Reliance Reports Lackluster Quarter - Growing Confidence in 2013

Sales of $1.89 billion for the fourth quarter were 7.1 percent lower than a year ago and down 8.1 percent from third quarter 2012. Sales for the full year 2012 rose slightly to $8.44 billion, up 3.8 percent from 2011.

A year over year decrease of 3.9 percent brought tonnage sold in the Q4 down to 1.01 million net tons—an 8.3 percent drop from December. Tonnage sold in 2012 increased to 4.4 million tons—a 5.4 percent over 2011 levels.

“Our fourth quarter results reflect the impact of continued global economic uncertainty on our industry coupled with normal seasonal trends including fewer shipping days as a result of the holiday season and extended holiday-related closures by various customers. However, our average price per ton sold held steady on a sequential quarter basis in our fourth quarter, allowing us to improve our gross profit margin. Our LIFO credit in the 2012 fourth quarter boosted our margins, but more importantly, our local managers were able to improve our FIFO gross profit margins as demand declined,” said David H. Hannah, Chairman and CEO of Reliance.

Reliance had relatively strong sales in most of its end markets in 2012. The oil and gas market continued to be robust and Reliance expects demand and pricing to remain solid in 2013. Toll processing for the automotive industry in the U.S. and Mexico did very well and the Company had a record year for tons processed. Aerospace also continued to be a strong market, with demand and pricing both good in 2012. The heavy industry market slowed in mid 2012 due to lean inventory management. Non-residential construction showed some improvement but was well below peak demand levels with growth mostly in the energy and manufacturing areas.

Reliance completed six acquisitions in 2012 and recently acquired Metals USA for $1.2 billion cash. Commenting on the Metals USA acquisition, Greg Mollins, president and chief operating officer, said, “The flat roll component is about 11% of our current business on a pro forma basis, with Metals USA, we would be about 14% or 15% carbon flat roll, so it really complements where we are in our products and we think it fits well and rounds us out better than we are today.”

Pricing on carbon steel products started to decline in March and continued through October. Spot pricing on hot rolled has been in the $620 range for the past few months said Mollins. Recent price increases, he said, “did not stick due to lackluster demand, high imports and excessive domestic capacity” but stopped prices from falling further.

Mollins commented he expects the second quarter of 2013 to be better. He said, “As you know, prices ran up early in the first quarter last year and then they started to correct. So they’re not running up this year, so I don’t think we would have that downward trend in the second quarter like we had last year. So I think that’s a positive for second quarter operations. And I think overall, we’re thinking that tons are going to be up compared to the first quarter in our guidance.”

In response to a question on shipments, Karla Lewis, executive vice-president and chief financial officer, said, “In terms of tons sold per day in January, we’re off about 4%, a little less than 4% in tons shipped per day this January versus January of 2012. So the bigger deal is of course the pricing and pricing is a fair amount lower now than it was a year ago. So that’s really what’s having a bigger impact on our guidance as opposed to the ton expectation.”

“So we’re really not complaining about the volumes that we have in plate, but I’ll tell you that the margins that we have on plate we are complaining about,” said Mollins. “There has been a tremendous decline in pricing throughout 2012 and there was just recently, I think recently as of Monday, SSAB made an announcement that $30 a ton increase on plate, which we certainly hope will hold….”

Reliance executives field several questions on non-residential construction during their conference call. Mollins commented, “We’re seeing non-residential improvement by way of quoting, we’re doing a lot more quoting. And overall, I can be honest with you, I’ve heard a more positive outlook in the last few months than I have in quite some time.”