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August 2012
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Sales up, Income Down
 
Service centers report some softening from the first quarter in their latest conference calls.

A.M. Castle & Co.
 
Castle Reports Loss in Second Quarter
A.M. Castle & Co., Oak Brook, Ill., reported a $3.0 million loss for the company’s second quarter, compared to net income of $3.7 million during the same quarter in 2011. Net sales for the quarter totaled $329.4 million, a 16.5 percent jump from last year.

“Consolidated gross material margins of 26.9 percent for the second quarter of 2012 were more than 70 basis points higher than the prior-year quarter. And, while we experienced a slight softening in demand when compared to the first quarter, I was pleased with our gross margin performance,” said Scott Stephens, Castle’s interim president and CEO during the company’s quarterly conference call with investors and analysts.

For the first half, Castle’s net sales totaled $692.3 million, 22.4 percent better than the first six months of 2011. The company experienced a net loss of $7.3 million through the first half compared to net income of $6.4 million a year ago.

In the company’s Metals segment, second-quarter net sales of $297.2 million were 17.8 percent higher than last year, primarily due to the acquisition of Tube Supply in December 2011. Metals segment tons sold per day, excluding Tube Supply, were up 1.1 percent from the second quarter of 2011, primarily driven by growth in the heavy equipment and oil and gas sectors.

Sequentially, tons sold per day were 4.1 percent lower than the first quarter of 2012 because virtually all key end-use markets, with the exception of oil and gas, experienced softer demand as customers adjusted inventory levels due to a more cautious outlook.

“We will remain focused on gross material margin management, operating efficiency and working capital execution during the second half of the year. Given our customers’ cautious outlook for the balance of 2012 and assuming no further softening of demand, we expect operating results to be comparable to levels achieved in the second quarter,” said Stephens.

The company retained an executive recruiting firm to assist in the identification of a new CEO. Stephens, the company’s chief financial officer, has been serving as interim CEO since the departure of Michael Goldberg in June. Castle expects to appoint a new CEO by the end of the third quarter.
 
Metals USA

Sales Grow 6% in Second Quarter
Metals USA Holdings Corp., Fort Lauderdale, Fla., reported net sales of $537.1 million during the company’s second quarter, a 6 percent improvement from the same period a year ago. Net sales were up 2 percent from the first quarter of 2012.
 
The service center company reported net income of $19.0 million, a modest decline from the $21.5 million reported in last year’s second quarter. Net income improved 17 percent compared to the first quarter.
 
"We are very pleased to achieve yet another quarter of strong results. Despite a persistently weak pricing environment in the second quarter, Metals USA delivered sequential growth, generating more revenues and profit in Q2 than in the first quarter," said Chairman, President and CEO Lourenço Gonçalves during the company’s quarterly conference call with investors and analysts.
 
Metals USA’s net sales for the first six months topped $1.06 billion, up 13 percent from net sales of $937.9 million for the first six months of 2011. Net income for the first half totaled $35.3 million, up modestly from the net income of $33.9 million for the first six months of 2011.
 
Metals USA’s metal shipments hit 413,660 tons for the second quarter, up 15 percent from the second quarter last year. Metal shipments for the first six months of this year totaled 816,452 tons, up 12 percent from the same period last year.
 
Toll processed tonnage totaled 52,470 tons during the second quarter, an increase of 24.7 percent from the second quarter of 2011. The company toll processed 92,719 tons during the first six months of 2012, up 7.0 percent from the first six months last year.
 
Though the first-quarter purchase of Gregor Technologies was the company’s only deal of the first half, Metals USA remains committed to growth through acquisition. Unlike other service centers, the company has not looked outside the U.S. to expand. Gonçalves said the lackluster returns of some Chinese investments and the obvious issues in Europe validate the company’s strategy. “We will stick to acquisitions in the U.S. We are going into an extended period of difficulty in this country, but I believe brighter times are closer to us. We are in good shape here; we believe it’s the best market to be present.”
 
On the pricing front, the Metals USA chief believes the higher figures the mills have been pursuing are unlikely to stick. “We don’t see a strong upward price trend, mainly due to the appreciation of the U.S. dollar against the euro and the Brazilian real. The adverse exchange rate no longer supports the significant tonnage exported by the U.S. throughout 2011 and the first months of 2012.
 
Some domestic capacity has been taken off line through the recent facility shutdowns by bankrupt RG Steel. Gonçalves does not expect further capacity reductions as a result of a labor issues at ArcelorMittal.
“We won’t see a strike at ArcelorMittal, but if any production is taken out, that would be great. It would make the supply side a little leaner and allow prices to get a little stronger. That’s the only thing missing in Q3, the ability to increase prices to where they should be.”

Reliance

Quarterly Sales, Income Increase
Reliance Steel & Aluminum Co., Los Angeles, reported net income of $108.8 million during its second quarter, a 10 percent improvement from the second quarter of 2011 but down 6 percent from the first quarter. Sales for the second quarter totaled $2.21 billion, up 8 percent from the second quarter of 2011 but 3 percent behind the first quarter.
 
For the first six months, Reliance’s net income totaled $225.0 million, an 18 percent improvement on 2011. Net sales hit $4.5 billion, up 14 percent from last year.
 
“We were pleased with our second-quarter results, which were in line with our expectations, although general economic uncertainty in the marketplace along with declining costs for most all of our products negatively pressured both volumes and pricing,” said David H. Hannah, chairman and CEO. “Underlying demand slowed slightly from the first quarter, but still represents solid improvement when compared to the 2011 periods. The declines in the costs of our products were supply, not demand, driven, as underlying cost inputs at the producer level decreased, imports were plentiful, and domestic overcapacity persisted.”
 
Reliance’s tons sold for the second quarter were up 10 percent from second-quarter 2011, but down 2 percent from the first quarter. The average price per ton sold in the second quarter was down 2 percent compared to both second-quarter 2011 and the first quarter.
 
During the second quarter, carbon steel sales represented 52 percent of the company’s net sales; aluminum sales were 15 percent; stainless steel sales were 15 percent; alloy sales were 11 percent; toll processing sales were 2 percent; and other sales were 5 percent.
 
“We continue to see strength in energy, aerospace, farm and heavy equipment, and auto, and expect continued growth in these markets,” Hannah said.
 
Though imports reached their highest levels since 2008 during the first half, they likely to be less of a factor going forward, said Reliance President and Chief Operating Officer Gregg Mollins. The spread between the U.S. price and the world price, even with China’s market deterioration, is no longer attractive to buyers. “I would not expect to see third-quarter or fourth-quarter import volumes anywhere near what they were in the first and second quarter this year. I think we’re seeing them going down, and thank God for that because they were at ridiculous levels,” he said.
 
Reliance made two acquisitions in the first half, adding National Specialty Alloys and McKey Perforating, plus two strategic asset purchases. The company also expanded into Australia through its newly formed subsidiary, Bralco Metals.
 
Still, the acquisition front has been relatively quiet in the service center sector, which Hannah chalked up to the overall operating environment. “Unless somebody has to sell today, their thinking is ‘let’s just wait until our numbers look a little better and some of this uncertainty goes away.’ Uncertainty in the market just doesn’t bode well for people making big decisions, whether it’s buying or selling,” he said.
 
Reliance officials expect pricing on most primary materials, carbon, aluminum and stainless, to reach bottom during the third quarter, with an uptick possible at the end of the quarter.
 

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