A. M. Castle & Co. Management Discusses Q1 2014 Results - Earnings Call Transcript

Apr.29.14 | About: A. M. (CAS)

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

Q1 2014 Earnings Call

April 29, 2014 11:00 am ET

Executives

Justin Frakes

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

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

Stephen James Letnich - Chief Commercial Officer

Analysts

Martin Englert - Jefferies LLC, Research Division

Edward Marshall - Sidoti & Company, LLC

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

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

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Operator

Welcome to the first Quarter 2014 A.M. Castle & Co. Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Justin Frakes. You may begin.

Justin Frakes

Good morning. Thank you, everyone, for joining us for A.M. Castle's First Quarter 2014 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, supplemental slides 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; Scott Stephens, Vice President of Finance and CFO; and Steve Letnich, Chief Commercial Officer. As a reminder, this call is being recorded.

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

Additional information concerning these factors is contained in the Risk Factors section of the company's most recent Form 10-K for 2013 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 SEC rules. You will find the reconciliation in the financial information attached in today's release, which is 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 will turn the call over to Scott Dolan. Go head, 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 the first quarter 2014 results as well as an operations update. Our CFO, Scott Stephens, will discuss financial results and current business conditions for the first quarter of 2014. And then, Steve Letnich, our Chief Commercial Officer, will speak to the status of our sales initiatives and commercial objectives. I will then close the prepared remarks with a few comments around our outlook for the remainder of 2014 before we open the call for questions.

For the first quarter of 2014, consolidated net sales were $253 million compared to $293 million for the same period last year. The reported net loss for the first quarter 2014 was $16 million or $0.69 per diluted share compared to a reported net loss of $11 million or $0.46 per diluted share in Q1 of '13. Adjusted non-GAAP net loss was $16 million in Q1 of '14 compared to net loss of $8 million in the first quarter of 2013. EBITDA was $0.4 million and 0.1% of sales in the first quarter of 2014 compared to $4.8 million and 1.6% of sales in the prior year period. Adjusted EBITDA was $1 million compared to $9 million in Q1 of 2013.

First quarter 2014 Metals segment net sales were 15% lower than the first quarter of 2013, while Plastics segment net sales were comparable to the first quarter of 2013.

The first quarter year-over-year Metals segment sales' decline reflected lower average price per ton and a volume decline. The first quarter of 2014 had 1 additional day of sales compared to Q1 of '13. The decline in average price and volume was the result of the continuation of soft markets and weak metal prices when compared to a year ago. We have always said that our pricing structure does not fall at hot rolled and certain commodity items on a short-term basis. But over time, our trend lines generally correlate to the broader metals market.

Sequentially, compared to Q4 of '13, we did see substantial growth in Metals volumes, which were 13.4% higher in the first quarter. In addition, we saw Metals sales and volumes improve sequentially within the first quarter. After a slow start to January, the quarter ended with March being the best month of the quarter in terms of overall sale and volume levels.

Now I will discuss our observation in our key end markets for Q1 2014. Slide 4 of our earnings supplement also provides a recap of the 3 primary macro data points that we monitor for indications of future performance, which are PMI, rig count and aerospace build rate. The average PMI for the first quarter of 2014 was 53 compared to 57 in the fourth quarter of '13, and 53 in the first quarter of 2013. Lower average PMI in Q1 2014 compared to Q4 2013 was indicative of the uneven economic recovery in our end markets and poor weather conditions in the first quarter of 2014. Typically, our results lag the PMI trend line by anywhere from 6 to 12 months.

Average weekly rig counts in North America for Q1 of '14 were up sequentially at 2,304 compared to 2,136 for Q4 last year but were relatively flat when compared to the Q1 2013 average count of 2,289.

In terms of end market performance, aerospace was our strongest performer in Q1 2014, while the industrial and oil and gas businesses performed below expectations. Q1 2014 Metals sales were up 9.3% from Q4 2013 due to volumes that were up 13.4%, partially offset by a 1.9% average price decline and 2.2% due to mix. The volume increases were spread somewhat evenly across all products. Notable exceptions to the sequential volume increases in Q1 over Q4 were our carbon alloy and plate products, where volumes were approximately flat from Q4 2013 levels. In these products, we experienced continued softness from certain mining and heavy equipment customers, as well as operational inefficiencies related to the Cleveland facility consolidation.

We believe that we addressed and remediated these operational and service issues by the end of Q1 2014. The average price decreases were most significant for aluminum, stainless and alloy bar products, while SBQ bar and nickel had improved average pricing in Q1 2014 compared to Q4 last year. Early in Q2, we have seen an upward trend in pricing for all of these products.

The aerospace market in Q1 2014 remained fairly consistent with 2013 results from a demand and activity perspective, and our aerospace sector sales results were in line with our expectations. There was a 2% increase in aerospace sales compared to Q1 of last year, a 9% increase compared to Q4 of 2013.

The industrial portion of our business was again negatively impacted by the decline in demand from the mining and heavy equipment sectors. Compared to Q1 of last year, we saw a 14% decrease in industrial sales, while there was a 9% increase compared to Q4 of '13.

In oil and gas, our performance in this market was also below expectations in Q1 of '14, with sales down 26% compared to Q1 of '13 and up 14% compared to Q4 of '13. We are optimistic that the increase in North American rig counts in Q1 of this year compared to Q4 of last year could be suggestive of increased drilling and production activity resulting from the recent increase in gas prices.

Now I'd like to provide a few more specifics about our performance in the first quarter. As we talked about on our last call, Q1 of this year began with a sluggish market environment, which was worsened by weather-related interruptions and increased operating costs related to the poor weather conditions spaced across the country this past winter. However, we saw positive trends in our commercial activity toward the end of the quarter, and our per day sales metric sequentially improved month-over-month during the quarter. Additionally, we saw improved performance from our Houston, Texas facility toward the end of Q1 as some of our commercial initiatives began to take hold and the transitional challenges related to prior year turnover or result.

Results at our facility in Edmonton, Canada, which has strong exposure of both the mining and the oil and gas industries, lagged in Q1. But we expect to see improved performance as leadership in Canada was bolstered in the fourth quarter of 2013.

Operating costs as a percentage of revenue were 28.5% in the first quarter of '14. Operations and plant productivity remains steady in Q1 of '14 compared to Q1 of '13 despite the decline in net sales. There were frictional costs incurred in Q1 of '14 associated with facility transitions optimizing our performance and weather-related issues. These costs are not part of our normal cost structure, and we anticipate these costs will decline and exit over the remainder of '14.

As our sales increased over time, we continue to believe that the business has significant leverage and can deliver solid profitability as our end markets grow stronger. It is worth noting that we have maintained our facility and trucking footprint in order to provide the necessary support for the expected revenue growth. We will continue to examine our operating expenses throughout 2014 and will make additional cost reductions if appropriate, particularly should market conditions recover less than anticipated.

During the first quarter of 2014, we also continued to execute the commercial initiatives that we began in the second half of 2013. Steve will speak to the specific initiatives and results later in the call.

Lastly, we continued our work to optimize the distribution and timing of inventory at our facilities, as well as to standardize our processes, all of which are key steps in our plan to improve on-time delivery and obtain on-time delivery rates in the upper 90s over the next couple of years.

Now I will turn the call over to Scott Stephens for a recap of our financial results.

Scott F. Stephens

Thank you, Scott. Good morning, everyone. Slide 6 and 7 of our earnings supplement provide a brief overview of our first quarter 2014 and 2013 financial performance. First quarter 2014 consolidated net sales of $253.4 million were 13.4% lower than the prior year period and up 8.7% from the fourth quarter of 2013.

Net sales in the Metals segment of $219.1 million were down 15.2% compared to the first quarter last year, reflecting a 10.5% average sales price decline and a 4.5% decline in sales volumes. Metals segment sales were up 9.3% sequentially from Q4 of 2013 on a 13.4% increase in volumes.

In the Plastics segment, first quarter 2014 net sales of $34.3 million were consistent with the first quarter of last year.

Consolidated gross material margins were 25.6% and -- compared to 25.0% in the prior year first quarter. First quarter 2014 gross material margins included a $1.2 million LIFO income and $0.3 million commodity hedge losses. When compared to the first quarter of 2013, gross material margins, that included $1.3 million of commodity hedge losses, $0.8 million of restructuring charges and $0.7 million of LIFO expense.

Plastics segment material margins improved from 28.9% in the first quarter last year to 29.8% in the first quarter 2014. Although we saw metals prices in our markets begin to improve at the end of Q1, we did not see a meaningful impact during the quarter on our prices or our gross material margins. If demand continues to improve and the recent price increases hold, we would expect some modest improvement in gross profit margins as the year progresses.

Total operating expenses were $72.2 million in the first quarter of 2014, including $0.7 million of restructuring charges compared to $74.3 million in the first quarter last year, which included $2.2 million of restructuring charges. There was deterioration in the operating expense to sales ratio from 25.4% in the first quarter last year to 28.5% in the first quarter this year.

We did realize the cost improvements that were implemented throughout 2013 from our restructuring activities. However, these cost savings were partially offset by the frictional costs that Scott mentioned earlier related to facility transitions, optimizing our operations and commercial structure and addressing weather-related issues. We don't expect these frictional costs to be part of our normal cost structure, and we should see these costs managed out of the business over the remainder of 2014.

As part of our continuous improvement plan, we incurred $0.7 million of pretax restructuring charges in the first quarter that were primarily related to moving and shutdown costs for the consolidation of our Ohio facilities. We anticipate approximately $1 million to $2 million of additional restructuring costs for the remainder of 2014 related to the 3 planned facility consolidations that were announced in October last year.

First quarter 2014 interest expense was $10 million, which was consistent with the first quarter last year. In January of this year, we partially exercised the accordion option under our revolving credit facility to increase our aggregate ABL commitment by $25 million. This increased our ABL borrowing capacity from $100 million to $125 million, and we maintain the ability to exercise the accordion for an additional $25 million in the future for a total potential ABL of $150 million. The company's current borrowing base assets are well above the $125 million ABL borrowing capacity, thus, all of the current ABL line of $125 million is available subject to customary adjustments. The company had no outstanding borrowings against the revolver as of March 31, and our total availability was approximately $115 million.

We continue to evaluate opportunities to refinance the company's high-yield debt into a more cost-effective solutions that will maintain or enhance our overall liquidity while achieving substantial interest cost savings.

Other expense for the first quarter 2014 of $0.7 million represents noncash foreign currency transaction losses, primarily related to intercompany loans with our operations in Canada and the U.K. This compares to $2.3 million for these same items last year.

The company recorded an income tax benefit of $0.1 million for the first quarter 2014 compared to a tax benefit of $1.4 million in the same period last year. The effective tax rate for the first quarter was 0.3% compared to 10.2% for the first quarter 2013. The lower effective tax rate was primarily due to a $2.7 million valuation allowance that was recorded against all the deferred tax assets of our U.K. subsidiary and a $3 million impact on the quarterly tax provision due to losses in the U.S. and U.K. that were not benefited during the period due to the potential that they may not be realized. Under normal operating conditions, the company's effective tax rate is expected to be in the 32% to 35% range. Based on current estimates, the effective tax rate for 2014 is expected to be in the range of 11% to 12%.

Accordion earnings of the company's joint venture was $1.9 million in the first quarter, which is an increase of $0.4 million compared to the same period last year. The company reported an operating loss of $7.3 million and a net loss of $16 million or $0.69 per diluted share for the first quarter compared to an operating loss of $1 million and a net loss of $10.6 million or $0.46 per diluted share the first quarter last year.

EBITDA as reported was $0.4 million in the first quarter compared to $4.8 million in the first quarter last year. Please refer to the earnings release posted earlier today for a full reconciliation of non-GAAP items.

Average day sales and inventory was 164 days for the first quarter this year compared to 173 days for the first quarter last year. We're targeting 150 DSI level for the second half of 2014. Average receivable days outstanding was 49 days for the first quarter compared to 51 days for the first quarter last year.

Cash used in operations was $2.9 million for the first quarter compared to cash provided by operations of $32.6 million in the prior year period. Cash paid for capital expenditures was $2 million during the first quarter which was in line with expectations and compared to $1.9 million during the first quarter last year. We expect capital expenditures in the $10 million to $12 million range for the full year of 2014.

Total debt net of unamortized discounts at the end of Q1 was $247 million. Cash and equivalent balances were $25.7 million at the end of the quarter. And net debt to total capital ratio was 40.9%, which compared to 38.7% at the end of 2013.

In 2013, we began the execution of our commercial initiatives under the direction of Steve Letnich, our Chief Commercial Officer. Let me now hand the call over to Steve, who will provide an update on our sales transformation and commercial objectives.

Stephen James Letnich

Thanks, Scott. As a reminder of our commercial improvement strategy, please refer to Slide 8 of our earnings supplement. I'm excited to say that we continue to see solid progress in our commercial initiatives. As we have discussed, programs like these are not quick fixes and they take time. The incremental successes that we are starting to see gives us confidence that we have made the right strategic decisions.

I will walk through a few more details on some of the specifics now. First, the realignment of our sales territories, which allows our reps to sell across our entire metals product portfolio, was fully implemented as of the beginning of this year. During the first quarter, we saw a 2% year-over-year increase in quote activity for the Metals segment, as well as improved quote closure rates, which we feel is a direct result of our sales realignment efforts. We also began tracking our revised and refocused key performance metrics for the sales team during the first quarter of 2014 and are now in the performance management phase of this process.

We have the tools in place to view performance on an individual basis for both our inside and outside sales people, which will allow us to create a more accountable and high-performance culture. We continued our work to build out our strategic account team in the first quarter of 2014. The team is focused solely on our larger customers, and they are working with senior leadership at the corporate level to identify and leverage global opportunities.

As of the end of the first quarter 2014, the team had identified numerous accounts that have the potential to generate additional revenue for the company over time. There is an opportunity to significantly increase revenue from these accounts as we move forward based on our current business with these customers.

In the first quarter 2014, we conducted executive level reviews of our top global accounts. These accounts will be reviewed at the executive level on a quarterly basis going forward. Regional top account reviews will also be completed on a quarterly basis. These reviews ensure cross-functional teams of operations, supply chain, logistics, IT, human resources and finance all understand customer expectations related to Castle's performance. We continue to work on localizing certain pricing inventory, lead time and delivery decisions to improve customer satisfaction in our local markets.

During the first quarter of 2014, short-term localized inventory solutions were rolled out while we continued to work toward a more robust, real-time pricing program. Full implementation using the localized pricing is targeted for the beginning of the third quarter of 2014. We will continue to maintain centralized sales along with our global sales strategy, but we'll delegate certain authority to the local teams for which they can make the best decisions.

In the first quarter of 2014, we completed inventory redeployment and rebalancing at 7 locations. Our plan is to complete inventory redeployment to an additional 8 locations in the second quarter of 2014. In locations where we have completed our inventory profiling and restocking exercises, we have seen significant improvement in sales trends.

I am encouraged that the number of active accounts for our Metals segment remained flat in the first quarter of 2014 and increases in revenue from new business exceeded normal account attrition. We will continue to focus on improving customer satisfaction and on-time delivery and remain heavily focused on gaining market share as our commercial programs begin to pay off.

The reorganization of our inside sales team will continue throughout 2014. This initiative will optimize the productivity of our inside sales team and create team consistency on a global basis so we can provide better, more uniform service to our customers.

The commercial initiatives will remain my team's focus throughout 2014 with emphasis on the overall commercial structure that will benefit the company in the long term. Now that the majority of our commercial initiatives are nearly fully implemented internally, we expect to see momentum from these programs beginning in the second quarter of 2014 and building through the remainder of the year.

I'll turn the call back to Scott Dolan to comment on our outlook for the remainder of 2014.

Scott J. Dolan

Thank you, Steve. While we do not see a dramatic improvement in our markets in the first quarter of 2014, I am encouraged by the progress we have made on our commercial initiatives. Sequentially improving daily sales metrics and increased quote activity give us the sense of confidence that we are doing the right thing to reinvigorate growth. We remain focused on growing our business and leveraging our facility and trucking footprint to support that growth while improving on-time delivery and optimizing inventory distribution and timing. We believe this will improve customer satisfaction and delivered gains in market share and performance. We will continue to explore opportunities with existing customers to increase sales volumes through the sale of commodity-grade materials.

As I have said before, specialty metals will always be our core business. However, we will need to build even stronger relationships with our customers and build additional flexibility into our commercial platform to be able to shift our sales priorities throughout the various cycles of the market.

We are optimistic about the second quarter based on the sequential sales improvement we saw during the first quarter. And if the markets continue to improve, we are optimistic that there will be modest sales growth in 2014 over the prior year.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Martin Englert from Jefferies.

Martin Englert - Jefferies LLC, Research Division

If you isolated the weather impact, what do you think it -- what kind of effect do you think it had on the top line sales for 1Q? And do you think there's going to be any catch-up associated with this?

Scott J. Dolan

Yes. We really don't think, on the top line, it probably had that much effect over the entire quarter, just by days here and there, when facilities were closed, but on the top line. On the cost side was more of the impact, which we think was around $1 million from a cost -- additional costs.

Martin Englert - Jefferies LLC, Research Division

And if you included the frictional costs with that, would that be above and beyond the $1 million, or would that be included with that?

Scott J. Dolan

No, no. Weather only, about $1 million. We think right now the frictional cost was around $2.5 million, and that really was the consolidation of Cleveland, our facilities there, and the overtime involved, some of the overtime here in Chicago and then really, all the additional costs of moving inventory around the system to better position us, as Steve mentioned, along with a little bit of consulting to help fix some things that we're still working on.

Martin Englert - Jefferies LLC, Research Division

So looking out into the coming quarters when we think about 2Q or 3Q, what should we think about those frictional costs weighing on the OpEx there?

Scott J. Dolan

Yes. Obviously, the $1 million should be gone from a weather perspective. Of the $2.5 million, I think you should get to the second half of the year. It's completely remediated. I think over the course of Q2, it's blending itself out until it gets to the second half of the year. And I think the other big piece to make up for the structural costs that have come out is just the fact that we still aren't optimized in terms of our plant and transportation network until we get a little bit of revenue growth, and then you start to fill out the total structural cost that we've taken out of business.

Martin Englert - Jefferies LLC, Research Division

So for the full year, it's going to be something $2.5 million plus for the frictional costs. Are you still expecting to get the incremental $8 million to $10 million on an annualized basis out of the OpEx?

Scott J. Dolan

Yes. All the -- $2.5 million on the frictional, $1 million on the weather. As you look at the structural costs that have come out close to $6 million as the business starts to grow, you'll start to realize that as well. As you highly leverage transportation costs, facilities, you don't have incremental costs for that additional revenue. In addition to that, we also have the work that's on track to consolidate Wichita, Houston facility and Edmonton later in the year.

Martin Englert - Jefferies LLC, Research Division

Okay. And so just to be clear, though, the prior quarter, I think you had anticipated a total of $8 million to $10 million with the cost savings with the restructuring for 2014. And -- so you're saying that's still on track, but the frictional costs will distort that to some extent?

Scott F. Stephens

Well, Martin, the $8 million to $10 million will be implemented in '14, yes. What we said was half of that came from the Ohio facility consolidation at the end -- that occurred at the end of last year, so we would pick up that benefit, roughly $4 million to $4.5 million. The balance from the other facility consolidation in '14 is not going to materially benefit the expenses this year. They'll be executed this year and benefit '15 but not significant to benefit '14. So I think what you're basically seeing in Q1 minus the frictional cost reduction, the elimination of this sort of weather-related activity, this kind of -- the baseline of expense, and then we're into sort of, as Scott mentioned, kind of continuous improvement efficiencies to improve from there.

Martin Englert - Jefferies LLC, Research Division

And one last question here on the frictional costs. You don't think there is any risk that these would hang on past the second quarter as you expect them to transition out, or maybe you had cut costs too much in that they would hang around in the OpEx for the remaining quarters?

Scott J. Dolan

Yes. We don't believe -- I mean, we'll -- Cleveland, we have done all the fixes there now. Performance is where it needs to be. Overtime levels sequentially got better throughout the quarter and are trending much better in April. So in terms of some of the temps we've had to bring on and consultants, they're weaning off. So we think we've identified them extremely well. And once again, it may not be 100% out come July 1, but we'll be pretty close and will be eliminated sometime in Q3, for sure.

Operator

Next question comes from Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

So the first thing I want to talk on is kind of pricing. And if -- and I know it's -- to be fair, I looked at Reliance and I guess they're your largest competitor. And when you look at kind of the year-over-year decline in pricing, if you try to isolate their business with carbon, it looks like you were right in line, x carbon, their price declines. If I look at the fourth quarter -- or the first quarter rather, it looks like you dropped 4% on price, they were up slightly. And I'm just curious if maybe I'm misreading anything. Or is -- or did you price product below markets in 1Q '14 relative to kind of what the closest competitor has reported?

Scott J. Dolan

Yes. Ed, Scott Dolan here. I'll start and let the guys jump in. I don't believe we have. I think we're trying to price at the market, which is a little bit different strategy on our transactional business that we had done before, which we priced sometimes above market, and that created a greater volume decline. I still believe, if you're trying to compare to Reliance, the strength that continued throughout the year and continued into Q1, with some of the flat roll products and other things, I think distorted the numbers a bit from ours. And we're finally starting to see the strengthening or firming of pricing in a lot of our products here at the end of Q1 and beginning of Q2, as I mentioned. And, really, a lot of that really didn't take hold till late. So I think that will start to come up in line a bit, but I think that flat roll strengthening has a big difference, obviously, between us and Reliance.

Scott F. Stephens

There is no question that the decline in our cost of goods or what we buy have declined significantly versus historical levels when you look back to '10 or '11 or '12.

Edward Marshall - Sidoti & Company, LLC

Okay. What level of sales is it going to take for us to see that 22% operating expense ratio? Especially, I think your most recent presentation says by the end of 2014. Understanding some of the frictional costs and maybe the weather-related costs in Q1, you still look well far from that kind of expectation, and I'm just kind of curious what you need to do to kind of get there this year. That's question one. And I guess, question 2 is, we've been at this at roughly 15 months or so now. And just looking over the last 3 quarters, it looks like it's going in the opposite direction. I just kind of hope you can rationalize those kind of comments and help me think about how I should be thinking about this going forward.

Scott J. Dolan

Yes. I think on the cost structure, we said 20% we needed to get back to -- close to revenue levels in 2012, which were about $1.25 billion. What we've said to get to 20% exiting this year, you basically need revenue levels that have single-digit growth over what we had in '13. And so for the full year, we didn't say we were going to hit 22%, so the frictional costs in the first quarter performance should not impact the ability to exit at 22% as long as we get the sales growth in the back half of the year that we think we will at this point. In terms of, we've been at it 15 months, we clearly started off jumping into the structural cost piece, and I think we've executed on everything we've said we would get done. We clearly did not anticipate from the time that we started this that our COGS, our overall pricing, would decline to the level it has. The fact that being the late cycle in the specialty markets have continued to be as weak as they have -- and the late cycle nature has taken as long as it has. And quite frankly, as I said throughout the course of last year, I underestimated it. I thought we were in a much stronger place from a commercial perspective to be able to pull off what we are trying to do, and that's why we spent our time in other areas. That became very clear last year that we had to go deeper and be more transformational in what we were doing in our commercial activity. That's why we made the change in leadership. That's why Steve came in, in July. And while we spent the back half of last year setting us all up, we are, in all essence, 3 months into -- for the purposes of this call -- 3 months into the work. And I think what you should start to really look at sequentially, how are we doing as a company and how are we doing compared to others when you look at the Q1 of our performance.

Edward Marshall - Sidoti & Company, LLC

I mean, I kind of hear you saying that you hit the reset key kind of December 31 this year. But I mean, to be fair, I guess, there were 6 facilities closed last year, and there were some other changes with sourcing and so forth. I mean, shouldn't those fixed costs start to show up in the model here, and shouldn't we have already started to kind of realize those -- that operating leverage this year? I mean, I understand sales have gone the opposite way. But I mean, shouldn't we have seen something in the cost line?

Scott J. Dolan

Yes. I think that what we're trying to point out is, if you go through it, all the structural costs have come out when you start adding the $1 million for weather, the $2.5 million for this executional frictional costs. And then with the sales decline, there's another couple of million dollars there that is being -- once you grow the sales a bit, you're getting free transportation, very cheap labor in the plants, and it comes through. And that's what -- soon as we start growing a bit, you'll see all that will start to come through in addition to the $3.5 million, which will come out for Q1 for this frictional cost.

Edward Marshall - Sidoti & Company, LLC

Yes. That $3.5 million is about $0.10 a share. Is that right, give or take?

Scott F. Stephens

Yes. After-tax, yes.

Edward Marshall - Sidoti & Company, LLC

Okay. When I look at -- when I kind of -- Scott, if I think about kind of the refinancing program and the thoughts that you first called at the end of this year, I mean, it looks like you were levered roughly 21x this year, trailing 12 month EBITDA right now. Do you think that's likely at the end of 2014, or are you kind of really looking now at 2015 as the potential first call for that loss?

Scott F. Stephens

Well, we still think that we're looking at a spectrum of refinancing that goes from sort of the bank senior debt asset based end of the spectrum to the leverage loan or sort of high-yield end of it. And sure, to your point, today, that high yield may not be an attractive place for us, or it might not offer the cost savings that we could get on the asset base side. I think we still feel like, regardless of the lack of earnings or the earnings growth being what we would like it to be right now, I think we still feel like that there's a pretty good market there. Well, there is a good market there for that kind of bank debt, and we have a fair amount of liquid assets here in this business to position us well there. So we're still going to work on that. So I think I wouldn't be surprised if we did something between now or leading up to that call date of December. To your question, it may make sense what you sort of see how the markets go and how the improvement goes. It may make sense for us to wait it out, pass that call date, to your point, into early '15, what market conditions may be better and our performance trajectory may make that make sense. So we're evaluating kind of everything right now, and we'll continue to work on it.

Edward Marshall - Sidoti & Company, LLC

Are you comfortable where the business sits today that you'd want to incur that kind of 1:1 coverage ratio if you want an ABL route or...

Scott F. Stephens

Well, we're significantly below that today. But typically, like with our ABL today -- and I would expect that to be the same -- that's a springing kind of a covenant, right? It's not on all times measured. So as long as we felt like we were on our way there, then I think yes, we will be comfortable going into that kind of a covenant, yes.

Operator

We have a question from Phil Gibbs from KeyBanc Capital.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Scott, I'm just curious because we were already through the majority of the first quarter. Last time, you guys reported around the 25th of February. And just curious why these frictional costs and maybe some of these weather issues at that point weren't flagged for us or the Street. I mean, I don't really understand why we're also surprised at this point unless you were surprised as you exited the quarter. So just help us out there from a high-level perspective.

Scott J. Dolan

I think from a high-level perspective, what we said in the last call is that we expect the Q1 to be a lot of the same of what we saw in Q4, and that's clearly what we saw from the commercial side of things in sales. We did see the uptick in March, which was good to see. I don't think, on that call, we were trying to triangulate into any specific guidance. And so really, we were giving more of a higher level activity level in commercial rather than spelling out any specific costs. So clearly, we knew the weather was impacting our costs. We didn't -- we were -- we didn't have the specifics on that and clearly, we monitor over time and where we are with temps and other things in the business on a weekly basis. So we had all those numbers, but we weren't giving specific guidance for Q1 on the last call.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. And as far as these 3 other facilities, Wichita, Edmonton and I think you gave another one in there.

Scott J. Dolan

Houston.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Houston. I mean, is it reasonable to assume that there will be some call it, over the long term, some nonrun rate costs associated with your inventory -- I think you would call that redeployment -- as the year unfolds or whenever those actions occur?

Scott J. Dolan

Yes. I think for the facility closures, that will be minimal. I mean, those -- all 3 of those facilities are within 10 miles of another facility in that city. So there'll be, obviously, some transitional costs but pretty minimal on that. The larger cost from the inventory work is what Steve mentioned that we did 7 or 8 facilities in Q1, and we're flushing out Q2. We just -- as we talked about last year, we never really had a true supply chain function in this company that analytically can look at where are the most opportune places to have the inventory working with our commercial group to drive sales. We have held, traditionally, way too much inventory in Cleveland, Franklin Park and Houston, and what we're trying to do is redeploy that out to the markets locally so we can serve the customer next day, and that really will help our transitional business. And so there's some double handling because a lot of that ended up in these hubs, and it takes too long to get it out. Now that we're redeploying that, our goal is, once we start to replenish that, we get more deliveries directly from the mills, directly into those branches and bypass the hub which saves on the double handling and the extra lead time involved -- extra lead time involved to get it to the customer.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

So is there more to go there as far as moving inventory around within your own facilities, or is it, call it, those mill supply lines, already being in the process of being reestablished?

Scott J. Dolan

We're about halfway through right now, and so we have about 7 facilities left to do in Q2. Some of that is -- comes out of the hubs to get out to those locations, another comes directly from the mill. But we feel comfortable that we'll have that all in place start of Q3, but it ramps up over time. And I think -- and Steve can give some specifics -- in certain markets like Toronto and Charlotte where we're the first to go, we have seen a really nice uptick in quote activity and overall transactional business in those markets.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Okay. And then just lastly here, I wanted to just touch upon your kind of bread and butter stainless bar business as far as what you're seeing there moving into the second quarter from your customers and call it in aerospace, oil and gas, power generation. Just what you're seeing there as far as, call it, a potential recovery and then maybe some color you could just broadly give on what Tube Supply is experiencing relative to late last year?

Stephen James Letnich

So overall, I would call our general industrial business, which incorporates a lot of the products that you had mentioned, we're seeing optimism from our customers. Are we saying that they're going to be levels back into 2012 or 2011? No. But certainly, they'd be better in the fourth quarter. And as Scott had mentioned, we are seeing sequential improvement January to February, February to March. And we believe April looks very similar to March. As far as oil and gas in Houston, all of the indications are with the gas levels and the oil levels that rig counts are going to continue. Horizontal drilling should start to increase, which is all benefits to our business.

Scott J. Dolan

Yes. I would just add, we've been, I think, pretty upfront that transition -- acquisition of TSI throughout 2012 had some issues. We -- as part of that, we lost some of our legacy Castle business, bar business, nickel products. Some of that weaned itself off of -- in Q1 and Q2, large contractual agreements that we had that we lost. We spent last year really rebuilding that team. But the year-over-year, there was a piece of that. But we've rebuilt that team, and we're starting to get that business back on the bar side. And then on the tube side, we did have transition as well and turnover. And we've completely built that team down there. And within 2 weeks here, we will have the entire oil and gas on Oracle, which will give us a global purview across all of our metals products, which we think is very unique.

Philip Gibbs - KeyBanc Capital Markets Inc., Research Division

Scott, did you talk about inventory levels just broadly for your company as far as how we look at those moving through the year, status quo, moving up, moving down? Appreciate it.

Scott J. Dolan

Yes. I mean, we're -- we came down a little bit Q1 over Q, from last year to Q1 of this year. Our target we set is to get under 150 days by the end of this year. We are in a position now -- as we said, as we are redeploying inventory out to more of the smaller branches, we are in a position right now that we are feeding the growth that needs to occur. So we are adding inventory right now, but we believe we can do that in a way to stay around the $160 million to $170 million. As you get in the back half of the year, growth starts to take over and you're replenishing back in, and that's how you settle down into the 150 number. I think one of the things we just have to get better on -- and we weren't as analytical as we would have liked -- obviously, with -- to control your DSI, top line sales growth can be just as effective as taking inventory out. And really, we're just making sure we're putting it in the right place to derive that. There'll be a little bit of a hangover period here for 3 or 4 months that will stay relatively stagnant. But as you get back to the half of the year, we should settle down to the 150. And then as you go onto next year, and we've optimized how we do this, there's no reason we shouldn't be down closer to the 120 range as we move forward. And we'll update that more specifically as we go forward, but we don't expect to run long term at 150.

Operator

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

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

It sounds like top line is -- you're actually going in the right direction here. We have had a few false starts from a macro perspective. Can you talk about some of the levers that you can still pull if top line didn't continue to recover? Are there more potential facility closures on the radar or non-core asset sales? Can you just talk about some of those potential levers?

Scott J. Dolan

Yes. Dan, I don't want to go into a lot of specifics here because we do believe, as you mentioned, top line, the things we are doing, we're very early into the game, and we like the direction they're going and the leading indicators that will move. So we're not in a position right now that we're actually doing that work in terms of bringing it forward. But once again, our transportation network are the number of plants that we have out there, the global footprint, being across Asia, being in Europe, Mexico, Canada, it lends itself to a company that's much larger than what we are today. As we've said before, we believe we could generate $2 billion of revenue through the footprint and the network that we have today. If we don't see things starting to move -- in addition, in terms of strategic account sales, we invested in positions that really allow us to drive this growth. Our supply chain group is larger now in terms of its capabilities. We could ratchet across plants in terms of the amount of area we serve with our transportation network and our overhead or headcount. We can act on that all very, very quickly if we saw the market turning or if we did not think this is moving in the right direction. But that would be -- unless something dramatic happened, we wouldn't really be talking about those specifics until later this year and into next year if things were to change in terms of the direction we see everything going.

Operator

And we have a question from David Olkovetsky from Jefferies.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Just a quick one. Would you consider buying back bonds in the open market still?

Scott F. Stephens

I think we would, David. We did some of that at the end of -- late in 2013, and we still have, as I mentioned, no borrowings outstanding on our ABL. We have some excess cash available to us. So yes, I think we -- the short answer is yes. Depending on economics, we'll continue to evaluate that as a component of our refinance thinking.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay, got you. And then earlier, I didn't catch the whole thought on the refinance. You guys were indicating basically more term loan as opposed to more high-yield bonds. Is that kind of the thinking at this point?

Scott J. Dolan

No. I -- not necessarily. What we were talking about was we think still that our spectrum of opportunity includes everything from sort of very low-cost ABL asset-based kind of refinance. And Ed Marshall had a question about the covenant part of that, the $1.0 million fixed charge covenant of that, which we think -- which we have today. And although we're not there, we would anticipate getting there. And the fact that it was springing covenant, not an all times covenant, is something that we think still is -- makes that an appropriate avenue for us to look at and clearly offers the most cost-efficient solution. That being said, we still feel like we'll continue to monitor the opportunities that may be out there, either in leverage loans or high yields. We think that structure makes sense. Also from a flexibility and liquidity capital standpoint, it may or may not make sense for us here in the near term as part of our refi, but we're certainly looking at it.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay. And then in terms of -- sorry, just a couple more. In terms of CapEx, could you guys give a number for the year? And then, finally, how much was available on the revolver? I didn't catch that, if you mentioned it.

Scott F. Stephens

Yes. We said CapEx $10 million to $12 million for this year as an estimated range. Approximately 1% of revenue, David. It's kind of still where we -- other than something individually significant, it's kind of where we would expect to be. And our availability number on the revolver at the end of the first quarter was about $115 million.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Were there any LCs drawn?

Scott F. Stephens

Well, yes. There were some LCs and other kind of ineligible type of adjustments, but no borrowings per se. That's how we go from the $125 million to the $115 million.

Operator

And we have a follow-up question from Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

Okay. So you mentioned that you had $2 billion in revenue footprint, and I'm just curious why wait until the end of the year to kind of look at and readjust that footprint because while I appreciate growing into your close, the best year ever was at $1.5 billion in revenue in 2008, which was arguably price driven and unlikely to replay in the future. And I'm just curious, I mean, were -- if you annualized Q1, you add $1 billion in revenue and you're running about 50% of capacity utilization. Why wait?

Scott J. Dolan

Yes. It's more because of where the footprint is. When you start to take out facilities, you're taking yourself out of those geographies. So we're continuing -- as we've said, we have 3 closures slated for this year that are close to other facilities in Edmonton and Houston and Wichita, and we continue to look at that every day in terms of where there's opportunity that does not preclude us from growing. And so nothing's standing out right now but we continue to do that work.

Edward Marshall - Sidoti & Company, LLC

What's the contribution of revenue from maybe Europe? Total sales in Europe on an annual basis?

Scott F. Stephens

Right now, it's sort of 10% to 15% of the business. Europe only, 10%, roughly 10%.

Scott J. Dolan

And Ed, the issue there is just the strategic parts that we have in Europe lend itself to what we believe our long-term real value proposition is, is which large strategic accounts working in these end markets across one ERP system we think is significant, and we're not ready to sort of give up on any geography which really hurts that long-term proposition. But understand we need to execute better in the short term to get that opportunity.

Operator

We have no further questions at this time.

Scott J. Dolan

Okay. To close, I really want to thank the entire team for their continued good work in restructuring the company. We are making progress on our commercial initiatives and reducing our structural costs, but we know we need to improve our execution on lowering the overall cost levels and increasing revenue, and that's where our focus is every day. So thank you for joining the call and look forward to updating our progress next quarter.

Operator

Thank you, ladies and gentlemen. This concludes today's call. Thank you for your participation. 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!

A. M. Castle (CAS): Q1 Adj. Net loss of -$15.7M. Revenue of $253.4M (-13.4% Y/Y) beats by $0.65M.