Open / Close Advertisement

Novamerican Steel Reports Third Quarter 2008 Results

10/14/2008 - Novamerican Steel reports net sales of $230.9 million for its third fiscal quarter, a 20.6% increase as compared to its pro forma third fiscal quarter of 2007.

Novamerican Steel Inc. announced net sales of $230.9 million for the third fiscal quarter ended August 30, 2008. This represents a $39.4 million (20.6%) increase as compared to $191.5 million in the pro forma third fiscal quarter of 2007. Excluding the impact of exchange rates, net sales would have increased by $36.6 million (19.1%).
 

On November 15, 2007, the company (the former Symmetry Holdings Inc.) completed the acquisition of Novamerican Steel Inc., a Canadian corporation, and its subsidiaries.
 
Subsequent to the acquisition, Symmetry changed its name to Novamerican Steel Inc. and changed its fiscal year end from December 31 to the last Saturday of November.
 
Here, the 2008 third fiscal quarter results of operations are compared to the pro forma 2007 third fiscal quarter.
Total tons of 365,822 tons reflects an 8.0% increase as compared to 338,738 tons in the pro forma third fiscal quarter of 2007.

 
Direct sales tons (190,255), or 52.0% of total tons reflect a 2.0% decrease, versus 194,074 tons, or 57.3% of total tons, in the pro forma third fiscal quarter of 2007.
 
Gross margin of $47.7 million (20.7% of net sales) reflects a 30.7% increase as compared to $36.5 million (19.0% of net sales) in the pro forma third fiscal quarter of 2007. The impact of exchange rates was an increase of $0.2 million. Excluding the impact of exchange rates, gross margin would have increased by $11.0 million to $47.5 million (20.8% of net sales).
 
Operating expenses of $40.0 million reflect a $14.0 million (53.8%) increase as compared to $26.0 million in the pro forma third fiscal quarter of 2007. Operating expenses included a restructuring charge of $4.0 million as a result of continued organizational changes, consisting primarily of severance and related costs for terminated employees.
 
Adjusted EBITDA of $17.8 million reflects a $2.4-million (15.6%) increase as compared to $15.4 million in the pro forma third fiscal quarter of 2007.
 
Long-term debt at August 30, 2008 was $372.6 million and cash and cash equivalents were $15.3 million (or a net debt of $357.3 million). Long-term debt at October 8, 2008 was $352.6 million and cash and cash equivalents were $18.9 million (or a net debt of approximately $333.7 million).
 
Operations Transformation—Regarding its transformation to its new operating methodology, the Decalogue™, the company said that it had made significant progress in its project plans. The transformation will allow the company to operate as one system versus 21 separate facilities, which will help the facilities to achieve much faster cycle times as well as maximized throughput with its enhanced capacity. The company also expects to achieve a permanent cash inventory reduction of at least $60.0 million primarily from this faster replenishment and operating cycle, and anticipates implementing organizational changes, especially in its replenishment, processing, distribution and sales processes.
 
The company has based its future business model on the predictability, reliability and speed of its material flow. It has reached agreement with key suppliers for operating on an actual, usage-based replenishment model with reliable, expedient delivery of materials, and inventory buffers have been calculated based on statistical methods. To date this has resulted in the generation of $26.3 million of cash from inventory reductions.
 
The company said that it will permanently liquidate any remaining inventory that does not fit into the new replenishment model. These changes are expected to result in a source of cash of at least $60 million and provide for the continued operation of a model based on increased and accelerated cash generation and return on capital investments.
 
The company has redesigned its organization systemically, with replenishment representing the strategically defined internal constraint. This is to result in the reduction of approximately 200 employees, primarily in the areas of administration and general management, purchasing, inside sales and accounting, offset by the addition of approximately 50 new employees of substantially different competencies, educational backgrounds and cultural diversities.

To date, the company said that it has hired professionals in a number of areas, of which over 30 have post-graduate degrees, including 7 PhDs, as it continues to evolve as a Decalogue company, that is, a knowledge-based organization.
 
The company is anticipating restructuring charges for this organizational redesign to total approximately $14.0 million, primarily for the severance and related costs for terminated employees. Restructuring charges of $4.0 million and $8.9 million have been recorded for the three and nine months ended August 30, 2008, respectively, and restructuring cash payments of $1.9 million and $2.9 million were made for the three and nine months ended August 30, 2008, respectively. These organizational changes and the closure of the Cambridge facility will result in approximately $10.0 million, net, in annual operating expense reductions, with that resulting run rate realized by the end of 2008.
 
The company also incurred approximately $2.0 million in the 2008 third fiscal quarter for operating expenses associated with hiring, training and development required for these changes and certain other redundant organizational expenses resulting from increasing certain resources in advance of other reductions. The company has also defined new, throughput-based, operational measurements companywide that help to measure the speed and reliability of its cash generation on a daily basis.
 
Liquidity and Capital Resources— “Our business strategy implementation will continue to accelerate, placing the highest priority on reducing variation throughout our system and accelerating the amount and speed of cash generated every day,” commented De Gasperis. “These actions ensure the stability of our company and enhance an already strong liquidity position as we have paid down over $20 million in additional debt obligations since the end of the third quarter.”
 
Long-term debt at August 30, 2008 was $372.6 million with $15.3 million of cash and cash equivalents (or a net debt of approximately $357.3 million). On November 24, 2007, the company’s long-term debt was approximately $390.6 million with $19.6 million of cash and cash equivalents (or a net debt of approximately $371.0 million).
 
As of August 30, 2008, the aggregate borrowing base was $152.7 million (including the $15.0 million availability block), of which $1.9 million was utilized for letter of credit obligations and approximately $57.6 million was outstanding under the ABL Credit Facility. At August 30, 2008, approximately $93.1 million was available for future borrowings.
 
Outlook—The company noted that it had experienced a softening in demand in its structural tubing and distributed products toward the end of the third fiscal quarter. It noted that continued high gasoline prices, tighter consumer credit conditions and overall broader economic weakness have weakened an already low demand outlook for steel sheet and tubular products used in large truck and SUV vehicles.
 
The company expects its volumes in the fourth fiscal quarter of 2008 to be lower than the third fiscal quarter of 2008, including continued softening demand from its distribution and structural tubing customers. It expects its automotive business to be flat when compared to the third fiscal quarter, despite the return from extended summer shutdowns, with a negative outlook based on further weakening of demand because of tighter credit conditions for auto buyers. Overall, the company expects its 2008 fourth fiscal quarter to result in lower revenue, lower operating expenses and lower operating profit when compared to the third fiscal quarter. Cash flows from operations, however, is expected to remain strong, resulting primarily from higher sources of cash from the liquidation of excess inventories and overall improved inventory cycle times.
 
The company expects cash interest payments to be approximately $41.5 million in fiscal 2008 with approximately $19.5 million expected in the fourth fiscal quarter of 2008. It spent $8.2 million in capital expenditures in the first three fiscal quarters of 2008, including $6.5 million for the Morrisville, Pa., structural tubing facility expansion. Capital expenditures are expected to total approximately $11.0 million in fiscal 2008, with an additional $2.0 million in the fiscal fourth quarter for completion of expansion at the Morrisville facility. Cash restructuring payments are expected to be approximately $6.0 million in fiscal 2008, with $3.0 million expected in the fiscal fourth quarter.
 
Depreciation, amortization and the purchase price allocation to inventory for fiscal 2008 are expected to be approximately $26.7 million. This includes routine depreciation of $9.7 million and $2.5 million, $8.0 million and $6.7 million associated with the amortization of the purchase price allocation for plant and equipment, intangibles (other than goodwill) and inventory, respectively.
 
De Gasperis commented, “We remain cautious about the overall economy but look forward to the positive cash flow in the fourth quarter resulting from our improved cycle times and resulting permanent reductions in inventory levels. This will have the most meaningful impact for Novamerican, not just in terms of strong liquidity but also in terms of enabling a much faster and more reliable delivery system.”