Global Brass and Copper Holdings (NYSE:BRSS) Q2 2016 Earnings Conference Call August 5, 2016 10:00 AM ET
Scott B. Hamilton - General Counsel and Secretary
John J. Wasz - CEO
Christopher J. Kodosky - CFO
Tyler Kenyon - KeyBanc Capital Markets
Josh Berman - William Blair
Good day, ladies and gentlemen and welcome to the Global Brass and Copper Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I’d now like to turn the conference over to your host for today, Scott Hamilton, General Counsel, you may begin.
Scott B. Hamilton
Thank you and good morning everybody and thank you for joining us to discuss Global Brass and Copper’s second quarter 2016 financial results. My name is Scott Hamilton and I am Global Brass and Copper’s General Counsel. Joining me on the conference call today are John Wasz, our President and Chief Executive Officer; and Christopher Kodosky, our Chief Financial Officer. For anyone who is not able to listen to today’s entire call, an archived version of this call will be available later this morning. Please visit the Investor Relations section of our corporate website at www.gbcholdings.com to access the replay.
Before beginning our discussion, we want to make you aware that our prepared remarks and responses to questions may include forward-looking statements that involve risks and uncertainties. These may include statements about our current expectations or forecasts of market and economic conditions, our business activities, prospects, strategies, and future business and financial performance. Actual results could differ materially from any forward-looking statements made by us. Information concerning factors that could cause actual results to differ from those in the forward-looking statements may be found in Global Brass and Copper Holdings’ Annual Report on Form 10-K and the Company’s quarterly reports on Form 10-Q filed with the SEC, under the Risk Factors sections of each filing, and other filings with the SEC.
In addition, our comments today refer to non-GAAP financial measures such as adjusted EBITDA, adjusted sales, and adjusted diluted earnings per common share. Reconciliations to the most directly comparable GAAP financial measures are provided in our earnings release for the fiscal quarter ended June 30, 2016 that we furnished to the SEC and posted to our website. We believe these non-GAAP measures provide useful information for evaluating our business performance. These non-GAAP measures should be considered as supplemental in nature and should not be considered in isolation or as a substitute for the related financial information prepared in accordance with GAAP.
In addition, these non-GAAP financial measures may not be the same as similarly entitled measures reported by other companies. Please be advised that the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast on August 5, 2016. Global Brass and Copper undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call except as required by law.
Now that we’ve covered these cautionary comments, I’d like to turn it over to John Wasz.
John J. Wasz
Thank you, Scott. Good morning, everyone and thank you for joining us on today’s call. Second quarter results were down year-over-year as a result of production outage at Olin Brass during the quarter which I will discuss in further detail momentarily as well as the fact that the prior year period includes a gain from the sale of our joint venture. Despite that we are encouraged by a continuation of positive trends from the prior quarter including solid volumes at A.J. Oster, increased green product portfolio sales at Chase Brass, and a strengthening of the building and housing market.
Turning back to Olin Brass, the year-over-year volume and earnings decline was primarily due to a disruption to a portion of the production activity at our integrated brass and copper mill located in East Alton, Illinois. The East Alton facility experienced a reduced production due to an equipment failure which is impacting an intermediary segment of the mill's production process. The production was restored as on target but volumes and profitability suffered as a result. While we did lose some volumes as a result of the outage, we expect to make up a good portion of that volume in the second half of the year.
Although we are disappointed with this occurrence we are very proud of the purposeful and methodical way in which the Olin brands team responded to and remediated the production outage. They developed and executed a comprehensive corrective action plan to mitigate the disruption. In my experience, unplanned outages like this generally take much longer to recover from and it is with resolution is a reflection of our employees commitment and our strong customer relationships. It is also a testament to the detailed processes, systems, and procedures we have put in place across our entire organization to improve our operational execution and successfully evolve our company.
Turning to A.J. Oster, we achieved our eighth consecutive quarter of year-over-year volume growth as the commercial initiatives continued to gain traction and deliver strong results. We are pleased with the progress we continue to make with organic growth initiatives, focus on expanding and growing our product portfolio. A.J. Oster continues to be well positioned from a service center perspective with best in class on time delivery performance and outstanding product quality.
Chase Brass delivered a strong quarter of year-over-year volume growth and increased adjusted EBITDA. Chase continued to successfully drive its commercial strategy with continued exceptional quality and service levels. Chase also has continued quarterly growth and its green product portfolio and achieved manufacturing productivity improvements in the second quarter.
Another positive dynamic was the continued strengthening of the building and housing market which was partially offset by lower demand in the industrial machinery and equipment sectors. Overall we continued to generate significant cash flows and remain in a strong financial position. The recent refinancing of our long-term debt agreements completed on July 18th significantly improves our capital structure, bolsters our future cash flows, and provides greater financial flexibility to further strengthen our competitive position.
Based on current market conditions and interest rate environment the refinancing of our debt represents a 425 basis point reduction in our borrowing rate which we placed to an approximate $12 million per year reduction in interest annually. Lastly I want to take a moment to thank our employees across the entire Global Brass and Copper Holdings organization for their commitment to the business and their steadfast pursuit of seeking opportunities to improve our company and expand our market leadership. We have made significant progress since our company's formation in 2007 to improve our profitability and strengthen our competitive position and create value for our customers.
With that I will turn the call over to Christopher Kodosky our CFO for a more detailed view of our financials.
Christopher J. Kodosky
Thanks John, good morning everyone. Volume for the second quarter of 2016 decreased by 0.8% to 132 million pounds largely due to demands in our coinage, transportation and industrial machinery and equipment markets. Volumes mitigated somewhat by increased demand within the building and housing market. Although overall though, volumes were significantly affected by the production outage at Olin Brass, which resulted in an inability to shift and sell products at normal levels.
Net sales for the second quarter of 2016 decreased by 18.6% to $338 million, the decrease was primarily due to decreased metal prices and less sales of unprocessed metal. Metal prices reflected basic cost recovery from a customer whereas the sales prices represent the value added component of adjusted sales, our non-GAAP revenue measure which we define as the excess of net sales over the metal cost recovery component of net sales. Adjusted sales for the second quarter of 2016 decreased by 2.7% to $137 million predominantly due to the decreased volume.
Net income attributable to GBC for the second quarter of 2016 was $8.4 million, or $0.39 per diluted share, compared to $17.1 million, or $0.80 per diluted share, in the second quarter of 2015. Net income decreased due to lower gross profit and the fact that the prior year includes a gain on the sale of the joint venture. Somewhat emolliating the decrease were decreased selling, general and administrative, interest and income tax expense.
Adjusted diluted earnings per common share, a non-GAAP financial measure, was $0.43 per diluted share in the second quarter of 2016 compared to $0.89 in the second quarter of 2015. Adjusted EBITDA, our non-GAAP financial measure decreased by 36.8% to 26 million from the second quarter of 2016. The decrease was primarily due to the aforementioned Olin Brass production outage and the fact that the prior year includes a gain on the sale of the joint venture.
We ended the second quarter with cash of $58.9 million and senior secured notes of $305.3 million. On July 18, 2016, we completed the refinancing of our debt by entering into a new asset-based revolving credit facility and the Term Loan B facilities. We used the proceeds from the Term Loan B facility allowing approximately $11.8 million of our own cash, to retire our $305.3 million senior secured notes facility. Based on the current market and interest rate environment, this refinancing represents 425 basis point reduction in our borrowing rate equating to approximately $12 million of interest.
Our new ABL facility matures on July 19, 2021 and allows for borrowings up to the lesser of $200 million or the borrowing base, along with a $200 million accordion feature. At closing we had a full 200 million available under the new ABL facility. We expect to record a loss on an extinguishment of debt charge in the third quarter of 2016 of approximately $20 million related to these refinancings.
Through the second quarter of 2016 we generated $23.1 million of cash from operating activities primarily driven by our earnings. Additionally our cash flows for the quarter ended June 30, 2016 includes outflows of 4.5 million for bond buyback including 300,000 premium paid to acquire them.
Looking at our three reportable segments, our performance in the second quarter was as follows; Olin Brass dollars decreased by 11.7% to 63 million pounds and adjusted EBITDA decreased by 55.9% to $8 million. These decreases were due to the production outage. However, as previously mentioned the outage will differ some volumes from the second quarter to the second half of 2016.
Chase Brass volumes increased 7.8% to 58 million pounds and adjusted EBITDA increased 5.3% to $18 million. The increase in adjusted EBITDA was due to higher volumes and decreased manufacturing conversion costs resulting from productivity improvement. However, profitability was negatively affected by unfavorable product mix fluctuations and decreased better margins.
A.J. Oster's volumes and adjusted EBITDA were relatively flat versus the same quarter to prior year. A.J. Oster does however continue to benefit from increased selling prices by passing around price increases from Olin Brass and by pricing [ph] these products to earn appropriate return on assets.
Before I turn the call back over to John, I want to briefly discuss our 2016 outlook and as a reminder we are focused on positioning our business for a success over the long-term and our ability to provide guidance is constrained to our short lead times in the tenancy of our shipping volumes lacked published market indicators. As previously stated volumes decreased in the second quarter mostly due to the production outage deferring some volumes from the second quarter into the second half of 2016. Having said that, based on Q2 2016 results industry trends and our insight into the remainder of 2016, we are reaffirming our previously disclosed 2016 full year guidance of shipment volumes within the range of 510 million to 545 million pounds and adjusted EBITDA of $115 million to $125 million. With that I turn the call back over to John.
John J. Wasz
Thank you, Christopher. In conclusion we are on track to achieve our full year 2016 guidance. Our strong cash flow generation coupled with our increased financial flexibility from our recent successful debt refinancing has us well positioned to drive growth through our organic initiatives as well as through acquisitions. Additionally our balanced book strategy continues to play a key role in insulating and stabilizing our margins in volatile metal pricing environment.
Overall we are excited about the future of GBC as we continued the strategic evolution of our company. We are well positioned to deliver continued value for our shareholders as we maintain our ongoing focus on driving profitable growth, generating strong cash flows, and strengthening our competitive position. We look forward to continuing to serve our customers and our shareholders. Thank you for your interest and continued support. Now we are ready to take your questions. Operator, please explain the question-and-answer procedures.
Thank you. [Operator Instructions]. And our first question comes from Tyler Kenyon from KeyBanc. Your line is open.
Hey, good morning John and Chris.
John J. Wasz
Christopher J. Kodosky
Just wanted to touch base just on the impact of the Olin outage. Anyway to just to think about what the drag was from an EBITDA perspective in the second quarter and also from a volume perspective and then how we should be thinking about the pace of the recovery in the volumes associated with the outages we move into the third and fourth quarter?
Christopher J. Kodosky
Well Tyler, I would say a couple of things in response to that is first of all as you know we provide annual guidance and as we just mentioned we are reaffirming the annual guidance and we are encouraged by the recovery that has come as a result of Olin Brass's outage and what has happened since they started to backup. As a result of that, the metal went down, we had a pretty decent order book of business that had June orders, that inevitably didn’t ship in June. That are going to ship in our third quarter and to some extent the fourth quarter. That represents probably somewhere between 8 million to 10 million pounds give or take. And in addition to that as we work our way through the outage we had costs in the second quarter that were hard costs of 1 millionish plus dollars that negatively impacted the second quarter.
John J. Wasz
So, I think the only thing to add to that would be any potential loss growth which at this point in time we have not finished sharpening our pencils on exactly what that is, but that would be an impact for the second quarter which is hard for us at this point to quantify exactly.
Okay, great. Appreciate that color. And then any update as far as the end markets, are there any end markets right where you are feeling maybe a little bit better than where you -- how you were thinking about them at the end of the first quarter and any end markets where maybe you are feeling perhaps a little bit more pressure?
John J. Wasz
Yes, building and housing we have seen a slow and steady improvement in that segment. And we continue to see that, so I think we are positive from a building and housing standpoint as to the balance of the year. New machines appears to be a pretty good -- on a pretty good run right now so we are encouraged about that. Industrial machinery and equipment not the case, continue to see pressures there and continue to kind of wallow along with -- at levels that are lower than what we experienced last year.
The interesting thing is that from an automotive standpoint because I know that is a hot button right now in discussion, our automotive is steady. It is I think the term plateau is being used and I would support that but that totaled to pretty nice level for us. So, we are encouraged by automotive business and particularly given the work that is going on, on the strip side of the business and driving the cost of complexity and right gauge pricing. We are pleased with the efforts and the results from that perspective as well.
And really thank you.
Christopher J. Kodosky
And last thing I would say is from green portfolio standpoint, we continue to be impressed with the growth of the green portfolio as it continues gain traction in the marketplace.
Thanks, and any update with respect to what you are seeing out there from an M&A perspective right now, anything that is looking particularly attractive, our multiples at levels where you would feel comfortable or the reverse, anything as far as what you are seeing out there right now would be helpful?
John J. Wasz
You know our acquisition focus is as I have mentioned before is really three fold. One is bolt on acquisitions in the metal service center and in the fabricating stamping business. Two, is looking for opportunities to export our brands both Eco Brass and CuVerro. Hence we being industry roll up opportunities on the strip side. We are very excited about the fact that we just got through the refinancing which really was one of the final foundational steps that we needed to take to really position us for growth as a corporation.
With that work done now, the management team is even further intensifying our efforts in looking for organic, looking for acquisitions. We continue to evaluate a lot of different opportunities. Nothing is imminent at this point, we are going to be smart but suffice it to say that the amount of time and the number of opportunities that we are taking a look at today is significantly greater than what it was a year ago.
Great, thank you, I will jump back in queue.
Thank you. [Operator Instructions]. And our next question comes from Josh Berman from William Blair. Your line is now open.
Hi, good morning.
John J. Wasz
Good morning Josh.
Thanks for taking the questions. First, just wondering what the reaction from some of your customers was that resulted the plant disruption, maybe it is still early but are there any of it that don’t expect to come there?
John J. Wasz
Josh, that is a great question. I know would say this that we got terrific customers and the work that has been done with Olin Brass and with A.J. Oster working with their customers and through this outage has been a tremendous experience. I mean obviously it has been very difficult but the work that was done in staying, communicating, keeping our customers fully up to speed on what was happening, constantly reprioritizing the order book based upon the customer's needs, working with them on and understanding what their inventory levels grow within their factories, and making sure they were managing it accordingly. It has been really positive and I think when it is all said and done, we are going to be rock solid with all of our customers as we work through this. And through the help of other industry participants and through the work of the various teams I think we have done a really nice job of taking care of our customers and I anticipate our position as the leading supplier of strip products in the U.S. will continue as we move forward.
Great, and then second…
John J. Wasz
And lastly from a customer's -- Christopher mentioned it we did lose some business but it was all cards face up on the table. Our customers had to do what they had to do and we are working -- we worked through it. But from a long-term standpoint we are in a very solid position.
Got it, great. And was A.J. Oster disrupted at all by this or are they not?
John J. Wasz
A.J. Oster buys a lot of product from Olin Brass but A.J. Oster over the last several years has done a really nice job and is really refining and fine tuning their supply chain systems. And because of those processes and systems that they develop and the communication network that has been established between those two businesses, the various supply chain teams were able to work through most of the issues. Identify the hot spots and work collectively to make sure that we satisfy the needs of our customers through this difficult period of time.
Okay, and just wondering if some of the top few organic priorities in terms of reinvesting the business now that like you have said you have more flexibility, just what are some of those initiatives that now you are taking a harder look at?
John J. Wasz
Well, as we have talked about before, from an A.J. Oster stand point the exceptional quality and service that they provide in the metal service business and the red metals focus along with the ability to manage a balance book and technical knowhow of their source people, we are really trying to expand those capabilities into things outside of red metals, things like stainless steel and aluminum as well as expanding the footprint into other geographic areas. So, that is kind of from a A.J. Oster standpoint.
From a Chase perspective, the business model that they have developed and their superior service and product offerings in the Eco Brass product line really taking a look at how do we further expand that Eco Brass product lines above and beyond just the brass rod sizes that they currently make is really the challenge and the opportunities that they are taking a look at.
From an Olin Brass standpoint we got the whole CuVerro initiative which we continue to be encouraged by the interaction with the affiliates, the interaction from the public. I don’t know if you recently saw it but week before last there was an article on the Wall Street Journal that was talking about CuVerro but that is a long slog and we don’t anticipate that being material for a few years.
Our fabricating business continues to look at how to further expand their stamping operations to create more value downstream in the products. And then the inflows of other organic type things that we are working on, that are smaller in nature. At the end of the day, the entire organization understands that our next chapter is about profitable growth and we got excited teams that are working on it.
Okay, thank you.
Thank you. [Operator Instructions]. And I am showing no further questions at this time. I would now like to turn the call back over to Scott Hamilton for any further remarks.
Scott B. Hamilton
Thank you everyone for joining us today and for your continued interest in and support of Global Brass and Copper. We look forward to speaking with you again during our third quarter conference call. Have a great day.
Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.
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