Global Brass and Copper's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov.12.13 | About: Global Brass (BRSS)

Global Brass and Copper Holdings, Inc. (NYSE:BRSS)

Q3 2013 Results Earnings Call

November 12, 2013 9:30 AM ET

Executives

Scott Hamilton - General Counsel

John Walker - Chief Executive Officer

John Wasz - President and COO

Robert Micchelli - Chief Financial Officer

Analysts

Josh Berman - William Blair

Phil Gibbs - KeyBanc Capital Markets

Sal Tharani - Goldman Sachs

Paretosh Misra - Morgan Stanley

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter 2013 Global Brass and Copper Holdings, Inc. Earnings Conference Call. My name is Ian, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions)

As a reminder, this call is being recorded for replay purposes. Now, I’d like to turn the call over to Mr. Scott Hamilton, General Counsel. Please proceed, sir.

Scott Hamilton

Thank you. Good morning, everyone. And thank you for joining Global Brass and Copper Holdings, Inc.’s third quarter 2013 earnings conference call. My name is Scott Hamilton, and I am Global Brass and Copper’s General Counsel. Joining me on the conference call today are John Walker, our Chief Executive Officer; John Wasz, our President and Chief Operating Officer; and Robert Micchelli, our Chief Financial Officer.

For anyone who is not able to listen to today’s entire call, an archived version of this call will be available later this morning. Please visit the Investor Relations section of our corporate website at www.gbcholdings.com to access the replay.

Before beginning our discussion, we want to make you aware that our prepared remarks and responses to questions may include forward-looking statements that involve risks and uncertainties. These may include statements about our current expectations or forecasts of the market and economic conditions, our business activities, prospects, strategies, and future business and financial performance.

Actual results could differ materially from any forward-looking statements made by us. Information concerning factors that could cause actual results to differ from those in the forward-looking statements maybe found in Global Brass and Copper Holding’s Amendment No. 1 to its S-1 Registration Statement as filed with the Securities and Exchange Commission on September 20, 2013 and in the company’s quarterly report on Form 10-Q for the quarter ended September 30, 2013 filed with the SEC under the Risk Factors sections of each filing.

In addition, our comments today refer to non-GAAP financial measures such as consolidated adjusted EBITDA; segment adjusted EBITDA, adjusted sales, and adjusted diluted earnings per common share.

Reconciliations to the most directly comparable GAAP financial measures are provided in our earnings release for the fiscal quarter ended September 30, 2013, that we furnished with the SEC and is posted to our website.

We believe these non-GAAP measures provide useful information for evaluating our business performance. This information should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP. In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies.

Please be advised that the content of this conference call contain time-sensitive information that is accurate only as of the date of this live broadcast on November 12, 2013. Global Brass and Copper Holdings, Inc. undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call except as required by law.

Now that we have covered these cautionary comments, I would like to turn it over to John Walker, our Chief Executive Officer.

John Walker

Good morning. And thank you for joining us on today’s call to discuss our third quarter performance. I’m going to begin by providing a brief overview of our performance for the quarter and some general comments of what we are seeing in the marketplace. I will then turn the call over to John Wasz, our President and Chief Operating Officer to provide business segment level results and trends, as well as discuss drivers of financial performance going forward. Afterwards, Robert Micchelli, our Chief Financial Officer, will review our financial results in more detail.

With that, let me highlight a few details from the third quarter. Overall, I am pleased to announce we had another quarter of solid performance, which was on consensus and consistent with our yearly guidance.

While our volumes were up on the year-over-year basis and our margins remained strong, our earnings were essentially flat due to four drivers. First, our operational performance was below expectation at our large facility in East Alton. Second, we have consciously added fixed cost to support our future growth initiatives. Third, while building and housing has improved, our volumes were below expectation to Chase Brass. And finally, last year, we had several one-time gains in Q3 2012.

On a year-over-year basis our volumes were up 6.1% and a continuation of market trends from the previous quarter, volume growth was primarily -- attributable to the increasing demand across key end markets including building and housing, munitions, automotive and coinage.

Adjusted sales, our non-GAAP revenue measure which reflects our value-added premium over metal replacement cost recovery, increased by 6.7% on a year-over-year basis. Net sales, which include the metal cost recovery, as well as the value-added premium increased 11.5% on a year-over-year basis.

Consolidated adjusted EBITDA, our non-GAAP profitability measure was $30.5 million, up modestly on a year-over-year basis. On a GAAP basis, net income attributable to GBC for the quarter was $9.9 million, compared to net income attributable to GBC of $11 million in the prior year period. This resulted an earning of $0.47 per diluted share, compared to $0.52 per diluted share in the third quarter of 2012.

However, adjusted diluted earnings per common share of $0.56 was $0.01 improvement on a year-over-year basis. While we’re seeing growth in some of our key markets, macro economic growth continues to be lackluster. We continue to focus on the factors that are within our control in near-term to prudently manage cost and improve our margin performance by investing in products and equipment.

These initiatives will allow us to emerge from this environment as an even stronger company. Longer term, we remain positive on the fundamentals of the business and believe we’re well positioned to capitalize on improving economic environment.

Our exposure to recovering cyclical end markets such as the upward momentum and the new residential construction, repairing and remodeling activity while vehicle sales will be positive for our business. And if these end markets continue in their recovery, we have significant available capacity to leverage these opportunities.

Along with these -- this expected momentum, exposure to attractive end markets, we are making investments in our business to drive sustainable growth. During the quarter, we increased our shipments of Eco Brass, our lead-free brass rod product offering, which meets the new federal drinking water standard. We also continue to develop and invest in our CuVerro, our antimicrobial product which we expect longer term will position us to penetrate the healthcare industry.

Lastly, it remains a compelling opportunity for GBC within the coinage market as a group of U.S. house members reintroduced legislation for the potential replacement of paper dollars with dollar coins. John Wasz will provide additional detail around those new products and growth opportunities momentarily.

And finally, before I conclude, I want to highlight a few management appointments announced in September which will serve to strengthen our business. First, John Wasz was elected by the Board of Directors in the role of President in September. John has been instrumental in driving transformative change within Olin Brass, developing and driving new company strategy and developing people and this expanded role will allow him to full -- more fully execute our GBC strategic initiatives across all of our segments.

Second, we also announced the appointment of Kevin Bense as President of A.J. Oster. Kevin’s industry experience coupled with its prudent success and strategic perspective will enhance A.J. Oster’s ability to solidify and achieve its strategy as we move forward.

Lastly, as our Board of Directors evolves into a more fully independent board, we announced last week that I will now serve as executive Chairman of Board, while previous Chairman, Michael Psaros, will remain the member of Board.

Michael has provided tremendous support during the transformation of our business and successfully moved from our private entity to a public company. And we now look forward to his continued support on the Board.

To conclude, our financial results continue to improve and remain confident in the direction of the business despite a challenging global and macroeconomic environment. As we look ahead towards the last quarter of 2013 and into 2014, we are committed to executing on our core strategies to position us from a sustainable, profitable growth while at the same time enhancing long-term shareholder value.

I want to thank all the Global Brass and capital employees for their efforts in making the third quarter a success and with that, I will now turn the call over to John Wasz to discuss our financial results by segment. Over to you, John.

John Wasz

Thank you, John. I will start by providing highlights from each of our three business segments; Olin Brass, Chase Brass and A.J. Oster. I will then provide some additional insights around certain elements of our go-forward strategy for the remainder of the year and beyond.

Overall, I’m pleased to report that we had a year-over-year volume growth across each of our three business segments. Olin Brass third quarter 2013 shipment volumes increased 4.6% largely driven by greater demand in the building and housing, munitions, automotive and coinage end markets.

Slightly offsetting this was lower demand in the electronics/electrical components end market as well as lower volumes to our A.J. Oster. And just as a reminder, our intercompany transactions are eliminated in our consolidated results.

Excluding sales to A.J. Oster, Olin Brass unit volumes increased by 11.2%. Overall, the automotive end market has consistently grown over the past several quarters and munitions’ demand continue to be solid in this segment as overall commercial demand is more than offsetting reduced military demand.

During the third quarter, Olin Brass continued to be challenged by certain operational issues largely associated with ramping up of volumes and difficulties associated with the hiring and training of new employees that come with our growth.

In addition, we continue to drive new processes and systems to improve our complex supply chain. And while we have experienced some short-term challenges associated with these issues, I’m pleased to report that progress was achieved in the third quarter and we are encouraged by the current operational performance.

And lastly, it is important to note that the collective bargaining agreement at the East Alton facility of Olin Brass, which was set to expire in November, has been ratified and a new long-term agreement has been reached.

Chase Brass third quarter 2013 shipment volumes increased 1.5%. This increase in shipment volume was driven by stronger demand within the building and housing end market, offset by lower demand in the electronic/electrical component end markets as well as ongoing competition from foreign imports.

Although we are encouraged by the growth in the building and housing segment and we understand a lag effect of the timing of our products going into homes as compared to certain building and housing statistics, we are also continuing to investigate the effect of brass rod imports home size single versus multi-family housing and housing starts versus housing completions on the demand of our products.

Overall, as we look at volume trends, imports of parts and brass rod were relatively flat on a year-over-year. And as we have previously noted, we continue to monitor closely import activity and we believe that our growth in shipments to these end market segments is to some degree being dampened by imported brass products.

It is our view that the continued growth of shipments of Chase’s green products, which I will discuss momentarily as well as our efficient supply chain, wider portfolio products and other management initiatives will result in continued shipment growth in these segments as the building and housing industry further improves.

And lastly, as another update to this segment, we are pleased to report that the collective bargaining agreement at Chase has been ratified and a new long-term agreement has been reached. A.J. Oster third quarter 2013 shipment volumes increased 4.3%, resulting from steady improvement and higher demand in the automotive and electronics/electrical components end market.

As a result of positive trending indicators within the building and housing segment, A.J. Oster has also experienced year-over-year volume improvement with many of their customers servicing the building and household segments. However, this growth was offset by intensified inventory management and year-over-year customer account losses.

Overall, our results for the third quarter of 2013 reflect continued steady improvement as demand continues to strengthen across key end markets. Additionally, key end market indicators such as housing starts trended higher in the third quarter of 2013.

While volumes often lagged these indicators, we found that over the long-term, these market factors in general positively correlate with demand in our served end markets. Our short lead times limit our ability to project future demand, but we would expect that a slow and steady recovery across our key end markets should lead to stronger demand levels.

Moving on, let me provide you with an update to some of our key strategic initiatives in place. First, we continue to make progress on many product development growth initiatives across our company. Within the Chase Brass segment, we are pleased to report that Eco Brass shipment steadily increased during the quarter as the January 3rd deadline draws closer, which requires a reduction of lead content on the wetted surfaces of plumbing devices.

Overall, this represents a great margin enhancement opportunity and complements our existing products, which create a value proposition for our customers in the building and household segment. This offering also provides us with the exclusive rights for the production sales of lead-brass rod under the Eco Brass and Green Dot brand names through 2027.

Second, our efforts increased demand in the coinage market with respect to the COINS Act is another opportunity for future growth. Recently, a bipartisan group of U.S. House members re-introduced legislation that would phase out the dollar bill after four years, and replace it with the dollar coin. The bill is sponsored by Representative

Mike Fitzpatrick from Pennsylvania would pass along whereby to the Treasury Federal Reserve would discontinue the production of the dollar bill and replaced that currency with a solid dollar coin.

According to the General Accounting office, this change will result in projected savings to the U.S. taxpayer of approximately $146 million per year. As the account certified supplier to the U.S. Mint, we would expect to capture a meaningful portion of the new demand in the U.S. currency monitory system, transitioning from the build of the coin.

And third, we continue to be encouraged by the interest level and commercialization progress with our CuVerro product line. We firmly believe that CuVerro and EPA registered antimicrobial bactericidal touch surface copper alloy, provides a solid long-term growth opportunity into the healthcare end market and other markets such as transportation, commercial building, construction, consumer durables to name a few.

Although, we have accomplished quite a bit since we began our commercialization phase of CuVerro, we have an awful lot of market stalls and work ahead of us and we will continue to deploy resources investment into this exciting long-term growth opportunity.

In summary, this quarter highlights another period of improved performance across entire GB enterprise despite tepid economic activity. I’m pleased by the teamwork continued improving efforts and employees across our business and our team’s willingness to strive for ongoing success across our company. We continue to push forward on a variety of strategic initiative at each of our segments and remain encouraged by our progress.

With that, I will turn the call over to Robert Micchelli, our CFO for a more detailed view of our financials.

Robert Micchelli

Thank you, John and good morning everyone. Overall, we are pleased with third quarter results, specifically unit volume increased 6.1% from a 124.4 million pounds from 132.0 million pounds in the third quarter 2013, due to higher demand in the building and housing, automotive, munitions, and coinage end markets. These increases were partially offset by lower demand in the electronics and electrical components end market resulting from increased competition from foreign imports. Volume growth in the building and housing end market was also dampened by foreign competition.

Net sales increased 11.5% from $394 million to $439.3 million as a result of higher volume, higher average selling prices and the sales of unprocessed metal, which was partially offset by the impact of lower metal prices on the metal cost pass through to our customers.

Adjusted sales, our non-GAAP revenue measure increased 6.7% from $130.9 million to $139.7 million due to higher volume and higher average selling prices, which was the result of a net increase in average selling prices at the segment level, partially offset by the shift in product mix within our business segments.

Gross profit increased 2% from $44.4 million to $45.3 million during the third quarter 2013 while gross profit per pound shift decreased $0.02 to $0.34 per pound. Higher volume, higher average selling prices and lower shrinkage costs due to lower metal costs and higher yields all contributed to the increase in gross profit. These increases were partially offset by net higher manufacturing conversion costs of $1 million in the quarter of which $600,000 was in support of our continuous improvement efforts in development of our information systems.

SG&A expenses increased by $2.7 million from $17.4 million to $20.1 million. This included expenses of $1.4 million for cost incurred as a publicly traded company, including follow-on offering costs and costs from an exchange offered to issue registered new notes as compared to $900,000 of public company readiness costs in 2012.

During the third quarter of 2013, we incurred costs of $1.1 million associated with marketing and product development, labor contract negotiations and development of our information system. In addition, we recognized $800,000 of share-based compensation resulting from the grant of equity awards to management and our Board directors.

As a reminder, we completed the secondary public offering of 5,750,000 shares of our common stock on October 1st. Halkos Holdings, LLC the company’s largest shareholder sold all of the shares in the secondary public offering and received all of the net proceeds from the offering. In addition -- additionally, on October 7, 2013, GBC completed an exchange offer to issue new registered notes.

Net income attributable to GBC for the quarter was $9.9 million or $0.47 per diluted share versus net income of $11 million or $0.52 per diluted share in the third quarter of 2012.

Consolidated adjusted EBITDA, our non-GAAP of consolidated GBC profitability was $30.5 million for the quarter, an increase of $100,000 compared to the third quarter of 2012. The modest improvement was led by higher volume, higher average selling prices and lower shrinkage costs, partially offsetting the increase for higher manufacturing conversion costs and an increase in SG&A expenses primarily due to additional expenses on continuous improvement, marketing, product development, labor contract negotiations and development of our information systems.

GBC ended the third quarter with cash of $18.1 million, borrowings of $22.5 million under our asset-based revolving lending facility, secured notes of $375 million and $177.0 million of borrowing availability under our AVL facility.

Going to third quarter of 2013, net cash provided by operating activities was $22.5 million, which was driven by earnings and reductions in working capital.

Looking at GBC’s three reportable segments, third quarter performance was as follows. Olin Brass volumes increased to $70.3 million or 4.6% during the third quarter, while segment adjusted EBITDA decreased by $200,000 compared to the third quarter of 2012.

The decrease was due primarily to higher manufacturing conversion costs including additional expenses associated with our continuous improvement efforts and development of our information systems and increase in other selling, general and administrative expenses incurred in support of marketing and product development, labor contract negotiations and development of our information systems.

Partially offsetting the decrease were higher volume, lower shrinkage costs, higher average selling prices, including increases in selling prices to A.J. Oster,which are eliminated in our consolidated results and partially offset by a shift in product mix.

Chase volumes increased to $53.5 million or 1.5% during the third quarter, while segment adjusted EBITDA decreased by $100,000 as compared to the third quarter of 2012.

The decrease was due primarily to a change in management’s estimate of recovery -- of recoverability of accounts receivable resulting in the reversal of the provision for bad debt in the prior year that will be 2000 -- benefit for 2012, as well a additional expenses associated with our continuous improvement efforts and increase in other selling, general, administrative expenses incurred in support of marketing and product development and development of our information systems. These are partially offset by higher average selling prices, higher volume, lower shrinkage costs and lower manufacturing conversion costs.

A.J. Oster’s volume increased to $17 million or 4.3% during the quarter, while segment adjusted EBITDA decreased by $400,000 as compared to third quarter 2012 as a result of higher prices on purchases from Olin Brass which resulted in higher conversion costs and which are eliminated in our consolidated results. Partially offsetting this decrease were higher average selling prices and higher volume.

As we enter the last quarter of 2013, let me remind you of the seasonality impact on our financial results. Excluding the impact of various macro economic factors, the first half of the year for GBC is typically stronger compared to the second half of the year. This holds true for Chase, which historically has its strongest shipments in the first quarter, while A.J. Oster and Olin Brass, typically have more robust second and third quarters.

Across all three segments, volume shipments have historically been the softest in the fourth quarter as a result of lower demand due to customer shutdowns for the holidays, and year-end maintenance of plants and year-end inventory focus by customers.

That said and before I turn the call back to John Walker for a few closing comments, I want to briefly discuss our 2013 outlook. As a reminder, we will provide quarterly updates on our annual outlook going forward, however, keep in mind that we are focusing on positioning our business for success over the long term and that our ability to provide guidance is constrained by our short lead times and the tendency of our shipment volume to lag published market indicators.

Based on our recent results, our outlook for 2013 remains unchanged. We expect shipment volume to range between $445 million pounds to $555 million pounds; adjusted sales, to range from 545 million to 555 million and consolidated adjusted EBITDA to range from 118 million to 122 million.

With that, I’ll turn the call back over to John Walker.

John Walker

Thank you very much, Bob. Before opening up the call for your questions, I’d like to reiterate very solid results for the third quarter amid increasing uncertainty, pressuring the global macroeconomic environment. Despite this uncertainty, we are confident in the long term fundamentals of our business which coupled with our ongoing continues improvement initiatives and growth initiatives, these investments will enhance shareholder value in the long term.

This concludes our prepared remarks for today. And operator, we will now begin our question-and-answer session.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Josh Berman at William Blair. Please go ahead Josh.

Josh Berman - William Blair

Hi guys. Good morning.

John Walker

Good morning.

Robert Micchelli

Good morning.

Josh Berman - William Blair

First question, could you give some more color on the increase spend on marketing product development, some more focus on some current products raising awareness of the Eco Brass product line before the deadline?

John Wasz

Yes, this is John Wasz. I will answer the question. From a marketing standpoint, it is much as raising awareness as bringing in the human capital in order to commercialize these products. I think if you think about it this way from an Eco Brass standpoint where the pretty far into that process having spent $10 million in capital a few years ago.

The increases are more affiliated with our growth with the CuVerro product and making sure that we are putting the resources in to do the proper marketing and commercialization of that product as well as investments and trying to push forward the dollar coin and other growth opportunities that we have in our business.

Josh Berman - William Blair

Got it. And then kind of along those lines, do you expect like a large initial ramp in Eco Brass shipments as this January deadline goes into effect or do you think it will still be like steady increases like the last couple of quarters?

John Wasz

I think it’s going to continue to be steady increases. Our third quarter shipments of the Eco Brass products in the green alloys actually exceeded our expectations. And I would say as we move through the fourth quarter we’ll probably see that continue to ramp up but I don’t think you’re going to see a step change, because we’ve seen steady increase over the last several quarters.

Josh Berman - William Blair

Yes. And then lastly, on the increase manufacturing conversion costs, looks like and you said 600,000 was from continues improvements and development on the information systems, are those costs -- are we going to see those again in the fourth quarter, when are those kind of left I guess moving forward?

John Wasz

I think you’re going to see those through the fourth quarter and then in the next year as well, particularly the continues improvement components. There were some IT expenses associated with an upgrade in one of our business but there is other IT expenses that will be ongoing through '14 but from a continues improvement standpoint we’re committed as a management team to focusing on the supply chain and all the elements of manufacturing excellence. And we are putting investment into that again in human capital consulting expenses, training expenses for our employees. And I would say that’s going to continue through the fourth quarter and well into 2014 as well.

Josh Berman - William Blair

All right. Great. Thanks.

John Walker.

Thank you.

Operator

Thank you for your question. We have another question for you and this one is from the line of Phil Gibbs at KeyBanc Capital Markets. Please go ahead, sir.

Phil Gibbs - KeyBanc Capital Markets

Good morning, gentleman.

John Walker

Good morning, Phil.

Robert Micchelli

Good morning, Phil.

Phil Gibbs - KeyBanc Capital Markets

I had a question along those lines on the cost side, is it fair to think about maybe the year-on-year cost pieces a million dollars or so higher on the conversion cost side through the cost of goods and a $1 million higher on the SG&A side, or maybe half of that through the IT spend?

John Walker

I didn't hear the last part of that. Half of that is what?

Phil Gibbs - KeyBanc Capital Markets

If you had a $1 million or so year-on-year related to conversion cost, call it higher conversion cost associated maybe with some of these one-time items. You had $2 million in total maybe $1 million through the cost of goods, $1 million through the SG&A with half of that $2 million roughly on the IT spend.

John Walker

The IT spend in total between SG&A and fixed overhead is about $600,000.

Phil Gibbs - KeyBanc Capital Markets

Do we expect that to be more recurring for the next year or year or two, is that the thought process on that?

John Walker

Yeah. I would say that you probably expect $300,000 to $400,000 going forward.

Phil Gibbs - KeyBanc Capital Markets

Okay. I appreciate that. And also had a question for John Wasz on the small-cal ammo business, should we expect that to be a seasonal as maybe some things in the housing side or is that more, is that typically more stable and less seasonal in the rest of the business?

John Wasz

I will tell you what, it's -- we are right now at a pretty unprecedented level of demand in the whole munitions side of the business and if you look at it and I mean I have the statistics perfectly correct. But you are looking at over the last 10 years, the number of background checks in the United States doubling, so I think we are in the mid stuff. It’s just the higher overall consumption and demand of commercial munitions and activity level it seems to be pretty solid and I would anticipate that being a bit of an abnormality as we move through the fourth quarter and into 2014.

Phil Gibbs - KeyBanc Capital Markets

Okay. And then just lastly any color you could provide on the backlog at Chase Brass at this time, this year, right now relative to maybe this time last year and the lead times there are typically very short but any color you could give on that?

John Wasz

Yeah. Well, I will tell you what, one of the benefits that Chase Brass has and one of the unique things that they offer a bit that it helps keep their customers at bay at a very short lead time. So they are looking at 7 to 10 days, so really the backlog doesn’t -- it doesn’t change a great deal.

Phil Gibbs - KeyBanc Capital Markets

Okay. Thank you very much.

John Wasz

Sure. Thanks.

Operator

Thank you. (Operator Instructions) We have another question for you now. It's from the line of Sal Tharani at Goldman Sachs. Please go ahead.

Sal Tharani - Goldman Sachs

Good morning, guys.

John Walker

Hi, John.

Sal Tharani - Goldman Sachs

Robert, your inventories have been piling up for the last couple of quarters, about $35 million so far this year and even third quarter was and so I was wondering, is that trying to continue and what's the logic behind it?

John Wasz

Hey, Sal, this is John Wasz. From an inventory standpoint, it’s predominantly the result pf, as John mentioned in the opening comment, and as I mentioned in my opening comments, issues surrounding the big facility in Olin Brass. And if you recall early in the year, we had some equipment issues that we ended up having to unexpected downtime that we ended up having to correct and we started to perform from a customer service level, below our expectations.

So, we pushed more inventory into the system and, then as we ramped up volumes through the balance of the year and we are very cautious about ramping up volumes. We got plenty of equipment capacity and the level of capacity really shifts and how many employees we have. And we are very focused on making money. We are very focused on selling products at profitable price levels.

So we are very cautious about adding new folks. But as we have added new folks into the facility and the big facility in East Alton here in the late second and third quarter, we’ve had issues regarding being able to get those people in within the timeframe that we’ve anticipated. And then I have had some training issues. And all that has resulted in some issues with operational performance.

But also even more importantly some issues related to customer service levels and delivery performance. So in order to bolster that, we build up inventories in second and third quarter at that facility. And as we move through the balance of the third quarter, we’ve seen some stabilization and are encouraged by what we are likely to experience in the fourth quarter there.

Sal Tharani - Goldman Sachs

Thanks. It’s fair to say that or coming months or coming quarters, we should see some improvement in the inventory terms?

John Walker

Correct.

Sal Tharani - Goldman Sachs

Okay. The next question I have is this low lead initiatives, how it would impact the scrap industry, do you think a new scrap purchase and availability and does it have any big negative or positive impact on that side of the business?

John Walker

It -- the -- I don’t think it’s going to have a material effect.

Sal Tharani - Goldman Sachs

So the leaded-copper, so brass, leaded-brass scrap, what will happen if people will be making less of it, they will let be a better price than the current or the margins will or the spend will improve you think?

John Walker

Well, I think, the challenge is that and one of the benefits that you have as being a domestic provider and seller of these products, is that you can develop relationships with your customers that allow and help your customers develop the proper segregation protocols and techniques, so that when you take that scrap back, you can run it right back into the flow of the product that its making.

But, if you look at, I mean, there’s going to be still a sizable quality of leaded-brass rod products that serve other markets and segments beyond building and housing. So the challenge from an operational standpoint is making sure that scrap comes back to you, the better you can segregate it, the more efficiently you can use it.

Sal Tharani - Goldman Sachs

Right. Thank you very much.

John Walker

Sure. Thanks.

Operator

Thank you. We have another question for you. This one is from Phil Gibbs at KeyBanc Capital. Please go ahead, sir.

Phil Gibbs - KeyBanc Capital Markets

Thanks, guys. Just had a follow-up, maybe this is dovetail on somewhat of sales question that you said you built inventory that add-on brass. And I know that your products there very specified, very diverse, you offer a lot of great in the market. Just curious how you’re able to build inventory given all the specificity in the products that you make unless maybe half the business is one base-load product, any color you can give there?

John Walker

Yeah. That’s a great question. And I tell you what, it’s -- I think one of the big challenges and opportunities with the business and that we are -- we have been working Phil for a few years on the value stream and continuing to drive improvement through the value stream. And it’s complex because you’ve got the big mill down in East Alton that not only supplies all the commercial customers but also supply the downstream businesses, whether it would be (inaudible) or fab and copping.

The munitions business and the fact that we have visibility through those downstream businesses to exactly what the customer needs are, allow us to be able to position inventory, working process in various places in the facility in order to service those needs, because we know we’re going to get it. It just a matter of, is it going to hit in August or is it going to hit in September or is it going to hit in October.

So, the challenge for us is, as you think about the whole supply chain is, linking it up with the sales forecasting system and the customers specific specifications to be able to make sure that we’re putting in there from an inventory standpoint, isn’t the product that is going to flow through the various pieces of equipment within the mill, as well as into the downstream businesses.

Phil Gibbs - KeyBanc Capital Markets

Thank you.

Operator

Thank you. We have another question for you. This one is Paretosh Misra at Morgan Stanley. Please go ahead.

Paretosh Misra - Morgan Stanley

Hi. Good morning. Just a question on scrap, what are you seeing in the scrap market right now in terms of availability and pricing here in the U.S.?

John Walker

Spread tightened in the second and third quarter and we’re seeing a little bit of improvement right now, not material, but a little bit of improvement which is good.

Paretosh Misra - Morgan Stanley

Understood. And then second on imports, building and housing side, is that, are those imports for certain specific products or it’s pretty much across the Board.

John Walker

I’m sorry. Can you repeat that please?

Paretosh Misra - Morgan Stanley

For the imports pressure in the -- for the building and housing product, are there certain specific products you’re feeling a bigger impact of these imports within this building and housing segment?

John Walker

No, well I would say it’s predominantly in the Brass rod side of the business but here is the interesting thing is that if you look at brass rod and you take a look at the import data, you’ve seen an uptick that’s come from South Korea which is largely one particular low-end customer that we’re familiar with. That has impacted our share at Chase but on a total basis imported brass rod is flat and actually slightly down on a year-over-year basis.

So I don’t think you can -- the challenge that we were having is that we’re looking at existing home starts that have gone up 15 plus percent on a year-over-year basis. We’re looking at housing starts that have gone up 15% on a year-over-year basis. And although we’re seeing growth in the building and housing sector in a brass rod business, we’re not seeing that type of growth.

So we’re continuing to look at the timing, how many completions are occurring and what’s coming in from overseas. On the brass rod standpoint, you’ve got a little bit of issue and then on the brass component fees, we have seen some uptick in the imports of some brass component as well an again it’s more at the lower end type applications.

Paretosh Misra - Morgan Stanley

Interesting. Thanks guys. That’s all I had.

John Walker

Sure. Thanks.

Operator

Thank you. We have another question from the line of Sal Tharani of Goldman Sachs. Please go ahead, sir.

Sal Tharani - Goldman Sachs

Thank you. You mentioned seasonality of different businesses. Can you just give us -- again I’m sorry I missed that?

John Walker

Yes, seasonality or just the volume shipments, Sal, Chase usually goes best in the first quarter and then second best in the second, third quarter and then fourth quarter. A.J. Oster and Olin Brass on the strip side of the business are usually second quarter, third quarter, first quarter, fourth quarter but sometimes it’s third quarter, second quarter, first quarter, fourth quarter.

Sal Tharani - Goldman Sachs

Great. Thanks. And also on the coin side, can you remind us what kind of opportunity you are looking at, just not for you just for the industry, what kind of volume we can think of and what is that volume now for the coin business, which is I know it’s very minimal?

John Walker

Well, I can say this that right now, it was the year before last that they discontinued the production of the dollar coin. So, I think as this year, our shipments of that has been relatively nonexistent, there maybe a little here and a little there. But in the event that there was a conversion such as this and the elimination of the dollar build, essentially it’s our understanding that there’s about $9 billion build in circulation and it’s approximately 45 to 50 coins are made per pound a strip. So it’s a pretty sizeable volume. Now, the question is over what period of time did that occur, is that two years? I think the current bill has got a four year time horizon on it as far as the transition.

Sal Tharani - Goldman Sachs

And when you are producing it and when this one discontinued, were you a dominant player in this or were you a smaller player?

John Walker

We’re roughly one or two suppliers.

Robert Micchelli

Essentially suppliers.

John Walker

And I would say it’s 50-50.

Sal Tharani - Goldman Sachs

Right. Thank you very much.

John Walker

Sure. Thanks.

Operator

Thank you. There’s no further questions. So, I would now like to turn the call over to Scott Hamilton for closing remarks.

Scott Hamilton

Thank you, everyone for joining us today and for your continued interest and support in Global Brass and Copper Holdings. We look forward to speaking with you again during our fourth quarter conference call. Thanks again and have a good day.

Operator

Thank you, ladies and gentlemen. That concludes your conference. You may now disconnect. Thank you for joining and do enjoy rest of your day

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Global Brass and Copper Holdings (BRSS): Q3 EPS of $0.56 misses by $0.01. Revenue of $139.7M (+6.7% Y/Y). (PR)