A. M. Castle & Co.'s (CAS) CEO Scott Dolan on Q2 2014 Results - Earnings Call Transcript

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 |  About: A. M. Castle & Co. (CAS)
by: SA Transcripts

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

Q2 2014 Earnings Call

July 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

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

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Operator

Welcome to the Second Quarter 2014 A.M. Castle & Co. Earnings Conference Call. My name is Joe, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is also being recorded.

I will now turn the call over to Mr. Justin Frakes. Mr. Frakes, you may begin.

Justin Frakes

Good morning. Thank you, everyone, for joining us for A.M. Castle's Second 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 one immediately following the conference call. The press release, supplemental slides and company 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 that are subject to a number of factors that could cause actual results to differ materially. Additional information concerning these factors is contained in the Risk Factors section of the company's most recent Form 10-K 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.

And this presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to related GAAP measures in accordance with 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 amcastle.com under the Investors tab and in the Form 8-K submitted to the SEC.

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

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 second quarter 2014 results, as well as an operations update. Our CFO, Scott Stephens, will discuss financial results and current business conditions for the second quarter and first half of 2014 and then Steve Letnich, our Chief Commercial Officer, will speak to our second quarter commercial results and metrics. I will then close the prepared remarks with a few comments around our outlook for the second half of 2014 before we open the call for questions.

Before I get into the numbers, it's important that I say we are clearly disappointed in our results this period. We entered the quarter with what appeared to be some slight momentum as each month in the first quarter had witnessed sequential improvement, and April was trending along the same path when we talked to you last, during the Q1 results call. However, May and June both took a step back from that trend. While this economic recovery has been unbelievably unique and lumpy, there is no questioning that there are pockets of strength that a fully functioning organization with a strong niche and global presence like Castle should be able to succeed in. We can do better and we will do better.

In retrospect, the organization has undergone significant change. I think it's clear from this quarter's performance, which included a handful of execution issues in various parts of the business, that we still have some work to do. In all honestly, I think it's fair to say that I have underestimated the impact this level of change would have on our short-term results. The decisions that we have made were absolutely the right ones for our long-term success, but they have obviously hampered our results in the short term.

The good news is the large majority of the business is operating well and is in a position to thrive as we increase both our transactional and contractual volumes. Our end markets are improving overall, and while they are far from strong right now, we should be entering a period where our company has had strong historical success. Our commercial efforts are also starting to work on a contractual side of the business and we will discuss some of our customers' success later on the call. Lastly, we have a solid understanding of the places we need to improve and we'll talk you through a number of those today.

Let's move on to the numbers now. For the second quarter of 2014, consolidated net sales were $249.5 million compared to $273.4 million for the same period last year and $253.4 million in the first quarter of 2014. The reported net loss for the second quarter of 2014 was $72.3 million, or $3.10 per diluted share, and included a $56.2 million noncash goodwill impairment charge related to our Metals segment. Second quarter 2013 reported a net loss of $3.8 million, or $0.16 per diluted share, and the first quarter 2014 net loss was $16 million, or $0.69 per diluted share. Adjusted non-GAAP net loss, excluding the impact of the noncash goodwill impairment charge, was $22.9 million in Q2 2014 compared to net income of $0.4 million in the second quarter 2013. EBITDA was a loss of $62 million in the second quarter of 2014 compared to EBITDA of $5.1 million in the prior year period. Adjusted EBITDA, which excludes the goodwill impairment charge, was a loss of $5.6 million compared to adjusted EBITDA of $11.6 million in the second quarter of 2013.

Second quarter 2014 Metals segment net sales were 10.6% lower than Q2 of 2013 and 2.3% lower than the first quarter of 2014. The second quarter year-over-year Metals segment sales decline reflected price and volume declines. Sequentially, compared to Q1 of '14, we saw a slight decline in Metals volumes and relatively flat prices. Q2 of '14 tons sold per day were down 1.6% compared to Q2 of '13 and 2.3% compared to Q1 of '14. Metals sales remained reasonably steady during the first half of 2014, although we saw an increase in March and April due to weather-related backlogs being processed during these months.

The Plastics segment net sales were 4.2% higher than Q2 of 2013 and 3.1% higher than the first quarter of '14. The Plastics segment continues to benefit from the strong automotive, marine and life sciences sectors.

Turning to our key end markets. Slide 4 of our earnings supplement provides a recap of the primary macro data points that we monitor for indications of future performance. These include trends in the PMI and rig counts, as well as comparative metals segment performance by market. The average PMI for the second quarter 2014 was 55 compared to 50 in the second quarter of '13 and 53 in the first quarter of '14. Historically, our results have lagged the PMI trend line by anywhere from 6 to 12 months. While the company's revenue recovery trend in 2014 has not followed the historical pattern with respect to PMI trends, we still believe that this data point is a reliable leading indicator over the long term.

One of the unique parts of this economic recovery is that it hasn't seen an associated recovery in many end markets. The mining industry in particular continues to struggle, and that has clearly been a drag on our industrial business.

Average weekly rig counts in North America for Q2 of '14 were 2,051, which improved compared to the Q2 '13 count -- average count of 1,914; but were down sequentially compared to the Q1 2014 average count of 2,304. While rig count trends remain reasonable, our performance in the Oil & Gas market was below expectations in Q2 2014 as we continue to work through a handful of issues in this market that Steve and I will discuss later in this call.

Aerospace trends continue to be fairly positive for the broader economy and overall. Our Q2 2014 sales results were in line with our expectations, with the exception of a few underperforming defense programs.

Now I'd like to provide a few more specifics about our performance in the second quarter. As we stated in our release, we had 3 specific initiatives this period that negatively impacted our results during the period. These initiatives included the branch consolidation in our plate business in Cleveland, where we incurred unexpected overtime and temporary health expenses, along with having lower on-time delivery performance than we would expect. Additionally, we undertook a system conversion in our Oil & Gas business to put the company on one global platform that will make it easier to work with all of our customers, especially strategic accounts, and execute better internally. We had some issues with the conversion that caused us increased cost and on-time delivery performance that was below goal. We also had our strategic local inventory deployment initiative to properly allocate inventory with the expectation of improved on-time delivery and transactional business growth, which has gone according to plan, but has had more of a cost and performance impact to our Franklin Park facility than we expected. These issues were mitigated by the end of the second quarter, and the cost structure will reflect this in Q3. Additionally, we do not expect there to be any impact on our growth nor long-term damage to the business, as this primarily affected our transactional business.

During the quarter, we executed organizational changes as part of our continuous improvement initiatives. These organizational changes were focused on corporate delayering and included the reduction of both executive and management level positions along with upgrading of talent in key positions. We incurred $0.9 million of employee termination and related benefits charges and anticipate approximately $7 million of annual cost savings associated with these headcount reductions. We expect to see the cost savings benefit beginning in the third quarter of 2014. Additionally, we reduced the carrying value of our Metals segment goodwill and recorded a $56.2 million noncash goodwill impairment charge in the second quarter of 2014. This charge impacted our reported earnings for the quarter, but it will not affect our liquidity position, cash flows from operating activities, compliance with debt covenants and is not expected to have an impact on our future operations.

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

Scott F. Stephens

Thanks, Scott. Good morning, everyone. Slides 5 and 6 of our earnings supplement provide a brief overview of our second quarter and first half 2014 and 2013 financial results. Second quarter 2014 consolidated net sales of $249.5 million were 8.7% lower than the prior year period and 1.5% lower than the first quarter of 2014. Net sales in the Metals segment of $214.1 million were down 10.6% compared to the second quarter of 2013 and 2.3% sequentially down from Q1 2014. Compared to last year, Metals segment net sales declined by 7.4% due to lower prices and mix, and 3.2% attributed to lower sales volumes. The Metals segment net sales declined to 2.3% compared to Q1 of this year is due to, primarily, the lower sales volumes.

In the Plastics segment, second quarter 2014 net sales of $35.4 million were 4.2% higher than the second quarter 2013 and 3.1% higher than first quarter this year.

Consolidated gross material margins were 23.2% compared to 26.3% in the prior period and 25.6% in Q1 this year. Metals segment material margins were 22.3% in Q2 compared to 26.1% last year and 24.9% in the first quarter of 2014. Plastics segment material margins were 28.7% in the second quarter this year compared to 27.8% in Q2 last year and 29.8% in first quarter 2014.

The second quarter 2014 gross material margins for Metals include a $4.4 million of inventory adjustments that negatively impacted gross margins. It also included $0.2 million of commodity hedge gains and no restructuring charges or LIFO charges for Q2. Second quarter 2013 gross material margins in Metals included $3 million of LIFO income, $0.9 million of commodity hedge losses and $0.5 million of restructuring charges. The $4.4 million of inventory adjustments this quarter were primarily recorded in the Oil & Gas business, taken in the second quarter in conjunction with the IT system that was implemented during Q2.

Our gross profit margin execution outside of the inventory adjustments was comparable to Q1 2014 as we had expected. And we do anticipate overall gross margins in the back half of 2014 will be comparable to Q1 levels of this year, around 25%. Excluding goodwill impairment and restructuring charges, operating expenses were $72.7 million in the second quarter this year compared to $70.1 million last year and $71.5 million in the first quarter this year. During the second quarter, we completed the remaining cost-savings initiatives from our original restructuring plans.

The frictional costs incurred earlier this year continued in the second quarter. These costs were primarily in the areas of overtime, temporary employment, hiring, consulting costs and transportation from the inventory deployments, which all prevented us from achieving our cost performance goals for the second quarter. As Scott mentioned, these frictional costs have been masking the success of our cost initiatives, but they were addressed by quarter end and we do not expect them -- expect to see them as we move forward.

Slide 7 outlines our second half of 2014 operating expense target of $65 million to $67 million per quarter.

The positive sales trends in the company's Metals segment that began at the end of the first quarter of 2014 did not sustain an improving trend throughout the second quarter. This resulted in financial results that were significantly lower than the financial results initially forecasted by the company and were used in the December 2013 annual goodwill impairment analysis. Management concluded that an interim impairment test of its Metals segment goodwill was necessary. The result of the interim impairment analysis indicated the Metals segment goodwill was impaired and the company recorded a $56.2 million noncash impairment charge to eliminate the Metals segment goodwill. As of June 30, $13 million of goodwill remains on the company's balance sheet, all of which relates to the Plastics segment.

As Scott mentioned, as part of our continuous improvement plan, we executed organizational changes in the second quarter that included the reduction of both executive and management level positions, and we recorded $0.9 million of restructuring charges to Q2. We expect these headcount savings to result in approximately $7 million of annual cost savings beginning in Q3. We anticipate approximately $1 million to $2 million of additional restructuring costs in the remainder of '14 related to the planned facility consolidations that were announced in October last year.

Second quarter 2014 interest expense was $9.9 million, consistent with second quarter last year. We had $22.9 million of outstanding borrowings against our revolving credit facility as of June 30, compared to no outstandings at year end 2013. The company does not have any near-term debt maturities, however, we continue to evaluate alternatives for interest cost savings.

Other income for the second quarter 2014 of $1.6 million represents noncash foreign currency transaction losses primarily related to intercompany loans with our operations in Canada and the U.K. This compares to $0.7 million of other income for the same items in the previous year.

Effective tax rate for the 3 months ended June 30, 2014 was 7.6%, and we expect an 11% to 12% effective tax rate for the full year 2014. Equity and earnings of the company's joint venture was $1.8 million in Q2 of this year, an increase of $0.3 million compared to the same period last year. The company recorded an operating loss of $71.9 million and a net loss of $72.3 million, or $3.10 per diluted share, for the second quarter of 2014 compared to an operating loss of $3.8 million and a net loss of $3.8 million, or $0.16 per diluted share, for the prior year second quarter. EBITDA was a loss of $62 million in Q2 compared to an EBITDA of $5.1 million in Q2 last year. Please refer to the earnings release posted earlier today for a full reconciliation of all the non-GAAP items.

So in summary. In terms of the operating results for Q2, they were comparable to Q1, which is what we had indicated in our June 3 press release with our continuous improvement update and restructuring update. Sales were $250 million for the second quarter compared to $253 million in Q1, and EBITDA for Q2, when you added back the $4.4 million of inventory charges, was a negative $1.2 million for the second quarter compared to $0.8 million in Q1.

Now a few comments on the balance sheet and working capital items. Average days sales and inventory was 164 days for the first half of 2014 compared to 174 days for the first half of last year. We're targeting a 150 DSI level for the second half of 2014. Average receivable days outstanding was 51 days for the first half of 2014, no change from the first half last year. Cash used in operations was $32.5 million for the first 6 months of 2014 compared to cash provided by operations of $56.1 million in the prior year period. Cash paid for capital expenditures was $4.3 million during the first 6 months of 2014, in line with our expectations and compared to $5.4 million last year. We expect annual capital expenditures in the $10 million to $12 million range for the full year 2014. Total debt net of unamortized discounts at the end of Q2 was $270.9 million and cash and equivalent balances were $17.1 million. The net debt-to-capital ratio was 51.3% at the end of Q2 compared to 38.7% at the end of last year. Increase in that ratio is attributable to losses incurred in the first half of '14 and an increase in borrowings under the revolving credit facility. We had $92.2 million of available borrowing capacity under the revolving credit facility at the end of June 2014.

Now I'll hand the call over to Steve Letnich, our Chief Commercial Officer, who will provide an update on our commercial objectives and results.

Stephen James Letnich

Thanks, Scott, and good morning, everyone. For key sales and margin metrics, please refer to Slide 8 of our earnings supplement. As Scott Dolan mentioned, the big picture as we look at the performance of our commercial sales initiatives is that we are seeing some initial contributions, and we believe we are starting to validate some of the strategic changes that we have implemented. Like all of you, we would like to see these efforts deliver a faster contribution, but programs like these are not quick fixes, and will take time to recognize the full benefits. We continue to see progress in these initiatives and expect to see momentum building throughout the remainder of the year and beyond.

Second quarter 2014 Metals segment net sales were 10.6% lower than Q2 2013 and 2.3% lower than the first quarter of 2014. Let me break that down by key industry groups that Scott Dolan already gave you some high-level color on. Industrial sales volumes on a per day basis were down approximately 1% from Q2 2013 and flat compared to Q1 2014. The industrial business remains under pressure due to weakness in mining and heavy equipment.

In an effort to diversify this business and expand our future opportunities, we have started to focus our industrial businesses on supplying segments that have been underserved by the company in the past. We have already had success with these segments in the Southwest. The focus on leveraging our specialty metal core to provide customers with more commodity grades of material will continue to help us broaden our industrial business.

Oil & Gas sales volumes per day were down 3% in Q2 2013 and 7% compared to Q1 2014. The Oil & Gas business had execution issues related to getting orders out on a timely basis in Q2 2014 and other short-term disruptions related to an IT system conversion. We addressed and fixed these issues by the end of the second quarter and expect better results from this business during the second half of the year.

Q2 2014 Aerospace volumes per day were down 5% compared to the second quarter of 2013 and improved by 3% compared to Q1 2014. Our second quarter Aerospace sales were negatively impacted by product delays and defense program cutbacks and issues that delayed production.

In terms of our contractual business, we had several contractual sales wins during the first half of 2014, which included a preferred supplier agreement with United Technologies Corp. that was announced in the second quarter of 2014. The nature of contractual business is that it ramps up over time. So while we expect to begin seeing the benefits of these successes in the second half of 2014, they should have a more meaningful impact in 2015.

Our transactional business hasn't performed as well as we would've liked, but it is starting to show pockets of success that we can build upon. For example, at the 15 facilities where we have partially rolled out our localized inventory plan during the first half of 2014, we are seeing incremental gains. This redeployment and rebalancing plan ensures that we have the correct volume at the correct location in order to better serve our customers with the products they want in a timely manner. The localized inventory plan is the key to near-term sales improvements while we work on our strategic account growth. We have 3 facilities that have fully implemented our localized inventory plan, and we have seen a significant increase in transactional shipments at these facilities. Additionally, there was a 7.4% increase in quotes in Q2 2014 compared to Q2 2013, which we feel is a result of the localized inventory plan.

Now I'd like to talk a bit about the gross margin execution issues that Scott alluded to earlier. Metals segment gross profit margin was 22.3% in Q2 2014 compared to 26.1% in Q2 2013 and 24.9% in Q1 of this year. The primary driver of lower second quarter gross margins from first quarter was the $4.4 million inventory adjustment in the second quarter that Scott mentioned earlier. Pricing remains firm in the marketplace and we anticipate overall company gross margins at 25% for the remainder of the year.

Clearly, we have a lot of work still to do, but we are making incremental progress. Specifically, we have a lot of work to do in our Oil & Gas Business and in stabilizing our Ohio operations consolidation. These issues were remediated by the end of the second quarter and we expect to see progress through the remainder of 2014.

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

Scott J. Dolan

Thanks, Steve. We continue to make progress in our commercial initiatives. As Steve said, we should begin to realize our contractual business successes during the second half of 2014 and see these results ramp-up through 2015.

Transactional business is our bridge to the large wins, and we need to leverage our new supply chain organization and processes to ensure inventory is properly deployed to support this business. Our Oil & Gas business has underperformed during the first half of '14, but we have put the right team and systems in place for this business, and we should begin seeing the benefits during the second half of '14.

We believe we will have stability in the back half of 2014, which will allow us to achieve our near-term cost objectives of $65 million to $67 million of operating expense per quarter, and further look for opportunities to reduce costs. We expect to deliver better results during the second half of 2014 from a combination of modest sales improvement, normalized gross margin level and operating cost in our targeted range of $65 million to $67 million per quarter.

Operator, we can now open up the call for questions.[Operator Instructions] Our first question here comes from Mr. Martin Englert from Jefferies.

Question-and-Answer Session

Martin Englert - Jefferies LLC, Research Division

I wanted to get an idea, what gives you the confidence that these frictional costs are going to be abating in the second half of the year or the -- fully finished as of the end of 2Q here?

Scott J. Dolan

Yes, I think we saw the costs reducing per month as the quarter went on. Two, we made -- a lot of the moves that we made that really occurred in early June to late June in terms of people going out of the operation -- in terms of the organization. So if you just take -- and then, three, we had some non-recurring costs in June that we won't have going forward in July. Some consultants that are no longer with us and other kind of onetime things that we incurred in the month. The other thing I would say is -- and so that we're clearly more than half of the way there to our target with what's already been done by the end of the quarter. Secondly, we now have a way to track our cost on a daily basis in terms of what's coming in from the operation beyond just overtime and temp help but with repairs and maintenance costs, with packaging, et cetera. We track that on a daily basis now and we have a weekly roll-up. And so as we look at July, we're tracking directionally where we need to be to hit this target for the quarter, which gives us confidence and visibility that we have had previously until the end of the month.

Martin Englert - Jefferies LLC, Research Division

Are you allowing any overtime now? Do you have any temp workers in place currently?

Scott J. Dolan

We do still have some temp workers, but it's reduced significantly from where we were back in April and over the course of the quarter. And we have a plan to really, by early August here, to have the majority of them moved out. We'll always have some temps where we need it for true temp purposes, but moving towards the practice of hiring off the street rather than temp-to-hire practice, which has kind of been in place. Overtime reduced significantly, but we still -- we'll have overtime going forward to a smaller degree, but just need to make it a lot less than we've had. And then the second thing I would say, structurally, in terms of how we set the operations up for the following year in terms of vacations and other off time, we need to do a better job at the end of the year setting that up for next year to reduce the overtime, and we've already started working on that. Even though we would like to do something now, that's already agreed to for the entire year at the end of '13.

Operator

Our next question here comes from Mr. Edward Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

I have a question. The $65 million to $67 million of cost savings for the operating expenses. First, did you raise that number, an additional $2 million? Wasn't it supposed to be $65 million per quarter starting in 3Q?

Scott J. Dolan

We said, as we got to the back half of the year, we wanted to be run rating at $65 million. And so we just want to give ourselves a little bit of wiggle room here in Q3 to get to that level, because we really had committed by Q4, we would be to that level.

Edward Marshall - Sidoti & Company, LLC

And as I think about kind of the focus -- I mean, your focus on the focus of call so far has been talking about the stability of the business on the cost side and looking for additional costs to take out. But I'm wondering, as I kind of look at the results, I mean, this looks like it's transferring more from what historically has been a cost issue at Castle to more of now as a sales issue. You're comping down year-over-year. You're comping down sequentially while your competition is comping up both year-over-year sequentially and up on price. So I know there are some mixed differences in there. But it seems to me that -- I'm curious if you're having issues attracting top sales talents or recaptured sales from maybe market share losses when your sales reps lost. I mean, can you answer -- well, let's start with how much of the market share losses you've recaptured from sales guys that left by their own choice.

Scott J. Dolan

Yes. First comment I would make in terms of are we losing good talent, I'd say absolutely not. We've been working very hard to upgrade the talent within the organization. Clearly, we've gone through a great deal of change here over the last year and the last quarter. And so -- and some of the individuals who left clearly were not going to cut it in the new organization, but we didn't take the action because of trying to reduce the amount of change. So I think you've got to be careful when you say someone leaves on their own. That doesn't mean the performance improvement plan and the discussions aren't already occurring before that occurs. I would say, back to our point about the core business continuing to perform well, the majority of the business is performing well and I think the comps show that when you take out the Oil & Gas and some of the plate issues we've had. As I stated, all of that is really transactional business, and now that we have the on-time delivery where it needs to be and the stability, we believe we can start to grow that back fairly rapidly.

Edward Marshall - Sidoti & Company, LLC

So do you expect sequential improvement in sales throughout the remainder of the year?

Stephen James Letnich

We just finished our rounds of quarterly business reviews and from the grassroots up, we feel that the back half of '14 will be better than the back half -- or the first half of '14 and incrementally better than the back half of '13.

Edward Marshall - Sidoti & Company, LLC

Are you talking about from a cost side or are you talking from a sales...

Stephen James Letnich

I'm talking about customer activity revenue and volumes.

Edward Marshall - Sidoti & Company, LLC

So you expect revenues and sales -- you expect sales and revenue and price to be up for the back half of the year relative to this -- did you say first half of this year?

Stephen James Letnich

Yes, the first half of this year or the second half comparison to '13.

Edward Marshall - Sidoti & Company, LLC

Okay. Also, you talked -- we looked at the balance sheet and it looks like you've taken on a little bit of debt. Any comment on that? And then, maybe if you can comment on kind of the potential refinance of the debt, as well.

Scott F. Stephens

Yes. It's Scott Stephens here. Yes, we mentioned the revolver outstanding balance kind of $20 million, $22 million at the end of June. We envisioned cash flow approximately neutral the balance of this year, given what Steve and Scott just alluded to in terms of potential and expectation per sales improvement and the earnings that would go with that. So we don't see a lot of movement in the debt balances from here. And we've got some inventory improvements still that were -- that should happen in the back half. So with all that being said, liquidity at $92 million, we feel like we want to make sure that we're opportunistic and selective in executing on the refi, so we don't feel any burning desire to get out there and do it yesterday. But for the 12 3/4% interest savings on the high yield, right? I mean, that's not insignificant and we still feel like we've got couple of different alternatives that make sense to us to achieve that. We're looking for the right time to do that in conjunction with the operating results to maximize it. So we've said before that we've got a first call on the bonds in December of '14, and that's kind of a -- that's an important kind of time frame for us to look at. So still later in '14 or even into early '15 is probably the window that we would anticipate executing the refi. So that not too much has changed on that, and we'll continue to work on it.

Edward Marshall - Sidoti & Company, LLC

And lastly, I guess, there's an important date coming -- or the next important date it is in August. Any comments that you can make today? I'm sure you prepared, even thought about it ahead of time as you knew you're going to have a public conference call, but on the poison pill.

Scott J. Dolan

Yes, as a Board, we continue to discuss the situation, but really no update on this time as we have not made any decisions and directionally don't have an opinion at this time, so we really can't comment.

Operator

Our next question here comes from Mr. Dan Whalen from Topeka Capital Markets.

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

It's Dan Whalen from Topeka Capital Markets. Just trying to put some numbers around. I know that the headcount reductions have been a process. Can you add any color in terms of numbers or percents in terms of either the quarter or year-to-date? And then secondarily, on the flip side, it sounds like the upgrading has been a process as well. Can you maybe just touch on what inning we are in, in terms of your upgrading the internal talent?

Scott J. Dolan

Okay. On the first part of the question, Dan, you wanted a percentage of people that you said quarter-to-date and year-to-date?

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

Either/or, just order of magnitude.

Scott J. Dolan

Okay. I mean, as a company from when we started restructuring, we're down close to 10% in terms of size. I think the key part of what we did in the quarter was not nearly on the percent of people but on the more high cost. We -- I thought we were a little overloaded on -- in terms of vice presidents. We had layers of directors in there, we had directors who were really just taking care of an account. And so it was more about taking out high cost. So the percentage was actually quite small for the $7 million of savings that we occurred. I would say in terms of the process upgrading talent, we're very late in the game. I think we've done a really good job of bringing in people who have a different view of the world, who actually want to expand our business and grow it instead of being reliant on the same customers that we've had forever. And as their business fluctuates, our business fluctuates. So as I say, the back half of this year, we talked a lot about stability because it's really in stability and the areas that we made significant changes in the beginning of the year. In terms of the talent changes and the people changes, would not expect really anything in that area. And with the commercial strategy that started at the beginning of the year, as that process ramps up, Steve mentioned the QBRs, we've had 2 rounds of the quarterly business reviews now. There'll be 2 more in the back half of the year. That kind of stability all, I think, feeds itself into getting the cost structure where it needs to be and getting the increase in the revenue as we talked about.

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

Okay, good. And then, that $7 million, is that all in the third quarter or is that hitting the back end or so just part of the third quarter or...

Scott J. Dolan

Yes, it's annual run rate, but it will start -- it should -- you should start to fully see the $7 million divided by 4 run rate in Q3.

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

In Q3, okay. And just lastly, if I may, it sounds like you got the bulk of the kinks out of the IT systems. Is that -- just the way to think about that, is that largely a function of I guess inventory management and maybe on-time delivery improvements just by your customer service and maybe mitigate some of those market share dynamics?

Scott J. Dolan

Yes, I think we got 2 things going on. I mean, I think, Oil & Gas, that business down there with the level of OSPs, outside providers, was -- it was very unique and we -- the system could handle it early on, but our internal processes matched up with the system and that was an oversight on our part. For the rest of the business, we have seen on-time delivery moving in a really good direction here in July. A lot of that was the result of Houston, Cleveland and Chicago. Chicago for the inventory mix. And that's all trending in the right direction. I'd also say, though, with the change in leadership in IT, we continue to look at ways within the system to improve operational efficiency, on-time delivery and how we manage inventory within the Oracle system, which we're very encouraged about. Last comment on the inventory is both locations that we had the inventory adjustments, it was outside of the Oracle system. Metalwear in Houston and our U.K. location that was doing most of it by spreadsheet. They're now fully on Oracle in our process. And I would say our inventory management in locations that are fully operational in Oracle has been very, very good for the last several years. So we don't expect that's an issue going forward.

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

Okay. So is the whole company on the system now? Or is there still facilities that will be upgrading, so to speak, down the road?

Scott J. Dolan

We are all, except for some of our plate, very small amount of our plate in Europe, but very small amount of the business. And that's, as we've talked about previously, an important part to our strategic direction, with our strategic accounts to be able to work with them across our entire business on one platform.

Operator

Our next question here comes from David Olkovetsky from Jefferies.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

My first question is on the $4.4 million inventory. Can you just walk us through exactly what that was within the Oil & Gas business?

Scott J. Dolan

Yes, I think about 3/4 of it was in Oil & Gas and, I mean, I thought I just kind of went into some of that. I guess it really comes down to off of the cycle count that we did here in Q2, we saw some discrepancies and we had to take the write-off here in Q2. We will -- we're consolidating not operations. Operations have been moved already to one facility but we do have a second location of inventory in Houston that will move -- be moved over in Q3, and we'll be doing a full physical. But based on our cycle counts, we just had numbers that were off, which was about 3/4 of that $4.4 million. Once again...

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

So it was a volume, not a price, event, essentially, correct?

Scott J. Dolan

Yes. Yes.

Scott F. Stephens

Yes, it was a write-off adjustment, not a -- based on accounts, not a valuation adjustment based on pricing or changes in material price.

Scott J. Dolan

And then, that's one of the reasons why I think it's so important we get on Oracle just because we do have a good process there and we won't these issues going forward that we did with our previous system.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay. And then, with respect to the -- I think it was the $900,000 or so of costs associated with some headcount reductions that I think you indicated would generate about $7 million of savings. Is that included in the $3.0 million to $3.5 million that's on Slide #7 or is that on top of?

Scott J. Dolan

That $0.9 million is -- all that is really the severance costs, and what you see here is our targeted amount of savings that actually are generated on an annual basis -- on a run-rate basis, I'm sorry.

Scott F. Stephens

So Slide 7, David, excludes any restructuring cost to begin with. So those charges are sort of not factored into the $72.7 million, and they are not factored into any of the kind of normalized operating expense target of $65 million to $67 million. However -- so the $7 million of savings generated by the riff in effect and the restructuring from Q2 is reflected in -- basically that's the first bar there. That $3 million to $3.5 million, it's a component of that, right? It's basically half of that, obviously.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Okay, got it. And then, with respect to the Oil & Gas business specifically, has the recent ruling out of commerce, has that had any benefit for you? Are you seeing any green chutes in terms of volume or price, et cetera?

Stephen James Letnich

We feel as though it's pretty much a nonevent for the niche of the Oil & Gas business that we traditionally have supplied.

Operator

And we have another question here from Martin Englert from Jefferies.

Martin Englert - Jefferies LLC, Research Division

I just wanted to see what are the daily sales rates look like in July compared to where you exited the quarter and overall last quarter?

Scott F. Stephens

Well, we wanted -- it's very difficult to look at month-over-month, but we said earlier, we feel as though the back half of 2014 will be better than the first half of 2014, and it will also be better than what the company did in the back half of '13.

Operator

[Operator Instructions] We have another question here from David Olkovetsky from Jefferies.

David J. Olkovetsky - Jefferies LLC, Fixed Income Research

Just in terms of the DSI, you wanted to get it down to 150 days by year end. Is that the sustainable rate as well going into 2015 throughout the year on average? Or is that just sort of like a year-end type number?

Scott J. Dolan

No, I think we expect to be lower than that in 2015 and continue to work down more towards our optimal level. I don't think there's any reason we should be far off from our competition. There is, with our percentage of Oil & Gas business in that transactional, I think we'll be slightly higher than our competition, but there is still room over '15 and beyond to continue to work that down.

Operator

And I'm showing no further questions. I'll now turn the call back over to Mr. Scott Dolan for follow-up.

Scott J. Dolan

Okay, thank you. Well, to summarize again, thanks again for joining. We are not pleased with the results, but we do feel with the cost structure in place of $65 million to $67 million, the normalized gross margins without some of the adjustments recovering, some of the lost business in Oil & Gas and our plates business, and really the increasing trends and growth we see in the other parts of the business, we feel very good about the second half of '14 and especially good about 2015. So look forward to updating your results -- our results next quarter. And thanks for joining, and have a great day.

Operator

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

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