Core Natural Resources Inc (CNR) 2012 Q2 法說會逐字稿

Hello and welcome to the NCI Building Systems' second-quarter 2012 earnings conference call. All participants will be in a listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity for you to ask questions. Please also note that today's event is being recorded. This time I would like to turn your conference call over to Mr. Todd Moore. Mr. Moore, please go ahead.

Thank you. Good afternoon and welcome to NCI Building Systems' conference call to review the Company's results for the second quarter of fiscal 2012. This call is being recorded. To access the taped replay, please dial 1-887-344-7529 and then enter the passcode 10013303 and then the pound sign when prompted.

The webcast archived and taped replay will be available approximately two hours after this call and will remain accessible through June 7, 2012. The replay will also be available on the Company's website at www.ncilp.com. The Company's second-quarter fiscal 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 call may be forward-looking statements within the meaning of 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 concerning future events.

The Company has made every reasonable effort to ensure that the information estimates, forecasts and assumptions on 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 further discussion of 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 website by following the NCI news link.

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 whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Norm Chambers, NCI's Chairman, President and Chief Executive Officer.

Thanks, Todd. Good evening, everyone, and welcome to our second-quarter 2012 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer, and Todd Moore, our General Counsel. I will provide an overview and review our operations, followed by Mark Johnson who will review our financial results. Then we'll be happy to take your questions.

Much has been accomplished since our last conference call. First, business continues to improve as evidenced by our solid year over year, our growth in volume, sales, profitability that we reported for Q2. And looking forward, we are cautiously optimistic based on the 39% increase in bookings in Q2 and our backlog of $259 million, which is up 23% year over year and 16% sequentially.

Second, we signed a definitive agreement to purchase the insulated metal panel company, Metl-Span. This acquisition will enable our Components group to improve its manufacturing footprint, technical knowledge, steel supply, distribution channels for insulated metal panels, which is our fastest-growing building product. Just last week we were notified that we had passed regulatory review and were granted early termination of the waiting period under Hart-Scott-Rodino Act, which means we're able to move forward on this transaction.

Third, we took action to permanently eliminate NCI's dividend obligation on our convertible preferred shares held by Clayton, Dubilier & Rice thereby ending the uncertainty around the potential future costs and dilution to our common stock.

In terms of market conditions, McGraw-Hill is forecasting very modest growth in volume of new construction starts for nonresidential construction for 2012. While the architectural building index for commercial industrial sector has indicated growth for the last eight months, the ABI forecasts or foreshadows, I should say, expected growth in the next six to nine months and there is a high correlation between the commercial industrial index and our future shipments.

Further, the combination of banks easing credit standards and the increasing percentage of banks reporting stronger loan demand for nonresidential structures is a significant one-year leading indicator for the continuing recovery in nonresidential construction spending as recently reported by economist Michael Darda of MKM Partners.

Our second-quarter 2012 results are another clear indication of our ability to convert even a modest uptick in demand into significant year-over-year growth in revenues and profits. Revenue and volume increased 11% compared to last year's levels. Operating profit was $4.9 million compared to an operating loss of $1.8 million last year. And EBITDA improved nearly 100% to $15.3 million.

We achieved these results despite an estimated $8 million to $10 million in revenue and $1 million to $2 million in operating income that represented orders pulled forward into the first quarter due to the unseasonably warm weather then. Mark Johnson will provide additional metrics on our segment and performance, but here are some highlights.

Our Coil Coating group increased its external sales by 15% and operating income by 12%. We are seeing growth coming from additional penetration of non-construction materials such as lighting, appliances and HVAC, as well as market share gains. Our Coatings group operating margin benefit from our base loading of their facilities with internal work from our Components and Buildings group and the significant gains made in increasing line speeds, improving the productivity and quality.

Our Middletown, Ohio, coating facility is currently being refurbished and ready for production by the end of calendar 2012. Once online, it will expand our operation into the Midwest and Northeast where our Buildings, Components operations consume and distribute significant tons of coated products and will provide additional capacity to meet future demand from the Coatings group external customers.

Under the new leadership of Mark Dobbins, a 25-year Company veteran and our former COO, the Components team is focused on rebuilding the core commercial industrial segment which has still not witnessed any real economy-driven recovery.

The Components groups' sales group grew by 3% in Q2 and adjusted profit was down by $1.6 million reflecting the weakness in their core institutional and commercial sectors offset by strong performance in the insulated metal panels and roll-up doors and relative strength in demand in agricultural and [depot] markets.

Our Buildings group continued their strong recovery, generating $6.7 million in operating profit compared to a small loss this past year. Sales grew by a very solid 15% driven by continued demand from the manufacturing of warehousing and broad energy end markets and a pickup in retail with specific national accounts. Profitability benefited from a more favorable mix of high complexity work as well as continued target enhancements in manufacturing and engineering efficiency. The team continues to stay focused and disciplined.

As you know, our seasonally slower first two quarters established the foundation for the seasonally stronger third and fourth quarters. We started to see an improvement in our business in last year's second quarter, so this was the beginning of a more challenging quarterly comparison. We expect to deliver solid comparisons in Q3 and Q4.

We have entered the second half of fiscal 2012 in a strong position, with first-half volume up 13%, sales up 19% to $494 million, operating income up 158% to $9.2 million and EBITDA of approximately 750% to $28 million. These results demonstrate our ability to capitalize on modest improvements in the market to drive significant revenue growth and take advantage of our improved operating leverage. Mark Johnson will now take you through a more detailed financial review. Mark?

Thank you, Norm. Our second-quarter revenues were $250 million, up 11% year on year and 2.7% above the prior quarter. Adjusted EBITDA was $15.3 million in the second quarter, almost twice the $7.7 million of last year and a 19% sequential increase. Our improved year-over-year performance was driven by a combination of higher volumes, favorable mix and lower costs. Each of our business segments contributed to our 12% increase in volume in the quarter.

The Coatings group benefited from volume increases for both internal and external customers, which are leveraged over a fixed cost base. External tonnage was up 30% for the Coatings group, which was comparing to a weak quarter last year. The Components group, which comped against a strong year ago quarter, had slightly higher tonnage of 1%.

As Norm mentioned, the basic commercial and industrial markets for our Components group have remained sluggish. Higher volumes in revenues have been driven by the success of our insulated panel product line where sales increased 88% year on year.

In addition to retooling two of our own plants, the state of art insulated panel production facilities, we recently announced an agreement to acquire the leading insulated metal panel producer in North America, Metl-Span. This expansion and combination reinforces our strategic position with respect to this high-growth product category.

Our Buildings group again led our improved performance this quarter. Volume was up 4% and revenue was up 15%, reflecting a disciplined marketing approach and more favorable mix of business. This group continues to significantly improve its operating leverage as volumes increase, realizing the benefits of lower relative engineering, drafting and manufacturing costs.

Our consolidated gross profit for the second quarter increased 14% to $58 million. Consolidated gross margin expanded to 23.2% from 22.5% last year and 22% in the prior quarter, but is still below our historical average margins of 24% to 26%. While we expect to see gradual progressive improvements 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 activity.

For the second quarter of 2012, engineering, selling, general and administrative costs were $51.6 million, or 20.6% of sales, compared to $52.7 million, or 23.3% of sales in last year's second quarter. Included in this year's ESG&A was an unusual benefit of $1.9 million related to the recovery of self insured general liability costs which was offset by $500,000 in Executive retirement charges and $1.5 million in acquisition costs related to the recently announced Metl-Span agreement.

We expect to recognize approximately $3.4 million in additional transaction related costs in our third fiscal quarter when the transaction is expected to close.

We also expect to complete a related financing transaction in our third quarter which will provide funding for the acquisition as well as refinance our existing term loan facility. The resulting early extinguishment of our current debt and recently completed amendment and upsizing of our ABL revolver will likely result in debt extinguishment amendment charges ranging from $6 million to $7 million, most of which as non-cash costs.

Operating income was $4.9 million compared to an operating loss of $1.8 million in last year's second quarter and an operating profit of $4.3 million in this year's first quarter. We reported net income for the period of $1.3 million compared to a net loss of $3.2 million in last year's second quarter.

Now a few comments on our balance sheet. At the end of the second quarter, we had cash and cash equivalents of nearly $74 million compared to $67 million at the end of the first quarter. In addition to our cash available on hand, our ABL credit facility remains undrawn and was recently amended, extended and upsized to $150 million in anticipation of completing our announced acquisition.

With respect to accounts receivable, our DSOs improved sequentially to 31.2 days as compared to 33.7 days at the end of the previous quarter. Last year our DSO was 30.2 days in the same period. The second quarter 2012 inventory balance was $106.9 million, a 1% decrease over the same period of the prior year, reflecting similar steel costs and on hand volumes between the two periods. Annualized inventory turnover was 7.2 turns for the quarter compared to 7.3 turns in last year's second quarter and 7.9 turns in our 2012 first quarter.

In the second quarter of 2012, our capital expenditures were $8.1 million. First half capital expenditures were $13.9 million, which included $8.7 million ongoing retooling of our two plants to convert them to insulated metal panel production, $1.8 million in continued enhancements of our engineering and drafting systems and further integration and automation of our manufacturing equipment. As previously indicated, in 2012 we plan to spend between $30 million and $35 million in capital expenditures.

With respect to our outstanding series B cumulative preferred stock, as we have previously reported, the Company reached an agreement with the holders of the convertible preferred shares, CD&R, to eliminate NCI's quarterly preferred dividend obligation. In exchange, the Company agreed to make a one-time, non-cash payment of 37,834 additional shares of convertible preferred stock. This payment to CD&R will be reflected in our third-quarter 2012 financial statements as a non-cash one-time charge.

The accounting treatment for this non-cash transaction will be complex and will likely result in revaluing the preferred stock to fair value on our balance sheet, with an offsetting reduction to additional paid in capital. In addition, we expect to incur a non-cash charge to net income available to common shareholders of approximately $55 million. The actual non-cash charge will depend on completing the financial accounting analysis and the fair value assessments of the convertible preferred stock.

As a result, the actual non-cash charge may vary significantly from our current estimate. This transaction achieves certainty with respect to ownership interest between preferred and common shareholders and will eliminate future charges related to convertible preferred stock dividends and accretion and the convertible preferred stock beneficial conversion features in subsequent quarters.

Therefore, after recording this one-time non-cash payment in our third quarter, beginning in our fourth quarter, we will be able to show a more direct correlation between net income and earnings per share. I'd like to turn the call back over to Norm.

Thanks, Mark. Our expectations for the remainder of the year are very positive, in addition to a seasonal pickup in activity. First, the Coatings group should have steady performance and growth in third-party sales with an increasingly diversified roster of customers.

Second, we expect with the change in leadership in our Components group, we should see renewed focus on the growth and profitability of our core commercial industrial or -- and in addition an acceleration in our growth initiatives. When we close the Metl-Span acquisition, their excellent team will join Mark Dobbins as a profitable addition to the Components group.

Third, we believe that our Buildings group should have a strong second half leveraging all of their external and internal initiatives for profitable growth. In summary, we're looking ahead to generating solid year-on-year improvements in volume, sales, operating income and EBITDA in both our third and fourth quarters of fiscal 2012. Now I'll be happy to take your questions.

(Operator Instructions) Bob Kelly from Sidoti.

Hello, good afternoon. A question on 2Q compared to 1Q. You talked about $8 to million to $10 million in revenue pulled forward into 1Q, $1 million to $2 million in EBITDA. Was the bulk of that pull forward seen in the Engineered Building System segment?

It was across the board, but this is what we said on our first quarter call that we -- we gave our estimate and foreshadowed that we might see a second quarter that was a little lighter than our first quarter. But the team was able to make up all that difference.

Right, so the pull-forward was equally in all segments?

It was pretty much across the board, but I would think that the Buildings group probably had the lion's share of it because of the way the projects work.

Of our three segments, the Coatings group probably experienced the least effect, but the Buildings and Components group both shared equally in the pull forward.

Okay and then just on Engineering and Building Systems, revenue was up sequentially but your profit margin there was down a bit? Is that a mix? Is that a raw material issue? Could you just walk us through that?

In the Components group the--

No, I'm sorry in the Buildings group.

We had some higher priced deal that went through in the second quarter so there was some materials piece of that and that was really about it.

What's the raw materials position for the second half? Any drag or material drag from input costs in the second half?

We should be in pretty good shape, Bob. One of the things we are seeing is that there's a fair amount of uncertainty because there's two steel mills that are in difficulty, both RG Steel at Sparrows Point and Crump but whether that materialize into some disruption we've yet to see.

Okay. As far as you talked about the refinancing and the expansion of your credit facility, could you ballpark -- I don't think you've made this public yet. Could you give us a sense of what interest rate you'll be paying and then what your annual interest expense is going to be once that facility is in place?

Well let me first say that it's a little bit premature to comment on it since the debt has not been marketed yet. But I would point out that in our 8-K announcement of the Metl-Span transaction, we did include the term sheets that went along with the committed financing for the transaction which is indicative.

Okay. As far as Metl-Span, is there some help you can give us on the accretion or the contribution from that acquisition in the second half of the year? It sounds like insulated panel has a higher margin than your average Component business. Will it be accretive on the margin line as well?

Before Mark gives you that, we have a confidential agreement, so we're limited in what we can say, but I think Mark can give you some guidance.

As far as the transaction closing we have some limitations. Generally speaking, insulated metal panels as a product line have a higher margin so it should be incremental at the margin line. We have disclosed publicly that the revenue that Metl-Span earned for the 12 months ended December 2012 --

'11. I'm sorry.

'12, it was '12, was $170 million. So if we close the transaction as we expect to in June of this year, we would anticipate having Metl-Span as part of our operations for the remaining four months of our fiscal year. And the Metl-Span product line is similar to our own product line.

If you looked at our Components group and the operating margins of our Components group as a whole, which is a larger group of products, you would find that type of product will generally perform better than the average of our overall components business. So it would be slightly higher margins earned on that $170 million than we would earn generally in our Components business.

That was their revenue in December 2011?

It was.

Yes, okay.

Okay, so just one more on the acquisition. Your panels were up I believe you said 88% year on year. I know we can't extrapolate that type of number. Should we expect Metl-Span, once it's fully integrated, to be posting high teens revenue growth? What's your expectation for the acquired business?

Well we bought the business as Bob, because -- and have been investing in the business because we see it as a high-growth group. But clearly as a new entrant, our growth was disproportionate, so we don't expect to see that level of growth going forward that's for sure. But we believe that we will continue to see solid growth, double-digit teens growth.

All right, thank you very much.

You're welcome, Bob, thank you.

(Operator Instructions) Lee Jagoda from CJS Securities.

Can you give us the fully diluted share count post the issuance of shares to CD&R in Q3 that would eliminate the dividend? And then the total shares outstanding excluding CD&R on a fully diluted basis assuming you have a profitable quarter?

Yes, give me one second. Prior to completing the transaction, the common shares outstanding for the Company would have been 20.3 million and that includes about 1.8 million in unvested restricted shares. And it's that unvested restricted shares which drives the difference between our common share count and the shares you see on the face of our income statement which drive the earnings per share calculation.

With the ultimate as converted calculation for the CD&R preferred share holdings, the total share count would be 74.5 million shares, and that's post transaction. So effectively the ownership interest between common and preferred would be 72.7% preferred shareholders and 27.3% common shareholders.

Perfect, that's very helpful. And then, Mark, can you give us your best estimate for the dividends and accretion and the beneficial conversion feature excluding the $55 million charge? Or maybe that $55 million is the entire charge.

That $55 million is expected to be the entire charge.

Okay.

Now I do have to caveat that $55 million that it has to be finalized and may vary, but it is the one single charge.

But by the fourth quarter we should be back to an EPS stock.

Okay, and then one last question and I'll hop back into queue. Norm, did the $200 million of EBITDA goal on 1 billion square feet of non-res construction include acquisitions? Or will the acquisition of Metl-Span or potentially other companies get us closer to the $200 million at less than 1 billion square feet?

It did not include any acquisitions. So it's additive to what our thoughts were. So either in terms of accelerating it or just getting higher.

Okay, great, thank you very much.

Great, sir.

(Operator Instructions) Dana Walker from Kalmar.

Norm, last years' seasonality had a 16% revenue increase from Q2 to Q3, I recognize you probably don't want to be overly specific, but would you view this years' relationships compared to last year to be worthy of any commentary?

We're expecting a similar move this year as well. There's still a lot of uncertainty with the macros and stuff, but frankly being a pure play in North America, we seem to be insulated to some extent from that.

What types of competitive observations might you offer and/or individual drivers from markets driving your business?

Well, I think the architectural building index has always had a strong correlation to our business and we've had eight consecutive months of growth, that's a very positive thing. The work that Michael Darda has done is really encouraging and that portends a forward-looking indicator on about a year. We look at the short term in terms of our backlog. We're really pleased with the backlog. We've seen an increase in the level of complexity of work, which is really good for us. So that backlog helps, the bookings are good and then the indicators are quite positive.

So on balance, it looks like the recovery is real. Now, it's not broad based. We're still disproportionately advantaged by the industrial sector. Now it's a fairly broad industrial sector, but nevertheless that's where we're really seeing the growth and particularly in the Buildings group.

You both commented on how the Metl-Span numbers are for calendar '11. Your insulated panel business was quite vibrant in the most recent quarter. Recognizing that you can't be overly specific, one presumes though that is not just NCI enjoying that category growth that another key player would have likewise seen some benefit from that like Metl-Span.

Yes, I would say that as we certainly have been more focused because of the strength in our distribution in commercial/industrial. We are stronger in respect to our distribution system there which has been in place for several decades because that's where our Components group works. The Metl-Span folks are stronger in coal storage. That is a more stable market without probably the growth percentage that we see in commercial/industrial. But the two together really blend very nicely, Dana.

Finally from me, is there anything about what will happen to you competitively, either opportunistically or from a conflict standpoint, as you work Metl-Span into your business and the relationships that you have outside of Metl-Span?

That's a good question. We as a Company have dealt with the fact that our Coating group sells to competitors of our Components group and our Buildings group, our Components group sells to competitors of our Buildings group and that's the way we've been structured for decades. So we're used to dealing with those situations and respect our customers. So we feel very good about the spread of business, the spread of customers and we think there's a great opportunity to grow that business.

And you don't believe that there are chasms and/or risks in the same way that you see opportunities?

To be sure, the markets are competitive and our competition is good, it's aggressive. So I'm sure there'll be all kinds of Machiavellian things going on, but we're used to that. We'll be just fine.

Thank you.

(Operator Instructions) And at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Management for any closing remarks.

Well again, thank you very much. We appreciate your questions, appreciate your interest and look forward to reporting back in our third and fourth quarter as we move ahead to have what I think is going to be a good year. Thank you very much.

We thank you for joining today's conference call. It has now concluded, you may now disconnect your telephone lines.