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8-2010 Second-Quarter Report and Outlook: Service Centers
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Earnings Impress

By the Staff of Metal Center News

In their latest conference calls with analysts and investors, service center executives reported dramatically improved sales and profits compared to last year’s second quarter. Prospects for the third-quarter remain uncertain, however.

A.M. Castle
Specialty Metals Distributor Posts Second-Quarter Profit

A.M. Castle & Co., Franklin Park, Ill., returned to profitability in the second quarter after four quarters in the red. The specialty metal and plastics distributor reported a second-quarter profit of $400,000, up from a net loss of $5.5 million during last year’s second quarter.

Castle’s net sales were $240.1 million in the quarter, a 23 percent improvement compared to the same period of 2009. Sales were also up from the $223.0 million recorded during this year’s first quarter.

“I am pleased to report a return to profitability in the second quarter. Sales activity and overall business conditions in the end-markets we serve improved from first-quarter levels, particularly in the general industrial and oil and gas markets, where demand for alloy bar and carbon bar and tubing strengthened,” Michael Goldberg, president and CEO of A.M. Castle, told analysts and investors during the company’s quarterly conference call.

The company’s metals segment sales were $213.3 million in the second quarter of 2010, compared to $174.1 million last year. Average tons sold per day increased 20.6 percent compared to the second quarter of 2009 and increased sequentially by 3.5 percent from the first quarter. Gross profit margins improved from 24.2 percent in the first quarter to 25.7 percent in the second quarter.

“In the second quarter, we leveraged the improved demand environment and our improved inventory position into stronger margin performance compared to the first quarter of this year. And if demand continues to improve, we would expect our gross margins to continue to improve in the second half of this year,” Goldberg said.

With destocking over in all but the aerospace sector, activity in the second quarter should be seen as consistent with real demand, Goldberg said. Moreover, demand should remain stable in the second half of the year.

The aerospace sector continues to pare down an inventory overhang, Goldberg said, estimating the destocking will persist until late 2010 or early 2011.

During the second quarter, the company expanded its presence in the oil and gas sector with the opening of a facility in Lafayette, La. Castle’s oil and gas business was only marginally hurt by the Gulf oil spill, officials said, and activity has already started to pick up. “Now that the well closure appears to be complete and customers in the Gulf have been able to redeploy rigs in other areas, sales appear to be returning to pre-spill levels,” Goldberg said.

Looking forward, Goldberg said the company’s forecast for the balance of the year will be similar to the second quarter. “While we expect the economy to continue to recover, the sequential rate of recovery has appeared to moderate as we compare our volume activity to the first quarter of this year. At this point, we expect demand levels for the balance of the year to remain steady from second-quarter levels. Longer term, we remain optimistic about our opportunities for growth in our key target markets including aerospace, oil and gas, energy and general industrial equipment.”

Metals USA
Newly Public Company Reports Earnings Increase

Sales and profits grew for Metals USA Holdings Corp., Fort Lauderdale, Fla., during the second quarter. The newly public company reported sales revenue of $335.0 million and net income of $2.5 million during the three-month period.

The net sales were an increase of 16.4 percent compared to the $287.9 million reported during the first quarter. Sales were up 25 percent compared to the $267.8 million in the same period of 2009.

Net earnings improved from the $100,000 in profit posted during the first quarter. In the same period of 2009, Metals USA reported net income of $13.8 million.

“The second quarter was a decisive one for Metals USA. We executed our initial public offering, significantly improved our balance sheet and purchased a great addition to our company with J. Rubin,” said Lourenço Gonçalves, chairman, president and CEO. “Our inventory, strong balance sheet and correct attitude toward the business environment will continue to allow Metals USA to capitalize on new growth opportunities.”

The company’s shipments increased 9 percent from the first quarter to 270,000 tons. Shipments were up 19 percent compared to the same quarter in 2009.

Despite that, Metals USA’s inventory tonnage was only 9 percent higher than it was at the end of 2009, evidence of its commitment to inventory management, Gonçalves said.

“After two solid quarters in an improving market, I can say with confidence that our inventory management processes, which we worked hard to optimize in the downturn, continued to work well. As volumes have rebounded, we have not had to rebuild our working capital to levels many would have expected, and we are well positioned to support the ongoing needs of our customer base,” he said.

While the company’s shipments continued to trend upward in all markets except nonresidential construction, Gonçalves said several barriers are working against greater steel consumption in the United States. Domestic mills are not giving users confidence they will hold prices stable, with the recent softening in prices keeping many companies on the sidelines, he noted.

Furthermore, “the average business owner’s operating mentality has been seriously affected by the economic crisis of 2009. End-users no longer trust their own perceptions and are overly cautious to avoid the conditions they found themselves in 12 to 18 months ago,” he said.

Gonçalves believes the recent dip in steel prices will be short-lived—or the mills will. The increasing costs of raw materials will force domestic mills to raise prices. “If they do not allow prices to go up, what we’ll see is a repeat of the dire straits the industry was in 10 years ago. I do not believe the mills will allow that to happen. It’s a decision the mills will have to make, because the cost pressure is real,” he said.

He also believes the domestic steel industry must remove some capacity to maintain profitability. “The mills continue to push China to reduce their installed capacity, but they don’t reduce installed capacity right here where we have a clear problem. It’s much easier to blame China to take the attention away from where the problems are.”

While the J. Rubin acquisition was the company’s first of the year, Gonçalves expects to complete at least one more before the end of the year. “Many smaller service center companies are experiencing difficulties, and even bigger companies at this point are shutting down locations. We believe there are many fine companies that possess the attributes we are looking for in acquisition candidates. Specifically, we are interested in historically profitable companies with a defensible niche, operated by good management teams that want to remain in business and see the benefit of being a member of the Metals USA franchise.”

Olympic Steel
First-Half Profits, Credit Give Olympic Resources to Grow

Olympic Steel Inc., Cleveland, Ohio, reported second-quarter 2010 net income totaling $3.3 million, up from a net loss of $33.8 million in last year’s second quarter. Net sales for the quarter totaled $212.8 million, a 73.8 percent increase from the $122.4 million in second-quarter 2009. Tons sold in the second quarter increased 45.2 percent to 252,000 from 174,000 in the second quarter of 2009.

First half 2010 net income totaled $5.0 million, up from a net loss of $59.3 million for last year’s first half. Net sales for the first half totaled $380.7 million, a 44.6 percent increase from the $263.3 million for the first half of 2009. Tons sold in the first half of 2010 increased 37.2 percent to 474,000 from 345,000 in the first half of 2009.

“We are pleased with our second-quarter results, and the sequential improvements in sales and earnings over the first quarter,” said Chairman and CEO Michael D. Siegal. “Our second-quarter shipments increased by 14 percent over the first quarter of 2010, and our shipments in the first half of 2010 increased year-over-year by 37.2 percent, nearly doubling the market increase in total steel shipments of 19.1 percent, as reported in the Metals Service Center Institute’s Market Activity Report. Our balance sheet remains exceptionally strong.”

Olympic recently closed on a new $125 million, five-year loan facility that provides the company with greater flexibility to grow the business, he added. “The new facility provides Olympic with a favorable capital structure to grow through greenfield locations and acquisition opportunities. We expect to invest in growth initiatives in the second half of 2010, despite normal third-quarter seasonal market softness and the accompanying price pressures that follow.”

Reliance
Sales Up 30 Percent in Second Quarter

Reliance Steel & Aluminum Co., Los Angeles, reported net income of $61.6 million during the second quarter, a reversal of fortune from the same quarter last year. In the second quarter of 2009, North America’s largest service center company reported a rare loss of $5.8 million.

Sales for the quarter totaled $1.62 billion, a 30 percent increase from the same three months of 2009. Sales were also up 11 percent from the first quarter’s $1.45 billion.

For the six months, net income amounted to $106.2 million, compared to a net income of $14.3 million for the first half of 2009. Sales for the 2010 six months were $3.07 billion, up 10 percent from 2009 six-month sales of $2.8 billion.

“Business conditions continued to improve at a modest rate, as we had anticipated. Overall, we were pleased with the quarter’s results. Our earnings improved 38 percent from the 2010 first quarter due to improved demand and metal pricing, with our expenses remaining fairly steady,” said David H. Hannah, chairman and CEO.

Reliance sold 951,000 tons during the second quarter, up 9 percent from the same quarter in 2009 and a 4 percent improvement from the first quarter. Average prices per ton sold in the second quarter were up 19 percent compared to second-quarter 2009 and up 8 percent compared to the first quarter. For the second quarter, carbon steel sales were 52 percent of net sales; aluminum sales were 18 percent; stainless steel sales were 15 percent; alloy sales were 8 percent; other sales were 4 percent; and toll processing sales were 3 percent.

Hannah noted that metals prices softened during the second quarter and may decline further in the third. However, he doesn’t expect the declines to cause major issues for the supply chain.

“Carbon steel prices over the past few months have softened in all products, but are still at higher price levels compared to the first of the year. This was no big surprise as the dollar strengthened and imports increased during the second quarter. We believe the domestic suppliers have done a good job managing the pricing side and exercising discipline. We do not expect any significant discounts, like the ones we experienced in 2009, and feel confident we can manage our way through whatever conditions exist,” he said.    

Among end markets, Hannah said agricultural equipment, infrastructure rebuild, bridge construction, barge man-
ufacturing, and electronics and semiconductor were performing well, while power, transmission towers and alternative fuel projects were improving.

“The one market that is still very weak is the one that everyone talks about, the nonresidential construction market. We wouldn’t even say that it has gotten any better, but the weakness seems to have leveled out, or at least we are close to the bottom,” Hannah said.

Reliance, one of the prominent players in the consolidation of the service center industry, has not made any major acquisitions this year, but anticipates some deal making. “I think there is some consideration for the anticipated increase in tax rates the first of the year. If they wait, they may be able to sell their business for a little bit more next year, but they may net a little bit less because of the increase in taxes. So people are thinking about that. I think [activity] is going to pick up and we should start to see some opportunities.”

In contrast, during the quarter, Reliance shut down its unprofitable Delta Steel facility in Morgan City, La. Reliance had acquired the operation four years ago to get into the shipbuilding market.

Worthington
Processor Finishes Fiscal Year in the Black

Worthington Industries Inc., Columbus, Ohio, reported net earnings of $33.1 million during the company’s fourth quarter, a dramatic improvement from the $13.7 million loss posted during the same period in its previous fiscal year.

Net sales for the fourth quarter were $626.4 million, a 33 percent increase from the comparable quarter in 2009, primarily due to increased volumes in the company’s steel
processing and pressure cylinders
segments.

“I am very pleased with our strong fourth quarter results,” said John P. McConnell, chairman and CEO. “The recession has made the past two years very difficult, but I believe we are a better company today because of the way we have responded. While our sales were down compared to last year, we improved our bottom line. We are growing the profit potential of existing businesses, investing in higher-value-added businesses, and working to reduce our earnings volatility.”

For the fiscal year ended May 31, the company posted net earnings of $45.2 million, driven by the strong fourth quarter. During the previous year, Worthington reported a net loss of $108.2 million.

Sales were down 26 percent from the prior year to $1.94 billion, primarily due to the reduction in sales volumes in the metal framing segment and a 24 percent decrease in the average market price of steel.

“Steel processing continues to show marked improvement in its operations, despite lower but improving volumes. Pressure cylinders had a very strong quarter in North America across many of its product lines with some modest improvements showing up in results from the European operations. Worthington Industries metal framing has worked diligently to remain cash neutral while market conditions continue to deteriorate,” he said.

Steel processing’s net sales of $349.6 million were up 95 percent or $170.5 million over the prior-year quarter. Higher volumes increased sales by $146.9 million, while higher average selling prices increased sales by $23.6 million. Sales volumes grew 74 percent over the prior-year quarter and 26 percent vs. the third quarter due to increased sales to the automotive, agricultural and construction markets and the contribution from the Gibraltar strip steel assets acquired in February 2010.

Steel processing’s mix of direct vs. toll tons processed was 58 percent to 42 percent during the quarter, the same as the year-ago quarter. Operating income improved $50.4 million to $28.3 million, from the prior year’s operating loss of $22.1 million. Higher spreads and volumes offset by increased variable manufacturing expenses drove the increase. Margins continue to benefit from better inventory management and operating improvements implemented as part of the company’s ongoing transformation plan, Worthington reported.

Pressure cylinders’ net sales of $144.8 million were up 12 percent from the year-ago quarter. A 20 percent increase in net sales in the North American operations was partially offset by an 18 percent decrease in European operations.

“We began to recover from the global recession this fiscal year, rebounding from the only year with an earnings loss in company history in fiscal year 2009,” McConnell said. “We have optimized our existing businesses and captured growth opportunities that fit our strategy. As we begin our new fiscal year, we will stay focused on growing the business both organically and through new acquisitions. We believe the economic environment in which we operate will continue to improve, though not linearly, over the next 24 months.”

  
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