A.M. Castle & Co.
Strong First Quarter Results;
Strategic Investment in Oracle
A. M. Castle & Co., Franklin Park, Ill., a global distributor of specialty metal and plastic products, reported record sales and continued strong financial results for the first quarter ended March 31 during last month’s conference call with analysts and investors.
For the first quarter, consolidated net sales hit a record $375.4 million, an increase of $96.2 million or 34.4 percent from the first quarter of 2006. Net income for the quarter was $15.6 million, as compared to $15.8 million in the prior year. First quarter 2007 net income included a $0.9 million after-tax charge for the write-off of the company’s prior investment in information technology systems. During the quarter, the company signed an agreement to purchase Oracle’s ERP system in support of its strategic growth initiative.
“As we embark on our bold new direction to become the foremost provider of specialty products, services and specialized supply-chain solutions for targeted industries, we have carefully considered the infrastructure required to successfully execute the strategy,” said Michael Goldberg, president and CEO of A. M. Castle. “The existing systems in our metals business lack the flexibility and functionality needed to support our customers growing requirements on a global scale.
“The acquisition of Transtar also increased our need for a technology upgrade. Our selection of Oracle, which is at the forefront of global technology solutions, exemplifies our commitment to the strategy,” Goldberg added. The company plans to invest $10 million to $12 million for the system implementation across its metals segment, to be completed in late 2008.
Metal segment sales were $346.6 million in the first quarter, an increase of $95.9 million, or 38.3 percent vs. the first quarter of 2006. Of the 38.3 percent sales increase, the acquisition of Transtar Metals (which was completed on Sept. 5, 2006) contributed 29.0 percent, while 14.4 percent was attributable to increased material pricing, offset by a 5.1 percent decline in volume for the balance of the business.
“Excluding Transtar, volumes were off from the corresponding quarter last year, but we should remember from an overall tons-sold perspective, the first half of 2006 represented the strongest period of the cycle so far,” said Goldberg. “In the first quarter of this year, our average daily tons sold, excluding Transtar, were up slightly vs. each of the prior three quarters. In addition, our mix continues to change with an increasing proportion of non-ferrous metal product sales driven by strong specialty metal markets. We continued to experience strong demand for specialty metal grade products in the aerospace and oil and gas markets. The balance of the business remains healthy, but is just softer than the exceptional first quarter we experienced last year.”
The company reported record high pricing for nickel during the first quarter of 2007, and experienced price increases in nearly all other metal products compared to the first quarter of 2006.
Plastic segment sales were $28.8 million in the quarter, an increase of $0.2 million vs. the first quarter of last year. Pricing and volume were essentially flat vs. the same period last year.
“Overall business conditions remain good,” Goldberg said. “In particular, the aerospace and oil and gas markets remain very strong, and the Transtar acquisition has proven to be a sound investment and a solid strategic long-term fit for the company. Pricing has been firm with surcharges for nickel and scrap being at all time highs.”
Goldberg expects business conditions to remain good at least through the second quarter. “We do not see signs of any economic downturn on the near-term horizon,” he said, noting that price increases have already been announced for the second quarter. “We are anticipating a second quarter with similar market conditions—high prices, strong aerospace demand, weaker industrial markets—essentially a market that looks fairly close to the first quarter.”
Olympic Steel
Sales, Earnings Up Over Fourth Quarter
Olympic Steel Inc., Cleveland, reported net sales for the first quarter totaling $259.4 million, an 8.6 percent increase from the $238.9 million for the first quarter a year ago. First quarter 2007 net income totaled $5.3 million, down from a net income of $8.0 million in last year’s first quarter.
Tons sold decreased 7.9 percent to 312,000 from 338,000 in the first quarter of 2006, in line with the Metals Service Center Institute statistics of a 7.4 percent decline in year-over-year flat-rolled shipments for the first quarter of 2007, the company noted.
“We are pleased to report improved sales and earnings performance over the fourth quarter of 2006,” said Chairman and Chief Executive Officer Michael D. Siegal. “The first quarter carbon steel market was quite challenging, as the year began with high inventories at steel service centers, causing a very competitive landscape.”
“Looking forward, carbon imports continue to be low, steel-making input costs such as scrap and pellets have risen, service center inventories are now at more balanced levels, and demand appears to be slowly recovering, leading to a potential improving price and earnings environment for the second quarter of 2007.”
Olympic is increasing its capital spending in new equipment, facilities and technology solutions to support future growth. In 2007, the company placed orders for a new Red Bud stretcher leveler cut-to-length line in Minneapolis, and new laser, plasma and machining equipment in Cleveland and Chambersburg. The company also broke ground on an expansion to its existing Iowa facility, and said its previously announced new IT system project is proceeding on plan.
Reliance Steel & Aluminum
Challenged to Maintain Record-Setting Ways
Though Reliance Steel & Aluminum Co. reported record sales and income during the first quarter of 2007, the company will be happy to put the three-month stretch behind it.
The bulging inventory levels at service centers across the country created an environment that put tremendous pressure on margins, Reliance executives told analysts and investors during the company’s quarterly conference call.
“Our biggest challenge in the first quarter was managing our gross profit margins in a very competitive environment, which was caused by high inventory levels coupled with some undisciplined selling practices by others in the industry,” said Gregg Mollins, Reliance’s president and chief operating officer.
The condition was particularly acute in Reliance’s stainless business, where service center competitors were going to great lengths to reduce stocks, he said.
“There was a lot of material in the pipeline everywhere, and people were getting rid of it at lower prices than normal,” Mollins said. “We would only allow them to take so much of our market share before we stepped up and said, ‘We’ve had enough of that,’ and that resulted in us having to drop our prices to be more competitive with our existing customer base.”
Company executives were encouraged about the industry-wide inventory levels going forward, as data from the Metals Service Center Institute show supply declining, and rising import prices discouraging overbuying.
“With the weak dollar and the recent reduction or removal of the rebate in China, we see imports much less a factor this year, at least through mid-summer,” he added.
Despite the environment, Reliance reported record income of $111.7 million, up 55 percent compared to the first quarter of 2006. Net sales for the quarter totaled $1.84 billion, an increase of 86 percent compared to the first quarter the previous year.
On an annualized basis, Reliance’s first-quarter income translates to more than $7 billion in revenue, which would make it North America’s largest service center company.
The company fully anticipates reaching record levels in sales and revenues this year, as the markets it serves all project for healthy performances in 2007.
“We believe that our major markets, including aerospace, energy, non-residential construction, electronics and semiconductors, as well as rail car and shipbuilding, will continue to grow,” said David Hannah, Reliance chief executive officer. “Additionally, we do not expect our costs and pricing to change significantly as the year progresses. As a result, we expect record sales and earnings in 2007.”
Much of the increase in year-over-year sales, in the first quarter and the remainder of the year, can be attributed to Reliance’s acquisition activity in the preceding 12 months. The service center company added Earle M. Jorgensen and Yarde Metals in 2006, then Encore Metals, Industrial Metal and Surplus and Crest Steel during the first quarter.
“When we acquired EMJ, we thought there was room for improvement in two keys areas: gross profit and inventory turns,” said Hannah. “EMJ management team has responded well, as we knew they would, with record revenues and inventory turns improved to 4.4 from 3.8 in 2006.”
Though it was the most active player on the acquisition front in 2006, the company offers no promises that 2007 will proceed in the same fashion.
“As things float in front of us, we look at them and evaluate them, if we like it we pursue it,” Hannah said. “We don’t have any internal goals of doing X number of acquisitions. It just so happens that there were a number of opportunities that came buy us.”
Though vertical integration is a hot topic among metals industry executives, Reliance doesn’t see tremendous benefit to mills owning service centers in North America.
“Most of the service centers are not big enough for it to be enough of a benefit to a mill, ourselves included,” Hannah said. “We had annualized first quarter sales of $7 billion and half of that is non-ferrous product. How comfortable would a mill be when 50 percent of our $7 billion is in products they don’t make? Is what they would gain, given our size today, worth the risk of upsetting other service centers who might decide to take their business elsewhere? Those are the things mill executives are thinking about. I don’t think there’s a need for change. But will it change? Who knows? But probably yes.”
Ryerson Inc.
Organizational Change Nets Financial Gain
While unhappy shareholders have called for new leadership at the service center giant, prompting management to postpone its annual meeting, Ryerson Inc.’s improved first-quarter results provide evidence for staying the course.
After a fourth-quarter 2006 that saw a net loss, the Chicago-based Ryerson rebounded in the first quarter to post $28 million in income on $1.66 billion in sales.
More important was that the company’s efforts to streamline its inventory began to take hold. Ryerson has reduced its inventory by $240 million, a 15 percent decline, since the end of 2006. Management cited changes to the inventory management process for the sizable cut in stocks.
“We put a new supply chain management team in place; we improved forecasting capabilities; we revised order parameters; and we established better lines of communication around the company and between service centers,” President and CEO Neil Novich told investors and analysts during the company’s quarterly conference call. “We did a good job sharing inventory among service centers, which enabled us to reduce purchases more than we anticipated in the first quarter.”
Previously, Ryerson had problems sharing information on inventory across the chain. With better analysis and reporting though its SAP system, the company says it is better at cross-shipping excess from one service center to another, which keeps the company from “ordering what we don’t need.”
Ryerson plans to cut inventory by at least another $100 million in the second quarter. And it is “on track to reach five turns by the end of 2007,” Novich said.
Ryerson has also launched plans to consolidate the company. “We reduced the size of three of our service centers by over 500,000 square feet and reduced head count by about 100 people, while still effectively servicing the market,” Novich said.
Additionally, the company instituted management changes at five larger service centers, with plans to realize $30 million in operating profit improvement by the end of the year.
While Ryerson’s executive team continues to implement its strategies, the board of directors is evaluating those efforts against other alternate strategies in advance of the annual shareholders meeting. The board has not set a new date for the meeting.
“The board has chosen not to schedule this year’s annual meeting until we are further along in our assessment of strategic alternatives,” Novich said. “We recognize the importance of this process to our shareholders and the need to perform a thorough and comprehensive review of all options.
Novich would not go into further details on the process, but acknowledged, “there is a need to proceed as quickly as possible, and we understand that and feel the same imperative.”
In January, minority shareholder Harbinger Capital Partners announced plans to seat a new board of directors at the annual meeting, which has been delayed from its initial May 11 date.
Steel Technologies
Improved Results Support Anticipated Merger Vote
Steel Technologies enjoyed a much-improved second quarter, though the company’s attention is focused squarely on an event to come.
In May, shareholders will meet to consider the Louisville, Ky.-based company’s announced merger plans with Mitsui and Co. Ltd. The two companies have long been partners in the Mi-Tech Steel joint venture.
“We believe this merger is in the best interests of all our shareholders, and the $30 per share transaction price represents outstanding value to our shareholders,” Chairman and CEO Brad Ray told investors and analysts at the company’s quarterly conference call. “Looking ahead, we believe the combined strengths of Steel Technologies and Mitsui offer new and attractive opportunities for our customers, suppliers, and our employees.”
For the quarter, Steel Technologies reported income of $2.9 million, up 27 percent from the same period in 2006. The income was negatively affected by transaction costs of the proposed merger, as income would have totaled $3.4 million without the additional expenditures.
Sales totaled $251.5 million, 6 percent ahead of the second quarter in 2006.
Officials cited average higher selling prices and increased volumes for the increased sales.
“As we discussed in our last conference call, we expected demand to improve in our second quarter after the very slow December quarter, and we anticipated stronger operating results,” Ray said. “This is in fact what we experienced, as our volumes increased throughout the quarter and March shipments were very strong.”
Ray said those trends are expected to continue into the company’s third quarter.
The outlook was even promising for one of the company’s bigger end-use markets, automotive, which has been soft over the past 15 months. Mike Carroll, president and chief operating officer, said that auto production schedules ended March up 8 percent over the same period in 2006.
Due to the impending merger, Steel Technologies officials did not take questions from analysts during the report.
