Metals USA
Inventory Confidence Defies Industry Trends
2006 was a good year for Metals USA Inc., and the first quarter of 2007 was shaping up to be even better, reported executives at the Houston-based metals processor and distributor.
“Volumes are good. Prices are trending in the right direction. Our customers are busy. We are having a great first quarter,” said Lourenco Goncalves, chairman, president and chief executive officer, during last month’s conference call with analysts and investors.
Though Metals USA does plan to go public again eventually, it is content to wait for the right time to make this move. “We are very comfortable with our current ownership, so we are not in a hurry to IPO,” he said. Metals USA is currently owned by private equity firm Apollo Management LP, Purchase, N.Y.
Metals USA reported a net income of $39.5 million for 2006, down 4.8 percent from 2005 even though net sales increased 10 percent to $1.8 billion. However, the adjusted EBITDA of $156 million—the company’s second best ever—“confirms our belief that our business is strong and consistently profitable,” says Goncalves, who attributes this success to the company’s inventory management.
In the fourth quarter, Metals USA posted $6.2 million in net income vs. a net loss of $1.3 million in the fourth quarter of 2005. Fourth-quarter net sales of $437.5 million gained 12.6 percent from the year earlier period. “The fourth quarter was a very interesting period,” Goncalves said. “We had confidence in our inventory position and were able to navigate through the choppy waters of a market where many were aggressively destocking. Despite some downward pricing pressure, we chose to sell only in business where profit margins were maintained.”
Metals USA has a different view of inventories than others in the industry. “Some people see service center inventories as a contagious disease, but I don’t see it as a problem. We are in the business of carrying the right inventory for our customers and charging for that,” said Goncalves. He noted that the company’s flat-rolled group finished 2006 with 3.2 months of inventory on hand, up from 2.7 months at the end of September. Goncalves called that the “perfect” amount: “I hit the ground running in January when other people were scrambling to get steel.”
In the plates and shapes segment, Metals USA ended the year with 5.2 months of inventory, up from 4.3 months at the end of September. Though some may consider this excessive, Goncalves noted that the products were not evenly distributed; preordered or hard-to-find materials made up much of the volume. “In commodity-type material, we had just 2.5 months on hand,” he added.
“We believe that we started this year with the right size of inventories and the right mix of inventories,” Goncalves asserted. “We are not running out of anything and we are not overloaded with anything. As far as volumes, mix and working capital, we are doing well.”
Goncalves believes that metals demand is healthy across the economy, though he admits that the current slowdown in the housing and home remodeling industry is causing some weakness in building products. “But building products is a high-margin business. As long as we continue to have a decent volume, we are going to be okay. As soon as the housing market starts to pick up a little bit, we will be in great shape,” he said.
When asked about potential acquisitions, Goncalves said, “I don’t see Metals USA as a consolidator,” though he didn’t rule out the possibility of future strategic acquisitions. Metals USA could be an acquisition target, he added, especially if mills start buying service centers again. With most meaningful mill mergers completed, producers will be looking both upstream and downstream for growth opportunities.
Olympic Steel
Profitable 2006 Leads to Capital Spending in 2007
Despite small declines in fourth-quarter tons sold and net income, Olympic Steel Inc., Cleveland, reported strong results for last year. Net sales for full-year 2006 totaled $981.0 million, an increase of 4.4 percent from 2005.
Net income for 2006 was $31.0 million, up from $22.1 million the previous year. Tons sold totaled 1.27 million in 2006, down slightly from 1.28 million in 2005.
“We are pleased to report strong 2006 sales and earnings performance, as we realized record annual sales and our second most profitable year in the 52-year history of Olympic Steel,” said Michael D. Siegal, Olympic chairman and chief executive officer.
“In 2006, we also began paying regular quarterly cash dividends, purchased and equipped a second Olympic facility in Chambersburg, Pa., to expand our value-add processing capabilities, added six new laser lines, and acquired a fabrication company in North Carolina.”
High fourth-quarter service center inventories caused the market to deteriorate at year’s end, Siegal noted, but stock levels should normalize by the end of the first quarter as demand increases and imports slow.
Olympic has begun increasing capital spending in new equipment, facilities and technology solutions, he added, “as we position ourselves for margin growth and value creation in the markets we choose to serve.”
Reliance Steel & Aluminum
Sales Reach Record $5.7 Billion in 2006
Reliance Steel & Aluminum Co.’s bevy of 2006 acquisitions led to record sales and revenues for the year.
Reliance reported year-end income of $354.5 million, a 73 percent increase from the $205.4 million posted in 2005. Sales for the year increased by almost the same percentage, going from $3.4 billion in 2004 to a record-setting $5.7 billion in 2006.
The Los Angeles-based service center company benefited from the 2006 acquisitions of Earle M. Jorgensen, Yarde Metals, Flat Rock Metal Processing and Everest Metals. The company also acquired the remaining 49 percent of American Steel in January 2005.
“We are very pleased with our fiscal year 2006 results. All of our end markets were strong with a very favorable operating environment throughout our network of facilities,” David H. Hannah, CEO of Reliance told investors and analysts during the companyyear-end conference call.
The EMJ and Yarde deals were the company’s two biggest acquisitions to date, contributing $1.6 billion to 2006 revenues.
As was the case for most service centers, performance slowed during the fourth quarter, with Reliance posting net income of $74.6 million. That was 23 percent ahead of the same period in 2005, but down from the record $107.5 million posted during the third quarter.
Sales for the quarter totaled $1.6 billion, an increase of 81 percent compared to the $868.7 million in the final three months of 2005.
“We were pleased with our fourth-quarter results, though the numbers were not quite as strong as previously expected,” Hannah said. “Gross profit margins were slightly below earlier expectations as a result of some inventory destocking that was occurring in the industry during the quarter, especially in regard to carbon steel products.”
Reliance has already started 2007 in similar fashion, completing the acquisitions of Crest Steel Corp., Industrial Metals and Surplus Inc. and related company Athens Steel, and Canada’s Encore Group. Executives say that trend will continue.
“There are some other regions within the country where we should be participating, and we will be,” Hannah said. He cited Philadelphia, Baltimore and the Southeast as areas where Reliance plans to add or expand operations.
International expansion is less certain. Reliance has involvement in facilities overseas, though it did so for specific markets such as semiconductors in Korea and electronics in China.
“The majority of what you’re going to see is in North America,” Hannah said. “We will grow internationally, but right now we feel we’re going to do it for a specific reason.”
Company executives are generally optimistic about 2007, with forecasts for demand growth in carbon steel products, though not at the same rate as 2006. The story is the same for aluminum. Prices are anticipated to trend slightly higher for carbon steel and soften a bit for aluminum.
“Stainless is the wild card,” Hannah said. “We’ve proven our inability to forecast prices accurately here. What we already know is that prices are up in the first quarter. After that, we don’t really know. Demand should be pretty steady, but may start to falter if prices continue upward.”
Russel Metals
Acquisitions Likely for Canadian Company
High inventories and lower-than-expected demand from the oil and gas sector resulted in some softness in Russel Metals Inc.’s fourth-quarter results. The Mississauga, Ontario, company was rebounding, however, with prices rising and inventories dropping early in 2007.
While declining to give any details during Russel’s recent analyst conference call, Edward M. (Bud) Siegel Jr., Russel’s president and chief executive officer, hinted that some acquisitions are on the horizon. “We believe that an opportunity to significantly add value for our shareholders through an acquisition, or acquisitions, will occur in due course,” he said. “Strong 2006 earnings coupled with the financial strength of our balance sheet will enable the company to selectively participate in the industry consolidation currently under way.”
2006 was Russel’s second strongest year ever, with net earnings of $158.7 million (Canadian), up 27.4 percent from 2005. 2006 revenues of $2.69 billion were up 3 percent from a year earlier.
Russel’s energy sector business experienced record operating profits during the year, said Brian R. Hedges, executive vice president and chief financial officer. Steel distribution profits, at $77 million, came close to the record set in 2004.
For the fourth quarter, Russel reported net earnings of $30.6 million, down 26.8 percent from the year earlier. Revenues for the quarter declined 8.3 percent to $593.2 million vs. fourth-quarter 2005.
Siegel pointed to indications of improvement in the first quarter, noting that demand for nonresidential construction products was fairly strong even in the fourth quarter. “Where we saw some slowdown was in the oil patch. We’ll see if that picks up again,” he said.
On the positive side, Canadian drill rig counts are on the rise, though that is offset by high inventory levels throughout the industry. “We are getting into a situation where everybody is chasing after the same increasing rig count,” he added.
Russel’s inventory levels, and inventory turns, were problematic in the fourth quarter, said Hedges, though less so for its service center and steel distributor business than its energy sector. Russel reduced its service center inventories by $36 million in the fourth quarter and expects to see a large reduction of stock levels on the steel distributor side in the first quarter.
Russel will not slash prices just to get rid of inventory, which could be detrimental to the industry, Siegel said. “What you have today is a certain amount of people in this industry who are acting in a professional fashion in reducing their inventories. There are others who are acting in a fashion that would be considered less professional. We could reduce our inventories overnight if we wanted to fall into that category.”
Ryerson
Leadership Advocates Staying the Course
The leadership at Ryerson Inc. believes its existing long-range plan is the best strategy to steer the nation’s largest service center company in the coming years.
“Our board has conducted a thorough review of Harbinger’s proposal compared to Ryerson’s short- and long-term plans. Based on this evaluation, the best course of action is for Ryerson to implement its current strategic plan, and it believes that will significantly enhance value for all shareholders,” President and CEO Neil Novich told investors and analysts during the company’s year-end conference call.
In January, Harbinger Capital Partners, a Ryerson minority investor, nominated a slate of seven candidates to positions on the board of directors at the Chicago-based company, enough for a majority. The company’s annual meeting is scheduled for May 11.
The investment company claimed Ryerson “has consistently underperformed, and there is a need for a significant change at the board level. Our seven nominees are experienced and independent, and once elected, will work to deliver value to all shareholders.”
Novich said the company remains open to other strategic alternatives outside its existing plan, and has retained UBS Investment Bank as a financial advisor. “The words strategic alternative mean anything in the following set: restructuring, potential deal of some sort, a wide variety of possibilities, which will all be compared to the strategic plan we already have in place,” Novich said in his response to an analyst who asked if a sale of the company is among the possibilities.
The combination of increased inventories among all materials and seasonal slowdown led to a declining performance in the fourth quarter. Ryerson reported a net loss of $4.4 million during the quarter, well behind the $6.3 million gain posted during the same quarter in 2005.
Fourth-quarter sales increased 8.5 percent to $1.41 billion, though sales were 8.0 percent off from the third quarter. The company’s average selling price per ton was up 21.2 percent compared to the previous quarter, though much of that was offset by a 10.5 percent decline in tons shipped.
“Fourth quarter 2006 volume, as anticipated, reflected the typical year-end slowdown, exacerbated by high inventories in a variety of products throughout the supply chain,” Novich said. “Additionally, this excess industry-wide inventory, coupled with an extraordinary run-up in stainless steel prices due to nickel surcharges, exerted margin pressure in the quarter.” Nickel surcharges increased approximately $700 per ton from the third to fourth quarters.
Stainless and aluminum sales account for nearly half of Ryerson’s revenues since its acquisition of Integris. The rising costs of the materials (stainless was up 84 percent, aluminum 25 percent) had a substantial effect on the company’s earnings, company officials said, particularly under the LIFO accounting method Ryerson employs.
Additionally, while most of the company’s 100-plus service centers are performing well, five of Ryerson’s larger facilities were significantly underperforming the average. Management changes have been implemented in each of the five service centers, Novich noted.
The company has also implemented changes to its inventory management practices to address and prevent inventory excesses. “We’ve improved forecasting capabilities, revised ordering parameters and safety stock levels, and upgraded software tools,” Novich said.
Ryerson planned to reduce its inventory by $100 million by the end of the first quarter. “We expect to achieve inventory turnover of five times by the end of 2007,” Novich added.
Steel Technologies
Sales Flat, Income Down During Tough Quarter
Softened demand led to disappointing first-quarter results for Steel Technologies, though executives believe the sluggishness will be short-lived.
“While our team was not pleased with the results of our last quarter, we are confident we can improve our operating performance,” Chairman and CEO Bradford Ray told investors and analysts during the company’s quarterly report. “We felt the effects of soft demand from certain customer segments, and from steel pricing swings that have been a drag on our financial performance.
Besides the typical seasonal slowdown, production cutbacks by the automotive companies were the chief reason behind the Louisville, Ky.-based company’s weaker performance compared to the same three months in 2005. Steel Technologies reported net income of $873,000, down 73.8 percent from the $3.3 million totaled in the same quarter of 2005.
“In 2006, our drive was to maintain our pricing strength in the volatile climate in the flat-rolled processing segment,” Chief Operating Officer Mike Carroll said. “While we were successful in maintaining our current business, we did not garner enough new business to offset the softening volume in our order book.”
Sales for the quarter totaled $201 million, virtually unchanged from the first quarter of fiscal 2006. Volume declined 9 percent, though that was offset by higher average selling prices compared to the same period the previous year. The company’s average selling price was up 8.5 percent.
Executives expected that price to come down during the current quarter, but then rise again as the year moves on due to rising scrap prices, improved pricing in Asia and fewer anticipated imports.
Like most service centers across the country, Steel Technologies grew its inventory in the second half of 2006. The company has already begun bleeding off some of that excess material, dropping inventory levels by $12 million since late September, giving the company 70 days worth of product on hand during January. Stabilizing inventory and a better economic outlook provide optimism for 2007.
“While the first-quarter results get us off to a slow start, this in no way dampens our enthusiasm for our underlying platform and the opportunities that lie ahead,” Carroll said. “We adjusted to production cutbacks, particularly in automotive, but also seasonal slowdowns. We knew this was a temporary setback, as many customers pushed orders back into the second quarter. It’s difficult to adjust when the underlying consumption is expected to spring back quickly. We’re prepared for increased demand in the first half of 2007.”
Also this quarter, Steel Technologies will deliver its first shipments from its greenfield project in Juarez, Mexico. The company has plans for a second Mi-Tech facility in Woodstock, Ontario.
“We see many strategic opportunities,” Ray said. “Our high priority is expanding blanking opportunities.”
