Distributors Delighted 2009 is in the Past
By the staff of Metal Center News
In their year-end reports, publicly held service centers express confidence in current market trends after a difficult 2009.
Despite Loss, Olympic Pleased with Progress
Olympic Steel, Cleveland, Ohio, reported a loss of $61.2 million for 2009, following an unprofitable fourth quarter. After turning a modest profit in third-quarter 2009, the company returned to the red in the fourth quarter with a loss of $2.6 million.
Net sales during the fourth quarter totaled $138.5 million, a 45.4 percent decrease from the $253.6 million reported during the same three months of 2008. Net sales for 2009 totaled $523.4 million, down 57.4 percent from the $1.23 billion the previous year.
“We are pleased with the progress we made in a very challenging 2009. We enter 2010 from a position of strength. We have an exceptionally strong balance sheet, as our core discipline of cash flow and working capital management allowed us to repay all of our bank debt in 2009,” Chairman and CEO Michael D. Siegal told investors and analysts during the company’s quarterly conference call last month.
Tons sold in the fourth quarter decreased 15.1 percent to 194,000 compared to the fourth quarter of 2008. For the year, tons sold were down 38.1 percent to 721,000.
The company’s sales volume improved in the fourth quarter compared to the third quarter of 2009, a trend Olympic expects to continue in 2010.
“Sales and margins are expected to improve, as steel prices have continued to increase since late fourth quarter. We expect to profitably grow our market share in 2010 by serving our customers from a position of strength.”
Over the course of 2009, Olympic Steel was able to get its inventory turns down to its preferred rate of five per year, cutting inventory by $144 million or 56 percent. Other changes during the year included closing a leased facility in Philadelphia, absorbing the business in other plants, and relocating a Michigan facility to Moses Lake, Wash., to accommodate a customer. Olympic also added aluminum to its product lines during the middle of the year, while bringing on industry veterans to manage the material.
“A lot of the same consumers who use some of our cold-rolled products are also buyers of aluminum. With expertise we brought on board, it gives another dimension to supply the customer and be more supportive of their manufacturing process,” Siegal said.
The changes, and bottom line improvements, will set the company up to expand in 2010 and the years to come, Olympic officials believe.
“A strong balance sheet puts us in a unique position to grow while market prices and valuations for assets and businesses remain depressed. We expect to grow our market share by exploring new geographic locations in 2010, either by acquisition or greenfield investments, and by increasing our product portfolios in both stainless and aluminum,” Siegal said.
Though merger and acquisition activity has cooled over the past year and a half, the company anticipates activity will resume in 2010.
“We believe there will be opportunities to acquire service centers and fabricators as the economic recovery takes shape,” said President and Chief Operating Officer David Wolfort. “We expect smaller service centers to struggle to keep pace with expanding working capital requirements, customers’ credit constraints and limited bank availability. We believe this environment presents us with opportunities for market share growth and favorably priced investments.”
The company is also encouraged by the direction of the market, believing that improvements in shipments are the product of real demand and not simply restocking through the supply chain.
“We are actually seeing increases in manufacturing and finished product sold by our customers. We are fully convinced we are midway through a recovery and probably have the balance of this year before we go into the infancy of an expanding economy, either at the tail end of this year or next year,” Wolfort said.
Strong Finish to ’09 for Market Leader
Reliance Steel & Aluminum Corp., Los Angeles, reported net income of $148.2 million for the year ended Dec. 31, down from a record net income of $482.8 million in 2008. Sales for 2009 totaled $5.32 billion, down 39 percent from record 2008 sales of $8.72 billion.
Reliance sold 3.52 million tons of metal during 2009 at an average price of about $1,500 per ton, compared to 4.16 million tons at an average price of about $2,100 for 2008, reported Chairman and CEO David Hannah during last month’s quarterly conference call with analysts and investors.
“Our 2009 fourth-quarter operating results were a welcome relief compared to the prior three quarters,” Hannah said. “Overall, compared to the 2009 third quarter, our average pricing increased 5 percent and tons sold decreased only 3 percent, which was better than we expected given the seasonal pressures we typically experience in the fourth quarter.”
Sales for the 2009 fourth quarter totaled $1.27 billion, down 41 percent from 2008 fourth-quarter sales of $2.14 billion, but up 2 percent from the 2009 third quarter. For the fourth quarter, net income amounted to $92.1 million, up 39 percent compared with net income of $66.3 million for the same period in 2008, and up 120 percent compared to net income of $41.8 million for the 2009 third quarter.
Carbon steel tons sold in 2009 totaled 2.96 million, down 13 percent from 2008. However, excluding the PNA Group companies, which Reliance owned for only five months in 2008, its sales of carbon steel were down 33 percent. Aluminum tons sold of 187,000 were down 22 percent, stainless tons sold of 160,000 were down 17 percent, and alloy tons sold of 144,000 were down 42 percent.
From a pricing perspective, stainless steel prices showed the most strength in the fourth quarter, up 12 percent from the third quarter. Stainless shipments showed the largest decrease, however, down 9 percent. Alloy products tons sold were up the most for the quarter at 11 percent, with pricing flat. Carbon steel shipments were down 4 percent, while pricing was up 5 percent. Aluminum shipments were up 1 percent with pricing up 1 percent.
“Our aerospace businesses continued to be the top performers, followed closely by toll processing, the energy and oil and gas sector, and an improving electronics and semiconductor market,” said Hannah. “We expect these markets to be our best performers again in 2010.
For the past year, Reliance has focused on maximizing cash flow through stringent working capital management, paying down debt and reducing expenses. With about 60 percent of its expenses personnel-related, the company reduced its workforce by 16 percent in 2009. Since September 2008, it has cut 22 percent or almost 2,500 workers from its payroll. Over the same period, the company also reduced its inventory by $1.4 billion.
“As we enter 2010, we are a financially stronger and much leaner company than a year ago. We anticipate that demand overall will recover slowly as the year progresses. We also expect pricing to stay at or near current levels at least through the 2010 first quarter,” Hannah said.
“I think it is fair to say we are happy to have 2009 behind us,” added Gregg Mollins, Reliance president and COO. “2009 was a true test of our company’s ability to react to rapid and significant changes in both demand and pricing in virtually all our product and end-use markets. Fortunately, we believe the worst is over and we feel more optimistic about business conditions going forward.”
Pointing to a few bright spots in the fourth quarter, Mollins noted that some industries performed better than anticipated. There was improvement in bridge building, barge manufacturing, tank builders and infrastructure rebuild. Aerospace, in particular military and defense, continued to do well. Electronics and semiconductor equipment manufacturers are expected to remain busy at least through the first half of 2010. “Nonresidential construction continues to lag, and we do not expect this to change any time soon,” Mollins added.
As for pricing in 2010, carbon steel prices on most products have gone up. Scrap, iron ore and coking coal have all experienced increases since the first of the year. Import offerings remain weak. “We are somewhat concerned about the three blast furnace restarts that are coming online in North America and their affect on supply and demand fundamentals,” Mollins said. “All the more reason to focus on inventory turns to minimize devaluation of our cost of goods, should pricing decline.”
Asked about industry consolidation, Hannah said Reliance has not been involved in any transactions lately, though it continues to talk with potential acquisitions. Service center owners would not want their businesses valued on the basis of recent results, so there is little activity at present. But he anticipates some buying opportunities in the second half of the year. “Our expectation is that as 2010 continues to improve, people will be more comfortable showing their results. From a financial standpoint, we certainly have the capability and the balance sheet to support our continued M&A activity. We will still focus on well-run companies with good management teams,” Hannah said.
Russel Metals Posts Quarterly, Yearly Loss
A fourth-quarter loss of $23.8 million by Russel Metals contributed to a losing year for the Canadian service center company. For the full year, the Mississauga-based company reported a net loss of $87.4 million, compared to net earnings of $217.6 million in 2008.
Revenues for the fourth quarter of 2009 totaled $411.4 million, a decrease of 48.6 percent from fourth-quarter 2008 revenues of $800.9 million. Revenues were approximately the same as the third quarter of 2009.
“I am glad 2009 is behind us. Early 2010 activity levels have increased for both our metals service center and energy tubular products operations compared to the end of 2009,” said Brian R. Hedges, president and CEO. “The mill price increases announced for the first quarter of 2010 have firmed pricing in the market. Our capital structure is well positioned to support growth during 2010.”
Revenues in the company’s service centers segment decreased 44 percent to $224.2 million for the fourth quarter of 2009 compared to the fourth quarter of 2008, and decreased 9 percent compared to the third quarter of 2009. The segment did report an operating profit of $6.7 million in the fourth quarter, behind the $18.1 million in the same quarter the previous year and the $12.4 million in the previous quarter.
The company is seeing its greatest strength in its flat-rolled products. “Right now flat-roll is picking up for a lot of reasons,” Hedges said. “The spread between coil and plate is tighter than it’s ever been. I don’t know if that’s going to see a widening, because I don’t know that non-residential construction is going to be all that strong.”
Revenues for Russel’s energy tubular products segment dropped 50 percent to $139.7 million for the fourth quarter of 2009, compared to $282.2 million for the fourth quarter of 2008. Revenues increased 27 percent compared to the third quarter 2009 due to a few large, low-margin orders. Low natural gas drilling activity continued into the fourth quarter of 2009. Operating profits excluding inventory write-downs totaled $1 million for the fourth quarter of 2009, compared to operating profits of $39.0 million for the fourth quarter of 2008 and $5.7 million for the third quarter of 2009.
Among its energy segments, Russel has highest hopes for its U.S. tubular products, as natural gas drilling has picked up. In contrast, gas prices in Canada have not increased to the point they will spur more drilling in Alberta. Some larger oil sands projects, however, have begun to resume, said company officials.
Russel’s steel distributors segment saw a decline in revenues of 61 percent to $44.7 million for the fourth quarter of 2009, compared to the fourth quarter of 2008, and 18 percent compared to the third quarter of 2009. Operating profits excluding inventory write-downs totaled $1.9 million for the fourth quarter of 2009, compared to $19 million for 2008 and $7.6 million for the third quarter of 2009.
Hedges is encouraged by the improving market conditions entering 2010. “For the most part, the price increases have stuck. A couple of flat-roll and plate prices may be as high as they are going to go, but all prior increases are sticking,” Hedges said. “The real question is the demand increase. Everybody is seeing, and MSCI numbers are showing, a slight increase in January. How strong? That is hard to say. It doesn’t have a lot of legs under it yet.”
One consequence of the increasing steel price is the greater attractiveness of import offerings. Hedges noted that the spread on imports is beginning to reach the point where it makes sense for North American service centers to “move the product in.”
Russel forecasts capital expenditures of nearly $19 million in 2010, which will be comparable to its 2009 outlay. The company remains committed to expansion, more likely through acquisitions than greenfield projects. Hedges said the company will look to expand its U.S. service center holdings around its JMS footprint in the Southeast, while also looking for opportunities in its energy sector. “That’s pretty depressed right now, so it’s a good time to buy assets.”