8-2009 Second-Quarter Report: Service Centers
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Earnings Take a Beating

In their latest reports to analysts and investors, service center executives reported deteriorating market conditions in the second quarter.

By The Staff of Metal Center News

A.M. Castle
Slowdown Catches Up with Specialty, Plastics Distributor

The continuing drop in sales led to a second-quarter loss for A.M. Castle & Co., Franklin Park, Ill. After staying modestly profitable during the first quarter of the year, the distributor of specialty metal and plastic products reported a loss of $5.5 million during the second quarter, compared to net income of $11.2 million during the same period of 2008.

Net sales totaled $195.1 million, more than 50 percent below the $397.1 million reported during the second quarter of the previous year and an 18.5 percent decrease from the $231.1 million in the first quarter.

“Sales activity and overall business conditions during the second quarter continued to be difficult across most of the end-markets that we serve,” Michael Goldberg, president and CEO of A.M. Castle, told investors and analysts during the company’s second-quarter conference call.

The company enjoyed a modest uptick in business activity at the start of the second quarter, historically the company’s strongest, but it resumed a downward path during May and June. Volumes were off 24 percent compared to the previous quarter and 51 percent lower than the second quarter of 2008.

That Castle was later than most in the metals business to suffer a losing quarter was not surprising to Goldberg. “Our business typically lags on business cycle swings. We expect our own recovery will lag that of early cycle metal segments from 6 to 12 months.”

Though the company’s complete recovery may have to wait, Goldberg does see some encouraging signs among macroeconomic trends, including an increasing PMI index over the previous six months and increased activity in China.

Additionally, from a survey of its customers, Goldberg says most have indicated that their own destocking plans will abate in the second half of the year. Among key end markets, Goldberg said the company’s oil and gas customers don’t plan any major shutdowns in the second half, though growth will be limited to its international customers while its domestic customers remain flat. Among aerospace customers, activity is expected to remain stable with the exception of the dismal business jet market.

The company’s plate and bar market suffered major second-quarter declines, and activity remains slow across most end-use markets. One-third of the company’s largest customers have planned shutdowns for the second half of the year, though most believe destocking will stop.

The one end market that has held up well through the downturn is the company’s defense sector.

Like others in the industry, Castle has spent much of the year trying to reduce expenses. The company initially planned an operating expense reduction of $45 million, but it has since taken measures to cut costs by an additional $20 million. Through the second quarter, the company had shaved its expenses by 30 percent and is on track to meet its operating expense reduction of $65 million.

“Our focus for 2009 remains on expense control, working capital management and completing the rollout of our Oracle ERP implementation. We remain on track to convert the balance of the U.S. locations to the new software in the second half of 2009,” Goldberg said.

Metals USA
Rebounds to Post Second-Quarter Profit
Metals USA rebounded from a losing quarter to post $13.8 million in net income for the second quarter. The Houston-based service center company reported a net loss of $4.1 million for the first quarter.

Metals USA reported the profitable quarter despite declining sales revenues. Company executives reported net sales of $267.8 million, more than 50 percent below the $593.1 million posted during the same period of 2008, and almost 20 percent behind the first quarter of 2009.

“We are pleased with the results of our continuing inventory reduction efforts. The cash generated by our actions allowed us to repay a significant portion of our outstanding debt during the first half of 2009,” said Lourenço Gonçalves, the company’s chairman, president and CEO. “We believe Metals USA is well positioned to benefit from the improving environment we anticipate for the second half of the year.”

Metals USA achieved profitability through an aggressive plan to reduce expenses. Same-store expenses for the first half of 2009 were down $47 million, a reduction of more than 29 percent compared to the first half of 2008. Inventory destocking generated significant free cash, and net debt was reduced by more than $250 million since the beginning of year.

Gonçalves said the dynamics of the service center industry were similar from the first to second quarters, with shipments lagging and most distributors focused on inventory reduction. “To the extent we needed to fill inventory holes, we generally bought steel from service center companies selling their products at fire sale prices,” Gonçalves said.

Such actions throughout the supply chain have taken inventories to historically low levels, about half what they were at the same time in 2008. “Unless we believe the U.S. economy has changed forever, the current low level of inventory in the supply chain is not sustainable.”

Gonçalves said the mills should demonstrate discipline during the third quarter for the good of the chain. He supports the early indications that the mills will hold capacity in check and believes prices will continue to escalate throughout the second half if the mills remain focused. “Now is the time for mills to resume market leadership by continuing to keep supply in line with real demand instead of overproducing.”

Looking forward into the third quarter, he said the company is seeing improvement in end markets such as appliance, defense and heavy equipment. “Some are domestically motivated. Some are improving because the U.S. dollar has been weak enough to be favorable for our customers to export. We are seeing signs of recovery, pretty much across the board in flat-rolled.”

Olympic Steel
Deteriorating Demand Leads to Further Loss
Plummeting sales led to further losses in the second quarter for Olympic Steel Inc. The Cleveland-based service center company reported a net loss of $33.8 million, slightly more than the $25.5 million loss the company posted in the first quarter.

Net sales for the second quarter totaled $122.4 million, a 66.3 percent decrease from the $365.5 million from the same period in 2008. Net sales were off 13 percent from the first quarter.

“We are disappointed to report continued demand and price deterioration through the second quarter,” Chairman and CEO Michael D. Siegal told investors and analysts during the company’s second-quarter conference call.

Net sales for the first half of 2009 totaled $263.3 million, a 58.8 percent decrease from the $638.4 million for the first half of 2008.

“We made significant improvements in rightsizing our balance sheet during the quarter by reducing our inventory tons by 32 percent, maintaining a strong receivable turnover and eliminating 64 percent of our debt. We also reduced our second-quarter 2009 operating expenses by 50 percent compared to second quarter of 2008.

“We expect our results to improve in the second half of 2009, as prices have begun to increase, and the unprecedented inventory liquidation by service centers during the first half of 2009 appears to be ending,” Siegal said.

Reliance
Market Leader Posts First uarterly Loss Since 1975
Reliance Steel & Aluminum Co., Los Angeles, reported its first losing quarter since 1975. The service center giant reported a second-quarter net loss of $5.8 million, a big decline from the $156.6 million in income posted during the same period of 2008.

“The 2009 second quarter was the most difficult operating environment that we have ever experienced at our company,” said David H. Hannah, chairman and CEO. “Carbon steel prices fell sharply during the quarter, much more than expected, which caused increased destocking activity and much lower gross profit margins than we had anticipated.”

The company posted net sales of $1.2 billion, down 41 percent from second-quarter 2008 sales of $2.1 billion. The company’s tons sold during the second quarter dropped 7 percent and the average price per ton sold was down 35 percent compared to the same period in 2008.

On a same-store basis, tons sold were down 39 percent and average price per ton sold was down 21 percent. From the first quarter, tons sold dropped 7 percent and the average selling price fell 14 percent.

Hannah said the company’s profitability streak would have continued through the second quarter had it not been for the timing of its largest acquisition in 2008. “There is one thing and one thing only that caused us to dip into this loss position, and that was the PNA transaction,” he said.

Though the PNA Group acquisition was accretive in 2008, Hannah said its inventory position was too high at the time the market went south late in the year, and the company did not have enough time to make a correction. “But we are not complaining. We don’t do these transactions for two or even 12 or 18 months. We do it for the long term, and we think there is good value in that business,” Hannah said.

For the first half, Reliance’s net sales were down $1.2 billion to $2.8 billion, and net income was $14.3 million, compared to net income of $264.0 million for the same period in 2008. On the positive side, the company generated record cash flow from operations of $681 million and repaid $194 million of debt during the second quarter. The company reduced expenses by 24 percent on a same-store basis.

Additionally, Reliance officials believe the company’s size helped it manage through the downturn more effectively.

“Because of our size, we had a lot more outlets for our inventory when demand fell. If we were a one or two location company, we could have only sold it to our customers. But because of our large number of operations, when one location needed a product, instead of purchasing from a mill, they got it from one of their sister Reliance companies,” said Karla Lewis, executive vice president and chief financial officer.

Looking forward, Hannah said, he believes the first half represented the worst the market has to offer, “although we don’t anticipate any meaningful improvement in demand for the balance of the year. There is some good news, however, on the pricing side, where it appears that we have bounced off the bottom as pricing on most of our products is increasing some. That, coupled with a better inventory position, should lead us to better gross profit margins in the second half of the year.”

Reliance has been as aggressive as any company in growth through acquisition in recent years, though the merger trend has slowed in 2009. Hannah doesn’t expect that to change in the second half of the year. “Maybe we will start to see some discussions [in the second half], but I don’t think you are going to see much in the way of transactions. There is virtually nothing out there now, certainly nothing attractive to us.”

Worthington
Suffers $108 Million Loss n Latest Fiscal Year
Worthington Industries Inc. reported net losses for both its most recent fiscal fourth quarter and year-end results. The metals company reported a net loss of $13.7 million for its fourth quarter, which contributed to a fiscal year loss of $108.2 million.

In contrast, the Columbus, Ohio-based company reported income of $53.9 million in the fourth quarter of 2008 and net income of $107.1 million for the previous fiscal year.

Net sales were also off substantially during the quarter. Net sales totaled $471.6 million, almost half the $868.9 million reported during the same period in 2008. Net sales for the year dropped 14 percent from $3.07 billion to $2.63 billion.

“The last nine months of our fiscal year were very difficult as the global economy plunged into deep recession,” said John P. McConnell, chairman and CEO. “We were very fortunate to have been focused on changing the way we work for over a year and had developed a clear path toward significant improvement before the recession began. This allowed us to act quickly and confidently in our steel processing and metal framing businesses to meet staggering declines in market volume.”

In the steel processing segment, quarterly net sales were down 57 percent, to $179.1 million from $412.7 million in the comparable quarter of fiscal 2008. Volumes declined 55 percent due to drastically reduced demand caused by the recession and the difficulties at GM and Chrysler, officials said. The continued decline in the price of steel also negatively impacted average selling prices and resulted in an additional inventory write-down of $5.0 million. The operating loss was $22.1 million for the quarter compared to operating income of $25.5 million in the year-ago quarter.

In the metal framing segment, net sales decreased 51 percent to $110.5 million from $225.5 million in the comparable quarter of fiscal 2008. This sales decrease was the result of a precipitous drop in demand due to weakness in the commercial construction market. The operating loss was $3.5 million for the quarter, compared to operating income of $15.4 million for the prior-year quarter.

“A primary focus since the recession began has been to strengthen our balance sheet and maintain our current credit facilities. Our thoughtful but quick actions to cut costs and transform the company have positioned us well to meet both objectives,” McConnell said.

The company’s actions during the 2009 fiscal year included: closing one steel processing facility in Louisville, Ky.; closing metal framing facilities in Renton, Wash., and Lunenburg, Mass.; idling two others in Miami and Phoenix; closing the Viking-Worthington joint venture; selling interest in three others, ABT, Aegis and Canessa; and reducing head count by more than 20 percent.



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