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Reliance Steel & Aluminum Company (RS) |
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WIKI ANALYSIS
Reliance Steel & Aluminum Company (NYSE: RS) is the largest metals processing and distribution center in North America (based on revenue).[1] As a metal service provider it buys raw metals in bulk from mills and after processing them sells them to manufacturers that use large amounts of different metals or to businesses that further process them.[2] After buying the metal from a mill, Reliance Steel then processes it into different shapes or applies different treatments before selling it to its customers. 83% of its company high $8.72 billion 2008 revenue came from shaping raw metals into plates, tubes, rods, or bars while the remaining 17% of sales came from heat-treated, galvanized, cold-rolled, hot-rolled, and toll processed metals.[3] It provides over 100,000 different metal products in more than 200 locations globally.[2]
Reliance Steel has acquired 40 other metal service centers since 1994.[4] In 2008 Reliance was able to increase its net sales by $888 million through acquisitions, leading to a company high $482.8 million in net income.[2]
The price of carbon steel products for manufacturers almost doubled between January 2008 and May 2008.[5] Reliance had purchased inventory from steel mills before the price increase and as a result, was able to sell products to manufacturers at higher profit margins during the first 4 months of 2008.[5] In the second half of 2008, as the demand for metals from end-users decreased, numerous steel mills lowered prices.[6] These fluctuations in price had a strong effect on the industry, causing many service centers to incur a fourth quarter loss. These service centers were unable to sell high-cost inventory, purchased earlier in the year, at high enough profit margins.[2] However, Reliance was able to remain profitable in the fourth quarter by reducing its operating costs and working capital budget by 62%.[5]
Business Overview
As a metal services center, Reliance Steel acts as a middle man between metal mills and end-users. Reliance provides delivery of raw materials, processing, and inventory management to its customers.[4] In 2008 35% of its sales were orders requiring either shaping or processing of metals, while the remaining were simple deliveries from mill to end-user.[4] Of the 35% of sales that required shaping or processing, 83% were orders requiring shaping while the remaining 17% required heat-treatment, galvanizing, cold-rolling, hot-rolling, or toll processing of the metal.[3] 85% of Reliance's orders are for the shaping or processing of carbon steels, aluminum, and alloys.[3]
Reliance's primary growth strategy is the acquisition of smaller service centers.[2] Through the acquisition of PNA in 2008 it was able to boost its sales by $888 million dollars to a company high level of $8.72 billion.[2]
Business Financials
Reliance steel had a company high revenue of $8.72 billion and net income of $482.78 million in 2008. [7] Reliance had a net income of $416.47 million during the first 3 quarters of 2008 with an average net income of $138 million for each quarter.[8] Net income dropped to $66.29 million in the fourth quarter of 2008.[8] In August 2008, Reliance completed its largest acquisition to date with the purchase of PNA Group Holding Corporation for $1.1 billion[4] increasing revenue by $888 million over the final five months of 2008, leading to a company high $8.72 billion in net sales and $482.8 million in net income in 2008.[2]
| 2008 | 2007 | 2006 | |
|---|---|---|---|
| Revenue | $8,718 | $7,255 | $5,742 |
| Gross Profit | $2,162 | $1,838 | $1,511 |
| Gross Profit Margin | 24.8% | 25.3% | 26.3% |
| Operating Expenses | $1,309 | $1,114 | $884 |
| Operating Income | $852 | $723 | $627 |
| Net Income | $483 | $408 | $355 |
There was an 11.8% increase in tons of metal sold and an 8.2% increase in the average price per ton of metal sold in 2008.[10] Even without the contribution of PNA and 2007 acquisitions, same store sales had increased by 7.0% from 2007 to 2008.[10]
During the first half of 2008, mills announced significant pricing increases for carbon steel from $563 per ton to $1,080 per ton before dropping prices back to $560 per ton by December[11] This mill pricing volatility is the main driver of profit margins.[10] With mills announcing increasing prices Reliance was able to sell its inventory at higher profit margins during the first half of 2008. However, with suddenly decreasing prices in the 2nd half of 2008, profit margins for the last quarter dropped substantially.[10] Furthermore, the acquisition of PNA, which tradititionally operated on lower margins led to a decrease in Reliance's profit margins.[10] Without PNA, profit margins for 2008 can be calculated at 28%.[10]
$152 million had been spent by the end of 2008 on capital expenditures for growth such as facilities, processing capabilities, geographical expansion, and new product offerings.[7] However, the 2009 capital expenditure budget was set at $80 million and acquisitions were suspended at the start of 2009.
The record breaking net income of $482.8 million can be attributed to higher gross profit and operating income from high commodity prices and the contribution of its 2008 acquisitions.[10]
The fourth quarter of 2008 would end the year with record cash flows for 2008 of $665 million.[7] This increase in cash flow was primarily due to the inventory destocking caused by lower prices set by mills.[7]
In the first quarter of 2009, Reliance's net income was $20.1 million and sales were $1.56 billion.[12] Compared to the 2008 first quarter, tons of metal sold were down 1% and the average price per ton dropped 16%.[12] Compared to the 2008 fourth quarter tons of metal sold were down by 14% and average price per ton dropped 15%.[12] Reliance still managed to stay profitable with a gross profit of $354 million and a net income of $20.1 million.[12]
Business Segments
Most sales (96%) are generated in Northern America with a bulk of its revenue (55%) coming from carbon steel products. [6] [3] Most deliveries originate in the US or Canada, but there is also a small presence internationally.[2] Reliance supplies metals to manufacturers and end-users in the general manufacturing, non-residential construction, transportation (rail, truck trailer and shipbuilding), aerospace , energy, electronics and semiconductor fabrication and related industries. [13] Most of Reliance's customers are within a 200 mile radius of their service centers allowing for quick deliveries.[13] In 2008, 85% of orders were from repeat customers.[13]
Reliance offers more than 100,000 products with a focus on alloys, aluminum, brass, copper, carbon steel, stainless steel, titanium, and specialty metal products.[2] It provides such services as shaping, welding, surface coatings, heat treatments, polishing, and cutting.[14] The metals it provided services for in 2008 can be broken down as follows
Carbon Steel (55% of Sales) - Reliance's sales of carbon steel were made up of plates (13%), tubing (12%), bars (10%), structural elements such as beams (10%), hot rolled sheets and coil (5%), galvanized sheet and coil (3%), cold rolled heat and coil (2%) in 2008.[3] The acquisition of PNA, a primarily carbon steel metal service provider, increased the percentage of Reliance's carbon steel sales from 46% in 2007 to 55% in 2008.[10] The fluctuations in mill pricing for carbon steel had important effects on Reliance's sales and inventory management as mentioned above.
Aluminum (16% of Sales) - Reliance's sales of aluminum were made up of untreated bars and tubes (6%), heat treated plates (4%), untreated sheet and coil (4%), untreated plates (1%), and heat treated sheet and coil (1%) in 2008.[3] The market price for untreated aluminum products, which make up 11% of Reliance's total sales dropped by 30% during the last five months of 2008 lowering profit margins.[15]
Stainless Steels (14% of Sales) - Reliance's sales of stainless steels were made up of bars and tubes (7%), sheet and coil (5%), and plates (2%) in 2008.[3] The mill prices for stainless steels were stable compared to aluminum and carbon steel.[15] They were also less volatile in 2008 then they were in 2007.[15]
Alloy (8% of Sales) - Reliance's sales of alloys were made up of bars and rods (6%), tubes (1%), and plates, sheet, and coil (1%) in 2008.[3]
Other (7% of Sales) - The rest of Reliance's sales were made up of toll processing (2%) and processing on other metals such as brass, copper, and titanium (5%). Reliance would perform toll processing by taking metals from the customer, processing them for a fee, and then returning the metal to the customer. This would be done when the customer does not have the necessary equipment but can provide the necessary metal.
Key Trends and Forces
Reliance Steel's Diversity of Suppliers and Customer Groups Lessens the Impact of Price Fluctuations
The mill prices for carbon steel doubled during the first half of 2008 only to decline rapidly during the second half due to slowing global demand.[6] Such fluctuations in price can be detrimental for a metal service center as it may end up buying large amounts of inventory at high prices, only to sell at very small profit margins or a loss when prices drop later. Since Reliance Steel offers services for many different metals it is not dependent on a single industry. By not being dependent on a single industry or group of mills Reliance is less affected by declines in specific industry demands or price fluctuations by specific suppliers.[3] Reliance was able to deal with the price fluctuations by passing on these higher prices to its customers through higher than average selling prices.[10]
Reliance Steel's Limited Involvement With the Automotive and Housing Industries Limited the Effect of the 2008 Economic Downturn
Reliance's sales come mainly from the non-residential construction, manufacturing, transportation (trains, truck trailer, and ship building), aerospace, energy and semiconductor fabrication markets.[11] Reliance is not a large supplier of metals to the automotive or residential housing markets. These two industries went through a severe economic downturn leading to decreasing demand for metals. As Reliance does not depend on sales from these industries, it was not heavily affected by this economic downturn.[13]
Rising Costs and Decreasing Demand Have Led to Large Budget Cuts
As the price of carbon steels from mills increased and demand from manufacturers decreased, Reliance was faced with lower margins. The decreasing demand and increasing mill prices during the economic downturn in 2007-08 led to downsizing, budget cuts, and a pause in future acquisitions.[16] [7] [4] Reliance has cut its workforce by 1800 employees, roughly 16% of its workforce, as labor costs are make up 60% of the company's operating expenses.[12] [17] [18] Furthermore, the capital expenditure budget allocated for new machinery, relocation of factories, and improving processing techniques was decreased from $210 million for 2008 to $80 million for 2009.[10] Reliance paused its acquisitions at the start of 2009 until the improvement of the economy.[4]
Carbon Steel Mill Consolidations are Leading to Higher Supplier Prices
As many carbon steel mills went out of business between 2001 and 2003, the remaining mills began to consolidate their operations leading to higher prices.[6] This led to less volatility in steel prices up until 2008.[6] However, the low end of pricing had been high.[6] By not being dependent on a single supplier, Reliance is able to source supplies as it sees fit from multiple mills despite the shrinking number of suppliers.[6]
Competition
Overall, the metals service industry produced $153 billion in sales in 2008. [19] The top 100 service centers provided 47% of these sales.[19] with the top five firms controlling 16.7% of the market, while the top 10 controls 24.6%. [19] Reliance Steel & Aluminum Co. is the largest supplier of metals to customers in North America with $8.72 billion in sales.[19]
Reliance Steel's Primary Competitors
- Ryerson Inc. (NYSE: RYI) : Distributor and processor of raw metals. Offers services for stainless steels, aluminum, carbon & alloy, brass & copper, building products, and fabrication[20]
- Samuel, Son & Co. (private company) : A family owned supplier of carbon steel, stainless steels, aluminum and aerospace alloys in a range of grades. Also supplies customers with a range of processing options.[21]
- Russell Metals (TSE:RUS) Offers metal servicing, energy tubular products, and steel distribution through a network of 58 Canadian and 12 U.S. locations.[22] It is the largest metal service center in Canada.[23]
Reliance differentiates itself from its competitors by focusing on small customers and quick turn-around.[4] It had an average transaction size of $1,650 per transaction and more than 40% of its orders were delivered within 24 hours in 2008.[4]
| 2008 Total Revenue (In millions) | % Revenue Growth in 2008 | 2008 Net Profit Margin | |
|---|---|---|---|
| Reliance Steel[9] | $8,720 | 20.17% | 5.5% |
| Ryerson Inc. [19] | $5,300 | -11.67% | Not Available |
| Samuel, Son & Co. [19] | $3,220 | 2.22% | Not Available |
| Russell Metals [19] [24] | $3,336 | 31.25% | 6.78% |
References
- ↑ Reliance Steel & Aluminum Co. Completes PNA Group Acquisition for $1.1 Billion; Raises $500 Million in a New Senior Unsecured Term Loan; and Settles Cash Tender Offers for PNA’s Senior Notes, August 4, 2008
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Business", p.1
- ↑ 3.0 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Products and Processing Services", p.8
- ↑ 4.0 4.1 4.2 4.3 4.4 4.5 4.6 4.7 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Aquisitions", p.4
- ↑ 5.0 5.1 5.2 Reliance Steel (RS) Annual Report 2008, p.5
- ↑ 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Suppliers", p.7
- ↑ 7.0 7.1 7.2 7.3 7.4 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Selected Financial Data", p.27
- ↑ 8.0 8.1 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Quarterly results of operations", p.80
- ↑ 9.0 9.1 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Selected Financial Data", p.25
- ↑ 10.00 10.01 10.02 10.03 10.04 10.05 10.06 10.07 10.08 10.09 10.10 10.11 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Selected Financial Data", p.30
- ↑ 11.0 11.1 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Industry and Market Cycles", p.10
- ↑ 12.0 12.1 12.2 12.3 12.4 Reliance Steel (RS) Form 8-K, First Quarter Results 2009
- ↑ 13.0 13.1 13.2 13.3 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Customers", p.6
- ↑ Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Products and Processing Services", p.9
- ↑ 15.0 15.1 15.2 Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Selected Financial Data", p.28
- ↑ "Reliance Steel & Aluminum Co.: "Uncertain Days Ahead" IndustryWeek
- ↑ "Reliance Steel & Aluminum 1Q profit tumbles" Yahoo Finance
- ↑ Reliance Steel (RS) Form 10-K, Fiscal Year 2008, "Employees", p.13
- ↑ 19.0 19.1 19.2 19.3 19.4 19.5 19.6 "Top 100 Metals Service Centers: Buyers sourced record $67 billion in metals from distribution giants" Purchasing Magazine
- ↑ Ryerson Products and Services
- ↑ Samuel "About Us"
- ↑ About Russell Metals
- ↑ Russell Metals Annual Report 2008, p.1
- ↑ Audited annual financial statements - English p.5
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