Core Natural Resources Inc (CNR) 2012 Q3 法說會逐字稿

Good afternoon and welcome to the NCI Building Systems third quarter 2012 earnings conference call. All participants will be in 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 now like to turn the conference over to Todd Moore. Please go ahead.

Thank you. Good afternoon and welcome to NCI Building Systems' call to review the Company's results for the third quarter of fiscal 2012. This call is being recorded. To access the taped replay please dial 877-344-7529 and enter the passcode 10016378 and the pound sign when prompted. The webcast archive and taped replay will be accessible approximately two hours after the call and will remain so through September 12, 2012. The replay is also available at the Company's website at www.ncigroup.com. The Company's third quarter results were issued earlier today in a 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 conference 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 upon which these statements are based are current, complete, and reasonable. 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 media 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 NCI's Chairman, President, and Chief Executive Officer, Norm Chambers.

Thank you, Todd, and good evening, everyone. I apologize for my voice which is a little bit creaky from getting over a bit of a cold. And welcome to our third quarter 2012 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer, and Todd Moore. I will provide an overview and review our operations, followed by Mark Johnson, who will review our financial results. Then we will be happy to take your questions.

We delivered a solid results in the third quarter, continuing the positive momentum that we reported for the first half of our fiscal 2012. Third quarter revenue grew by 14% to $298.5 million on a year-over-year basis, while operating income adjusted for one-time acquisition and refinancing costs increased by 69% to $10 million. These results were achieved without the benefit of a meaningful economic recovery and were driven by major year-on-year improvements at our components and buildings group which more than offset the flat performance of our coating group. Looking at the key factors affecting our segment results, the coatings group results were the most affected by prevailing business conditions with lackluster demand in the third quarter that was line with the broader economy. Their quarterly revenue and operating income were off slightly largely due to the mix of products sold with less packaged sales than in recent quarters, a situation that we believe will improve in future quarters.

The coatings group nine month results are still benefiting from a strong first half with year-to-date sales up 10% and operating income up 17%. We are very pleased with the progress of our new Middletown, Ohio facility which is on schedule and on budget for production to begin at the end of this calendar year. With this coating line up and running we will be in an excellent position to increase efficiencies with respect to base loading our coating lines for internal use as well as serve customers in new geographic locations. This plan is coming on stream at a time when we are becoming an important second source supplier for larger customers, thanks to the recent industry consolidation.

While far from normalized levels, we have seen some pickup in demand for our core components of products, albeit in a competitive type of market. Additionally, insulated metal panels had a very strong quarter and benefited from a six-week contribution from our recent Metl-Span acquisition. The year-over-year sales for the components group were up 29% to $121 million and increased 40% sequentially. Operating income was up 43% on a year-over-year basis and up 33.9% on a sequential basis. We are migrating NCI's two insulated metal panels plants onto the Metl-Span assistants, and I've organized them under the Metl-Span management team. All the integration from systems to structure to sales force is proceeding very well. In fact, the Metl-Span is already beginning to take our full components product line and introduce it, in fact, to their customers.

The buildings group continues to exceed previous levels of performance with year-over-year growth in sales of 7% to 1.5 -- I'm sorry, to $159.3 million, and a 15% increase in operating income to $9.1 million. Sequential growth in sales and operating income were 9.6% and 34.7%. The building group has delivered 17 consecutive months of year-over-year growth in bookings in both dollar value and volume. Its backlog of $282 million at the end of the quarter was up 26% year-over-year and 9% sequentially.

It is important to keep in mind that our third quarter performance was achieved despite the absence of a sustained upturn in the economy and in the face of uncertainty regarding political -- both policy and leadership, which has kept the lid on demand. As you will recall, our first half performance was quite strong, reversing the prior year operating loss of $16 million with a profit of $9.2 million. Year-to-date, we have achieved 17% growth in revenue and have succeeded in reporting $26 million in a positive swing in operating income. From a forward-looking perspective, we finished the third quarter with bookings in dollars up 6.7% on a year-over-year basis and 15.4% up in volume. The current cost of steel is approximately 13% lower than at this time last year, which results in lower bookings measured in dollars than measured in tons. However, our volume growth continues to meet or exceed our current bookings expectations and reflects continued improvement in the industrial sector. The same steel price effect is generally reflected in the buildings group with a backlog of $282 million which is still the highest level it's been in the last 12 quarters.

At the end of fiscal 2011 we said that NCI would produce improved results this fiscal year, based on our confidence in the internal improvements we had made in each of our business units, without relying on a broad economic recovery. And this has been the case so far this year. McGraw-Hill is forecasting that the calendar year 2012 will be flat in volume at about 690 million square feet of new construction in non-res. However, the commercial industrial category within the overall forecast is expected to grow at about 12% to 414 million square feet of new construction, which, while positive for us, is still 64% below 2007 levels which were lower yet again than the late 90s and early 2000s. The American Institute of Index -- the American Institute of Architects' index has weakened recently, but the fed senior loan and real non-residential investment looks strong and looks for continued growth in 2013. McGraw-Hill is expecting annual new starts to break through the 1 billion square feet between calendar 2014 and 2015. And as you know, 1 billion square feet is the low point during all previous downturns in the economy since McGraw-Hill began to track this data in 1967. And we believe that NCI can produce at least a $200 million in EBITDA at the volume of a billion square feet even before the positive increase that will (technical difficulties) from the Metl-Span acquisition.

Now I'd like to hand it over to Mark Johnson who will take us through a more detailed review of the financial results.

Thank you. As Norm said, our third quarter revenues were $298 million, up 14% year-on-year, and 19% above the preceding quarter. Looking past the special charges in the quarter, which I will discuss momentarily, adjusted EBITDA for the period was $18.9 million, 28% ahead of the prior year and 24% ahead of the preceding quarter. Our strong year-over-year performance was driven primarily by improved operating leverage from higher volumes including the addition of Metl-Span for six weeks during the quarter.

Each of our business segments contributed to our 12% increase in volume in Q3. The coatings group volumes which had shown a 30% year-over-year improvement last quarter achieved a more modest 3% growth rate this quarter as the comparable period in the prior year had already experienced a significant step up. In addition, the coatings group absorbed approximately $300,000 in costs to ready the Middletown, Ohio, facility during the quarter which masked the underlying leverage gains. The components group achieved a 10% year-over-year improvement in production volumes exclusive of the contribution from Metl-Span. As Norm mentioned, the basic commercial and industrial markets for our components group have been sluggish in the first half of the year. And while volumes improved in the third quarter, pricing remains very competitive. And, in addition, we are dealing with higher freight and delivery costs. Overall results for the components group benefited from the increased volume which also included the addition of Metl-Span for the last six weeks.

Our buildings group continued the trend of year-over-year improvement again this quarter. Volume was up 10.5% but revenue was up only 6.7%, reflecting the lower cost of steel. This group continues to improve its operating leverage as volumes increase, realizing the benefits of lower relative engineering, drafting, and manufacturing costs. We believe the investments we have made in equipment, systems, and processes should allow us to continue to expand our operating leverage as volumes increase. Moving down to P&L you can see that our consolidated gross margin expanded to 22% from 21.7% in last year's third quarter. In fact, all three of our business segments increased their gross margin levels over the prior year.

On a sequential basis, however, our margins decreased from the 23.2% achieved in the preceding quarter. This decline results from lower sequential gross margins in both the buildings and components groups. Buildings margins were lower due to higher freight and delivery costs, partially due to increased international sales and slightly lower pricing relative to steel costs. The components group gross margins were lower due to pricing pressure driven by the expected declines in steel prices and the higher cost of freight and delivery. We still expect that our normalized gross margin range is 24% to 26%. So, while we expect to see continued, gradual, aggressive improvement in gross margins throughout the recovery, we do not expect to return to these historical levels until there is a meaningful improvement in volume driven by increased non-residential construction activity.

Engineering, selling, and G&A costs were $55.6 million or 18.6% of sales compared to $50.9 million or 19.4% of sales in last year's third quarter. The declining cost as a percentage of revenue illustrates our improving operating leverage. With the inclusion of Metl-Span for a full quarter, you can expect our ESG&A costs to be between $61 million and $63 million in the fourth quarter, which includes $1.6 million of non cash amortization of intangibles related to the Metl-Span transaction. This amortization expense is higher than it will be in the future periods, because it includes $1 million for the amortization of very short-lived intangibles.

As mentioned last quarter, our third quarter results included a lot of noise with respect to special non-operating charges resulting from the completion of three significant transactions, the acquisition of Metl-Span, the related refinancing of our debt structure, and the agreement to eliminate future dividend obligations on our convertible preferred stock. The charges for each of these items have been separated on the face of our income statement. With the exception of the $2.9 million in acquisition costs, all of these costs were non cash charges. We do not expect to incur any material additional costs with respect to these items in future periods. Therefore, beginning with our fourth quarter, there will be a direct relationship between our operating performance and our reported net income and earnings per share trends. Adjusted operating income was $10 million compared to $5.9 million in last year's third quarter and $5 million in this year's second quarter.

Now a few comments on our balance sheet. After completing the acquisition, we ended the period with cash and cash equivalents of $32 million compared to $74 million at the end of the second quarter. Our amended $150 million ABL credit facility remains undrawn. With respect to accounts receivable, our DSOs were 33.4 days as compared to 31.2 days at the end of the previous quarter. This increase in DSO over the past period is temporary and is the result of a few large transactions which were subsequently collected. Last year, our DSO was 31.9 days. Our inventory balance was $113 million, a 3% decrease over the same period of the prior year, despite the inclusion of Metl-Span, reflecting lower steel costs and on-hand volumes between the two periods. Annualized inventory turnover was 8.3 turns for the quarter compared to 7 turns in last year's third quarter and 7.2 turns in our 2012 second quarter.

Third quarter capital expenditures were $8.3 million. Year-to-date capital expenditures were $22.2 million, which included $12.1 million in insulated panel plant conversion and retooling, $2.8 million related to the refurbishment of our Middletown, Ohio coating facility, $2.5 million in continued enhancements to our engineering and drafting systems and $2 million further investment in automation of our manufacturing equipment. Our 2012 full-year capital expenditures are expected to be between $32 million and $35 million, within the range of our previous estimates.

Looking ahead to Q4, in addition to the ESG&A comments mentioned earlier, for modeling purposes you can expect total depreciation and amortization of about $9.6 million exclusive of amortization of debt issuance costs and interest expense of $6.5 million which includes $1 million of amortization of debt issuance costs. Now that we have the preferred stock amendment and the acquisition related noise behind us, we expect to report positive net income in the fourth quarter and should not have charges for dividends and beneficial conversion features in determining income available to common shareholders. As a result, it will be a more intuitive relationship between net income and earnings per share. The diluted earnings per share in the fourth quarter can be approximated by dividing net income by 74 million shares which represents the weighted average shares outstanding on an as converted basis.

I would like now to turn the call back to Norm.

So with the completion of our third quarter, we have now had six consecutive quarters of improved trailing 12-month EBITDA. Each of our business units are focused on a strong finish for our fiscal 2012. The buildings group has a good backlog and shipping schedule through October. Improvement in components core business and the insulated metal panels growth led by Metl-Span should set components up for a strong finish. And, finally, the coating group should have some additional increase in volume and revenue to complete the year. We expect our fourth quarter will be meaningfully better than our third quarter and foreshadowing further growth in 2013.

Now we will be happy to take your questions.

(Operator Instructions)

Robert Kelly, Sidoti.

Question on -- could you tell us the -- was there an EBIT contribution from Metl-Span in the third quarter?

Absolutely there was. It was approximately $2.3 million.

And the sales were --?

About $21.6 million.

That was EBIT, you just said?

Yes.

Okay, fine.

And that kind of works out to like a $45 million run rate. Is that a seasonal quarter? Is that what we should be expecting for Metl-Span for 4Q?

The Metl-Span business has a seasonality that's fairly similar to our buildings group which generally would have about 55% of the revenue in the last half of the year and 45% of the revenue in the first half.

So the acquisition did $160 million or so in fiscal '11. It's growing at what? What should we be plugging in for 4Q revenue for Metl-Span?

I think Metl-Span is experiencing a similar level of growth that the rest of our business is, in the low double digits.

Okay.

So I would expect in that the fourth quarter as well.

Thanks. That's helpful. You mentioned in the components group, sounded like organic volumes are up 10%.

In the components group organic volumes were up 10%, yes.

But that was depressed a little by price so organic sales, will they be hurt? You're comping negative on price again in 4Q. Is an organic growth rate in the mid single digits appropriate?

Probably more appropriate, Bob.

As far as the sequential EBITDA contribution, sales are up in 3Q compared to 2Q almost $50 million but only 3 and change is dropping to the EBITDA line. That all -- you talked about some margin pressure. How much of that is the lack of flow-through related to freight and some of the other costs you called out vis-a-vis the gross margin compression?

Well, the freight cost is probably contributing about half of that, lower contribution margin, and the other half is coming from just depressed pricing.

Okay. And last year, 4Q versus 3Q, you had sequential sales growth but lower gross margins. Did the same thing play out again in 4Q of '12?

No, we think it's going to be better than that, Bob. This 4Q will not be like the 4Q of last year. This will be a stronger fourth Q than we've probably seen in relation to Q3 since before the downturn.

So just for modeling purposes, now that the noise is complete with the three -- with the refinancing, with the acquisition and the elimination of the future dividend payments, 4Q looks pretty much plain vanilla and, on the P&L, and we use a weighted average diluted shares of almost 75 million and a normal tax rate?

I think the weighted shares is closer to 74 million.

$74 million.

yep. And I mentioned one item in my remarks.

Yes, the interest.

Well, the interest issue, but -- there are some short-lived intangibles as related to the Metl-Span acquisition that get amortized in the fourth quarter. That's about $1 million, it's a non cash charge that will happen in the fourth quarter.

Okay. But once we get below the operating line, the noise that we've had to model prior to 3Q pretty much goes away?

I think our muddling days will be over.

That's good news. As far as market commentary this is the first time the McGraw-Hill data has shown positive year-over-year growth on the square footage in year fiscal '12. Flat volume for calendar '12 seems pretty realistic given what we're hearing from other players in the non-res market, but McGraw-Hill is currently saying like plus 13% square footage for calendar '13. Does that line up with what your customers or peers are thinking for your fiscal year '13?

Yes, and that's based from my standpoint on if we see the industrial sector, which has been strong this year. McGraw-Hill's forecasting 11% or 12% growth or 410 million square feet in 2012, and if that continues to grow and we get some broader economic recovery, then I think that 13% is doable for next year.

I don't know how granular they get with their forecast. Is the C&I portion of that plus 13% for calendar '13? Is that -- is it expected --?

I don't have it in front of me, but it is showing growth for next year for sure.

Is it a similar low teens growth rate for C&I as well?

Yes.

Okay. Thanks, guys.

Lee Jagoda, CJS Securities.

if I look at your building revenue growth year-over-year it looks like it's slowed versus the past two quarters sequentially, and your backlog is at a pretty high level. Were there any orders that were sort of on the bubble of shipping that may have slipped into Q4?

That's exactly what occurred. We had about close to $7 million slip in the last week or 10 days that ended up getting shipped in August but didn't ship in July. And it was just nothing at that late stage the guys could do to pull forward. I will tell you that they are keenly aware of that issue this quarter and have taken steps to make sure that they have every possibility of everything getting out the door that we're planning to get out the door. And the shipping schedule looks really quite strong.

is there any way you can quantify the impact it may have had on your operating margin in the building segment in Q3?

Sure. It definitely dropped it down some. It was probably -- if we last year, $700 million.

$7 million.

I'm sorry. Then we had the consequential effects on the bottom line, too.

Okay, great. And then how should we look at Q4 in terms of the price of steel affecting the top line on a sequential basis?

I think it's going to stay about the same.

Right, it will be the same on a sequential basis. Relative to the prior year the cost of steel is lower by about 13%.

That's what we said.

Yes.

Okay last question, and I'll hop back into queue. The new incentive compensation agreement that you entered into about a month ago, is there any impact on the accounting for it on the corporate expense line?

What was your copy, again, I'm sorry?

It's the PSUs.

Oh, the PSUs. Yes, there will be an impact of that in the fourth quarter. The PSUs effectively take the place of the grants the management team would have received over the next three years anyway. So it's primarily a timing change in the cost recognition of that, but that cost recognition will begin in the fourth quarter where you normally wouldn't see that cost begin until next year. It will approximately be about $1 million non cash stock compensation charge in the fourth quarter.

Which would be in the SG&A, right?

Which would be in SG&A.

Will that be in addition to the normal 123R expense?

Yes, that would be in addition to that.

Okay.

Dana Walker, Kalmar Investments.

Could you comment on gross margin for the quarter compared to what you thought gross margin might look like three to four months ago?

Yes. I would say that we knew we would have a bit of compression in both our components and our coating group, which we saw. And I would say we had a little bit less gross margin than we would have expected in our buildings group which was generally a result of this work that dropped out of the last seven days and slipped into August. So I put it down to that primarily. But I would expect that we would see a recovery in gross profit in our fourth quarter more in line with what we had experienced in our second quarter.

Gross profit margin not just gross profit?

Gross profit margin.

The freight and delivery phenomenon that you described -- is that something that ordinarily you should be able to pass through, or is there a mathematical nuance here?

We do a very good job of passing it through. There are some situations where we will shift production to another plant which has cost advantages in the manufacturing side which might increase the freight a bit. In that case, it may be a case if we've moved it that we can't pass the delta on, but the overall cost, the total cost to deliver your product should be less. But, as I said before, the whole transportation side is still an area that we have opportunities on. We are still not as consistent as we need to be in that area. And that's an area that we will continue to focus on. Where -- we're not where we need to be with that yet.

Would you folks also amplify again on gross margin on the phenomenon of the part that you attributed to lower steel pricing and/or just lower pricing generally? I guess I'm wondering, in an environment where you're beginning to see a little better tone, how predictable gross margin is versus it being a wild card.

Over time, our gross margin should be fairly stable, right? As I said, when we kind of I think look back from next quarter, we'll see something that resembles kind of a reasonable expectation for the year we've had, which certainly hasn't seen a lot of economic growth, but we've had some good growth. I mean, we should still be up materially over this past year. So, again, going forward, it is a function that I believe even in a flat market we can continue to show some year-on-year improvement. However, we just show the real level of exceeding -- first getting back to the 24% to 26%, and then exceeding it, it does really require that we start to make some progress back to that billion. A billion square feet is a pretty important line of demarcation. As we see recovery to that in 2014, that's kind of when we should have -- you have an opportunity to generate some real gross margin.

And, about component pricing being competitive, can you talk about whether that's across most if not all of your products, whether you understand why the market behavior was as it might be, and what type of environment you believe would be necessary for it to not be described the way you just did?

Yes. So it's in a primary area which is largely their institutional and retail piece, and that part of the market has continued to be very weak. However, we have seen some very real indications of what I refer to as very local markets that have continued to be quite good for us. And those have been categorized historically by where we have our depot sales, where we leverage the manufacturing of our bigger plants and have a very local distribution in markets. I think you can see us pointing in that direction as a way to have a more sustainable competitive position. And so that's the way we expect that -- I mean, that's an opportunity that we think we can improve our situation in the core business. However, the acquisition of Metl-Span was a very important part of our future, and we continue to see nice growth there and would expect that to continue.

Robert Kelly, Sidoti.

Just a follow-up. With all the numbers you called out as being unusual or incremental for, I guess, both -- both unusual and incremental for 4Q, the corporate expense run rate should be what, if we're just looking at it on a sustainable run rate rather than with -- if you could throw out non cash, some guidance there would be helpful.

Yes, we'll just have a quick look here, Bob.

The corporate run rate will be very similar to what it was in the third quarter with the addition of the $1 million PSU cost I described earlier.

Yes.

So for F'13, quarterly corporate expense should be $14.5 million?

Let me just check you on that.

I was looking for like a clean -- with all the non cash excluded.

Without that.

Yes. Should be about $14.5 million.

$14.5 million is a good run rate? All right, thanks very much. All right, thanks very much.

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference back over to Management for any closing remarks.

Well, thank you very much for listening in on our call. We look forward to reporting in our fourth quarter as well. Again, thank you and good evening.

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