A. M. Castle & Co. Management Discusses Q2 2013 Results - Earnings Call Transcript

Jul.30.13 | About: A. M. (CAS)

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

Q2 2013 Earnings Call

July 30, 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

Edward Marshall - Sidoti & Company, LLC

Martin Englert - Jefferies LLC, Research Division

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

Jason Brocious - KeyBanc Capital Markets Inc., Research Division

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

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Operator

Good morning. Thank you, everyone, for joining us for A.M. Castle's Second Quarter 2013 Earnings Conference Call. By now, you should have received a copy of this morning's press release. If anyone still needs one, please call our office at (847) 349-2510, and we'll send you a copy immediately following the conference call. The press release and the company's filings are available on the company's Investor Relations website.

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 projects 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 K (sic) [Form 10-K], as amended, for 2012 and 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 the related GAAP measures in accordance with the SEC rules. You will find the reconciliation in the financial information attached with today's release, which is also available on the company's website at www.amcastle.com under the Investors tab, and in the Form 8-K submitted to the SEC.

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

Scott J. Dolan

Thank you. Good morning, everyone, and thank you for joining the call today. Let me start by outlining how we have structured today's call. I will provide a brief overview of our second quarter 2013 results, as well as a restructuring and operations update. Scott Stephens, our CFO, will discuss the second quarter 2013 and first half 2013 financial results and current business conditions. I will comment on our outlook for the remainder of 2013 and then we will open up the call for questions.

Steve Letnich, our Chief Commercial Officer, joined us a few weeks ago and will not be participating in the quarter's call. But he will be a part of our future calls beginning with the third quarter.

For the second quarter of 2013, the company reported EBITDA of $5.1 million or 1.9% of sales. And on an adjusted basis, excluding the impact of restructuring charges and unrealized losses on commodity hedges, EBITDA was $11.6 million, 4.2% of net sales. Second quarter sales were $273 million, 17% lower than the year ago and 6.6% lower than the first quarter this year.

As we have discussed many times, our customers' businesses are primarily late cycle businesses. If you recall, in 2012, our business remained quite strong and notably more robust than the broader industrial market trends early in 2012.

The lower sales level in the current quarter compared to the first quarter of this year was primarily volume driven. Mining equipment has been one of the weaker markets with aerospace and oil & gas also a bit softer in Q2 versus Q1. Sales per day for the second quarter were lower than the first quarter by 10.2%, and quarter-over-quarter were lower than the second quarter of 2012 by 20.7%.

Although the second quarter and the first half of 2013 were challenging from a top line perspective, we continued to generate strong positive cash flow and we successfully completed our restructuring efforts on schedule and within budget. We remain optimistic about our long-term opportunities to drive additional operating efficiency and working capital improvements going forward.

In the quarter, we improved our gross material margin from 25% in the first quarter of 2013 to 26.3% in the second quarter, while facing softness in market demand and a challenging pricing environment. This speaks to the value-added nature of our business and our focus on specialty metals. We also achieved a $25 million replacement cost basis inventory reduction that we had targeted for the second quarter, while maintaining our strong commitment to customer service. We still have a target to reduce inventories by an additional $30 million to $40 million in the second half of 2013.

As I've previously noted, the restructuring activities we announced in January of this year were completed this quarter, in line with our original timeline. On the Investor Relations page of our website, we have provided a slide deck updating these activities. Key accomplishments towards our performance improvement since we began our structuring include the reorganization of our sales teams, which I will comment on further in a bit, the implementation of a new sales incentive for 2013, the fulfillment of several key leadership roles including the Chief Commercial Officer, VP of Operations and VP, Sourcing and Supply Chain. Finally, we completed the consolidation of 5 warehouse facilities and the realignment of targeted corporate functions.

For the remainder of the year, we will continue to execute our plans for inventory optimization and cost management. In terms of our sales focus, I was very excited earlier this month to introduce Steve Letnich as our new Chief Commercial Officer. With Steve's extensive experience and expertise in the metals industry, I am confident in his ability to lead A.M. Castle's sales force initiatives while focusing our efforts on profitable revenue generation and market penetration.

I will continue to be much more involved with our commercial activities going forward, as I have been in the last 3 months, working with Steve on influencing our sales strategy including the following: The migration of a sales team from a group that sold only 1 sales vertical to a more efficient model with a sales team selling all products. This will make our sales team much more productive while allowing us to increase our call density within each geographic territory. Broaden our base of customers, products and services, allowing our salespeople to increase wallet share with existing customers and target new customers. Implementation of a larger, more effective strategic account group while leveraging top customers, which participate in all 3 of the verticals. The increase of our transaction business, by supplying more decision-making capabilities to our inside sales representatives, driving more sales force accountability with metrics and ownership, and the bolstering of our marketing group to better segment markets and target new opportunities.

Although it will take some time to see the full impact of these sales force initiatives, we anticipate that the sales organization changes combined with several system enhancements implemented in the first half of 2013 will position us to execute more effectively on the top line. Shifting to a geographic focus with vertical expertise is the right thing to do long term for our company and will allow us to build even stronger relationships with our customers in the future and add more value to their supply chains.

Now I will recap our observation of our key end markets for the second quarter of 2013 and what we have seen so far this year. As we have spoken about before, we monitor 3 primary macro data points for our business. The PMI, rig counts and aerospace build rates.

The average PMI for second quarter was 50.2, indicating a very small amount of growth in the U.S. manufacturing sector. Although PMI has now consistently remained above 50, it is down from the 3 previous quarters and down from 52.7 the second quarter a year ago. As we have said before, the late cycle nature of our customers' businesses is such that historically, our net sales lagged the PMI trend line on a 6 to 12-month basis.

Rig counts in North America were at 1,954 at the end of the second quarter of this year, 1,994 at the end of the first quarter of this year and 2,220 at the end of second quarter a year ago. The steady decline in rig counts compared to a year ago indicates the lower activity when compared to the second quarter of 2012, a trend which is translated into our oil & gas results for the first half of this year. However, we remain confident in our market position and our global opportunities in this key market.

Although the aerospace market trend did show modest improvement in the quarter, as we have indicated previously, we tend to lag the demand cycles of our key end markets. With the positive improvement in the broad aerospace market that has been occurring, as well as improvements in our aerospace business execution, we expect to see more positive results out of this part of our business going forward.

The industrial market trends continue to be the area that we see the most pockets of weakness. Our short-term market outlook on the industrial side is cautious but we expect to maintain our share and position ourselves for success as the markets recover.

Moving on to our Plastics business. We achieved 5.6% sales growth in the second quarter of 2013 compared to the second quarter of 2012, primarily due to increased volume in the automotive sector. We expect continued growth from the automotive sector for the remainder of 2013. Overall, we expect the Plastics segment of our business to contribute positively to free cash flow and earnings through the balance of the year.

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

Scott F. Stephens

Thank you, and good morning, everyone. Second quarter consolidated net sales were $273.4 million, which is $56 million or 17% lower than the second quarter of last year; and on a sales per day basis, were 18.3% lower than the prior year period; and sequentially, 9.5% lower than Q1 of this year.

Net sales in the Metals segment of $239.5 million were $57.8 million or 20.7% lower than the second quarter of 2012 on a per day basis, and 10.2% lower than Q1 this year on a per day basis.

Metals segment tons sold per day were down 20.1% from the second quarter 2012, and sequentially, down 6.7% from Q1 this year. In the Plastics segment, second quarter 2013 net sales of $34 million were $1.8 million or 5.6% higher than the prior year period and, as Scott mentioned, primarily due to increased volume in the automotive business. Sequentially, second quarter Plastics segment sales were $0.4 million or 1.1% lower than the first quarter this year.

Operating income in the Plastics segment was $0.7 million in the second quarter of 2013, down $0.3 million from the prior year period. To reiterate what Scott just said, our Plastics business continues to perform well and we expect to see it contribute positively to our cash flow and profitability moving forward.

Since we began our restructuring efforts in January 2013, consolidated gross material margins have improved from 25% in Q1 this year to 26.3% in the recent quarter. Consolidated gross material margins in the second quarter of 2012 were 26.9%. Gross material margins for the second quarter of 2013 included LIFO income of $3 million, and charges of $0.9 million for commodity hedges and $0.4 million for restructuring costs. The first quarter of 2013 gross material margin included LIFO expense of $0.7 million and charges of $1.3 million for commodity hedges and $0.8 million for restructuring charges. Based on current projections for inventory levels, our inventory mix and commodity pricing levels, we anticipate a full year LIFO credit of between $3.5 million and $4.5 million, which would represent about $1 million per quarter of LIFO income for the second half of this year.

Second quarter consolidated operating expenses, including restructuring charges of $5.6 million, decreased by $9.1 million or 11.4% from $79.2 million in the second quarter of 2012 to a $70.1 million level excluding restructuring in Q2 2013. Compared to a year ago, we achieved a 6.9% or $2.7 million quarterly reduction in warehouse processing and delivery expense, and a 19.1% or $6.5 million quarterly reduction in SG&A expenses. Depreciation and amortization was $6.6 million in Q2 2013, essentially the same as the prior year. Given the decline in top line sales, there is deterioration in the operating expense to sales ratio compared to a year ago. 24% of net sales in the year-ago quarter and 25.6% of net sales in Q2 this year. With that said, the completion of the restructuring actions have significantly lowered our structural operating cost.

Total pretax restructuring charges for the quarter were $6.1 million and were primarily related to lease termination costs and shutdown costs for the 5 impacted facilities. Cumulative restructuring charges through June 30, were $9.1 million compared to the company's estimate of $10 million. The remaining charges of approximately $1 million, we expect will be incurred in the second half of 2013.

As we mentioned, we're targeting $33 million of overall operating profit improvement through our restructuring efforts and realizing $20 million of those run rate improvements in fiscal 2013. We estimate $21 million of the total operating profit improvement will come from cost reductions. And so far, we've realized approximately $5 million in structural cost improvements in the first half of 2013, which is in line with our expectations and which comes predominantly from cost decreases.

The other third or $12 million of profit improvement comes via gross margins, partially from better sourcing leverage and partially from better pricing execution. We expect the remaining $15 million improvement to occur in the second half of 2013, resulting in $3 million to $4 million of quarterly expense reduction in the third quarter when compared to Q2.

As we said earlier this year, the announced restructuring actions get us a 22% expense to sales ratio on 2012 sales levels. We have a plan to improve our cost structure to a 20% expense ratio as we exit 2014. And we'll talk more specifically about those continuous improvement initiatives later in this year.

Consolidated operating loss reported for the second quarter was $3.8 million or 1.4% of net sales compared to operating income of $9.6 million in the same period last year. Total interest expense was $10.1 million for the second quarter 2013 compared to $14.2 million in the second quarter last year. Excluding the unrealized loss on debt conversion option in the second quarter of 2012, which was $4.3 million, interest expense was comparable to that in the prior year period.

Other income related to foreign currency transaction gains was $0.7 million in Q2 this year, compared to expense of $0.7 million in the same period last year. These gains and losses relate to foreign currency transactions and unhedged intercompany financing arrangements.

In the second quarter of 2013, the company adjusted it's expected annual effective tax rate to reflect the estimated geographical mix of income and losses for the full year of 2013. This adjustment resulted in the company's effective tax rate for the 6 months ended June 30, being 34.6%, resulted in a tax benefit of $7.8 million recognized in the second quarter.

The second quarter effective tax benefit rate, being higher, added $0.14 per diluted share to second quarter earnings. The company's effective tax rate for the 6 months ended June 30 is consistent with our estimated tax rate for the full year of 2013.

Equity in earnings of the company's joint venture was $1.5 million in the second quarter, which was $0.2 million last -- in the same period last year, and comparable to the first quarter of this year.

The company's reported second quarter 2013 net loss of $3.8 million or $0.16 per diluted share, compares to a net loss of $3 million or $0.13 per diluted share in the prior year period. Adjusted non-GAAP net income for the second quarter this year was $0.4 million or $0.02 per diluted share, compared to adjusted non-GAAP income of $2.6 million or $0.11 in the second quarter last year. And as I mentioned, the second quarter results this year include a higher tax benefit rate in the quarter than we are expecting for the balance of the year, adding $0.14 per diluted share to our Q2 results.

The company's second quarter EBITDA was $5.1 million or 1.9% of net sales, compared to $17.1 million or 5.2% of net sales in the second quarter last year. Adjusted EBITDA was $11.6 million or 4.2% of net sales compared to $18.9 million and 5.7% of net sales last year. And adjusted EBITDA for the 2000 third quarter excludes the financial impact of the restructuring charges and unrealized commodity hedge losses, and for 2012, excludes unrealized loss on debt conversion option, CEO transition cost and unrealized loss on commodity hedges.

Now I'll briefly go through the 6-month comparative results for the year. Consolidated net sales for year-to-date June were $566.1 million, which is $126 million or 18.2% lower than the first 6 months of 2012. Consolidated gross material margin rate for the first 6 months of this year is 25.7%, compared to 27.1% last year.

Consolidated operating expenses, excluding restructuring costs of $7.8 million, were $142.2 million in the 6 months, which is $17.8 million or 11.1% lower than the same period last year. Consolidated operating loss was $4.7 million or 0.8% of net sales for the first 6 months this year versus operating income of $27.5 million in the prior year period. Equity in earnings of the joint venture was $3 million in the first 6 months of 2013 versus $4.7 million in the same period last year.

Interest expense for 6 months 2013 was $20.3 million, compared to an expense of $35.8 million for the prior year comparative period. Excluding the unrealized loss on debt conversion option in the first half of 2012, which was $15.6 million, interest expense overall was consistent with the prior year. The net loss reported for the 6 months of 2013 is $14.4 million or $0.62 per diluted share compared to a net loss of $7.3 million or $0.32 per diluted share in the first 6 months of 2012.

And now on to the working capital and balance sheet results. During the quarter, we met our inventory reduction target of $25 million, which brings our total inventory decline during the first half of the year on a replacement cost basis to $59.7 million. This follows the $65 million reduction -- decline in the second half of last year. Average day sales and inventory, which the company calculates on a replacement cost basis was approximately 174 days for the first half of this year compared to 171 days for the first half of 2012. Average day sales on inventory was 187 days for fiscal 2012.

We set a DSI goal of 150 days by the end of 2013. And although the sales weakness experienced in Q2 makes the DSI goal more challenging, we believe that 150 days remains an appropriate target for the second half of the year and we're keeping our plans focused on that level. We do expect to further reduce inventory by $32 million to $40 million in the second half of this year.

Average receivable days outstanding was 51 days for the first half of 2013 compared to 48 days for the same period last year and compared to 49 for the full fiscal year of 2012.

Accounts payable days was 37 for the first half of 2013 compared to 55 for the same period last year and compared to 51 days for the full year of 2012. This year, we have returned to a normalized level of accounts payable after a decrease at the end of 2012, which had reflected a very low level of inventory purchase in the back half of 2012.

Cash provided by operations was $56.1 million for the first half of 2013, compared to cash used in operations of $5.6 million for the prior year period. Cash paid for capital expenditures during the first half of this year was $5.4 million, compared to $4.7 million in the first half of 2012. We're projecting annual capital expenditures to be between $10 million and $12 million for 2013.

In the first half of 2013, we used cash generated from operations to pay down the remaining revolver balance to 0 at June 30, 2013, from $39.5 million at the end of last year. We will continue to evaluate uses of cash from operations while working to improve our capital structure. Our strong and improving balance sheet will provide support for opportunities to create shareholder value as our operations continue to improve.

Total debt net of unamortized discounts at the end of the quarter was $258.8 million compared to $297.1 million at the end of last year. Cash and equivalent balances were $33.2 million at the end of the quarter, compared to $21.6 million at the end of 2012. The net debt to total capital ratio at the end of Q2 was 38.8% compared to 43.4% at the end of last year.

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

Scott J. Dolan

Thanks, Scott. Given the near-term market demand picture, similar to what we experienced in the first half of this year, our current sales outlook is comparable to the second quarter with opportunities for modest growth, primarily in oil & gas and aerospace business and overall, better sales execution.

We believe our value-added solutions and strong focus on customer service position us well to grow the business as the global economy improves. We are also confident in our ability to continue to generate positive cash flow in the second half of 2013 and further enhance our liquidity and balance sheet.

We are excited about the new leadership we have added to our team and expect that our new Chief Commercial Officer, Steve Letnich, will lead our new sales initiative and reinvigorate the sales force while we pursue new revenue growth opportunities and better position the company to prosper once our end markets recover.

Operator, we can now open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

My first question was on pricing and in particular, on the Metals segment. Looks like revenue was down roughly 19% on a volume decline about 20%. The sequential numbers look very similar. Am I looking at that right? It seems as though you're actually getting pricing in a particular quarter both on a sequential and a year-over-year basis?

Scott F. Stephens

I think, Ed, on the -- no, there's modest price deflation, less so on the year-to-year than on the sequential. It's sort of small-single digits is kind of what we're seeing in pricing weakness, sequential Q2 versus Q1 in Metals.

Edward Marshall - Sidoti & Company, LLC

Then, I mean, am I right, though? The revenues are down 19% year-over-year and volumes are down 20%? I mean, doesn't that suggest increase of -- I mean, unless there was something else that round through that?

Scott F. Stephens

Yes, the per day numbers are slightly different than what you're quoting. So you'll see on a per day basis, a modest difference there. Which brings in a -- which brings a small amount of pricing and mix into it. But it's very small.

Edward Marshall - Sidoti & Company, LLC

And with declines in surcharges and nickel and stainless, I mean, even -- and to aluminum, I mean, can pricing continue to kind of hold up as it has, I guess, in 2Q? Or do you see that as being kind of a challenging environment that remains [indiscernible] the year?

Scott J. Dolan

Yes. I mean, I think we see a lot more of the same and I think one of our challenges is to continue to drive more top line revenue. And so we don't want to impact the pricing environment that we have. But to go after some of the new business, we're going to look at some things as well. But we see a lot more of the same.

Edward Marshall - Sidoti & Company, LLC

And then my second question is, by our math, it looks like the 20% volume declines fall short of say, the 5% declines for the MSCI data. I understand it's a little bit different mix there. But I'm curious if you can give me an idea, is that a function of maybe a richer story if you're going on profitable business? Or kind of what's happening there and kind of piece that back together with the pricing so I can kind of understand exactly what's going on there?

Scott J. Dolan

Yes. I mean the first thing is when we break down the MSCI data for our basket of products, we get a different number than that and is down further. When you just start looking at historically, what markets we played in, much heavier in mining, heavy equipment, other things, don't have any automotive. So that mix, compared to some of our competitors, is very different. I think this is one of the things that we need to focus on going forward, is how do we diversify that a bit. So we're not as sort of just at the mercy of the market, in the markets that we currently play in to balance that out a little bit more.

Edward Marshall - Sidoti & Company, LLC

And are you sacrificing market share for pricing?

Scott J. Dolan

We don't believe so. But that doesn't mean we can't gain market share going forward.

Edward Marshall - Sidoti & Company, LLC

And then the final question is, can you quantify, maybe the margin impact that you've seen in the quarter from -- or maybe on a sequential basis from liquidation of inventories, and the margin impact from the benefit from -- that you're receiving there?

Scott F. Stephens

Well, it's pretty small, Ed, and it was a bit less in Q2 than it was in Q1. And you can sort of see that in the realized margin comparison from Q2 to Q1. But clearly, compared to, let's just say, normal, or what we would like to be normal, with the DSI still being as elevated as it is, yes, there's more abnormally priced or mispriced product still coming through the system than we would like to see. And with some more inventory improvement to go, we'd anticipate that to still continue for the balance of '13 because we've got to get -- keep working on the inventory. Sequentially, compared to Q1, not really different enough to quantify, however.

Edward Marshall - Sidoti & Company, LLC

Can you do it year-over-year maybe?

Scott F. Stephens

Not really. Compared to second quarter last year, right, if you remember, we weren't -- the market was still pretty strong last year. It's a factor, put it that way. It's a factor in the margin comparison from Q2 of '13 to Q2 of '12. But look it's -- what we basically have said is, when our inventory is normal, we expect to be able to make 27% margins, right? And that was the margin level that we achieved for the full year fiscal 2012. I would say that yes, a significant contributing factor to the 26.3% that we achieved in Q2 versus that 27% that we're targeting as normal, there's a meaningful part of that is remains to be the inventory overhang that's going on. That's the way I would sort of look at it.

Edward Marshall - Sidoti & Company, LLC

I mean, maybe we could follow up later. I just wanted to -- I mean, when you break out the balance sheet, it talks about $137 million of replacement cost of inventory, higher than what's reported on the balance sheet. So it's about 55% increase in pricing there. And presumably, as you're pulling that on that inventory, the cost versus what you're selling that price were as you're liquidating into those layers, wouldn't you see some kind of margin benefit there? And I mean, wouldn't that be significant on a $23 million reduction in inventory on a sequential basis?

Scott F. Stephens

Yes, but that's LIFO in effect. And as we said, we picked up -- we did pick up $3 million of LIFO income or LIFO benefit to the reported margins in Q2. So, yes, that's a factor. That's in there.

Operator

The next question comes from Martin Englert from Jefferies.

Martin Englert - Jefferies LLC, Research Division

So I wanted to touch on the guidance for the back half of the year. You'd noted you're more or less expecting similar demand. And that would that be sales trends for both 3Q and 4Q compared to where we exited or where 2Q was?

Scott J. Dolan

Yes. We're kind of overall first half, average of the first half for the overall market demand.

Martin Englert - Jefferies LLC, Research Division

Okay. And would you expect that as sales trends to generally mirror that?

Scott J. Dolan

Yes. I think what we're saying is, we're sort of, I guess, being a bit conservative and make sure we start hitting our numbers on a regular basis. And so we're kind of saying, starting point and what we believe is Q2 sales rate for us. But at the same time, we do believe there's opportunities in Aero and oil & gas and all the work that we've been working on the last 3 months. And now that Steve's really taken over, we, over time just don't know when it's going to hit. We will start to take some share and it's just a matter of timing on that. And so we're not sort of committing to any of that in the back half of the year but there is the opportunity there.

Martin Englert - Jefferies LLC, Research Division

Okay. And as far as the seasonal trends, would you anticipate some type of improvement 3Q and then maybe some modest pullback in 4Q?

Scott J. Dolan

Yes, I think summer will continue to sort of move on like we're doing. But I think in September, October, November -- or September, October, we could see a little bit of a seasonal uptrend. I think it just depends on what the overall market, I think, the overall market and where the confidence in economy, where things are going, are going to more than make up for any seasonal trends.

Martin Englert - Jefferies LLC, Research Division

Okay. And what are your thoughts on the operating expenses for the back half of the year? I know on the release, you've highlighted you're starting to see some of those improvements now from the restructuring efforts towards the end of 2Q. When I think about OpEx going into third quarter and fourth quarter this year, what type of level should I be anticipating there?

Scott F. Stephens

We're expecting, Martin, $3 million to $4 million to pick a range, $3 million to $4 million of improvement to come in, in Q3 relative to Q2. And then I think that ends up being sort of ratable or status quo-ed and into Q4. I mean at this point, we'd see them being flat in Q4 versus Q3 but with that improvement level of $3 million to $4 million off the second quarter.

Scott J. Dolan

I was just going to follow up as well. In 3Q, as Scott said, we'll be updating some more on the continuous improvement work that we're doing. But you'll start to see that as more of a ongoing reduction to get us to that level that we want to be exiting 2014, rather than the lumps that we saw in terms of how we got the first half of this year, the reduction.

Martin Englert - Jefferies LLC, Research Division

Okay. And when I think about the facility closure, consolidations and what's been happening there, how is that expected to impact D&A for the back half of the year?

Scott F. Stephens

Not significant.

Martin Englert - Jefferies LLC, Research Division

Okay. Similar D&A as the $6.6 million or so run rate that we've seen in the first half?

Scott F. Stephens

Yes.

Martin Englert - Jefferies LLC, Research Division

If I could one last question on the end markets there. Are you seeing anything as far as high channel inventories and energy arrow or industrial, or something that may be inhibiting some of the, I guess, true demand trends in some of the sales and shipment levels? Is it there's some ongoing inventory reductions happening with any of the end users there?

Scott F. Stephens

We haven't seen it, Martin. I mean, our read of the, first of all, our read of sort of competitive landscape is that inventories are balanced. I mean, it's very competitive, given the demand levels. But again, as you could see from our pricing, we're sort of relatively balanced from a peer standpoint. Customerwise, we're not seeing anything unusual there either. There are individual circumstances, perhaps, where there's some things going on. But in general, people are buying for the business that they have and buying to support the orders that they need to get out. We've not seen anything that we would call either restocking or destocking directionally. So it's kind of, the orders that we're seeing are for basically, predominantly for current month shipment. So we got a pretty good read of what we're -- of what folks are doing with the orders and it's generating very current sales. So we don't see anything trending in terms of inventory building or even declining at costumers. It's relatively static.

Operator

The next question comes from Lloyd O'Carroll from Davenport.

Lloyd T. O'Carroll - Davenport & Company, LLC, Research Division

I'm assuming that your weak end-use market is mining and heavy equipment. Can you remind us what your exposure is and what are your customers telling you about those markets?

Scott J. Dolan

Yes, we're in the 10% to 15% range exposure in our industrial group, really about each of those. And what we're hearing in general is, basically, a bottoming in China and it's starting to come off the bottom there, which is going to help. But I think everyone you talk to says that it's going to be a slow sort of come back on the industrial side. And that's why we think the growth opportunities, really, for us in the shorter term are more around aero and oil & gas because we do think it's going to be sluggish as GDP is what it's at and you sort of see the general economy moving along like it is.

Operator

Next question comes from Mark Parr from KeyBanc Capital Markets.

Jason Brocious - KeyBanc Capital Markets Inc., Research Division

This is Jason Brocious in for Mark. I was just wondering if you can give us an idea of what we should expect for a general gross margin level in the second half. If 26.3% would be a good level to use going through the third quarter and fourth quarter?

Scott F. Stephens

Yes, we think that makes sense. Given what we said about pricing levels and about demand levels. We're just not seeing any -- we're still not seeing any catalyst that would tighten the markets. I mean, we're doing all of our internal execution to drive margin but we're doing that in Q2 as well. So we would anticipate that relatively static for the balance of this year. Again, Ed was asking about kind of the inventory impact to that. Until the inventory improves, I think that's where we are. As we turn inventory and get a better velocity on replacement costs, we would expect that there will be some improvement there. But I don't -- I wouldn't anticipate that for the second half of the year.

Jason Brocious - KeyBanc Capital Markets Inc., Research Division

Okay. And I may have missed it earlier, but did you give a, like a sales level for tube supply during the quarter?

Scott J. Dolan

No, we didn't. I mean, as we look at our oil & gas business now, we're -- it's on a consolidated integrated business. With that said, we do believe, tube supply is one of our businesses and really the tube side of the business is now -- is one of our businesses that's really hitting our expectations. While all of our overall oil & gas is down, that's really been more on the high-end bar side, the specialty bar side because of some of the overcapacity and in other things. But right now, the tube side is hitting expectations.

Jason Brocious - KeyBanc Capital Markets Inc., Research Division

Okay. And the margins have held up there as well?

Scott J. Dolan

Margins have held up, yes, maybe not as quite as high as we were seeing at the first half of last year, but they're doing well.

Operator

The next question comes from Dan Whalen from Topeka Capital Markets.

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

Most of my questions have been addressed. But just based on what you guys are seeing in July, can you add any additional commentary on just what you're seeing in terms of both the nickel and the stainless steel markets? And then just secondarily, can you just -- any terms of flexibility in terms of prepaying some of your debt instruments?

Scott F. Stephens

I would say, first, Dan, on the, on July, I don't know that we've seen anything in the first 3 weeks, specifically in nickel or stainless, different than what we have. I mean, those are meaningful contract markets for us or program type of pieces of business for us, so we're not as subject to the sort of transactional variables in that. Having said that, I mean, we are, we're in that business and, yes, it continues to be pretty challenging there from a pricing standpoint transactionally. So when that changes, we will react to that. But it's very competitive there. Order levels overall, more broadly for July. So to support what we're saying about Q2 sales levels. So we're seeing a little bit better activity than we exited the quarter. But -- of Q2, but comparable to what we saw kind of on balance around average for the second quarter. So it's kind of what we expected, actually. And in terms of uses of available cash. The main focus that we have, Dan, is to delever. We've kind of structurally done everything we can do there in terms of delevering. The revolver is 0 as we said. And at this point, we're building a cash balance. And our thought there is to continue to do that and maintain maximum or create maximum flexibility around the high-yield bonds, which are callable in December of '14. There are make whole provisions in there should we want to take the bonds out sooner. We could certainly do that, and that's certainly something that we'll look at. But at this point, we're mainly focused around that December '14 time frame and taking advantage of the markets between now and then, if that makes sense to do.

Operator

Our final question comes from David Olkovetsky from Jefferies.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

First, how much availability is there on the revolver, currently? Are there any LCs on it?

Scott F. Stephens

There are some, David. It's approximately $85 million that we would consider freely available.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay. And then presumably, given the cash inflow that you guys are anticipating in the back half of the year from inventory, would you expect that the revolver remains largely undrawn for the rest of the year?

Scott F. Stephens

Yes. Specifically, we would expect it to be completely undrawn or 0.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay. And then you guys mentioned a little bit about the oil & gas side of the business. So I thought I'd look at the rig counts. The North American rig count typically grows in the second half of the year but that's mostly due to Canadian rigs, whereas U.S. has been sort of flat the last couple of months. Are you anticipating a -- or actually, can you just remind me, how much of the tube supply business is outside of the U.S.? I just can't remember.

Scott F. Stephens

Substantially, all of it's domestic. I mean, at least in terms of where the product is shipped and machined and where the products are made, it's predominantly domestic. A lot of it goes offshore after it's machined. But it's predominantly sort of 80-plus percent of domestic business.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

So would you anticipate any sort of pick up just from an increasing North American rig count as a result of, I guess, the Canadian improvements? Or is it just -- should I just be focusing mostly on the U.S. rig count as I think about growth in tube supply?

Scott J. Dolan

Yes. I mean, I think you want to look at rig count. You want to dive down a little bit to look at directional, horizontal as well versus -- some of those can be surface and some other things in there. The Canadian business, I think, the next couple of months is critical just because in terms to see what that does just because you kind of go through the thaw and you're pretty quiet April, May, end of June. We have seen the uptick that we expect here in July. That's seasonal and just how much that sort of goes. I go back to crude oil prices are strong, and would say, you would see consistent in that and maybe some upside, but obviously, very concerned about natural gas that I think it was $3.47 this morning. And while we saw the nice uptick, I think almost to $4.50, it has been retreating here, and that's going to continue to be concerning as to what happens overall in terms of the demand there.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay, and then in terms of the 5 metals facilities that were closed, has that been completed? And if so, has all the inventory and the equipment, has that been moved to new facilities where it's currently being utilized? And what is the ramp-up of, I guess, profitability from that movement? Has that already been completed? Or is that going to take a couple of quarters?

Scott J. Dolan

Yes. Every all of them are empty. The only thing is we do have 2 that the leases are still -- we still have leases on but we took that all in the restructuring as a onetime charge. So if there's a sublease on either one of those, that would be up

[Audio Gap]

all the inventory has been moved and is operational in other facilities. And I'd say the last thing from a capability standpoint is in Dallas, to get the plate burning, up and running, finalized here in the next couple of weeks. But other than that, you're really -- you're seeing it all incorporated. It's just you're only seeing the timing of that, one was in late April, to the last one being June 10. So you're only seeing pieces of it in Q2. In Q3, you'll see the full impacts of the whole quarter.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay. And -- that's great. And I guess this one is for Scott Stephens. Scott, can you help me tie that into some of the numbers that you guys discussed in the prepared remarks? I thought I heard you say that you achieved, I think, $5 million of operating cost improvements this quarter. I just want to confirm, is that on an annualized basis or a quarterly basis? And then, I also thought you had mentioned that you're going to be reducing OpEx by about $3 million or so, $3 million or $4 million in the third quarter relative to the second quarter. Can you help me tie in those numbers? And then a final question is, I also heard a number of $12 million and a $15 million of cost reductions. Can you, maybe just one more time, just recap all that for me? That would be terrific.

Scott F. Stephens

Yes. David, basically, what we're saying is we do anticipate achieving our $20 million fiscal improvement in 2013 from the restructuring. And that the $5 million of that $20 million has been achieved in the first half, predominantly in the second quarter. And predominantly through expenses, by the way, so far, as opposed to the gross margin enhancement, which we anticipate being more back-end loaded. So sequentially, looking out on expenses, what we said is that given the timing of what happened in Q2 in terms of the restructuring, we would anticipate the full run rate of those improvements to occur starting in Q3, resulting in $3 million to $4 million of quarterly expense reduction in Q3 compared to Q2.

Operator

We'll now turn the call over to Scott Dolan for final remarks.

Scott J. Dolan

Thank you very much. Really, just in close, clearly, when I started here back in October, we laid out that we wanted to be a company of credibility in terms of delivering on what we said we were going to do. And I think this quarter really starts to prove that we are delivering on what we say we're going to deliver on. We clearly are not where we want to be yet. But we've laid out a plan and every quarter, we'll continue to give updates on how we're doing to get to those goals that we've laid out, that we want to be at when we exit 2014. So I think very good progress and really want to leverage a lot of the progress that we've done on the rest of the business over to the commercial side now in terms of driving accountability and metrics. And really taking more control of our destiny on the sales side rather than being at the whim of the market, something that we've talked about over the last 9 months. And I think we've done some good work over last 3 months. And there's a lot more to come in that regard and you'll start seeing the benefits as we go forward.

So thank you very much for your time today, and look forward to talking to you in the future. Thanks.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!