GBC’s Guidance Implies Better Performance in Second Half of 2014

Global Brass and Copper (GBC) reported second-quarter results that were roughly in line with our forecast and consensus expectations for volume and adjusted sales and slightly below expectations for earnings. Volume decreased 3%, to 135 million pounds (William Blair estimate: 135 million pounds). Adjusted sales (adjusted to eliminate the impact of the movement in metal prices) decreased 3%, to $138 million (William Blair estimate: $140 million). Adjusted EBITDA decreased 18%, to $30 million (consensus: $31 million; William Blair estimate $31 million). Adjusted EPS were $0.49, below the consensus estimate of $0.56 (William Blair estimate: $0.55). A higher-than-expected tax rate reduced adjusted EPS by about $0.01.

Volume was lower in each of the company’s three segments (Olin Brass, Chase Brass, and AJ Oster) because of inventory correction, particularly in the building/housing endmarket, and softness in demand in the electronics/electrical components, munitions, and building/housing end-markets. The company was once again plagued by operational issues at the flagship Olin Brass facility in East Alton, Illinois. There was an unexpected outage resulting from an explosion on a casting deck at the facility, which limited production material flow through the facility in the latter part of the second quarter. Additional equipment reliability issues negatively affected productivity and cost performance in the quarter.

Management is confident that operations will improve in the second half of the year. The company has launched a comprehensive total preventative maintenance program designed to boost operating performance. For example, the program has helped identify that complexities of the current product mix in mill products has negatively affected costs and productivity. The company has undertaken steps to improve the ability to meet customer demands and improve efficiencies in the production of complex products.

Management has instituted leadership, organizational, and structural changes at Olin Brass to drive corrective actions as well. Turning to specific end-markets for the second half of 2014, management anticipates improvement in the automotive and building/housing end-markets, easier comparisons in the electronics/electrical components end-market, and softness in the munitions endmarket. The coinage end-market is expected to remain steady. Improvements across the end-market environment combined with better operational performance gives the company confidence in meeting the 2014 guidance, which, for the second half of 2014, calls for 20% year-over-year adjusted EBITDA growth and 7% sequential adjusted EBITDA growth.

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