Description

Metals USA is a classic roll up story (53 acquisitions, got to $2bn in revs in 2000) that took on too much debt, mismanaged, and was hit with weak economy (1997-2000 136% revs growth, 188% EBITDA growth). Company emerged from Chapter 11 in November 2002, converted unsecured debt at .525 on the dollar ($365mm) priced at $9.50 a share. In Feb 2003, board brought in Lorcenco Goncalves, from California Steel (private company). Lorenco took over CEO position in 1998 with EBITDA $40mm and in 2002 when he left had EBITDA to $120mm. In addition, when he took over there were 17 accidents a month, when he left there had not been an accident in 454 days (major cost and morale savings). He also implemented internal systems that were successful in lowering costs (major ERP system). He has brought the guy who implemented these systems with him to Metals USA.


New systems and focus should allow mgt to work down WC over time. Industry average of WC as % of Revenue is 20%, MLT is at 30% currently. If MLT can work this down (closest peer comps RS, RT, MLT) 24% would generate $2.66 per share in CF, simply by reducing WC. Net Net Working Capital is $8.99 a share (CA-TL), Working capital is $13.32 per share. CAPEX will be between $12-14mm this year and very close to that next year. Share count is 20,200,000 (NOT including 3.55mm shares in wts at $18.37 strike price).

Targeting inventory turns going forward between 3-4x. Management believes they are in good shape because inventories have been appreciating. Last quarter MLT generated $48mm ($2.37 per share) in CFO mainly from reducing inventories.

Plus’s
Less than 50% of TB (if include PP&E at $105mm, but carried on b-sheet $6mm Fresh start accting)
About 55% of WC and 75% of NNWC
GAAP profitable and 4.5x EV/CFO
$900mm in revs, 6-7% normalized EBITDA=EBIT margin
Favorable industry trends
New focused mgt w/ track record of success and good corp. governance
Attractive CF (CFO $46mm- CAPEX $13mm= $33mm/20.2 shares)
Not a steel manufacturer, value added processor Cost plus model
No coverage, yet
Hidden Asset $100mm in PP&E (off b-sheet) $5 +/- per share
Liquidity: $113mm on revolver, paying down debt, margins expanding
EBITDA = +/- EBIT (very little depreciation because PP&E is carried $6mm on b-sheet)
Generated 35% or 22% of the market cap or EV in CFO last quarter.
CEO has 300,000 shares with avg strike of $9.40 a share.

Negative’s
High Fixed costs
Early cycle
Unproven
(I Have not had opportunity to speak with mgt, called for the last 10 days:
i have listened to their presentation and PPT from late Sept which was very helpfuL: in presentation: gave targeted margins in EBITDA but, really no current D&A so they are EBIT margins.)


According to recent presentation CEO set out on following principles:

“metals USA behave as a single focused company”
a) Employess: “establish clear priorities”
b) Management reporting: “simple, relevant, and timely”
1) sell more to existing customers
2) Sell more value added products to the customer base
3) Get new customers

Become Honorable Buyers from suppliers (suppliers now shareholders, were pissed off lost a lot of money) At first suppliers giving 10 days COD now(8 months later) 30 day terms and getting best deals in US now
many times MLT is just as important to customers as customers are to them
shut down big offices focused on cutting costs


Metal prices going up… this is very good for MLT’s inventory.
More price discipline is good, prioritizing buying from massive mills

Business trends:
Shapes and Plates: starting to pick up
Building Pdts: Greay
Flat roll: Flat nothing either ways


What Metals USA does?
Value added Processor: Steel, Cooper, Alumnium for 45,000 customers

Building Products: 15% of revenues, $156mm 2002, GM 30% target 7-10% margins EBIT margins

Drivers: remodeling, and higher % of home ownership, aging homes, improving value for homes, lower rates mean more remodeling (most remodels happen 16-24 months of moving into new house)

“Further, advancements in quality and a broader range of price-offerings in home improvement products are making consumers feel more comfortable about making significant remodeling decisions as opposed to purchasing a new home. All of these demographic trends are expected to benefit the continued growth of the building products industry.”



Metal Service Centers: 85% of revs, GM low 20%’s, 5-7% EBIT margins

Plates and Shapes
Plates and Shape: $347.1mm 2002, 20 operating locations throughout the U.S.
“Operating segment sells carbon steel products such as wide-flange beams, plate, tubular, angles and other structural shapes. Processing services include cutting, sawing, cambering/leveling, punching, drilling, beveling, surface grinding, bending, shearing, cut-to-length and tee-splitting. Plates and Shapes customers are primarily in the fabrication, construction, machinery and equipment, transportation and energy industries.”
Flat Rolled
Flat Rolled $465.6mm 2002 15 operating locations in the Midwest and southern regions of the U.S.
“This operating segment sells a number of products including carbon and stainless steel, aluminum, brass and copper in a variety of alloy grades and sizes. Steel mills generally ship carbon steel in sizes less than a quarter of an inch in thickness in continuous coils that typically weigh 40 to 60 thousand pounds each. Few customers can handle steel in this form. Accordingly, substantially all of the carbon steel material as well as the nonferrous materials sold by Flat Rolled undergo additional processing prior to customer delivery. Processing services include slitting, precision blanking, leveling, cut-to-length, laser cutting, punching, bending and shearing. Flat Rolled customers are in the electrical manufacturing, fabrication, furniture, appliance manufacturers, machinery and equipment and transportation industries.”








WHAT IS THE BUSINESS WORTH:

a) Between NNWC and TBK value: average is $11.70 a share (+65%) to get to NNWC (+26%) and to TBK (+102%), I think this is very reasonable, given that the company is GAAP profitable, Generating a lot of cash, low CAPEX, highly talented new management, and attractive industry dynamics are emerging.

Barriers to exit are high, So companies that have profitable operating structure trade at significant valuation premiums vs. their competitors that are not profitable. Out of 5 comps: RT, RS, MLT (best 3), then secondary comps MTLM, ROCK, CMC.

EV/(CFO-Normalized CAPEX) D/TC P/BK EV/Sls
RS 13.2x 29.35% 1.19x 59.4%
MTLM 16x 30.57% 2.64x 43.66%
CMC neg 33.26% 1.12x 33.26%
ROCK neg 45.55% 1.25x 109%
RT neg 49.77% .52x 19.6%
MLT 6.1x 36.47% .49x 24.38%

AVG 11.7x 37.47% 1.20x 48.4%


MLT COMP
VALUE $13.61 $17.38 $14.09

Blended average: $15.02 per share (+112%)

(MLT has essentially no D&A, due to fresh start accting, so I chose EV/CFO-CAPEX vs. EV/EBITDA-CAPEX)

WC $13.32
NNWC $8.99
BK (with PP&E) $14.36
Blended = $12.22 (+72%)

Accord to mgt longer term if BP can run say low end of guidance 7-8% and Metals Service centers can run 5-6% EBITDA margins. $1000bn in revs
BP= $11.25
Metals=$46.75
CAPEX= $12-14mm
SO= 20.2

FCF= $2.17 per share (12-18 months out?) NOT including potential working down of WC. WHich could be $2.50 per share to get to industry peer group avg.
8-10x= $17.42-$21.17 per share


I USUSALLY WOULD NOT POST SOMETHING THIS LONG FROM 10-K but I think it is really important to the story (my comments) .....

INDUSTRY COMPETITIVE DYNAMICS (FROM 10K)
The industry in 3 parts:
A) primary metals producers, B) metals processors/service centers (METALS USA) or C) end-users.


“We believe that both primary metals producers and end-users are increasingly seeking to have their metals processing and inventory management requirements met by value-added metals processors/service centers (METALS USA, MLT).”

“During the past two decades, the trend among primary metals producers has been to focus on their core competency of high-volume production of a relatively limited number of standardized metal products. This change in focus has been driven by metal producers’ need to develop and improve efficient, volume-driven production techniques in order to remain competitive. As a result, most of the primary producers have sold their service centers. Accordingly, most end-users are no longer able to obtain processed products directly from primary metals producers and have recognized the economic advantages associated with outsourcing their customized metals processing and inventory management requirements. “

“Outsourcing permits end-users to reduce total production cost by shifting the responsibility for pre-production processing to value-added metals processors/service centers, whose higher efficiencies in performing these processing services make the ownership and operation of the necessary equipment more financially feasible.”

“These trends have resulted in value-added metals processors/service centers playing an increasingly important role in all segments of the metals industry. Metals processors/service centers now serve the needs of over 300,000 OEMs and fabricators nationwide. “

Industry Consolidation
Based on industry data, we believe that the metals processor/service center industry is highly fragmented, with as many as 3,000 participants generating about $50 billion in annual net sales.
The necessity for value-added metals processors/service centers to add specialized processing equipment, manage inventory on behalf of their customers and use sophisticated computer systems is requiring industry participants to make substantial capital investments in order to remain competitive. In addition, many customers are seeking to reduce their operating costs by limiting the number of suppliers with whom they do business, often eliminating those suppliers offering limited ranges of products and services. These trends have placed the substantial number of small, owner-operated businesses at a competitive disadvantage because they have limited access to the capital resources necessary to increase their capabilities, or they cannot economically justify the investment in equipment. As a result, smaller companies are finding it increasingly difficult to compete as current industry trends continue.

Since our formation in July 1997, we have become one of the leading providers of higher-value components from processed metals. We have invested substantial capital integrating our operations to maximize operating margins and accelerate internal sales growth.

Catalyst

Very strong B-sheet (75% of NNWC, 50% of TB, 54% of WC)
Clean NNWC number (truly liquid)inventory turns, a/r ok.
Strong new management: with track record of success
GAAP profitable
Positive Industry trends
Close to $1bn in revs, has scale to succeed
4.5x EV/CFO
Min. CAPEX $12-14mm
Generated 35% of the MKT cap in CFO last qtr and 22% of the EV