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

Thomson Reuters StreetEvents

Q4 2016 AM Castle & Co Earnings Call

Franklin Park Apr 7, 2017 (Thomson StreetEvents) -- Edited Transcript of AM Castle & Co earnings conference call or presentation Friday, April 7, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Donovan

* Patrick R. Anderson

A.M. Castle & Co. - CFO, EVP and Treasurer

* Steven W. Scheinkman

A.M. Castle & Co. - CEO, President and Director

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Presentation

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Operator [1]

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Welcome to the Q4 2016 A.M. Castle & Company Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. (Operator Instructions) I will now turn the call over to Mr. Chris Donovan. Sir, you may begin.

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Chris Donovan, [2]

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Good morning. Thank you, everyone, for joining us for today's financial community conference call. We will be discussing A.M. Castle's announcement of an agreement in principle to complete a financial restructuring along with the company's fourth quarter 2016 financial results and the company's preannouncement of select, expected first quarter 2017 results.

By now you should have received a copy of this morning's press release. If anyone still needs one, please call the Alpha IR Group at (312) 445-2870, to receive a copy immediately following the conference call. The press release and the company's filings are available on the company's Investor Relations website.

With us from management of Castle this morning are Steven Scheinkman, President and CEO; and Pat Anderson, Executive Vice President and CFO. 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 statements under the Private Securities Litigation Reform Act of 1995. Those statements are based on 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 Form 10-K for 2016, which will be filed today, and also in the cautionary statements contained in today's release. The company does not undertake any duty to update any forward-looking statements.

This presentation also includes certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to their related GAAP measures in accordance with SEC rules. You'll find the reconciliations in the financial information attached in today's release, which is available on the company's website at www.castlemetals.com under the Investors tab, and in the Form 8-K submitted to the SEC.

And now, I'll turn the call over to Steve Scheinkman. Steve?

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Steven W. Scheinkman, A.M. Castle & Co. - CEO, President and Director [3]

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Thank you, Chris. And good morning, everyone. Thank you for joining the call today. I'll start off today by discussing our decision to complete a financial restructuring in collaboration with our stakeholders. Then, I will review our operating and financial performance and structural events that occurred at Castle since our last call, as reported in our fourth quarter press release, and we'll also reference select preliminary first quarter 2017 financial results, which we also announced today. After that, I will turn the call over to Pat for a more detailed discussion of our financial performance, and lastly, I'll wrap up with a few closing remarks.

As we noted in today's press release, we announced an important milestone in A.M. Castle's return to leadership in the specialty metals industry. Since May of 2015, A.M. Castle's new management team and employees at all levels of our organization have successfully restructured the company's operations resulting in positive adjusted EBITDA during each month of the first quarter of 2017 for the first time in more than 3 years.

Our strategic restructuring plan focused on 2 essential thrusts. The first was our branch management initiative, designed to improve the value proposition we delivered to our customers by driving more resources, capabilities and accountability down to the branch level, bringing our branches closer to our customers and making them more responsive to customers' evolving needs. The second was cash generation by more efficiently managing our inventory and selling some of our real estate and other noncore assets, such as the assets of our Total Plastics Inc. subsidiary, the 50% equity interest in our Kreher Steel Company, LLC joint venture and the closure of our energy-oriented Houston and Edmonton facilities.

We executed this plan, rightsizing our network's footprint and installing our branch network strategy while raising more than $110 million through the strategic sale of noncore assets.

We have done everything we set out to do in May of 2015, transforming the company's operations and enabling it to achieve positive adjusted EBITDA in the first quarter of 2017. However, while the changes we've already made have brought us closer to profitability, better operational execution by itself is not enough. Our interest burden is too great and must be reduced.

Specifically, A.M. Castle incurred approximately $280 million of debt in 2011, the majority with a coupon of 12.75% to acquire Tube Supply, Inc. at a time when the oil and gas market was near its peak. Over the past few years, the metal service center industry felt the negative effects of decreased demand in the oil and gas market as well as historical weakness in demand and decline in metal prices, which compounded the adverse impact on our volumes and margins.

Consequently, since issuing this debt, A.M. Castle's interest expense has become a significant burden. For example, as of December 31, 2016, we are incurring $35 million of cash interest alone per year, making significant reinvestments in our business to jump start growth initiatives nearly impossible.

Faced with this interest burden, it has always been our long-term strategy to comprehensively address our balance sheet once we achieved improved operating results. Now having achieved that, we will be able to proceed with this comprehensive financial restructuring as a definitive next step in our 2-year transformation to return our company to profitability and position it for growth.

In recognition of our improved results, more than 92% of our aggregate first, second and third lien debt holders have agreed to a plan providing for additional cash investments and conversion of a significant amount of their debt into a combination of equity and equity-like instruments.

We're also soliciting additional support for remaining holders. When completed, we believe this initiative will result in a balance sheet optimized to allow the company to properly invest more in our business and our people.

In order to minimize disruption to our operations, expedite the restructuring, as well as minimize any potential unfavorable income tax consequences in partnership with our financial stakeholders, we may determine that it'll be best for us to complete the restructuring process under the protection of the bankruptcy court through a pre-packaged proceeding.

We expect to make that decision within the next 4 to 6 weeks, and if we confirm that it is the best path, we believe that such a process, governed by the court, will allow our restructuring to be completed within 45 to 60 days after filing.

In total, we expect the process to be complete during the third quarter of fiscal 2017. In either event, we expect to continue to receive product, deliver all shipments, make payments on time and most importantly, take care of our employees. Because this restructuring is a purely strategic, long-term choice for us leveraging our recent improved performance, insuring our continuity of operations is a critical factor in determining our ultimate path.

Regardless of the path we take, restructuring our debt will help sustain the positive performance we achieved this quarter, reducing our cash interest expense by more than 70%, and will move us even closer to becoming the true agile, customer-centric company we envisioned when we embarked on this path in May of 2015.

Over the last few years, our vendors and customers have overwhelmingly believed in our plan to restructure A.M. Castle and have supported us throughout our transformation. Following our restructuring, we expect to be financially stronger and better positioned to deliver on our promise of growing our partnerships with our vendors and improving our service to our customers, and we thank them for making this possible.

As we look toward investing back into our business and supporting our employees, we continue our commitment to making enhancements that reinforce the culture of innovation and entrepreneurialism.

We sincerely appreciate the cooperation and commitment by our greatest asset, our employees, as we continue with them on the route forward to growth and success. Together, we are building the future of A.M. Castle, and we are excited of what that future holds.

Let me summarize. Today's announcement marks a critical, definitive next step in our journey to return our company to the forefront of our industry. We will emerge from our debt restructuring stronger and more financially stable. We will continue serving our aerospace and industrial customers with the operational rigor we've exhibited in the last year, to drive profitability and business growth. Armed with a more robust balance sheet, we aim to increase our share of business among existing customers and secure new business that our prior financial conditions may have dampened.

Now let me turn to our performance in the fourth quarter of 2016. We experienced the expected year-end seasonal decrease in volumes as sales tons per day decreased by 7% from the previous quarter, which was the primary contributor to the 9% decrease in net sales from the third quarter 2016. MSCI data indicated that metal service industry volumes declined in the fourth quarter about 6% from the third quarter of 2016. This, combined with unfavorable product mix, resulted in a sequential decrease in fourth quarter sales.

These changes do not include the impact of sales made in the fourth quarter of a substantial amount of aged and excess inventory at an overall negative gross margin, which was done as part of our continuing effort to improve the management of our inventory.

These sales and the related cost of materials significantly impacted our reported gross material margin for the quarter. But excluding their impact, our adjusted gross material margins are continuing to align with Castle's traditional margins in more stable markets.

We believe this is an achievement given the historically low demand and commodity price environment.

In addition to our 10-K and fourth quarter results, we announced preliminary select estimated results for the first quarter of 2017. The impact of our lower cost structure and improved operations are reflected in these results, specifically the increase in tons sold per day and in our adjusted gross material margin, excluding the impact of the Houston and Edmonton locations, which we closed during last year's first quarter. These results also indicate the first quarter of 2017 will be the first in over 3 years in which we achieved positive adjusted EBITDA from continuing operations.

Finally, let me comment briefly on the outlook for the markets we serve. We expect the aerospace markets to remain stable and for business to improve, particularly where we have long-term contracts with subcontractors who support platforms that are anticipated to grow.

Demand in the industrial market has improved. However, we still do not see significant growth at our larger contractual customers in the short term. Given our lower cost structure, we do see the opportunity to grow our market share in transactional business as we did in 2016, that's still accretive net margins.

With that, I'll hand the call over to Pat Anderson, our Chief Financial Officer.

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Patrick R. Anderson, A.M. Castle & Co. - CFO, EVP and Treasurer [4]

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Thanks, Steve. Before I get into our financial results for the fourth quarter of 2016, the preliminary results for the first quarter of 2017, I'd like to remind our audience that on December 6, we were notified by the New York Stock Exchange that it had determined to commence proceedings to delist the company's common stock as a result of the company's failure to comply with continued listing standards.

The company's Board of Directors determined that it was in the best interest of the company and its shareholders to begin trading on the OTCQB venture market, where the company's stock began trading on December 7, under the symbol CASL. Also, let me remind call participants that the February 2016 sale of assets and the subsequent closure of our Houston and Edmonton facilities, which primarily service the energy market, was not accounted for as a discontinued operation per the authoritative accounting literature. Accordingly, the following reported financial results include the impact of those pieces of our business for all of 2015 and approximately half of the first quarter of 2016.

With the sale of substantially all the inventory and subsequent closure of these facilities, going forward, the company eliminated the operating losses generated by these branches in prior periods and the related negative impact on gross material margin.

Net sales attributed to the Houston and Edmonton operations were $33 million in Q1 2016, which includes the $27.1 million sale of inventory of those facilities and the $9.1 million in Q4 of 2015.

The operating expenses of the Houston and Edmonton facilities were $3.5 million in Q1 2016 and $4.6 million in Q4 2015.

The following discussion of the financial results for the fourth quarter of 2016 and the prior comparative quarters includes, among other things, restructuring gains and losses, noncash charges associated with the impairment of intangible assets associated with our energy business and the write-down of certain energy-specific inventory, cost related to our debt restructuring activities and, as it relates to the first quarter of 2016, the $27.1 million sale of all the inventory at our Houston and Edmonton facilities.

In certain circumstances, management feels it's useful to provide financial results which have been adjusted for the financial impact of these significant events resulting in non-GAAP financial measures such as EBITDA and adjusted EBITDA, gross material margin and adjusted gross material margin, operating expenses excluding restructuring charges, and adjusted non-GAAP net loss.

Please refer to the earnings release posted earlier today for a full reconciliation of any non-GAAP items referred to in the following discussion.

Now for Q4 2016 results, net sales in Q4 2016 were $114 million, a decrease of $19 million or 14.2% compared to Q4 2015. The decrease in net sales was mainly attributable to a 5.6% decrease in tons sold per day compared to the same period last year, coupled with a 6.1% decrease in average selling prices.

Net sales in Q4 2016 decreased by $11 million or 8.9% compared to Q3 2016. Excluding the tons sold from our Houston and Edmonton facilities in Q4 2015, tons sold per day in Q4 2016 increased by approximately 1% compared to Q4 of last year, but decreased by approximately 8% compared to Q3 2016.

Gross material margin in Q4 2016 was positive 14.3% compared to a negative 27.8% in Q4 2015 and positive 26% in Q3 2016. The gross material margin in Q4 2016 was significantly impacted by sales of a substantial amount of aged and excess inventory at an overall negative gross margin. These sales were made as part of the company's continuing effort to improve the management of its inventory.

The adjusted gross material margin in Q4 2016, which excludes the impact of these sales, was 25.1%. The negative gross material margin in Q4 2015 was the result of a $61 million noncash charge for the write-down of inventory and purchase commitments at the Houston and Edmonton facilities as well as a $3 million write-down of inventory related to restructuring activities.

Excluding those charges, adjusted gross material margin in Q4 2015 was positive 21.1%. The adjusted gross material margin in Q3 2016 was 25.3%, which excludes the favorable impact and gross material margin of a reduction to the liability for purchase commitments associated with the Houston and Edmonton facilities.

The year-over-year improvement in adjusted gross material margin in Q4 2016 was due largely to the strategic decisions we have made to restructure our branch network costs, better align our sales force with customer needs, increase focus on transactional business, and improved inventory management.

Operating expenses, excluding restructuring income of $1.7 million, were $41 million in Q4 2016, including the cost to handle the aged and excess inventory; compared to $47 million in Q4 2015, which excludes restructuring income of $8.6 million and a $34 million noncash charge for impairment of energy-related assets.

Operating expenses were $40 million in Q3 2016, excluding restructuring expense of $0.9 million.

Interest expense was approximately $8 million in Q4 2016 compared to $10 million in Q4 2015, with the decrease primarily attributable to lower outstanding borrowings. The company recognized an unrealized gain of $3 million in Q4 2016 on the embedded conversion option associated with the convertible notes issued in the convertible notes exchange that occurred in the first half of 2016.

In connection with its entry into its new term loan credit facilities and the related termination of its former revolving credit agreement, the company expensed the remaining unamortized revolving credit agreement issue costs in Q4 2016, which are included in debt restructuring loss.

Other expense comprised mostly of foreign currency transaction losses from the company's foreign operations was $3 million in Q4 2016, $2 million in Q4 2015 and $6 million in Q3 2016. A majority of the foreign currency transaction losses are in intercompany loans, with the largest being in the United Kingdom and Canada.

The company recorded an income tax benefit of $3.6 million in Q4 2016, which resulted in an effective tax rate of 10.9% for the period. As a reminder, the company has a full valuation allowance recorded in most of the tax jurisdictions in which it operates.

The company reported an operating loss of $23 million in Q4 2016, which includes the $11.7 million negative gross margin from sales of aged and excess inventory.

Comparatively, the operating loss in Q4 2015 was $109 million, which included the $61 million write-down of inventory and purchase commitments of the Houston and Edmonton facilities, the $3 million inventory write-down related to restructuring activities, the $34 million impairment of intangible assets and restructuring income of $9 million.

Q4 2016 net loss from continuing operations was $30 million compared to $121 million in Q4 2015. Adjusted non-GAAP loss from continuing operations in Q4 2016 was $19 million compared to $29 million in the comparative prior year quarter and $21 million in Q3 2016.

Negative EBITDA from continuing operations in Q4 2016 was $22 million compared to negative EBITDA of $107 million in Q4 2015 and a negative $5 million of EBITDA in Q3 2016.

Finally, adjusted EBITDA from continuing operations of negative $11 million in Q4 2016, a negative $15 million and negative $8 million in Q4 2015 and Q3 2016, respectively.

Full year 2016 net sales were $533 million compared to net sales of $638 million in 2015. Loss from continuing operations in 2016 was $114 million or $3.93 per diluted share compared to a loss from continuing operations of $213 million or $9.04 per diluted share in 2015.

Adjusted non-GAAP loss from continuing operations was $84 million and $81 million in 2016 and 2015, respectively. The company reported negative EBITDA from continuing operations of $64 million in 2016 compared to negative EBITDA from continuing operations of $173 million in 2015. Adjusted negative EBITDA from continuing operations was $33 million and $41 million in 2016 and 2015, respectively.

Looking at the balance sheet and working capital items. Average day sales and inventory was 168 days for the full year 2016 compared to 202 days for the full year 2015. The decrease is primarily the result of the Houston and Edmonton inventory sale in Q1 2016 and improved inventory management initiatives taken by the company under its branch network strategy.

Overall, inventory decreased by $69 million during 2016. Average receivable days outstanding was relatively flat at 54 days for the full year 2016 and 53 days for 2015.

The operating activities of continuing operations had a cash flow use of $29 million during 2016 compared to a cash flow use of $33 million during 2015. A $4 million improvement in operating cash flow from continuing operations was mainly the result of cash flow from a significant reduction in inventory.

Capital expenditures in 2016 were $3 million. Total capital expenditures for 2017 are expected to range between $6 million and $7 million.

In December 2016, the company entered into new $112 million senior secured first lien term loan credit facilities to replace and repay amounts outstanding under the company's revolving credit facility, including cash collateralization of undrawn letters of credit and to provide access to additional working capital.

The term loan facilities consist of a $75 million initial term loan facility funded at closing and a $37 million delayed draw term loan facility.

Under the delayed draw facility, $24.5 million was available and borrowed by the company in December of 2016, and $12.5 million is expected to be available in June 2017 and thereafter.

The funding of the term loan facilities was subject to original issue discount in amount -- in an amount equal to 3% of the full principal amount of the term loan facilities.

The term loan facilities bear interest at a rate per annum equal to 11% and the outstanding principal amount of the term loan facilities will be due and payable in September 2018.

At times during the agreement as amended, the company will also be subject to certain financial covenants, including cash EBITDA targets, a minimum liquidity amount and a minimum working capital covenant. The company was in compliance with all covenants in the credit facilities agreement as of December 31, 2016.

Total debt outstanding, including the derivative liability for the embedded conversion feature of the company's convertible notes net of unamortized discounts and issuance costs, was $287 million at December 31, 2016, and $318 million at December 31, 2015.

Proceeds from the sale of the assets of TPI and the company's Kreher joint venture investment, which were used to pay down the company's debt as well as the exchange and conversion of the company's convertible debt, resulted in a $31 million or 10% decrease in the company's debt during 2016.

Now let me briefly comment on select preliminary first quarter 2017 results. The company expects to report first quarter 2017 net sales of approximately $135 million compared to $163.8 million in the first quarter 2016.

First quarter 2016 results reflect $33 million in sales from our Houston and Edmonton locations, which we closed in February last year.

We anticipate that gross material margin will be between 25.5% and 26% in the first quarter of 2017 compared to 18.4% in the first quarter of 2016. The gross material margin in the first quarter of 2016 reflects the company's $27.1 million sale of all its inventory at the Houston and Edmonton locations at 0 gross profit margin and a $0.5 million noncash inventory charge related to restructuring activities.

The company anticipates reporting a loss from continuing operations, which includes interest expense, in the first quarter of 2017. The company expects to report positive adjusted EBITDA from continuing operations in the first quarter of 2017, including positive adjusted EBITDA in each month of the quarter.

Now I'll hand the call back over to Steve for a few closing remarks.

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Steven W. Scheinkman, A.M. Castle & Co. - CEO, President and Director [5]

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Thanks, Pat. The financial restructuring we announced today builds on the operational and financial improvements we have made since May of 2015. With our operational turnaround complete, we can now take these decisive steps to address our balance sheet. We anticipate that Castle will become a stronger, more financially stable company, better able to serve our customers and continue to strengthen our relationship with our mill partners and our valued and talented employees. We believe with the continuous support of our stakeholders, Castle will have a bright future ahead of it.

With that, thank you for joining the call today.

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Operator [6]

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Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.