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Novamerican Steel Reports 1st Quarter Results

Novamerican Steel Inc. reported financial results for the first fiscal quarter ended February 23, 2008. Novamerican—the former Symmetry Holdings Inc.—assumed its current name after its Nov. 15, 2007 acquisition of the former Novamerican Steel Inc. and its subsidiaries, a Canadian corporation. At that time, the company also changed its fiscal year from December 31 to the last Saturday of November.

The consolidated financial statements for the three months ended March 31, 2007, include only the financial results of Symmetry. Consolidated balance sheet as of November 24, 2007 and consolidated financial statements for the three months ended February 23, 2008 include the financial position and results of Novamerican and its wholly-owned subsidiaries.

In its first quarter, the company reported net sales of $195.6 million, and $8.4 million (4.5%) increase compared to net sales of $187.2 million in the first fiscal quarter of 2007. Excluding the impact of exchange rates, net sales would have decreased by $8.0 million (- 4.3%).

Total tons, 372,200 tons, reflected a 6.2% increase compared to 350,600 tons in the first fiscal quarter of 2007. Direct sales tons decreased slightly to 202,600 (54.4% of total tons) vs. 203,400 tons (58.0% of total tons) in the first fiscal quarter of 2007.

Gross margin was $27.7 million (14.2% of net sales), a 20.5% decrease compared to a gross margin of $34.9 million (18.6% of net sales) in the first fiscal quarter of 2007. Cost of sales included the remaining $6.7 million of purchase price that was allocated to certain inventories, and the impact of exchange rates was an increase of $2.2 million. Excluding the impact of exchange rates and the purchase-price allocation to inventory, gross margin would have decreased by $2.7 million to $32.2 million (18% of net sales).

Novamerican reported first quarter operating expenses of $31.6 million, a 10.2% ($2.9 million) increase compared to operating expanses of $28.7 million in the first fiscal quarter of 2007. Operating expenses included $2.7 million from higher depreciation and amortization associated with the purchase price allocation for fixed assets and other intangible assets, and the impact of exchange rates on operating expenses was an increase of $2.6 million. Excluding the impact of exchange rates and higher depreciation and amortization, operating expenses would have decreased $2.4 million to $26.3 million.

Adjusted EBITDA of $8.6 million reflects a 23.2% ($2.6 million) decrease compared to adjusted EBITDA of $11.2 million in the first fiscal quarter of 2007.

Management Comments—“Our first fiscal quarter of 2008 started off with a very slow first two months,” said Novamerican CEO Corrado De Gasperis, “particularly from weaker Canadian manufacturing and automotive markets. February represented the strongest month in the quarter, with higher shipping rates for processing and structural tube and higher average selling prices.”

Long-term debt at February 23, 2008 was $373.1 million and cash and cash equivalents were $18.6 million (or a net debt of approximately $354.5 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 February 23, 2008, the aggregate borrowing base was $151.8 million (including the $15.0 million availability block), of which $1.0 million was utilized for letter of credit obligations and approximately $58.1 million was outstanding under the ABL Credit Facility. At February 23, 2008, approximately $92.7 million was available for future borrowings.

“Our business strategies place the highest priority on accelerating the amount and speed of cash generated every day,” commented De Gasperis. “We expect cash flow from operations to be positively impacted by our plans for implementing our operating methodology, the DecalogueTM , at Novamerican, effectively operating it as one system versus 22 separate facilities. During the first fiscal quarter, we completed the training of over 60 of our operating managers in the Decalogue methodology, planned and redesigned our organization and realigned responsibilities across the one system design, and scheduled the specific projects associated with this transformation, including how we replenish our processing, distribution and manufacturing network and the closure of our Cambridge, Ont., processing facility. We incurred approximately $0.7 million in the 2008 first fiscal quarter for operating expenses for training and development associated with this effort.”

The company said it has finalized, scheduled and commenced project plans for implementing its operating methodology, effectively operating it as one system versus 22 separate facilities. During 2008, the company plans to (a) enable the system to operate at much faster cycle times, enabling practical capacity of approximately 2.5 million tons per annum and maximizing the throughput from the sale of such capacity, (b) experience a permanent reduction of inventory of approximately $50.0 million primarily from this faster replenishment and operating cycle, and (c) implement organizational changes, especially in our replenishment, processing and distribution processes. The changes include closure of the company’s Cambridge, Ont., processing facility as that facility’s activities are consolidated with the company’s Stoney Creek processing center located in Hamilton, Ont. These organizational changes and the closing 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 noted that it had incurred approximately $0.7 million in the first fiscal quarter for operating expenses associated with training and development required for these changes, and estimates approximately $4.5 million in cash exit costs associated with the organizational changes to be incurred over the last three quarters of fiscal 2008. The plan also includes increasing resources in certain areas such as replenishment, production scheduling, statistical process control, and human resources.

The company also expects cash interest payments to be approximately $40.0 million in fiscal 2008 with approximately $19.5 million paid in the 2008 second fiscal quarter. Capital expenditures of $1.8 million were incurred in the first fiscal quarter of 2008, substantially all for the Morrisville, Pa., structural tubing facility expansion. Capital expenditures of approximately $7.5 million are expected for fiscal 2008, with $3.0 million for maintenance capital and $4.5 million for the completion of the Morrisville tubing facility expansion.

“Although the first two months of this year started slow, our cash flow has been positive,” commented De Gasperis. “We remain cautious about the overall economy but look forward to the positive cash flow in the third and fourth quarters resulting from our improved cycle times and resulting lower 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 that will result in higher asset turnover and utilization.”