Core Natural Resources Inc (CNR) 2010 Q2 法說會逐字稿

Hello. This is the Chorus Call conference specialist. Welcome to the NCI Building Systems second quarter 2010 earnings conference call. As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions). This conference is being recorded. At this time, I would like to turn the conference over to Todd Moore, Executive Vice President and General Counsel. Please proceed, Mr. Moore.

Thank you. Good afternoon and welcome to NCI Building Systems conference call to review the Company's results for the second quarter of fiscal 2010. This call is being recorded. To access the taped replay, please call 1-412-317-0088 and the pass code 419727 and the pound sign when prompted. The webcast archived and taped replay will both be available approximately two hours after the call, and through June 15, 2010. The replay will also be available on the Company's Web site at www.NCILP.com.

The Company's second quarter results were issued earlier today in a press release that was covered by the financial media. Release was also issued advising of the accessibility of the conference call on a listen-only basis over the Internet. Some statements made on this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and the section 27-A of the Securities Act. These statements and other statements identified by such forward-looking statements as potential, expect, should, will, and similar expressions are forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a number of risks and uncertainties that may cause the Company's actual performance to differ materially from that projected in such statements. Investors should refer to statements filed by the Company with the Securities and Exchange Commission and in today's news release for a discussion of factors that could affect NCI's operations, as well as any forward-looking statements made on this call.

To the extent any non-GAAP financial measures are discussed on today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's Web site by following the news link to see today's news release. Information provided today is as of this date only and NCI expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

At this time I would like to turn the call over to NCI's Chairman, President and Chief Executive Officer, Mr. Norman C. Chambers.

Thank you, Todd. Apologies for our technical delay. Good evening, welcome to the second quarter 2010 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer, Mark Dobbins, our Chief Operating Officer, and Todd Moore. I will provide an overview and Mark Johnson will review our financial results, followed by Mark Dobbins, who will review our operations, and then we will be happy to take your questions.

Second quarter results were in line with our expectations and represented market share gains in a very tough business environment. We reported an 11.6% sequential improvement in terms of tons shipped and higher sequential revenues, gross profit and positive EBITDAR. Additionally, we saw linear improvement in key metrics throughout the quarter, with April comping very well on a year on year basis, in terms of volume, revenue and profits. We take some encouragement from these improvements, as they were achieved in the face of continued challenges of weak demand and pricing measure across the Board. The fact we have sequential and year-over-year improvements to discuss is a result of the extraordinary effort on the part of our men and women who compete for sales, produce our products and support our operations. There is no doubt in my mind that with a little improvement in the economy, the NCI team will produce excellent results.

That leads me to address three investor questions that I am often asked. First, since nonresidential construction is highly correlated with the US economy, are we seeing signs of an economic recovery in our markets? The short answer is, unfortunately no. McGraw Hill nonresidential starts are down year on year, the American Institute of Architects building interest, while improved, continues in negative territory. The market is however showing some seasonal improvement, which we hope will lead to economic driven improvement in 2011.

The modest improvement we are experiencing is coming from market share gains. We are increasing our market share by offering our customers more compelling end market products for certain industrial and institutional applications. Products that provide a greater energy efficiency and architectural attractiveness. We are working not only to out perform our traditional competitors with our products, services, speed and support, but also we are utilizing this very same approach to take market share from nonmetal construction materials. We are seeing some evidence of what I just described, McGraw Hill indicates fiscal second quarter nonresidential construction volume measured in square feet was down 27.5% compared to the same period last year. And commercial industrial was off 48%.

For calendar 2010 McGraw Hill forecasted new construction volume will be only 6% lower than 2009. By contrast, our volume was up 8.8% in Q2 and for the first half of 2010, our volume was up 4%, while the Metal Builders Manufacturing Association Index was down 14%. This speaks to the tremendous opportunity we have once there is economic driven market improvement. For example in 2010, we expect there will be about 700 million square feet of new nonresidential construction. Looking at the last 40 years, a normalized level of new construction is closer to 1.2 billion.

The significant opportunity for growth leads to the second quarter. Given that we reduced costs so substantially by cutting our work force by nearly 40%, and consolidating our plants by 25%, will we be able to respond to improving market without adding back all of the costs we cut? We believe, depending on the mix of work, that we can process about the same amount of steel as we did in 2008 with 25% fewer plants. You will recall that we generated $200 million in EBITDAR in 2008. While we will likely need to add back some labor in our manufacturing plants for safe and efficient operations, it will require attention to supply chain effectiveness and optimum plant utilization. But we believe we can do it with much leaner cost structure.

For example, our engineering and drafting costs in the second quarter of 2010 were 13% lower on a per ton basis compared to last year at this time. While volume in our buildings group was up 10%. This ability to take advantage of the economic recovery gives us confidence in reaffirming our expectations that will surpass the $200 million in EBITDAR we generated in 2008 within the five year period in December 2009. Now, our second quarter SG&A did rise sequentially from our first quarter, because of expenses that were related to the refinancing and additional engineering and drafting costs, in advance of Q3 and Q4 building shipments. Nevertheless, SG&A for the last second quarter was 11.5% below last year.

As many will recall, we commenced cost reductions in Q4 of 2008 and completed about 95% of our three phase cost reductions by the end of our 2009 second quarter. We expect that fiscal 2010 SG&A will come in about 10% less in 2009, which would be nearly 33% less than 2008. In May, shortly after the second quarter ended, we did collect our tax refund of $26.7 million, which added $13.4 million to our cash balance, and we used the remaining $13.3 million to reduce our term loan B to $137 million. The third question that is often asked is can we grow in a persistently weak market.

I believe our results for the first half of 2010 support the thesis that we can perform better in the market. While there remains uncertainty about the economic recovery, the actions we have taken to reduce costs, improve our operations, produce and sell new products and support our customers, position us well to grow even in a weak market. We expect that each business unit will generate positive operating results in the second half of fiscal year, and this will lead to positive EBITDA operating, and cash flow for 2010. While painful in the short intermediate term, the weak economy and slow recovery work to our long term advantage, because our market leadership and financial stability give us a sustainable competitive edge, in a very fragmented market.

As we noted in our earnings release, although visibility is limited, we do expect a seasonal pick up in the second half of the year. Based on our current activity, we expect it to be of a similar magnitude to last year's second half, but more in line with our historical pattern of fourth quarter being our strongest. Now I will turn it over to Mark Johnson and then Mark Dobbins.

Thanks, Norm. Our consolidated operating results for the period continued to reflect depressed levels of nonresidential construction activity. But also showed the positive impact of our sales initiatives in cost reduction programs. Revenue for our second quarter was $202.4 million, 10.6% above the prior quarter, but down 10% from the year ago period, due primarily to lower sales prices per ton, resulting from 17% lower material costs per ton. In contrast, our overall shipments, measured in tons increased 11.6% sequentially and 8.8% year over year. Gross profit margin was 19.8% compared to 17.6% in the first quarter and 14% in last year's second quarter.

Exclusive of special charges, growth profit margin was up sequentially at 19.7% compared to 18.2% in the first quarter, and was down from the 21% in last year's second quarter. The year-over-year variation was primarily the result of continued margin compression in our longer cycle buildings group, as steel prices were rising steadily during this period despite the weak market environment, in contrast to the year ago period, when prices were declining rapidly. Selling, general and administrative costs were $48.4 million, down 11.5% from last year's second quarter but as Norm mentioned earlier, up from the $44.4 million reported in the prior quarter.

The decline from the year ago period reflects the significant cost reductions that have been made across the breadth of our business, while the increase over the first quarter includes $600,000 in special expenses, related to our recapitalization transactions, $600,000 of incremental non-cash stock compensation charges, and higher spending on drafting and engineering in advance of production. While drafting and engineering costs tend to increase as part of the seasonal pattern, this year's spend was relatively higher due to the need for expedited turn around to keep our builders crews busy during this period of weak backlog. As Norm mentioned, we expect SG&A to remain at approximately this level for the remaining two quarters of 2010.

Our operating loss for the period was $9.2 million, compared to a loss of $12.7 million in the first quarter, and $132 million in last year's second quarter. If you back out special charges, the operating loss was $8.5 million compared to $11.2 million in the prior quarter and $7.4 million in the year ago period. Adjusted EBITDA moved into the positive territory in the quarter at $1.1 million compared to a loss of $2.6 million in the prior quarter, and earnings of $3.1 million in last year's second quarter.

Looking to our segment results, our components and coatings groups have showed significant sequential improvement in operating performance in the second quarter. Similar to the first quarter, the higher margins in our coaters segment reflected the return to more normalized margins after selling through higher priced inventory in last year's second quarter, as well as incremental sales to new customers. Despite a 7% decline in third party volume, the components segment maintained comparable operating margins to the prior year as a result of their cost reduction initiatives. The components group has also benefited from a 39% increase in intersegment sales, as we more effectively utilize the manufacturing capacity of our components division to support our buildings group customers. The margin compression in our buildings group was driven primarily by two factors. The impact of increasing steel prices on this business segment which has a longer order to fulfillment cycle than components and coatings and a highly competitive market. We anticipate that this margin compression will begin to dissipate as steel price increases slow in our third and fourth quarter.

Moving to the balance sheet, I will just review some of the highlights, we finished the quarter with approximately $51 million in cash, and additional $3 million in restricted cash. For the first six months of 2010, we invested $29 million in inventory, to both support our customers needs, and the seasonally stronger second half, and as a result of the increasing cost of steel. In addition to the cash on hand, our $125 million AVL credit facility remains effectively undrawn. Our only remaining debt obligation is our term loan, which as Norm mentioned, we paid down to $137 million. We estimate that our inventories, measured in tons, is approximately 7% lower than this time last year, but approximately 5% higher than it was at the end of this year's first quarter, as we restocked in advance at a seasonally stronger period. Our days sales outstanding calculated on a trailing three month basis improved at 34 days, compared to 36.4 days in the same period of last year as we continue to carefully manage the credit terms we offer during these economically challenging times.

For the first half of 2010, our capital expenditures were $3.9 million. We expect to spend a total of between $11 million and $13 million in 2010, about half of which will be spent on technology and systems. As we explained on last quarter's conference call, in our second quarter, we recognized the remaining $230.7 million non-cash beneficial conversion features related to the preferred shares. We also recognized an additional $10.6 million beneficial conversion charge related to the preferred stock dividends accrued since inception, because the additional shares of preferred stock issued as payment in kind included the same beneficial conversion features.

Going forward, we expect to incur non-cash charges in periods in which we accrue for fixed dividends as opposed to cash dividends. We will be posting an example calculation on our Web site in the coming days. On a related note, we expect to accrue approximately $7.9 million of in-kind preferred stock dividends and $600,000 in preferred stock accretion in our third fiscal quarter. These are non-cash charges deducted from net income in determining earnings per share. As a reminder, our preferred stock instrument includes a knock out provision such that if at any time, after April of 2012, the closing value of our common stock exceeds $12.75 for 20 consecutive trading days, the basic preferred stock dividends are permanently eliminated.

As of May 2nd, 2010, we had 19.6 million common shares outstanding, which includes 1.4 million vested shares of restricted stock granted to employees which will vest ratably over the next four years. As of May 2nd, 2010, the outstanding preferred stock and accrued dividends could be converted into 41.8 million shares of common stock at a conversion price of $6.37. The $7.9 million of in kind preferred stock dividends we expect to accrue during our fiscal third quarter would be convertible into 1.25 million additional shares of common stock. Now I would like to turn the call over to Mark Dobbins to discuss our operations.

Thank you, Mark. As described earlier, each of the business units was under pressure from weak market conditions, competitive pricing and higher steel costs. During our Q1 conference call, we noted our that our buildings group had begun to see a slight improvement in quote activity and bookings. That trend continued into our second quarter, and has resulted in higher shipment volumes. The buildings second quarter tonnage volume was up 10% sequentially, and this is the first year-over-year increase in tons shipped by this segment in seven consecutive quarters.

Q2 bookings measured in tons were up 33% over last year's second quarter. We have seen modest improvements in our design build type projects, which have been mostly absent in the past 12 months. Additionally, large industrial projects associated with mining and nuclear energy, plus export opportunities continued to show relative strength in the current market. Pricing remains very competitive and is being impacted by a weak construction market with the aided pressure of rising steel costs. Absent the refinance concerns of last year however, the buildings group is gaining market share, and has added 160 new builders year-to-date.

Operationally, this group continues to benefit from previous cost reduction activities and on going utilization improvements within the engineering and manufacturing operations. Additionally, the engineered building group is benefiting from the large footprint of our components organization, which provides manufacturing support and freight advantages. As a result, the buildings group is able to meet or exceed builder requests for faster turn around times on quote requests, approval drawings, engineering and project delivery. This is an important benefit to our builders, some of whom have a reduced backlog of work and are depending on our quick deliveries to keep their crews busy.

The components group is facing the very same challenges mentioned earlier, competitive pricing and weak markets with increasing steel costs. As is shown by past performance, this group continues to maintain prudent commercial discipline in a tough environment. Many of the components group's customers currently have reduced backlogs, however, the forward-looking sentiment from these customers is improving. Wide gauge agricultural-related volume improved significantly in the quarter, with a 16% increase over prior year. The components group posted only a modest sequential improvement in external tons shipped.

However, a substantial increase in internal tons, along with continued efforts directed toward cost reductions, and improved efficiencies allowed this group to perform well in the quarter. Operations at the new insulated panel manufacturing facility in Jackson, Mississippi, are progressing nicely, and after a relatively slow Q1, bookings and shipments have significantly improved. Our insulated panel manufacturing schedule for Q3 is filling up quickly and we are currently staffing up for an additional shift there. We have also developed a proprietary educational program on insulated panels that was recently approved by the American Institution of Architects for continuing education units and expect this program to increase exposure and demand for insulated panels in the marketplace.

Our coatings group is having success with many of the sales initiatives that began last year, in addition to ones that we moved ahead with this year as well. The result was a solid performance in the quarter. This group had a 21% improvement in tons shipped sequentially, and a 21% improvement as compared to the same quarter last year as well. Sales efforts outside the construction market have been particularly effective in the lighting and electronics industries as well as the service center distribution network. Efficiencies and quality improvements gained through lean manufacturing efforts are having a significant impact on the coatings group's ability to take market share in a very tough environment. Additionally, we have several capital improvements under way that will allow them to continue this trend.

To sum up, we believe that in the context of our markets, our Q2 results show that we continue to outperform the industry average. With that, we would like to open the call to questions. Thank you very much.

(Operator Instructions). Our first question comes from Eric Prouty from Canaccord.

Thanks. Good quarter, guys in a tough environment out there. Let me ask first a high level question around what's going on with steel. Can you just kind of work through as steel prices spike and then start moderating here how that should work through the results in your, in the three different group that is you have and how we should look the at that, the steel impact going far?

Great, Eric. Sure, what we are finding is that the steel market is I would say at a relatively confused state from the standpoint that the mills were quite successful earlier in the year and through current times to increase their prices. We now find that there's some hesitation in that. And so we think there's a pretty good chance that steel prices will flatten. And probably adjust down this season. We don't see a crash and drive.

The reason why we don't is that there is seasonal demand and we expect to start to see some economic improvement between now and the first part of 2011. Then kind of secondarily but very smart way, the steel mills are being cautious about bringing on more capacity. There had been considerable conversation between two of the steel producers that each expect to bring on interfurnace capacity, and now that has been put on hold, so that will work to keep supply and demand in check a bit more. Now from our perspectives, we certainly benefit across all of our businesses in terms of steel prices that are reasonably priced again the materials we compete against. One thing we are seeing is our ability particularly in the panels business and some reroofing to take market share from building materials that are not metal. And that's a good thing.

In the event that steel prices rise or fall, parts of our business do better and worse. So when steel prices flatten and come down, our buildings group will do better, and coating group and our components group will kind of hold their own. In the event that steel prices rise historically, our coating group and components group have done particularly well passing those costs on, and our buildings group has their margins effected, and they will be compressed in some fashion. So, if we see a period, that could be good for us. So that's a long-winded answer, Eric.

That's perfect. In the revenue, you mentioned your growings were up, would that -- I guess I'm trying to understand or reconcile if we look at your revenue number and how that increased sequentially, how much of that sequential increase is volume driven and how much of that increase if any of it is commodity price related?

Virtually all of the change between the first quarter and the second quarter is volume driven and very little of that is driven by price increases.

Okay. So with the price of steel having increased a descent amount during that time period, would we expect then looking at the back half of the year, there to be a beneficial impact on your revenue from higher steel prices?

Well, we would like to think so. My only caveat is, as we've explained before, we generally take from a numerical perspective whatever the backlog is at the end of our second quarter, and historically, that backlog, which is for the buildings group will end up being the foundation of revenue in Q3 and Q4, and historically, we have always done or generated that backlog plus a percentage.

5 to some times 40%. Last year though was the first time that our, that our revenue in the buildings group in Q3 and Q4 was actually less than the backlog number. So that made us a little on the gun shy side here. But our sense is that if we see a more normalized approach, we would expect to see benefits in the second half.

Great. And then you mentioned inventory levels a couple of times, could we expect that inventory then to decline as you ship heading into Q3 and Q4, and therefore inventory levels would decline and more cash would be generated?

That's exactly right, Eric. We expect the normal pattern to occur with respect to our inventory where it reaches its high points into the second quarter, comes down in the third quarter and comes down further in the fourth quarter.

Great. Then just a final question, it sounds like again to the back half of the year, you are looking at normal seasonality from a revenue standpoint, generally Q3 and Q4 have also been periods where there has been a very nice increase in the gross margin, could we expect gross margin in Q3 and Q4 of 2010, do you think they will approximate levels of 2009 be a little below a little above? Can you give a little guidance there?

That's a great question, Eric. If we look historically, it is very, very clear, we do better in the second half of the year. I will tell you that the pricing pressure that we're seeing is clearly more severe than we've seen in past years, the fact we gain share and the fact we can monitor that from the standpoint of making sure we are not doing that by discounting our prices and we are sure we are not. Still, still leaves me in a place that this market at 700 million square feet of new construction is so extraordinarily low, that I think we will be challenged to have the same kind of margins that you would have expected in a more normal year. And don't give up on it, we're not giving up on it, but at the end of the day, I do know that the challenges that the folks are facing out there are absolutely real.

Sure. So, maybe worse than last year, but we should expect a good sequential improvement at least, from the April-quarter?

Absolutely.

Okay. Fantastic. I will jump back in the queue. Thanks a lot.

The next question comes from Arnie Ursaner at CJS Securities.

Hi, good afternoon. My first question is how many shares were issued for the pick in the quarter, please?

Do you have it?

I do. I am digging it up here.

Just a second, Arnie. He is looking it up from his script.

Okay. While you do that, let me move forward to the next question. In your prepared remarks on your outlook, you indicated you expect a seasonal pick up in the second half, similar to last year's second half, I am very unclear how we should think about that. If we look at your revenues in the first half of last year versus the second half, it was roughly 50/50 you didn't have the normal seasonal pick up in revenue last year, and if I do try to do it on EBITDA, you had 87% of your EBITDA in the back half of the year, but you are starting with a negative number for the first half of this year. So I am a little bit.

100%.

It is well over 100.

It should be.

Okay.

So the real answer is that the steel price movements last year versus this year is part of the answer. We would expect when I look at volume, Arnie, volume first half and second half last year was about 25% more in the second half, when steel prices were plummeting. This year I am expecting, we might see something 25 or a little above, in volume. And steel prices will be favorable in terms of helping on the top end, I mean the bottom end. The only thing that gives me concern is actually not the volume, it is not the revenue per se, it is whether or not we can continue with the level of discipline and the commercial piece and that's most challenging, most challenging in the buildings group.

With respect to the number of shares issued, the total of 41.8 million common stock equivalents that are derived from the preferred stock and that would include any dividends issued and the original issuance of preferred shares. Looking forward to the third quarter, based on the anticipation of paying a PIC dividend in the third quarter of approximately $7.9 million, that would add 1.25 million shares of common stock equivalents.

Okay. So it is 41.8 plus the 1.25.

That's right.

Okay. In your filings with the bank papers you had EBITDA targets of $36 million, next year $73 million, and 2012, $127 million. On a trailing 12 months, you are at $38 million. But if I take the first half performance and you just mentioned your margin expectation for the back half of the year, it doesn't appear to me unless you have more volume that you are going to get to the $36 million in your bank paper. If you were not to get there, does it cause any issue of any sort we should be focused on there.

There's no issue whatsoever, and again while I would not, we are not giving guidance, I am not sure that -- let me say this way, we don't share your view about our second half.

Let me state clearly there are no financial maintenance covenants that an event like that would trip over. With an unutilized credit facility and no maintenance covenants to run up against and more than adequate cash, it is not a liquidity concern either.

Perfect. What sort of operating rate did you have in the quarter, particularly in the building segment, and can you give us your best guess where we stand on incremental margin at this point?

With respect to the capacity utilization within our buildings group, it ran at approximately 60% for the quarter, and comparatively, our coaters and components group ran in the low to mid-50s. So there was comparatively more utilization going on in the buildings group, but that can be I am sorry, low to mid-40s in the coaters and components group. But the utilization can be misleading when you take into account the fact that a lot of our production from our buildings customers does come from our components plants. In an increasingly manner. With respect to our incremental margins, we expect to have if not more incremental margin based on incremental volume as we have ever had, based on the reduction in fixed costs that we have made and the cross utilization of our plant, I won't go so far as to try to calculate those for you, but rest assured that they're as significant, if not greater, than they have been in the past.

What has been the peak in the past?

It has been in the upper 30s in the past.

Okay. Thank you very much.

You're welcome, Arnie. Thank you.

(Operator Instructions). We have a follow up question from Eric Prouty at Canaccord.

Thanks, guys, just a couple of housekeeping question, you mentioned the number of builders you added during the quarter, can you just -- what base was that off of? What's the actual current number of builders you have in total?

Eric, this is Mark Dobbins. Our total builder count right now, with the 160 net add is 3470.

Okay. Great. Finally you mentioned this in the call can you give a little color, obviously it is a bleak market out there, but go into a little more detail if you see any end market or geographies of particular strength or particular weakness?

We certainly are, the agriculture piece has stayed strong. We are probably seeing a little bit of brightness in the manufacturing and the heavy industrial side as well. That is encouraging to us. We are still, I don't think seeing much brightness anywhere in terms of the retail space.

I would agree, and Norm's on track there. Most of the upside that we're seeing is in more heavy industrial-type applications. I mentioned a bit ago some of the nuclear energy type facilities that are beginning to be built. One automotive facility automotive manufacturing facility that comes to mind but another area that we have seen some nice traction on I mentioned is the insulated panels, and Eric, that's a piece we are real proud of. We see a lot of opportunity there and it had an uptick in the quarter in interest and in shipments.

Fantastic. And then just finally, if you could talk about, I know you've -- well, turning the Company around, have also kept an eye from an acquisition standpoint, any commentary on what you are seeing out there in the market as far as opportunities go from an acquisition standpoint?

We are seeing lots of small companies that are struggling and pretty much all three of our divisions and we are seeing I can tell you that almost a week doesn't go by that I don't see some book across my desk. We clearly have a pretty clear view about good adds in terms of things that might fit nicely into the three divisions we have. That would complement us in terms of geographies, complement us in terms of supply chain, complement us in terms of a focus on an end market we may not be quite as strong as we would like to be in. So we are very clear about those things we would be interested in, and we are even more clear about wanting to get those at great values. That doesn't require debt, that you know, that could be a nice fit, asset-only sales are particularly attractive to us. But we will see. The reason I say asset-only sales is because we need to continue this battle with the idea that we will focus on the business in such a way as to provide a compelling reason why builders will leave our competitors and join us, or that we can recruit industrial people who haven't been with a builder before, to join our ranks. So I would rather try to win business that way, than try to buy a Company, but I do look at assets with some attractiveness. Great. Thanks a lot, guys.

(Operator Instructions). This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Chambers for any closing remarks.

Great. Thank you, very much, for your patience on our technical glitch, and we appreciate your questions and we look forward to speaking to you next quarter. Thank you.

Thank you, all, very much, for participating in the NCI Building Systems second quarter 2010 earnings conference call. You may now disconnect.