A. M. Castle & Co. Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb.26.13 | About: A. M. (CAS)

A. M. Castle & Co. (NYSE:CAS)

Q4 2012 Earnings Call

February 26, 2013 11:00 am ET

Executives

Scott J. Dolan - Chief Executive Officer, President and Director

Scott F. Stephens - Chief Financial Officer, Vice President of Finance and Treasurer

Analysts

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

Edward Marshall - Sidoti & Company, LLC

Daniel M. Whalen - Topeka Capital Markets Inc., Research Division

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Operator

Good morning. Thank you, everyone, for joining us for A.M. Castle's Fourth Quarter 2012 Earnings Conference Call. My name is Sandra, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. By now, you should have received a copy of this morning's press release. The press release and the slides accompanying this presentation are available on the company's Investor Relations website and in the company's Form 8-K filed this morning with the SEC. With us from the management of Castle this morning is Scott Dolan, President and CEO; and Scott Stephens, Vice President of Finance and CFO. As a reminder, this call is being recorded.

Certain information relating to projections of the company's results that will be discussed during today's call may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. Those statements are based on the current expectations and assumptions that are subject to a number of factors that could cause actual results to differ materially.

Additional information concerning these factors is contained in the Risk Factors section of the company's most recent Form 10-K and other reports and filings with the SEC during 2012 and is also in the cautionary statement contained in today's release. The company does not undertake any duty to update any forward-looking statements.

This presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to related GAAP measures in accordance with the SEC rules. You will find the reconciliation in the financial information attached in today's release and in the slides accompanying this presentation, which are available on the company's website at www.amcastle.com under the Investors tab and in the company's Form 8-K filed this morning with the SEC.

And now we'll turn the call over to Scott Dolan. Go ahead, Scott.

Scott J. Dolan

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Thank you, Sandra. Good morning, everyone, and thank you for joining the call today. Let me outline how we have structured today's call. I will provide a brief overview of our fourth quarter and full year 2012 results, as well as an operations update. Scott Stephens will discuss the fourth quarter and full year 2012 results and current business conditions. I will then comment on our outlook for 2013 and then we will open up the call for questions.

For the full year 2012, our sales increased $138 million or 12.2% to $1.27 billion. EBITDA for 2012 was $74.2 million or 5.8% of net sales compared to $37.4 million or 3.3% of net sales in 2011. Adjusted non-GAAP net income was $6.3 million or $0.26 per diluted share in 2012 compared to $12.4 million or $0.53 per diluted share in 2011.

In the fourth quarter, net sales were $274 million compared to $282.2 million for the same period last year. EBITDA was $8.8 million or 3.2% of net sales in the fourth quarter of 2012 compared to $3.9 million or 1.4% of net sales in the prior year period.

The fourth quarter demand environment was weaker than we had expected. Sequentially, tons sold per day in the fourth quarter were 9% lower than the third quarter of 2012 and 16.3% lower than the fourth quarter last year, excluding Tube Supply. As the overall market conditions deteriorated throughout the fourth quarter, we implemented appropriate cost actions. The company reported gross material margins of 25.3% for the quarter and 27% for the full year of 2012. During the fourth quarter, we leveraged our operations and reduced inventory levels by approximately $54 million on a replacement cost basis.

Tube Supply's performance remains strong and contributed significantly to the bottom line. We remain focused on executing the global growth opportunities that we envisioned with the combination of Tube Supply with our existing Oil & Gas business.

As the company continues to execute its continuous improvement and cost-reduction strategy, we're realizing operating efficiencies and experiencing improved operating margins. Our operating execution around pricing and cost management continued -- contributed to an improvement in EBITDA as a percent of net sales to 3.2% in the fourth quarter compared to 1.4% in the prior year quarter. As expected, due to seasonality in the business, EBITDA as a percent of net sales was down sequentially from 6.6% in the third quarter. In analyzing our business, we see opportunities to further improve the company's operating efficiency and inventory management, as well as to leverage the company's position in our end markets and with key customers. We announced our plan to improve performance in January and we established the key elements and milestones for 2013 in that announcement.

We are advancing our strategy which specifically focused on key areas of opportunity, including realigning our footprint of domestic and international facilities, our network, efficiency, strategic sourcing and our general and administrative spend in targeted areas.

Several slides that provide an update on our progress over the past few weeks were posted in the Investor Relations section of our website and filed with the SEC on Form 8-K this morning.

Looking at Slide 5, one of the goals of vertical sales teams -- action here was to replace the commercial units with sales teams focused on our 3 end markets of Aerospace, Industrial, Oil & Gas, in addition to implement and enhance sales incentive program. The update as of today, we have announced Blain Tiffany as our Chief Commercial Officer and have reorganized commercial management structure down several levels -- has been announced. The sales program was implemented early here in 2013.

In terms of operating functions, assigned new group leadership over operations and procurement and implemented Continuous Improvement program for consistency and improved on-time delivery. We have hired a VP of Strategic Sourcing effective February, and we have named our interim VP of Ops and announced a reorganized operations team.

Within that, several CI projects have been started.

Realigning our facility footprint, planned consolidation of 5 metals facilities into the existing network. We've implemented plans in transition for 5 of those warehouses to be consolidated here in the first half of 2013. All transition plans are on track.

Corporate streamlining. Restructure back office and shared services functions to eliminate redundancies and focus on continuous improvement. We've executed our initial plans to streamline the corporate functions and the rest of the plan is on track for the next quarter and a half.

We believe we can improve operating margins and enhance our focus on customers to better serve them. We'll provide more details to shareholders about the progress we've made in executing the restructuring plan announced in January on the first quarter earnings call. Now I'll recap our observations of our key end markets for Q4 2012 and what we have seen so far early in 2013.

As we've spoken about before, we monitor 3 primary macro data points for our business: the PMI, rig counts and Aerospace build rates. PMI dipped below 50 during the fourth quarter, which is a level indicative of contraction in the manufacturing sector of the economy, and then reverted back to the expansion levels slightly above 50 in December. The average PMI for the fourth quarter was 50.6, consistent with third quarter levels. We were pleased to see PMI improve to 53.1 in January.

As we have said before, the late-cycle nature of our customers' businesses is such that historically, our net sales lag the PMI trend line on a 6- to 12-month basis. Rig counts in North America were at 1,967 at the end of the fourth quarter of this year compared to approximately 2,228 a year ago and compared to 2,207 at the end of Q3. We expect the oil and gas market will continue to be a strong market for us in 2013.

Our Aerospace business remained relatively flat in 2012. As of the end of 2012, open orders were up 10% from December of 2011 and we are optimistic that this trend will continue and will ultimately have a positive impact on top line sales in 2013. Activity levels within our Joint Strike Fighter programs, which is our primary Aerospace defense business, continued to increase during the fourth quarter.

The new Aerospace warehouse that opened in the second quarter in the U.K. to serve our BAE and its JSF and Typhoon programs was fully operational during the fourth quarter.

Our Plastics business achieved 8.6% sales growth in Q4, compared to the prior year quarter. As several new automotive contracts have ramped up production this year. We expect continued growth from the automotive sector in 2013, a key market for Plastics growth this year.

Now I'll turn the call over to Scott for a recap of the financials.

Scott F. Stephens

Thank you, Scott. Good morning, everyone. Fourth quarter consolidated net sales were $274 million, which is $8.2 million or 2.9% lower than the fourth quarter of last year. Tube Supply contributed net sales of $33.4 million in the fourth quarter 2012 compared to $7.6 million in the prior year period as we closed the acquisition in mid-December 2011.

Metals segment tons sold per day, excluding Tube Supply, in Q4 were down 16.3% from the fourth quarter of 2011. Sequentially, tons sold per day were 9% lower than the third quarter as virtually all key end use markets experienced softer demand due to the uncertain economic conditions and normal seasonal shutdowns in the fourth quarter.

In the Plastics segment, fourth quarter 2012 net sales of $31.7 million were $2.5 million or 8.6% higher than the prior year period, primarily due to increased volume in the automotive sector. Operating income in the Plastics segment was $0.6 million in Q4 2012, up $0.4 million from the prior year period.

Consolidated gross material margins were 25.3% for the fourth quarter 2012, compared to 24.1% in the prior year quarter and compared to 28.3% in Q3 of this year. Gross material margins for the fourth quarter included a $0.4 million charge for unrealized losses on commodity hedges, compared to a $0.8 million charge for the prior year quarter and compared to $1.1 million of income in Q3 of this year.

Reported fourth quarter 2012 cost of materials includes a pretax LIFO credit or income of $0.6 million compared to a pretax LIFO charge or expense of $4.4 million in the fourth quarter last year and compared to a LIFO credit or income of $4.4 million in Q3 of this year.

Fourth quarter consolidated operating expenses decreased $4.2 million to $68.3 million or 24.9% of sales, compared to $72.5 million or 25.7% of sales in the fourth quarter last year.

Excluding the impact of Tube Supply's operating expenses, which were approximately $7 million in Q4 this year and $1 million in Q4 last year, operating costs in the business were down $10.3 million from the prior year quarter, primarily reflecting reductions in compensation, benefits and incentive comp.

In addition, there were $4.3 million of SG&A items in Q4 of 2011 related to the Tube Supply acquisition and no such costs were incurred in the fourth quarter this year.

Fourth quarter operating expenses declined sequentially by $5.2 million or 7.1% compared to Q3 of this year. And depreciation and amortization was approximately $6.5 million per quarter in 2012.

Warehouse and processing costs decreased by 6.9% and SG&A costs were down by 9.7% in Q4, compared to the third quarter. The nearly 10% decline in sequential SG&A was primarily related to lower compensation and benefits and incentive comp. As we mentioned in our January call, many of the elements of our improvement plan include building on the cost improvement initiatives that were ongoing in 2012 and that contributed to the reductions in Q4 expenses compared to the third quarter.

Consolidated operating income for the fourth quarter was $1.1 million or 0.4% of net sales, compared to an operating loss of $4.4 million in the same period last year. Total interest expense was $10.7 million for the fourth quarter, which consisted of $9.1 million of cash interest and $1.6 million of noncash amortization.

The effective tax rate for the fourth quarter was 28.9%, compared to 29.4% in the prior year quarter. Our normalized effective tax rate is approximately 33%. The fourth quarter rate was lower than our normal rate due to the impact of taxes on our joint venture. Our normalized tax rate calculations include the equity income from the JV in our pretax income and also reflect the tax amount as reported.

Equity in earnings of the company's joint venture was $1.4 million in the fourth quarter this year, which is $1.6 million less than the same period last year and $0.2 million less than Q3 of this year. EBITDA for the fourth quarter was $8.8 million or 3.2% of net sales, compared to $3.9 million or 1.4% of net sales in the fourth quarter last year, and compared to $20.2 million and 6.6% of net sales in Q3 this year.

Adjusted non-GAAP net loss for Q4 was $5.4 million or $0.24 per diluted share, compared to an adjusted non-GAAP net income of $1.3 million or $0.05 per diluted share in Q4 2011.

The company reported a fourth quarter 2012 net loss of $5.6 million or $0.24 per diluted share, compared to a net loss of $12 million or $0.52 per diluted share in the prior year period.

Now I'll mention a few selected items from our year-to-date results. Consolidated net sales were $1.27 billion, an increase of $138 million or 12.2% compared to 2011. Consolidated gross material margins were 27% for the year ended 2012, compared to 25.3% in the prior year. Operating costs and expenses were $301.9 million or 23.8% of sales, compared to $281.6 million or 24.9% of sales last year. Consolidated operating income for 2012 was $41.1 million, which compared to $5.2 million last year. EBITDA for 2012 was $74.2 million or 5.8% of net sales, compared to $37.4 million or 3.3% of net sales a year ago.

Now on to working capital and balance sheet results. Cash provided by operations was $5.4 million for 2012 compared to a cash use in operations of $46.3 million in the prior year. Cash paid for capital expenditures during 2012 was $11.1 million, compared to $11.7 million in the prior year. We're projecting annual capital expenditures between $13 million and $14 million for 2013.

On a replacement cost basis, inventory levels declined $54 million during the fourth quarter and by over $65 million during the second half of last year, which exceeded the $50 million second half 2012 inventory reduction goal that we had communicated on our second quarter call.

Average day sales and inventory, which the company calculates on a replacement cost basis, was approximately 187 days for 2012, compared to 128 days for the prior year. We set a DSI goal of less than 150 days by the end of 2013.

Average receivable days outstanding was 49 days for 2012 compared to 50.3 for the same period last year. Total debt, net of unamortized discounts at the end of 2012 was $297.1 million compared to $314.9 million at the end of last year. Cash and equivalent balances were $21.6 million at the end of the year, compared to $30.5 million at the end of 2011 and compared to $20 million at the end of Q3. We had a balance of $40 million outstanding on our revolving credit facilities at the end of 2012, compared to $48 million at the end of the third quarter and compared to $36 million at the end of last year. Net debt to total capital ratio at the end of 2012 was 43.4%, compared to 45.3% at the end of 2011.

And now I'll turn the call back over to Scott Dolan to comment on our outlook for 2013.

Scott J. Dolan

Now a few brief comments on the company's outlook. We remain cautious heading into 2013 based on sentiments from many of our customers and a weaker overall economic outlook, particularly at the beginning of 2013 compared to the beginning of 2012.

However, with the reductions in inventory and implementation of additional cost reduction initiatives implemented during the fourth quarter, we feel that the company is well positioned for success. As stated on our January call, we anticipate $10 million of pretax charges to 2013 earnings associated with implementing this plan, and these charges will be taken in Q1 and Q2 of 2013. We expect to realize $20 million of the targeted $33 million improvement in calendar 2013, resulting in a net $10 million operating income improvement to 2013 after the impact of the charges.

We continue to focus on working capital improvements and we expect to achieve a $50 million inventory reduction on a replacement cost basis in the first half of this year, building on the $65 million reduction we achieved in the second half of last year.

In addition to working capital improvement, we will continue to focus on gross material margin execution and implementing the plan to reduce cost and improve operating performance that we announced in January. We have executed the initial steps of our improvement plan as scheduled and expect to start seeing the benefits during the first quarter and we expect improvements to ramp up throughout the year. With that, Sandra, we can now open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question is from Brett Levy from Jefferies.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

Can you guys just sort of talk about a general trend? I mean it feels like perhaps the service centers are getting a bit dis-intermediated because the industry's mills are running at less than 80% utilization. You guys seem to be dropping inventories and that sort of thing. Is there sort of an increase in kind of mill-direct activity that is accounting for the lower volumes, do you think?

Scott J. Dolan

This is Scott Dolan. I don't think we see that. Obviously, overall demand is not where we'd like to see it. And clearly, many of our customers got in an over-inventory position. I'd say, when you look at our inventory coming down, I mean, it's not, for any other reason, other than we built it up too much over last year, especially when we saw a strong Q1 and Q2. And we just had way too many orders in place and didn't turn that off quick enough. You look at where we're heading with our inventory. I mean, our target for this year towards the end of the year for a 3-month DSI is only 150, so it's not like we're reducing inventories at the risk of not being able to serve our customers.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

All right. And what was -- what's revolver -- revolving credit availability at this point as of 12/31?

Scott F. Stephens

Brett, a safe assumption is that there is approximately $10 million of an adjustment from -- between the total line of $100 million and the outstandings. So with $40 million of outstandings at the end of the year, there would've been approximately $50 million of availability.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

And $10 million of LCs or something like that?

Scott F. Stephens

Correct, correct.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

All right. Can you guys talk about -- I mean, obviously you're redoing a lot of your thoughts -- can you guys talk about any plans to -- I don't know, own all of the JV or anything like that?

Scott J. Dolan

It's something that we'll consider to -- we'll consider in the future. Our focus right now is really to get our cost structure in line and get our inventory in line and we will continue to look at those opportunities in the future, but no immediate plans.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

All right. And then I probably just missed this. Was there an EBITDA number given for Tube Supply in the fourth quarter? And can you just talk about some general trends in that business? I mean there was a magically good business for a period of time, but can you talk about sort of EBITDA now and sort of what your thoughts are specifically on the Tube Supply side?

Scott F. Stephens

Yes. I think, Brett, well everyone, as we continue to integrate the operations, the numbers for and the results for Tube Supply as it were will become less relevant and less reliable. So I think as we get into '13 here, it may be more difficult. But looking back and we did do that, we gave the sales number at $33.4 million for Q4. We provided the quarterly information for Tube Supply throughout last year, which, if you go back and run the math, you'll see annual sales from last year at $179 million, which is fantastic, I think. Lower than the $200 million, approximately, run rate in '11 when we acquired the business, but the profitability remains at that 20% EBITDA rate that the business had experienced prior to the acquisition. So we expected that and that's what we got at least in 2012 and we don't see any reason for that to be any different going out into '13 and beyond. There are sort of a litany of opportunities to synergize the revenue side of that business with our Oil & Gas part [ph] of our business and that's really our focus in addition to the operations integration in 2013.

Scott J. Dolan

Yes, this is Scott Dolan. Just to add on that, I think that synergy on the revenue side is really important. I've had the opportunity to spend a lot of time in Houston and customers really can see the ability to bring the legacy Castle Oil & Gas program business, together with the transactional TSI business and being able to offer the full portfolio of products to them is extremely exciting and I would just say that we were, we just didn't -- we did not execute to the level we needed to in 2012 and that has been a huge focus as we kicked off this improvement plan. There's been a renewed focus to really get that integration done as quick as possible, both on the operations and the revenue side.

Brett M. Levy - Jefferies & Company, Inc. Fixed Income Research

And last question, I mean, first off it sounds like almost all of EBITDA in the fourth quarter came from the Tube Supply side, unless I'm doing bad math. I noticed there's sort of a traditional period where your Aerospace customers and you guys sort of get together and almost set margins for the year. How have the discussions gone and sort of what does that mean sort of up or down relative to 2012 or 2013?

Scott F. Stephens

Well, Brett, Scott Stephens here, you're math on Q4 is approximately correct. So we'll just confirm that, and I'll give you my two cents on what we've seen in Aerospace in terms of the margins coming into '13. Not a significant change. You're right, many of those contracts are renegotiated annually. Many are multi-year, by the way, as well. So in that business, at least there's probably less than the normal amount of the annual renegotiations. We're not expecting anything significantly different in 2013. We feel like as the market continues to improve and our inventory position continues to improve that we would anticipate continued improvement in our Aerospace margins in '13 as compared to '12 and there's nothing in our contract -- in the contract business that would -- that doesn't support that.

Operator

And the next question is from Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

Clearly, it sounds to me that the first half looks a little bit challenging based on your remarks previously made in the conference call and in the press release. And at the same time, you're lowering your costs, which is a bit hard to navigate so you've got certainly tall tasks ahead. And so as you prepare for that cost structure, what -- you've mentioned in the past that you prepare -- you constantly prepare your cost structure for, say, a 10% growth year-over-year and I know that's not in your plan now and that's the reason why you're cutting costs. But what sales projection are you basing your cost cuts in the first quarter -- for the full year of 2012 and then has your results through to February so far maybe made you look at them again to say maybe you weren't sharp enough?

Scott J. Dolan

Yes, I think when we started off on this, we were not anticipating much revenue growth for this year compared to last year with the strong start we had to 2012. So when you look at what we're targeting, we've said the $33 million run rate coming out basically. $20 million will hit in this year. I think, as you look at our goal for coming out of 2014 to be at 20% percent expense of sales, we're not banking on very much revenue improvement to hit that number. That doesn't mean we don't foresee revenue improvement over that period of time, but we're really focused on getting to that number whether or not revenue increases or not.

Edward Marshall - Sidoti & Company, LLC

Okay. And at this point in time, I mean, and this is might be a tough one for you to answer, but do you see a flattish environment for 2013 on sales as we look at '12 -- '13 over '12?

Scott J. Dolan

Yes, I think, what we're seeing right here out of the gate is clearly similar to what we saw in the second half, probably more like the first 4 or 5 months of the second half of 2012. There's a lot of talk about things getting better, but we're not necessarily seeing that yet. And so I can't sit here and say anything other than that, other than what we do here is there's optimism out there, but I'll believe it when I see it.

Edward Marshall - Sidoti & Company, LLC

So you're 2 months through the first quarter just about, give or take a week or so. Does this first quarter look a lot like the fourth quarter, x charges for the restructuring?

Scott J. Dolan

Yes, I'd say, somewhere higher than the fourth quarter as we saw a precipitous drop in December, and really just how quickly the cost can come out, something in between fourth and third quarter.

Edward Marshall - Sidoti & Company, LLC

I guess you're referring to sales. Is there anything on the margin that would materially change from Q1 to Q4, just maybe the absorption factor because you have more days?

Scott F. Stephens

I think it looks like the second half of the year, which is kind of no surprise, right, because it's only a couple of months later. So from kind of the top line to the margins and obviously, we're working on the cost to continue to keep driving those down. But it looks like a lot like the combination of Q3 and Q4, somewhat between there.

Edward Marshall - Sidoti & Company, LLC

Okay. And then could you kind of talk about maybe the cadence of how the cost improvements flow through the model in 2013 as we move forward? I don't know that we talked about that yet. I know you're reducing $10 million a quarter in the first quarter, but x charges, how do we kind of see those cost savings flow through the model itself?

Scott F. Stephens

Yes. So we've highlighted on Page 6 of the deck that we've put out, the buckets again to reiterate that. We've done one big round of layoffs here as we move towards our 10% number that we stated in the restructuring call. Between now and the end of second quarter, you get another 25%, 30%. And then really, in second quarter is the big chunk, which is the 5 facilities that will be fully integrated into the rest of our network. The process work, that really starts to hit in Q2. A lot of good stuff around transportation has gone on. Clearly with our new VP of Strategic Sourcing, we have a roadmap for him in terms of the opportunities to go at and you'll start to see that hit in second quarter as well. So bottom line is you really -- you want to have the bulk of it hit by the end of second quarter with process improvements continuing on in Q3 and Q4, but we also want to have the right platform as we go into 2014 because we obviously have more costs to take out in 2014. With that said, all of the charges will hit pretty much in Q1 and Q2.

Edward Marshall - Sidoti & Company, LLC

Right. So are you saying more like -- I'm just eyeballing this, but 70-30 split where you'll start to recognize most of the cost savings in the 70% in the first half of the year x charges, x the restructuring charges?

Scott J. Dolan

Yes, I think that's pretty close. The only thing I'd be cautious of is a lot of those might hit at a run rate of 70% towards the end of Q2. So you may not see it show up in Q2 results, but you'll fully start to see that kind of percentage for Q3.

Edward Marshall - Sidoti & Company, LLC

Okay. So you'll be most of the way throughout by 2Q and then the results will be evident in the back half of the year, I see.

Scott F. Stephens

Yes, I think that's a fair way to assess it.

Edward Marshall - Sidoti & Company, LLC

And Scott, I know the Q or the K will be out later, but do you have the gross profit and the operating profit for the 2 businesses real quick? For the 2 segments, I'm sorry.

Scott F. Stephens

For Metals and Plastics?

Edward Marshall - Sidoti & Company, LLC

Please.

Scott F. Stephens

Ed, I don't have them right at my fingertips at this moment. I'll get them before the end of the call and I'll mention it before we close up the call here.

Operator

And the next question is from Dan Whalen from Topeka Capital Markets.

Daniel M. Whalen - Topeka Capital Markets Inc., Research Division

You touched on this briefly earlier, but can you just maybe add a little more color in terms of how big of a delta there was between November and December? It seems December was a pretty sharp falloff from everybody else we speak to. Just trying to get a better gauge that -- out of first quarter. I mean, is it kind of -- should we kind of be normalizing a November kind of mindset?

Scott J. Dolan

Yes. I think when you look at October, November, it felt a lot like Q3 and then the difference between Q4 and Q3, almost was December. We really, coming back after the Thanksgiving break, really slowed up and then we saw a lot of our customers shutting down operations and really extending their holiday periods. So really, across the line, all the businesses saw a pretty big impact and I'd say as soon as you got through the first few days of the month in January, we were sort of back to that third quarter run rate and away from December, which was tough.

Daniel M. Whalen - Topeka Capital Markets Inc., Research Division

All right. So, I mean, my sense is it sounds like the first quarter is probably shaping up to kind of a breakeven to nominal loss. Is that a kind of fair way to look at it?

Scott J. Dolan

Yes, I don't think we're in a position to comment on that right now, but I think from what we've said, you can sort of triangulate your way to what you feel.

Daniel M. Whalen - Topeka Capital Markets Inc., Research Division

Okay. And then just -- it's probably still a little early here, but just in terms of your new sales verticals, what kind of customer response are you getting back in the early stages here?

Scott J. Dolan

Yes. So far, it's been extremely positive. I've had the opportunity to visit and call several customers. What's really nice with Blain and his role, he was -- he ran the Aerospace organization before coming Industrial, so he has a lot of experience there. Clearly, with the Tube Supply team in place with Mark Fagert, a lot of experience there and good customer relationships. So I think overall, it's been positive. We've been able to leverage some activities, some project management activities -- or program management activities that we do in Aerospace, looking at that in Oil & Gas, and we've had a couple of really good visits down there. So overall, for the customer to this point, they really haven't seen much of a difference. They're still dealing what the same salespeople and much of the change -- which there won't be a tremendous amount of change other than the sales folks now should be able to spend a lot more time getting intimate with our customer base and less time worrying about other stuff that they were involved with before.

Operator

[Operator Instructions] And the next question is from Phil Gibbs from KeyBanc Capital Markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

I had a question on the FIFO gross profit margins. I think we've seen some pretty marked deterioration as the year has progressed, and in the fourth quarter you did see over 100 basis points of deterioration relative to 3Q, which was unique to -- which was a unique, I mean, I think we saw mostly lower margins -- lower volumes, but stability from the rest of the service center space in the quarter. Do we expect the FIFO margins to improve in the first quarter? Are we looking to be relatively stable from what we saw? What can you do to improve on those? Any color you can provide would be helpful.

Scott F. Stephens

Yes, I think, Phil, our thinking is that, as kind of we said about the second half of the year resembling how we were starting 2013, it's sort of a combination of Q3 and Q4, which -- so in other words, we don't -- we do expect margins to improve from the Q4 levels for several reasons, but we don't know that we'd get back to the Q3 levels. So I think we see it somewhere in between there. That's kind of how we see it starting out the year here.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. And can you just refresh us on what you may see for absolute inventory reduction for '13? Just because I know that the fourth quarter was ahead of -- it was ahead of target but what are we looking for, for the rest of the year?

Scott F. Stephens

Well we said 2 things. We said that we expect $50 million to come out of inventory by the -- in the first half, so by the end of June. And we also said that we expect to achieve a 150 DSI in the second half of the year. So if you do the math on that, you'll find -- you'll see that there is additional -- if we hit that target, there will be additional inventory reduction beyond the $50 million in the first half, approximately another $25 million depending on sales levels and cost of good levels. But there would be another anticipated decrease beyond the $50 million of first half. We'll update that, Phil, at the end of Q1 or as the first half progresses, but we would expect improvement beyond the $50 million. But our focus right now is hitting that $50 million reduction in the first half.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. And then just lastly, if I could. When are you expecting the daily volume comps on a year-over-year basis to get, call it, stable before they turn the corner to the other direction, given the visibility you have today? I mean I wouldn't say it would be in the first half of the year. That would probably be safe to say, but are you expecting the comps to get positive in the second half?

Scott J. Dolan

Yes. I mean, I think, yes, with everything we see and with no dramatic improvement in market conditions, I think you're exactly right. Last year was the tale of 2 halves and the first half of the year was very different than the second half. And so clearly, if you don't break it down by month from a quarter perspective, it would definitely be third quarter.

Operator

And there is a follow-up question from Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

My question's sort of on the same lines as the last caller and more along the lines of maybe market share. And I look at the posted numbers from the industry and I know that your mix is a little bit different, but you're certainly trending below the volume year-over-year and quarter-over-quarter of some of the peers and also some of the industry data. And I'm curious if some of the cost cuts you're putting in place may be putting some of your market share at risk or anything else that maybe you could mention or shed light on, I'd appreciate it.

Scott J. Dolan

Yes. No, we don't see any of that. I mean, all of the cost cuts, we feel, as we said it, it's about cost cutting but improving performance. And we haven't lost any key talent with what we're doing. I don't believe that that's the case at all and we're very mindful of that and make sure we're measuring -- even in the markets that we have announced that we will be closing down the warehouse, we've still not lost traction in those markets and continue to sell. And I think, Ed, when you look at it, we obviously, as people, other companies, have reported over the last week, the 9% quarter-over-quarter was fairly comparable. I think when you look at it, Q4 this year, or 2012 versus Q4 2011, our 2011 Q4 was really strong and the market was on its way up. It had a couple more quarters to run in the first and second quarter of 2012. We're clearly seeing in Q4 2012 that we're more on the way down and I think everyone sees that a bit, but it seems like we're a bit more exaggerated or that is for our company. And that's a lot lately [ph] because as you said, our customer base and our product mix, but our customer base, I mean, we think we're a little bit more deeply cyclical in our customer base than maybe some of our competitors to adjust that. So it's obviously something we'll continue to watch. The quarter-over-quarter gives us a better sense of what's happening in the near term and we'll really watch that closely as we look to Q1.

Scott F. Stephens

Ed, I'll just give you the segment information that you asked for earlier. From one of the slides, you'll see the sales numbers for the segments for Q4, $242 million for Metals and $31.7 million for Plastics. We will -- the 10-K will reflect the segment operating profits of $3.6 million for Metals in Q4 and $0.4 million for Plastics. The gross margins that will be reflected within that are 25.5% for Metals and 27.7% for Plastics for Q4.

Edward Marshall - Sidoti & Company, LLC

Do you have a corporate expense number by any chance?

Scott F. Stephens

It was $3 million in Q4.

Edward Marshall - Sidoti & Company, LLC

$3 million. Why has that trended higher in '13 relative to 2012? Has that something to do with the acquisition? Just curious. I think last year, it looked like about $8.4 million. This year, $11.9 million.

Scott F. Stephens

I will have to take a look to see what the different components to that are, Ed. And we'll make sure that, that's reflected in the K document.

Edward Marshall - Sidoti & Company, LLC

But something like $3 million going forward is more relevant than, say, the $8.4 million from 2011?

Scott F. Stephens

Until I take one more look at that, I don't know if I would necessarily say that. So we'll give an indication of that.

Operator

Thank you, and at this time, we have no further questions.

Scott J. Dolan

Okay, great. Thanks, Sandra. So just in closing, obviously, continues to be a difficult environment out there and not improving as quick as we would like. With that said, we're still extremely optimistic at all the levers that we do have to pull. And with the conditions the way they are, it just gives us a greater sense of urgency to get all that done, get our inventory under control, get our cost level to where it should be, which really sets us up very well going forward as the market does improve -- whenever that may be. So very good. Thank you, all, and have a great day.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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