5-2010 First Quarter Report and Outlook: Service Centers
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Service Centers Predict
Better Days Just Ahead

By the Staff of Metal Center News
 
A.M. Castle: Expects Even Stronger  Second Half in 2010
A.M. Castle & Co., Franklin Park, Ill., moved closer to profitability during the first quarter, reporting a net loss of $4.6 million. That followed a fourth-quarter loss of $15.5 million for the specialty metals distributor.
 
The company’s net sales during the quarter totaled $223 million, 11.6 percent behind the $252 million from first-quarter 2009, but 23 percent ahead of the previous quarter. Similarly, Castle’s metals segment sales of $199.7 million were off first-quarter 2009 sales of $231.1 million.
 
“Sales activity accelerated throughout the first quarter of 2010. However, reported gross profit margins of 24.2 percent were lower than we had expected primarily due to the competitive pricing environment,” said Michael Goldberg, president and CEO of A.M. Castle. “We expect our gross profit margins to improve throughout the balance of the year.”
 
Sequentially, average tons sold per day improved by 22.0 percent compared to fourth-quarter 2009, reflecting the ongoing recovery in the industrial economy. However, average tons sold were 10.9 percent lower compared to the first quarter of 2009.
 
“We experienced increased activity and increased optimism from our customers during the first quarter. Overall, sales activity was better than expected. In addition, our efforts on working capital initiatives resulted in strong improvements in our inventory and accounts receivable positions,” Goldberg said.
 
Though the company projects improved performance for the second quarter, Castle still expects to report an overall loss for the first half of the year. That Castle was reporting lower sales and net losses during the quarters while other publicly traded service center companies have moved back to profitability was not surprising to its executives.
 
“Our volume trends exceeded industry comps for the first several quarters of the recession due to the late-cycle nature of our customers’ businesses,” said Scott Stephens, vice president of finance and chief financial officer. “Similarly, we would expect to be late out of a recovery and thus lag the industry comps for several quarters.”
 
Among end markets, Castle has seen better performance in its oil and gas, heavy industrial equipment and defense markets. While there is some increased optimism for its construction equipment and aerospace markets, flush inventories in the supply chains will keep those sectors from significant improvement until 2011.
 
“If the economic recovery continues, we expect to be profitable in the second half of this year. We have continued to execute well on our balance sheet and operating cost improvement initiatives, and we are excited about our prospects for growth in the balance of 2010,” said Goldberg.
 
“Typically, the second half of the year with fewer shipping days is weaker than the first half, but not necessarily all the time. And in fact, even last year our volumes in the fourth quarter were higher than the third quarter as the recovery started for us during that time period. So in a recovering economy, we have seen in the past and we actually anticipate in this year for the second half to be stronger than the first,” Goldberg said.

Metals USA: Late February Turnaround Leads to Small Profit
Metals USA Holdings Corp. enjoyed a profitable first quarter, a contrast with the previous three months and the same period in 2009. The Houston-based service center reported net income of $100,000 in first-quarter 2010, compared to a loss of $4.4 million in the fourth quarter of 2009 and a loss of $20.9 million during the first quarter of last year.
Metals USA achieved profitability despite lower sales revenues and nearly identical shipment totals compared to last year’s first quarter. The company reported sales of $287.9 million, 12.8 percent lower than the $330.2 million in sales during the first quarter of last year. Metal shipments during the quarter totaled 249,000 tons, slightly more than the 248,000 tons shipped during the first three months of 2009.
 
“Our first-quarter results prove the effectiveness of our efforts to work out of smaller inventories,” said Lourenço Gonçalves, chairman, president and CEO. “Also important, our previous cost reduction efforts were a decisive component of our improved performance this quarter. We will continue to manage our inventory and drive profitability.”
 
Gonçalves said the pattern of activity in the first quarter suggests a better market than the actual results indicated. “First quarter featured a January that was like 2009 and a February that was like 2009 through Feb. 20, at least. We had a decent March and a reasonable end of February. It was a quarter built during 40 days.”
 
Those conditions are continuing to improve, with particular strength in flat-rolled carbon sales. The only end market Metals USA serves that isn’t expected to improve during the coming quarter is nonresidential commercial construction.
 
“Market conditions continue to improve, as we see increases in customer inquiries and order volumes. Raw material prices continue to rise and metal prices are following,” Gonçalves said.
 
He expects mill costs to continue escalating as iron ore miners and other raw material producers gain market power. The shift toward quarterly iron ore price negotiations will result in greater leverage for the producers. “Given the fact the mills were hurt by painful losses last year, these mills will probably not want to be in that situation again. I believe the mills will pass along such cost increases, and the trend of rising prices will continue for the balance of the year, as long as the economy continues to recover,” Gonçalves said.
 
In early April, Metals USA completed its initial public offering of 11,426,315 common shares at a price of $21.00 per share. The stock began trading on the New York Stock Exchange under the ticker symbol MUSA.
 
Gonçalves said the company is continuing to look for growth opportunities, and expects to announce one or two acquisitions before the end of the year. That contrasts with other major players, such as Reliance Steel & Aluminum, which say the current service center offerings are not attractive. “Due to our relative size, companies that would not interest other competitors could still be very interesting and accretive for us, as far as acquisitions,” Gonçalves said.

Olympic Steel: First-Quarter Profits Rekindle Growth Plans
Olympic Steel Inc., Cleveland, reported net income of $1.7 million in the first quarter, rebounding from losing quarters in the same three months of 2009 and the previous quarter. Olympic suffered a loss of $25.5 million in last year’s first quarter and a $2.6 million loss during the prior three months.
 
Olympic’s net sales in the first quarter totaled $167.9 million, a 19.2 percent improvement from the $140.9 million for the same period in 2009. It was also ahead of the fourth-quarter sales of $138.5 million.
 
“We are pleased with our first-quarter results and our sequential improvement from the fourth quarter of 2009,” said Michael Siegal, chairman and CEO. “Our first-quarter shipments increased year-over-year by 29 percent, outpacing the market increase in total steel shipments of 11.2 percent, as reported by the Metals Service Center Institute.”
 
Shipments totaling 221,000 tons were up 14 percent compared to the previous quarter and showed a 50,000-ton improvement from the same quarter last year.
“We have benefitted from large OEM customers awarding business to financially strong suppliers like Olympic Steel, as well as improved overall customer demand as the economy recovers. The increased investments in our specialty metals business are also producing growth in our stainless and aluminum sales and earnings” Siegal said.
 
The company’s average selling price increased to $750 per ton during the quarter. While that was lower than the average price in the first quarter of 2009, which was $822 in a declining pricing environment, it was a $45 increase over fourth-quarter 2009. Additionally, the spread from the low point of the fourth quarter to the high point of the 2010 first quarter was more than $100, company officials noted.
 
Like pricing, gross margins followed a similar trend. Margins increased in each month of 2010, closing at $161 per ton. These trends, plus increasing steel prices, historically low inventory levels and other factors will all benefit second-quarter sales and earnings, Siegal said. Most important, “the things that are driving the increase in demand are real sales in the marketplace, and not a rebuild. There is a belief among customers that their distributors are way under inventoried.”
 
While not ready to announce any changes, the company is primed to begin an aggressive growth plan. “We expect to continue to grow our market share by exploring new geographic locations in 2010, either by acquisitions or greenfield, and increasing our stainless and aluminum specialty businesses,” Siegal said.
The company is targeting new operations in the Chicago area, where it already has an existing facility, plus growth in the area south and west of its Georgia operation. It is also looking to expand in the Great Plains. “We’ve drawn the map out and we want to fill in the gaps from a logistics perspective,” Siegal said.

Reliance: Margins, Profits Improve Along With Conditions
Reliance Steel & Aluminum Co. reported net income of $44.7 million during the first quarter, more than doubling income from the same three months of 2009. The Los Angeles-based service center company reported net income of $20.1 million during the first quarter last year.
Sales for the 2010 first quarter were $1.45 billion, down 7 percent from 2009 first-quarter sales of $1.56 billion, but up 14 percent from 2009 fourth-quarter sales of $1.27 billion. Reliance’s profit margin was at 26.3 percent, up from the 25.0 percent in the fourth quarter and 19.0 percent in first-quarter 2009.
 
“Business conditions continued to improve during the 2010 first quarter, allowing us to increase our profit margin. Our sales dollars and tons shipped per day were our highest monthly amounts since February 2009,” said David H. Hannah, chairman and CEO of Reliance.
Reliance’s tons sold for the 2010 first quarter were down 2 percent from the 2009 first quarter, but up 9 percent from the 2009 fourth quarter. Average prices per ton sold in the 2010 first quarter were down 5 percent compared to the 2009 first quarter, but up 5 percent compared to the 2009 fourth quarter.
 
By product, compared to the 2009 fourth quarter, carbon steel sales of 761,000 tons were up 13 percent with average pricing up 5 percent, on a same store basis; stainless steel tons sold of 45,000 were up 18 percent and average sales prices were flat; alloy tons sold were 44,000, up 19 percent with sales prices flat; and aluminum tons sold of 53,000 were up 12 percent, with average sales prices up 3 percent.
 
For the 2010 first quarter, carbon steel sales were 52 percent of net sales; aluminum sales were 19 percent; stainless steel sales were 15 percent; alloy sales were 8 percent; other sales were 4 percent, and toll processing sales were 2 percent.
 
“Demand continues to improve in most of our end markets, however it is still at relatively low historical levels. Pricing for most of our products has increased to relatively healthy levels, and current pricing volatility is manageable. Our 2010 first-quarter results prove that the swift, albeit difficult, actions that we took over the past six quarters positioned us to operate at profitable levels even in this low-demand environment. We were able to significantly improve our earnings even as our revenue dollars decreased compared to the 2009 first quarter,” Hannah told analysts and investors.
 
Reliance has grown to become North America’s largest service center company through an aggressive acquisition strategy, but it has been largely idle since the start of 2009. The company doesn’t expect that to change in the immediate future, though opportunities may begin to arise in the next 18 months. Currently, most acquisition opportunities involve smaller, often distressed companies, which has never been the type Reliance has targeted, company officials said.
As for the only major deal involving the North American distribution market thus far in 2010— Nucor’s joint venture agreement with Mitsui to operate Steel Technologies—Hannah does not anticipate that arrangement to have any major impact on Reliance.
 
“We’re not concerned about it. We’ve never really viewed Steel Tech as a direct competitor to our service center business,” Hannah said. “We do compete with them a little bit in our toll processing operations, and we do compete a little bit in some metal sales, but not very much. We don’t think there’s going to be any change in behavior in their operations and the way they do business going forward.”
 
Looking forward, the company expects conditions will continue to improve throughout the year in most of its markets. “We anticipate that demand for most of our products will recover slowly and steadily as the year progresses, with the exception of nonresidential construction, where we expect some further weakness, although we believe we are close to the bottom. We also expect pricing to remain at or near current levels during the 2010 second quarter, with the possibility of some downward pressure in the 2010 second half.”
 
Hannah said the second-half pricing environment is heavily dependent on the amount of real demand improvement, particularly as additional carbon steel capacity enters the market at the producer level. The low level of inventories throughout the supply chain, and continued discipline among the participants, may help to keep prices stable.
 
Additionally working in pricing’s favor is limited offshore opportunities. “Usually, when people get in trouble in our industry, it’s because they’ve bought large quantities of import materials,” Hannah said. “That’s not happening now, and it’s not really a viable alternative at this point in time.”

Reliance has had no difficulty passing previous price hikes through to its customers, in large part because of the nature of its end-users. The company does little selling on large-volume contract business, instead working with smaller companies that are buying just to meet their immediate needs. “We buy on the spot and we sell on the spot. And we are pretty darn good at passing through pricing,” Hannah said. “It’s not easy to do that, particularly in a weak-demand environment.”
  
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Friday, December 19, 2014