U.S. Markets closed

Edited Transcript of BRSS earnings conference call or presentation 7-Mar-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Global Brass and Copper Holdings Inc Earnings Call

Schaumburg Mar 7, 2017 (Thomson StreetEvents) -- Edited Transcript of Global Brass and Copper Holdings Inc earnings conference call or presentation Tuesday, March 7, 2017 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Scott Hamilton

Global Brass and Copper Holdings, Inc. - General Counsel

* John Wasz

Global Brass and Copper Holdings, Inc. - President & CEO

* Christopher Kodosky

Global Brass and Copper Holdings, Inc. - CFO

================================================================================

Conference Call Participants

================================================================================

* Josh Berman

William Blair & Company - Analyst

* Daniel Moore

CJS Securities - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day ladies and gentlemen, and welcome to the Global Brass and Copper Holdings, Inc. Q4 2016 earnings conference call.

(Operator Instructions)

As a reminder, this call is being recorded. I would now like to turn the call over to Scott Hamilton. You may begin.

--------------------------------------------------------------------------------

Scott Hamilton, Global Brass and Copper Holdings, Inc. - General Counsel [2]

--------------------------------------------------------------------------------

Thank you very much. Good morning everyone, and thank you for joining us to discuss us to discuss Global Brass and Copper's fourth-quarter and full-year 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For anyone who is not able to listen to today's call, an archived version of this call will be available later this morning.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 and year ended December 31, 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 March 7, 2017. Global Brass and Copper Holdings undertakes no obligations to revise or update any forward-looking statements to reflect events or circumstances after the date of this conference call, except as required by law. Now that we have covered these cautionary comments, I would like to turn it over to John Wasz.

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [3]

--------------------------------------------------------------------------------

Thank you, Scott. Good morning everyone, and thanks for joining us on today's call. Overall, we're pleased with our 2016 financial results which reflect volume growth, improved margins and strong cash flow generation, all while overcoming a production outage in the second quarter.

Along with delivering solid financial results, we also refinanced our debt, which represents a significant milestone in the strategic evolution of our Company and provides greater flexibility to grow organically and through acquisitions. We also implemented IT systems at two of our businesses which went live in January.

We made solid progress in creating value for our customers, improving our cost profile through productivity and product yield, and in driving pricing strategies focused on the cost of product complexity. The dedicated efforts and teamwork of our employees were critical to achieving our 2016 results and positioning our Company for future for success.

Looking at our business units, Olin Brass volumes increased year over year despite the production outage in the second quarter. Volumes increased in the munitions market as a result of a year-end inventory build, which we expect will cause first quarter 2017 volumes to soften.

Also year-over-year coinage volumes did not grow like they did in 2015, which was a strong year. Our supply chain and manufacturing excellence initiatives reduced cost, increased productivity and reduced inventory levels in the overall supply chain.

Turning to A.J. Oster, we achieved our 10th consecutive quarter of year-over-year volume growth due to underlying market growth and a strength in proprietary alloys. For the year, A.J. Oster's growth and pricing initiatives continued to deliver strong results in growing both the top and bottom line. We believe A.J. Oster continues to create customer value and is well positioned from a service center perspective with best in time on-time delivery performance, customer responsiveness and outstanding product quality.

During the year Chase Brass executed on its commercial strategies with another year of over 17% growth in its green product portfolio along with continued exceptional quality and service levels to their customers. The building and housing market demand exhibited steady improvement, however we continued to face headwinds in the industrial machinery and equipment sector.

Our strategy in 2017 will be to continue employing our balanced book philosophy and asset management practices to drive sustainable profitable growth. Rather than focusing on volume growth or strategic pricing efforts, our strategic pricing efforts are focused on enhancing long-term profitability and achieving an appropriate return on our inventory, taking into account the enormity of the assets and the complexity of the operating activities required to convert them. We will drive our organic initiatives while also looking for acquisition targets that meet an appropriate rate of return.

We generated significant cash flows resulting from strong operational performance and remain in a solid financial position. With that, I will turn the call over to Christopher Kodosky, our CFO, for a more detailed view of our financials.

--------------------------------------------------------------------------------

Christopher Kodosky, Global Brass and Copper Holdings, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks, John. Good morning, everyone. I'll talk about our Q4 and full-year 2016 results and finish with our guidance for 2017.

Volumes for the fourth quarter were flat at 121 million pounds driven by solid growth in our building and housing and munitions markets and decreased coinage volumes. Full-year volumes increased 2% to 521 million pounds due to similar dynamics.

Net sales were flat for the quarter at $323 million, as favorable mix and pricing were offset by a decrease in our pass-through commodity costs and less sales of unprocessed metals. Net sales for the full-year decreased by 11% to $1.3 billion, again due to these pass-through commodity cost and sales of unprocessed metals partially offset by increased volumes. Metal prices reflect replacement cost recovery from the 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.

Fourth-quarter adjusted sales, a non-GAAP financial measure, increased by 2% to $127 million, largely due to improved pricing. For the full year adjusted sales increased by 1% to $542 million, largely due to increased volumes

Net income attributable to GBC for the quarter was $7.7 million, or $0.35 per diluted share, versus $3.5 million, or $0.16 per diluted share in 2015. The increase is due to improved gross profit and decreased interest expense, partially offset by an increased income tax expense.

Net income attributable to GBC for the full year was $32.2 million, or $1.49 per diluted share, compared to $35.6 million, or $1.66 per diluted share for 2015. Full-year 2016 results were affected by the following: an increase in the loss in extinguishment of debt as a result of our refinancing, decreased interest expense due to the refinancing, the gain on the sale of our joint venture that we reported in 2015, the improvement in base business gross profit and reductions in lower of cost to market charges in 2016.

Fourth-quarter and full-year adjusted diluted earnings per common share, a non-GAAP financial measure, increased 64% and 7% year over year to $0.46 and $2.36 per share respectively. Fourth-quarter adjusted EBITDA, a non-GAAP financial measure, increased by 20% to $24 million. The increase was primarily due to favorable changes in pricing as well as decreased manufacturing conversion costs as result of increased productivity and improved cost control.

There are several factors that, when combined, net to an overall 2% decrease in adjusted EBITDA to $119 million for the full year. They are as follows: the lack of a gain on sales joint venture like we reported in 2015, unfavorable shift in product mix, shift from coins to munitions coupled with improved volumes, lower SG&A and improved productivity and cost control, which more than offset increased cost related to the production outage.

We entered the fourth quarter with cash of $88 million, $319 million outstanding under our new term loan facility and $198 million of availability under our new asset-based revolving loan facility. During the fourth quarter and full year of 2016 we generated $46 million and $95 million respectively of cash from operating activities, largely due to cash earnings and decreased investment in working capital.

Capital expenditures increased from $21 million for the full year 2015 to $34 million in 2016 as we increased our IT spend by $7.1 million. We expect capital expenditures in 2017 to approximate $30 million.

Looking at our three reportable segments, our performance in the fourth quarter was as follows. Olin Brass' volumes were relatively flat at 62 million pounds and adjusted EBITDA increased 60% to $10 million. The increase in adjusted EBITDA was driven by decreased manufacturing conversion costs related to improved productivity and cost controls.

Chase Brass' volumes increased slightly to 51 million pounds, as strong building and housing volumes more than offset softer transportation, industrial machinery and equipment volumes. Adjusted EBITDA remained relatively flat at $15 million, as solid volumes were offset by unfavorable mix and increased SG&A costs.

A.J. Oster's volumes increased 7% to 18 million pounds and adjusted EBITDA increased 33% to $4 million. Adjusted EBITDA benefited from improved volumes and the fact that A.J. Oster continues to price its products to earn an appropriate return on assets and pass on price increases from Olin Brass.

Regarding our outlook for 2017, I'd first like to remind you that we focused on the long term, and our ability to provide guidance is constrained by our short lead times and the tendency of our shipment volumes to lag published market indicators. In addition, we have not included any amounts related to the recovery of proceeds under our insurance policies related to the production outage at Olin Brass in 2016.

Having said that, based on a variety of factors including our 2016 results, industry trends and our own insight, we are providing the following 2017 guidance. Shipment volumes within the range of 530 million to 560 million pounds and adjusted EBITDA within the range of $120 million to $130 million. With that, I turn the call back over to John.

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [5]

--------------------------------------------------------------------------------

Thanks, Christopher. In conclusion, we are very pleased with our 2016 results and enter 2017 with positive momentum. Our strong cash flow generation coupled with our financial flexibility has positioned us well to drive growth for 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 a volatile metals pricing environment. We're excited about the future of GBC as we continue the strategic evolution of our Company.

We thank all of our employees across GBC who are working to improve our Company, and we believe we are well positioned to continue to provide customer value and deliver shareholder value 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 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.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions)

Josh Berman, William Blair.

--------------------------------------------------------------------------------

Josh Berman, William Blair & Company - Analyst [2]

--------------------------------------------------------------------------------

My first question relates to the guidance. It looks like the volume guidance calls for about 5% growth at the midpoint, which has been above the growth we've seen in recent years. What leads you to expect an acceleration in growth in 2017?

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [3]

--------------------------------------------------------------------------------

Josh, this is John. As we look at all three of our businesses and we look at the diversified market segments that we're in and we look at the external factors, we see building and housing continuing to provide steady growth as multifamily and single-family home construction continues to grow. We see automotive surprisingly continuing to grow, albeit at a lesser pace and also remain somewhat optimistic about the use of our products as cars become more smart and the electronics in cars continues to increase.

Munitions and coinage, I think from a munitions standpoint we are anticipating the first quarter and perhaps maybe the first half of the year to be a little soft. There was an inventory build in munitions here as we moved through the latter half of the year, I think in anticipation of a different election outcome. Subsequently, that volume appears to be working itself out of the supply chain.

Then from a coinage standpoint, we tie that into GDP. It's an extremely volatile segment for us. But anticipate that activity level to be slightly better than what we experienced in 2016. That's kind of one.

The two is that, as I mentioned, we are continuing to work on various organic growth opportunities. We continue to see success in a lot of the operational supply chain and commercial initiatives.

In addition to that, a lot of great work has been done by the folks across the three businesses in improving the quality of our products and the service levels, lead times, on-time delivery performance. Despite we're continuing to push our price levels, particularly in the light gauge product lines, we continue to earn business from customers based upon the value we are providing.

In an interest rate environment that appears to be going up, not down, and commodity prices that appear to be going up but not down, having a supplier who can provide short lead time, on-time delivery performance to the levels that our companies are doing, is something that bodes well for us.

--------------------------------------------------------------------------------

Josh Berman, William Blair & Company - Analyst [4]

--------------------------------------------------------------------------------

Got it. Thank you. Then touching on the price increase. I think less than a month ago you publicly announced price increase of some products coming out of Olin Brass. I'm just wondering how the customer response has been, and what the potential impact to volume and EBITDA in that segment is looking like for 2017?

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [5]

--------------------------------------------------------------------------------

Josh, as you know, we've been working for many years on the cost of complexity in our Olin Brass operation, and the pricing levels of these highly complex products that are high performance alloys, very light gauge and this is a continuation of that work. It's important to note that it affects just the strip business, Olin Brass and then inevitably, A.J. Oster.

It is predominately in the automotive and electronic connector market. So it's a thin slice of the pie of Olin Brass and A.J. Oster, and it's reflective of us putting forth our efforts to continue down the path of the asset management philosophy and making sure that we are getting paid for the unique products that we are producing, the cost of producing those products.

As I've mentioned before, these are the items that are 20, 25 processing steps. That is the focus of this.

--------------------------------------------------------------------------------

Josh Berman, William Blair & Company - Analyst [6]

--------------------------------------------------------------------------------

Got it. Thanks a lot.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Daniel Moore, CJS Securities.

--------------------------------------------------------------------------------

Daniel Moore, CJS Securities - Analyst [8]

--------------------------------------------------------------------------------

Was wondering in terms of the guidance you provided a little bit of color in the prepared remarks, but both in terms of volume and EBITDA guidance for FY17. Maybe just a little bit more color or rank order your expectations for growth across each of the three businesses?

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [9]

--------------------------------------------------------------------------------

Dan, I think at Olin Brass we're expecting to see growth. We expecting to see growth in the markets that I've already mentioned or talked about.

Also the fact that we had a motor outage in the second quarter of last year had somewhat of a negative effect on volumes in 2016. So that has some degree of impact.

As we're looking at A.J. Oster, we continue to be encouraged by the work that is going on regarding the commercial initiative to expand their base of products and to expand their geographical base. So we are anticipating growth there as well.

As it pertains to Chase, we are encouraged by what we continue to see in building and housing. We are expecting industrial machinery and equipment to be relatively flattish.

Now, it is important to note a couple of things. As we think about the first quarter, we do anticipate volumes on the first quarter to be negatively affected by the munitions business at Olin Brass and the impact of what I would describe as an inventory correction.

In addition to that, in the first quarter we're going to have some expenses that are a bit unique. We transitioned to a health savings account for our salaried employees from a benefit -- health benefits perspective in 2017. As a result of that we are going to experience an expense of a $1 million to $2 million.

As we mentioned, we went through two successful ERP implementations coming out of the box January 1 and 2. We are pleased to report that both are operating very well and we are running the businesses as we have in the past. As we're looking at expenses, particularly consultant expenses, we are going to experience additional consulting expenses to the tune of $1 million to $2 million.

--------------------------------------------------------------------------------

Christopher Kodosky, Global Brass and Copper Holdings, Inc. - CFO [10]

--------------------------------------------------------------------------------

Those are two probably strategic things that have probably changed since Q3, is the last time we talked to you. They're the right things to do. As John mentioned, A.J. Oster has performed very well now with regards to production and meeting customer demand with the new ERP system that it has.

The other thing that would go on is we have significant inventory reduction in 2016. We are expecting further inventory reduction in 2017. I think for the first quarter especially, that inventory reduction through the first half of the year will probably be bigger than this whole year, which means we will give back some of it in the latter half of the half of the year. But in the first quarter, we're probably going to, in an effort to reduce inventory and manage cash, are probably going to suffer some increased production expenses at Olin Brass, probably in the same order of magnitude John was talking about there.

--------------------------------------------------------------------------------

Daniel Moore, CJS Securities - Analyst [11]

--------------------------------------------------------------------------------

Got it. Very helpful on the color in terms of the cadence. In industrial, John, you mentioned flattish and this has been soft. Others have seen some signs of stabilization. Are you seeing any green shoots in any pieces of that business?

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [12]

--------------------------------------------------------------------------------

Dan, I think we are seeing and hearing chatter about improved activity level but I think its way too early to call it. Our sense is that the worst is behind us.

After the last whatever, six quarters, I think it's encouraging that it's stabilizing and we are hopeful. But we want to see the orders on the books.

--------------------------------------------------------------------------------

Daniel Moore, CJS Securities - Analyst [13]

--------------------------------------------------------------------------------

Got it. Lastly, in terms of capital allocation, you are down below 2 times leverage. If you don't anything else it could be closer to 1, certainly below 1.5 by year end.

What does the pipeline for M&A look like? Absent opportunities there, when do you start to seriously consider alternative uses of capital?

--------------------------------------------------------------------------------

John Wasz, Global Brass and Copper Holdings, Inc. - President & CEO [14]

--------------------------------------------------------------------------------

I'll talk about the acquisitions, then I will kick it over to Christopher to answer the second half of your question. We continue to focus on the organic growth opportunities.

We continue to focus on acquisitions. We continue to work through a variety of options that are focused in on really bolt-on acquisitions in distribution, continuing to look at the stamping and the fabricating side of the business, product extension opportunities with the green portfolio at Chase. We continue to keep our ear to the ground and try as best we can to advance a strip industry consolidation, which we think is -- would be very good for the industry.

As a management team, we are spending more and more time on this. We've evaluated several opportunities over the last several quarters.

We've walked away from some. We've continued to evaluate others, and as a management team we'll continue to focus on this as we move through 2017 and beyond.

We are looking for acquisitions that can be additive to our business. I mean, it's all about the synergies and how those businesses can complement us or how we can complement them.

We are going to be smart. We're going to be patient, and when we find the right one, we are going to jump.

--------------------------------------------------------------------------------

Christopher Kodosky, Global Brass and Copper Holdings, Inc. - CFO [15]

--------------------------------------------------------------------------------

I think you are right, Dan, to be thinking about what is our capital strategy. For us, it's focusing on organic growth first and then CapEx and acquisitions, as John had mentioned. I think probably maybe if the latter half of the year, those acquisitions don't pan out we would be taking a look at potentially making other changes in our capital structure and our dividend policies and whatnot.

--------------------------------------------------------------------------------

Daniel Moore, CJS Securities - Analyst [16]

--------------------------------------------------------------------------------

Very good. Appreciate it.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

There are no further questions. I'd like to turn the call back over to Scott Hamilton for any closing remarks.

--------------------------------------------------------------------------------

Scott Hamilton, Global Brass and Copper Holdings, Inc. - General Counsel [18]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.