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Third-Quarter Report & Outlook: Service Centers

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Demand Sputtering as Year Winds Down Service centers earnings pressured by tough third-quarter business conditions. A.M. Castle & Co. Castle Reports Profitable Third Quarter A.M. Castle & Co., Oak Brook, Ill., returned to profitability in the third quarter, posting net income of $3.2 million during the three months ended Sept. 30. The distributor of specialty metals and plastics had reported a net loss of $3.0 million the previous quarter. Net earnings were off 7.8 percent from third-quarter 2011. Castle’s net sales during the quarter totaled $304.0 million, an increase of 3.0 percent from the same period in 2011, but down 7.7 percent from the previous quarter. “We made progress toward our goal to improve operating margins,” said Scott Stephens, vice president-finance and chief financial officer, who also served as interim CEO during the third quarter. “Through strong gross material margin execution and effective cost management, we achieved the third-quarter profit levels that we had anticipated, despite external headwinds, including declining scrap and commodity prices and continued uncertain customer demand.” In the company’s Metals segment, third-quarter net sales of $272.4 million were 3.0 percent higher than last year, primarily due to the acquisition of Tube Supply in December 2011, which contributed net sales of $39.9 million. Metals segment tons sold per day, excluding Tube Supply, declined 9.2 percent in the third quarter versus third-quarter 2011. “Most key end-use markets experienced softer demand, as customers adjusted their inventory levels due to a more cautious outlook,” Stephens said. However, volumes increased by 8.5 percent from July to September, suggesting a strengthening in the markets. “We remain cautious heading into the fourth quarter, which has historically been seasonally slower for the company. Nevertheless, we expect daily sales in the fourth quarter of 2012 to be comparable to third-quarter levels and expect gross material margins in the fourth quarter of approximately 27 percent,” Stephens said. “We continue to be optimistic about our global growth opportunities in our targeted end markets, and we are committed to expanding our business as we focus on cost management and improved operating efficiency for the balance of 2012 and into 2013.” Just prior to quarter’s end, A.M. Castle’s board of directors hired Scott J. Dolan to serve as the company’s president and CEO. "Scott Dolan possesses the qualities we sought in a CEO to execute A.M. Castle's strategy, engage our employees and deliver improved results for shareholders," said Brian P. Anderson, chairman of the board. Dolan, who most recently worked as a vice president for the combined United and Continental Airlines, said he is in the process of reviewing the entire company from top to bottom. “I plan to evaluate all aspects of the business over my first 90 days, and act very quickly to implement process improvements, organizational changes and an overall execution culture that will enable us to drive performance,” he said. Also during the quarter, Castle’s board dealt with reports of a possible takeover from the Platinum Equity group, a minority shareholder. Castle’s board determined to rebuff any attempts from the private group. “We evaluated Platinum’s stated intentions and the strategic alternatives available to our company. Based on this assessment, the board determined it is in the best interest of Castle and its shareholders to pursue Castle’s business plan as a standalone entity,” said Anderson. Olympic Steel Olympic Sales, Profits Decline Net sales and income dipped for Olympic Steel during the company’s third quarter. The Cleveland-based service center company reported net sales of $342.6 million, down 1.7 percent from the same period in 2011 and 6.7 percent from the previous quarter. Net income during the third quarter totaled $1.6 million, down from the $6.1 million reported in the year-ago quarter and the $4.5 million in the previous quarter. For the year to date, Olympic’s net sales increased 15.9 percent to $1.1 billion, in large part due to the July 2011 acquisition of Chicago Tube & Iron Company. Net income for the first nine months declined almost 50 percent to $12.4 million. “Margin pressure persisted during the third quarter and nine-month period, reflecting lower steel pricing versus the prior year's comparable periods. In addition, higher operating expenses—primarily associated with ongoing expansion projects—were incurred during the current year,” said Chairman and CEO Michael D. Siegal during the company’s quarterly conference call with investors and analysts. Third-quarter and nine-month tonnage volumes improved for the company’s flat-rolled, tubular and pipe products, partially offsetting the lower margins. Volume in the flat-rolled segment increased more than 5 percent during the third quarter to 280,000 tons. Volume increased 3 percent to 894,000 tons sold for the first nine months of 2012. As a percentage of net sales, consolidated gross margin contracted slightly during the third quarter to 19.3 percent versus 19.5 percent in the second quarter of this year and 19.4 percent in the third quarter last year. “While our shipments improved in the third quarter and we gained market share, the supply side pressures continue, resulting in declining steel prices and lower margins, especially in the carbon and stainless flat-roll areas. The fourth quarter will be impacted by the expected year-end seasonal weakness, fewer shipped days and potential disruptions associated with Hurricane Sandy,” said President and Chief Operating Officer David Wolfort. Olympic reported improvements in its inventory turns during the third quarter to 4.3 times, compared to 4.0 times at the end of the second quarter. “We still have some room to improve, as we're targeting a return to our historical turnover rate of closer to five times. We did reduce our inventory in the third quarter of 2012 by almost $24 million,” Chief Financial Officer Richard Morabito said. Total capital spending in 2012 is anticipated to be approximately $25 million for the full year. In 2013, Olympic’s capital expenditures are expected to decrease below depreciation expense, which is at an annual run rate of approximately $20 million. Olympic’s biggest expense over the past year-plus is the new temper mill in Gary. Olympic officials say the ramp-up there is going much faster than with its other two temper mills. The mill is operating at about 65 percent of its capacity after running its first product in December. Russel Metals Russel’s Earnings Dip Despite Higher Revenues Russel Metals Inc., Mississauga, Ont., reported earnings of $23 million during the company’s third quarter, an 11 percent decline from the same period in 2011. For the year to date, Russel’s net earnings totaled $78 million, 13.3 percent behind last year. Net sales in the third quarter totaled $713 million, 1.1 percent better than last year’s third quarter. For the first three quarters, Russel’s revenues totaled 2.2 billion, 12.7 percent more than the same period last year. "All of our segments experienced margin pressure in the third quarter as steel prices declined due to lack of demand. The energy segment was able to produce stronger operating results due to higher volumes. However, our other segments were impacted by industry-wide lower shipments. We continue to outpace industry shipments in our metals service center operations," said Brian R. Hedges, president and CEO. Revenues in the company’s metals service center segment decreased 2 percent to $382 million in the third quarter, compared to the 2011 third quarter, on decreased demand and pricing that was down 4 percent compared to 2011. Gross margins in this segment were 20.1 percent, slightly lower than the 20.6 percent in third-quarter 2011. Revenues in the energy tubular products segment increased 12 percent to $249 million due to increased shipments of large-diameter line pipe in Russel’s U.S. operations and strong demand in operations servicing the Alberta oil sands. Segment gross margins declined to 13.4 percent, compared to 14.3 percent in the 2011 third quarter, due to pricing pressure and lower margins on the higher volume line pipe orders. Strong activity in these operations resulted in operating profits increasing by 5 percent to $16 million for the quarter. Revenues in the steel distributors segment decreased 12 percent in the third quarter to $78 million. Gross margins in this segment were down 1.5 percentage points to 13.0 percent. During the quarter, Russel made a significant acquisition, adding Edmonton, Alberta-based oilfield supplier Apex Distribution to its energy segment. Apex had $500 million in revenue in 2011, with 58 branches in Canada and the United States. The company is continuing to look elsewhere in the energy segment, though nothing to match the size of the Apex acquisition. “During our due diligence process, Apex made us aware of a couple of opportunities we may want to consider in the next year related to their specific area. There is a chance for us to do additional acquisitions,” said Chief Financial Officer Marion Britton. The company has also seen increasing opportunities in the service center segment, though most of the deals involve smaller companies than Russel is targeting. Looking ahead, Russel officials said current demand for its products is lower than in the third quarter and what the company experienced in the fourth quarter of 2011 for both metal service centers and steel distributors. Unlike some other public companies, Russel wasn’t overly enthusiastic about prospects for early 2013. “We don’t see a reason for what is going on right now to rebound. You typically see a bit of seasonal uptick in the first quarter, but we don’t see anything to drive it,” Britton said.