Reliance Pleased by Q3 Demand Growth Despite Seasonal Headwinds
10/28/2014 - Reliance Steel & Aluminum Co. reported its financial results for the third quarter ended 30 September 2014.
Third Quarter 2014 Financial Highlights
"We were very pleased with our operational performance during the third quarter of 2014," said David H. Hannah, chairman and CEO of Reliance. "Although the typical seasonal trend is for third quarter volume to decline from the second quarter, our tons sold were up 0.4%, and well ahead of the MSCI industry trend of down 2.2%. Our increased volume reflects ongoing slow but steady improvement in customer demand. In addition, the overall pricing environment continued to improve during the third quarter with a 2.9% increase in our average selling price per ton sold over the prior quarter, driven by strength in most of our products. Overall, we remain very pleased with the execution of our managers in the field, as demonstrated by Reliance's consistently strong FIFO gross profit margin of 25.8% for both the third quarter and year-to-date periods, especially in light of the historically high levels of imports and increased competitive pressures. Additionally, our operating income on a FIFO basis for the nine month period ended 30 September 2014, is up 27% on a 14% increase in net sales compared to the nine month period ended 30 September 2013, illustrating our strong earnings momentum."
Mr. Hannah continued, "We continue to profitably grow through M&A activity to supplement our organic growth. We completed two acquisitions during the quarter which expand Reliance's aerospace presence and augment our traditional metal distribution capabilities with higher value-add services. We reported non-GAAP earnings per diluted share of US$1.33 for the third quarter, which were near the high end of our guidance range and were exclusive of non-recurring charges mainly related to the settlement of a previously disclosed Texas antitrust litigation matter. Due mainly to carbon steel prices holding at levels higher than we had previously anticipated through the third quarter, we adjusted our LIFO estimate for the year, resulting in higher than anticipated expense. Offsetting this was a decrease in our effective tax rate for the quarter related to the resolution of certain tax matters."
"Looking at our balance sheet, we continue to operate from a position of financial strength, and have ample liquidity to continue executing our growth strategies to create long-term shareholder value. Our healthy regular dividend and extension of our share repurchase plan reflect our commitment to returning value to our shareholders," concluded Mr. Hannah.
End-market Commentary
Reliance was pleased with both demand growth and pricing during the third quarter despite typical seasonal headwinds experienced by our industry in the second half of the year. Because of our product and end market diversification, we were able to avoid this trend in the third quarter, mainly due to strength in the energy and aerospace markets, as well as continued modest improvement in the non-residential construction market.
As of 30 September 2014, total debt outstanding was US$2.32 billion, for a net debt-to-total capital ratio of 35.1%, up from 33.3% at 30 June 2014, mainly due to funding our August 1 acquisitions. At 30 September 2014, the Company had US$667.0 million outstanding on its US$1.5 billion revolving credit facility. The Company generatedUS$162.8 million in cash flow from operating activities in the nine months ended 30 September 2014, compared toUS$513.0 million during the same nine-month period in 2013. The decline was mainly due to the improved business environment that requires higher levels of working capital. Reliance remains pleased with its overall financial position.
Corporate Developments
Effective 1 August 2014, Reliance acquired all of the capital stock of Aluminium Services UK Limited, the holding company parent of All Metal Services ("AMS"), the world's largest independent raw material service provider to the aerospace and defense industries. AMS offers a broad range of aerospace metals including aluminum, steel, titanium, nickel alloys and aluminum bronze, offering full or cut to size materials. Net sales for AMS were approximately GBP 174.9 million for the twelve months ended 31 December 2013.
Additionally, Reliance acquired all of the capital stock of Northern Illinois Steel Supply Co. (NIS) effective 1 August 2014. NIS is a value-added distributor and fabricator of a variety of steel and non-ferrous metal products, primarily structural steel components and parts. Net sales for NIS were approximately US$19.8 million for the twelve months ended 31 December 2013.
Business Outlook
Reliance expects the U.S. economy to maintain its slow but steady recovery. Due to normal fourth quarter seasonality associated with fewer shipping days resulting from the holiday season as well as extended holiday-related closures at many of its customers' facilities, Reliance expects lower tons sold in the fourth quarter of 2014 than in the third quarter. Pricing is also expected to decline somewhat in the fourth quarter given current weakness in many carbon steel products as well as decreasing nickel prices. As a result, management anticipates a solid operational performance with non-GAAP earnings per diluted share to be in the range of US$1.00 to US$1.10 for the quarter ending 31 December 2014, compared to US$0.92 non-GAAP earnings per diluted share in the 2013 fourth quarter. We believe this reflects a healthy earnings level given the typical fourth quarter trend of our earnings per share down about 18% to 20% from third quarter levels.
- Sales were a record US$2.71 billion, up 10.7% from US$2.44 billion in the third quarter of 2013 and up 3.4% from our prior record sales of US$2.62 billion in the second quarter of 2014.
- Tons sold were up 6.4% from the third quarter of 2013 and up 0.4% from the second quarter of 2014, with the average selling price per ton sold up 4.3% from the third quarter of 2013 and up 2.9% from the second quarter of 2014.
- Net income attributable to Reliance was US$95.5 million, up 0.4% from US$95.1 million in the third quarter of 2013 and down 1.0% from US$96.5 million in the second quarter of 2014.
- Earnings per diluted share were US$1.21, down 0.8% from US$1.22 in both the third quarter of 2013 and the second quarter of 2014.
- Non-GAAP earnings per diluted share were US$1.33, up 8.1% from US$1.23 in the third quarter of 2013 and up 2.3% from US$1.30 in the second quarter of 2014.
- A pre-tax LIFO charge, or expense, of US$20.0 million, is included in cost of sales compared to a pre-tax LIFO credit, or income, of US$27.5 million in the third quarter of 2013 and an expense of US$5.0 million for the second quarter of 2014.
- The effective tax rate was 25.7% compared to 32.7% in the third quarter of 2013 and 36.6% in the second quarter of 2014.
- Cash flow from operations was US$53.3 million for the third quarter of 2014 and net debt-to-total capital was 35.1%, up from 33.3% at 30 June 2014.
- Completed two acquisitions effective 1 August 2014.
- A quarterly cash dividend of US$0.35 per share was declared on 21 October 2014 for shareholders of record as of 11 November 2014 and will be payable on 18 December 2014.
- Share repurchase plan extended to 31 December 2017.
"We were very pleased with our operational performance during the third quarter of 2014," said David H. Hannah, chairman and CEO of Reliance. "Although the typical seasonal trend is for third quarter volume to decline from the second quarter, our tons sold were up 0.4%, and well ahead of the MSCI industry trend of down 2.2%. Our increased volume reflects ongoing slow but steady improvement in customer demand. In addition, the overall pricing environment continued to improve during the third quarter with a 2.9% increase in our average selling price per ton sold over the prior quarter, driven by strength in most of our products. Overall, we remain very pleased with the execution of our managers in the field, as demonstrated by Reliance's consistently strong FIFO gross profit margin of 25.8% for both the third quarter and year-to-date periods, especially in light of the historically high levels of imports and increased competitive pressures. Additionally, our operating income on a FIFO basis for the nine month period ended 30 September 2014, is up 27% on a 14% increase in net sales compared to the nine month period ended 30 September 2013, illustrating our strong earnings momentum."
Mr. Hannah continued, "We continue to profitably grow through M&A activity to supplement our organic growth. We completed two acquisitions during the quarter which expand Reliance's aerospace presence and augment our traditional metal distribution capabilities with higher value-add services. We reported non-GAAP earnings per diluted share of US$1.33 for the third quarter, which were near the high end of our guidance range and were exclusive of non-recurring charges mainly related to the settlement of a previously disclosed Texas antitrust litigation matter. Due mainly to carbon steel prices holding at levels higher than we had previously anticipated through the third quarter, we adjusted our LIFO estimate for the year, resulting in higher than anticipated expense. Offsetting this was a decrease in our effective tax rate for the quarter related to the resolution of certain tax matters."
"Looking at our balance sheet, we continue to operate from a position of financial strength, and have ample liquidity to continue executing our growth strategies to create long-term shareholder value. Our healthy regular dividend and extension of our share repurchase plan reflect our commitment to returning value to our shareholders," concluded Mr. Hannah.
| Third Quarter 2014 Business Metrics | |||||
| (tons in thousands) | |||||
|
Q3 2014 |
Q2 2014 |
Sequential Quarter Change |
Q3 2013 |
Year- Over-Year Change |
|
| Tons sold | 1,545.4 | 1,539.8 | 0.4% | 1,452.5 | 6.4% |
| Tons sold (same store) | 1,227.3 | 1,200.1 | 2.3% | 1,151.0 | 6.6% |
| Avg. price per ton sold | US$1,752 | US$1,703 | 2.9% | US$1,679 | 4.3% |
| Third Quarter 2014 Major Commodity Metrics | |||||||
| Tons Sold (tons in thousands; percent change) |
Average Selling Price per Ton Sold (percent change) |
||||||
|
Q3 2014 Tons Sold |
Q2 2014 Tons Sold |
Sequential Quarter Change |
Q3 2013 Tons Sold |
Year-Over- Year Change |
Sequential Quarter Change |
Year-Over- Year Change |
|
| Carbon steel | 1,258.7 | 1,265.5 | (0.5%) | 1,195.3 | 5.3% | 1.7% | 5.2% |
| Aluminum | 84.3 | 78.7 | 7.1% | 75.0 | 12.4% | 4.1% | 3.2% |
| Stainless steel | 80.6 | 81.2 | (0.7%) | 74.4 | 8.3% | 4.3% | 6.4% |
| Alloy | 83.2 | 76.6 | 8.6% | 74.6 | 11.5% | (2.0%) | (0.7%) |
| Sales (US$ in millions; percent change) | |||||
| Q3 2014 Sales | Q2 2014 Sales |
Sequential Quarter Change |
Q3 2013 Sales |
Year-Over- Year Change |
|
| Carbon steel | US$1,482.6 | US$1,465.5 | 1.2% | US$1,338.3 | 10.8% |
| Aluminum | US$438.0 | US$392.8 | 11.5% | US$378.0 | 15.9% |
| Stainless steel | US$401.7 | US$388.0 | 3.5% | US$348.9 | 15.1% |
| Alloy | US$243.4 | US$228.9 | 6.3% | US$219.9 | 10.7% |
| Year-to-Date (9 months) Business Metrics | ||||
| (tons in thousands) | ||||
| 2014 | 2013 |
Year-Over-Year Change |
||
| Tons sold | 4,617.6 | 3,981.9 | 16.0% | |
| Tons sold (same store) | 3,626.4 | 3,404.6 | 6.5% | |
| Avg. price per ton sold | US$1,709 | US$1,736 | (1.6%) | |
| Year-to-Date (9 months) Major Commodity Metrics | ||||
| Tons Sold (tons in thousands; percent change) |
Average Selling Price per Ton Sold (percent change) |
|||
| 2014 Tons Sold | 2013 Tons Sold |
Year-Over- Year Change |
Year-Over- Year Change |
|
| Carbon steel | 3,784.6 | 3,234.5 | 17.0% | 1.9% |
| Aluminum | 239.6 | 213.8 | 12.1% | (2.4%) |
| Stainless steel | 239.0 | 208.7 | 14.5% | (2.2%) |
| Alloy | 243.6 | 228.3 | 6.7% | (2.0%) |
| Sales (US$ in millions; percent change) | |||
| 2014 Sales | 2013 Sales |
Year-Over- Year Change |
|
| Carbon steel | US$4,387.0 | US$3,676.2 | 19.3% |
| Aluminum | US$1,217.4 | US$1,113.2 | 9.4% |
| Stainless steel | US$1,141.9 | US$1,019.5 | 12.0% |
| Alloy | US$711.3 | US$680.2 | 4.6% |
End-market Commentary
Reliance was pleased with both demand growth and pricing during the third quarter despite typical seasonal headwinds experienced by our industry in the second half of the year. Because of our product and end market diversification, we were able to avoid this trend in the third quarter, mainly due to strength in the energy and aerospace markets, as well as continued modest improvement in the non-residential construction market.
- Energy (oil and gas) demand for the products Reliance sells strengthened during the 2014 third quarter, and is expected to continue to improve into 2015.
- Aerospace demand improved meaningfully during the quarter compared to 2013 levels, and is expected to further improve as we move into 2015. Despite pressure from excess mill capacity and higher industry-wide aluminum plate inventory levels, pricing improved slightly in the third quarter.
- Automotive, supported mainly by the Company's toll processing operations in the U.S. and Mexico, is expected to continue at its current, strong production rates in the fourth quarter of 2014 and into 2015. The increase in aluminum usage in the automotive industry continues to represent a growth area for Reliance.
- Heavy industry continues to perform reasonably well, despite some recent downward pressure on agricultural equipment.
- Non-residential construction continued to improve modestly in the third quarter of 2014 but remains at significantly reduced demand levels from its peak. Reliance is cautiously optimistic that this important end-market will show further signs of improvement in 2015.
As of 30 September 2014, total debt outstanding was US$2.32 billion, for a net debt-to-total capital ratio of 35.1%, up from 33.3% at 30 June 2014, mainly due to funding our August 1 acquisitions. At 30 September 2014, the Company had US$667.0 million outstanding on its US$1.5 billion revolving credit facility. The Company generatedUS$162.8 million in cash flow from operating activities in the nine months ended 30 September 2014, compared toUS$513.0 million during the same nine-month period in 2013. The decline was mainly due to the improved business environment that requires higher levels of working capital. Reliance remains pleased with its overall financial position.
Corporate Developments
Effective 1 August 2014, Reliance acquired all of the capital stock of Aluminium Services UK Limited, the holding company parent of All Metal Services ("AMS"), the world's largest independent raw material service provider to the aerospace and defense industries. AMS offers a broad range of aerospace metals including aluminum, steel, titanium, nickel alloys and aluminum bronze, offering full or cut to size materials. Net sales for AMS were approximately GBP 174.9 million for the twelve months ended 31 December 2013.
Additionally, Reliance acquired all of the capital stock of Northern Illinois Steel Supply Co. (NIS) effective 1 August 2014. NIS is a value-added distributor and fabricator of a variety of steel and non-ferrous metal products, primarily structural steel components and parts. Net sales for NIS were approximately US$19.8 million for the twelve months ended 31 December 2013.
Business Outlook
Reliance expects the U.S. economy to maintain its slow but steady recovery. Due to normal fourth quarter seasonality associated with fewer shipping days resulting from the holiday season as well as extended holiday-related closures at many of its customers' facilities, Reliance expects lower tons sold in the fourth quarter of 2014 than in the third quarter. Pricing is also expected to decline somewhat in the fourth quarter given current weakness in many carbon steel products as well as decreasing nickel prices. As a result, management anticipates a solid operational performance with non-GAAP earnings per diluted share to be in the range of US$1.00 to US$1.10 for the quarter ending 31 December 2014, compared to US$0.92 non-GAAP earnings per diluted share in the 2013 fourth quarter. We believe this reflects a healthy earnings level given the typical fourth quarter trend of our earnings per share down about 18% to 20% from third quarter levels.
