to take costs out of that business as we wait out the cycle.”

Revenues for the Plates and Shapes group totaled $225 million, within $3 million of third-quarter 2006 and about even with second-quarter 2007. EBITDA totaled $25 million, $7 million below last year and $4 million below second-quarter 2007, due to some margin compression during the quarter, he said.

Revenues for the Flat-Roll and Nonferrous group, at $206 million, increased by $3 million during the third quarter vs. last year. However, revenues were down $7 million compared to second-quarter 2007 as volumes declined 7 percent. EBITDA for the quarter was $14 million vs. $17 million for both third-quarter 2006 and second-quarter 2007.

“Margins on stainless steel were constricted as the nickel surcharges declined significantly. Fortunately we saw this one coming and repositioned our inventory in a timely fashion,” Goncalves said. “We have already seen an increase in the nickel surcharge and a bounce in stainless prices, which should have a positive impact in the fourth quarter.”

Goncalves predicted steel prices will trend upward in the coming months, for several reasons: The exchange rate of the U.S. dollar has been at an all-time low against the euro, which will inhibit imports. And mill costs are on the rise because of escalating ocean freight rates, iron ore and coke prices and energy costs.

“As far as domestic consumption is concerned, we continue to have a positive outlook despite weak demand in specific sectors,” Goncalves said. “Clearly, two important steel-consuming industries, housing and automotive, have been in troughs. But other steel consumers, such as nonresidential construction, fabrication and heavy machinery are doing just fine. Our customers tied to defense and aerospace industries are doing really well.”

Both service centers and end-users have taken a severe position on inventory, he noted. “In fact, I believe consumers’ inventory levels are too low, which may cause shortages in the next couple quarters as demand naturally improves. Shortages usually drive prices higher—sometimes much higher,” he added.

In other news, Metals USA is putting its plans for a public stock offering on hold indefinitely. Metals USA Holdings Corp will withdraw its Form S-1 on file with the Securities and Exchange Commission, citing a lack of favorable equity market conditions.

“With so many good things happening, or about to happen, throughout the metals industry, I confess I remain frustrated that these things have not translated into higher equity valuations,” Goncalves said. “More and more good companies are becoming great companies, but the investment community continues to deny these companies a proper valuation. Until investors and some analysts decide to better understand the so-called cyclicality in our business and stop punishing great companies for poor performance delivered more than five years ago, by management teams that no longer exist, and in a business environment that has no relationship to today’s environment, Metals USA will have no incentive to become public. We appreciate the support of our high-yield investors. We remain committed to continue delivering consistent results and will, of course, review our position on public ownership if and when investors start to consistently pay what we believe are adequate multiples for public companies comparable to Metals USA.”

Olympic Steel
Market Share Gains
Soften Demand Decline
Increased market share wasn’t enough to offset a sluggish metals environment, but it was cause for optimism at Olympic Steel in Cleveland.

The company reported third-quarter sales and income below the figures from the same period one year earlier, though its performance still topped that of many peers in the service center industry.

Olympic reported net sales of $256.1 million during the quarter, down 1.5 percent from the $259.9 posted during the third quarter of 2006. Net income totaled $6.0 million, 45.0 percent behind the $10.9 million recorded during the same period in 2006. Tons sold decreased 1.4 percent from 313,000 to 309,000 during the quarter.

“We are pleased with our 2007 performance in a volatile market. Despite the sliding price environment, particularly in stainless steel, we were able to gain market share, control operating expenses and improve our asset turnover and cash flow during the quarter. We reported a shipping rate that was 6.2 percent better than the service center industry average,” Chairman and Chief Executive Officer Michael D. Siegal told analysts and investors during the company’s third-quarter conference call.

Net sales for the first nine months of 2007 increased 5.0 percent to $792.9 million, compared to the previous year’s nine-month net sales of $754.9 million. Net income for the first nine months totaled $20.7 million, compared to $27.3 million for the same period in 2006.

Tons sold in the first nine months totaled 957,000, a decrease of 3.8 percent—which compares favorably to the average 7.9 percent decline in industry shipments reported by the Metals Service Center Institute, Siegal noted. He attributed the actual declines in volume to the performances of Olympic’s toll processing operations in Detroit and Georgia.

Additionally, Olympic officials say the decreased revenues were a product of weaker shipments, cautious buying and declining prices, particularly in stainless. But they did express hope for a price rebound going forward.

“When demand is restored, price increases may occur, spurred by declining imports, the weakened dollar and increased costs for raw steelmaking materials,” Siegal said.

Olympic has made several capital improvements through the first nine months, including the completion of a 54,000-square-foot addition to its Bettendorf, Iowa, facility. Other projects included the move of the paint line to Chambersburg, Pa.; a new stretcher leveler in Minneapolis, which will become operational in the first quarter of 2008; a new large-bed laser in Cleveland; and the installation of laser-punch equipment in Schaumburg, Ill.

The company is also converting its transportation fleet to company-owned trucks, starting with its Pennsylvania and Ohio operations.

Going forward, Olympic is exploring locations for new facilities, particularly ones closer to manufacturers. The company expects to announce new greenfield sites in 2008. Siegal said such expenditures were the best use of the company’s cash. “The use of capital for growth plans, such as new satellite facilities and a potential new temper mill, we believe to be a better use of capital than a [stock] buyback,” he said.

Like others in the supply chain, Olympic Steel continued to reduce inventories during the month, its 11th straight month of reducing stocks. The company says it is just below five turns per year.

“We manage our inventory to market sentiment,” said David Wolfort, president and chief operating officer. “We have a lot of confidence in the management of our inventory today and feel we’re managing it better than we have in years.”

Russel Metals
Inventory Reduced During Slower 3Q
Russel Metals Inc., Mississauga, Ontario, reported third-quarter earnings that were flat compared to the previous quarter, but well below the same period in 2006. Russel had earnings of $28.6 million in the third quarter, down slightly from the $29.6 million posted in the second quarter, but off 37.8 percent from the third quarter of 2006.

“Although demand in the quarter was soft in metals service centers and steel distributors, our concentration on obtaining inventory levels that were consistent with forecasted demand led to a meaningful reduction in inventory levels,” President and CEO Bud Siegel told investors and analysts. “In energy tubular products, lower drilling activity in Alberta was offset by strength in our Canadian operation servicing the oil sands, as well as our U.S. operation in this segment.”

Revenues for the third quarter of 2007 were $637.0 million, down 7.1 percent from the third quarter of 2006 and off 4.4 percent from the previous quarter.

As was the case throughout the service center industry, Russel Metals continued its inventory destocking during the quarter, moving from 3.3 turns to 3.7 turns. “Inventories never can be too low. You can always buy your way in, but sometimes you can’t sell your way out,” Siegel said. “We have no problem obtaining material. If the market’s changed, we won’t have any problem supporting our customer base.”

Siegel said fourth-quarter pricing is hard to predict. “It’s a mixed bag. Basically, it becomes a question of people’s confidence on where the industry and demand are going. If people are uncomfortable, they will divest their inventory as quickly as they can, and the easiest way to do that is price.

“Others feel they can wait out the storm or have greater confidence of where the market’s going,” Siegel added. “Generally, some have the financial wherewithal to be patient as opposed to overreacting.”

During the quarter, Russel Metals completed its acquisition of JMS Metal Services, a distributor of steel and aluminum with facilities in five states in the southeastern U.S. Siegel said the acquisition is a good cultural fit and provides a platform for growth in a new region for Russel.

Russel will consider further growth projects over the next few years, either acquisitions or greenfield expansions, to improve its geographic coverage, Siegel said.

Ryerson Inc.
Sales, Income Decline During Acquisition Quarter
Ryerson Inc., Chicago, reported sales and earnings figures in line with the rest of the industry in its final quarterly financial report as a public company. The acquisition of Ryerson by private firm Platinum Equity was completed during the quarter.

Ryerson’s sales were down slightly in the third quarter to $1.43 billion from $1.54 billion in 2006, but the net income of $9.7 million in the quarter was 55.1 percent off the same period in 2006.

However, the company’s performance for the first nine months of the year was in line with 2006. Net sales were up 4.8 percent to $4.71 billion, while net income was almost flat at $75.9 million compared to $76.2 million during the first nine months of 2007.

Ryerson has planned a conference call this month to discuss the results.

The Mills

Aleris
Acquisitions Spur Revenue Growth
The acquisitions of Corus Aluminum, Wabash Alloys and EKCO Products drove revenues to almost $1.7 billion for Aleris International Inc., Beachwood, Ohio. Revenues were 20 percent higher than the same period in 2006.

Additionally, net income for the quarter hit $3.5 million, reversing the performance from the third quarter of 2006 when Aleris reported losses of $24.2 million.

“We are pleased with the performance of the controllable elements of our business, driven by the step-change productivity improvements across all areas of the company,” said Steven J. Demetriou, chairman and CEO. “This was essential in partially offsetting the significant volume reductions in our North American rolled products and zinc businesses, primarily associated with construction and transportation end-uses.”

For the first nine months of 2007, Aleris reported sales of $4.9 billion and a net loss of $14.7 million. This compares to revenues of $3.3 billion and net income of $59.4 million for the period last year.

“Our various integration activities are yielding strong results,” Demetriou said. “We are on track to achieve the $65 million of acquisition synergies associated with the Corus Aluminum acquisition, which is more than double the original estimate.”

Aleris is just beginning to realize benefits from the Wabash Alloys acquisition this year.

“Since completing the Wabash acquisition two months ago, we have begun executing several initiatives, including plant closures and back office integration. Estimated annual synergies from the Wabash acquisition are expected to be $30 million over 12 to 18 months,” Demetriou said.

ArcelorMittal
Quarterly Income Tops $3 Billion
ArcelorMittal, Luxembourg, reported net income of $3.0 billion in the third quarter, an increase of 36 percent compared to the previous year. The world’s largest steel company had sales of $25.5 billion during the quarter, slightly behind the $27.2 billion posted in the previous quarter but ahead of the $22.1 billion recorded during the same period in 2006.

“We are pleased to report another strong set of numbers for the third quarter, with EBITDA at $4.9 billion. This takes EBITDA for the first nine months of the year to $14.6 billion, 30 percent higher than in 2006. We are on track to deliver a record year for the company,” said Lakshmi Mittal, president and CEO.

ArcelorMittal also announced progress on the company’s growth strategy, including transactions in Argentina, Canada, China, Italy and Turkey. The company also has identified 20 million tons of organic growth opportunities to be completed by 2012.

In the Americas, Mittal reported steel shipments of 6.9 million tons, down from the 7.1 million tons shipped during the previous quarter. Sales of $5.7 billion were also slightly lower during the third quarter compared to the second quarter of 2007.

Operating results for the three months ended Sept. 30, as compared with the three months ended June 30, were down due to lower shipments, partly offset by higher average steel selling prices in Mexico, South America and Canada.  

Carpenter Technology
Sales Record Set During Company’s First Quarter
A richer product mix, growth in the energy market and a focus on margin enhancement were the reasons behind Carpenter Technology’s 12.7 percent increase in net income during the quarter ending Sept. 30. 

Carpenter Technology Corp., Wyomissing, Pa., reported net income of $57.7 million during its first quarter. Carpenter had net income of $51.2 million during the same period of 2006.

“Our focus on higher-value materials and growth in energy market sales contributed to record first-quarter results,” said Anne Stevens, chairman, president and chief executive officer. “We are pleased with our results and see opportunity to further improve our performance through an enhanced focus on operational excellence.”

Carpenter’s sales of $475 million were a first-quarter record and 17 percent more than a year ago. Adjusted for surcharges, sales improved 3 percent.

Sales to the energy market, which includes oil and gas and power generation, increased 94 percent from a year ago to $56 million. Within the energy market, sales to the power generation sector, excluding surcharge revenue, surged 140 percent to $22 million, due to increased demand for industrial gas turbines, particularly from the Middle East.

“We expect the energy market to remain favorable and are confident about the outlook for our aerospace business in the second half of our fiscal year,” Stevens said.

Gerdau Ameristeel
Revenues Increase as Chaparral Integrated
Gerdau Ameristeel Corp., Tampa, Fla., reported net income of $123.8 million, a 35 percent increase in comparison to the $91.4 million posted during the third quarter of 2006.

Income was also up 29 percent for the first nine months of the year to $396.5 million.

The story was the same for the company’s sales, which were up 20 percent for both the quarter and the year-to-date. Revenues for the quarter totaled nearly $1.4 billion and were at $4.1 billion for the first three months of the year.

“Our operations have performed well during 2007 and earnings through the first nine months of 2007 have already surpassed our full-year earnings from 2006,” said Mario Longhi, president and CEO. “The slowdown in the North American residential construction segment has little direct impact on our demand as we primarily service the infrastructure and non-residential construction industry, which remains strong.”

For the nine months, finished steel shipments increased to 5.4 million tons, an increase of 309,000 tons from the previous year, primarily due to the acquisitions of Chaparral Steel, Sheffield Steel and Pacific Coast Steel. Average mill finished-steel selling prices increased 11 percent over those in this same period in 2006.

The company completed its acquisition of Chaparral in September.

Kaiser Aluminum
Performance On Rise in
First Year After Bankruptcy
Kaiser Aluminum Corp., Foothill Ranch, Calif., marked its one-year emergence from bankruptcy with improvement in its sales performance. Kaiser, which exited bankruptcy in July 2006, reported an 11 percent increase in sales to $367 million during the quarter.

Kaiser also reported a net income of $24.8 million, a substantial improvement over the second quarter’s 14.3 million..

“The company’s earnings for both the quarter and year-to-date reflect strong results in both our fabricated products and primary products segments,” said Jack A. Hockema, chairman, president and CEO of Kaiser Aluminum.

For the first nine months of the year, Kaiser reported net income of $77 million. Sales for the first nine months of 2007 increased 12 percent to $1.14 billion. The increase reflects the pass through to fabricated products customers of higher metal prices, higher shipments, favorable product mix and improved value-added pricing.

Operating income in fabricated products increased to $40 million for the third quarter of 2007, compared to $29 million in the prior-year period. Strong shipments of heat-treat plate for aerospace and defense applications contributed to a richer product mix, more than offsetting continued weakness in demand for ground transportation and general industrial applications.

“The strong financial results for the quarter and year-to-date were a change from the prior year driven by additional sales made possible by the Trentwood expansion,” said Hockema. “Robust demand for aerospace and defense-related applications continues, although increasing at a slower rate than anticipated.

“Demand in ground transportation and general industrial markets remained soft, and we expect normal seasonality for the rest of the year. Although rod and bar destocking continued in the third quarter, with service center inventories at historic lows, we expect restocking to occur when demand eventually begins to strengthen,” Hockema said.

U.S. Steel
Income Declines During Third Quarter
Net sales continued to improve for United States Steel Corp., Pittsburgh, though they didn’t translate into improved income performance.

U.S. Steel reported net income of $269 million for the third quarter, a decline of 10.9 percent from the previous quarter and 35.5 percent vs. the same quarter in 2006.

Sales, however, remained on the upswing, as U.S. Steel recorded sales of $4.35 billion, up 2.8 percent over the second quarter and an improvement of 5.8 percent vs. the same quarter of 2006.

“We had a good quarter as each of our segments effectively responded to diverse challenges, including general economic concerns that affected our major markets,” U.S. Steel Chairman and CEO John Surma told analysts and executives during the company’s third-quarter conference call.

By segment, U.S. Steel’s flat-rolled division enjoyed the best performance, improving income for the third consecutive quarter despite a $9 per ton decrease in the average price and higher raw material costs. Officials cited higher operating rates, including hot-rolled band shipments to support tubular production, and lower outage and energy costs, as the reasons for the improvement.

The decrease in European operating results was due primarily to lower shipments related to outages, increased raw material costs and higher unit costs resulting from lower raw steel capacity utilization.

Tubular operating results declined due mainly to lower prices and the effects of integrating Lone Star into the U.S. Steel supply chain and establishing the company’s unified business model. Distributor inventories and imports remained high.

U.S. Steel made a major move in the quarter with its acquisition of Canadian steelmaker Stelco. The $1.2 billion transaction was completed at the end of October.

“The business case for the Stelco purchase is strong,” Surma said. “The addition of Stelco allows us to expand our customer base in North America, increase production at Minnesota ore operations, and expand our supply chain in providing semifinished steel to our flat-rolled and tubular finishing facilities in the U.S.”

The company also continued to integrate Lone Star into its OCTG operations. U.S. Steel expects to generate at least $100 million of annual synergies by the end of 2008, primarily through supply of semifinished steel. U.S. Steel also closed two small furnaces in East Texas as part of the integration.

Looking forward, Surma said the company isn’t expecting to reverse the revenue decline in the fourth quarter. Seasonal effects and planned outages will cut down shipments, while prices are expected to remain flat through the period. And though steel consumption is healthy in Europe for its U.S. Steel Europe division, a higher level of imports and higher levels of service center inventories are dampening expectations.

Though the turnaround may not come in the fourth quarter, Surma is excited about the long-term prospects for both demand and pricing.

“Steel market fundamentals are generally positive. Service center inventories and flat-rolled imports have continued to decline throughout the year and are currently at relatively low levels. Very high ocean freight rates, the relatively weak U.S. dollar, high scrap prices and the prospects for a significant increase in iron ore prices, have us cautiously optimistic that the North American flat-rolled market could be poised for some improvement.