Castle & Co. Q4 2008 Earnings Call Transcript

| About: A. M. (CAS)

Castle & Co. (NYSE:CAS)

Q4 2008 Earnings Call

March 10, 2009 11:00 am ET


Michael Goldberg - President & Chief Executive Officer

Scott Stephens - Vice President of Finance, CFO & Treasurer

Katie Pyra - Ashton Partners


Lloyd O’Carroll - Davenport & Co.

Timothy Hayes - Davenport & Co.

Nat Kellog - Next Generation Equity Research

Mark Parr - Keybanc Capital Markets


Thank you for standing by and welcome to A.M. Castle & Company’s fourth quarter and full year 2008, earnings conference call. At this time, all participants are in a listen only mode. Following today’s presentation instructions will be given for the question-and-answer session.

I would now like to turn the conference over to Katie Pyra with FD Ashton Partners. Please go ahead.

Katie Pyra

Good morning. Thank you everyone for joining us for A.M. Castle’s 2008 fourth quarter and year-end conference call. By now, you should have all received a copy of this morning’s press release. If anyone still needs one, please call my office at (312) 553-6717, and we will send you a copy immediately following the conference call.

With us from the management of Castle this morning are Mike Goldberg, President and CEO; and Scott Stephens, Vice President of Finance and CFO.

Before we begin, as usual, we would ask that everyone take note of precautionary language regarding forward-looking statements contained in the press release. That same language applies to comments made in this morning’s conference call.

We will begin the call with an overview of the quarter and the year and then we will open up the line for questions.

I will now turn the call over to Mike Goldberg. Please go ahead, Mike.

Michael Goldberg

Thanks, Katie. Good morning everyone and thanks for joining us on the call. We are pleased to report that 2008 our company achieved record revenues and the third best operating earnings in our 118-year history. We expanded our global footprint, we invested new systems and equipment and made significant progress on the strategic initiatives, we believe are vital to our long-term growth and profitability.

However, 2008 seems like a long time ago and the world is a very different place today than it was say last summer. At the fourth quarter, we started to see a significant decline in demand, as well as the elimination of both of the carbon surcharges that are built up over the year.

As we moved into 2009, we have seen across the Board, continuing softening of customer demand and further price declines in certain commodities. We have taken the steps that are necessary in this environment, we have significantly reduced our head count; we have attacked every element of our cost structure and accelerated our efforts to reduce our inventories.

We will talk at greater length about our outlook, later in the call. So today, we’ll highlight our fourth quarter and total 2008 results and along with some of our key business developments and we’ll provide you with our perspective on the current business environment and share our early outlook for 2009. But first, a quick recap of our fourth quarter and year-end financial results.

As you have seen from our press release, our fourth quarter consolidated net sales were $322.5 million comparable to last year’s $322.1 million. The company reported a fourth quarter net loss of $53.6 million, which includes $58.9 million, non-cash charge to reduce the carrying value of goodwill. Excluding the impact of this goodwill impairment charge, fourth quarter 2008 non-GAAP net income was $5.2 million or $0.23 per diluted share compared to $6.7 million or $0.29 per diluted share in the fourth quarter of last year.

The Company’s Metal segment, which accounted for 92% of total reported revenue recorded fourth quarter sales of $297.1 million, this was $3.2 million or 1.1% higher than last year. On a same-store basis, overall volume was 7.3% lower than the prior year period and approximately 9% lower than the third quarter.

The Plastic segment, which comprised the remaining 8% of total reported revenues reported fourth quarter sales of $24.4 million, which was 12.8% lower than the prior year. As you would expect, activity slowed with each month in the fourth quarter and as the holiday period approached many customers extended their shutdowns somewhere into the New Year.

Before I recap our full year results, I’d like to make a few comments about the 2008 business environment. In my nearly 30 years in the metal service center industry, I have never experienced such a sudden change in business conditions. And as always said, that change in this business, whether its price or volume are always larger than you can ever think off or plan to. Well in 2008, we experienced an unbelievable high and a very sudden and large drop off.

During the first six months of last year, we experienced very healthy activity levels with volumes up year-over-year. At the end of the second quarter, we reported that we shipped 5.2% more tons in the first half of 2008 compared to the same period last year. And we also saw unprecedented strength in pricing in carbon and alloy products especially in plate.

The environment began changing in mid-year when we really saw the economy begin to effect our customers , after the normal July holiday slowdown, we started to see a softer market conditions in many of our markets resulting in reduced volumes and increased competitive pressure on pricing and margins for the metal segment.

The Plastics business experienced similar market softening in the second half particularly as a result of decreased demand in the marine and the boat building business and the automotive industries.

In total, we still shift 2.1% more tons last year than in 2007, but by the end of the year, the fourth quarter run-rate was about 7% less than the prior year. In addition, average market prices for the Company’s products especially carbon based materials, which increased significantly during the first three quarters of the year fell considerably in the fourth quarter, and actually returned close to January, 2008 levels by year-end.

With that background let me recap our full year 2008 results. Our consolidating net sales rose $80.7 million or 5.7% to a record $1.5 billion versus $1.42 billion a year ago. Metal segment sales gained 6.1% to a record $1.385 billion, excluding the Metals UK acquisition, sales were 2.4% higher than 2007.

Sales for our Plastic segment were $116.2 million, which is $0.5 million higher than the full year of 2007. As I said earlier, activity in the boat manufacturing market was particularly weak but the relative strength in certain industrial markets and life sciences combined with higher overall pricing contributed to a slight sales increase for the full year.

On an operating basis, non-GAAP net income was $41.1 million or $1.84 per diluted share. In the fourth quarter, $58.9 million non-cash impairment charge uncertain of the company’s goodwill was recorded resulting in $2.59 reduction in earnings per share. This adjustment produced a reported net loss for 2008 of $17.1 million or $0.75 per diluted share.

Scott will provide more details on the comparative financial results later on. Now, I would like to highlight few of our last year’s business developments. Two and a half years ago we launched our strategy became a leading global provider of specialty metal products, services and supply chain solutions.

Since we kind of started this journey, we are focused on serving a longer term, high growth end-user market such as aerospace, oil and gas, heavy equipment, power generation, mining and infrastructure. In this diversified industrial customer base now represents the bulk of that metals business.

In support of this strategy, we continue moving forward our global expansion efforts. In January of last year, the company acquired Metals UK Group, a distributor and processor of specialty metals and its distribution and processing facilities in England and Spain.

The acquired company primarily served the oil and gas, aerospace, petrochem, power generation markets world-wide and it has helped us expand our global reach and service certain potential high growth initiatives.

Also in January of last year, our company obtained a business license from the opening of the new service center in Shanghai, China. The facility became fully operational in the second quarter of 2008, and this service center enables us to serve new customers in China, as well as existing customers, we previously received material from the company’s domestic operations.

In 2008, sales shift from locations outside the United States totaled 18% of total metal sales, up from 12% in 2007. The company also achieved two significant information system milestones in 2008. In the second quarter, we implemented the first schedule phase of Oracle ERP system in the network segment.

This implementation brought our domestic aerospace locations online and replaced a number of legacy systems at these locations. At the same time, the company implemented the finance and human resource functionality.

In February of this year, we successfully implemented Oracle in our Canadian operations and planned to install it in various spaces across all our domestic locations by the end of the year. Additionally, during the third quarter of last year, the plastic’s business successfully completed implementation of its own stand-alone ERP systems.

Effective July 1, 2008 certain companies sponsor-defined benefit pension plans were frozen in conjunction with this decision to freeze these plans, the company modified into investment portfolio. The investment portfolio on the pension is now primarily comprised of corporate fixed income securities that match the overall duration and terms of the company’s pension liability structure.

We made this change primarily from equities to corporate fixed income and instruments before the collapse of the stock market and the plan remains over funded and hence the company does not anticipate making any significant cash contributions to the pension plans in 2009 or the foreseeable future.

In 2008, we also made a number of strategic hires to strengthen our leadership team, key executives joining Castle last year included Curtis Samford as President of our Castle Metals Oil & Gas Unit, Bob Perna as Vice President and General Counsel, of course Scott Stephens joined us as Vice President of Finance and Chief Financial Officer and earlier this year Kevin Fitzpatrick joined us as Vice President of Human Resources.

As the market continued to soften over the course of last year, we intensified our cost reduction efforts. We achieved a sequential improvement in operating expense in the second half of 2008 and particularly in the fourth quarter as we work to bring our cost structure in line with current and anticipated business levels.

By the end the first quarter of this year, we would have reduced headcount by more than 10% contributing to more than $45 million or a 15% year-over-year reduction in our total operating expense run rate. I’ll be remiss not to mention the significant improvement we made in our safety record in 2008; we had a reduction of over 30% in total recordable accidents and an amazing 64% reduction in last time accidents.

I’d like to commend all our employees for their continuing efforts and we seek similar improvements this year too. And as previously announced during the fourth quarter, the company determined that a weakening of the U.S economy, the global credit crisis resulting in the reduction of the company’s market capitalization below its total shareholder value for a sustained period of time was an indication that its goodwill may be impaired.

As a result, the company reformed an analysis as of December 31, 2008, recorded a non-cash charge of $58.9 million for goodwill impairment, and Goldberg will mention this more later.

As you look forward in ‘09, the tremendous uncertainty surrounded the economy, the financial markets like it’s very difficult to predict how our business is going to be impacted, but let share our current perspective effects.

It shows that activity levels in the Metal segment, we sold fourth quarter 2008 tons sold declined by 9.4% sequentially from the quarter three levels. As 2009 had begun, we are seeing continued sequential softness and demand as the overall economy has continued to weaken.

In general, base prices have remained relatively stable from last year-end, with the exception of carbon and alloy plate. We have also experienced declines in various surcharges, from molybdenum and other alloying elements.

At this point, we don’t anticipate any significant near-term changes in overall market pricing for our primary metal products. The expensive metal consolidation that has taken place over the past few years and an enormous ability to adjust capacity has kept base prices reasonably firm, but even with such reduced capacity, we have seen supply lead times contract and there are severe market pressures as both mills and service centers compete for lower volumes.

As we look across our market areas, we still expect to see reasonably healthy build rates for large commercial aircrafts, and of course we are optimistic that the defense side would hold up, and the Joint Strike Fighter program will come on stream.

However; the project jet manufacturers have obviously been impacted, we anticipate this market will be weak. Oil and gas had a strong 2008, particularly overseas. In 2009, while the decline in oil prices will undoubtedly reduce research and exploration efforts, we expect our focus areas, the productions and the production consumables sectors of the market to hold up fairly well, but still weaker than last year.

In general, equipment manufacturers are going to have a tough year, but we have some bright spots power generation and mining equipment should be firm, alternative energy has some great upside. We believe that there is a recovery opportunity in equipment going to the domestic infrastructure market related to the new administrations plans spending projects. And we see similar potential around the world, as many other countries consider infrastructure projects to jump start their economies.

On the plastic side, we see some opportunities in the life sciences and point of pressure despite, but general industrial demand is soft and the marine and boat building sector is very weak. From a global market perspective, we continue to see significant opportunity to expand our business in the Asia-Pacific region and we continue to look at expanding our capabilities in Mexico and Canada to pursue the potential we see in those markets.

We anticipate a decline in our revenue in the first quarter of 2009, both from reduced volumes and lower selling prices. Consequently, we have reduced our work force to align our cost with anticipated activity levels. In addition, we’re taking a cautious approach in our inventory planning and capital commitments and are actively perusing working capital improvements with further strengthening of our balance sheet as the two key priorities for 2009.

We intend to decrease inventories by $50 million in the first half of the year, which would generate significant cash flow. We’ve also set a debt reduction goal of at least $50 million by 2009 year-end. This will preserve the strength of our balance sheet and position us to win market share from other less world capitalized competitors. It will also allow us the flexibility to make opportunistic acquisitions once the recovery begins.

The effort we began in 2008 to reduce our cost structure is continuing in 2009. We will continue working to find process efficiencies and additional ways to reduce our overhead through the organization. Our capital spending will be much reduced in 2009. Our budget is for $10 million compared to $26.3 million last year.

Approximately, $1 million of 2009 spend will be dedicated to the ERP Project, with the balance rates to equipment facility upgrades. So, that’s our perspective on things and where we will be focusing our efforts this year and also being in business for 118 years and so the company has weathered a few storms in its day and will get through this one as well.

In fact, we believe there is a real opportunity amidst today’s challenges. We are confident that we’re pursuing the right strategy and targeting markets with tremendous potential. So now, we will continue to focus on strengthening our market position, our balance sheet and our cost structure. And when the economy begins to recover, our company will be much stronger and ready to capitalize on the upside potential, historically the company’s economic recovery.

At this time, I’ll turn things over to Scott to give a more detailed review of the numbers.

Scott Stephens

Thank you, Mike. Good morning everyone. I will start with a recap of the full year 2008 results and then provide an overview of the fourth quarter 2008. Consolidated sales for the fiscal year 2008 were a record $1.5 billion, an increase of $80.7 million or 5.7% over the full year 2007.

Sales in our Metal segment were $1.38 billion in 2008, which is 6.1% higher than 2007. Excluding the impact of the Metals UK acquisition in January 2008, Metal segment sales were $31.3 million or 2.4% higher than 2007 on sales volume that was 2.1% higher than the prior year.

Metal segment sales volume growth in 2008 was driven primarily by strength in plate and alloy bar products sold into energy, mining, and power generation markets. The company experienced higher prices in 2008 for its carbon-related products; however, those price increases were mitigated by a changing sales mix that included lower sales levels in 2008 on higher price to aluminum, stainless and nickel products. 2008 sales for our Plastic segment were $116.2 million, an increase of $0.5 million versus last year. Plastics volume levels declined by 5% in 2008, but higher prices mitigated the top line impact of reduced volumes.

Decreased sales volume in Plastics was primarily a result of softer demand and the boat builder and automotive industries particularly during the second half of 2008. Our consolidated 2008 gross margin rate was 25.1% of sales compared to 27.3% in 2007. Higher product cost including significant scrap surcharge on carbon products throughout much of 2008 was a primary driver of lower 2008 gross profit margins.

The full year consolidated operating expenses were $373.9 million as reported, which includes the goodwill impairment and includes expenses related to the Metals UK acquisition in January 2008. Excluding these items from 2008, operating expenses were $308.9 million which represents a 3.9% increase from 2007.

Primary drivers of the $11.6 million increase year-over-year were $5.1 million for the ERP implementation, as well as higher plant transportation and selling cost for the year associated with higher annual sales volumes in the Metal segment.

Excluding the goodwill impairment charge, operating expenses were 20.9% of sales for 2008, the same ratio as 2007. Excluding the goodwill impairment charge, non-GAAP consolidated operating profit for the full year 2008 was $63 million or 4.2% of sales, versus $90.7 million or 6.4% of sales for the full year of 2007.

Joint venture equity income was $8.8 million for the full year versus $5.3 million in 2007. Interest expense for the full year of 2008 was $9.4 million, which is $3.5 million less than 2007.

For 2008, again excluding the goodwill impairment charge, non-GAAP net income was $42.1 million or $1.84 per diluted share, compared to $51 million or $2.41 per diluted share for 2007. Full year 2008 reported net loss was $17.1 million or $0.76 per diluted share.

Regarding the goodwill impairment charge, company issued a press release several weeks ago announcing that the anticipated goodwill charge that would be reported in the fourth quarter of 2008. Press release indicated the charge would likely be in the range of $55 million to $65 million and the actual charge recorded was $58.9 million.

Due to weakening economy and a reduction in the company’s market capitalization that occurred in the fourth quarter of 2008, management performed an interim test for potential goodwill impairment as of December 31st 2008. That analysis resulted in the $58.9 million non-cash charge to reduce the carrying value of goodwill that was recorded in the fourth quarter, the charge non-deductible for tax purposes.

Of the $58.9 million amount, $49.8 million relates to the aerospace reporting unit and $9.1 million relates to the Metals UK reporting units, both of which are in the company’s Metal segment.

Summary results for the fourth quarter 2008 were as follows. Consolidated fourth quarter net sales were $321.5 million, which is comparable to the fourth quarter of 2007 amount of $322 million.

Our Metals segment recorded sales of $297.1 million for the quarter, which was $3.2 million higher than the same period of 2007. Overall tons per day were down 7.3% versus the fourth quarter a year ago. And sequentially, fourth quarter 2008 tons sold per day were 9.4% below third quarter 2008 levels. On the Plastic side, Q4 2008 sales were $24.4 million, a12.8% reduction from the fourth quarter of 2007.

Our consolidated gross margin rate in the fourth quarter was 23% of sales, compared to the prior year of 25.6%. Fourth quarter gross margins were negatively impacted by the weakening economy and the result in price declines and increased competition in the market place.

Fourth quarter consolidated operating expenses excluding the goodwill impairment charge were $67.5 million or $4.9 million and 6.8% lower than last year. Fourth quarter operating expenses were impacted by several year-end adjustments and by the acquisition of Metals UK Group and excluding these items from the fourth quarter, operating expenses were approximately $3 million or 4.1% lower than the prior year quarter.

Consolidated operating loss for the quarter as reported and including the goodwill impairment charge was $52.4 million excluding goodwill, non-GAAP operating profit for the fourth quarter was $6.5 million or 2% of sales compared to the prior year fourth quarter of $10.2 million or 3.2% of sales.

Joint venture equity income was $0.8 million for the fourth quarter and lower than the $1.6 million recorded in Q4, 2007. Interest expense was $2.3 million for the fourth quarter compared to $1.7 million last year. In the fourth quarter, the company reported a net loss of $53.6 reflecting the goodwill impairment. Excluding the goodwill impairment charge non-GAAP net income for the fourth quarter was $5.3 million or $0.23 per diluted share in the prior year, the company earned $6.7 million or $0.29 per diluted share.

Moving on to the balance sheet, we continue to reduce our inventory and debt levels to the fourth quarter of 2008. Inventory declined by $32 million and debt declined by $34 million from the third quarter to year-end 2008.

Day Sales and Inventory or DSI ended the year, at 130 day average better than last year’s 132 day average and DSO or Days Sales Outstanding was 47.6 days for 2008 versus 45.1 days for 2007. We anticipate that the weakening global economy may hinder our ability to generate improvement in these turn rates going forward.

As I went through this, our fourth quarter DSO and DSI levels were higher than our averages for 2008 as a whole and we expect the downward momentum in the economy will provide a challenging headwind to maintain 2008 DSI and DSO levels at least for the first half of 2009.

Having said all that, we recognize it is crucial for us to continue our focus on reducing our inventory levels and as Mike mentioned earlier, we set an aggressive inventory reduction target of $50 million for the first half of 2009. And we are on track with our inventory plan, so far this year.

As of December 31, 2008, our debt-to-capital ratio was 25.2% compared to 18.3% at the close of 2007. The increase primarily reflects the debt undertaken in conjunction with the January 2008 acquisition of Metals UK Group.

Total debt at year-end 2008 was a $117.1 million compared to $86.5 million at the end of 2007. We do have additional financial flexibility to our $230 million credit facility including $179 million of available borrowings at December 31, 2008. The company was in compliance with all of its debt covenants as of December 31st 2008.

Capital expenditures for 2008 were $26.3 million as compared to $20.2 million in 2007. 2008 expenditures included $7.5 million of external cost related to the company’s ERP implementations, also included $2.7 million for the expansion and redesigning of projects and $2.1 million for other information technology related enhancements.

The remaining capital expenditures resulted from the sizable investment in new saws, side loaders and other capital equipment. We anticipate 2009 capital spending to decline significantly to less than $10 million in 2009. In terms of the Oracle ERP implementation project $13 million of the anticipated $14 million of external capital to be spent was incurred by the end of 2008.

In summary, despite a difficult business climate, the company ended 2008 well-positioned to navigate the challenges of the business cycle. We have a clear road map for 2009, with an emphasis on improving our inventory position, further reducing our cost structure, improving our gross margins and fighting to gain market share from our competitors.

By minding these basics, we are confident that the company will be well-positioned to make the most of the economic recovery when it arises.

And we’ll now open up the call for questions.

Question-and-Answer Session


(Operator Instructions) And our first question comes from Mark Parr - Keybanc Capital Markets.

Mark Parr - Keybanc Capital Markets

I guess the year could have ended worse, I think you guys relatively speaking did a pretty good job to end up the year, so congratulations on that.

Michael Goldberg

Thank you.

Mark Parr - Keybanc Capital Markets

I think you still doesn’t feel very good, so I am sure.

Michael Goldberg

What does?

Mark Parr - Keybanc Capital Markets

I had a couple of questions, one on the SG&A front, the reduction from the third quarter, could you give us some more color on the year-end adjustments and how much of that reduction that we saw is recurring on a go-forward basis?

Scott Stephens

Well, there was a couple of million dollars basically of favorable year-end adjustments. So excluding those, we still year-over-year in the fourth quarter, we are down about 4% Q4-to-Q4. So they weren’t terribly significant. We mentioned the headcount reductions and the workforce reductions given activity levels that were in excess of 8% by the end of last year and that are now in excess of 10%.

Mark Parr - Keybanc Capital Markets

So you have a sense for the run rate of SG&A for ‘09?

Scott Stephens

Well, what Mike mentioned was at least a 15% or $45 million reduction is on track for 2009 at this point.

Mark Parr - Keybanc Capital Markets

Well, for SG&A?

Scott Stephens


Mark Parr - Keybanc Capital Markets

Well, that’s really good. Do you have any sense, you talk about the competitive environment and Mike, I was wondering if you could talk a little bit about the outlook for gross margins as well. And also, I’d also like to get a sense, your LIFO adjustments are subject to such tremendous volatility over the course of the year. Does the new ERP system imply that, we are going to see less volatility as far as LIFO impacts on quarterly earnings going forward?

Michael Goldberg

I’ll answer that. First question, now let’s go on to the second one. The market is obviously extremely competitive as the year is kind of unfolded. To-date, our margins have held up quite well. So, we are relatively pleased with our margins and we’d anticipate kind of margin levels kind of close to the average of last year. So we are seeing a recovery from the fourth quarter, but we know that this that the market is extremely competitive and there just really isn’t the volume of business out there for it not be so.

So, but we do anticipate some sort of pick up certainly in the first quarter. I will let Scott address the specific LIFO issues but yes, as we roll on to the ERP system through this year, our costing methodology will change and I think it will allow us to have a kind of predictable less volatile LIFO number. But it’s, we are going to take most of this year to transition the balance of domestic locations. So, we’ll have to deal with that through this year until we make that switch over.

Scott Stephens

Okay. Mike, I’ll just add. Yes, it will improve from several standpoints including the mechanics, the data will be more consistent, the amount of detail and the speed with which we can grab it from the various segments will be improved. So as a general statement, yes, that will improve and also with the change in the costing methodology, we would anticipate a lower level of quarterly volatility in the LIFO.

Mark Parr - Keybanc Capital Markets

Is there any guidance you can give us at this point as to the magnitude of LIFO impacts over the next couple of quarters?

Scott Stephens

Well, other than to say that we would anticipate with continued pricing declines and just the overall liquidation of inventory that along with that would come some LIFO liquidation. So, that’s our expectation predicated on the inventory reductions and how pricing ends up shaping it, shaking out.

Mark Parr - Keybanc Capital Markets

I think I heard you say that you expected a $50 million reduction in inventories?

Scott Stephens

Right. In the first half, yes.

Mark Parr - Keybanc Capital Markets

And then, if that in the first half or if so if that happens and let’s say base prices don’t change, is there a range that, can you give us a fairly tight range in terms of what sort of LIFO benefit that could create?

Scott Stephens

What we’ll do is, we’ll talk about the first quarter LIFO impact in a month and we’ll take that as a jumping off point to talk about say second quarter and the next couple of quarter expectations.

Mark Parr - Keybanc Capital Markets

Okay. Right, that will be really helpful Scott, all right. Thanks for your color. I’ll get back in the queue but Michael, I know you talked a little bit about the demand environment, but it doesn’t look good for the economy here in the near-term and I think your positioning in the defense area. And again I don’t know a lot about the Joint Strike Fighter, that’s something that’s been delayed for a long time, you said you were hopeful that, that might come back or might not come back, but they might get going this year. I just wonder what the basis is for that.

Michael Goldberg

Globally, there is a lot of activity on that platform. Where there is a lot of a kind of request for quotes and business to be done. So it does appear that this platform is kind of moving along and there is a significant amount of activity around the world and there are self-contractors to support that program. So it’s still not kind of what I would kind of call reach in terms of it’s not happening tomorrow, next week, but there is a pretty kind of significant level of business out there, which we certainly plan to participate in.


(Operator Instruction) And our next question comes from Tim Hayes - Davenport & Company.

Timothy Hayes - Davenport & Company

My question is on the aluminum plate market, how are your inventories there? I would imagine, you still got plenty of plates in stock and then when might that be back in balance and that you would start ordering from mills again?

Michael Goldberg

We are ordering some material, is not that we are not ordering. Yes, you are right; we still have our inventory in our heat-treated aluminum plate area. The timing in terms of kind of getting it right back into balance is going to depend on obviously some of the market activity. But it’s something which we’re going to end up working through at least the first half of this year to address Tim and I made the general comment, which is most probably true that all our inventory programs as business has softened and we certainly are not anticipating it recovering anytime soon.

Your recovery programs or your inventory just take longer, longer to put into full effect. So that’s why we’ve set a target out of that $50 million reduction in the first half, which does include the aerospace plate. And we would anticipate when we choose that would be another significant trench down beyond that. So we see our inventory correction or our inventory reduction being a major emphasis for us the whole of 2009.

Timothy Hayes - Davenport & Company

And then from your comments about Q1, how that’s shaping up versus Q4, implied there any volumes would sequentially be down a bit from Q4, is that a fair assumption?

Scott Stephens

They will be down, yes. Through the first couple of months and again those with we are not far away from talking about our first quarter earnings, we can’t say too much, but we know where we stand after a couple of months, yes. As I mentioned, as volumes are down and average pricing is down as well. So, we will see a reasonable revenue reduction through the first quarter of it. We’re kind of right through three weeks away from wrapping that up, so we’ll talk much more about that I’m sure on the next call which isn’t that far away.


And our next question comes from the line of Nat Kellog - Next Generation Equity Research.

Nat Kellog - Next Generation Equity Research

Just as far as ERP, sorry if I missed it, but did you guys have a number for expense on the ERP in the fourth quarter?

Michael Goldberg

We didn’t. I can get you that, it was in terms of year-over-year comparisons Nat or you just want to know or how much of the fourth quarter expense was ERP project?

Nat Kellog - Next Generation Equity Research

Yes, I mean I know I can get the last years number but yes, just how much you guys spent in the fourth quarter would be helpful.

Michael Goldberg

Okay. I’ll get to that, it’s a couple of million dollars, but I’ll get you the exact number.

Nat Kellog - Next Generation Equity Research

Okay and then just on it, I mean I know you guys have talked about it a couple of times, but can you just give us a sort of update now given where we are as far as into 2009. When you guys expect that to ramp up and sort of how you expect that unfold for the rest of the year?

Michael Goldberg

Okay. I think we don’t see that, we don’t have a crystal ball. We are anticipating 2009 to be a tough year. I don’t think there is any doubt in that. We don’t see a recovery in sight. We have some kind of brighter spots, some of our international business, some of our energy business will be better areas for us, but our focus really on ’09 is really planning for significantly reduced volumes and making sure that our expenses, probably match those volumes and continuing working our inventory down, managing our receivables which is a bigger challenge today than it most probably has ever been and completing our ERP project.

Those are our emphasis today and I would kind of characterize it in an environment where we anticipate significantly reduced volume levels. Again I think we’ll be able to talk a little bit more intelligently about this after the first quarter when you see the first quarter numbers that kind of provide us all a good base of what to expect for the balance of the year.

Nat Kellog - Next Generation Equity Research

I was actually talking about the ERP implementation. I know you guys have said in the past you’d expected it I think to be done in sometime during Q2 or Q3 ’09. So I was just wondering if you guys where now most of it’s in Q1, just update on how that’s going and you still expect it to be finished on time and all the rest?

Michael Goldberg

Yes, well I gave you good color anyhow there. Yes, the ERP project as we mentioned in our script, we implemented in our first Canadian operations in February and we were very pleased with what happened there and we plan to roll it out over the balance of the domestic locations over the year through the whole year. So, our next big rollout is scheduled for June and then there’ll be one schedule in September, then one late in the year.

So, we’re trying to mitigate the risk of doing this by making sure that we have adequate resources in splitting that kind of play off and we’re confident that we can get this behind by 2009 and we’ll address our international operations which in early 2010.

Nat Kellog - Next Generation Equity Research

Okay and then did you guys give a number of several placement cost of inventory, I know that’s some is specifically in the Q, but just wondering if you guys can…?

Scott Stephens

We did and it will be on the K filing Nat which will be probably tomorrow.

Nat Kellog - Next Generation Equity Research

And then how about cash flow?

Scott Stephens

How so?

Nat Kellog - Next Generation Equity Research

Did you guys give the cash flow number for 2008?

Scott Stephens

Yes, that will be in the K filing as well. I can sort of read off a couple of the numbers here; bear with me one second. Cash flow from operations $21.7 million, net cash used in investing $52.2 million, that’s cash used. Cash from the financing $26.6 million, exchange rate negative of $3.9 million, a net decrease in cash for the year $7.7 million.


(Operator Instruction) Your next question comes from Mark Parr - Keybanc Capital Markets.

Mark Parr - Keybanc Capital Markets

Mike, in the year we don’t have any quantified earnings guidance but are you comfortable that you’re not going to be posting any losses this year. It seems like that would be the case certainly based on the moves which you made on the cost side. I mean is that something that we need to be concerned about? Are you guys going into the red for a quarter or two this year?

Michael Goldberg

We are not planning on doing so. I think we’ve been very proactive on our cost side to make sure that we don’t get into the red. I think there is so much uncertainty about what the business environment is going to be, second quarter or third quarter, even fourth quarter. We’re trying to keep ahead of anything that we see at this stage. We’ve actually planning not to be in the red, but the environment is such that it’s tough to recognize where our activity levels might be three, six months from now and so our efforts are around making sure our costs would rise.

Timothy Hayes - Davenport & Company

Sure, I was kind of hoping you were going to share some of your crystal ball with us there for a minute?

Michael Goldberg

If only I had one, I’d lend it to you.

Timothy Hayes - Davenport & Company

In terms of the things that you look at or that you would anticipate, what are some of the signs for AM Castle that perhaps the worst is over for your end markets and then on top of that, I mean what are some of the things that you are really most keenly focused on regarding perhaps the potential for additional downside?

Michael Goldberg

We look at obviously the various markets, our major markets; we keep a careful eye out on the build rates, on the large commercial side. We are pretty close to the oil and gas business in Huston and we get a fair bit of kind of markets knowledge in that end and then as you know, so much of our business is really revolving around capital equipment. So from an indication perspective, we look at stuff that everybody does. The PMI index is a leading indicative for us, we speak to customer-by-customer and we’re close to that; and again as always, the new activity levels is a leading indicator for us.

So again there is one thing, it’s a combination of the general economic industrial environment, its specific market places and it’s also a kind of what’s happening around the globe. I think that we might see economic activity say in China, pulling some material and equipment into China, perhaps sooner than we see that in the domestic market. So, we are very interested in their stimulus packages as well as our own. So, we look at a number of indicators, none of which would surprise.


Thank you and we have no more audio questions at this time. I’d like to turn the conference back over to management for any closing statements.

Scott Stephens

Well, I too appreciate everybody’s questions today and you’re kind of on going interest in the company and we will be speaking to you very soon with our first quarter numbers. So, again, thanks very much and thanks for your time.


Ladies and gentlemen, this concludes the A.M. Castle & Company’s fourth quarter and full year 2008 conference call. You may now disconnect. Thank you for using AT&T conference.

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