Reliance Steel & Aluminum Management Discusses Q2 2012 Results - Earnings Call Transcript

Reliance Steel & Aluminum (RS)

Q2 2012 Earnings Call

July 26, 2012 11:00 am ET

Executives

David H. Hannah - Chairman and Chief Executive Officer

Gregg J. Mollins - President, Chief Operating Officer and Director

Karla R. Lewis - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Assistant Secretary

Analysts

Timna Tanners - BofA Merrill Lynch, Research Division

Michelle Applebaum - Steel Market Intelligence Inc

Michelle Applebaum - Michelle Applebaum Research Inc.

Aldo J. Mazzaferro - Macquarie Research

Richard Garchitorena - Crédit Suisse AG, Research Division

John Charles Tumazos - John Tumazos Very Independent Research, LLC

Sohail Tharani - Goldman Sachs Group Inc., Research Division

Mark L. Parr - KeyBanc Capital Markets Inc., Research Division

Timothy P. Hayes - Davenport & Company, LLC, Research Division

Anthony B. Rizzuto - Dahlman Rose & Company, LLC, Research Division

Arun S. Viswanathan - Longbow Research LLC

Presentation

Operator

Good morning, ladies and gentlemen, and welcome to the Reliance Steel & Aluminum 2012 Second Quarter Conference Call and Webcast. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Chairman and CEO, David Hannah. Sir, the floor is yours.

David H. Hannah

Thank you and good morning. And I thank all of you for joining in our conference call for the second quarter and 6-month period ended June 30, 2012. Gregg Mollins, our President and COO; and Karla Lewis, our Executive VP and CFO, are also here with me today.

After completion of this call, a printed transcript, including Regulation G reconciliations, will be posted on our website at www.rsac.com in the Investor Information section.

This conference call may contain forward-looking statements relating to future financial results. Our actual results may differ materially as a result of factors over which Reliance Steel & Aluminum Co. has no control. These risk factors and additional information are included in the company's annual report on Form 10-K for the year ended December 31, 2011, and other reports on file with the Securities and Exchange Commission.

For the 2012 second quarter, we reported net income of $108.8 million or $1.44 per diluted share. That's up 10% from the 2011 second quarter, and down 6% from the 2012 first quarter. Sales for the 2012 second quarter were to $2.21 billion, up 8% from the 2011 second quarter, and down 3% from the 2012 first quarter. And for the 6 months ended June 30, 2012, net income was $225 million, up 18%, compared with net income of $191 million for the 2011 6-month period. Earnings per diluted share were $2.98 for the 6 months ended June 30, 2012. That's up 17% from $2.54 per diluted share for the 2011 6-month period. Sales for the 2012 first half were $4.5 billion, up 14% from 2011 first half sales of $3.96 billion.

We sold 1.15 million tons of metal in the 2012 second quarter. That was down 2.3% from the 2012 first quarter, but up 10% from the 2011 second quarter. For the first half of 2012, we sold 2.32 million tons of metal. That's up 11.8% from the 2011 first half. Also our toll processing businesses have processed 2.78 million tons of metal in the 2012 first half, and that's up 20% from the 2011 first half.

The average price per ton sold in the second quarter was $1,921, and it was down 1.6% from the 2012 first quarter. And it was down 2.2% from the 2011 second quarter. For the 2012 second quarter, carbon steel sales were 52% of our net sales dollars, aluminum was 15%, stainless steel was 15%, alloy was 11%, toll processing was 2%, and miscellaneous and other sales were 5%.

That compared to the first quarter of 2012, our carbon steel sales of 921,000 tons in the second quarter were down 1.7%, but the average price per ton, down 1.9%. Our aluminum tons sold of 62,000 were down 0.6%, but the average price is down 1.2%. Stainless tons sold of 60,000 were down 0.6%, with average prices up 1.5%. And alloy tons sold of 77,000 were down 13.2%, with average prices up 3.4%.

Now the larger decrease in alloy tons sold and the increase in the average prices per alloy sales were the result of reduced OCTG sales in the second quarter compared to the first quarter, as OCTG prices are generally lower than our other alloy product prices. The reduction in OCTG sales in the second quarter is a normal seasonal occurrence.

Consistent with the first quarter, we saw the most strength in the energy, that being oil and gas, aerospace, farm and heavy equipment and the auto markets. We service the auto markets primarily through toll processing operations. In general, demand during the first quarter was helped by increasing prices and slightly better economic expectations.

The second quarter business climate was hampered by a downward pricing trend from most all of the metals we sell. Contributing to this, from the carbon steel perspective, were declining scrap prices, ample domestic supply and high import levels that needed to be absorbed. Lower LME Aluminum prices and reduced nickel surcharges were responsible for the drop in common alloy aluminum and stainless steel prices, respectively.

Add to this the increased uncertainty surrounding Europe, China and the U.S. fiscal cliff issues, and you get a more skittish economic environment where the momentum we gained in the first quarter was slowed during the second quarter.

Nonetheless, we were pleased with our second quarter results, which were in line with our expectations, although not at the high end. At the operating income level, our second quarter 2012 profit was up 1% over the first quarter of 2012, and up 12% from the 2011 second quarter.

Our balance sheet remains strong and provides the solid foundation for our operations and our growth strategies, both organic and by acquisition, that we expect to continue. Our operating cash flow for the 2012 second quarter was $84.4 million, compared to $15.9 million in the 2011 second quarter.

We're very fortunate that Reliance has such a broad range of products, substantial customer diversification and wide geographic footprint. Those attributes have helped us to achieve industry-leading operating results on a consistent basis.

As I mentioned earlier, economic uncertainty will most likely persist through the third quarter, which is seasonally softer even under normal circumstances. Carbon steel prices should be at or near the bottom, which should be the case for aluminum and stainless steel also, with the possibility of some modest increases near the end of the quarter. Given these expectations and considering the third quarter will have 1 last shipping day, we currently estimate earnings per diluted share in the range of $1.15 to $1.25 for the 2012 third quarter.

On July 24, 2012, our Board of Directors increased the regular quarterly cash dividend 67% from $0.15 to $0.25 per share of common stock. The dividend is payable on September 14 to shareholders of record, August 17, 2012. We've increased our dividend 18x since our IPO in 1994, and we've paid quarterly dividends for 53 consecutive years. Once again, we believe we have ample liquidity and sufficient cash flow from operations to continue our growth strategies and support increased cash dividends going forward.

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