Core Natural Resources Inc (CNR) 2011 Q4 法說會逐字稿

Good afternoon and welcome to the NCI Building Systems fourth quarter 2011 conference call and webcast. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would like to turn the conference over to Todd Moore. Please go ahead.

Thank you. Good afternoon and welcome to NCI Building Systems conference call to review the Company's results for the fourth quarter of fiscal 2011. This call is being recorded. To access the taped replay please dial 412-317-0088, followed by the pass code 10007046, and the pound sign when prompted. The webcast archive and tape replay will be available approximately two hours after this call and will remain accessible through December 13, 2011. Replay will also be available at the Company's Web site at www.ncilp.com. The Company's fourth 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 call on a listen-only basis over the Internet.

Some statements on this call may be forward-looking statements within the meaning of the applicable securities laws. These statements are made pursuant to Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. And generally includes such words as potential, expect, should, will, and similar expressions. These forward-looking statements reflect the Company's current expectations and/or beliefs concerning future events.

The Company has made every reasonable effort to ensure that the information, estimates, forecast and assumptions upon which these statements are based are current, reasonable and complete. However, these forward-looking statements may be subject to a number of other risks and uncertainties that may cause the Company's actual performance to differ materially from that projected in such statements. Investors should refer to reports filed by the Company with the Securities and Exchange Commission, and in today's news release for a discussion of other factors that could cause actual results to differ.

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 in today's press release, which can be located on the Company's Web site by following the NCI news link. Information being provided today is as of this date only and NCI expressly disclaims any obligations to release publicly any updates or revisions to these forward-looking statements, whether as a result of new information, future events, or otherwise. At this time I would like to turn the call over to NCI's Chairman, President and Chief Executive Officer, Norman C Chambers.

Todd, thank you very much. Good evening, everyone and welcome to our fourth 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 will provide an overview and Mark Johnson will review our financial results, followed by Mark Dobbins who will review our operations and then we would be happy to take your questions.

Fiscal 2011 ended positively across the board with year-on-year improvement in revenue, gross profit margin, operating income and EBITDA. For the first time since 2007 we returned to historical patterns in which our fourth quarter performance exceeded our third quarter. At the time of our second quarter earnings release in early June, we believed we have enough confidence based on order of bookings trends to state that second half results would be significantly better than last year's second half. And when we issued our third quarter results, we added that we expected the fourth quarter profitability to be sequentially higher. I'm pleased to report that we were correct on both counts.

This is important not because -- not just because we do not want to disappoint, but because it means that we are generating data and metrics which we believe is improving our visibility. In fact, our fiscal 2011 EBITDA was significantly better than 2010. Reflecting our first year of recovery from the worst downturn in non-residential construction in almost 50 years. Non-residential new construction starts for fiscal 2011 were down 5%, and we were flat with 2010. Our buildings group adjusted operating income swung from a loss of $14.3 million in 2010, to a profit of $13.9 million in 2011. Despite a 4% reduction in tons shipped, the buildings group gross profit increased 410 basis points year-over-year. This is a clear demonstration of tangible, measurable improvements that our marketing and sales, engineering and drafting, and manufacturing initiatives are producing despite market challenges.

By working creatively and constructively with our builder network, our colleagues in the buildings group were able to accomplish a very significant improvement that firmly puts us on the path to achieving our corporate objective of exceeding $200 million in EBITDA as the non-residential market improves to 1 billion square feet of new non-residential construction starts. We are certainly encouraged by increased bookings that our buildings group has enjoyed in the second half of fiscal 2011, up 38.7% compared to the same period in 2010, and 24.4% better than the same period in 2009. This increase in bookings is in part the result of higher demand from the manufacturing and energy end markets. These end markets have grown about 11% in volume during fiscal 2011. We believe the industrial sector will continue to lead the recovery in the US economy, and we expect that manufacturing and energy sectors to continue to improve even through a choppy economic recovery.

Our components group, while still quite profitable, did not perform as well in fiscal 2011 as it did in 2010. While the insulated metal panels, roll up doors and products for the agricultural segment saw year-on-year growth, the components group core, commercial and industrial activity remains slow in line with broader non-residential market conditions. The components group does not have the benefit of a backlog. Their business is quick-turn, sell and ship in the same week or so. Therefore, we do not have the visibility that we have in our buildings group, but we do expect based on historic trends that the components group will experience growth as a result of the pick up in bookings in the buildings group. In fact, our components group saw evidence in pick up in demand in both October and November.

The coatings group continues to increase third-party sales which were up 16% over 2010, and led to an 11% increase in operating income for the year. This business unit supports all of our internal requirements for coated and painted steel with great focus on safety and quality. Every move into 2012, which we expect will be our second year of recovery, we recognize there is great uncertainty about the broader recovery of the US economy, particularly when you layer on the global economic concerns. Even within this difficult environment, we are confident we will produce improved results in fiscal 2012 over what we have accomplished in 2011. November, the first month of our fiscal year, has continued the positive momentum with significant year-over-year improvements.

However, the underlying basis for our optimism is squarely due to the internal improvements. In other words, we are not relying on a broad economic improvement. We do expect that our buildings group will continue to drive improved profitability as a result of our marketing and sales campaigns with our builder group, improved -- improved engineering and drafting, and leveraging of our manufacturing plant efficiencies. We do expect that our components group will continue to see top line growth as a result of the two new retooled insulated metal panel plants that will come on production in 2012. We do expect our coatings group will continue to experience double-digit top line growth as they begin to bring their new coating plant on line for 2013.

In summary, each of our business units are structured for better performance in 2012 and positioned to significantly benefit from even a modestly better business environment. Now I'll hand over to Mark Johnson and Mark Dobbins to provide more detail about our fourth quarter and year end results.

Thank you, Norm. Our fourth quarter revenues were $282 million which was nearly 17% higher than the year ago period. Revenue benefited from small improvements in volume, better pricing that offset higher material costs, as well as a more favorable mix of projects all by our buildings group, which allowed us to capitalize on our superior service and delivery capabilities. We generated approximately $17.5 million in adjusted EBITDA in the fourth quarter, which is 134% higher than the year ago period. Similarly for the full fiscal year, our revenue increased 10% and EBITDA more than doubled. The improved earnings result from a consolidated 140 basis-point improvement in gross margin, and lower relative operating expenses.

Throughout the last three years, including 2011, we have substantially restructured our operations, aligning our footprint with the reality of today's marketplace but also positioning our business to capitalize on our market's eventual recovery. In the second half of 2011 we saw the initial benefits of these investments in improved operating efficiencies.

As we have previously described, our restructuring included rationalizing our manufacturing capacity, eliminating our least efficient plants, and enhancing the capabilities and automation of others. This reduced our manufacturing fixed cost burden nearly 25% from 2008 levels without impacting future capacity. We began to see the benefits of these actions in the fourth quarter of 2011, as our building segment improved labor efficiency by nearly 6% over 2010. We have continued to automate and streamline our engineering and drafting capabilities, which has allowed us to improve our delivery times and will allow us to achieve lower per unit conversion costs on increasing levels of production in our buildings group.

Our consolidated gross profit margin for the fourth quarter increased to 21%, compared to 19.2% a year ago. These results included $1.2 million of impairment charges related to fair value write-downs of real estate assets held for sale. Excluding these charges, our gross margin would have been 21.4% this quarter. Both our buildings and coatings groups contributed to the improved gross margin. The coatings group benefited from increasing external shipments, which are leveraged over a high fixed-cost base, while the buildings segment benefited from a combination of higher volume, improved margins associated with design and build work, and improved labor efficiencies. The components groups margins remain challenging due to its broader exposure to weaker commercial and industrial, and institutional sub sectors.

For the year, consolidated gross margins increased 140 basis points to 20.9%. Billed significantly below our margins of 24% to 26%. While we expect to see gradual progressive improvement in our margins throughout the recovery, we do not expect to return to more normalized levels until there is a meaningful improvement in volumes, driven by increased non-residential construction activity.

Engineering, selling and general and administrative costs were $51.1 million or 18% of sales, compared to $48.5 million or 20% of sales in last year's fourth quarter. For the full year, our ESG&A costs were $202 million, 21% of sales compared to the prior year's $191 million or 22% of sales. In 2012, we expect to see continued gradual year-over-year improvements in ESG&A expense as a percent of sales as the recovery continues. However, material improvements in this metric will not occur until there is meaningful improvement in the level of non-residential construction activity.

Now a few comments on our balance sheet. In the fourth quarter we generated $36 million in cash from operations, bringing our cash balance to $79 million, compared to $50 million at the end of our third quarter. Despite investing $21 million in capital expenditures during fiscal 2011, paying $11 million in dividends and reducing our debt by $6 million, we were able to increase our available cash reserves by nearly $2 million over the prior year. In addition to our available cash on hand, our $125 million ABL credit facility remains undrawn. With respect to accounts receivable, during 2011 we achieved marked improvements in our days sales outstanding, reducing them by two full days to 30.8 days from 32.9 days in the prior year. The improvement in our collections was driven in part by the implementation of automated work flow systems for our collections team.

Our year end inventory balance was approximately $89 million, down by almost $28 million from the prior quarter, and represented approximately 41 days of inventory on hand. An improvement of 1.5 days as compared to 2010. While the value carried in inventory is higher than the prior year by $7 million, this reflects lower on-hand quantities but higher per-unit costs from higher raw material prices.

In 2011 our capital expenditures were $21 million, which included $11 million to begin retooling two plants and convert them to insulated metal panel production, $5 million in continued enhancements to our engineering and drafting systems. And, further, integration and automation of our manufacturing equipment, particularly in the buildings and coatings segments. Looking forward to 2012, we currently plan to spend between $30 million and $35 million, which will include the completion of our two insulated metal panel lines and the refurbishment of our Middletown coating facility for operations in 2013.

With respect to our outstanding Series B cumulative preferred stock, as we have previously reported, the Company's ability to pay cash dividends is limited by the terms of our credit facility. If not paid in cash at an 8% annual rate, we have the option to pay the dividend in kind at an annual 12% rate. For the upcoming dividend payment on December 15, 2011, however, the holders of the preferred stock have agreed to accept payment in kind at the lower 8% rate and we have agreed to forego utilizing the annual $5 million equity issuance basket within the related shareholders' agreement during our fiscal 2012. As you will recall, a similar agreement was reached for the September 15 dividend payment in our fiscal 2011.

The determination to pay cash versus payment in kind is made each quarter and continues to be subject to limitations in our credit facility. There can be no assurance that the holders of the preferred stock will agree to this lower 8% rate in future periods. As a reminder, our preferred stock terms include a knockout provision under which these dividend payments are permanently eliminated if our common stock trades above $12.75 for any 20 consecutive trading days following April 2012. Now I'd like to turn the call over to Mark Dobbins, our Chief Operating Officer.

Thank you, Mark. As Norm noted earlier, 2011 non-res construction starts, as reported by McGraw-Hill, were down 5% as measured in square feet in our fiscal 2011. However, our components and buildings groups tonnage volumes were down only 1% and 4% respectively, with our coatings group managing a 6% improvement in tons shipped compared to prior year. While each of our business units outperformed the market, this was a very challenging year indeed. However, we saw a reversal of that downward trend in the fourth quarter when volumes for each business unit actually exceeded prior year tonnage volumes, with the components group up 2%, buildings group up 3% and the coatings group exceeding the prior year Q4 by 14% in tons shipped.

This Q4 improvement, in what has been a down year, is very encouraging especially considering our current booking trends. Even with the meager increases in quarter-over-quarter tonnage volumes, the improvements we have made in efficiencies, technical systems and equipment upgrades produced a significant positive impact on profitability late in our fourth quarter compared to prior year. We have noted in the past that these improvements will allow us to exceed historic levels of profitability on significantly less volumes, and this is beginning to play out.

Now moving to each business unit, the components group continued to operate in a very competitive environment with compressed margins. Component tons shipped in Q4 were slightly better year-over-year, but the margins were lower. You may recall that this group tends to expand their margins in an increasing steel price environment as we experienced earlier in the year, but margins will contract when steel prices drop significantly, as they did in the last half of our fiscal year. Norm mentioned earlier that core commercial, industrial component sales remained depressed in the quarter, but we saw nice improvements in our insulated metal panel sales, roll up doors and our agricultural related products. As an example, our door division sales were up 11%, our agricultural product division sales increased 13.6% and sales at our insulated metal panel division were up a significant 75% in the quarter as compared to prior year.

Just one additional note regarding insulated panel sales, for the year insulated metal panel sales increased 35%. And this will continue to be a significant focus area for us moving forward as we previously announced the addition of two new manufacturing facilities for these products, which we are currently retooling and will come on line during fiscal 2012. The demand for these products continues to increase and we're also taking market share in this product line by providing superior service and quality that the components group has built their reputation on.

The coatings group had steady improvement throughout the year, reporting a 6% year-over-year growth in volume driven by their initiatives to increase third party sales outside the typical construction markets. During Q4 this group achieved a 14% improvement in tons shipped compared to prior year which, again, gives us a level of optimism that we may be seeing improving conditions as we exit a very tough year. Along with the non-construction sales initiatives to markets such as lighting fixtures, HVAC and aluminum products, a lot of vocations and improvements are now under way at the previously idled coating facility we purchased in Middletown, Ohio, last year. This facility will allow us to access sales in a region of the country that we have not been able to service from our existing coating plant footprint, and will supply plenty of material for our internal components and buildings divisions in the upper midwest, which would improve their relative cost positions in those areas.

The engineered buildings group continues to improve and we are now beginning to see the earning potential of this group. Beginning in 2009 and throughout 2010, the buildings group went through substantial change resulting in a leaner organization utilizing more efficient manufacturing facilities and equipment, faster and more efficient drafting and engineering systems, with a continued focus on service and quality. These improvements, along with good commercial discipline, provided the complete turn around and profitability in 2011 as compared to 2010, which Norm commented on earlier. These marked improvements -- this marked improvement in a depressed construction environment is yet another indicator that small improvements in construction activity should yield dramatic results.

The engineering and buildings group finished the quarter with strong results. Revenues were up 20% over prior year's Q4, but more importantly, gross profit improved by 600 basis points on the same comparison. Norm noted earlier a 38% increase in bookings during the past six months compared to the same period prior year, and this positive trend is continuing currently. During previous conference calls we stated that overall construction activity was still weak but that the design build type projects have made a rebound and that is the type of work in which our buildings group does excel. During Q4 there were a number of large projects sold or delivered with a wide variety of end uses such as several manufacturing projects associated with oil and gas development, freight terminals, general distribution warehousing, and heavy equipment manufacturing projects. We also had return of some government spending in the form of large aircraft hangar projects for the military.

In wrapping up, we are cautiously optimistic that we may be seeing the beginning of a slight improvement in construction activity, though we are confident that we are managing those things which are in our control to improve the profitability of the entire organization. Now, operator, we would like to open the call to questions. Thank you.

(Operator Instructions) Our first question comes from Arnie Ursaner at CJS Securities.

Hi, good afternoon. My question relates to your shipping schedule for the building group. You've been over quite a bit of the last year, you have been getting more rapid orders, more real-time, as you say book for production business. When you look into Q1 next year, how is that business shaping up versus the trends you've seen so far this year?

Arnie, the buildings group, the backlog has remained steady. Their shipping schedule is actually well filled into December and filling into January. And what that means when I say well filled, it is according to our plan. It is not a capacity issue, but it is lining up with our plan for those periods.

And I assume if that is the case, the first quarter is usually is a challenge to achieve profitability. With what you have in hand, is that likely that you will achieve profitability in Q1?

We're loathe, Arnie, to give guidance like that, but I have to tell you that we clearly see that our first quarter will be meaningfully, significantly better than last year, for sure. To the extent, that we have -- we have an opportunity to get back in profitability, you know that we're going to move all things to get that done.

Well, Norman, you set yourself up for my next question. In your prepared remarks on the outlook, you indicated that with the growth initiatives underway and the operating leverage, you are in a position where you can deliver another year of the word you choose, significant improvement in EBITDA. Can you quantify what significant means to you?

I can tell you what significant meant to me last year, and it meant that we would produce the kind of EBITDA or growth that we saw this year, which took us from [$16 million] to [$35 million]. And all I'm saying is that if we continue to have bookings and the bookings trend that we're seeing now, then that really bodes well for us to be able to start off the first half of our year a lot better than last year, would be a meaningful achievement and would really put us in great position for the second half of the year, Arnie.

It would be foolish of me not to take advantage of the fact that you mentioned three different times that November was really strong. So, perfect question is, can you quantify how strong November was?

It's interesting. It was up double-digits, I'll tell you that.

Any more clarification beyond double-digits?

If I start giving the monthly stuff, Arnie, I'm going to be forced to do that on a regular basis. But it's certainly -- it certainly was meaningful enough for us to mention it three times in our call. The significance of that, not to be too -- the significance is that for those that have been around us, they know that we are hard-wired to deliver everything we can into the year. So, what normally happens is that November is normally pretty doggone weak, both from a bookings perspective as well as a shipments perspective because we have really worked hard to get everything into October. And we did the same thing this year. Pleasantly, we find that the level of activity has continued well into November as well.

I'll jump back into queue, thank you very much.

Thank you, sir.

(Operator Instructions) We show no further questions at this time. I would like to turn the conference back over to Mr Chambers for any closing remarks.

Let's make sure Mr Ursaner doesn't want to jump back in.

We have a question from Jon Gruber at Gruber and McBaine.

I didn't want you to end the call so soon.

I appreciate that.

How optimistic are you relative to where you have been the past couple of years on what is going to transpire in the next nine months here? Where do you stand?

Yes, so one of the things that we have really tried to improve is our metrics in terms of monitoring more closely what's going on in each of our businesses. And the buildings group gives us the best visibility because of the quoting activity, because of the bookings, and to be sure, we continue to see really substantial strength in the industrial piece in the manufacturing and the energy side, and that, that is material. And the reason why it is, if you look at the commercial and industrial part of the ABI, while we've had -- we had nine months of growth in that, and positive territory, followed by five months of decline. In the last two months have been up.

Yet our bookings in our buildings group has continued to be strong because we find that the kinds of -- a large part of what we are selling and shipping is in areas of the marketplace where the architectural involvement is limited, because engineers are doing the design work. And that part continues to be strong, and I think it's driven by, by a lot of -- by a lot of energy work in the US, and that's a very good thing. So, we would feel more confident if we saw our broad-base recovery, but we're very pleased that within a year where the overall marketplace that we serve was down by 5% in volume, this part of that marketplace was up by 11%. And that's a good thing. So, our confidence is certainly higher than it has been at any time in the past three years or more.

The other thing that gives us some level of confidence is that this is the first year since 2007 that our historical patents, in which our fourth quarter is better than our third quarter, has been achieved. And what that means is that in the past years, which include 2008, 2009 and 2010, our fourth quarter was less than our third quarter, and that was because the year was continuing to decline, the year we're going into. That is not the case this year. And it is not the case because the industrial side is stronger than the rest of the marketplace. So, our confidence is high, but at the end of the day we really far prefer to prove it in terms of our results. And be a little circumspect with our guidance.

Thank you.

Thank you.

We are showing no other questions at this time.

Well, I want to thank you for the questions we did get. And, again, I appreciate your following us, and we will continue to do our level best to deliver the significant results that we think we can. Thank you very much.

The conference is now concluded. Thank you for attending today's event. You may now disconnect.