NEW YORK Reliance Steel & Aluminum Co.s earnings jumped in the second quarter, but flat shipments vs. the first quarter sparked some concern from analysts.
Bank of America Merrill Lynch analyst Timna Tanners questioned whether the companys disappointing shipping volumeswhich rose just 0.5 percent from first-quarter levelsimplied Reliance lost market share, partly because overall industry shipments increased well above that rate, according to Metals Service Center Institute (MSCI) data.
Credit Suisse Group analyst Gayle B. Podurgiel asked whether lingering weather-related problems from the first quarter had delayed Reliances carbon steel shipments in the most recent quarter.
Shipments by U.S. steel and aluminum service centers totaled a combined 11.66 million tons in the second quarter, up 5.1 percent from just under 11.1 million tons in the first three months of the year, the MSCI data show.
During an earnings conference call July 24, company executives found it hard to explain why shipments improved only marginally, especially since the second quarter is typically stronger than the first quarter for seasonal reasons.
Reliance executives cited lower-than-expected demand, a lackluster nonresidential construction sector and competition from cheap imports as partial factors.
"We were disappointed with our volumes," Reliance chief executive officer David H. Hannah said. "Its a tough market out there. Things have not recovered in a way that we would say the industrial economy is booming."
"It was shocking to us, very honestly, that the volume in the second quarter over the first quarter was lackluster," chief financial officer Gregg Mollins said. But executives denied that Reliance was losing market share to rivals, even as analysts focused during the conference call on the puzzle of weak volume growth.
The Los Angeles-based metals service center and distributor said in its earnings report that it sold 1.54 million tons in the second quarter vs. 1.53 million tons in the first three months of the year. However, it fared better compared with a year earlier, recording an 8.2-percent gain in tons sold.
Net income of $96.5 million in the three months ended June 30 jumped 19.1 percent from a year earlier and was 10.7 percent above $87.2 million in the first quarter, with record-high revenue of nearly $2.62 billion up 6.9 percent from a year ago and 2.5 percent ahead of $2.55 billion in the first quarter.
Stainless steel products were a bright spot in driving revenue, the company said, with Hannah citing a broadly "improved metals pricing environment."
Junes average daily sales revenue was the highest in the year so far and the best "in quite some time," Mollins said, and that sales momentum is continuing into July, with demand in automotive, aerospace and energy end markets expected to improve throughout the rest of 2014. He highlighted strong demand for flat-rolled steel product and "notable pricing discipline" by domestic steel mills after a trade decision on oil country tubular goods (OCTG), which could mean higher flat product prices (amm.com, July 17).
Metals prices have generally improved this year and are likely to end 2014 slightly higher than at the start of the year, according to Hannah.
Reliance expects third-quarter earnings to land between $1.25 and $1.35 per diluted share amid improved demand and stable pricing, below the Wall Street consensus of $1.43 per share.
The company has invested significantly in new and upgraded equipment, spending $58 million during the second quarter out of a total projected capital expenditure budget of $220 million.
Reliance could also add extra capacity related to aluminum as it seeks to capitalize on the lightweight metals growing use in automobiles, executives said during the conference call.
The company, the largest U.S. service center, is still considering acquisitions but doesnt expect another sizeable deal soon, executives said.
"There are other companies out there that were always talking to," Hannah told analysts. "Timing is the unknown. ... Were pretty secure in the fact that well continue to do acquisitions." Achieving diversification will be one factor Reliance examines as it eyes smaller companies, he added.
Reliances shares closed at $71.10 apiece July 24 on the New York Stock Exchange, down 5.1 percent from $74.89 per share the previous day.