Core Natural Resources Inc (CNR) 2012 Q4 法說會逐字稿

Good afternoon and welcome to NCI Building Systems fourth quarter and full-year fiscal 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 Mr. Todd Moore. Mr. Moore, the floor is yours, sir.

Thank you. Good afternoon and welcome to NCI Building Systems conference call to review the Company's fourth-quarter fiscal 2012. This call is being recorded. To access the taped replay, please dial 877-344-7529 and enter the passcode 10020411 and then the pound sign when prompted. The webcast archive and taped replay will be available approximately two hours after this call and will remain accessible through December 11, 2012. The replay will also be available at the Company's website, which is www.ncigroup.com.

The fourth quarter results were issued earlier today in a press release that was covered by the financial media. The release was also issued advising of the accessibility of this conference call on a listen-only basis over the Internet.

Some statements made on this conference 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, 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 with 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 of any non-GAAP financial measures discussed, you'll also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today's news 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 claims to release publicly any updates or revisions to these forward-looking statements, whether as a result of new information, future events or otherwise. I'd like to also advise you that we are experiencing some significant storms in Houston right now. So if we do get cut off the line, we will dial back in as quickly as possible. At this time, I'd 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 our fourth 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 will be really happy to take your questions.

We have spoken in the past in considerable depth about being well-positioned due to the operating leverage we have gained from almost four years of restructuring and investments in automation and systems across our organization.

We believe that our fourth quarter results support this thesis, and that our streamlined infrastructure, combined with the efficiency improvements that are ongoing throughout the Company, continue to position us to significantly outperform the industry average. In our fiscal fourth quarter, we produced year-over-year growth in EBITDA of 68%, and an increase in operating income of 98%. As expected, results in the fourth quarter were significantly ahead of the third quarter with EBITDA improving 56% and operating income up about 120%. Driving these strong comparisons were external volume increases of 21% versus last year's fourth quarter and 18% versus this year's third quarter. This translated into revenue growth of 28% compared to last year's quarter and 21.2% compared to the prior quarter. This progress was achieved within a market environment that was lackluster, with the exception of the industrial segment, and where overall non-residential construction was flat on a square footage basis according to the last McGraw-Hill data. This speaks to the opportunities we have as market conditions improve.

Full-year results benefited from a relatively strong first half resulting from a very mild winter, and the expectations of an economic recovery. The second half of our fiscal year, however, saw a seasonal pick-up that was somewhat muted as the economic recovery failed to take hold. Despite these headwinds in fiscal 2012, we delivered 15% year-over-year increase in volume, on which we generated a 20% improvement in revenue and 130 basis point improvement in gross margin, which more than doubled our EBITDA to $76.5 million, and swung to an operating profit of $32 million from our 2011 operating loss of $1.6 million.

For our full-year 2012, each of our three groups -- Coatings, Components and Buildings -- generated year-over-year increases in volume, revenue, gross profit and operating income. The Buildings group continued to march toward reaching its full potential by posting a 16% increase in volume, and 18% increase in revenue, and nearly a threefold result increase in operating income. In addition to benefiting from the Metl-Span acquisition, which closed in mid-June, our Components group experienced modest organic growth year-over-year although their core markets remain weak. The integration of Metl-Span is proceeding well. We rolled our two legacy insulated metal panel plants under Metl-Span's management team and they have begun to introduce our full components product line to their customers. The Coatings group had a successful year, both growing third-party sales, as well as refurbishing our new Middletown, Ohio light-gauge paint facility, which we expect to be online this month. The timing is excellent as we have become an important second source supplier for larger customers, thanks to recent industry consolidation.

While we still have a long way to go over the next few years to generate financial results that reach and surpass our previous records, we completed a productive year in which a 15% increase in volume drove a 115% increase in EBITDA in a flat market. We acquired a market leader in insulated metal panels, Metl-Span. We refinanced the balance sheet extending our term loan, bringing working capital facilities through to 2018. We knocked out the preferred share dividend. We substantially completed a refurbishment of the Middletown, Ohio Coating plant and most importantly, we improved our safety record. Throughout the year, we worked with our customers focusing on a combination of attractive, specific geographic areas and certain market end opportunities in which we could provide distinctive value to our product offerings.

2012 marks the fourth consecutive year of depressed non-residential markets, during which new construction starts measured less than 800 million square feet, more than 20% below any recession in the last four decades, and some 45% below the average new construction starts of the last cycle of 2004 to 2007. When we look at the macro and Company-specific indicators for 2013, we conclude that the US is at the beginning of a business recovery, although there is clearly still headwinds and a fair amount of uncertainty.

On the positive side, our year over -- our year-end backlog was up 22% from year-ago levels and our bookings were up 6% in dollars and 11% in volume. McGraw-Hill forecasts 6% annual growth in non-residential new construction starts in 2013. Very important is that building permits are up and the Fed Senior Loan Survey for non-res construction shows a net easing of credit requirements and non-residential construction loans are up year-over-year. On the negative side, the AIA Billing Index for commercial/industrial has been below 50 for six months. The Chicago Capital Expenditure Index has been slowing.

Given the industry indicators are more positive than negative, and based on our end-of-year backlog and strength of our current quoting activity, we expect fiscal 2013 to be another year of strong growth for NCI. We expect to have positive year-over-year comparisons across all financial key metrics in both our first half of the year and our second half, with each benefiting from solid operating leverage. There is elevated concern and uncertainty regarding tax and debt ceiling negotiations in Washington, DC. And it is difficult this time to know what impact the ultimate debate and resolution of these matters will have on the non-res market.

In the near term, Hurricane Sandy has had a negative impact on our shipments to the Northeast in our first quarter of 2013 but should positively impact demand later in 2013. We will also be faced with absorbing higher cost in our Coatings group during the production ramp-up at Middletown, and a temporary mix shift in our Buildings group in our seasonally slowest first quarter. We expect to make up for that in the second quarter and our third and fourth quarter should reflect both market growth and seasonality. Now I will be happy to hand over to Mark Johnson, who will walk you through the details of our performance.

Thank you, Norm. Fourth quarter 2012 revenues were $362 million, up 28% year-on-year and adjusted EBITDA for the period was $29.5 million, which is 68% of last year's fourth quarter. For full-year 2012, revenues increased 20% to $1.2 billion from $960 million in fiscal 2011, and adjusted EBITDA was $76.5 million, more than twice the $35.6 million that was reported last year. This was the best quarterly and full-year performance that we have reported since 2008, and we expect to continue this positive momentum in fiscal 2013.

As Norm noted, each of our business segments experienced year-over-year increases in volumes, revenues and operating income in the fourth quarter. The Coatings group increased our operating income 43% year-over-year and grew third-party sales during the quarter. With the nearing completion of the refurbishment of the Middletown, Ohio facility, the volumes from this group are expected to increase substantially year-over-year and we have already begun pre-selling production from this plant. While revenues from this asset are expected to increase progressively in fiscal 2013, it will not be truly incremental to our bottom line until the fourth quarter.

Just as a reminder, we purchased the Middletown facility in 2010, at the depth of the recession for $4.9 million, and we've made capital investments there of $8.5 million. The cost of a new greenfield facility, like the one we are about to open, would have been about $55 million to $60 million. Most importantly, by extending our footprint with the Middletown plant, we are seeing many opportunities that were not previously available as a regional coater.

The Components group achieved 28% year-over-year growth in volume in the fourth quarter while operating income improved 61%, benefiting from both the Metl-Span acquisition and organic year-over-year growth. Further improvements from this group are still to be seen as the demand from their core market recovers in 2013 and we leverage our new role as the market leader in insulated metal panels. Our Buildings group continued its year-over-year improvement by generating a 33% increase in operating profit in the fourth quarter, on volume growth of 23% and revenue growth of 17% which reflects the lower cost of steel between the two periods. We continue to leverage the process efficiencies and systems investments made within this group. And as market demand picks up, we expect to see an even further increase in the Buildings group's revenues and volume potential.

Moving down the P&L, you can see that our consolidated gross margin increased to 21.8% from the 21% reported in the year-ago fourth quarter. On a sequential basis, however, our margin declined slightly from the 22% achieved in the 2012 third quarter. This decline resulted mostly from the Buildings group margins which were lower due to the mix of work completed in the quarter. For the year, consolidated gross margin increased 130 basis points to 22.2% from the 20.9% reported in fiscal 2011. Even though all three business segments continue to increase their gross margin levels over the previous year, this is still significantly below our historical average margins of 24% to 26%, which we do not expect to achieve until there is a substantial increase in non-residential construction activity, which will then support a more significant improvement in our volumes.

Engineering, selling and G&A costs were $63 million or 17.5% of sales, compared to $51 million or 18.1% of sales in last year's fourth quarter. Moving forward, ESG&A costs are expected to be similar to those expensed in the fourth quarter as it was the first full quarter which included the Metl-Span acquisition. For the full year, our ESG&A costs were $219 million or 19% of sales, compared to the prior-year's $202 million or 21.1% sales. In 2013, we expect to see continued gradual improvements in ESG&A expense as a percentage of sales as the recovery continues. However, material improvements in this metric will not incur until there is a meaningful improvement in the level of non-residential construction activities.

Operating income was $15.4 million, nearly twice the $7.8 million reported in last year's fourth quarter. Adjusted operating income, which excludes acquisition charges, was $15.6 million compared to last year's adjusted operating income of $9.3 million. For fiscal 2012, our operating profit was $32 million compared to the $1.6 million operating loss in 2011. We reported net income for the period of $6.3 million, almost twice the net income of $3.4 million earned in last year's fourth quarter. In Q4 of 2011, the reported net loss applicable to common shares was $4.4 million, due to the accrual of preferred stock dividends and accretion and a non-cash beneficial conversion feature charge. Our earnings per diluted common share were $0.08 in this year's fourth quarter compared to an adjusted net loss of $0.11 and a reported net loss of $0.24 in last year's quarter.

Moving to our balance sheet, we generated $27.5 million in cash from operations during the quarter, bringing our cash balance to $55 million compared to $32.3 million at the end of our third quarter. Our amended $150 million ABL credit facility remains undrawn. With respect to accounts receivable, at the end of the quarter our days sales outstanding were 33.3 days, which is higher than the 30.8 days in the prior year due to the inclusion of Metl-Span. Our year-end inventory balance was approximately $106 million, a 19.7% increase over the same period of the prior year and represented approximately 36 days of inventory on hand, an improvement of nearly 5 days as compared to 2011. In this case, benefiting from the inclusion of Metl-Span, as well as incremental improvement in our inventory turns.

Full-year 2012 capital expenditures were $28.2 million, which included -- $12.9 million in insulated panel plant conversion and retooling; $4.5 million related to the refurbishment of our Middletown, Ohio facility; $3.3 million in continued enhancements to our engineering and drafting systems; and $7.5 million further investment in automation and maintenance of our manufacturing equipment. This was below our guidance of between $32 million and $35 million due to the timing of payments. We expect to roll over the difference to 2013.

Looking forward to 2013, we currently plan to spend between $27 million and $30 million, which will include -- completing the Middletown, Ohio plant; integrating our insulated metal panels, plant, and systems and expanding their capabilities; and finally enhancing and further integrating our Buildings group systems. At this point, operator, we would like to turn the call open to questions.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Robert Kelly, Sidoti.

A question on engineering building systems. Can you just talk about the mix? The way you characterized it, it sounded like there's a little bit of a drag from mix in engineering building systems. Could you just walk us through that and how that plays out for F '13?

Sure, Bob, what we have found in the fourth quarter and continuing into the first quarter is a larger amount of pure structural work which does not provide us the opportunity for value-added in the sense that the full building envelope does. Now we're -- I will tell you that we are pleased to have the structural work and they're very large and good projects, but they do carry a lower level of margin. We'll see some of that still in the first quarter. Then we look at our backlog, we expect that to end up being a more normalized mix going forward in the second quarter.

Okay. So the business that's rolling through, that's rolled through in 4Q and the business that you expect the roll through the engineering building segment in 1Q, that is from a few quarters ago? And the growth we're seeing in backlog, are you saying that, that is higher margin, normalized with more envelope and structural work?

I will say that the sequencing of the backlog had a fairly consistent, maybe slightly higher than norm structured component. But what did occur is the delivery of those projects actually hit us schedule-wise in the fourth quarter, and we are still shipping some of those jobs into the first quarter. And that is, that is that phenomenon and we should see that normalize. We can get a pretty good look at that by looking at our bookings and looking at our shipping schedules, now shaping up for the second quarter.

So the business coming in today, could you give us a sense of what the mix is between the lower margin structural and the higher margin, I guess, envelope work?

Well, it's -- let's just say that it is pretty much the sole reason why we have had some depression in gross margin. It is a portion of the work. And it's, if you look at it on a tonnage, I'm not sure where it's -- where the incremental difference would be something on the order of 25% more than norm or something along those lines.

Okay. As far as the industry projections for next year, square footage being positive, that will be the first year since '09 that we would have seen growth. How do you think about end market demand? I know you guys have largely outperformed a flat to slight down market. Do you think the end market gives you a tailwind beginning 2013 based on what you're seeing and hearing from your customers?

Well, certainly, the quoting activity remains quite good. We're seeing an increase in complexity work while still having some very good distribution in the lower complexity work. We continue to believe that the first quarter of last year was an incredibly good from a weather perspective. Right off the bat as we started, the first quarter of this year, we had the Northeast situation. So my point is that we like the conditions that we see. We do our budgeting and our planning from the ground up. As I mentioned in my part of the script, we really have been focusing on advantaging ourselves in specific end markets and geographic areas that are showing some growth. That has been over the last year more in the industrial and in heavy commercial. We see that trend continuing.

Okay, great. And then just one final one. What was the contribution, both sales and EBIT, from the acquisition for the metal components division?

Yes, that was from Metl-Span.

Yes, the Metl-Span acquisition for the quarter contributed in revenue about $42 million, almost $43 million, and EBIT was about $2 million and EBITDA was about $6.4 million.

$6.4 million on EBITDA.

Yes.

Lee Jagoda, CJS Securities.

So you listed several factors, Norm, that could negatively impact Q1 results but you also said the first half which showed solid growth on a year-over-year basis, but you didn't explicitly speak to the growth we might see in Q1 on a year-over-year basis. Could you had elaborate a little bit on just Q1?

Yes. So, and the context for this is graphically shown on, I think it's page 44 of our investor presentation. Any given year, our first quarters and second quarters can be juxtapositioned into which is a better quarter. For sure, the way we look at it internally and have for years, is how our first half will go. It is critically important to us that our first half is always better than the first half of the previous year. So I can tell you that, from our perspective, there is a more challenging first quarter given the Northeast. We definitely have been impacted in terms of deliveries there, and we certainly will benefit from the Metl-Span acquisition on the positive side. We know that we have and are still shipping some structural work in our Buildings group that will have a slight drag on margins.

So all I am saying is that we will produce the best first quarter we can. When I look at our backlog and I look at what we're adding to the backlog, when I look at the delivery schedule of that, I have a high degree of confidence that we will finish the first half convincingly better than the first half of last year. But whether the first and second quarter are better or worse, really depends on how things go for the rest of this quarter and next quarter, in terms of which quarter is bigger.

Norm, given that you are up against a pretty difficult weather comp in Q1, is it safe to say that we might be looking at a negative organic growth quarter in Q1 just because of weather?

Well, I can tell you that if the weather got worse from this point on, that would have a negative impact. If the weather stays like it is, then that enables us to try to overcome that which we have already experienced with the storm in the Northeast and see where we come out. We are doing some work in the Northeast with our Components group but until the insurance money starts to flow, we really won't see the benefit that our Buildings group and our Components group will experience.

Mark, do you have contribution Metl-Span would have had in Q1 of last year on an EBITDA basis?

No, I do not have that information available.

Okay.

But, Lee, it is important to remember that the Metl-Span contribution in the fourth quarter was very good, and they are on the same seasonal pattern as we are, so that would be historically their best quarter.

Okay. A couple more quick ones and I'll hop back in queue. Excuse me if I missed it, but in Coatings, you had an exceptionally high operating margin? Is there anything unusual in there that may have caused that?

Well, Coatings, as you know, benefits from the volume improvement across our Company's production. So they benefited on internal volume shipments as well as increases in their external volume, and that multiplies up their operating income pretty quickly.

Okay. So, it doesn't sound like there's anything out of the ordinary except for volume.

It's 95% volume driven.

Absolutely the case. And that's really the way we expect them to perform, I'll be honest with you, when they have that opportunity with volume.

Great, and then Norm, just one more quick one. Can you update us on the transportation supply/demand dynamic that may or may not have impact on margins this quarter but certainly was an issue in Q3?

Well, there are a couple of things. First of all, there clearly was in Q4, a -- some improvement in the transportation management side. We still have not achieved the level of manage -- manufacturing efficiencies that we expect to see. That is, in part, because the volume was a little bit higher than expectations, and we ended up having more overtime and slightly less efficiency. We have in the third and fourth quarter spent a lot of time in adding welders and training. So we absorbed a fair amount of on-the-job costs, I will be honest, what occurred in the Buildings group which didn't help. But I will say that on the engineering and drafting side, we continue to see a very nice improvement in our cost per ton and that was down 12% in the year. We're expecting to see both the manufacturing and the engineering and drafting in the Buildings group continue to improve.

(Operator Instructions)

Trey Grooms, Stephens Inc.

Just a couple of follow-ups here. So it sounds like the mix issue in Buildings group will probably work itself out as we progress through the first quarter, I guess, maybe into the second quarter. But the other cost that you point out here -- excuse me, so the negative effects of Sandy and then also the cost of ramping up Middletown, is that something that we should expect to run its course in 1Q? Or is that, could that have some negative impact as we look across into the second quarter as well?

So my sense is that we will see the product mix issue largely dissipate in our first quarter. We will see an improving second quarter on all fronts. And the only caveat I have is if we were to experience a really bad series of Northeast storms or something like that across the country, then that always does actually make it difficult for people to take our products on sites and continue with construction. But barring that, we should still convincingly see a first half of the year that is significantly ahead of the first half of last year.

And when you're speaking of -- are you referring specifically to sales or margin or both?

Well, I would expect to see with the backlog up 22%, that all that backlog won't be delivered in the first and second quarter but we should benefit from that, and I like the bookings, particularly in tons. We're still trucking along, comparing against much better numbers this time last year. I like the fact we are still seeing growth there. And the one thing -- and I don't make a huge deal of this -- but it is really difficult to be very precise about what this Washington stuff is playing in terms of people's confidence to move forward with the same enthusiasm that they showed this time last year. But all that being said, we still have quoting activity and good activity relative to where we are in the cycle.

Let me pick up on one piece. On the Middletown, Ohio facility, that facility won't truly be incremental to our operations until the fourth quarter. So on a year-over-year basis, the beginning and the opening of that plant in our first quarter probably has a detrimental impact of about $1 million. And then almost on a linear basis, that declines until you get to our fourth quarter where it turns into an incremental contribution.

Okay. And then when -- how quickly do you think that it would take to get that plant not just incremental but really running on eight cylinders?

We should be pretty close by the end of this year. I mean, and we certainly would expect that we will be absolutely full-bore ahead in 2014 but we have a program that is pretty convincing in terms of ramp-up of that facility.

Okay. So this is -- you've got a full quarter of Metl-Span. It obviously performed well in the fourth quarter. Is it -- and we've only got, I guess you've only got about a quarter-and-a-half or whatever the number is of results here. But how is it performing relative to your expectations right out of the gate here?

I will tell you that, as is the case with any acquisition, once you buy something and you look under the hood, there's some times when you are less happy than you thought you were going to be. I will say that this is, by far, one of the best acquisitions I have ever been around. This -- the management team at Metl-Span is absolutely superb and they're focused. They're incredibly detailed, well-managed. We're very fortunate to have them part of the family.

That's great to hear. I guess on the same topic there, should we -- as we look forward, should we expect the Metl-Span acquisition, the Metl-Span business, should we expect that to outperform the overall business? Or would it be something in line with your overall business from a performance standpoint going forward? And then also tied to that, what kind of impact do you think that it will have on the standalone business as you look forward -- the standalone Components business?

So we believe -- what we know that the contribution margins, particularly when we look at the EBITDA margins in Metl-Span are higher than the historical levels we have had in the Components. So that addition of that business to Components is a net plus. And frankly, it offsets some of the softness we are seeing in the core markets that our Components group has, which is really the roofing systems and sidewall systems. And as the market begins to more broadly recover, and by that, I mean the commercial, the retail, we will see that the Components group recovers, so that once we get both Metl-Span and the Components core business moving in the right direction, meaning the core Components business, then we should have a significant move because the historical margins of the Components group have generated have been really quite good.

Okay. And my last one is, and I was going to take a stab at this one, but you've mentioned, Norm, in the past about $200 million in EBITDA, if you can get back to this one billion square feet of non-res construction. But my understanding is that excluded any impact from Metl-Span. Could you give us an update on your thoughts there on post-Metl-Span, what that new number could look like?

Well, I can tell you right now that it is absolutely incremental to what we have said in the past in terms of $200 million. And whether it is $225 million or more, we will see. But I will also say that within the rest of the organization, we are working very hard in terms of improving the historical margins that we have enjoyed in the Buildings group. And with the Metl -- I'm sorry, and with Middletown new facility, we would expect to be well on our way by one billion square feet. And I think the exciting thing from our perspective is, what that offers us as the market improves beyond what has been the historical lows for four decades. That is pretty exciting here. That is a very important part of how we view the period between now and 2016.

Great. Thanks a lot, Norm. Good luck.

Alex Rygiel, FBR.

Nice quarter and nice year.

Thank you, Alex.

As it relates to the mix shift, is that telling you anything about the industry or is that really all just a timing issue?

I've got to tell you really what it is. It is winning a handful or more of large structural jobs where we were a participant in a very large manufacturing types of projects, but only supplying the structural steel. It is more a function of just the shipping schedule that those jobs fell into. When you look at the overall mix across the Buildings group in particular along complexity. Complexity, 1, 2, 3, being the low complexity; the mid complexity, 5, 6, 7; and the 8s, 9s and 10s being the high complexity. We are seeing a filling out of that bell curve.

And as you know, we have really pushed up our effectiveness in the low complexity with being able to guarantee deliveries that are very, very competitive in the industry. That has been a meaningful impact in terms of our building brand's ability to actually generate a lot more activity in the low complexity work which really suits us well from the standpoint of it requiring less engineering and drafting because of the level of automation.

That is very helpful. And then secondly, you talked a lot about Middletown and thank you for the better understanding the near-term costs associated with Middletown and how that ramps over the next couple of quarters. But you've also talked a little bit about pre-selling capacity. Exactly how should we think about that? Have you pre-sold capacity to the max that you can handle in the next 12 months? Or have you pre-sold capacity at a lesser amount, and do you have to go out and win a lot of work?

Well, it's actually something in between. When you pre-sell capacity to new customers, you have a period in which you are proving that you can produce the material at the quality and the timeliness that they want. So what often happens in a situation where we have attracted a new customer and this is particularly the case in appliance and HVAC, they will have a goal and a projection of how they will ramp up their demand from us, but it's predicated on us building their confidence that we can deliver. So a part of the ramp-up is really a function of that.

So we have a very real number of contracts from Middletown that fall into that type of side. But in addition to that, the Middletown facility really helps our supply chain in terms of our internal needs as well. So as we see the ramp-up in volume in our Buildings group -- I mean in our Components group, that will be a very beneficial effect of the ramp-up as well.

Yes, It is important to note that the investment in Middletown, Ohio, would have penciled out and been a favorable investment because of it's bargain nature just on our internal demand and internal logistical savings. So the fact that we are also achieving some significant external growth is icing on the cake.

It sounds, lastly, it sounds like your acquisition of Metl-Span and integration is going very well. Your Middletown plant is going to be open very soon. At what point in the future, do you feel comfortable going back and looking at other acquisitions?

Well, that's great question. When we -- we look at different opportunities and have since really the CD&R investment in October of 2009. We've looked at opportunities, a number of opportunities. We are really fastidious in terms of sticking to the knitting, and really not spending a lot of time on things that really don't fit the structure and our synergies expectations that we have from the standpoint of the integration we have between our core Coating, our Components and our Buildings group. So therefore, by virtue of our desire to stick to the knitting, it limits us into the types of things we're willing to chase.

Now Metl-Span was a great example. That's something that we had been tracking since 2006. We had a very good idea of how well that would fit. We were fortunate to have the opportunity and very fortunate to -- because we won. If we were to see other opportunities like that, it does not have to be in metal panels, but to provide the operational integration and synergies, then we would move on them, if we could buy at the right price. We're not bottom feeders but we are not people who are going to pay too much either.

Dana Walker, Kalmar Investments.

The complexity that you refer to on the metal buildings mix that was light, did that -- was there complexity that went to some other party or did these jobs just not have complexity?

Well, in one of the very large jobs, a manufacturing job in Mexico, the work was awarded without our ability through our Mexican partners to bid on anything but the structural work. I think it was the construction and project management philosophy that, that particular end user had. And then in the case of some buildings that are more conventional, there are times when the structural steel is what we will provide and then our Components group may provide panels and sidewall systems and roofing systems. But in the case of the work that we are talking about for the fourth quarter and the first quarter, it just so happened that these jobs were structural jobs.

Is -- would the other providers in the marketplace also be looking at this kind of work or do you think that there's been some adverse selection favoring you or disfavoring you?

I would say that we and our competitors always will have a mix of some structural work. Oftentimes, in support of builders who deliver the entire projects as well, but they themselves may pick up a structural job and need our support. That would be the case across our competitors as well.

On Metl-Span for a moment, the -- if one were to look at the EBITDA margin and the EBIT margin, there's still some inventory accounting flow-through at work that is transitory? Or is this an honest snapshot of the likely operating margin profile of this business?

It's a good snapshot of their fourth-quarter EBITDA production but when you look at their operating income, it's depressed by the fact that there is some very short-lived annual assets that are amortized along with the acquisition. Those were somewhere in the neighborhood of $1 million to $1.5 million.

So that depressed their earnings.

Depressed their earnings, right.

That will continue for how long?

No, that should be complete in the fourth quarter of this year.

With the completion of our fourth quarter.

Yes. Now they will continue to have some purchase accounting mark-ups to their assets and their intangibles that will continue to be amortized but not to the extent that you saw in our fourth quarter.

And the way that NCI has been structured to benefit from volume leverage, is Metl-Span structured to benefit from volume leverage. And thus, if we add back that $1.5 million or thereabouts, should we see disproportionate flow-through on growth?

I think that, that they do benefit from the leverage that we would expect to see as well. I will say the only difference is that the product of insulated metal panels has a large chemical component which is different than our other businesses, if you know what I'm saying. In other words, it's one of the largest costs that we have. It's actually a larger cost than the steel in that business.

But if you look at them from a fixed cost versus very low cost basis, they're very consistent with the rest of our Components business, and they would experience leverage as their volumes grow on a very similar basis.

I think this has been talked around and perhaps it has been talked through but one more time on Middletown. The reason why you would get started in December and not expect something more positive to flow through on the P&L is, would something like a shakedown cruise for the facility?

Well, I think there is a shakedown cruise, and they're actually going through that now. But I think it's more really along the lines of how I expressed the new third-party sales are ones where there is a ramping up virtually determined by the customer. And the customer is taking product from a new plant. Even though we have a history of good performance, they want to be cautious and make sure that the ramp-up is successful and that the product quality is to their specifications. So there is a bit of a more cautionary approach. But I will also say that we have seen in the past that our Coating group has outperformed our expectations. So we will see if this year is an example of that.

One last question and we've -- there have been an awful lot of questions on today's call about short-term results. Can you talk about the commercial side of your business? Any snippets that you might offer about whether you are taking share? Whether you think you are gaining customer influence in some way that will possibly not be evident in the next six months but could very well make a difference over the next three years?

Well, I don't want to give away too much on that because this is a public forum. But I will say that over the last two years, we have invested a hell of a lot more in our marketing and statistically looking very closely at very specific geographic areas and end markets. I can tell you that, unlike the past cycle in 2004 to 2007, that ability and our ability to work across our brands, work effectively with our customers has vastly improved. And to the extent that we can be the generator of leads and direction for our builder network, it is a real marked change. And it's something that we benefited from in the Buildings group for sure.

One last thing comes to mind, Norm. You have talked about some of the end markets that have been more active over the last year. Perhaps you would update that list?

Sure. So the industrial continues to be quite good and that is everything from energy, all aspects of energy, whether it is upstream, midstream, or downstream. It includes a good portion of work in the heavy commercial distribution, in the warehousing, assembly plants, manufacturing plants. It includes maintenance facilities for both rail, air, and ground transport. It includes, actually, some very specific retail operations, and I will refer to them as the quality retailers that are very well known in the United States. We have benefited where retail overall is down from having a very good series of relationships in retail in the Buildings group, in particular, that has been beneficial.

The institutional side is still quite weak but yet we have certain departments of the government where we have historically not done a lot of work but during the downturn, we built a relationship and are still doing some work. The agricultural piece continues to be strong. And in fact, I think in the Components group in particular, we're going to see some very nice growth there. So the -- in an economy that is still only producing 750 million square feet of new construction, I am actually quite pleased to see so many improvements that we have seen.

Good luck and thank you.

(Operator Instructions)

Robert Kelly, Sidoti.

Just a few questions. In 3Q, you said Metl -- the metal panel acquisition had done about $2.5 million in EBIT on $23 million in sales, and 4Q was $2 million on almost double that number. What transpired between 4Q over and above the $1.5 million of intangible amortization costs to get to that 4Q contribution?

The primary difference there is strictly the amount of amortization of the intangibles that were acquired during the fourth quarter. The actual underlying operating performance was very consistent between the two periods on a weekly, monthly basis. So particularly, the dollar amount of intangibles being amortized, completing the purchase accounting and knowing exactly what those amounts are to get them amortized properly.

So you had a larger amortization charge in 4Q?

Yes, we did, Including that $1.5 million.

And I think you said the amortization charge ends 4Q of '12?

The unusually high nature, or the short-lived assets end in 4Q. But we will continue to have amortization charges associated with the longer-lived assets over the next 8 to 12 years.

But nothing extraordinary.

Nothing extraordinary.

So if we were to model the contribution from metal panel on the EBIT line, what sort of margin should it be? Should it be in line with what component has done historically, slightly above, slightly below?

If you take the fourth quarter, as an example, on the EBITDA line and add back what Mark said, you would find that, that historically would be the strongest --

Quarter that they have.

That's right. So you would expect that just like our other business, the first half will be a bit weaker than that but you should start to see a substantial improvement in Q3 and Q4. Don't forget, they are just now taking over -- I know they're running out of our two plants as well, and we have, I would say, a great opportunity to improve on that, as they fit those into their sales and delivery as well. We're just at the, really the early stage of that aspect.

So a full year, even with the amortization charges dropping down to something less substantial in 4Q, high single-digit EBIT margin for the full year for metal panel?

No, I think it would be just short of high single -- well, it would be high single digits, yes.

High single. Okay, fair enough. If we strip out the acquired sales in 2012, you did about 6% organic growth; does that sound about right? And the market is flat to down. I mean, as we think about F '13, is that a good rule of thumb for NCI vis-a-vis what the market is doing, 5 to 6 percentage points of above-market performance?

Well, when I strip it out, I get year-over-year improvement of about 13% of revenue.

That is on -- that's volume?

That is on revenue.

Okay. So -- all right, got it. This is now in your Components division or for the entire business?

I'm sorry. This is for NCI consolidated.

Okay, fair enough. So, I mean, what is the bogey for above-market performance? Should we expect you to outpace the end market by 12%, 13% going forward?

Well, what we are starting to do is to continue to show the level of growth we were able to achieve in 2012, in a marketplace that was, overall, flat, but did have growth in the industrial side. So to the extent that, that growth continues, we should be continuing to grow on a very similar rate. As we get the tailwind of the expectations in McGraw-Hill that we see an actual broadening of the growth, then our view is that we should disproportionately improve as well.

So our expectations are that we will have a significant growth opportunity next year, caveated by the seasonality in the first and second quarters and making sure that our first half is better than the first half of last year. But also, not knowing anything around what the uncertainty Washington can play and I guess that is the same for all companies. So we're moving ahead as if the Washington thing was not occurring, and we're just focused on the things we're doing and growing the businesses.

Okay, great. And just two final quick ones. Incremental margins for Components and engineered buildings on a full year. Where should they be based on the cost structure? And just, could you just quickly recap as far as the $1 million in expense from the ramp-up of Middletown? Is that compared to the year prior period? Is that $1 million a quarter? What's the step down as we move towards 4Q?

Okay, so taking your second question first. That $1 million is the year-over-year effect of opening Middletown so it has a $1 million negative impact on earnings, opening Middletown in Q1 of 2013. With respect to incremental margins, in our buildings and --

That will have come down through the course of the year.

Right. And so then on a linear basis, that will decline to the point where it is contributing operating earnings in the fourth quarter of 2013.

So it comes down 500 a quarter?

In that neighborhood, yes. And then with respect to incremental margins in the Buildings group, the incremental gross margin level was about 36% to 37%. And the Components group, the incremental gross margin is around 31%, 32%.

It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Well, we're very pleased that bad weather didn't knock out the call. We thank you for your interest and look forward to reporting to you in the first quarter of this coming year. Have a very good holiday season. Thank you.

And a great holiday season to you also, sir. We thank you all for attending today's conference. At this time, you may disconnect your lines. Thank you again and have a great day.