Core Natural Resources Inc (CNR) 2011 Q2 法說會逐字稿

Hello. This is the Chorus Call conference specialist. Welcome to the NCI Building Systems second-quarter 2011 earnings conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) The conference is being recorded. At this time, I would like to turn the conference over to Todd Moore. Mr. Moore, the floor is yours, sir.

Thank you. Good afternoon and welcome to NCI Building Systems conference call to review the Company's results for the second quarter of fiscal 2011. This call is being recorded. To access the taped replay, please dial 412-317-0088, and enter the pass code 451170 and then the pound sign when prompted. The webcast archive and taped replay will be available approximately 2 hours after this call, and will remain accessible through June 15. The replay will also be available on the Company's website 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. A release was also issued advising of the accessibility of this conference call on a listen-only basis over the Internet. Some statements made on this conference call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, as well as Section 27-A of the Securities Act. These statements and other statements identified by the words such 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. These forward-looking statements may be 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, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's website by following the news link to see today's release. Information being 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'd like to turn the call over to Norm Chambers, NCI's Chairman, President and Chief Executive Officer.

Thank you, Todd. Good evening, everyone and welcome to our second-quarter 2011 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer, Mark Dobbins, our Chief Operating Officer, and Todd Moore, our General Counsel. I'll provide an overview. Mark Johnson will review the financial results, followed by Mark Dobbins who will review our operations and we'll be happy to take your questions.

For the first time since Q3 of 2008 our Company has generated both sequential and year-over-year improvement. All three of our business units generated positive sequential and year-over-year operating income. We believe that this demonstrates our ability to significantly benefit from even a modest up-tick in demand. As expected, the Buildings group generated the most significant improvement with double-digit year-over-year and sequential growth in revenue and very near breakeven level of operating income in the quarter. Gross profit in the Buildings group increased sequentially by almost 300 basis points. Operating results improved throughout the -- throughout the second quarter.

In April, the buildings group returned to operating income profitability. We continue to see strong sequential booking numbers for the Buildings group, although year-over-year bookings were basically flat. In the second quarter, bookings increased sequentially by 16% in value, and 4.3% in volume. We are not, however, seeing recent booking trends result in growth in our backlog figures. The reason for this is that in the second quarter, we experienced a 30% increase in the velocity of converting our backlog to production, compared to similar periods in the last several years. This is primarily because an increasing portion of our order-flow is comprised of booked-for-production business and small buildings.

Converting our backlog more quickly creates additional manufacturing efficiencies, which enhances our profitability. Also, you'll recall that small buildings have been a recent target of ours and our past investments in improved engineering, drafting, manufacturing have enabled us to produce and ship buildings more quickly. Of course, we are closely monitoring our backlog levels, but current bookings are on track and quoting activity remains good. Rounding this out, both the Coatings group and Components group had solid year-over-year and sequential improvement in operating profits.

For our fiscal Q2, McGraw-Hill nonresidential new construction measuring square feet was up sequentially by 3.8% and down about 6.8% year over -- on a year-over-year. By contrast, our volumes were up 6.7% on a sequential basis and down only 2.5% on a year-over-year basis. On a year-over-year volume comparison, our Buildings and Components group were up and our Coatings group was modestly down. Both McGraw-Hill data and our improvement provide a foundation for our view of further recovery in our industry this year.

Commercial discipline played an important role in our quarterly improvement, particularly in a rising steel price environment. I'm pleased by the performance of our sales teams. They continue to demonstrate their ability to work with our customers in a mutually beneficial manner that recognizes the quality of our products and the value they bring to our customers. Throughout these difficult times, our customers continued to demonstrate a strong -- a spirit of cooperation. We are fortunate to have such a solid base of long-term folks that are -- that remained our customers and we appreciate their support. It's important that every job makes commercial sense for both our customers and ourselves.

Before moving on to our outlook discussion, I want to address one significant disappointment we had in the second quarter, which was our inability to gain a waiver for our term loan B note holders to pay the preferred share dividend cash instead of in stock. The preferred share dividends on the investment made by Clayton, Dubilier and Rice that enabled us to restructure our balance sheet in 2009 and avoid a default. After several discussions, the likely cost and fees that the term loan holders would have required from us in terms of additional covenants and high interest rates were just not in the best interest of the Company, nor our shareholders. I can assure you that we're working hard to build our cumulative earnings which would enable us to return to paying a cash dividend as we have on the last two dividends and other alternatives that would reduce the dilutive effect of the PIC dividend. Please keep in mind that at any time after April of next year when NCI share price trades above $12.75 for more than 20 consecutive days, all future preferred share dividend obligations, whether cash or stock, cease.

As I indicated during our first quarter call, there's a historically strong correlation between the American Institute of Architects building interest and the commercial-industrial sector with our shipments. The billings index for commercial-industrial activity slipped to 49.9, just below the level of 50 for the first time after 9 consecutive months of growth above 50. Even with the decrease in April, there should be sufficient momentum to fuel continued improvement in our volume of shipments. Additionally we see other positive signs in the facts that lending standards for commercial real estate loans as reported in the April Fed Senior Loan Officers survey, have eased and commercial-industrial loan demand has been picking up.

In fact, one of the reports I read that's authored by the economist Michael Darda, of MKM, noted that the number of commercial industrial loans increased by 3.8% on a year-on-year basis. We have maintained for some time that the significant raising of the lending standards initiated by the Federal Government May of 2009 has greatly exacerbated the decline of new construction. We have learned from our customers that regional bank lending has improved and that is good news, there's no question about it.

So for the first time since 2008, our view of the remainder of the year is positive because of our current business and quoting activity. But I must stress that the improvements we are seeing are compared to 2010 new construction levels which were the lowest levels in nearly 50 years. There are a number of challenges that we will have to deal with to maximize the level of performance in the second half of 2011. First, the economy must continue to stay at least modestly on a path of recovery. And nonresidential new construction starts measuring the square feet will need to grow on a year-on-year basis. Second, the Buildings group will need to continue to strike an appropriate balance between the commercial discipline and increasing their bookings. Third, each of our business segments will need to effectively deal with likely steel price volatility.

From what we see today, we believe that our business units will be able to successfully manage these challenges, which will enable us to report second half fiscal 2011 results that are significantly ahead of last year's second half performance. This should make 2011 an important first step in our goal to generate $200 million in EBITDA when the market returns to 1 billion square feet of non-res construction. Now Mark Johnson will take you through the financial highlights and Mark Dobbins will provide more color in terms of our operations.

Thanks, Norm. Revenues for our second quarter were $225.6 million, 11.9% ahead of last year's second quarter, and 18.7% higher than first quarter levels. Revenue growth was driven by a combination of higher raw material prices and mix, despite continued declines in nonresidential construction activity. Gross profit margin for the quarter was 22.5% which was 230 basis points higher than the 20.2% earned in last year's second quarter, and 490 basis points better than the preceding quarter.

Each of our three business segments worked effectively with customers in maintaining commercial discipline in the face of rising raw material costs. Year-over-year margin improvements resulted primarily from improved spreads relative to material costs, while the sequential improvement from the first quarter also reflected increased operating leverage on 6.7% more volume. Our operating costs or ESG&A totaled nearly $53 million, up from $49 million in last year's second quarter, and up sequentially from nearly $48 million in the preceding quarter. Although as a percentage of revenues, ESG&A declined to 23.3%, from 24.3% last year, and 25.1% in the prior quarter.

In absolute dollars, the increased costs over the prior year were driven by a $1.5 million increase in self-insured healthcare costs, a $1.3 million increase in our calculated reserve for general liability insurance claims, and $600,000 related to the reinstatement of our annual spring builders meetings and various marketing programs. Both the healthcare and general liability insurance costs are related to self-insured plans that often result in nonlinear expenses from quarter to quarter. In both the first and second quarters of this year, we incurred unique increases in our general liability insurance reserves, which we identified as special charges for transparency and trending purposes. Our operating result for the quarter was a loss of $1.8 million, which compares to an operating loss of $9.2 million in last year's quarter, and a $14.1 million operating loss in our first quarter.

Adjusted EBITDA for the second quarter was $7.7 million, which was significantly ahead of last year's $1.1 million, and a negative $4.4 million of the first quarter. On a trailing 12 month basis, adjusted EBITDA moved up from $14 million at the end of the first quarter, which was the lowest level in the Company's comparable history, to $21 million at the end of the second quarter, which I believe is an inflection point indicating that the worst is over. Looking forward, I want to make a few comments on our financial expectations for the remainder of 2011. As I mentioned on the last couple of conference calls, we have completed our cost restructuring programs which began in 2009. And our ESG&A costs have now stabilized at significantly reduced levels. We expect our quarterly costs in our seasonally stronger second half to be relatively similar to the dollar amount reported in the second quarter.

In addition, based on the streamlining of our operations and an expectation of improved market demand in the second half of our fiscal year, we expect our gross margin percentage to show a modest increase over the comparable period of 2010. However, we do not expect to return to our historical levels until we see meaningful improvements in demand leading to greater operating leverage.

A few comments on our balance sheet. For the second quarter, we generated cash from operations of $4.9 million. Our cash balance was $57 million, and our ABL credit facility remained undrawn. While we continue to produce positive cash flow from operations, since the beginning of the year we have elected to use $11 million to pay the first three quarterly preferred dividends in cash and have invested $8 million in capital additions. Our $70 million accounts receivable balance improved to approximately 30 days of sales outstanding, compared to 34 days in both the preceding quarter and the year-ago period.

Our inventory balance reflected growth in volume as we prepare for the seasonally stronger period, but also reflected the increased cost of raw materials. Inventory levels were nearly $108 million, up seasonally from the $83 million of the prior quarter, and up from $101 million at the end of last year's second quarter. Our current inventory balance represents approximately 50 days of inventory on hand, which is similar to the 49 days on hand at the end of the first quarter, but is improved over the 58 days at the end of last year's second quarter. We received a tax carry-back refund of approximately $15 million in the second quarter, which effectively offset the higher investments in the inventory. Capital expenditures for the quarter were $5.8 million. For fiscal 2011, we expect to spend a total of approximately $25 million to $30 million which includes the planned expansion of our insulated panels production as well as continued enhancements to our engineering and drafting systems, improvements to our MRP and transportation systems and further integration and automation of our manufacturing equipment, particularly in the Buildings and Coatings segment. Now I'd like to turn the call over to Mark Dobbins, our Chief Operating Officer.

Thank you, Mark. Norm spoke of the McGraw-Hill metrics earlier and in fact the first half of our fiscal year has been very challenging. The industry has experienced rapidly escalating steel prices and interruptions in delivery of some grades of raw materials. Yet, the general forward-looking sentiment is still positive as steel prices appear to have settled, supply levels have normalized and we've experienced sequential improvements in our volumes. In the second quarter, each of our business units had improved results compared with same period prior year.

The Buildings and Components groups each posted increases in tons shipped, higher revenues and improved operating income over last year. The Coatings group also reported improved operating income from last year's levels, but had slightly lower tonnage in revenues for the quarter. You may recall that rising steel prices earlier in the year caused many of our Coatings customers to push through orders in advance of these expected price increases. And as anticipated, this resulted in a slight reduction in Q2 volumes. We expect these volumes to correct in the coming quarters as customer inventories are worked down.

Additionally, early in Q2 several steel mills were making late deliveries of light gauge products to their customers creating a temporary disruption in the supply chain which includes our Coatings group. This disruption while short-lived created many inefficiencies in our Coating operations which were asked to coat smaller lots of steel. Some customers who ran short on materials were forced to buy pre-painted packages on the spot market which also had a negative impact on tons coated in the quarter. But as of today the steel mills have solved their bottleneck issues and the flow of materials through our Coating operation is beginning to normalize. Given these circumstances the group did very well, continuing to keep close control of their manufacturing and ESG&A costs in the quarter.

The Coatings group focused on sales outside the construction market continues to be productive. We are currently coating aluminum products for the transportation industry as well as performing trial runs for various home hardware products. Now, these are in addition to previously mentioned work we are doing with the lighting and HVAC industries. The Components group had a slight increase in tons over prior year's second quarter and sequentially, while maintaining good commercial discipline and solid control over their ESG&A costs. Now, while the increase in tons was not significant, the contribution to profitability was much improved on both a year-over-year and sequential basis. Components group has always differentiated itself through its superior service levels and this continues to allow them to gain a competitive advantage in this market, which is still very challenging. Most Component customers are still working with little or no backlog of projects but their overall outlook is positive as they are seeing improving conditions and increased quoting activity.

Specific initiatives at the Components group are working on such as the new roof or retrofit products and the insulated metal panel products each are showing significant gains over the prior year and our expectations for these products remain high. Agricultural related sales increased in the quarter but have been negatively impacted by storms and flooding across the midwest and southeastern US. This segment of the Components business did not deteriorate quite as dramatically as commercial-industrial over the past 2 years and we expect steady growth in the near term.

The Engineered Buildings group performance for the quarter was greatly improved from the prior year and prior quarter. Tons shipped in the quarter were up 3% over prior year and 27% ahead of Q1. And Norm mentioned the backlog earlier and I want to just add that this current backlog is significantly different from the past 2 years in a couple of ways. First, it's more heavily weighted towards production work versus permit and approval; and secondly it's just simply more current. This indicates the backlog will have a faster turn as it consists of more active jobs.

Additionally, the percentage of work in the backlog which we classify as commercial and industrial is returning to levels we experienced prior to the downturn. Most importantly, the Buildings group is making huge strides toward improving the profitability of their business and is on a trajectory to more normalized returns. As volumes increase this segment begins to realize significant improvements in engineering costs and manufacturing costs. Many of the system improvements and equipment upgrades will begin to show full potential as we move forward. Business conditions in the Building group began improving in our first quarter and continued throughout Q2. Quoting activity is strong. Bookings have improved and the projects that are available are returning to a more favorable mix. Now this mix includes more design build projects which allow the buildings group to capitalize on the value they add with a custom engineered building.

A sampling of some of the end users for projects booked or shipped during the second quarter include several multi-site retail projects, oil and gas related manufacturing projects, large data storage centers, warehouse distribution centers and aviation projects. This mix represents continuing improvement toward the types of projects that we excel in. As Norm noted earlier, the business units are still operating in a challenging environment but have proven they can respond effectively. Additionally, we are well positioned and prepared to respond to an increase in construction activity with our lower fixed cost advantage and the efficiency improvements we have made in manufacturing and engineering. So at this point, operator, we would like to open the call to questions. Thank you.

Thank you, sir. (Operator Instructions). Arnie Ursaner, of CJS Securities.

Can you quantify the amount, the impact of lower cost steel inventory that may have benefited you in the quarter and maybe talk a little about the potential benefits that that could have in the back half as well?

Sure. You know, we really didn't see lower price inventory in the quarter. We have been seeing a gradual increase, as the higher priced steel makes its way through our inventory into production and it's likely that the highest priced steel will occur during our third quarter, this quarter.

That's right.

And so the businesses as you know from our conversations of past have historically, the Coating Components group, have always been able to react very quickly to steel price increases, the Buildings group is a little bit slow to do so. But all 3 of our business units really I thought did a really good job working with their customers and trying to deal l with the steel price increases and that was very important.

Great. And just switching gears a little bit, you had said that you were unable to obtain the waiver to be able to pay the debt or the interest on the debt in cash in the quarter. Were there any pick shares issued this quarter or will they be issued next quarter?

We paid cash in the previous 2 dividends.

That's right.

And we have a dividend coming up. The way that works is that the Board, subcommittee of the Board will review our situation about a few days before we announce, whether we pay a dividend, pick or cash. Mark, you want to add some color?

Sure. The amount of common stock equivalents that the preferred shares represent remains relatively unchanged from the prior quarter, and the reason for that is we accrue the dividends as though we're going to pay them in kind and only reverse that once we've actually paid them in cash. So during this period, we've accrued the dividends as though they'll be paid in kind, which would have increased the shares over the prior period, but then we reverse the prior period accrual of shares because we paid in cash. So they remain unchanged.

If you were to issue pick, we would see it in the next quarter's share count, because there would be no reversal?

We've already accrued for the in-kind payment so you will see us accrue in the next quarter, just like we have in all quarters for the payment at a 12% rate, and then subsequently if we paid in cash we would --

Adjust.

We would reverse it.

Great. And Norm, can you just repeat what you said about the stock price going above $12.75 and the dates that we need to pay attention to.

That's a very important thing. I just want to say that the Board is committed to paying a cash dividend, and we have certain obligations, a term loan B that just make that a bit more difficult. But the good news is that a year from now, less than a year from now when our stock price trades at $12.75, for 20 consecutive days, all future dividends, whether they be cash or pick, cease, ends, don't come back. It's over. And that's a hugely important thing for the common shareholders.

And at that point would there be any benefits of CD&R to not convert their shares to common stock?

You know, we really can't address the CD&R question but I'll just give you a view that I have, and that is that the preferred shares that CD&R has has certain other rights that seems to me would be unlikely they would convert. But I don't know that for sure.

Okay. Great. Thank you very much.

Eric Prouty, Canaccord.

Thanks a lot and good quarter, guys. First, a question just on the back half of the year outlook. If 1 looks last year at the seasonality of the business, there was a good marked up-tick in business in the -- from the April to the July quarter, 20%, 25% move in the Metal Components and Engineered Building systems, I think sequential revenue overall was up about 20% sequentially. Should we expect that same kind of seasonality and move this quarter or will it be more muted?

It's always hard to say because the velocity of the backlog turn and our booking rates, okay? But we expect to see seasonality, that's for sure. Last year was the worst year in the history of the Business and we saw seasonality. My sense is that we're seeing a backlog and a quoting and a bookings that is more reflective of the recovery we saw in the beginning of 2004. In other words, just as Mark has said, that the backlog is serious and relevant and kind of timely. People want the jobs and need the work shipped and this is the reason why, without beating our chest, we're really pleased with all the improvements we've made in the engineering and drafting side and the manufacturing side, because we're able to really do well on timely delivery.

Great. Let's maybe just look at it another way. You had between volume and pricing, you had about 11% year-over-year increase in revenue this quarter. Would you expect similar year-over-year increases, given your visibility in the July and the October quarters, greater, less or about the same? Any visibility into that?

Yes, I mean, since we're not providing a guidance, per se --

Sure.

I'll just say this. That when we look forward with the caveats I've said, we can't flip into a double dip, we've got to see some modest recovery in the economy, we look forward and we see that we'll do significantly better than the second half of last year.

Yes.

And that's going to be a combination of efficiencies in manufacturing, some commercial discipline, some volume. It's going to be across the board. But as I said before, we're blessed and fortunate to have our Coating group and our Components group just really very disciplined, just executing very well and the folks in our Buildings group have really worked their butts off and we're starting to see some results from that. Mark, do you want to add anything to that?

I think that's a good point. Norm mentioned the Buildings group. The guys have really turned it around. I alluded to that a minute ago. The opportunities they see better fit their organization. They have better design, build opportunities out there and that's the kind of work that they tend to do and do well.

Just on the Buildings group in particular, then, you're at about breakeven, given your comments here and the increase in revenue, is the expectation that we're going to move nicely into profitability in the Buildings group in the back half of the year?

The answer is yes. And I tried to allude to that without over-stating the situation. We're back in nice profitability in the month of April and it's really a function of all the things we're working on and there will be some things that I'm sure will be challenging for us that we're not expecting right now, but at the end of the day the teams have really shown that the volatility of steel price or whatever the hell it might be, they get the job done. I mean, they're getting the job done now. It may not be a perfect linear path through the second half of the year, but we definitely see that the second half will be better than the second half of last year.

Okay. And then given that, Norm and Mark, you hit 22.5% gross margin this quarter. That was an excellent gross margin. Is there anything 1-time oriented or is the previous caller asked the question, anything to do with steel prices that would make that 22.5% artificially high? Is that a number we should be able to at least maintain, if not build off of, given the higher level of revenue we're looking for in the back half of the year?

So it comes down to volume, the balance between working with our customers, the commercial discipline side, but as I said earlier, we will see their highest priced steel go through our production and our shipments in the third quarter. My point is that whether we see some fluctuation, plus or minus, in the -- I mean, with the percentages is going to be probably muted by virtue of the other things that are going on. So the whole numbers we believe will continue to show nice improvement.

Okay. That's fair enough. Norm, you touched upon this a bit and this is much more of a macro oriented question, but let's face it, the last month there's been a marked turn at least in perception of the economy. We had the ABI slip a bit. We've had the market slipping down as folks have been continually hit up with weak economic data. These are big, huge macro numbers. You've talked about it a bit. But can you just give us a flavor of your business itself and what you're hearing from your distributors, et cetera, and bring us up-to-date to today. Has there been a marked change in your builders, your network's outlook in business over the last month or so here?

I've got to tell you --

From a negative standpoint.

And Mark Dobbins is all over this with our builder network and our Presidents and our groups and there's kind of 3 things I'm going to speak to. The very first is that our customers across the board remain positive about this year. Now, again, it's really important that we don't lose sight of the fact that we're comparing against the worst year in 50 years, and that's 2010.

So where they are seeing improvement, we're seeing our quoting activity is quite good. Our bookings in May were spot on, just where we need them to be, right? So my sense is that activity is consistent with the relationship between the AIA, billing index and commercial-industrial, which have a 6 month lag to our shipments and we had 9 months of sequential improvement and it ticked down to 49.9. Right? We've got plenty of momentum left in that AIA to get us through the rest of this year. On top of that, as Mark Dobbins said, is that we're really beginning to see a recovery of the commercial-industrial piece. Hell it's almost back to the 70% mark that we historically have and that's a big change from last year, Eric.

And then third, what we find is that financing for the buildings and the things that we produce are funded by regional banks and that senior lending deal that I mentioned by the Fed, which was the April report, showed for the first time since 2005 a lessening of the terms of the standards which makes it much more probable that we will continue to see improving lending to projects. Commercial-industrial is up 3.8% on a year-on-year basis and the MKM guys, with Michael Darda, really do a good job of tracking this and that's a forward indicator. Mark, do you want to add some color to that?

Yes. Eric, I'd just say that Norm touched on the main issue. That's the type of work available today and it's the type of work that our builders are seeing out there. It's the design build type work as I mentioned earlier. That's a more profitable type work. The other thing that's significant and we talked about the quicker turn and the backlog and the jobs that are turning quicker for production. There's just a greater urgency to construct today. In other words, if a job shows up on the radar screen, it's a real job. Somebody's going to get it built and we can take advantage of it as opposed to in the past where we saw a lot of job shopping going on over the last couple of years.

And I just want to add just 1 other little piece of this, Eric, that in this recovery in non-res, it is normally the case that the low rise construction leads the recovery. It is the things that's easier to get built, right? And we clearly see with the Metal Building Manufacturers Association, that it's not just us. The whole association is doing better. The whole association is shipping more, is booking more work. So while I'm pleased with our performance, I'm also doubly pleased that the whole industry seems to be making a recovery. Now, again, it's relative to the worst year in 50 years, but it is nevertheless a recovery.

Great. Just a couple more questions, if I might. Given the outlook, what would be your expectations for bringing on the Coatings plant that you had recently purchased? Are we at the point where that can start producing, or not quite yet?

When you look at our capacities and Mark Dobbins will probably have to pull the numbers up for me. We're still running 50% odd, I think 55% or 58%, so we've got plenty of capacity in the plants we have and frankly, we're more keen to bring the Middletown facility on as we have it scheduled for 2013. We can accelerate that a bit if we need to.

But really, the more important thing at this juncture is what the Components group are doing, I mean, with the panel business. That is really showing some nice improvement. Mark Dobbins will talk about, we just won a really nice contract, a long-term contract. We want to bring those 2 plants that we're re-tooling online in a real steady state. But Mark, we expect to bring those on --

No, we do have the 2 facilities, Eric, we plan to bring up, 1 at the second quarter 2012 and the other in about the third -- toward the end of the third quarter. And that's in support of what we see happening in the market here today. Norm mentioned that we just secured a nice contract agreement with a large manufacturer that will have a significant take of that type of product. So we're pretty excited about that.

Back to the Middletown Coating plant, we have that modeled in and we have that modeled in as the industry recovers and our volumes recover. Norm mentioned the capacity utilization currently. We'll probably end up there with Coaters somewhere in the 50% for the year, at the end of the year. But as we noted earlier, as the volumes pick up in this industry, that Middletown play will be very important to us, from both the capacity standpoint and the location of it.

Great. And then you mentioned the panels, your other growth area of the re-roofing was -- that's been mentioned by more and more folks as being a good growth area, a good market. What are you guys seeing for traction on the re-roofing side of things.

We're making very nice traction. We had a session today about it, and looking at the speed of our growth there, we've got a great team that's focused on that. We have -- we're pleased with the market focus we have and we're very pleased with that. And 1 of the nice things, Eric, is that that doesn't require new manufacturing plants. That utilizes the plants we have and what we may find is we bump up some resources in terms of sales there, but that team is doing a great job.

Great. I'll hop back in the queue. Thanks a lot.

Robert Kelly, Sidoti & Company.

Wanted to start with Engineered Building System segment. What was utilization in the quarter? And then as far as the production work, the quicker turn work, I think you alluded to that margin on the project being better than the build and permit. Is that what's driving the improvement there?

This is Mark Dobbins. The Buildings group, the capacity utilization there was just under, just slight of 60% in Q2. But the question about the smaller, less complex buildings are just -- those are projects that we can turn quicker through our backlog. We have structured some of our engineering and drafting squads to specialize in the smaller buildings and take advantage of a quicker turn in the market.

Now, typically that market, a turn for a lower complexity buildings is in the 6 to 7 week turn time. We can today promise and deliver a 3 week delivery on a project like that and many of our builders have taken advantage of that, especially when you see some of the construction we've seen over the past few months in the southeast with some of the storms that we've had.

And we're finding that that is being complemented by a resurgence of commercial-industrial in the higher end. We're beginning to book higher end work which has a longer lead time, but provides us a real opportunity to really employ the engineering and drafting expertise they have and the advantages that we have there. So that's been coming along nicely as well. So we're beginning to see the filling out, in the bookings, which is across the whole complexity range.

A better mix.

Yes, better mix.

Okay. And then -- okay. So you kind of alluded to if certain things hold in the second half of the year you think you'll be profitable in Engineered Building Systems. 1 of the variables is competitive discipline. It stands to reason, you've seen a fee change in competitor pricing discipline over the past 6 to 9 months. Why wouldn't that hold into the second half of the year.

Well Bob, you can never forecast behavior of companies or individuals. You kind of -- what we focus on is the things that we have in our care, custody and control.

You're not trying to imply that discipline is breaking down, it's just a matter of this could go wrong?

No, I'm not implying that at all. And I think that to some extent, the steel producers are doing a pretty good job in leadership there. You get people -- like Nucor that are kind of saying there's a base price. Well, I think that's -- I think that is -- I think that has a noteworthy effect. That's not a bad position to take. I mean, I applaud that.

So when we look at things, we really have a sales force that has made the transition since really 2009 and '10, that is focused on working with our customers in selling the value. And looking for those opportunities where the value is meaningful and means something to the customer. And those are the jobs that we're pursuing with great vigor.

Great. As far as the expectation that if we see the usual seasonal up-tick in demand for 3Q and 4Q that you've seen historically, not only will you have EBS breaking into the black but the Company on the whole on the operating line. Do you think you'll be generating positive cash flow in the second half of '11 and any chance you can just give us an idea of what you expect to generate for the full year '11, free cash flow?

I'm loathe to give guidance that specific, but let me just say quite clearly; I can't guarantee absolutely what the second half will be because if I could, I'd give guidance. I mean, I'd give it in a heartbeat. Because we want to provide that certainty to you guys.

But I've got to tell you, it's clear to me that really we have an opportunity, even with the modest recovery, because of the execution of our teams to be in the black across the board and that will be an important second half of the year. We may have something that comes up that we haven't foreseen but we've looked at things very carefully and very hard and our teams keep working any parts of our makeup of our brands that may be a little slower than the others are getting lots of attention, and we're seeing certain of our brands that have really found it difficult over the last 2 years, are really starting to show improvement, particularly as Mark said, I mean, with the design build. That's a really important part of the market that was missing for a couple of our brands, where they are really good at that and we're seeing those bookings, we're seeing their performance and frankly, let's not forget that we really made the biggest changes in our structure in our Buildings group.

We took the number of plants from 16 to 9 and it's taken us a fair while for the teams to get used to that and to work in that structure. We've still got work to do in the transportation side but the guys are making progress. We're making good gains in terms of the allocation of which plants are building which products. So I'm really pleased with the direction. I can tell you that within the Buildings group, while they're pleased to have a recovery, they have their eyes and goals set very clearly on much bigger improvement and this is the whole notion of a $200 million in EBITDA. When we look at improvement the way we have in this quarter, that's nice, but it's only a small step in where we're taking this Company.

Great. Free cash flow, positive in F '11?

Yes. Yes.

Okay. Great. And just 1 final 1 on the waiver or the lack of waiver. Are there plans to continue to seek a way to get the relaxation or are we just kind of going to go through to next April incurring the pick and issuing the incremental shares?

That would for me be the worst case. And I think where as we've said all along, we accrue as if we're picking but I can also say that we can earn our way out of this. In other words, the cumulative earnings can provide us an opportunity to pay cash, but we have to overcome the adjusted loss we have in the past. I mean, not -- and that's an adjusted basis. So we would have to do very well to earn our way out, but that's a possibility. Then you have the situation as our credit profile improves, there's always a chance that we could refinance. So there's a couple of things that we can do and you can better believe we're focused on them.

Right. As far as the incremental per quarter share count that you would be issuing, if you were to pick from here on out and not pay cash, what type of range should we expect for the next -- say for the next quarter? What would be the increment if you were to accrue and then just do a pay-in-kind rather than pay in cash?

Generally speaking, the common stock equivalents that would occur on a pick dividend would be approximately 1.3 million shares.

Quarterly?

Quarterly.

And that's -- is that dependent on where the stock price closes or trades on average throughout the quarter?

No, has no bearing on the stock price.

Okay. Great. And then just what is today, if you were to just -- if CD&R were to convert and also if you were to count in everything you've accrued on the pay-in-kind, what is the total share count, if you were to be totally diluted right now?

So if CD&R converted their entire preferred stock holdings into common stock including the accrued dividend, it would be about 44 million shares that they would convert into -- 44.3 million.

On top of the 18 that NCI has outstanding?

On top of the 19 that NCI has.

19. Right. Thanks, guys.

(Operator Instructions). Showing no further questions at this time. We'll go ahead and conclude the question-and-answer session. I will now turn the conference back over to Norman Chambers, Chairman, President and CEO. The floor is yours, sir.

Thank you very much for your interest and the good questions and we look forward to conference call next quarter. Thank you.

Thank you all very much for participating in the NCI Buildings earnings conference call. This concludes today's event. At this time you may disconnect your lines. Thank you.