Core Natural Resources Inc (CNR) 2012 Q1 法說會逐字稿

Good afternoon, and welcome to the NCI Building Systems first quarter earnings conference call. All participants will be in a listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) 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 NC Building Systems conference call to review the Company's results for the first fiscal quarter of 2012. This call is being recorded. To access the taped replay, please dial 877-344-7529 and then enter the passcode 10009517 and the pound sign when prompted. The webcast archive and taped replay will be available approximately two hours after the call and remain accessible through March 14, 2012. The replay is also available on the Company's website at www.ncilp.com. The Company's first 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 made on this call may be forward-looking statements within the meaning of the applicable securities laws. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as potential, expect, should, will and similar expressions. These forward-looking statements reflect the Company's current expectations and/or beliefs of future events. The Company has made every reasonable effort to ensure that the information, estimates, forecasts 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 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 factors that could cause actual results to differ.

To the extent that 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 website by following the 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, Norm Chambers.

Thank you, Todd. Good evening, everyone, and welcome to the first quarter 2012 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 the operations, and then we would be happy to take your questions.

This was the best first quarter we have reported since 2008. Volume increased 14% on a year-over-year basis. Benefiting from improved demand in certain sectors of our market, particularly manufacturing, energy and warehousing where NCI is very well positioned. We also saw some pull forward of shipments in the first quarter due to the unseasonably warm weather around the country this winter. Higher volumes from a pricing environment and excellent execution at each of our business units drove a 28% increase in revenues. Operating income and EBITDA increased at even greater rates with operating income up 130% over the same period last year and EBITDA up 383% to $12.4 million.

Each of our business groups, Coatings, Components and Buildings, posted double-digit growth in sales with our Buildings group leading the year on year on year improvement. The Coatings group has made good progress expanding their third party sales while serving the internal demand from our Component, Building groups as well. Our Components group delivered an excellent turnaround from a weak performance in Q1 2011. When we look into the quarterly results, all three business groups demonstrated pricing discipline and improved operating leverage from increased volume. Our gross profit on a year over year basis improved by 440 basis points to 22%. Mark Dobbins will provide greater insights when he reviews our operations.

As we indicated our previous calls, we view the first half of our fiscal year, which is our seasonally slower period, as establishing the performance foundation for the more seasonally important second half of the year, which aligns with the construction season. Our second half has always been substantially better than our first half. While we do not provide specific quantitative guidance, we do expect our fiscal second quarter to be significantly better than our second quarter of 2011, thus setting the stage for continued improved performance in the second half of the year compared to the second half of fiscal 2011.

Overall in our first quarter, nonresidential market measured in volume was down 5.4% from the same period last year. Our bookings remained strong at 16%, better than same period last year, and up 42% over the same period in 2010. In fact, February, the first month of our fiscal second quarter, produced extremely strong bookings. Backlog was up 3% sequentially, 8% year-over-year. Our backlog continues to turn faster than it has in the last several years. The Architectural Billing Index for commercial industrial is positive. The Fed Senior Loan Survey for commercial industrial activity remains quite positive. Taking all of this into consideration, strength in the industrial sector is helping us while improvement in the broader economy has yet to materialize in a meaningful way. Now, Mark Johnson will provide additional financial information.

Thank you, Norm. Our first quarter revenues were nearly $244 million, up 28% year on year. Revenue benefited from improvements in volume, better pricing, as well as a more favorable mix of projects held by our Buildings group which allowed us to capitalize on our superior service and delivery capabilities. We produced $12.4 million in adjusted EBITDA in the first quarter, which is a positive swing of $16.8 million compared to the year ago period. Improved earnings resulted from a consolidated 440 basis point increase in gross margin and lower operating expense ratios.

Our consolidated gross profit for the first quarter increased 60% to $53.6 million compared to $33.5 million in last year's first quarter, and each of our business segments contributed to the year on year improvement. The Coatings group benefited from increased volumes in both internal and external customers which are leveraged over a fixed cost base. The Components group, which was comparing to a very weak quarter last year, captured the pickup in business from certain manufacturing and warehousing sectors and saw continued strong demand for its new products. And the Buildings group benefited from a nearly 26% volume increase as well as a more favorable mix of business and improved labor efficiencies. Consolidated gross margin is still significantly below our historical average margins of 24% to 26%. While we expect to see gradual progressive improvement in our gross 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 nonresidential construction activities.

For the first quarter of 2012, engineering, selling, general and administrative costs were $49 million, or 20.3% of sales compared to $48 million, or 25.1% of sales in last year's first quarter. The first quarter tends to be our seasonally lowest with respect to ESG&A costs, so you can expect to see the absolute number increase somewhat in subsequent quarters this year, but we expect annual costs to remain in the range of 19% to 20% of revenues. Operating income was $4.3 million compared to an adjusted operating loss of $12.8 million in last year's first quarter which included certain special charges of $1.4 million. We reported net income for the period of $589,000 compared to a net loss of $12.7 million in last year's first quarter.

Now, a few comments on our balance sheet. At the end of the first quarter, we had cash and cash equivalents of $66.7 million, down from $79 million at the end of the fourth quarter, which was the seasonally strongest period of the fiscal year. In addition to our cash available on hand, our $125 million ABL credit facility remains undrawn.

With respect to accounts receivable, our DSOs continued to benefit from improved workflow systems and automation, accelerating to 33.7 days from 34.3 days in the same period last year. The first quarter of 2012 inventory balance was $102 million, a 22% increase over the same period of the prior-year, reflecting approximately 10% additional volume to support increased activity levels and approximately 12% higher raw material unit costs. Sequentially, inventory has increased 15%, which was more in line with our traditional pre-recession patterns. In last year's first quarter, our inventory levels were only up 2.5% sequentially. Annualized inventory turnover was 7.9 times for the quarter compared to 7.5 turns in last year's first quarter and 8.9 times in our 2011 fiscal fourth quarter.

In the first quarter of 2012, our capital expenditures were $5.8 million which included $4.1 million ongoing retooling of our two plants to convert them to insulated metal panel production, $1.7 million in continued enhancements to our engineering and drafting systems and further integration and automation of our manufacturing equipment, particularly in the Buildings and Components segments. As previously indicated, in 2012 we plan to spend between $30 million and $35 million in capital expenditures, which will include the completion of our two insulated metal panel lines and the refurbishment of our Middletown coating facility to be operational in 2013. As a result, we plan to spend the remaining $24 million to $29 million over the next three quarters.

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. For the upcoming dividend payment on March 15, 2012, we will pay the dividend in kind at the 12% rate. 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 after April 20. Now, I'd like to turn the call over to Mark Dobbins, our Chief Operating Officer.

Thank you, Mark. Obviously, we are very encouraged by the Q1 performance of our business units. Each business unit significantly exceeded the previous year's Q1 from both a revenue and tons perspective. Our Buildings group lead with the 26% increase in volume, Components volumes were up 6%, and Coaters had a 10% increase in tons shipped over the prior year's quarter. These improvements in volumes support the trends we identified in the fourth quarter of 2011, and we continue to see slow improvement in the markets that we serve. But more importantly, each business unit is improving at a faster rate than its respective markets, which is a result of their efforts to manage those things which are within their control. While we obviously cannot control the economy or the weather, both of which impact our business, we can control how we go to market, which markets we concentrate on and how efficiently we operate.

We continue to see improvements in our businesses resulting from the initial consolidation of facilities and through ongoing initiatives to modernize equipment and streamline processes which are resulting in much more efficient operations. Total ESG&A costs per ton in each business unit were reduced by double-digit percentages in Q1 compared to the prior year's quarter. These adjusted ESG&A cost per ton reductions were 21%, 16% and 11%, respectively, for Coaters, Buildings and Components.

The Coatings group managed a 10% improvement in external tons year-over-year, driven by their successful initiatives to develop coating opportunities outside our traditional construction markets in areas such as HVAC, lighting fixtures and appliance markets. These initiatives will be expanded with the start up of our recently acquired Middletown, Ohio coating facility, and we're currently in the process of updating the technology and capacity of this facility to align it with the other world-class coating operations. This effort is progressing as scheduled. The Coatings group has historically run a very lean and efficient organization, and we continue to invest in numerous initiatives to further drive costs out of the process through man hour per ton productions and reductions in scrap rate while positioning our coated products to compete in additional end markets. The results of these efforts have helped the group realize a 10% reduction in variable manufacturing expense per ton during Q1 compared to the prior year.

The Components group has 6% improvement in external tons over last year's first quarter in a market that still remains very competitive. Similar to the Coaters group, Components has historically operated a lean and efficient organization and has also managed improvements to their operating costs. This organization has several ongoing growth initiatives which are progressing very effectively. As example, the insulated metal panel initiative is providing significant growth in volume and profitability. These insulated metal panels provide a product to the construction industry which is easier and faster to install, but more importantly, provide a level of energy efficiency that exceeds other typical building construction methods. Growth of this product line has been a outstanding since we commissioned our first new insulated panel plant in 2010, and this growth continues to accelerate as insulated panel sales increased approximately 80% in Q1 2012 as compared to prior year.

Sales and marketing efforts for these insulated metal panels initially focused on commercial and industrial building construction and has been quite successful. However, we are targeting architectural horizontal panel applications for office buildings, hotels and retail. Another significant end use for these products is in cold storage applications for warehousing and distribution facilities of perishable goods. We're in the process of expanding our capacity and the product line with the addition of two new insulated metal panel facilities which will be operational later this fiscal year in order to meet the growing demand and additional applications for these products.

So, last quarter we reported the improved profitability of the Buildings group in fiscal 2011 and our view that we had only begun to see the potential for this group. While the first quarter of 2012 reinforced that viewpoint as the Buildings group managed a 28% increase in tons shipped and a 30% improvement in sales compared to Q1 2011. In addition to increased sales, the group continues to improve quality and efficiencies through consolidation of resources, enhancements to their technical systems, process improvements and equipment upgrades. Some of the accomplishments during the quarter include a 7% reduction in manufacturing expense per ton, a 22% decrease in engineering and drafting expense per ton and a 16% reduction in overall ESG&A expense per ton. These improvements are not only sustainable, but we believe they will be enhanced by volume growth as construction activity improves.

The construction market has improved in certain sectors such as manufacturing, warehouse and some retail, and the Buildings group has taken advantage of these slight upticks in demand. Regionally, we are seeing improved conditions in the South Central, North Central and South Atlantic regions of the country, and we continue to see more of the design build type work which allows our Buildings group to provide a level of expertise and experience to the project, which truly adds value. Bookings during Q1 improved 16% over Q1 2011 bookings, and our coating activity continues to be very strong. Some of the specific end use markets showing signs of improvement our multisite retail, agricultural related projects, service and manufacturing projects for the energy sector and large international opportunities in Canada, as well as Central and South America.

In conclusion, we are experiencing improvement in certain areas of the market and taking advantage of those opportunities. We are focusing on those things which we can control and creating significant operational improvements across each of the business units which we will leverage as the economy and construction market begins a return to more normalized levels. At this time, operator, we would like to open the call to questions. Thank you very much.

(Operator Instructions). Our first question will come from Robert Kelly of Sidoti. Please go ahead.

Hey, good afternoon. You called out weather being a beneficiary -- or weather being a driver of better volumes in the quarter. Any way to quantify, particularly with the engineered building systems segment, how much weather helped you?

Pretty much overall for the consolidated, Bob, was between $8 million and $10 million on the top line and maybe a couple of million dollars on the bottom line.

Okay, $8 million to $10 million in revenue. Great. The profit change in engineered building systems was pretty drastic, and you called that, in the release, your ability to turn the backlog quicker and shorten lead times. Are we seeing also more complex projects come through the P&L out of backlog and then last year was just a -- some of the weaker priced, weaker mix projects that are now -- have now run off?

Well, I wouldn't say it quite that way. I'd say that we had a different distribution, and Mark Dobbins will add some color on this as well, but a different distribution in the last year. We've done a lot better at the lower end in terms of our -- some of our express buildings. But what we have seen in the second half of last year, and certainly more in the bookings we see today, is a reemergence of the bigger projects. Which to me, speaks to the fact that on the industrial side in particular, people are willing to take more risk than they have in the past several years on big products. Mark, do you want to add something to that?

Yes, I think just to add to that, on these larger projects, most of those projects are typically design built-out projects, as I mentioned earlier, and that's the type of projects that we tend to be a lot more profitable with. We have a better-value add there for those projects.

So, as far as your makeup of backlog or orders, however you want to characterize it, what percent does design-build or higher-margin project make up of current backlog or 1Q orders?

When we look at the distribution through our classic complexity, we're finding that there is a barbell shaped, or dumbbell shaped, I should say. We've got a little more work in the top end, similar levels in the bottom end. So, the 8s, 9s, 10s are pretty good equal sized chunk of our work to the 1s, 2s and 3s, and we see a little less activity in the 4s, 5s and 6s.

Okay. You talk about February being a fairly strong order period, can you quantify the year-over-year increase on the month?

Bobby, it was so good I wouldn't want to let people think that that's what our run rate is going to be going forward. It was the best February we've had in a very, very, very long time.

Okay. One final one, and this is a below the line question. You have quite a bit of variability in the convertible beneficial conversion feature line. That's a fairly big drag. Does that also get -- does that line also get knocked out if the share price is above 12 -- ?

Yes, yes, yes does.

That is a direct part of the formula with the additional shares that are issued with the pick dividend. That, combined with our trading price of our stock, are what drive the beneficial conversion feature.

And the convertible dividend increase in line, that also drops to zero as well?

Yes. The dividends increase, and they go pretty close to zero. There is a little bit of accretion that occurs, probably want to say $600,000 per year that would continue.

I know you can't tell the future, but assume at the end of the next quarter, your second fiscal quarter, the knockout provision goes into effect. The share count would be, what?

The share count would still be the same. So, it would show on Yahoo as the 19 million or 20 million shares. But then the further dilution that when we pick is something like 1.3 million shares a quarter, that would cease. I think Mark can maybe give you a rough idea of what it might be at -- in May sometime.

Yes. Right.

Thanks, maybe we can do that offline--

I'll just run through a number real quick. In terms of the common stock that is outstanding, there it roughly 20 million shares of common stock. Some of that, about 1.5 million is unvested, restricted stock, so it's not included in the earnings per share calculation. That $20 million combined with -- 20 million shares combined with the as if converted preferred shares would be about 67 million shares, almost 68 million shares.

Okay thank you.

You're welcome, Bob.

And our next question comes from Arnie Ursaner of CJS Securities. Please go ahead.

Hi, this is Lee Jagoda for Arnie.

Hi, Lee.

How are you? So, through Q1, Norm, you've already surpassed last year's first half performance from an EBITDA basis, and historically, Q2 has been stronger than Q1. Even with the weather pull forward you saw in Q1, would you expect the historical trend to continue this year?

Well, Bob, if you look at page 33 in the investment packet, you see going back to 2004, which was the first recovery from the downturn of 2001 to 2003, that our first and second quarters can be one up, one down. It could be a whole variety of ways. But we certainly -- what way we think about it is how we are going to come out of the first half. So, we do expect that the second quarter will be significantly better than the second quarter of last year. Whether that pull through of work in the first has some effect where it may be a little less than the first quarter, we don't know yet. But, I will say that there is a no doubt in our mind that we're going to finish the first half a lot better than the first half of many, many years.

Great, and then can you talk a little bit about the percent of revenue that came from the energy and shale related end markets in the quarter, and your expectations related to that end market this year and going forward as a growth driver?

Well, one of the things we're seeing is that when we look at our bookings, if we would have thought in a more normalized environment before the wonderful finds of oil and gas and shale that's been taking place over the last 18 months or so, we would have probably had in the buildings group maybe 5% of our revenue or a little more would have been in the energy space, and that's probably 15% now. And the beauty of that is that, as I've explained to many, that is a long-term opportunity. That's not just a couple of quarters. There is lacking of infrastructure, both in the Marcellus shale and elsewhere in the new developments, and we expect that we will benefit from that for many, many years to come.

Great, and then one more bookkeeping type question, and I'll hop back into queue. Related to your interest expense, it has come down slowly for the last two quarters, and your debt level really hasn't changed that much. Is there anything that's causing that, and is this a good run rate to sort of build on forward?

Yes. There's really two things that are causing that. In the middle of last year, we amended our ABL facility, which lowered some of the fees we pay related to this facility. And then in addition in this first quarter, because our leverage metrics crossed over a grid threshold within that facility, our interest rate is lower by about 150 basis points.

So going forward, this is a good number to use quarterly?

I believe this is a good number to use quarterly.

Okay, great, thanks.

(Operator Instructions) And our next question comes from Matthew Spotswood of Basix Capital. Please go ahead.

Hi, there, great quarter, you guys. Quick question on the ESG&A. I know that you did a great job, it's down to 20% of revenue. Norm, what are your thoughts going forward? Is there further absolute costs to take out, or from here on out, does leveraging in the top line where that comes down overall? What's the goal on that ESG&A as a percentage of revenue?

What we really expect is the ESG&A will stay really quite flat with the exception of -- as we sell more and do better, we will have more commission costs in there. So, there'll be some, if you will, variable parts of that will grow a bit with performance. But we really have a goal to return to the 15% range on an annualized basis.

But for 2012, as I said earlier in the script, I think we are focused in on a 19% to 20%.

Right,

Right, okay, thank you.

(Operator Instructions) Having no further questions, this concludes our question-and-answer session, I'd like to turn the conference back over to management for any closing remarks.

Great, well, thank you very much. You can tell that while we are certainly pleased with our quarter, it is all in service to us exceeding $200 million in EBITDAR as the market returns to 1 billion square feet which many of you realize before this downturn was the low point of every recession going back almost 50 years. So, while we are very pleased with this step along the way, we will not be pleased until we really show that we are back to performing at very high levels. So, thank you very much, and good night.

The conference has now concluded, thank you for attending today's presentation, you may now disconnect.