An anonymised Midwest components maker. $400M of revenue, $44M of budgeted EBITDA, $120M of net debt. We rebuilt the budget as eight drivers, priced from the US commodity and tariff sheet, and ran 10,000 scenarios. On our ranges the budget is a one-in-four outcome, free cash flow goes negative one year in three, and steel matters more than anything the sales team does.
// an anonymised composite, not a client · commodity and tariff ranges from public forward curves and bank forecasts · not investment advice
This company is a composite of manufacturers we have seen, not one client. Revenue $400M. Steel is 22% of cost of goods, bought at Midwest HRC prices. Copper is 6%. Natural gas 3%. A plant in Mexico carries 8% of cost in pesos. Tariffed components are 4%. Freight is 3.5% of revenue and moves with diesel. Net debt is $120M against a 3.5x leverage covenant, with a $35M revolver behind it.
Five of the eight cost lines are set in Chicago, Houston, New York and Washington. The budget carries each of them as one number.
EBITDA $44M, 11% of revenue. Below it: capex $18M, interest $9M, cash taxes $5M, a $2M working-capital build. Free cash flow $10M. The board pack shows the two numbers and no ranges around either.
EBITDA = volume × price × $400M − steel − copper − gas − Mexico labour − tariffs − other variable cost − freight − fixed cost. Free cash flow = EBITDA − capex − interest − tax − working capital, where inventory moves with the steel price. Plan values land on $44M and $10M. Our ranges:
| Driver | Plan | Range | Shape | Why |
|---|---|---|---|---|
| Volume | index 1.00 | −6% … +4% | triangular | order book and the cycle; ρ +0.2 with price |
| Net price | index 1.00 | −3% … +2% | triangular | list price holds; discounts do not |
| Steel, Midwest HRC | $65M | −15% … +25% | triangular | falls slowly, spikes fast; ρ +0.4 with copper |
| Copper, COMEX | $18M | −12% … +18% | triangular | same demand cycle as steel |
| Natural gas, Henry Hub | $9M | −25% … +45% | triangular | the widest range on the sheet; ρ +0.3 with diesel |
| Diesel, DOE | $14M freight | −15% … +20% | triangular | freight contracts reprice quarterly |
| Mexico labour, USD/MXN | $24M | ±6.6% (90% conf.) | normal | a stronger peso raises the dollar cost |
| Tariffed components | $12M | −20% … +40% | triangular | rates go up faster than they come down |
Look at the direction of the cost ranges. Every commodity line has more room above the plan than below it. That is not pessimism. It is how these prices have behaved. The budget does not say so.
Hedging is in the model, as what-ifs. The base case holds no fixed-price steel and no surcharge clause in the customer contracts, which is how most mid-size manufacturers actually go into a year. The two what-ifs further down add them one at a time, so you can see what each is worth. If your steel is already fixed for the first half, the range on the steel bill narrows in proportion and your odds sit between the base case and the contract case. Gas and diesel run at market ranges; a Henry Hub swap or a fuel clause in the freight contract would clip them the same way. Tariffs cannot be hedged.
Budget versus the simulated range, EBITDA
EBITDA, $M. Blue bar: P10 to P90. Dot: P50. Dashed line: the $44M budget.
The budget sits in the top quarter of the range. Three years in four land below it.
The median year misses the budget by $6M. Not because anything went wrong, but because the cost ranges are skewed up and the budget is built on their midpoints. The covenant floor, $34.3M of EBITDA, is a one-in-three event on these ranges.
Budget versus the simulated range, free cash flow
Free cash flow, $M. Blue bar: P10 to P90. Dot: P50. Dashed line: the $10M plan.
Cash is worse than EBITDA. A steel spike raises inventory as well as cost.
What moves the year
Share of the total EBITDA swing, one driver at a time between its P10 and P90.
Steel and price together carry half the year. The five external lines carry 55%.
The sales forecast, the line the budget meeting spends most of its time on, is the third bar. The first bar is a price set on the CME.
Who sets the driver
The same swing as above, grouped by who sets the driver. Bars: share of the total swing.
Six lines set in Chicago, Houston, New York and Washington carry 61% of the year.
Three fifths of the swing is in prices nobody in the building sets. The response to that part is contractual, not operational: fixed-price steel for the volume you are sure of, an index surcharge so the customer carries the rest, a fuel clause in the freight contract, and a revolver sized for the P10 cash year. The one big line management does set is price, and it is the second bar in the chart above.
Bear (P10, about $27M): steel up 15 to 20%, a gas spike, volume off 3%. The covenant is broken, inventory absorbs cash, the revolver is drawn. Nothing exotic happened. Three prices moved the same way.
Base (P50, about $38M): an ordinary year that misses the budget by $6M. The budget was the optimistic case and did not say so.
Bull (P90, about $48M): steel falls, volume holds, the peso weakens. The budget is beaten by $4M. The upside is smaller than the downside, because the cost ranges are.
First, fixed-price steel for most of the volume: the steel range clips to −15% … +8%. Second, an index surcharge in the customer contracts, so net price can move −1% … +4%. Everything else unchanged, same seed.
Chance of reaching the $44M budget
Same model, same seed. One range changes per row.
The covenant-breach odds fall from 35% to 16% with the steel contract and 17% with the surcharge. The P10 cash case improves from −$8.4M to −$1.8M with the contract.
Pricing beats hedging. A surcharge clause tied to the HRC index moves the odds more than a supply contract does, and it costs nothing up front. The two together are the year.
What share of next year's steel is under fixed price, and until when? Which customer contracts carry an index surcharge, and which do not? At what HRC price does the covenant break? How much of the revolver does the P10 cash year use? None of these need a new system. All of them need ranges on five prices that are already on a public screen.
For a mid-size US manufacturer the budget risk is not in the sales forecast. It sits in three or four prices set in Chicago, Houston and Washington, and it shows up in cash before it shows up in EBITDA. Range them, run them, and fix the contracts before the year starts.
// method: simplified driver model, plan values set to a typical cost structure for the size, ranges from public forward curves and bank forecasts; 10,000 Monte Carlo scenarios per run through the ScenarioCast engine, correlations and hedges as stated in the model section; sensitivities one-driver-at-a-time at marginal P10/P90; what-ifs re-run on the same seed. Figures rounded. Our estimates, not the company's. Not investment advice.