Anticipating Tough Times
In their third-quarter financial reports to analysts and shareholders, some of which still showed surprisingly positive results, metals executives universally warned of the difficult business environment ahead.
By the staff of Metal Center News
Cost Cutting Trims Management Workforce
Carpenter Technology Corp., Wyomissing, Pa., responded to difficult economic conditions and sluggishness in its fiscal first quarter with a 20 percent reduction of upper management positions.
Carpenter reported net income of $25.8 million during the first quarter, 53.4 percent below the record first quarter of the previous year. Net sales for the quarter totaled $413.7 million, 7.6 percent below the same period in 2007.
“Our first-quarter earnings were disappointing,” Anne Stevens, president and CEO told analysts and investor’s during the company’s quarterly conference call. “While we anticipated a slow start to the fiscal year, our results reflect higher operating costs than expected, including inflationary pressures and unanticipated difficulties in bringing our upgraded rolling mill to full production. In addition, the effects from our raw material surcharge and hedging activities, and a leaner product mix, compared unfavorably to last year.”
Moreover, the current weakness in the world economy and the markets Carpenter serves has the company cautious about the short-term outlook. “Later in the quarter, we also saw aerospace and oil and gas customers pushing out some orders in response to the strike at Boeing and other aerospace market conditions, and a buildup of inventory in the oil and gas supply chain,” said Stevens.
The company’s sales to the aerospace industry were mostly flat from a year ago, though the effects of the Boeing strike and economic slowdown are just starting to be felt.
“The global situation and the Boeing strike are going to have an impact, and we believe it’s going to work its way through the supply chain. There will be fewer planes built. How many more adjustments we have to make because of global economic issues vs. the strike is still to be determined,” Stevens said.
Besides costs, the other main factors affecting profitability in the quarter included a weaker product mix, with the company selling less of the high-end stainless steel products. The pounds sold during the quarter were only 1 percent lower than the same quarter of 2007.
The softening markets have caused the company to reexamine its expenditures in the short-term. “As the domestic and international economies soften, we recognize the potential for a downturn in overall market conditions as we move through the year and have taken actions internally to streamline our business and reduce our costs,” Stevens said.
Those actions included reducing the organizational structure through management layoffs, plus taking steps to capture additional cost reductions in all areas through more frequent and in-depth performance reviews and profitability analyses.
Though the company is taking some cost-cutting measures, it is preceding with its premium melt capacity expansion, which remains on schedule for completion by the end of the year. Carpenter officials announced that all four vacuum arc remelting furnaces are currently operating. The first of two electro-slag remelting furnaces began operating in September and the 20-ton vacuum induction melting furnace is scheduled to start in December.
“Despite near-term problems we face, we’re still optimistic about our long-term growth plan. Our ongoing strategic investments in technology, research and development, marketing and international growth will help ensure the long-term future success of Carpenter’s business,” Stevens said.
Acquisitions Fuel Strong Results
Gerdau Ameristeel Corp., Tampa, Fla., reported net income of $316.9 million for the three months ended September 30, a 156 percent increase in comparison to net income of $123.8 million for the same three-month period last year. For the first nine months of the year, Gerdau’s net income totaled $742 million, an increase of 87.1 percent compared to the same period last year.
Net sales for the third quarter increased 78.6 percent to $2.5 billion, as finished steel shipments increased to 2.1 million tons, an increase of 305,000 tons, primarily as a result of the acquisition of Chaparral Steel in September 2007. Net sales for the nine-month period increased 73.2 percent to $7.1 billion as finished steel shipments increased to 7.0 million tons, an increase of 1.6 million tons from the first nine months of 2007.
Gerdau’s results reflect other acquisitions made earlier this year. On July 14, the company acquired Hearon Steel Co., a rebar fabricator and epoxy coater with locations in Muskogee, Tulsa and Oklahoma City, Okla. On October 27, it acquired Metro Recycling, a scrap processor with two locations in Guelph and one in Mississauga, Ontario, Canada. On October 31, it acquired Sand Springs Metal Processors, a scrap processor located in Sand Springs, Okla.
“The results from the third quarter of 2008 represent our fourth successive quarter in which we have delivered increased net earnings to our shareholders from our balanced long-product portfolio of rebar, merchant, structural and wire rod products. Our recent acquisitions further strengthened both our downstream rebar fabrication business, which represents an outlet for a significant portion of our mill rebar production, and our upstream raw materials scrap procurement group, which has increased our captive scrap sourcing to approximately 40 percent,” said Mario Longhi, president and CEO of Gerdau Ameristeel.
“We expect shipment volume in the fourth quarter to be reduced from the levels of the third quarter. As we enter this period of economic uncertainty, we will remain focused on driving productivity and cost improvement initiatives,” he added. “Our balance sheet is strong with good liquidity and no significant scheduled debt repayments until 2011. With decreasing scrap costs and shipment volumes, we anticipate a significant reduction in the investment of working capital as we match production to customer demand, which should further enhance our liquidity position in the fourth quarter.”
Well Positioned Despite Third-Quarter Loss
Declining metal prices and an outage at its Anglesey facility contributed to a net loss of $22.1 million in the third quarter for Kaiser Aluminum Corp., Foothill Ranch, Calif.
Consolidated net sales for the third quarter totaled $369.2 million, increasing slightly from net sales of $366.7 million reported in the prior-year quarter. Net sales were favorably impacted by higher realized prices in the fabricated products and primary aluminum segments, offset by a 40 percent reduction in primary aluminum shipments.
“Operating results for the quarter were largely in line with our expectations, as the underlying fundamentals of our core fabricated products business generally remained strong and consistent with market trends discussed during our previous earnings conference call,” President and CEO Jack A. Hockema told analysts and investors. “We continued to experience solid demand for aerospace and defense products, but began to see the early trends of distributor destocking in our rod and bar business. Consolidated operating income was $30 million after adjustment for non-run-rate items and the impact of the Anglesey outage.”
Kaiser’s net loss was due in part to a fire at the Anglesey smelter in June. The affect of the outage in the third quarter was estimated at $20 million. Further losses of $4 million to $6 million are expected in the fourth quarter before the facility returns to full production by the end of the year.
Anglesey’s future is uncertain, however, as Kaiser continues to pursue more affordable power for the operation. The company is considering other strategic alternatives, including potentially shutting down the facility.
Kaiser’s results also included a $44 million loss on the company’s hedging positions primarily as a result of declining metal prices during the quarter. This was a reversal of significant hedging gains recorded in the first half of 2008.
The company is taking several steps to counter the uncertain economic climate and beleaguered credit markets. Actions include reviewing and prioritizing capital spending projects, deferring acquisition initiatives and temporarily suspending share repurchases.
The company’s customer base has already responded to fears of a recession, as service center demand softened considerably in the third quarter.
“What happens whenever you get an economic downturn is that everyone pulls in their arms, causing a dramatic destocking that backs up to the distributors. So, not only are [service centers] destocking on their own, but their customers are also going through some destocking as they see reduced demand. Our OEMs are doing the same thing, so we get slammed immediately with artificially high reductions in orders because of that severe destocking through the whole system,” Hockema said.
“We hope we are seeing the worst of it because of this very, very dramatic destocking and that we are going to see better things as we get into the first and second quarter,” he added.
Still, Kaiser believes the company is in better shape to withstand the current malaise than it was during previous periods of recession. “Compared to 2001 to 2003, we are a very different company. We are in a much better position to deal with an economic downturn given our financial strength and rich production mix and heat-treat plate contracts, which should help to mitigate the impact if we experience recessionary demand,” Hockema said.
While existing projects are being re-examined, Kaiser is proceeding with major expenditures already in the pipeline. The final phase of the company’s heat-treat plate expansion project at the Trentwood facility is now complete, increasing production capacity to meet existing aerospace contract demand and other heat-treat plate applications. The new Kalamazoo project, a core component of the company’s business strategy, remains on track to begin start-up in late 2009. The investment will improve operating efficiency and the overall cost structure in the rod and bar value stream, company officials said.
Positive Quarter But Uncertainty Ahead
Sweden’s SSAB reported the best third quarter in the company’s history, due in large part to the contribution from its new North American plate business, reported company officials during their Oct. 28 conference call with analysts and investors. (SSAB acquired IPSCO’s tubular and plate operations in 2007, but divested the tubular segment earlier this year.)
SSAB reported a 29 percent increase in third-quarter sales (excluding the tubular business) to $10.36 billion, of which the North American division accounted for $2.51 billion. Of the company’s $1.38 billion in operating profit, $543 million was earned by the North American division.
“The North American operations made a very significant contribution to the positive trend, and the integration is going according to plan,” said Olof Faxander, president and CEO.
Plate deliveries by the North American division declined by 9 percent in the quarter due to a planned production outage, but deliveries of quenched and tempered and advanced high-strength steels increased 38 percent vs. the 2007 third quarter.
SSAB expects a decrease in volumes for the rest of the year. “It appears that the prices of our niche products will continue to be stable while the prices of our commercial steels are expected to decrease slightly,” Faxander said.
Noting that the World Steel Association recently declined to offer a forecast for the steel market in 2009, Faxander said it is very difficult for SSAB to predict the impact of the global financial instability on the steel industry. “Our concentration on niche products makes us less sensitive to negative economic trends,” he added. “Even if growth in steel consumption as a whole declines, the motivating forces for a substitution from simpler steel to more advanced high strength steel remain.”
SSAB will continue its $480 million capital expenditure program with a new heat-treat facility in Mobile, Ala. The investment will increase the facility’s quenched and tempered steel plate capacity from 100,000 to 400,000 metric tons by 2011.
Sets New Profit Record
Ahead of Expected Drop
The third quarter of 2008 proved historically profitable for U.S. Steel. The Pittsburgh-based steelmaker reported record profits of $919 million, 37.5 percent more than the previous record set during the second quarter. The quarterly income was 241 percent greater than the same period in 2007.
Net sales were also up from the sequential quarter and third quarter of 2009, though not to the same degree. U.S. Steel reported sales of $7.31 billion during the period, 8.4 percent ahead of the previous quarter and 67.9 percent above the $4.35 billion posted during the third quarter of 2007.
“U.S. Steel performed well in the third quarter and recorded the most profitable quarter in our history,” Chairman and CEO John Surma told investors and analysts during the company’s quarterly conference call. “Our flat-rolled and tubular segments again posted record results, and tubular markets especially remained robust throughout the quarter.”
Income from operations for flat-rolled improved significantly from the second quarter, the result of higher average realized prices, which were partially offset by increased raw materials costs, decreased shipments and higher costs for profit sharing, officials said.
The substantial increase in tubular income compared to the second quarter resulted primarily from higher average realized prices, partially offset by increased costs for semi-finished steel.
U.S. Steel’s third segment, its European operations, suffered a decrease in operating results due to higher raw material costs, lower shipments and increased costs from a planned reline of one of the three blast furnaces at U.S. Steel Kosice.
The company does not expect such positive results in the fourth quarter, however. Production was reduced late in the third quarter to match declining order rates for the flat-rolled and USSE segments. Raw steel production for the quarter was down to 86 percent of capacity in North America and 87 percent in Europe.
“The volatile, global economic climate is having significant negative effects on our business, and our forward view is limited because of low order backlogs and short lead times,” Surma said. “We expect a decline in fourth-quarter results mainly due to softening demand and prices for flat-rolled products in North America and Europe, and we expect to continue to operate at reduced production levels, corresponding with customer order rates.”
For flat-rolled, officials expect fourth-quarter results to decrease from the third quarter due primarily to substantially lower shipments and lower average realized prices, partially offset by lower raw materials costs. Based on very weak market conditions, the company expects results to decline substantially for U.S. Steel Europe in the fourth quarter.
Surma said the market suffered an abrupt weakening at the end of the quarter, one that is attributable to more than just seasonal softness. He guessed that some was due to credit worries and some due to the overall weakness in the economy.
“The credit crisis is not so severe that we don’t have access to capital or liquidity or that the customers we deal with don’t have the ability to run their businesses. We think they do,” Surma said. “Everybody, including us, is trying to take their investment in working capital down and thereby preserve liquidity.”
Surma said that condition is most evident with stocks at the service centers. “Inventories have been heading down, and it feels like they are heading toward another drive-down by the end of the year. It could be another million tons below what the restated number is now. If that’s the case, by the time that reduction is achieved, the relative consumption that underlies the economy and what’s in the pipeline may begin to calibrate a bit and we could return to some normalcy in the order book.”
He’s confident that U.S. Steel will be able to steer itself through the rough patch. “Managing through difficult times is a core competency of a lot of the management that’s still at U.S. Steel. We know the levers we have to pull when things are difficult,” Surma said. “We’re moving quickly to maintain our liquidity, holding down inventories where we need to and matching our production to our customer order rates quickly. We have a good history of conservative behavior that should help us during this kind of a time.”
A.M. Castle & Co.
Net Sales Hit Record, But Outlook is Cautious
A.M. Castle & Co., Franklin Park, Ill., a global distributor of metal and plastic products, reported that third-quarter consolidated net sales hit a record $388.9 million, an increase of $38.6 million, or 11.0 percent from the third quarter of 2007. Net income for the quarter was $11.5 million, down from $12.9 million in the prior year.
For the first nine-months of 2008, consolidated net sales reached a record of nearly $1.18 billion, an increase of $81.2 million or 7.4 percent from the same period last year. Net income for the first-nine months hit $36.5 million, down from $44.5 million in the prior year.
Metals segment sales totaled $360.1 million in the third quarter, which was 12.3 percent higher than the third quarter of 2007. Average tons sold per day in the metals business increased 2.6 percent over the third quarter of 2007.
“We were pleased with overall sales in our metals segment, as higher volumes combined with higher average prices to produce 12.3 percent sales growth compared to the prior year,” stated Michael Goldberg, president and CEO of A.M. Castle. “However, we suspect that the unprecedented volatility throughout the global markets affected our volume in the third quarter, which decreased by 11 percent compared to the second quarter of 2008, which is more than the typical seasonal decline.
“We achieved a significant gross margin improvement in the third quarter, as compared to the second quarter, as a result of the actions we took to remediate the significant level of surcharges experienced earlier this year. Consolidated gross margins improved to 26.0 percent of sales in the third quarter compared to 25.2 percent in the second quarter of this year,” added Goldberg.
Plastics segment sales were $28.8 million in the quarter, a decrease of $700,000 or 2.4 percent from the third quarter of last year.
“We continue to make significant progress on our Oracle ERP project. During the quarter, we completed several initiatives in our aerospace business, which implemented the new ERP system in the second quarter of this year. These initiatives have allowed the aerospace business to function much more efficiently. We plan to convert our Canadian operations to the new system in early 2009, while the balance of the business currently on the Castle legacy system is scheduled to transition to Oracle approximately 90 days later,” Goldberg said.
Commenting on specific markets, Goldberg noted that demand from the oil and gas industries remains strong. International business remains very active. Common and alloy plate saw reduced demand and lower volume in the third quarter, though certain segments such as mining equipment and cranes remain strong.
The company’s bar and tubing business had a solid quarter, albeit with lower volumes. The aerospace market appears steady, and unaffected thus far by the strike at Boeing, though it is unclear what impact the financial markets may have on aircraft makers. “We still expect aerospace build rates to remain close to current levels,” Goldberg said.
Castle has taken significant steps to expand its global presence this year, adding three locations in Europe through the acquisition of Metals UK, opening a service center in Shanghai and working to double capacity in Mexico. “We will continue to pursue these global expansion initiatives throughout 2009 as our multinational customers continue to require additional support outside of the United States,” Goldberg said. “Next year our focus will be on making incremental investments to our existing infrastructure, including opening new service centers where we have specific customer demand and requirements.”
Castle’s outlook for fourth quarter is a cautious one, as the recent credit crisis and financial market turmoil has added a layer of uncertainty. The company anticipates continued softness in demand, as customers remain cautious about metal pricing trends and the overall economic environment.
“We know pricing will be lower, driven largely by a reduction in scrap and nickel surcharges. Additionally, we anticipate that overall volumes may continue to soften,” Goldberg said. “Anyone who has been in the service center business for awhile understands there are cycles and that you have to manage your expenses and working capital very closely when markets go down. We are in one of those situations today.”
Gains Share Despite Depressed Demand
Olympic Steel Inc., Cleveland, reported net sales for the third quarter totaling $335.2 million, a 30.9 percent increase from the third quarter a year ago. Third quarter net income totaled $24.2 million, up from $6.0 million for last year’s third quarter. Tons sold decreased 13.4 percent to 268,000 in the third quarter of 2007.
Net sales for the first nine months of 2008 increased 22.8 percent to a record $973.6 million, compared to last year’s nine-month net sales of $792.9 million. Net income for the first nine months totaled a record $66.9 million, up from $20.7 million for last year’s first nine months.
Tons sold in the first nine months decreased 2.1 percent to 937,000. This compares favorably to Metals Service Center Institute statistics, which show a 6.6 percent decline in total U.S. steel shipments industry wide for the first nine months of 2008.
“We are pleased with our record year-to-date 2008 performance. For the first nine months of 2008, we achieved record sales and earnings, gained market share in a depressed demand environment and maintained a particularly strong balance sheet,” said Michael D. Siegal, chairman and CEO. “Given the uncertainty surrounding the economic and financial environment, there is limited forward market visibility. We believe we are appropriately positioned for these challenging economic conditions with a strong, low-leveraged balance sheet and a proven disciplined approach to working capital management and turnover.
Olympic spent over $24 million on capital expenditures in the first nine months, including new facilities in Dover, Ohio, and Sumter, S.C. Investments in new processing equipment included large bed lasers, plasma cutters, a blanking line, press breaks, shot blasters and a new stretcher leveling line. Implementation of a new computer system is moving forward according to plan.
Olympic has reduced its inventory tonnage by 14 percent in the past two months in response to weakening steel prices and demand. “We expect to see inventories continue to decline through year’s end as we get back to our preferred inventory turnover rate of five times per year,” said David Wolfort, Olympic president and COO.
Siegal and Wolfort characterized the service center market as sluggish, but not disastrous. While some large markets such as automotive and appliance are down, others continue to be surprisingly active, including mining and agricultural equipment, energy and military-related markets. “Our situation is different from the mills, which must wait for a large inventory selloff to run its course. Business is not a disaster, but it’s not robust either,” said Wolfort.
The volatility in the financial markets is a greater cause for concern than the steel markets, added Siegal. “Today everybody is a little more concerned about the bank than they are about their own business. We need stability in the financial markets, and until that occurs we won’t see stability in the steel consuming markets.”
The executives say they have not seen a widespread deterioration in buyers’ credit quality, though they do give customers closer scrutiny. “At the end of the day it has probably cost us sales because we are a little more tight with credit than others who are more concerned about their cash situation. We are apt to decline sales rather than extend credit,” Siegal noted.
“While global markets are currently challenged, we remain optimistic about the outlook for the steel industry and Olympic steel. We are confident we will successfully navigate through this business cycle just as we have done in prior markets that demonstrate sluggish sentiment,” Wolfort added.
Canadian Company Has Strong Third Quarter
Russel Metals Inc., Mississauga, Ont., reported third- quarter net earnings of $70.7 million, up more than threefold from $21.1 million in third-quarter 2007. Consolidated revenues for this year’s third quarter totaled $737.9 million, an increase of 12 percent from the previous quarter and 53 percent from third-quarter 2007. Net earnings for the nine months ended Sept. 30 totaled $154.5 million, up from $66.4 million for the same period in 2007.
Revenues for Russel’s energy tubular products segment totaled $251 million for the third quarter of 2008 compared to $135.3 million for the third quarter of 2007. Steel price increases and increased volumes in all operations within this segment led to record high revenues and earnings for the company.
Increased demand from Russel’s two units servicing the oil and gas drilling activity in Western Canada, as well as continued high demand at its U.S. energy operations and those servicing the oil sands of Northern Alberta, produced operating profits of $46.4 million for the third quarter, compared to $12.4 million for the third quarter of 2007. The high demand for pipe product resulted in increased margins of 29 percent, compared to 21 percent reported in the second quarter of 2008.
Revenues in Russel’s service centers segment increased 50 percent to $393.4 million for the third quarter of 2008. Operating profits for the segment hit $52.6 million, a significant increase from the $17.8 million reported in the third quarter of 2007, due largely to steel price increases initiated earlier in 2008.
Russel’s steel distributors segment produced operating profits of $16.2 million for the third quarter, double the $7.7 million in third-quarter 2007. The increase was a result of higher margins, which more than offset reduced volumes. Volumes in this segment were lower compared to 2007 due to lower import levels as strong worldwide steel demand and pricing resulted in product flowing to areas outside North America, company officials said.
“Our record earnings for third-quarter 2008 are in contradiction to current overall economic conditions,” said Bud Siegel, Russel president and CEO. “The financial crisis has impacted both demand and steel pricing in most of the industries we service, although there remain positive pockets of business. Uncertainty in the markets has had an impact on both our suppliers and customers, but I strongly believe that Russel Metals has the flexibility, expertise and a strong balance sheet that will enable us to react to the changing conditions as well as any company in our sector.”
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