Third-Quarter Report and Outlook: Mills Small Steps in a Long Journey
In their latest quarterly reports to analysts and investors, mill and service center executives report some better-than-expected results, but slow progress toward recovery amid ongoing concerns about the fourth quarter.
By The Staff of Metal Center News, Editor-in-Chief
Mill Returns to Profitability, But ‘New Normal’ Unclear
AK Steel, West Chester, Pa., ended three quarters of losses, posting a net income of $6.2 million in the third quarter. The quarter represented a $53.4 million improvement over the second quarter loss of $47.2 million.
Net sales for the third quarter totaled $1.04 billion, compared to sales of $2.16 billion during the third quarter of 2008. The company’s average selling price for the most recent quarter was $994 per ton, a 7 percent decrease from the $1,072 per-ton price in the second quarter of 2009, and approximately 32 percent lower than the $1,462 per-ton average price realized in third-quarter 2008.
“Despite the deepest recession in 75 years, AK Steel employees drew upon their experience and resolve to return the company to operating profitability and net income,” said James L. Wainscott, chairman, president and CEO of AK Steel, in his remarks last month to analysts and investors. “While the results may pale in comparison to the year-ago records, in many respects the performance is even more remarkable, given that third-quarter 2009 revenues fell by more than half from the year-ago period.”
For the first nine months of 2009, the company reported a net loss of $114.4 million. Net income for the corresponding 2008 period was $434.6 million. Sales were about $2.76 billion, down sharply from $6.18 billion in the first nine months of 2008.
AK reported third-quarter shipments of 1.05 million tons, well behind the 1.48 million tons shipped in the same period of 2008, but an improvement on the 740,000 tons shipped in the second quarter. Shipments for the first nine months of 2009 totaled 2,567,200 tons compared to 4,792,500 tons for the first nine months of 2008
“Overall AK Steel is emerging as a stronger company,” Wainscott said. “We survived when we shipped only 700,000 tons in the second quarter, and we make a little money when we ship a million tons.”
Looking forward, AK Steel expects shipments in the fourth quarter to improve again to 1.3 million tons, a 24 percent increase on third-quarter shipments. The company expects its fourth-quarter 2009 average per-ton selling price to decline approximately 2 percent compared to the third quarter due to an anticipated variation in the product mix to be sold.
The increase in orders expected in the fourth quarter is attributable to two major customers: automotive companies and service centers. Wainscott said inventory levels in the automotive supply chain remain 40 percent below normal. The need to fill that pipeline, combined with production increases for 2010 models, should keep automotive active through the end of the year.
Among service center customers, inventory levels in both carbon and stainless steel remain at historically low levels, and the yearlong destocking trend has largely run its course. “The data suggests service centers are now buying at levels essentially in line with shipments. They have not yet begun to build or restock inventory to a large degree. We think that’s a good thing, as it provides us with a sustainable level of demand,” Wainscott said.
Service centers’ decisions not to significantly restock their warehouses supports AK’s belief that the recent uptick in carbon steel orders was not a pull-ahead, but representative of actual demand. And a similar scenario is playing out among stainless inventories, as service center operators evaluate the direction of the nickel price.
While the company has managed through the worst of the recession, Wainscott admits the future remains somewhat murky. “The visibility is still difficult beyond this quarter. We’re moving to new normal and it will take a while to settle in.”
Aluminum’s ‘Weathering the Economic Storm’
After consecutive losing quarters, aluminum giant Alcoa returned to profitability during the third quarter. The Pittsburgh-based company reported net income of $77 million, a dramatic improvement from the $454 million in losses posted during the second quarter. Net income still trailed the $306 million posted in the third quarter of 2008.
Revenues in the quarter totaled $4.6 billion, up modestly from the $4.2 billion posted in the second quarter. Alcoa reported net sales of $7.0 billion during the third quarter of 2008.
“The financial and operational measures we took in the first half of the year are having a strong positive impact on our cash position and profitability,” Klaus Kleinfeld, Alcoa president and CEO, told investors and analysts. “Despite unfavorable currency and energy headwinds, our performance this quarter indicates that Alcoa is weathering the economic storm and is in excellent shape to benefit when the market recovers.”
Revenues for the first nine months of 2009 totaled $13.0 billion, compared to $21.2 billion in the first nine months of 2008. The first nine months of 2009 showed a net loss of $874 million, compared to net income of $1.1 billion through the first three quarters of 2008.
In its flat-rolled segment, Alcoa’s revenues increased $45 million from the second quarter through improved orders and significant cost reduction efforts. Shipments for the quarter increased 6 percent sequentially and revenue increased 7 percent.
“Every end market, with the exception of aerospace, was up,” Kleinfeld said. Automotive revenue improved 21 percent from the second quarter. Shipments to distribution were up 10 percent sequentially, though still down 52 percent from the same period in 2008.
“U.S. distributor stock has fallen to all-time lows. The supply chain is really tight, and we believe it’s going to need to be refilled,” Kleinfeld said.
Continued destocking among aerospace customers contributed to a 15 percent decline sequentially in the company’s engineered products sector. Commercial transportation gains helped mitigate losses in aerospace, industrial gas turbine and seasonal impacts.
Capital expenditures in the quarter totaled $370 million, on-target to reach the 2009 goal of a nearly 50 percent reduction from 2008. Alcoa spent $3.5 billion in 2008 and is targeting capital spending of $1.8 billion in 2009. It intends to maintain a lower budget in subsequent years.
In the quarter, the company commissioned its Juruti bauxite mine in Brazil and new lithographic sheet operations in Bohai, China. This follows the opening of a new end and tab line in Russia in late-June.
Officials reported Alcoa is exceeding all the targets of its Cash Sustainability Program, which helped to offset $89 million in negative currency and energy impacts in the quarter. Overhead savings totaled $375 million, 188 percent of the full-year target for 2009, and procurement savings were $1.61 billion, 107 percent of the full-year target. Reductions in working capital have generated $780 million in cash, or 98 percent of the 2009 target of $800 million.
In the second half, there are signs that key markets are stabilizing, Kleinfeld said. Due to low inventories at distributors and rising shipments, regional premiums are improving. Global aluminum consumption is expected to increase 11 percent in the second half of 2009.
“The markets are still extremely distressed, but we’re seeing modest improvement on a sequential basis,” Kleinfeld said.
Breakeven Quarter Suggests ‘Worst Appears to Be Behind Us’
Allegheny Technologies Inc., Pittsburgh, reported net income for third-quarter 2009 of $1.4 million on sales of $697.6 million. This is down dramatically from its net income of $144.1 million on sales of $1.39 billion in third-quarter 2008.
Results for the nine months ended Sept. 30, excluding special charges, show a small profit of $10.9 million on sales of $2.24 billion. This compares to net income of $455.0 million on sales of $4.20 billion in the first nine months last year.
“Looking past the remainder of 2009, the worst appears to be behind us, and we remain confident in the intermediate and long-term growth potential of our core markets,” said L. Patrick Hassey, chairman, president and CEO. “We are having success in the marketplace by developing and expanding strategic relationships with key global customers, and we are well positioned to meet their growing needs as economic conditions improve and our core markets recover.”
During the third quarter, ATI completed several new long-term agreements with key global customers that position the company well for future growth. “ATI’s financial position is strong. Cash on hand was over $826 million at the end of the third quarter, and net debt to total capitalization was 10.5 percent. We achieved gross cost reductions of over $121 million in the first nine months, and expect to exceed our 2009 cost reduction goal of over $150 million,” Hassey said.
He reported that the company’s new titanium and superalloy forging facility began operation in the third quarter and the start-up is going well. The company now expects to begin production at its premium-grade titanium sponge facility before the end of 2009. It also anticipated closing the Crucible asset acquisition, which gives ATI an entry into advanced powder metal products.
In the short term, Hassey expects customers to remain cautious and keep inventories low due to the uncertain global economy. This uncertainty is exaggerated by recent volatility in prices of raw materials, particularly nickel. But looking ahead, he expects ATI’s operating earnings to improve throughout 2010. “We believe 2010 to be a transition year to the next growth cycle in most of our markets, particularly the aerospace and global infrastructure markets,” he added.
Reports Loss But Predicts Revenues Have Bottomed
Carpenter Technology Corp. Wyomissing, Pa., reported a net loss of $9.3 million for its fiscal first quarter ended Sept. 30, down from an income of $25.8 million for the same quarter a year earlier.
“We continue to expect that our revenue level has bottomed this quarter and will improve quarter-to-quarter over the balance of the year,” Gregory Pratt, chairman and interim chief executive officer, told analysts and investors. “While we predict the pace of economic recovery will vary considerably among markets, we are seeing more balanced inventories in certain segments of our business including aerospace engines, power generation and automotive. Our financial goals and expectations remain intact for the year.”
Commenting on various markets, Carpenter executives noted that their aerospace sales totaled $102.9 million in the quarter, down 35 percent compared with the same period a year ago. The decline reflected lower airplane build levels, reductions of inventory in the supply chain and a leaner mix.
Industrial market sales in the first quarter totaled $50.4 million, down 49 percent compared with the first quarter of fiscal 2009, reflecting continuing weak manufacturing demand and lower pricing.
Automotive market sales were $19.4 million, a decrease of 49 percent from a year earlier. As expected, domestic auto production increased in the first fiscal quarter due to the effect of incentive programs and a new model year. Supply chain inventory has been significantly reduced, which should lead to more demand pull-through for materials.
Energy market sales of $12.1 million represented a decline of 77 percent from the first quarter a year earlier. Excess inventories in the supply chain continue to exacerbate an already weak demand for materials used in oil and gas exploration. Inventory levels serving the power generation market have become more stable, which should result in increased demand for Carpenter products, the executives said.
Signs of Recovery Prompt Restarts of Various Mills
ArcelorMittal, the world’s largest steel company, recorded net income for the three months ended Sept. 30 of $900 million, up from a net loss of $800 million for the prior quarter, but well short of the $3.8 billion earned in third-quarter 2008.
Worldwide, sales for the third quarter totaled $16.2 billion, up from the $15.2 billion in the second quarter, but down sharply from $35.2 billion in third-quarter 2008. Despite improved demand, sales remained substantially lower year-on-year due to the global economic crisis, including a steep fall in selling prices.
Steel shipments for the third quarter totaled 18.2 million metric tons, up from 17.0 million tons shipped the prior quarter, but down substantially from 25.6 million tons in third-quarter 2008.
“As anticipated, we have seen the first signs of recovery in the third quarter. In response to this increased demand, a number of our facilities have now been re-started, and we expect fourth-quarter crude steel capacity utilization to be approximately 70 percent. We should continue to see further gradual improvement through 2010, although the operating environment remains challenging,” said Lakshmi N. Mittal, chairman and CEO.
Third-Quarter Loss Shows Improvement
Despite a 40 percent increase in total steel shipments, Nucor Corp., Charlotte, N.C., reported a $29.54 million net loss in the third quarter, partly due to its accelerated consumption of high cost iron units, particularly pig iron, which were purchased prior to the abrupt downturn in the economy late last year.
The third-quarter loss was actually an improvement over the prior two quarters, as the minimill steelmaker reported net losses of $133 million in the second quarter and $190 million in the first quarter of this year. Nucor saw positive net income of $734.59 million in the third quarter of 2008.
Nucor’s net sales also declined considerably in the third quarter, falling 58.1 percent from a year earlier to $3.12 billion.
Not all segments were in the red in the third quarter, said Dan DiMicco, the company’s chairman, president and chief executive officer. Nucor’s bar products business unit has been profitable all year, while its raw material, fabrication and structural beam operations were profitable during the three-month period ending Oct. 3.
“At this point, we are starting to feel a little better about profitability in the fourth quarter,” DiMicco, said, although he admitted there is still a lot of uncertainty with current business conditions. “We will know more once we get into next year.”
While apparent steel demand did increase in the third quarter due to the end of customer destocking, there has been no meaningful “real” improvement in end-use demand, he said. “I believe that real demand is in for a long, slow recovery,” given certain imbalances that created the current economic crisis,” including excessive leverage, credit issues and mercantilist trade abuses.
“But we are not sitting back waiting for a better economy,” said John Ferriola, Nucor’s chief operating officer of steelmaking operations. “We have a number of exciting projects under way...to grow our earning power for the year ahead.”
He noted that Nucor’s new galvanizing facility at its Decatur, Ala., sheet mill began production in the third quarter and is expected to successfully produce to the full width and gauge of its equipment capabilities by the end of November.
The steelmaker also has begun commissioning its second Castrip production facility, located at its Nucor-Yamato mill in Arkansas, and is set to begin commissioning its Arizona wire rod and bar mill in November.
Nucor also is continuing to grow its international footprint with the opening of a sales office in Rio De Janeiro in the third quarter. It plans to open its first Middle East sales office, to be located in Dubai, in the fourth quarter.
Nucor officials have long expected the United States to have a stronger export market going forward given the weakening U.S. dollar and the significant trade and budget imbalances. They maintain that Nucor is well positioned to capitalize on attractive export opportunities given that over 60 percent of its steel production capacity is on deep water.
Exports accounted for 12.5 percent of all Nucor’s shipments in the third quarter and 10.5 percent of shipments year to date. Nucor plans to further leverage its Nucor-Duferdofin joint venture in Italy (with Duferco Corp.), which has allowed the company to supply projects throughout the Mediterranean, the Middle East and Eastern Europe, and could be parlayed into future international steelmaking opportunities.
Due to the financial crisis, all of Nucor’s raw material strategic growth initiatives—including its proposed pig iron facility in Louisiana—were put on hold about a year ago, although conversations are ongoing. In the case of the pig iron plant, the steelmaker is still working on getting the necessary permits, though it wants more clarity on the implications of proposed climate change legislation before proceeding
Steel Dynamics Inc.
Projects Profit for Full-Year 2009
Steel Dynamics Inc., Fort Wayne, Ind., enjoyed its first profitable quarter of the year, reporting net profit of $69 million during the third quarter. The positive quarter followed losses of $16 million in the second quarter and $88 million in the first quarter.
Though the company has lost $35 million on a year-to-date basis, SDI officials believe they will ultimately report a profit for the full year once the fourth quarter is complete.
Net sales in the third quarter totaled $1.17 billion, a 48 percent increase from the previous quarter, though off 54 percent compared to the $2.56 billion reported in the same quarter of 2008. Net sales of $2.78 billion for the year to date were off 59.5 percent from the first three quarters of 2008.
“It’s exciting to be reporting profit in the third quarter of 2009,” Keith Busse, chairman and CEO told investors and analysts during the company’s quarterly conference call.
Busse said the principal driver for the company exceeding its September guidance were higher production and shipping volumes by its flat-rolled division and better than expected performance in metals recycling.
Sequentially, shipping volumes in all segments except fabrication were up in the third quarter, as were selling prices. Steel shipments for the third quarter totaled 1.2 million tons, 41 percent higher than the second quarter.
SDI’s average steel selling price for the third quarter increased $33 per ton, to $627 from $594 per ton in the second quarter. Average scrap cost per net ton charged increased $49 compared to the second quarter.
In the third quarter, the company’s steel operations produced operating income of $128 million, or $105 per ton, while OmniSource made significant strides in earnings growth, resulting in operating income of $50 million during the quarter, the company reported. All its steelmaking divisions, including structural and rail, produced pre-tax profits, though the company’s fabricating operations reported a loss of $3 million due to the continued weakness in nonresidential construction.
“Current business conditions remain relatively steady. Orders for flat-rolled steel products continue to be strong; merchant, specialty and engineered bars are reasonably good; but structural steel backlogs remain weak. Our flat-roll steel business, inclusive of The Techs, continues to run at near full capacity utilization rates, while the bar divisions are running at 60 to 70 percent of capacity,” Busse said.
The company anticipates a slight easing in current operating rates during the fourth quarter, which could result in lower earnings than the third. Factors that could affect fourth quarter results include lower flat-roll steel shipments, due to seasonality coupled with a slight slowing in market momentum, and margin compression in metals recycling due to lower scrap prices.
“There’s some legitimate worry out there we may have cranked up too much capacity too soon,” Busse said. “There’s a big debate over what the steady state level of demand really is and what your operating rate is at any time as you’re trying to refill the pipe. A lot of that euphoria in the third quarter was pipe filling.
“We currently believe that SDI’s second-half earnings will offset first-half losses and foresee the company generating a small profit for the year 2009, a feat few, if any, other steelmakers will accomplish in this very challenging and difficult environment,” Busse said.
That success could fuel more growth opportunities, but Busse said the quiet on the merger front that has characterized the year will continue for the foreseeable future. “There hasn’t been a lot of opportunities out there, and I don’t know that there are going to be a lot of opportunities. There’s some speculation about what Severstal might be doing with some of their assets, but we have no major M&A activity on the horizon.”
Savvy Management Minimizes Year’s Loss
The Timken Company, Canton, Ohio, reported sales of $763.6 million for the third quarter of 2009, a decrease of 43 percent over the same period a year ago. The sales decline reflects weaker demand in many of the company’s end markets and lower surcharges, partially offset by improved pricing. Quarterly income from the company’s continuing operations totaled $7.5 million, down from $129.2 million in the prior-year quarter.
“This quarter’s performance is more about how we’re managing the business than a shift in marketplace trends,” said James Griffith, Timken president and CEO. “Without the benefit of improved volume, we’re yielding better results from structural changes we’ve made, in part from our Project O.N.E. and portfolio management initiatives.”
In recent months, the company signed an agreement to sell the assets of its Needle Roller Bearings business to JTEKT Corp. for $330 million, announced plans to streamline its distribution footprint by consolidating its Ohio and South Carolina distribution centers into a new facility, expanded its ability to offer engineered steel solutions in Asia through collaboration with Daido Steel Co. Ltd., and reached a tentative four-year labor agreement with the United Steelworkers covering 2,300 Canton employees.
During the first nine months of 2009, the company was affected by weaker demand across most of its end markets, partially offset by pricing and cost-reduction initiatives. For the first three quarters, Timken’s sales totaled $2.37 billion, a decrease of 40 percent from the same period in 2008. The company incurred a loss of 56 cents per share from continuing operations for the first nine months, compared with earnings of $2.87 per share last year.
Sales for Timken’s Steel Group, including inter-group sales, totaled $157.9 million during the third quarter, a decrease of 71 percent from the same period last year, with 53 percent fewer shipped tons. The greatest market declines were from the industrial and energy sectors, while light vehicle demand was up slightly compared with a year ago due to consumer stimulus programs in the U.S. The Steel Group incurred an earnings loss of $20.3 million, down from a gain of $133.8 million for the same period a year ago.
For the first nine months, Steel Group sales totaled $541.4 million, down 63 percent from the same period a year ago. Year-to-date, the Steel Group incurred a loss of $60.4 million, which compares to a profit of $267.5 million in the same period last year. Steel Group sales are expected to decline 60 to 65 percent for the year due to lower demand across all market sectors and reduced surcharges.
Looking ahead, Timken forecasts its sales for full-year 2009 will be down 35 to 40 percent from the prior year, principally due to weak end-market demand. Mobile Industries sales are projected to be down 30 to 35 percent for the year, driven by lower North American light-vehicle production and significant declines in heavy-truck builds in North America and Europe. Process Industries sales are expected to be down by 30 to 35 percent, with broad-based volume declines in most end markets, especially heavy industrial equipment. Sales in the Aerospace and Defense segment are projected to increase modestly for 2009, driven by a strong defense sector offsetting softer commercial and civil sectors.
Losses Show Signs of Improving Conditions
While it improved its performance in the third quarter by 22.7 percent over the second quarter, United States Steel Corp. reported another quarterly loss of $303 million. For the year, the Pittsburgh-based steelmaker has lost $1.14 billion and is projecting further losses in the fourth quarter, although executives expect continued improvement in market conditions.
For the third quarter, the company reported net sales of $2.8 billion, an increase of 32 percent from the second quarter, but 61.6 percent behind results in third-quarter 2008.
“Shipment volumes and operating rates for all of our reportable segments increased significantly from the very low levels of the second quarter as we brought several idled facilities online to satisfy increased customer order rates. Our European and Tubular segments had improved financial performance and our Flat-rolled segment’s results were in line with the prior quarter, despite the effects of continued low operating rates and facility restart costs,” U.S. Steel Chairman and CEO John Surma said during the company’s third-quarter conference call.
While utilization rates improved in the third quarter, they remained below average at an estimated 54 percent. The company did incur $65 million in costs associated with startups of its idled mills. Six of its seven mills were running in the third quarter, excluding Lake Erie Works, where the previous labor contract has expired and a new deal has not yet been reached.
During the fourth quarter, the company plans to idle the No. 14 blast furnace at its Gary Works, plus one of two furnaces at its Granite City Works. The facilties will be idled for maintenance work, though the shutdown date is flexible.
“We’ll take two furnaces off sometime during the quarter, de pending on how we see the market developing,” Surma said. “We’ll continue to match steelmaking to demand.”
Overall, the company anticipates fourth-quarter capacity utilization rates to be fairly flat with the third-quarter numbers.
Among its operating segments, U.S. Steel experienced a flat performance in its flat-rolled products division. Improved operating efficiencies, higher shipments and lower inventory write-downs were offset by lower average realized prices, higher raw material costs and the restart expenses. Shipments improved by 50 percent to 2.7 million tons, while average realized prices decreased by 11 percent to $605 per net ton.
“We expect improvement in our overall fourth quarter results mainly as a result of increased demand for flat-rolled products in North America, driven primarily by automotive markets and continued strength in tin mill markets,” Surma said.
The company’s tubular segment reported a reduced operating loss in the third quarter, mainly due to higher shipments and lower inventory write-downs, partially offset by lower average realized prices. Shipments and average realized prices continued to be depressed by the inventory glut. Shipments increased by 64 percent to 151,000 tons, which is still well below historical levels, and average realized prices decreased by 3 percent to $1,474 per net ton.
Surma said tubular inventories throughout the supply chain have come down from their peak earlier in the year, but are still above average. In March, tubular goods had a 16-month overhang, which has been cut to about a year’s worth of product. “We’re moving in the right direction. I can’t tell how quickly,” he said. “Carbon has the largest OCTG overhang, and that’s going to take longer to work through.”
Fourth quarter results for tubular are expected to be comparable to the third quarter as operating levels, shipments and prices remain around prior quarter levels and the company continues to incur carrying costs for idled facilities.
“We remain cautious in our outlook for end-user demand as customer order rates in Flat-rolled and U.S. Steel Europe have decreased from the third quarter, partly due to seasonal slowdowns. We will continue to adjust production to meet our customers’ demand. Despite these concerns and uncertainties, we believe that the U.S. and global economies are in the early stages of a gradual recovery, which has been aided by global stimulus policies and may be supported by continued improvement in credit markets and inventory restocking,” Surma said.
Third-Quarter Financials & Outlook: Service Centers
Even Losses Show Progress
A. M. Castle & Co.
Still Upbeat Despite Third-Quarter Loss
A.M. Castle & Co., Franklin Park, Ill., reported a net loss for the third quarter of $6.3 million, down from net income of $11.5 million in the prior-year quarter. Its net sales totaled $184.0 million for the three months ended Sept. 30, less than half the $388.9 million in third-quarter 2008, reflecting continued weakness in demand as a result of the global recession.
The company’s Metals segment sales totaled $161.8 million in third-quarter 2009, compared to $360.1 million in third-quarter 2008. Total Metals revenue declined 55 percent compared to the prior-year quarter, as tons sold per day declined approximately 49 percent from the record levels in the prior-year quarter. Virtually all products and end markets served by the company were affected by softer demand this fall.
In Castle’s Plastics segment, third-quarter sales were $22.2 million compared to $28.8 million in the prior-year quarter.
“The continued weakness in the overall global economy obviously had a major impact on our activity levels and financial results for the third quarter of 2009,” said Michael Goldberg, president and CEO of A.M. Castle. “During the quarter, we continued to focus on executing our key priorities during the economic downturn,” he added, including a $75 million reduction in operating costs for the year and a $19 million reduction in inventory.
The company is now running nearly all of its domestic businesses on the Oracle computer platform. Goldberg called the transition from its legacy system to Oracle ERP a significant milestone for the company and major competitive advantage for Castle for years to come. “Given the scale and complexity of this initiative, our employees have done exceedingly well in implementing the changes across the entire organization,” he added.
While demand levels remained at historically low levels, Castle executives reported improving macroeconomic trends and signs of stabilization in the third quarter. “Although business remained at very depressed levels in the third quarter, we do have a degree of optimism about the future,” Goldberg said. “Daily sales trends improved sequentially throughout the quarter, and we expect that trend to continue.”
Pointing to recent economic data that shows improvements in industrial production and manufacturing activity, he noted that Castle’s Total Plastics business has always been a reliable leading indicator. “TPI had a good September, and that may be the best indication that the industrial world potentially has begun its long road to recovery,” he said.
Goldberg believes a significant portion of the decline the company has seen since it bottomed out in June was due to widespread destocking, and that much of the improvement it expects in the coming months will be the result of inventory replenishment. “We believe the inventory cycle will have a bigger impact on our results than improved demand over the next few quarters,” he said.
Runs Lean, Cuts Costs
Ahead of 2010 Recovery
Metals USA suffered a modest loss in the third quarter as it continues to prepare itself for the rebound of the domestic steel market. The Houston-based company reported a net loss of $1.8 million during the quarter, compared to $36 million in net income during the same period the previous year. It reported a net income of $13.8 million during the second quarter of 2009.
The company’s third-quarter net sales were well behind the same figures in 2008. Metals USA reported net sales of $255.4 million during the quarter, a 58.7 percent decline. Net sales in the second quarter totaled $267.8 million.
In Metals USA’s flat-rolled and non-ferrous segments, third-quarter shipments declined 29 percent and averaged realized prices were down 33 percent from the year-earlier period. Shipments were mostly flat compared to the second quarter. For the year, shipments have declined 31.6 percent.
Shipments were off nearly 47 percent in its plates and shapes group compared to the third quarter of 2008, and were down slightly from the second quarter. Shipments were off 45 percent for the year.
Emerging from the downturn, the company is determined to run leaner inventories for the foreseeable future. “We continue to work out of a much smaller inventory, and have no plans to change that as we stand prepared to benefit from the market rebound when it occurs,” said Lourenço Gonçalves, chairman, president and CEO. “We believe we are going to take care of business in a new way that will allow us to carry fewer tons as we go.”
Such an attitude is not limited to Metals USA. The entire industry is planning to work from smaller inventories, a product of the mills’ irresponsibility with respect to prices, he claims.
“They showed no respect to the fact we were carrying a lot of tons and allowed prices to deteriorate to a crazy point. Now it’s payback time,” he said. “Restocking is not coming. Service centers will be working leaner for a long time.”
The lean inventory commitment is just one of the cost-cutting measures the company has undertaken during the downturn. Metals USA reduced its workforce by 870 employees, 30 percent, since September 2008. It has also used the recession as a catalyst to consolidate facilities, reposition existing equipment in other locations and other cost-containment measures. Gonçalves said the steps have removed almost $50 million in quantifiable annual costs from the company.
Another change for the company is the inclination to look outside its domestic customers to grow the business. Citing the weak dollar, Gonçalves said Metals USA has begun to seek opportunities in the export market. “The first results are encouraging. We believe we can make exports an important element of our business.”
Looking forward, Gonçalves anticipates a significant increase in demand following the typical seasonal slowdown in the fourth quarter. He estimated demand could increase 20 percent in 2010—which would still leave it below historical averages.
“Volume growth is not entirely predicated on service center restocking. With the exception of nonresidential construction, we’re starting to see a pickup in inquiries. Our customers are starting to see some momentum in their orders books. And the stimulus has yet to materialize as a catalyst to steel consumption—but it will.”
But, he cautioned, the mills must be disciplined while managing through the growth in demand. “It’s absolutely critical that domestic supply be kept in balance with steel demand. Time and again mills have been fast to bring production back, and faster to lower prices.”
Return to Black Wraps Up Three Tough Quarters
Olympic Steel, Inc., Cleveland, Ohio, saw a small profit in the third quarter after suffering losses throughout the year.
The service center reported third quarter net sales of $121.6 million, a 63.7 percent decrease from the $335.2 million for the third quarter of 2008. Tons sold in the recent third quarter decreased 32.2 percent from the previous quarter to 181,000. Third quarter 2009 net income totaled $671,000, down sharply from $24.2 million for last year’s third quarter.
For the first nine months of 2009, Olympic’s net sales totaled $384.9 million, a 60.5 percent decrease from the same period in 2008. Tons sold for the period decreased 43.7 percent to 527,000. The result was a net loss for the company in the first three quarters totaling $58.6 million, down from a net income of $66.9 million in last year’s first nine months.
“We are pleased to return to profitability in the third quarter, and to report an exceptionally strong balance sheet,” said Michael Siegal, Olympic chairman and CEO.
The company is now debt free and has accumulated a cash balance as it has cut operating costs by 44 percent compared with third-quarter 2008. Its inventories are in line and turning at a healthy rate above five times per year. “We are benefiting from large OEM customers re-sourcing to quality suppliers during this economic downturn. We expect to grow our market share when steel demand recovers by serving our customers from positions of strength,” Siegal added.
Results Show Improvement, But Market Concerns Linger
Reliance Steel & Aluminum Co., Los Angeles, reported net income of $41.8 million for the 2009 third quarter, an improvement over the previous quarter when the company had a net loss of $5.8 million, but still well below the $152.5 million in income reported in last year’s third quarter.
Sales for the 2009 third quarter totaled $1.24 billion, down from 2008 third-quarter sales of $2.57 billion, and flat with 2009 second-quarter sales of $1.24 billion.
For the nine months ended Sept. 30, Reliance’s net income amounted to $56.1 million, down from a net income of $416.5 million for the same period in 2008. Sales for the 2009 year-to-date period totaled $4.04 billion, down 39 percent from 2008 nine-month sales of $6.58 billion.
In the most recent third quarter, Reliance sold 26 percent fewer tons than in third-quarter 2008, though its tons sold were off less than 1 percent from the previous quarter. Average price per ton sold was down 34 percent compared to the 2008 third quarter and flat with the 2009 second quarter. For the nine months ended Sept. 30, tons sold were down 13 percent and average pricing was down 29 percent compared to the same period of 2008.
Carbon steel sales represented 54 percent of Reliance revenues in third-quarter 2009. Aluminum sales were 19 percent; stainless steel sales were 14 percent; alloy sales were 7 percent; other sales were 4 percent; and toll-processing sales were 2 percent.
In total, Reliance sold about 866,000 tons of metal during the recent third quarter, down from 873,000 tons in the second quarter. By major product group, the service center giant sold 727,000 tons of carbon steel products, down 1.8 percent from the prior quarter with average selling prices down 2.8 percent. Aluminum sales for the period totaled 47,000 tons, up 1.2 percent from the second quarter with average prices down 1.8 percent. Stainless steel sales were about 42,000 tons, up 5.5 percent from the prior quarter with average prices up 6.6 percent. Alloy sales were 33,000 tons, up 5.5 percent with prices down 2.5 percent.
“The 2009 third-quarter results improved substantially from the 2009 second quarter mainly due to higher gross profit margins,” said David Hannah, Reliance chairman and CEO. “Because of mill price increases for most of our products during the third quarter and our significant inventory reductions over the past 12 months, our inventory costs on hand are now more in line with current replacement costs, allowing us to improve our gross profit margins from the historically low margins experienced in the 2009 second quarter. Demand from our customers improved slightly during the quarter from the low levels experienced in July.”
“Our aerospace businesses continue to be the top performers,” Hannah continued. “We saw some increased activity in the energy and oil and gas sector after it slowed a bit in the second quarter. We have also seen some improvement in the electronics and semiconductor areas that we believe will continue into next year. Business levels relative to private commercial and industrial construction are the most challenging, and we do not see any improvement in the near term. We remain hopeful that some infrastructure work will begin to appear, as we have seen some increased quoting activity in that area.”
While Reliance executives are pleased with the improvement in gross margins, they remain concerned about the uncertainty of business activity in the seasonally slower fourth quarter, as well as downward pressure on pricing in the coming months.
“We are pleased with our results in the third quarter as compared to what took place in the second quarter,” added President and COO Gregg Mollins. “Average daily sales and volume hit bottom in July and slowly began to inch its way up in the August-September time frame. It is way too early to call this a trend, especially heading into the fourth quarter, but as they say, ‘pray for the best and prepare for the worst,’ and that is what we intend to do.”
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