A. M. Castle & Co. Management Discusses Q4 2013 Results - Earnings Call Transcript

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A. M. Castle & Co. (NYSE:CAS) Q4 2013 Earnings Call February 25, 2014 11:00 AM ET


Monica Gupta -

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


Luke Folta - Jefferies LLC, Research Division

Edward Marshall - Sidoti & Company, LLC

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

Brett M. Levy - Jefferies LLC, Fixed Income Research


Welcome to the Q4 2013 A.M. Castle & Co. Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that the conference is being recorded. And now, I'll now turn the call over to Monica Gupta. Monica, you may begin.

Monica Gupta

Good morning. Thank you, everyone, for joining us for A.M. Castle's Fourth 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 the 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, as amended for 2012, and also in the cautionary statement contained in today's release. The company does not undertake any duty to update any forward-looking statement.

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'll turn the call over to Scott Dolan. Go ahead.

Scott J. Dolan

Thank you. Good morning, everyone, and thank you for joining the call today. Let me start by outlining how we have structured today's call. I will provide a brief overview of our fourth quarter and full year 2013 results, as well as an operations update. Our CFO, Scott Stephens, will discuss financial results and current business conditions for the fourth quarter and full year 2013. And then, Steve Letnich, our Chief Commercial Officer, will speak to the status of our sales initiatives and commercial objectives. I'll then close the prepared remarks with a few comments around our outlook for 2014 before we open the call for questions.

Let's start with our high-level results. For the full year 2013, our sales were $1.1 billion, a decline of 17% compared to 2012. Net loss for the year was $34 million or a loss of $1.46 per diluted share compared to a net loss of $10 million or a loss of $0.42 per diluted share in 2012.

EBITDA for 2013 was $16 million or 1% of net sales compared to $74 million or 6% of net sales in 2012. Adjusted non-GAAP net loss was $28 million compared to net income of $6 million in 2012, and adjusted EBITDA for 2013 was $26 million compared to $75 million in 2012.

The Metals segment full year 2013 net sales were $918 million, which was $226 million or 20% below full year 2012. Plastics segment net sales are $135 million for the full year 2013, or $8 million or 7% higher than full year 2012. Historically, the Plastics segment has comprised 10% of our total net sales. In 2013, plastics was 13% of net sales due to the weak metals markets and higher demand for plastics from the automotive, life science and marine sectors.

Fourth quarter consolidated net sales were $233 million compared to $274 million for the same period last year. Net loss for the fourth quarter 2013 was $13 million and $0.54 per diluted share compared to a net loss of $6 million and $0.24 per diluted share in Q4 of 2012.

Adjusted non-GAAP net loss was $13 million in Q4 2013 compared to a net loss of $5 million in the fourth quarter 2012. EBITDA was $0.3 million in the fourth quarter of 2013 compared to $9 million in the prior year period. In Q4 2013, adjusted EBITDA was $0.4 million compared to $9 million in Q4 2012.

Fourth quarter 2013 net sales for our Metals segment of $200 million or $42 million, or 17% lower than the fourth quarter of 2012. The Plastics segment had $33 million of net sales in the fourth quarter of 2013 compared to $32 million in the fourth quarter of 2012. We generated $74 million of cash flow from operations in 2013, primarily by meeting our inventory reduction targets last year and lowering replacement cost inventory by $98 million. While we met our inventory reduction goals in terms of total dollars, DSI of 180 for 2013 was higher than our target of 150 due to the decline in net sales.

We completed the restructuring activities that were announced in January 2013, which resulted in approximately $17 million of total operating profit improvement realized in 2013, including structural cost reductions of approximately $14 million. This equates to an annual operating profit improvement of approximately $33 million and annual structural cost reductions of $21 million, beginning in 2014.

As we have talked about consistently throughout 2013, market conditions across the metal space were challenging. As I mentioned earlier, Metals segment sales declined 20% in 2013 from 2012 levels, which reflected an 18% volume decline due to weak demand from various end markets.

On Slide 4 of our earnings supplement, we recapped a few observations about our key end markets in 2013. In terms of our key end markets in metals, all markets experienced lower sales in 2013 compared to the prior year. For Castle, aerospace was the best end market performer in 2013, followed by the industrial business, with oil and gas having the largest sales decline when compared to the prior year. The aerospace market overall remain fairly consistent in 2013 from a demand and activity perspective. Commercial aircraft build rates were higher and our JSF F-35 program continue to grow at many global locations.

The industrial portion of our business in 2013 saw a promising start to the year and a difficult finish in the later part of the year, with the softness in mining and certain heavy equipment sectors playing a big part in the overall sales weakness. Average PMI for the second half of 2013 increased 9% compared to the first half, indicating substantial expansion in the U.S. manufacturing sector.

Typically, our results lagged the PMI trend line by anywhere from 6 to 12 months. Based on the market data, average weekly rig counts in North America for 2013 were down 7% compared to 2012. The rotation in rigs from natural gas to oil that occurred beginning in 2012 did not seem to reverse course in 2013, and oil prices remained at healthy levels while natural gas prices remained quite depressed throughout the year.

As you probably are aware, natural gas prices have improved quite dramatically of late. We are optimistic about the long-term opportunities for us in the oil patch and higher gas prices, which we believe could lead to increased drilling and production activity certainly add to that optimism.

In the Metals segment, we saw declines from our core customer base in terms of their production schedule, and the traditional niche markets that we support were off more than the general manufacturing market. We did not see a significant loss of active accounts but we did see some of these accounts take less material. We saw decline in sales transaction lines and average weight per sales line in 2013 compared to 2012.

On Slide 5 of our earnings supplement, we provide updates on our restructuring activities in key markets and key targets going forward. Operating cost as a percentage of revenue were 27% in 2013, which masks some of our success on the operating side. This level was higher than the 22% we initially targeted last year due to the decline in net sales. Although our long-term goal is to achieve an operating expense to sales ratio under 20%, we believe we will exit 2014 at approximately 22% as sales levels recover. We will continue to examine our operating expenses in 2014 and make the appropriate reductions if market conditions do not recover as anticipated.

In our commitment to continuous improvement, we closed an additional facility in Ohio in the fourth quarter and we are executing our previously announced plan to close 3 more facilities in 2014 that are located in areas where we have redundant operations.

We executed many leadership changes in 2013. José-Luis Bretones-Lopèz was brought on in March 2013 as Vice President of Strategic Sourcing and Supply Chain. We appointed Ron Knopp as Vice President of Operations in July of 2013, and Steve Letnich started with us in July 2013 as Chief Commercial Officer. Chris Sekella was successfully recruited as our Vice President of Strategic Accounts in the third quarter of 2013. And Alvaro Dominguez was appointed commercial Vice President of Oil and Gas in July of 2013. I have great confidence in this new leadership to execute our existing plans and to further grow and improve the company.

We began executing our commercial initiatives in the second half of 2013 and there has been significant progress to date. I will let Steve speak to specific initiatives and results later in the call.

Additionally, we improved supply chain insourcing in 2013. In 2013, we created capabilities in our sourcing, supply chain organization to enable us to purchase metals and indirect materials at a lower cost while ensuring our suppliers are meeting our operational expectations. In addition, we laid the groundwork to move the company to a pull system that will enable us to have the right quantity of inventory at the right place at the right time at all of our locations around the globe with less reliance on our hubs. This will be very important in helping us grow our business and react quicker to our customers' needs while reducing the amount of internal transfers and costs.

The operations organization made great progress in 2013 in improving our on-time delivery to levels that we have not seen in many years. In addition, the team worked to standardize our processes across the system to move on-time delivery into the upper 90% range over the next couple of years, while identifying inefficiencies that will help us keep improving our productivity.

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 7 and 8 of our earning supplement provide a brief overview of our 2013 and 2012 financial performance. Fourth quarter 2013 consolidated net sales of $233 million were 15% lower than the prior year period. Net sales in the Metals segment of $200 million were down 17% compared to the fourth quarter of 2012, primarily due to lower volumes, which were down 13%.

In the Plastics segment, fourth quarter 2013 net sales of $33 million were up 3% versus the prior year period, primarily due to increased volume in the automotive, life science and marine sectors. Consolidated gross material margins were 26.4% in Q4 2013 compared to 25.3% in the prior year fourth quarter.

Fourth quarter 2013 gross material margins included $4 million of LIFO income and $3 million of commodity hedge losses compared to $1 million of LIFO income and $0.4 million charge for commodity hedge losses in the fourth quarter 2012.

Given the decline in net sales, there was deterioration in the operating expense to sales ratio from 25% in the fourth quarter 2012 to 30% in the fourth quarter 2013. However, we have a lower overall cost structure base to leverage as revenue improves.

Total operating expenses were $290 million in 2013, including $9 million of restructuring charges compared to $303 million in 2012, which is a 4% reduction when including the restructuring charges. We realized approximately $14 million of structural cost reductions in 2013 from our improvement actions announced in January, which was in line with our expectations.

There was $0.3 million of pretax charges in the fourth quarter that were primarily related to moving and shutdown costs for the consolidation of our Ohio facilities as part of our continuous improvement plan.

Cumulative pretax restructuring charges for 2013 were $10 million related to the restructuring announced in January, and the additional facility closures announced in October of last year.

We anticipate approximately $2 million of restructuring costs in 2014 related to the additional facility closures announced last October.

The January, 2013 restructuring efforts are expected to result in approximately $33 million of annual operating profit improvement starting in 2014, and the closures announced in October last year are expected to result in an additional $8 million to $10 million of annual cost structure savings, which will be fully realized starting in 2015, when all the closures are complete.

Fourth quarter 2013 interest expense was $13 million compared to $11 million in the fourth quarter 2012. In the fourth quarter last year, the company purchased $15 million of senior secured notes on the open market, utilizing cash on hand, and recognized $3 million of debt extinguishment interest charges related to that purchase.

In January 2014, we partially exercised the accordion option under our revolving credit facility to increase our aggregate ABL commitment by $25 million. This increased our 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 borrowing base assets are well in excess of the $125 million ABL borrowing capacity, and thus, all of the current ABL line of $125 million is available to the company.

We will continue to evaluate opportunities to refinance the company's high-yield debt into more cost-effective solutions.

Equity and earnings of the company's joint venture was $2 million in the fourth quarter 2013, which was an increase of $1 million compared to the same period last year.

The company reported an operating loss of $8 million and a net loss of $13 million or $0.54 per diluted share for the fourth quarter 2013, compared to operating income of $2 million and a net loss of $6 million or $0.24 per diluted share for the prior year period.

EBITDA was $0.3 million for the fourth quarter 2013 compared to $9 million in the fourth quarter 2012. Please refer to the earnings release posted earlier today for a full reconciliation of non-GAAP items.

Some selective items from our full year 2013 results include consolidated total net sales of $1.1 billion, which was a 17% decline compared to 2012. Consolidated gross material margins were 26% compared to 27% for 2012.

Operating costs and expenses excluding $9 million of restructuring charges were $281 million or 27% of sales compared to $303 million or 24% of net sales last year. And EBITDA was $16 million compared to $74 million in 2012.

Our Plastics business continues to perform well. It achieved a 7% sales growth in 2013 compared to 2012, primarily from increased volume in the automotive, life science and marine sectors. We expect continued growth from this business in 2014. Overall, we expect the Plastics segment to contribute positively to free cash flow and earnings in 2014, as it did in 2013.

Balance sheet results include a reduction in inventory on a replacement cost basis of $98 million in 2013. This follows the $65 million decline in inventory during the second half of 2012.

Average day sales and inventory was 180 days for 2013, compared to 187 days in 2012. As Scott said, we achieved our inventory reduction goals on a dollar basis but average DSI for 2013 was higher than our 150 day target, primarily due to the decline in sales.

Average receivable days outstanding was 51 days for 2013 compared to 49 days in 2012.

Cash provided by operations was $74 million for 2013, compared to $5 million in the prior-year period. Cash paid for capital expenditures was $12 million during 2013, which was in line with our expectations and compared to $11 million during 2012.

During 2013, cash generated from operations was used to pay down the revolver balance by $40 million and repurchased the 15 million of senior secured notes. We continue to evaluate uses of cash from operations to improve our capital structure, balance sheet and our liquidity position.

Total debt net of amortized discounts at the end of 2013 was $246 million, which was down 17% from the prior year end balance. Cash and equivalents were $31 million at year end 2013 and the net debt to total capital ratio was 39% compared to 43% at the end of 2012.

In the summer of 2013, we began the execution of our commercial initiatives under the direction of Steve Letnich, our Chief Commercial Officer. And 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, and good morning, everyone. As a reminder of our commercial improvement strategy, please refer to Slide 6 of our earnings supplement. While the top line was weaker than anticipated, we did see substantial progress in our commercial initiatives in the fourth quarter.

First, we completed the realignment of our sales territories, which allows our reps to sell across our complete product portfolio going forward. We had initially rolled this out -- this new geographic base sales structure to a test market in the Southeast in 2013, as we saw an increase in quote activity as a direct result of our territory managers owning a defined territory and having the ability to sell all products.

As a result of the success in this test market, we decided to roll this structure out to the rest of the commercial organization.

Also in 2013, we revised and refocused our key performance metrics for the sales team. To promote ownership and accountability, we are focused on performance tracking and enterprise rankings for regional managers, territory managers and inside sales representatives.

In the fourth quarter, we reenergized the strategic accounting to leverage the company's global footprint and help our customers profitably grow their business. This team works with senior leadership at the corporate level to identify global opportunities.

We continue to work on localized certain pricing, inventory lead time and delivery decisions to improve customer satisfaction in local markets. We are not only bringing some of the decision-making power closer to the customer but also empowering our local teams. We will maintain centralized sales in our global sales strategy but delegate certain authority to the local teams for which they can make the best decisions.

We saw transition in our sales leadership in 2013 at our Mexico, Europe, Canada, Midwest and Dallas operations. Joe Bonnema joined us in January 2014 as Director of Inside Sales. Joe will be creating a global inside sales organization that provides consistent service to all of our customers.

In 2014, Joe will be standardizing processes and service expectations to improve training to bring efficiency and standard best practices to our inside sales efforts.

In 2014, we will focus on holding the sales team accountable to key performance metrics and ensuring regional and territory sales plans are aligned to drive growth.

Earlier this year, the strategic account team under the leadership of Chris Sekella became full strength with target accounts identified and tracking metrics in place.

We will continue to focus on and improve customer satisfaction and on-time delivery. Starting in the first quarter of 2014, we will conduct executive level reviews of top global accounts to ensure customers are satisfied. Similar account reviews will be conducted at the local branch level to ensure all facets of our organization have visibility to our customers' needs and expectations, as well as how we are performing in relation to their expectations.

In 2014, we will see the birth of a new commercial organization. 2014 will be a year of transition, but we expect to see momentum in our initiatives throughout the year and fully recognize our plans by 2015. We are excited to see the commercial organization and the company evolve in the coming year.

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

Scott J. Dolan

Thanks, Steve. While 2013 was certainly challenging, I'm encouraged that we set the groundwork and have improved our platforms so we can be more successful in the future. We've done that by creating a more efficient cost structure, realigning our sales territories and incentives to create a stronger relationship with our customers and through the transformation to a continuous improvement culture. While we remain focused on controlling cost, our main objective is to grow the business into our footprint, which has facilities and a trucking network that are underutilized. We achieved approximately $21 million of annualized structural cost reductions and $98 million of inventory reductions on a replacement cost basis in 2013, which was consistent with our plan. Additionally, we met our on-time delivery goal despite the multiple facility consolidations that occurred during 2013.

Although we achieved our objectives in these areas, we fell short in executing our sales growth plan. With regard to our commercial initiatives, we made the decision last year to implement more significant restructuring and realignment plans than we had originally anticipated. This increases the timeline for achieving our commercial initiatives, but we believe it will deliver more substantial long-term growth and improvement.

Historically, our company has focused on maintaining gross profit margins, but the prolonged nature of this downturn has resulted in lower volume and higher-than-expected operating cost as a percentage of sales. In an effort to regain share and expand our overall volume level, we will be expanding sales of commodity-grade materials in 2014 to existing customers. It's important that I reinforce that specialty metals will always be our core business. However, we need to build more flexibility within our commercial platform to be able to shift our sales priorities through the various cycles of the market. We anticipate that this will enable us to be more quick to succeed in both the up and down cycles that our industry inevitably faces. This should also allow us to develop stronger relationships with our customers and serve more of their needs, which will create a more positive and value-added relationship.

Our outlook for 2014 is again cautiously optimistic, as the key market indicators have shown steady improvement in the second half of 2013, but the economic climate still remains uncertain. As long as the PMI can maintain these levels and aerospace trends remain positive, we would expect to see volumes begin to stabilize in the first half of '14. And at this point, we would anticipate a modest sales increase for full year 2014 compared to 2013 levels.

Now that our vertical silos have been eliminated, we are able to operate as a global company and share best practices to drive new business. In 2014, we will focus our efforts on exceeding our customers' expectations through our commercial and operational improvement initiatives, which we believe will deliver gains in market share. We will continue our ongoing continuous improvement initiatives, including completing the centralization of our transportation network. This will enable us to work more efficiently across all delivery points and better utilize our trucking network.

We expect to be centralized by the end of the first quarter of 2014, and ratably realize the improvement through 2014 with the improvement fully realized in 2015. Additional cost and productivity enhancements include several facility consolidations and warehouse improvements that have been previously announced. We are also excited to continue our commercial initiatives in 2014 and regain some of the market share we lost in this very difficult market environment.

We have the potential to grow our sales substantially over the next few years, based on our current operating capacity. We believe that we have developed a strong platform for profitable growth.

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

Question-and-Answer Session


[Operator Instructions] And our first question is from Luke Folta from Jefferies.

Luke Folta - Jefferies LLC, Research Division

First question was on the cost side. I was surprised to see that operating costs were flat sequentially. It's big of a revenue pullback that we saw, 3Q to 4Q. I guess, I want to understand, I mean, of the facilities you've announced from here, how much more absolute cost savings should we expect into next year, if any, or do you think this is kind of the bottom in terms of the absolute cost structure?

Scott F. Stephens

Well, from what we've announced, Luke, it's Scott, on the facility side, $8 million to $10 million annual reduction was not -- is yet to be picked up. We said full run rate for that starting in '15, but part of that, roughly half of it, comes from the Ohio facility shutdown -- that were shut down by the end of '13. So just to parse that again, about half of that $8 million to $10 million would be realized in '14. And the balance implemented during the back half of '14 and realized in '15. So again, based on what we've announced so far, it's kind of that $8 million to $10 million annual run rate kind of a number.

Luke Folta - Jefferies LLC, Research Division

And you're saying that the first whole round of cost cuts that were in the original transformation plan are now all in the numbers at this point?

Scott F. Stephens

Right. So we said roughly $14 million was achieved to fiscal -- and benefited fiscal '13 with an annualized reduction rate of 21.

Scott J. Dolan

And Luke, it's Scott. Maybe let me help you put a little bit more color around it to help you kind of see the problem we're having. The structural costs are coming out, but our variable costs aren't coming down. The productivity is staying relatively flat but if you look at metals for the year, we're down 20% on revenue but the lines that we shipped were only down about 6.5%. So our revenue per line is down 14%. And so we're doing as much work as we did out in the facilities and in the system as almost that we did in '12, but we're clearly not seeing the revenue. So part of the work Steve's group is doing is with all the pricing and all the different initiatives, we have to work on driving larger revenue per line through the system and not getting so cherry-picked as we kind of are today for some of those true specialty items.

Luke Folta - Jefferies LLC, Research Division

Okay. And looking into '14, you're saying you expect to see a modest improvement on the top line. And you've also said that to the extent that you see an improvement, we should see OpEx around 22% of total sales. I guess, how much sales improvement specifically do we need to see to exit 2014 at 22% operating expense?

Scott F. Stephens

Well, I would sort of range bound it in kind of the modest single-digits, Luke, is kind of what we mean by modest.

Luke Folta - Jefferies LLC, Research Division

So something in the 5% range?

Scott F. Stephens


Luke Folta - Jefferies LLC, Research Division

Okay. And then, I guess, on the market share issue, you've spoken like -- I guess, I wanted to understand, so it's clear that there is some share loss here. I mean, the tons sold are down much more than what we're seeing across the rest of the industry. What -- can you just talk more specifically like what is it that's resulting in people not buying from Castle? Is it more things coming across from the competitors in terms of pricing? Is it the deliveries aren't kind of on-time? Can you just kind of walk us through the entire core problem?

Scott J. Dolan

Yes. As I've kind of said previously, we believe our markets are down, our year-over-year revenue decline, about 2/3 of it is really the markets that we play in. And I think, you've got to be real careful when you look at some of our competitors who are public and comparing us, because the more specialty type markets and the markets we -- we don't have any automotive, and so the markets we play in are down significantly more from all the data we see. And so that's about 2/3 of it. When you look at the other 1/3, a large amount of this is historically -- has happened in the past when we've been in soft markets, just in terms of how we price, how we're so focused on gross margin percentage, how we don't really give proper discounts for larger orders, that could be more profitable in the future. That's by far the second biggest component. And then, third, we clearly, with the restructuring, I think, has had an impact. Some of our customers have new salespeople now going through transition. But overall, I would say that, that has been very small. I'd say the only area where that's had a little bit more of an impact has been with oil and gas. And that's less about the restructuring and really the integration that we've done to bring TSI in. I'm happy to report we've really turned over the -- a large percentage of the commercial organization down in Houston, and have a much stronger oil and gas team than we did previously.

Luke Folta - Jefferies LLC, Research Division

Okay. And just last question and I'll turn it over. In terms of, we've got 2 full months of the first quarter now largely passed, can you give us some sense of how things are shaking out in 1Q? I mean, are you seeing -- I mean, this is the first time that we were near breakeven on an EBITDA basis, and that included several million dollars of LIFO benefit this quarter. I mean, what’s -- how should we think about the trajectory in terms of earnings power heading into the first quarter at this point?

Scott J. Dolan

Yes. And I would say that Q1 has started off a little bit slower than we would have liked. I know weather has been thrown around a bit and I wish I could sort of put a number on that but I can't. Obviously, the PMI data was off in January as well and a lot of the explanation for that was around weather. But we're seeing metal pricing not come up like we would have liked in January. Now here in February, we're starting to see some traction with some of the recent announcements moving in the right direction. And so we're seeing demand after a very slow start in January start to become more positive here as we've gotten into February. But overall, I'd say a little bit slower than we would have thought coming into this year.

Luke Folta - Jefferies LLC, Research Division

Is there anything you can say in terms of year-over-year tonnage growth, or tons sold per day versus 4Q? Any sort of metric you can give us to help us understand what the magnitude of the trends to date has been?

Stephen James Letnich

Hey, Luke, it's Steve Letnich. We track both bookings and shipments and the best way to describe that is we've been relatively flat in bookings, November, December and January. And year-to-date in February, we've seen about a 16% increase. So a booking could ship 2 days from now or 2 months from now. But it is a trend. We've also seen an increase in quote activities and an increase in the number of active customers. So all of those, I think, are good signs of future success that either the market is getting better or some of our initiatives are starting to show some early returns.


Our next question is from Ed Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

So I wanted to kind of talk about the bookings that was just mentioned. And I'm curious, given seasonal trends maybe, and kind of how customers buy, kind of weaker in the second half of the year, stronger in the first half of the year, do you think any of that February increase is due to seasonal trends? Or is this real demand flowing through?

Scott F. Stephens

It's Scott. Time will -- the answer to that will be determined in what happens maybe at the next leg. But clearly, we have seen a typical seasonal bounce off of -- at the beginning of the year. I mean, we typically see a pretty marked step up in January from December levels. And we saw that this year. A little bit less than maybe a historical norm, but still a pretty significant increase from December. That's expected based on seasonality. I think, as Steve was mentioning, the increased bookings in February, as that plays out and as we get into Q2, now you're really talking about the demand pull through and that will tell us whether or not the activity is more than seasonal or just seasonal. I mean, without speculating at this point, I would call it a typical seasonal bounce for early '14. Pretty much as expected. Weather or -- notwithstanding, I mean, the weather is a bit of an issue in that, but broad brush, pretty consistent.

Edward Marshall - Sidoti & Company, LLC

Did you say earlier in the call, in response to another question, that the production lines were down about 6.5%, Scott?

Scott J. Dolan

Well, no. What I'm saying, our lines, '12 over '13, so a line is kind of like in order basically that comes through. So that was down '13 over '12 by 6% with revenue being down 20%. So the revenue per line was down 14%. There's not just as much weight and/or revenue for every line that we have to pick, process and ship.

Edward Marshall - Sidoti & Company, LLC

Okay. And then, if I look at -- I mean, we spent a lot of this time on this call talking about some signs that things are improving and maybe the positive outlook. But what gives you the confidence that -- I mean, looking at SG&A, they’ve fallen less than sales and strip out LIFO adjustments, you're down about 200 basis points on a year-over-year gross margin basis. You're guiding to kind of, I'd say, modest improvement in sales this year and there are some additional costs coming out. But I mean, what signs and confidence that we can kind of sink our teeth into that there is actually seeing some improvement internally that's not showing up in the results yet?

Scott J. Dolan

Yes. I mean, clearly, as I said, we still have a footprint and an infrastructure that is oversized for what our cost structure is. Our facilities are a little less than 50% utilized. Our trucking network is 35%, 40%. So as we start growing into this, the amount of fixed cost or structural cost that goes along with it is very minimal. So that really turns into very, very profitable growth. I'll also say, when you look at the year-over-year growth that we have, part of the reason that it is what it is, is because we obviously decline from the beginning of the year to fourth quarter. And so we really have to get that loss back and get above to get a full year '13 over '12. And then, I would just say, I think, one of the things that I will say on this call is I underestimated where this organization was from a commercial perspective and a supply chain perspective. We went after a lot of great work to get the cost structure at a place where it needed to be. And the reality was we didn't have the kind of relationships that we need with our customers and the ability to get the right product to the right place at the right time. We started building the supply chain earlier in the year. We realized, on the commercial side, we didn't have what we needed internally, made a move and we're 6 months into that. And just in terms of Steve being able to execute against the direction that we've kind of laid out in terms of where we want to go, some of these are long cycle processes, when you talk about strategic accounts and really getting stickier in understanding our accounts, that, over time -- well, it's already starting to produce a lot of opportunities that we never saw before and what we need to do is balance that with the work Joe Bonnema is doing in inside sales to really work on transactional sales and get that going in the near term. But we're very, very much in the early stages of the kind of commercial and supply chain work. Even though I've been here 15 months, we really didn't get that going as quick after we realized where we really were as an organization.

Stephen James Letnich

Ed, it's Steve, some more color, Chris Sekella joined us in October, and already, his top 20 targets, we've had very good meetings with all 20 of them, and there are significant opportunities, but as you know, with those larger companies, the decision-making cycle and contract cycles are, in some cases, 1, 2, maybe even 3 years, so if you're not in the cycle at the right time, even though you're developing a lot of good relationships and opportunities, that won't necessarily translate in significant move the needle business until the time is right. But we are absolutely seeing great progress in that area in a very short period of time.

Edward Marshall - Sidoti & Company, LLC

And unlike manufacturing, when you sign a new customer and you start working with them, is there a cost curve that you need to work on, or is this kind of just more of what you do on a regular basis, and I assume more of the latter than the former?

Stephen James Letnich

There's always cost onboard, especially if you have to go out and secure unique or new material to support that customer. But generally speaking, our existing footprint, headcount, can absorb a lot of new business without adding a lot of not only both incremental but fixed cost. We can absorb a lot.

Scott J. Dolan

And we've mentioned it before, but I just -- it's so basic and fundamental in terms of how the company was structured before, with the 3 business units, But then the silos, within those business units, in terms of Mexico being off by itself and Europe being off by itself. As Steve mentioned the relationships we're building at a corporate level with these large OEMs, they really lend themselves to opportunities becoming available in all these different locations where before, we never did that, we never shared information across, we did things in our old silos. So it's sort of like business that was never available before kind of being served up on a platter out of the corporate relationships. So a lot of it, obviously, we're targeting our existing markets where we have facilities, people on the ground, et cetera.

Edward Marshall - Sidoti & Company, LLC

And then, finally, when you look at the 22% cost structure that you -- the operating cost structure versus sales that you anticipate capturing. I'm curious, I think, in quarters past, we've talked about $1.25 billion in sales appropriated to that line. Is that still an accurate forecast, or does that come up or down given your current outlook?

Scott J. Dolan

$1.25 billion gets us to the 20%. But as we continue to uncover things and all that, I think, we'll be able to find additional utilization productivity in savings that may not take us getting quite to that level but that's where we are right now.

Edward Marshall - Sidoti & Company, LLC

And looking at -- I guess, looking at 2014, one last one, if I can, if you look at 2014, 5% sales growth, I guess, it puts you at about 2 70 , 2 75 a quarter, give or take, how you look at 4Q, looking at the cost structure and seeing how that kind of rolls throughout the year, do you think in the first half of the year you'll be profitable from an EPS perspective?

Scott F. Stephens

I wouldn't think so, not on the current, no. Not on the current debt structure. I mean, we've talked about some ideas and thoughts around refinancing but unless that were to impact, I wouldn't see us hitting that until the back half of '14.


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

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

Just to Scott's point there. Can you just talk a little bit about the decking point of your capital structure? How you see it yourself kind of ending up on the year, either from a debt capital perspective or average interest rate or however you can -- more comfortable when you're framing that up?

Scott F. Stephens

Sure. Well, as we've said, at the end of last year, and as we said here today, we have full availability on the revolver. In addition, we have $20 million to $30 million of available cash on hand that we could utilize for debt paydowns opportunistically. So I think, at this point, we envision converting that sort of cheap availability into funded debt in a manner of replacing the high yield. And to the extent we're able to do that, you're swapping out 12.75 debt with 2%, right? So that's kind of the spread available on that. And we did some of that recently by open market bond purchases. We'll continue to look at that. And in addition, the first call date on the bonds is December of this year and at 1 06. So we're looking at that opportunity either between now and then, provided that there are make holes in there. But between now and then or sort of at the latest point, at that time in December of this year, we would anticipate refinancing out of the high yield. And whether all or a significant portion of that transitions into that kind of 2% ABL environment, we would anticipate that. Maybe not 100% of it, but a substantial majority of that turns into sort of 2% ABL debt with maybe some other balance at a different kind of loan structure at a slightly higher, somewhat higher cost than 2%. I think that's the way I would -- and that will happen, we envision that happening some time in 2014.

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

2014. So -- and I know this sounds far out but now that it's -- I mean, what do you think a realistic 2015 interest expense number is, just given a wide range we've seen pre and post the legacy acquisition that led to that?

Scott F. Stephens

Oh, I think, well, at this point, I think, 3% to 4%, we would be comfortable with, something in that range.


[Operator Instructions] And we have a question from Brett Levy from Jefferies.

Brett M. Levy - Jefferies LLC, Fixed Income Research

What's the CapEx number that you guys are targeting for 2014? And then, I know, Scott Stephens, you have highlighted that the first call date was 1 06 and 3/8, the next year, it dropped suddenly down to par. Given that you're sort of looking for a modest improvement in the EBITDA, and EBITDA is sort of a key driver of refinancing metrics, are you potentially even looking at waiting a year? So CapEx and then sort of waiting a year as an option.

Scott F. Stephens

CapEx assumption is, I would use $12 million to be sort of conservative, that was the same level as last year. And we typically would look to 1% of revenue. So anywhere between $10 million and $12 million probably make sense. But $12 million is probably the number I would use. And in terms of the refi, yes, I don't think we see it any differently than that, Brett, in terms of the options available to us. We obviously have to balance the cost and the liquidity and the flexibility issues right. And if we feel like we can get to a solution in that sort of cheaper and more sort of all senior looking environment that make sense from a liquidity standpoint, well, that's going to certainly offer us the lower cost. If we want more flexibility than that and more liquidity than that, #1, we're going to have to pay for it. And then, now, your sort of issue comes into the picture, which is all right, well, now, the EBITDA level and the earnings level is much more important than in the previous scenarios. So yes, I think, that's possible. I mean, listen, I'll put it this way, we're sort of -- we remain comfortable with the overall level of debt on the business that we would anticipate continuing to go down this year. So mid 30% debt to cap or something under 35% debt to cap is, we think, is an okay range to be in. The cost is not okay. So that's really what we're trying to deal with is can we deal with that 12 3/4 cost? We love the flexibility and the liquidity that, that provides, but it's just not -- it doesn't make sense, especially in today's market, from a cost standpoint. So yes, we'll factor that. I think, that's -- it's actually a possibility. I wouldn't say it's our plan, but there's certainly a possibility that it would -- it could make sense to go beyond December '14 and consider those options.

Brett M. Levy - Jefferies LLC, Fixed Income Research

All right. And then, you guys said that sort of the roughly 0 EBITDA, aerospace was best, industrial was medium, and energy was worst. Can you give a sort of a rough sense as to sort of, with revenue up, any metrics you can give us to sort of break out aerospace from industrials from energy, whether it's on the revenue line, the units line, the EBITDA line, anything that sort of gives us a sense as to whether or not you sort of have 2 medium sick children, and one really sick child or kind of what the case might be?

Scott F. Stephens

Brett, I would sort of -- I would kind of range it like this. Our industrial business, which is -- remains roughly 40%, 45% of total sales, it kind of carries the day or it tends to set the average, which it kind of did from last year. I would say that kind of upper teens to 17% is kind of the number that our industrial business was down relative to '12, and that's pretty consistent with the metals average number. So that's kind of the midpoint. Aerospace was closer to flat on the -- I guess, on the positive side of that range. And then, oil and gas was sort of into the mid-20% in terms of volume -- or in terms of revenue. And again, that's partially volume, but there was also some price impacts in terms of the oil and gas products, alloy bar to be specific, and some of the tubing products were hit last year, particularly in the back half of the year. So there was more of a pricing component felt in on the revenue side of oil and gas than the other parts of the business.

Brett M. Levy - Jefferies LLC, Fixed Income Research

All right. And lastly, you get $31 million in cash, a big undrawn revolver. In terms of what you do with your liquidity this year, can you sort of set the priorities in terms of: a, debt reduction; b, investing in inventory in selected cases, where, I mean, again, you sort of talked for the market outlook that maybe there may not be that many opportunities there; and then, I guess, c, would be acquisitions.

Scott F. Stephens

Yes, I think -- well, I don't think we see it too much differently. I think, the A priority is definitely debt reduction and sort of recapitalization or refinance. So -- and preparing for that as well. So it may be accumulating cash on hand for an eventual refinance. That's certainly priority #1. We mentioned the CapEx number, it's not a significant amount. We feel like we can fund the -- I mean, there are growth opportunities for customers in certain locations, certain facilities, piece of equipment build outs and whatnot. We think we can take care of that within that CapEx budget. If something else were to come up, we would certainly put that pretty high on the list as a B priority. I don't see -- we continue to see inventory as a source of cash for 2014. We mentioned the DSO number, it's still quite a bit higher than we think is needed. And from an overall standpoint, we still expect to work the DSI number down. There are some local inventory deployments that we're doing and that we think strategically make sense but that's more shifting where the inventory is than it is adding to the overall inventory pile. So I don't see us -- depending on the top line, of course, if the top line were to grow more significantly, then it may be a different answer. But in the current environment, we would see inventory levels continuing to trend down in dollars as 2014 rolls along.


And we have a question from Ed Marshall from Sidoti & Company.

Edward Marshall - Sidoti & Company, LLC

So last quarter, I think, we discussed kind of the cost side of the business, very similar to what we're talking about today. I seem to recall that wasn't out of the question at one point to be able to grow the top line 15% to 20% year-over-year. We look at kind of markets improving, some of the markets that are improving around you, you mentioned oil and gas giving you a little bit more optimism, aerospace being relatively strong, although I think there is some weakness in play. You've talked about the PMI in industrial side picking up. I'm wondering what the difference in kind of the outlook on this particular call as opposed to just, I'd say, a quarter ago on third quarter. Has the hole gotten deeper for you? Have you kind of realized that, jeez, we're in a bigger hole than we thought? Are you being a little bit more realistic or are you just kind of putting an outlook out there that maybe you can kind of leapfrog as we progress through the year? I'm just kind of curious as to what your response would be.

Scott J. Dolan

Yes, Scott here. I would say, clearly, from third quarter to fourth quarter, the decline was a little bit more than we anticipated, not significantly, but was definitely more. I'd say coming out of the gate here in Q1, as I said, we got off to a slow start and has picked up, as Steve indicated, and clearly seeing an impact here. When you look at the year-over-year too, once again, because of the decline from January through December, your year-over-year, you have to not only -- you're coming off with your low in Q4, but you're having to leapfrog what was better in Q1 of that year. So that year-over-year makes it substantially more difficult. So I would say -- and then lastly, I agree with your point. Just trying to be a little bit more conservative here. This industry has been talking, has been cautiously optimistic for the last couple of years, as some of my colleagues said on their calls, and it kind of feels like we're going through the same thing every year here. And there are signs of optimism and things looking better as you get into the beginning of the year, and they're just not quite playing out the way I think everyone thinks they're going to. And once again, our whole goal is to fix the business so we get out of that. But quite frankly, where we are right now, until we get the business completely where we want it, we do need some help from the markets, and I'm not sure it's going to be quite as strong as maybe we thought as we look at the back half of last year.

Edward Marshall - Sidoti & Company, LLC

Okay. And then, lastly, we talked about the first half but I'm curious if I can have you bite count on the full year, do you think you'll be

profitable for the full year as we move into 2014?

Scott F. Stephens

Yes, right about that, I think, we see it, yes, modestly, but yes.

Scott J. Dolan

And I think, what Scott was talking about, with the amount of interest expense that we're carrying, I think, how -- when that all occurs and how that plays out could have a big impact on that.


And that was our final question. I'll turn the call back over to Scott Dolan for closing remarks.

Scott J. Dolan

Okay. Thanks, everyone, for joining us today. I just really want to end by saying, obviously, a difficult year but very proud with the work our leadership team did in really significantly changing how this company does business. I know it hasn't shown in all the results yet, but we have made significant changes in how we do business.

We executed on the things that we said we were going to do around costs, around inventory. Obviously, some of the metrics weren't met as the top line declined. I don't think anyone, including ourselves, thought these markets were going to be as soft as they were going to be this year. And once again, as I said earlier, that's what we're trying to do, is positioning this company so that we're not as dependent on the macro economy and we can do well whether the markets are strong or not. But clearly, we're not there yet and we get more impacted than others when it comes to soft markets because of the way we do business and we need to move ourselves out of that.

Lastly, as I said, there is more cost that we could go after, but we're really positioning the company right now not to get out of any markets, any geographies and really grow the company into the footprint we have as we move forward. And if that growth isn't to the level that we would like, we do have levers and options to do more on the cost side. But we've been very careful not to impact our ability to grow into the sized company we want to be, because we think, ultimately, that's going to optimize profitability as we go forward. So thank you once again for joining, and take care.


Thank you. Ladies and gentlemen, that concludes today's call. Thank you for participating. You may now disconnect.

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