Novamerican Steel Inc. (NASDAQ: TONS, TONSW) (�Novamerican� or the
�Company�) today announced financial results for the third fiscal
quarter ended August 30, 2008. The consolidated financial
statements of Novamerican Steel Inc. and its subsidiaries are
included in the Quarterly Report on Form 10-Q for the quarter ended
August 30, 2008, filed October 10, 2008 with the Securities and
Exchange Commission. On November 15, 2007, the Company (the former
Symmetry Holdings Inc. (�Symmetry�)) completed the acquisition of
Novamerican Steel Inc., a Canadian corporation, and its
subsidiaries (�Acquired Company�). 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.
To enhance the consistency and relevancy of this release, we have
compared the 2008 third fiscal quarter results of operations to the
pro forma 2007 third fiscal quarter. 2008 Third Fiscal Quarter
Highlights � � Net sales increased $39.4 million, or 20.6 percent,
to $230.9 million, 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 or 19.1
percent. � � Total tons increased by 8.0 percent to 365,822 tons as
compared to 338,738 tons in the pro forma third fiscal quarter of
2007. � � Direct sales tons decreased by 2.0 percent to 190,255, or
52.0 percent of total tons, versus 194,074 tons, or 57.3 percent of
total tons, in the pro forma third fiscal quarter of 2007. � �
Gross margin increased 30.7 percent to $47.7 million, or 20.7
percent of net sales, as compared to $36.5 million, or 19.0 percent
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 or 20.8 percent of net sales. � �
Operating expenses increased $14.0 million, or 53.8 percent, to
$40.0 million, 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 the continued organizational
changes associated with our transformation into a Decalogue�
company. These costs consist primarily of severance and related
costs for terminated employees. � � Adjusted EBITDA increased by
$2.4 million, or 15.6 percent, to $17.8 million, 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). Our Transformation We have
significantly progressed our project plans for implementing our
operating methodology, The Decalogue�, at the Company. This
transformation allows us to operate as one system versus 21
separate facilities, and will (a) enable the system to operate at
much faster cycle times, enabling us to maximize the throughput
from the sale of our enhanced capacity, (b) experience a permanent
cash inventory reduction of at least $60.0 million primarily from
this faster replenishment and operating cycle, and (c) implement
organizational changes, especially in our replenishment,
processing, distribution and sales processes. We have defined our
future business model based on the predictability, reliability and
speed of our material flow. We have reached agreement with our key
suppliers for operating on an actual, usage-based replenishment
model with reliable, expedient delivery of materials. We have
calculated our inventory buffers based on statistical methods. To
date this has resulted in the generation of $26.3 million of cash
from inventory reductions. We will permanently liquidate all
remaining inventory that does not fit in our replenishment model.
We expect that these changes will 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. We have designed our organization
systemically, with replenishment representing the strategically
defined internal constraint of our system. This will 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, we have hired
professionals in the areas of Statistical Studies, Quality,
Material Science, New Product Development, Marketing, Logistics,
Safety, Process Engineering, Synchronized Manufacturing, Human
Development, Information Services and Sales, among others, of which
over 30 have post-graduate degrees, including 7 PhDs. We are
becoming a Decalogue� company, that is, a knowledge-based
organization. We expect total restructuring charges for this
organizational redesign of approximately $14.0 million, primarily
for the severance and related costs for terminated employees. We
recorded a restructuring charge of $4.0 million and $8.9 million
for the three and nine months ended August 30, 2008, respectively.
We made restructuring cash payments of $1.9 million and $2.9
million, 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. We 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. We have defined new, throughput-based, operational
measurements companywide that measure the speed and reliability of
our cash generation on a daily basis. Liquidity and Capital
Resources Mr. De Gasperis commented, �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.
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, our 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 U.S. steel service
center hot-rolled inventories rose sharply in August to
approximately 3.3 months on hand coming off the slowest
non-December shipment month since November 2007. We believe that
underlying consumption in the U.S. and Canada has continued to
weaken from the already sluggish pace of the past year, with a
particularly weak automotive outlook. In the U.S., the automotive,
residential construction and related sectors are in a
recessionary-like environment and have been over the last 18
months. Canadian manufacturing, including automotive, has also
experienced shrinkage. The strength of the Canadian dollar versus
the U.S. dollar has continued placing pressure on our Canadian
customers that export into the U.S. Globally, demand and pricing in
markets outside of North America has weakened and, along with some
strengthening in the U.S. currency, has increased imports for our
market as demonstrated in recent month to month comparisons;
imports, however, remain below year ago levels. The combination of
higher imports into both the U.S. and Canada from other
jurisdictions and relatively higher service center inventory levels
have increased North American supply and, when combined with lower
raw material costs for our suppliers, particularly much lower scrap
prices in August, has resulted, in September, in the first sign of
lower 2008 steel prices from steel mills. Flat rolled carbon steel
sheet prices continued their upward trend into July 2008, although
price gains in July were more disparate among the steel mills and
were relatively weaker than prior increases during this upward
pricing cycle. North American steel suppliers had pushed prices for
hot rolled coil to about $1,100 per ton, with world spot export
market prices as high as about $1,175 per ton. In September, there
was a reduction from these historically high levels with flat
rolled carbon steel sheet prices decreasing to about $1,000 per ton
and with some smaller mills offering even more aggressive pricing.
While mill costs remain high, easing scrap and freight costs will
facilitate these decreases. We believe increasing supply and higher
inventory levels should continue resulting in softening prices, at
least through the end of 2008. The outlook for the U.S. dollar,
freight rates and other world steel sheet markets indicate that
import pressures are likely to increase, providing for potentially
lower prices in the near term. We experienced price increases
peaking in July 2008, mainly in our structural tubing, steel sheet
and distribution channels. Although our ability to raise prices
depends on multiple market factors, we have been successfully
passing along price increases of steel on a timely basis through
July but have begun experiencing declining prices through August.
Our profitability typically expands during inclining price cycles
and contracts during declining price cycles. We experienced a
softening in demand in our structural tubing and distributed
products toward the end of the third fiscal quarter. 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. We expect our volumes in the fourth fiscal
quarter of 2008 to be lower than the third fiscal quarter of 2008,
including continued softening demand from our distribution and
structural tubing customers. Our automotive business should be flat
in the fourth fiscal quarter 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, our 2008 fourth
fiscal quarter is expected to result in lower revenue, lower
operating expenses and lower operating profit when compared to our
2008 third fiscal quarter. Cash flows from operations, however,
will remain strong, resulting primarily from higher sources of cash
from the liquidation of excess inventories and overall improved
inventory cycle times. We expect 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. We spent
$8.2 million in capital expenditures in the first three fiscal
quarters of 2008, including $6.5 million for the Morrisville,
Pennsylvania structural tubing facility expansion. We expect
capital expenditures of approximately $11.0 million in fiscal 2008,
with an additional $2.0 million in the fiscal fourth quarter for
the completion of the expansion at our Morrisville, Pennsylvania
structural tubing facility. We expect cash restructuring payments
of 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. Mr. 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.�
NOTE ON FORWARD-LOOKING STATEMENTS: This news release and related
discussions may contain forward-looking statements about such
matters as: expected future or targeted operational and financial
performance; growth rates for, future prices and sales of, and
demand for our products and our customers� products; changes in
production capacity in our operations and our customers�
operations; changes in costs of materials and production;
productivity, business process and operational initiatives, and
their impact on us; our position in markets we serve; employment
and contributions of key personnel; employee relations and
collective bargaining agreements covering our operations; tax
rates; capital expenditures and their impact on us; industry market
conditions and the impact thereof; interest rate management
activities; currency rate management activities; deleveraging
activities; realignment, strategic alliance, raw material and
supply chain, technology development and collaboration, investment,
acquisition, venture, consulting, operational, tax, financial and
capital projects; legal proceedings, contingencies, and
environmental compliance; potential offerings, sales and other
actions regarding debt or equity securities of us or our
subsidiaries; and future asset sales, costs, working capital,
revenues, business opportunities, debt levels, cash flows, cost
savings and reductions, margins, earnings and growth. When used in
this document, the words �believe,� �expect,� �anticipate,�
�estimate,� �project,� �plan,� �should,� �intend,� �may,� �will,�
�would,� �potential� and similar expressions are intended to
identify forward-looking statements. Forward-looking statements are
subject to risks and uncertainties that could cause actual results
to differ materially, including those described in our SEC filings.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES NOVAMERICAN STEEL
INC. AND SUBSIDIARIES The following tables set forth a
reconciliation of certain non-GAAP financial measures to the
comparable GAAP financial measures. Such GAAP measures are derived
from the consolidated financial statements of Novamerican Steel
Inc. and subsidiaries included in the quarterly report on Form 10-Q
for the quarter ended August 30, 2008 filed by Novamerican, which
should be considered in connection with any consideration of such
non-GAAP measures. Net Debt Reconciliation (Dollars in Millions)
(Unaudited) � August 30, 2008 November 24, 2007 ABL credit facility
$ 57.6 $ 75.6 Senior secured notes � 315.0 � 315.0 Long-term debt $
372.6 $ 390.6 � Less: Cash and cash equivalents � 15.3 � 19.6 Net
debt $ 357.3 $ 371.0 NOTE ON NET DEBT RECONCILIATION: Net debt is a
non-GAAP financial measure that Novamerican calculates according to
the schedule above, using GAAP amounts from the consolidated
financial statements. Novamerican believes that net debt is
generally accepted as providing useful information regarding a
company�s indebtedness and that net debt provides meaningful
information to investors to assist them to analyze leverage.
Management uses net debt as well as other financial measures in
connection with its decision making activities. Net debt should not
be considered in isolation or as a substitute for total debt or
total debt and other long term obligations calculated in accordance
with GAAP. Novamerican�s method for calculating net debt may not be
comparable to methods used by other companies. RECONCILIATION OF
NON-GAAP FINANCIAL MEASURES NOVAMERICAN STEEL INC. AND SUBSIDIARIES
� � � � � � Adjusted EBITDA Reconciliation (Dollars in Millions)
(Unaudited) � Q1 2008 Q2 2008 Q3 2008 2008 YTD Pro Forma Q3 2007
Pro Forma 2007 YTD Notes Net loss, as reported $ (7.9 ) $ (4.4 ) $
(1.8 ) $ (14.1 ) $ (0.3 ) $ (1.9 ) � Add back: � Interest expense
10.6 11.5 10.7 32.8 10.9 32.7 Depreciation and amortization 5.2 6.0
5.1 16.3 5.0 14.7 (1) Purchase price allocation to inventory 6.7 -
6.7 - - (2) Restructuring costs - 4.9 4.0 8.9 - - Income taxes (6.5
) (1.7 ) (0.2 ) (8.4 ) (0.1 ) (0.9 ) Adjusted EBITDA $ 8.1 $ 16.3 $
17.8 $ 42.2 $ 15.4 $ 44.6 Note 1: Depreciation and amortization
excludes the amortization of deferred financing charges which are
included in interest expense. Note 2: Purchase price allocation to
inventory is included in cost of sales in the consolidated
financial statements. NOTE ON ADJUSTED EBITDA RECONCILIATION:
Adjusted EBITDA is a non-GAAP financial measure that Novamerican
currently calculates according to the schedule above, using GAAP
amounts from the consolidated financial statements. Novamerican
believes that such non-GAAP financial measures are generally
accepted as providing useful information regarding a company�s
credit facilities and certain financial-based covenants and,
accordingly, its ability to incur debt and maintain adequate
liquidity. Such non-GAAP financial measures should not be
considered in isolation or as a substitute for net income (loss),
cash flows from continuing operations or other consolidated income
or cash flow data prepared in accordance with GAAP. Novamerican�s
method for calculating such non-GAAP financial measures may not be
comparable to methods used by other companies and is not the same
as the method for calculating EBITDA under its senior secured
revolving credit facility or its senior secured notes.
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