AK Steel
Sets New Records
Across the Board
A more-diversified AK Steel reported record sales, income, tons shipped and average selling price during the second quarter.
AK Steel reported net sales of $2.24 billion during the quarter, 19.7 percent better than the same period in 2007. Shipments totaled 1.74 million tons, 1.7 percent ahead of the 1.71 million tons from the same period in 2007.
The company’s income for the quarter was $145.2 million, 32.1 percent better than the second quarter of the previous year. The average selling price was $1,287 per ton, a 13 percent jump from the first quarter and 18 percent better than the second-quarter of 2007.
“Despite unprecedented raw material and energy cost increases and weakness in several markets, AK Steel employees have shown they can deliver record operating and financial performances,” James L. Wainscott, president and CEO, told investors and analysts during the company’s quarterly conference call.”
The West Chester, Ohio-based steelmaker has had to make considerable adjustments to its product mix in light of depressed sales in some of its traditional markets. Auto sales, which represented 40 percent of 2007 sales, were down to 29 percent of quarterly revenue. The appliance market has also dipped in the wake of the residential housing slump.
“As markets have changed, so has AK Steel. We’ve adapted pretty well,” Wainscott said. “We have increased sales to the spot market and substantially increased our export sales. Not all of our eggs are in one basket.”
Additionally, Wainscott said, the steel industry has had to deal with unprecedented spikes in the costs for raw materials. Those increases have forced AK Steel to adjust its agreements with customers. “AK began negotiating variable pricing mechanisms of one sort or another into its contract sales agreements. Today, the vast majority of agreements contain variable components allowing for adjustments,” Wainscott said. Those contracts that don’t already contain those agreements are up for renewal in the next 12 months, and will be adjusted accordingly, he said.
“Our position is that the days of pure fixed price sales agreements for steel products are history,” Wainscott said. “In the future, AK cannot and will not bear all the risk for price movements.”
AK Steel officials expect third-quarter shipments to be approximately 1,550,000 tons, off from the second-quarter figures due to expected seasonally lower automotive shipments and a planned five-day outage at the company’s Middletown Works hot-strip mill. The company also expects higher raw material and energy costs relative to the second quarter.
AK Steel also anticipates its third-quarter 2008 average per-ton selling prices will be about 10 percent higher compared to the second quarter of 2008, while it expects to generate operating profit of $170 to $175 per ton, which would represent another record.
The outage at the hot-strip mill will take an estimated 100,000 tons of hot-band out of the system from third-quarter shipments. “We should be well positioned as we head into the fourth quarter and continue to wait for any positive sentiment coming out of the automakers, and for the housing markets to really ramp things back up,” Wainscott said.
Alcoa
Higher Volume, Pricing
Offset Input Cost Pressures
Alcoa reports that strong revenue growth in second-quarter 2008 led to an 80 percent increase in profitability compared with the first quarter of this year. The Pittsburgh-based company reported net income of $546 million, compared with $303 million in first-quarter 2008.
Revenues for the quarter increased to $7.6 billion from $7.4 billion in the first quarter of 2008 driven by higher volumes and prices. All of the company’s operating segments achieved higher revenues in the quarter. Revenues in the second quarter of 2007 were $6.8 billion; including divested businesses they totaled $8.1 billion.
All of the company’s operating segments achieved double-digit after-tax operating income increases over the prior quarter. The company’s downstream Engineered Products and Solutions segment again achieved an all-time quarterly after-tax increase.
“Each of our operating groups grew their top line this quarter, but more importantly they achieved profitable growth as they achieved strong after-tax increases,” said Klaus Kleinfeld, Alcoa CEO. “Higher prices for our products and increased volumes more than offset the increased input costs facing the entire industry.”
Allegheny Technologies
‘Good Returns in an Uncertain Time’
Allegheny Technologies Inc., Pittsburgh, reported net income for second-quarter 2008 of $168.9 million on sales of $1.46 billion, down about 18 percent from net income of $206.5 million on comparable sales of $1.47 billion in second-quarter 2007.
“The second quarter demonstrates our ability to deliver good returns during an uncertain time. ATI is benefiting from our ongoing transformation, and our product, market and geographic diversification,” said L. Patrick Hassey, chairman, president and CEO. “Return on capital employed of 24 percent, return on stockholders’ equity of 30 percent, and overall operating profit of nearly 19 percent of sales represent outstanding performance for any industrial company.”
Commenting on the company’s products, Hassey said a combination of steady demand from aerospace and growing demand from the global industrial markets resulted in total titanium shipments of nearly 24 million pounds for the first half 2008, a 19 percent increase compared to the same period last year. Exotic alloys set a record for total sales. Global demand for grain-oriented electrical steel remains robust. Shipments of nickel-based and specialty sheet and plate were strong to the chemical process industry, oil and gas, electrical energy and automotive turbocharger markets. Shipments of stainless sheet and plate products improved during the second quarter in a flat to declining market due to growing demand for ATI’s AL 201HP lean-nickel alloy and good demand from the chemical process industry and oil and gas markets, he added.
“Aerospace and infrastructure continue to drive our results, and we believe these markets are in a period of long-term growth,” Hassey said. “Looking forward, we expect the normal third-quarter seasonal slowdown. We believe we are well positioned to continue to achieve good performance in this uncertain U.S. economy due to our product and market diversification and our global reach.”
ArcelorMittal
Shipments Up Slightly, But Income Doubles
ArcelorMittal reported net income for the second quarter of $5.8 billion, up sharply from $2.4 billion for the previous three months, and $2.7 billion for second-quarter 2007. Sales and operating income for second-quarter 2008 totaled $37.8 billion and $6.6 billion, respectively, as compared with sales and operating income of $29.8 billion and $3.6 billion for the previous three months.
Steel shipments for the second quarter totaled 29.8 million metric tons, up slightly from the 29.2 million tons for the previous quarter and 28.7 million tons for second-quarter 2007.
“We are pleased to report results for the first half of 2008 with EBITDA of $13.1 billion, up 35 percent over the same period in 2007,”said Lakshmi N. Mittal, chairman and CEO. “This reflects the diversity and strength of the ArcelorMittal business model, in particular the significant diversification of our value chain including our considerable mining operations.
“We continue to look for opportunities to further enhance our raw material self-sufficiency, with recent investments being announced in Africa, the Americas and Australia,” he added.
In the third quarter, the company expects its EBITDA to exceed $8.5 billion.
Carpenter Technology
Good Momentum, But Earnings Slip
Carpenter Technology Corp., Wyomissing, Pa., reported net income from continuing operations of $46.9 million for its fiscal fourth quarter ended June 30, down from $58.9 million in the year-earlier period.
“We finished the year with good momentum due to strong demand in the global energy and aerospace markets, and improving demand in our industrial and consumer businesses. Our international sales also continued to grow at a double-digit rate year on year and now account for 34 percent of total annual sales,” said Anne Stevens, chairman, president and chief executive officer. “We continue to drive operational excellence initiatives to improve our results and expect to complete the expansion of our premium melt facilities by the turn of the calendar year, which will provide needed additional capacity.”
Net sales from continuing operations for the fourth quarter were $556.3 million, or 4 percent higher than a year ago. Excluding surcharge revenue, net sales from continuing operations were $391.3 million, 12 percent higher than last year. Although volumes grew, gross profit in the fourth quarter declined to $117.3 million, from $120.8 million a year earlier.
“In the 2009 fiscal year, we expect continuing strong growth driven largely by the favorable industry dynamics in our key aerospace and energy markets,” said Stevens. “Our first half will be subject to capacity constraints on our premium melt products that should be relieved when the new melting facility and other equipment upgrades come on line around the beginning of 2009. We are well situated to respond to the challenges that the current economic conditions are presenting, and anticipate greater demand for our high-performance materials as we pursue aggressive goals for new product development.”
Nucor
On New Record Pace
While reporting record results for both the second quarter and the first half of this year, Nucor Corp., Charlotte, N.C., expects that third-quarter earnings will be even better, driven by continued global demand for plate, beam, bar and sheet. “We are on a record pace that is significantly greater than our past record pace,” said Daniel R. DiMicco, Nucor’s chairman, president and chief executive officer.
Nucor reported net earnings of $580.8 million in the second quarter, up 68.4 percent from a year earlier on net sales of $7.1 billion, up 70 percent from the second quarter of 2007. The steelmaker’s first half net earnings totaled $990.5 million, up 36.4 percent from the first half of last year, on net sales of $12.1 billion, which were 52 percent higher than those a year earlier. This was achieved despite “unprecedented escalation of the cost of scrap and other iron units,” DiMicco said.
Nucor executives reported that this strong performance was not tied to any one steel market, but rather to the company’s product diversity, as well as continued moves toward vertical integration.
As part of this diversification, Nucor launched an international growth platform in July with the acquisition of a 50 percent equity stake in the Duferdofin-Nucor S.r.l. joint venture in Italy, which currently consists of three Italian steel mills strategically placed to serve the growing market for structural shapes in southern Europe, northern Africa and the Middle East. Its total production in 2007 was about 1 million tons.
A new merchant bar mill, which is expected to produce approximately 450,000 tons a year, is under construction at the Giammoro plant and is expected to be fully operational later this year.
In May Nucor signed a memorandum of understanding with Sidenor SA, Greece’s largest steel producer, to acquire a 34 percent share of a proposed new joint venture for the production of long products and plate in the Balkans, Turkey, Cyprus and North Africa.
“This is just the beginning of Nucor’s presence in the European and North African market,” said DiMicco, adding that the steelmaker will have “a much more sizeable footprint internationally 10 years from now than we have today.”
DiMicco said there also continue to be growth opportunities in NAFTA for both Nucor’s downstream and steelmaking operations, given that certain market fundamentals should support continued steel export opportunities for a decade, if not more. “I believe that the world is going to be chewing up a lot of steel,” which will keep imports relatively low and “give us an opportunity to grow our steelmaking operations in North America.”
Of Nucor’s $502 million in capital expenditures in the first half of this year, over half were for greenfield projects, including the Memphis SBQ bar mill, the Decatur, Ala., sheet mill’s galvanizing line, the Arkansas Castrip plant and the Utah building systems facility.
Nucor is also planning to invest up to $3 billion in a pig iron project, most likely in Louisiana, which John Ferriola, chief operating officer of steelmaking, called “a major step forward in implementing Nucor’s raw materials strategy.” That plan calls for the company to produce 6 million to 7 million tons per year of high-quality scrap substitutes in-house.
Phase 1 of this proposal, which still needs board approval for both funding and site, calls for a three million ton a year greenfield blast furnace facility, most likely in St. James Parish, La., right on the Mississippi River. A potential second phase, the building of a second blast furnace, might follow.
Nucor is also continuing to use its February acquisition of scrap processor David J. Joseph Co. and its March 2007 acquisition of Harris Steel as growth platforms for the company. With the recent acquisition of two scrap processing companies—Galamba Metals Group and Metals Recycling Services Inc.—Nucor’s total annual scrap processing capacity now approaches five million tons a year, “with more on the way,” DiMicco said.
In June, Nucor’s Harris Steel unit, whose sales have more than doubled since being acquired by Nucor, entered into an agreement to purchase the assets of rebar fabricator and distributor Ambassador Steel Corp. in a transaction expected to close in the third quarter. Ambassador, which shipped 422,000 tons of fabricated rebar and distributed another 228,000 tons last year, expands Nucor’s rebar fabrication footprint through the Midwest, Gulf Coast and the southeastern U.S.
Steel Dynamics
First Half Nearly Matches Last Year
Steel Dynamics’ net sales and net income for the first half of 2008 nearly matched the 2007 full-year results in both measures. The acquisitions of The Techs, OmniSource and Recycle South, plus rising steel prices, drove the Fort Wayne, Ind.-based company to new heights.
Steel Dynamics posted net sales of $4.3 billion and net income of $353 million for the second half, slightly behind the $4.4 billion in sales and $42 million less than its net income reported during 2007.
For the quarter, net sales totaled $164 billion, 164 percent ahead of the same period in 2007 and a 26 percent jump from the first quarter of 2008. The quarterly net income of $210 million was up 48 percent from the first quarter and 124 percent above the same three months in 2007.
“SDI’s second-quarter results exceeded our June 12 earnings guidance due to the stronger-than-anticipated performance by both our steel and metals recycling operations,” said Keith Busse, chairman and CEO.
Earnings from steel operations continued to improve as a result of strong shipments and higher selling values, Busse said. Second-quarter net steel shipments of 1.5 million tons were ahead of the first quarter and, excluding The Techs, were 10 percent higher than second quarter 2007. The company’s flat-roll division showed the largest increase, up 22 percent from second-quarter 2007 and up 3 percent from first-quarter 2008.
The steel scrap and scrap substitutes segment also provided a strong margin contribution for the company. Demand for recycled ferrous scrap remained strong, both from Steel Dynamics mills and from other minimills, integrated steel mills and foundries.
Compared to the first quarter of 2008, second-quarter ferrous shipments of 1.5 million net tons were up 8 percent and non-ferrous shipments of 254 million pounds were up 6 percent. OmniSource reported higher-than-expected earnings for the quarter, and Iron Dynamics continued to operate well, providing 51,000 metric tons of pig iron used as an alternative to higher-cost imported pig iron in the production of flat-rolled steel.
Additionally, Steel Dynamics grew its recycling business in June with the acquisition of Sturgis Iron & Metal Inc., a Michigan-based metals recycler that had filed for Chapter 11 bankruptcy protection. The company operates four facilities in Michigan, two in Indiana and one in Georgia. SDI is in the process of reopening all seven facilities.
On another raw material front, work continues on the Mesabi Nugget project in Minnesota, with a timetable for opening in late 2009 or early 2010. Busse is enthusiastic about the prospects of the project.
“Given the market climate and the demand for low residual resources, if the No. 1 battery works as well as anticipated, I wouldn’t expect just one more battery but two or three more batteries to be launched,” he said. “That would put us, I think, in a favorable position vs. our competition in the virgin iron arena.”
As for the immediate future, Busse feels the domestic steel industry is well positioned. “Our outlook continues to be very positive. We currently expect third-quarter results to be similar in nature to the second quarter,” Busse said. “Third-quarter steel and scrap shipments could decline slightly as the result of seasonally planned mill outages and other consumer/provider industrial outages in July and August. Currently, though, order activity remains strong for steel products and metals recycling volumes are running at a record pace.”
The orders from service centers are consistent, with most customers buying on an as-needed basis. “The credit position of our customers is certainly under pressure given the transactional values. At these values, no one wants to speculate on a position. So literally, they’re converting an order. They’re getting an order before they place an order with us,” he said.
Those orders tend to slow up in the fourth quarter, and the company is modeling for that traditional seasonal slowdown.
U.S. Steel
Achieves Highest Quarterly
Results in Company History
United States Steel Corp., Pittsburgh, Pa., reported second quarter 2008 net income of $668 million, compared to first quarter 2008 net income of $235 million and second quarter 2007 net income of $302 million.
“We recorded the highest quarterly sales and net income in U.S. Steel's history during the second quarter as all three reportable segments posted record results, reflecting strong operating performance and favorable global pricing dynamics,” said U.S. Steel Chairman and CEO John P. Surma.
Second-quarter 2008 income from operations of $954 million more than tripled the company’s first-quarter 2008 income of $266 million and more than doubled last year's second-quarter income of $391 million.
U.S. Steel management believes segment income from operations is a key measure in evaluating company performance. The company’s reportable segments and other businesses reported segment income from operations of $959 million or $136 per ton in the second quarter, up from $327 million or $48 per ton in the first quarter of 2008 and $434 million or $79 per ton in the second quarter of 2007.
The significant increases for all three reportable segments resulted primarily from substantial price increases, which outpaced increases in raw materials costs. Shipments for all segments were also at record levels for the quarter as strong operating results were achieved.
Raw steel capability utilization, up slightly from the first quarter, was 92.7 percent in North America, including 101.1 percent for the company’s Canadian operations, and 104.3 percent in Europe.
Commenting on U.S. Steel's outlook for the third quarter, Surma said, "We expect another excellent quarter with continued earnings improvement as price increases implemented during the second quarter and early in the third quarter are expected to improve average realized prices for each of our reportable segments."
Third-quarter results are expected to decrease for U.S. Steel Europe. While average realized prices should be higher, raw materials costs are also expected to increase, and shipments and operating costs will be negatively affected by a planned blast furnace reline at U.S. Steel Kosice that is scheduled to begin shortly and continue into the fourth quarter.
Executives expect third-quarter results for tubular products to increase significantly as price increases continue to be realized. n
Second-Quarter Report & Outlook: Service Centers
Sales Surprisingly Strong
Service centers’ sales have benefited from the high metals prices, and so have profits for some. Following is a roundup of leading service centers’ latest conference calls with analysts and investors.
A.M. Castle
Sales Up, But Profits Down
Higher metal prices produced record sales but declining profits for A.M. Castle & Co. during the second quarter. The Franklin Park, Ill.-based service center reported nets sales of $397.1 million, a 6.6 percent increase from the same period in 2007. However, net income for the quarter was down 30.7 percent to $11.3 million.
“Overall demand in our key strategic end-markets remained solid during the second quarter of 2008,” President and CEO Michael Goldberg told investors and analysts during the company’s quarterly conference call. “In particular, we saw continued healthy demand from our heavy equipment and oil and gas end-markets, and when combined with increasing tons sold per day and higher prices for certain products, we experienced solid revenue growth compared to the prior year. However, significant material cost increases for carbon products pressured our margins resulting in lower overall net income for the quarter.
The company’s gross margin was at 25.2 percent, down from both the previous quarter and the same quarter in 2007. The company cited the high carbon prices, and the surcharges attached, for the dip in gross profit.
“In many of the contracts, there isn’t a markup on the surcharges. When surcharges take an increasingly larger part of the selling price, our gross margin percentage gets diluted and compressed,” Goldberg said.
Metals segment sales were $365.4 million in the second quarter of 2008, which was $22.1 million or 6.4 percent higher than the second quarter of 2007. Average tons sold per day in the metals business increased 9.3 percent over the second quarter of 2007.
In April, the company completed the first implementation of the new Oracle ERP system at its domestic aerospace locations. In addition, human resource systems were also implemented company-wide during the second quarter.
“We are pleased that the system worked as designed, but we experienced the typical learning curve associated with an ERP implementation,” Goldberg said.
The associated costs included declines in service levels and productivity in the quarter. Company officials estimated the interruptions cost as much as $10 million in lost sales and $3 million in operating profits. The impact was felt in April, with the company recovering some of those losses in May and June.
“Management has focused on remediating any issues and returning customer service metrics to historical levels in the third quarter,” said Scott Stephens, vice president of finance and chief financial officer.
Among end-use markets, Goldberg said the company remains confident in aerospace, despite widespread speculation that some orders could be canceled in response to rising fuel costs and other economic concerns. Goldberg said the seven-year backlog on some orders cushions the industry from serious worries.
“We believe there’s significant strength in the market to avoid any meltdown, and large aerospace build rates should remain close to current levels for the balance of this year and 2009.” The only A.M. Castle market showing significant recent weakness, Goldberg said, is construction equipment.
On the international front, the company has committed to an expansion of its operations in Mexico, doubling the size of its facility in Monterrey while also adding equipment. The company has seen revenue growth of 30 percent per year for the past four years in Mexico. The expansion will be completed in 2009.
Looking forward, Goldberg said existing trends should continue. “We expect the current level of business will be somewhat softer in the third quarter in light of traditional trends. And carbon and alloy prices are expected to move higher due to continued surcharge increases, though nickel surcharges will move lower.”
Metals USA
Price Hikes Lead to Record Quarter
Metals USA, Houston, posted its best quarterly sales and revenue figures ever during second-quarter 2008. The company’s net sales totaled $593.1 million, up 23.3 percent from the same period in 2007. Net income totaled $39.8 million, a 240 percent hike compared to the same quarter in 2007.
Additionally, Metals USA reported adjusted EBITDA of $92.6 million, a 104 percent increase from last year and more than 60 percent better than the company’s previous best quarter in 2004.
“Despite the slowdown in the economy and historically low shipments from the service center industry this year, Metals USA produced our best quarter ever,” said Lourenço Gonçalves, president and CEO. “We believe such a strong accomplishment was a direct result of our ability to gain market share and, at the same time, achieve price increases down the chain.”
He said the company’s ability to sell its products based on replacement cost was crucial to its record-setting quarter. So, too, was keeping its customer base informed about the increases throughout the period.
“Equally important to preparing inventory is that we prepare our customers,” Gonçalves said. “We regularly give our customers advice and guidance regarding the reality in the marketplace.”
Gonçalves believes the fundamentals behind the latest round of price increases remain in place. Thus, it’s likely costs for steel inputs will continue to escalate, and steel prices will follow suit.
“There seems to be a fair amount of concern in the media that mills’ new efforts to pass along surcharges to their annual contract customers have met steep resistance and, as a result, there seems to be a consensus that this represents a peak in the market. We see it differently,” Gonçalves said.
The fact that mills have attempted to modify contracts mid-year, and their likelihood of pulling that off, is a sign of strength in the market. “Since most steel consumers have no substitute for steel in their products, we believe mills will succeed in their cost-recovery efforts as contract renewals occur,” Gonçalves said.
The mills aren’t the only segment of the steel industry with a healthy outlook. Despite weakness in residential construction and automotive, the outlook is positive for most of the sectors Metals USA serves, including marine, defense, infrastructure and energy.
“We are pleased with the resilience of the U.S. economy and its participants during this difficult time,” he said. “Additionally, the weakness of U.S. dollars continues to serve not only as a barrier to entry to imported metal, but also as a barrier to competitive products made out of metal. We also expect to see export opportunities for both domestic mills and domestic OEMs, as well as a growing number of foreign manufacturers increasing existing or implementing new U.S. production capacity.”
Novamerican Steel
Has ‘Positive Momentum’
Novamerican Steel Inc., Norwood, Mass., reported a 13.6 percent increase in net sales for the second quarter, to $241.3 million, though the company’s adjusted EBITDA decreased by $1.7 million or 9.4 percent.
“Our second fiscal quarter of 2008 continued experiencing positive momentum throughout the quarter from improved shipments and pricing, mitigated by an extremely weak automotive sector,” said Corrado De Gasperis, Novamerican CEO. “Our direct sales tons and revenue were lower than previously anticipated by about 38,000 tons. We implemented a significant portion of our organizational changes during the second quarter, including the closure of our Cambridge, Ont., facility. We anticipate having substantially all of our organizational changes concluded by the end of the third fiscal quarter.”
U.S. steel service center hot-rolled inventories remained at historically low levels through May of 2008, just under a seasonally adjusted average of approximately three months on hand, he noted. “We believe that underlying consumption in the U.S. and Canada has weakened from the already sluggish pace of the past year, with a particularly weak automotive outlook. In the U.S., the automotive, residential construction and related sectors are in a recessionary-like environment and have been over the last 12 months, somewhat offset by strengthening export activity.
“Canadian manufacturing, including automotive, has also experienced shrinkage. The strength of the Canadian dollar vs. the U.S. dollar has continued putting pressure on our Canadian customers that export into the U.S.,” he added.
He expects stronger demand and pricing in markets outside of North America, as well as the weaker U.S. currency, to continue to inhibit imports. Combined with the relatively low service center inventory levels, supplies should remain tight and steel prices high for 2008, he said.
Olympic Steel
First-Half Results All Trending Up
Olympic Steel Inc., Cleveland, reported net sales for the second quarter totaling $363.5 million, a 31 percent increase vs. the second quarter a year ago. Second quarter 2008 net income totaled $29.6 million, up from $9.4 million for last year's second quarter. Tons sold increased 5.1 percent to 353,000 for the quarter.
For the first half of 2008, Olympic’s net sales increased 18.9 percent, to $638.4 million, compared to last year's first half net sales of $536.8 million. Net income for the first half of 2008 totaled $42.8 million, up from $14.7 million for last year's first half. Tons sold in the first half increased 3.3 percent, to 669,000.
"We are pleased that our efforts are gaining market share as we are moving closer to our customers both in business alignment and physical presence. Given the uncertainty surrounding the general economic environment, our outlook remains favorable, yet cautious. We believe we are appropriately positioned in terms of inventory, value-added processing capabilities and liquidity to continue performing well through the seasonally slower sales period of the third quarter," said Olympic CEO Michael D. Siegal.
Reliance Steel & Aluminum
Net Sales Top $2 Billion
Reliance Steel & Aluminum Co. posted another record sales and income quarter, while adding to its holdings with the acquisition of one of the country’s largest service groups.
The Los Angeles-based service center company reported net income of $156.6 million, a 27.5 percent improvement from the same period in 2007 and 45.8 percent higher than the previous quarter. Net sales eclipsed $2 billion for the first time in company history, which represented a 10.5 percent increase over the same period in 2007.
Reliance officials said carbon steel sales accounted for 51 percent of revenue, followed by aluminum and stainless steel at 17 and 16 percent, respectively. Alloys, toll processing and miscellaneous sales accounted for the remaining 16 percent during the quarter.
“The 2008 second quarter turned out to be quite a bit better than we had originally anticipated. The main reason for the increased earnings was higher carbon steel prices, which resulted in higher gross profit margins as we quickly passed through the increases to our customers,” said David Hannah, president and CEO. “While we expected carbon steel pricing to continue upwards during the second quarter, the increases were larger than we had anticipated.”
For the six months, net income amounted to a record $264.0 million, up 12.6 percent compared with net income of $234.5 million for the same period in 2007. Sales for the 2008 year-to-date period were a record $4.0 billion, an increase of 7.1 percent compared with 2007 six-month sales of $3.74 billion.
Reliance made the biggest deal in company history recently with its agreement to acquire PNA Group from private equity firm Platinum Equity. The nation’s 12th largest service center in Metal Center News’ Top 50 of 2007, PNA Group had sales of $1.6 billion last year. During the first quarter of 2008, the Atlanta-based service center reported revenues of $474 million. PNA Group consists of Delta Steel LP, Feralloy Group, Infra-Metals Co., Metals Supply Co. Ltd., Precision Flamecutting and Steel LP and Sugar Steel Corp.
“The PNA Group fits well with the Reliance family. We’re looking forward to the opportunity this combination represents,” said Hannah.
While Reliance has consistently sought out acquisition candidates, Hannah acknowledged there might be additional opportunities now, as service center owners may be concerned about political change in Washington, D.C., and its impact on taxes. “We have had some discussions with folks, and there is some concern out there about tax rates going up. Maybe that will spur them to sell businesses this year rather than next year,” Hannah said.
Looking forward, Reliance officials predicted continued strength in carbon prices and the absence of import offerings. The company plans to pare its inventories further over the final six months of the year.
“Looking at the third quarter, we expect pricing to be slightly above second quarter levels. While we do not expect any unusual changes in demand, we do expect the normal seasonal softness compared to the 2008 second quarter, and we recognize there is still a good deal of uncertainty surrounding overall economic activity. We, therefore, are anticipating our volume to decrease slightly and our gross profit margins to be a bit lower because the rate of carbon steel price increases will be below that of the second quarter,” Hannah said.
