TONSW Novamerican Steel (MM)

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.