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Second-Quarter Financials: Service Centers

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Service Centers Manage Through Price Deflation Flat volume levels and declining metals prices challenged North America’s service centers in the second quarter. Compiled by the Staff of Metal Center News A.M. Castle Castle Restructures to Reverse Losses A.M. Castle & Co., Oak Brook, Ill., reported a net loss of $58.9 million in the second quarter, a slight improvement on the same quarter of 2014 for the specialty metals distributor. Castle reported a loss of $20.7 million in the first quarter. Net sales for the company totaled $199.7 million, a 19.5 percent decline from the same quarter last year. Net sales through the first half totaled $421.9 million, down 16.1 percent from 2014. To combat the persistent underperformance over the past five years, Castle’s new executive leadership has announced a restructuring plan. The company has begun implementing some of the changes. “Our plan consists of two essential thrusts—improving our customer value proposition by driving more resources, capabilities, responsibility and accountability down to our branches so that they may be closer to our customers, and improving the financial position of the company through better balance sheet management and a reduced, more effective cost structure,” President and CEO Steve Scheinkman told investors and analysts during the company’s quarterly conference call. Among the ways Castle plans to meet the latter goal is through the consolidation of seven of the company’s facilities. The company has folded its Lafayette, La., facility into its Houston operation, and relocated its plate operations from Chicago to Cleveland. Earlier in the month, Castle reported plans to lease a new facility in Wisconsin to handle its bar business, allowing for the closure of a facility in Franklin, Park, Ill. The company has decided not to consolidate three other facilities under consideration based on their current operating performances and opportunities for growth. Castle estimates the planned consolidations will save the company $23 million in 2016. “Our headcount is down by 9 percent since the beginning of the year, and will decrease further as we complete the remaining facility consolidations,” Scheinkman said. During the second quarter, the company’s Metal segment reported sales of $166.3 million, 22.3 percent lower than the second quarter of 2014 and 11.8 percent below the first quarter. Tons sold per day were down more than 20 percent, but the average selling price was up. Looking ahead, Scheinkman said, the company is “seeing some recovery from the second quarter in certain areas. We’re looking at continued strengthening in aerospace. But other areas, like oil and gas, are in line with what we saw in the second quarter.” Global Brass and Copper GBC's Earnings Improve Despite Falling Copper Prices Global Brass and Copper Holdings, Inc., Schaumburg, Ill., reported net income of $17.1 million during the second quarter, nearly doubling the results from the same period in 2014. Earnings also were up more than 50 percent compared to the first quarter. The company’s net sales during the quarter declined 5.8 percent to $414.9 million. Through six months, GBC’s net sales were down 7.8 percent. Volume for the second quarter decreased by 1.5 percent to 132.8 million pounds due to continued destocking in the supply chain and lower demand in munitions. The decline was partially offset by higher demand in the coinage and building and housing markets, the company said. “Operating performance at Olin Brass significantly improved year-over-year, and we continue to drive the productivity improvements and cost reduction initiatives we implemented last year across all business segments,” said John Wasz, GBC’s president and CEO. “As anticipated, rebalancing of the supply chain in the munitions market led to a slight decline in overall volume. However, we’re encouraged by double-digit growth in our green product portfolio, including Eco Brass, continued expansion of our A.J. Oster product portfolio, and further strengthening of the building and housing market.” GBC battled declining commodity prices during 2015, as average copper prices declined by 7 percent from fourth-quarter 2014. However, the company’s results improved over that time frame. “We believe this illustrates how our business model as a metals converter employing a balanced book approach is effective in mitigating the effect of price fluctuations on our results,” Wasz said. Looking ahead, GBC executives have increased their projected shipment volumes for the year to 505-525 million pounds. Olympic Steel Olympic Reports Quarterly Loss Olympic Steel, Inc., Cleveland, reported a net loss of $22.3 million in the second quarter, compared to second-quarter 2014 net income of $3.5 million. For the first half, the company posted a loss of $21.2 million, down from net income of $6.3 million in the first six months last year. Olympic’s second-quarter net sales totaled $315.3 million, a decrease of 18.3 percent from the record sales figure reported in the same quarter of 2014. First-half net sales declined 9.8 percent to $666.1 million. The company attributed the revenue decrease in both periods to a decline in industry-wide shipments and lower average selling prices. “Global metal markets have been challenged throughout 2015. Olympic Steel has not been immune to these factors,” said Chairman and CEO Michael D. Siegal during the company’s quarterly conference call with investors and analysts. “Our stated objectives of reducing operating costs, debt reduction and enhancing cash flow, while retaining market share, are reflected in our results.” Olympic’s sales declined across the board, with carbon flat-rolled products down 20.5 percent to $209 million. Pipe and tube products declined 19.0 percent to $53 million, while specialty metals flat product sales fell 7.5 percent to $52 million during the quarter. “Historically low costs for inputs, combined with a strong U.S. dollar, resulted in consistent downward pressure on metals prices. Those factors are not expected to disappear any time soon,” Siegal said. Olympic continued the inventory reduction efforts it began in the first quarter, with stocks declining by $37 million in the second. Operating expenses fell by more than $8 million in the quarter, and were down $11 million for the year. “Waiting for the market to improve is never an option,” Siegal said. “We saw what was happening in the market and took action to get ahead of it.” Executives are encouraged that carbon flat-rolled prices have been firming since May, but they remain cautious. “While we hope the cycle’s bottom is truly behind us, we won’t know with any certainty until after the seasonal summer slowdowns,” Siegal said. Russel Metals Russel Profitable Despite Headwinds Russel Metals reported net earnings of $16.4 million in its second quarter, about half the total from the same quarter in 2014. For the year to date, the Mississauga, Ontario-based service center company had net earnings of $35.0 million, 41.6 percent behind the previous year. Russel’s net sales for the quarter totaled $761.3 million, 14.7 percent lower than second-quarter 2014. Year-to-date sales of $1.67 billion were 8.3 percent behind the first six months of last year. “The current downturn is affecting steel and energy prices and their associated businesses. In our view, oil prices will remain at these low levels for at least the balance of 2015 due to oversupply,” said Brian R. Hedges, president and CEO, during the company’s quarterly conference call. Hedges said the problem is particularly acute in the U.S. OCTG market. “There’s still a lot of inventory in the South and Houston, a lot of it imported. That will continue to be a problem and cause margin compression in the States at least for the balance of the year.” The company’s metal service center segment revenues of $385 million were off 8 percent in the quarter, primarily the result of lower demand from customers in Western Canada serving the oil and gas industry. Tons shipped declined 7 percent, though selling prices remained consistent. Energy product segment revenues dropped 27 percent in the quarter due to reduced drilling activity. Distribution segment revenues were mostly flat from 2014, though margin compression reduced earnings. Russel has taken steps to combat the low prices and industry oversupply, executives said, by quickly rightsizing its stock levels. “Our metals service center operations have corrected their inventory positions. While our other operating segments have reduced inventory, we expect further inventory reductions in those segments,” Hedges said. “We have implemented a number of strategies such as reduced work weeks, layoffs and other cost-containment measures to reduce costs in line with current business levels.” Ryerson Profits Up Despite Lower Sales Ryerson Holding Corp. reported net income of $15.8 million during the company’s second quarter, an improvement on both the second quarter of 2014 and the first quarter. The Chicago-based service center company reported net income of $2.6 million during second-quarter 2014, and a loss of $2.5 million in the prior quarter. Ryerson’s net sales totaled $840.4 million in the quarter, down 3.2 percent from the first quarter and 9.8 percent behind the same quarter last year. A 0.9 percent increase in tons shipped per day was more than offset by a 5.6 percent decrease in average selling prices compared to the first quarter. “We executed well within areas under our control and generated strong earnings and cash flow in the second quarter of 2015, while navigating a challenging environment in the metals market,” Eddie Lehner, Ryerson’s president and CEO, told investors and analysts during the company’s quarterly conference call. “Metal prices declined further in the second quarter, a continuation of the deflationary environment the service center industry has faced over the past year.” During the quarter, hot-rolled steel and LME nickel prices each fell 7 percent, while the Midwest aluminum price fell 16 percent. The company saw some stabilization in the carbon price, but stainless and aluminum remained under pressure, Lehner said. “With our aggressive inventory management, we’ve taken progressive steps to align the average cost of inventory with current prices. We will do so as long as deflation and short lead times persist,” said Eric Schnaufer, interim chief financial officer. “Over the course of the second quarter, gross margins improved despite the continued fall in metals prices.” The lower pricing environment is partially the result of heavy import pressure, which Ryerson expects to abate in the second half. The margins between domestic offerings have declined to no more than $100 per ton for most products. Ryerson typically buys from 5 percent to 20 percent of its product from overseas suppliers, and the company is moving back toward the lower end of that range, Lehner said. “We’ve shifted the opportunistic portion of our buy back toward domestic.”