Core Natural Resources Inc (CNR) 2013 Q2 法說會逐字稿

Good afternoon, and welcome to the NCI Building Systems Inc second quarter 2013 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 Layne de Alvarez, NCI's Director of Investor Relations. Please, go ahead.

Thank you. Good afternoon, and welcome to NCI Building Systems call to review the company's results for the second quarter of fiscal 2013. To access a taped replay of this call, please dial 877-344-7529 and enter the passcode 10028871 and the pound sign when prompted. The replay will be available approximately two hours after this call and will remain accessible through June 12. The replay will also be available at the Company's website at ncigroup.com. The Company's first -- second quarter results were issued earlier today in the press release that was covered by the financial media. A separate release was also issued advising of the accessibility of this call on a listen-only basis over the Internet. Some statements made on the 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 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, 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 the projected and such statements. Investors should refer to reports filed by the Company with the Securities and Exchange Commission, and in today's news release, for a discussion of factors that could cause actual results to differ.

To the extent of 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 update 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, Layne. Good evening, everyone, and welcome to our second quarter 2013 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer, Todd Moore, our General Counsel, and Layne de Alvarez, our Director of Investor Relations. I will provide an overview and review our operations followed by Mark Johnson, who will provide additional color on the CD&R conversion to common shares, progress on our new bank loan, and a review of our financial results. Then, we'll be happy to take your questions.

Second quarter performance was similar to that of the first quarter and in line with the estimates we provided in our May 14 release and conference call. On the plus side, we did achieve 17% revenue growth, thanks to the contribution of our June 2012 Metl-Span acquisition and a success related to our commercial and industrial distribution channels. However, we estimate we lost about 6 percentage points in revenue growth, largely due to adverse weather conditions that caused a slower release of work from our backlog, and reduced demand from our components and buildings groups products, particularly from the agricultural market. And, for the additional reasons we discussed on the call three weeks ago, namely our investment and manufacturing personnel and normal seasonality of Q2, adjusted EBITDA for the period came in at approximately $11 million.

There were several business highlights in the second quarter that are worth noting. Our components group posted a 29% year-over-year increase in sales to OEM customers, which signals a broader economic pickup including light commercial and retail. Additionally, we generated 44% increase in insulated metal panel sales for commercial industrial application. We purchased Metl-Span last year because we believed the C&I market provides excellent growth opportunities for us given our manufacturing footprint, breadth of product offering, and established distribution channels.

The market recovery in the first half of 2013 has been choppy. Our performance has been mixed. This is very similar to what happened at the beginning of 2004 recovery in nonresidential construction. I remember having to explain weak performance and uneven demand in several of our end markets in geographic areas during our second quarter 2004 conference call.

By fiscal year end 2004, the nonresidential market was well into recovery registering 100 million square feet of improvement, driving a $44 million year-over-year increase in EBITDA. From trough to top of the four-year cycle, our EBITDA grew by 139%. Of course today, we're coming out of a much deeper recession as the nonresidential market has been below 800 million square feet since 2009. The same time, however, we have improved our position in the marketplace and stand significantly -- and stand to significantly benefit from the growth in nonresidential construction. Today, each of our businesses is now either first or second in their respective market segments.

The acquisition of Metl-Span one year ago, and its integration into our components group, has made us the market leaders in one of the fastest-growing buildings products in North America. The purchase and ramp up of our new light gauge paint line in Middletown positions us to add efficiencies and reduce costs in our supply chain. And, equally important, to attract new third-party customers in appliance and the lighting industry.

Second, the continuous improvements made to our integrated business model, through process efficiencies and automation, enables us to leverage are manufacturing footprint for our hub and spoke delivery system that significantly reduces delivery times to our customers. Our integrated business model also provides a natural internal hedge against fluctuations in steel prices, our largest imput, through the complementary sales cycle of our three business groups, coating, components, and buildings. Third, we have tremendous operating leverage as a result of our aggressive cost reductions in 2009 when we take out nearly $700 million in costs by reducing our headcount by 40% and an additional $121 million -- $120 million in indirect costs by consolidating our manufacturing plants and reducing their number by 25%. All these achievements will benefit NCI as the market conditions improve and forward-looking indicators firmly point to a recovery in nonresidential construction.

A current, sustained recovery in the residential sector is a strong indication that the start of nonresidential recovery will take place any time within the next few quarters. The April Architectural Billing Index for the commercial industrial sector survey was below 50. But, this is not unusual because the ABI reflected a similar pattern in 2003 and early 2004 before that recovery took hold.

The lending standards for nonresidential loans are at historical, positive position. Nonresidential vacancy rates continue to fall to attractive levels that support demand in new construction. The Dodge Momentum Index posted significant increases in expected commercial building activity and is at its highest level since 2008. This aligns with our own experience as we are seeing pockets of recovery in areas such as light commercial and retail that have been weak since 2009, adding to the existing recovery that's taking place in the commercial industrial sector.

At the end of the second quarter our backlog was up 10% in volume, 6% in value compared to the same period last year. Importantly, it comprised of a greater number of higher quality design build projects that are diversified across several end markets. Our performance progressively improved in the second quarter. We ended the period with a profitable April. Increased quoting activity, higher backlog, current shipping schedules, support our view that we will see growth in the nonresidential construction market in the second half of our fiscal 2013. Now, I'll ask Mark to provide some additional clarity about the quarter.

Thank you, Norm. Let me first comment on the recent conversion of our convertible preferred shares. As we had previously indicated in our May 14 press release, CD&R, the holders of our preferred shares, delivered formal notice that they would convert all preferred shares to common shares. As a result, effected on May 14, we converted all the outstanding convertible preferred shares into 54.1 million shares of common stock. This conversion simplified our capital structure and the calculation of our earnings-per-share by eliminating the preferred class of stock. The conversion will increase the stockholders equity reported on our balance sheet by nearly $620 million, returning our stockholders equity to a positive balance. All of this will be reflected in our fiscal third-quarter results.

A short-term impact of the conversion was that NCI no longer meets the technical requirements for inclusion in the S&P Small Cap 600 index, because our public float fell below the required 50% of total common shares after the conversion. This temporarily increased selling pressure on our shares as certain index funds were forced to trade out of our stock in about a seven-day window. This was evident in the elevated trading volumes between the date of the index change announcement on May 22 and the end of May when are trading volumes were approximately 5 times the previous daily average, and represented 3.7 million shares or approximately 19% of our public float.

Now to an update on our debt refinancing. In our May 14 release we also noted that we were planning to refinance our existing $240 million term loan. Since that time we have marketed, syndicated, and priced an amended term loan and we expect to close the transaction by the end of June. During this process, both Moody's and Standard & Poor's updated our credit ratings based on our improved performance, acknowledging the improved outlook for our industry, and the simplification of our capital structure.

In addition, the debt markets have significantly improved since last July when the initial loan was put in place in the very tight window available for the acquisition of Metl-Span. As a result, under the revised terms we expect to reduce our annualized interest expense by nearly $12 million, cutting our effective interest rate by 50% to approximately 4.5%. Which includes both the cash interest cost plus the amortization of any deferred financing costs. In addition, the new loan eliminates financial maintenance covenants and extends the maturity to 2019. In connection with the earliest extinguished -- in connection with the early extinguishment of our existing facility, we will incur non-cash special charges in our third quarter results ranging between $20 million and $22 million to write off existing deferred financing costs and original issue discounts and the cash payment of a 1% early termination fee. These charges our predominately non-cash items and are not significant compared to the true economic savings the Company will gain under the new structure.

Turning now to our operating results, revenue for the quarter was $293.4 million. Which was 17% higher than the prior year, driven primarily by our Metl-Span acquisition in late 2012. We did experience mid to low single-digit volume growth in each of our three segments. However, much of the volume growth was offset by lower sales prices on lower material costs compared to the prior year. Despite the underlying volume growth, our earnings compared to the prior year were negatively impacted by investments we made to build our manufacturing capabilities in all three segments, investments in certain growth initiatives in the components group, integration costs, and an unfavorable comparison due to some unusual cost recoveries in the prior year.

Looking at our segment results, the components group was again the strongest revenue performer in the quarter, mainly due to the acquisition of Metl-Span, posting a 38% increase in total sales and a 51% increase in third-party sales. On a comparable pro-forma basis, the group's external tonnage increased 6%. However, revenue was up only 4% due to lower material costs which resulted in lower unit sales prices. Operating income was $5.1 million compared to $9 million in the 2012 period. However, last years second quarter results included nearly $3 million in unusual benefits from a legal recovery related to our self-insured general liability program, which we spoke about, and a significant bad debt recovery of an account that had been previously written off.

In this year's second quarter, we experienced increased pricing pressure in the core agricultural and C&I components businesses, which was somewhat mitigated by the 44% volume growth in the higher-margin insulated metal panel for commercial and industrial applications of this product. Also, we invested $1.3 million in specific growth initiatives and we incurred nearly $1.6 million in integration costs and investments in our insulated metal panel business and ramp-up of our new Mattoon, Illinois panel plant.

The coatings group total sales grew 2% while third-party sales grew 12%, which included production from our Middletown, Ohio plant and an increasing mix of painted [pot well] sales which carries a higher transactional price as it includes the underlying steel coil. Internal sales were lower due to variations in the timing of our internal supply chain. Operating income declined slightly due to the inclusion of $900,000 in ramp-up costs for our new Middletown facility, which is now capable of producing all of the products required to supply its intended end markets and is on track to begin contributing to earnings in our fiscal fourth quarter.

The buildings group total sales were flat compared with last year and compared to our first quarter. Operating income was also similar to the first quarter but was $2.5 million lower than the prior year. As we noted in our first quarter release, we incurred additional manufacturing cost to retain and trained skilled labor during the seasonally slower period in order to optimize our performance in the seasonally stronger second half. There was a 75 basis point sequential improvement in our buildings group gross margin in the second quarter based on improving product mix. However, as is our normal pattern, the second quarter included a step up in marketing and sales costs which offset the margin improvement. Margins were pressured by poor weather conditions which caused project delays in the seasonally slower second quarter, whereas last year, the weather was unseasonably warm.

Moving down the P&L, you can see that our consolidated gross margin was 20.7%, up slightly from the first quarter, but down compared to 23.2% in last year's second quarter. The lower margin resulted in part from the investments each of our three segments are making to position for the anticipated demand growth. Buildings is investing in people and training, components invested in integrating our legacy, insulated panel plants to the medal stand production processes and added the Mattoon, Illinois insulated panel plant. And, coaters is ramping up the Middletown, Ohio facility.

Engineering, selling and G&A costs were $62.8 million, compared to $51.6 million in last year's first quarter. The inclusion of Metl-Span added approximately $6 million and is the primary driver of the increase in costs. Also, our costs include $1.3 million in higher non-cash stock compensation charges as we have now reached the mature annual run rate for our plan. In addition, this period included $1.5 million in unique charges related to the conversion and registration of shares as well as certain growth initiatives in the components group, while the prior year included nearly $3 million in unusual benefits. ESG&A as a percentage of revenues was 21.4%, compared to 20.6% last year. We incurred an operating loss of $1.9 million, compared to operating income of $4.9 million in the prior year, and $398,000 in this year's first quarter.

And, we reported a net loss applicable to common shares for the period of $5.3 million, or $0.28 per diluted common share, compared to a net loss applicable to common shares of $16.3 million in last year's second quarter, equivalent to a diluted loss per common share of $0.86. Excluding the effect of the prior year beneficial conversion feature charge of $7.9 million, the comparable adjusted loss per common share last year would have been $0.44.

Now, a few comments on our balance sheet. We ended the period with cash and cash equivalents of $27.5 million. Relatively consistent with the $25.8 million at the end of our first quarter. Our amended $150 million ABL credit facility remains undrawn and we have paid down our outstanding term loan by over $10 million. Our inventory balance was $126 million at 17.7 % -- a 17.7% increase over the same period of the prior year due to the inclusion of Metl-Span. Annualized inventory turnover improved to 7.5 turns compared to 7.1 turns in last year's second quarter. Our year-to-date capital expenditures were $12.7 million. As previously announced, our 2013 full-year capital expenditures are expected to be between $27 million and $30 million, which will include the integration enhancement and expansion of our product lines and operations across all three of our business segments. With that, I'll now turn the call back over to Norm.

Thanks, Mark. In closing, first, I want to emphasize we are in a much better position than ever before to deliver superior growth and superior operating leverage during the market recovery. Second, we believe that this market recovery promises to be a much longer cycle than the previous 2004 to 2007 period because the starting line for this recovery is 750 million square feet compared to the 40 year average for nonresidential construction activity which is 1.3 billion square feet. Third, our product offering is a broader and deeper than ever before. Our proven strength in commercial industrial building products is particularly well-positioned for the likely leading sector in this recovery. Fourth, our management team is aligned with shareholders to drive performance. So, with that, I will be happy to take your questions. Operator, back to you.

Thank you.

(Operator Instructions)

Trey Grooms, Stevens.

Hi. Afternoon, guys.

Evening, Trey.

Norm, could you talk a minute about what kind of demand trends you have been seeing in May? Any changes there in quoting activity, that sort of thing?

Yes, Trey, it's been interesting because, as I think we said on the first quarter call, the first quarter was flattish year over year. And, through the second quarter, we saw improvement every month in February, March, and April and now in May. Meaning that the deficit to year-on-year comparisons got less and less throughout that period. And, in fact, May, on a weekly basis, was about 5% ahead of April. So, we are clearly seeing some movement. It is at a pace that is recognizable, not particularly robust, but is sustainingly moving in the right direction.

And, are you referring to shipments, Norm? Or, are you --?

I'm sorry, I was referring to bookings. I was referring to bookings.

Okay, thank you, that's encouraging. And then, looking at the pricing pressure you guys have been seeing, I mean have you seen any relief there? Is it your thought that this could persist as a we go into a stronger back half? And then, also, do you think it's -- or has it been isolated or has it been more widespread as far as the pricing pressure you've seen there?

So, I think that the pricing pressure has clearly been bifurcated from the standpoint that the design build work within our backlog within the buildings group continues to increase as a percentage of that backlog. And, the pricing and the value that we're able to bring to our customers in that particular approach continues to lead us to higher profit margins for that kind of work. So, that's a particularly positive thing. On what we saw, particularly in the first quarter and certainly for part of the second quarter, that was more opportunistic and weather driven, we would clearly expect to see as the market demand improves that we would see a lessening in that tension from pricing. I am not saying that it goes away entirely, but I think we will see that the pricing pressure does release a little bit as we move forward. And, of course as the non-residential market recovers, we would expect to see, as we have in the past, that the pricing pressure would abate to a very large extent.

Okay, and then, lastly, and then I'll just jump back in queue, but lastly, with the investments in the personnel that you made in the last few quarters, you guys took out a lot of headcount. I think it was 40%, you said, since the downturn. So, it's reasonable that -- to expect you guys to bring back some of those folks. But, as we look into the second half and going forward, do you think that you're pretty well positioned where you want to be for now? Or, should we expect this bringing back some of these folks to continue?

No, I think we're well positioned now. I think that on the margin we may have a person or two. But, in terms of our plant productivity, we're about where we need to be. Now, as you know, we are looking at a couple of growth initiatives and as we move forward on those we would add some people specifically for that initiative.

Okay. Thanks a lot, Norm, and best of luck. I'll pass it on.

Thank you.

Robert Kelly, Sidoti.

Good afternoon.

Mr. Kelly.

How are you doing?

Good.

First off on the interest expense for the refi. Did I hear it right, the all in cost will be 4.5% or is that the cash interest cost?

No, that would be the all in effective cost including the non-cash amortization.

Okay, so the $12 million is not including some of the one timers? $12 million --?

The $12 million would be a reduction in costs over the previous annualized interest cost.

Got it, got it. Okay, so that's the new run rate. Okay, helpful, thank you, very much. As far as the outlook for the second half you talked in the release about what the forecasts were for. Is that May pace of improvement, is that pretty much consistent with what the forecast was or what your budget was going into fiscal '13?

No, it's not, it's really -- it's a bit below that. But, I must say that when we look at the volumes at our backlog being up at 10%, that's not a bad situation. And, when I answered Trey's question that our bookings have continued to improve, and particularly, April was a very good month in that respect. And, to see May on a weekly basis increase, it's -- we're seeing, we believe we're seeing more than just a seasonal pickup. But, it is not at the pace that we would have expected but it's not far below that pace. If that can answer your question.

No, I understand. That's good -- that's a good description. As far as engineered building and components segments, quite a bit of drag there. Can you talk about what the depression on margin is going to be? You talked about those cost drags using and productivity increasing and then I guess the third leg of margin expansion would be price discipline getting a little bit better.

How should we model the second half as far as the margins go? It seems like you had some pretty big negative margin drags exacerbated by weather in 2Q. What should we be thinking about margin wise for components and buildings systems for second half?

So, we should expect to see some margin improvement over the first half. And, that margin improvement should increase asymmetrically from the third to the fourth quarter. Meaning, that we would expect to see more margin improvement in Q4 than Q3. And, part of that, Bob, is that we are increasingly pleased with the job that our buildings folks are doing in terms of winning higher value work in the design build part of their backlog. I was listening to the call today and the team are doing a very good job where are shipping schedules look good. They are strengthening. We're expecting to see the buildings group have a nice rebound in Q3 and Q4. But, it will be more loaded into Q4.

Right, just seasonally that should happen. How about compared to the year ago period? You have costs going away and volumes up double digits.

So, we should expect to see our margins improve. In Q3 over Q3 I would expect we'd see some improvement. It may not be much but I expect in Q4 that we'll see some substantial impact because of the work that will be going through in Q4.

Understood, okay. Very helpful, thank you.

Thanks, Bob.

Lee Jagoda, CJS Securities.

Hi, good afternoon.

Hi, Lee.

So, you cited elevated costs related to the investments, competitive pricing pressures, the facility ramp up expenses, and integration costs all impacting the margin. Can you quantify each of those buckets? And then, what if any of those costs are ongoing versus behind us and completed?

Mark will do the best he can. He's got a little cheat sheet in front of him.

I called a lot of these out but there's a lot of numbers, so I'll re-summarize. Speaking first to items that would impact the gross margin of our company, the Middletown ramp up cost us about $900,000. The integration of Metl-Span and the addition of our Mattoon, Illinois panel plant adds about $1.6 million of cost.

This is on a year over year basis?

Yes, these are year over year incremental costs. And, the buildings group, the elevated investment in manufacturing costs is between $500,000 and $600,000. The growth initiative, there's only about $300,000 of that is included in the gross margin impact. And then, the net of the volume and pricing impact in the period was about a $2.6 million impact.

Now, there's a couple of items that are specific just to ESG&A costs. I mentioned that last year it included some unusual recoveries, of which we had spoken about previously, but $2.9 million of cost recovery was included in the second quarter of last year, that doesn't recur this year. Our non-cash stock compensation cost is primarily in our corporate group. And, that has now reached its mature annual run rate level, because we've now topped the plan up to its four year run rate, and that added $1.3 million of cost.

Growth initiatives are primarily in the components group and those added about $1.3 million of cost. And then, lastly the conversion and registration cost in our P&L are about $200,000. That's a mouthful. All of that together adds up to about $10 million, almost $11 million of items.

And, of that $11 million, what, if any of that, will occur in Q3?

So, as we progress that through into Q3, a couple of items will continue. For example, the non-cash stock compensation costs will continue. That will continue because we've now reached the mature, annual run rate and that cost will be fairly consistent, going forward.

At what level?

I don't have that right in front of me. But, it added $1.3 million of incremental cost this year and we'll have that same incremental cost in Q3.

Right.

The integration, in addition of the Mattoon, Illinois plant, that will add about $500,000 of cost in Q3 and then just $200,000 in Q4 before we're past that event. And then, Middletown will be a little bit of a drag, as we had planned it for Q3, of about $300,000. But, it will be a contributor to earnings in Q4. And then, the growth initiatives in the components group will add about $600,000 of cost in Q3 and then dissipate to about $400,000 of cost in Q4. That's effectively all of the items.

Okay. And then, just switching gears a little bit to the backlog. With the increased complexity, does it provide greater medium to long-term visibility than in recent past? And, how should we think about the trend of backlog as we move through Q3 into Q4?

That's a good question, actually, and I wish I had mentioned that. It clearly provides more balance in our backlog. And, generally speaking, higher complexity work takes a longer time to be moved through the system and to be delivered. So, that extends the backlog a little bit. But, it also provides us with a greater opportunity to add value and to work with our customers in a whole host of ways, so it's a net positive. So, our backlog should give us at least six months of good visibility. And then, our booking rates gives us a more immediate sense of market conditions on a go forward basis as well.

Okay. And, one more quick question and I'll hop back in the queue. Just as it relates to the share count, I know you gave us the 54.1 million that represents CD&R's portion. Do have the basic and the fully diluted share count on a go forward basis? Just because we haven't really had a profitable quarter to see the fully diluted share count in a little while.

Yes, let me try to answer that for you. So, as you know, before the conversion there was about 19.4 million shares that would be included in the basic calculation. In addition to that, there is approximately $2 million -- I'm sorry, 2 million shares, let me say that again. 1.2 million shares of unvested, restricted stock and about 2 million stock options with a strike price in and around almost $9. So, altogether that would be about 21 million shares. And then, in addition to that you would add the 54.1 million shares that were converted to get to the fully diluted shares.

Okay, so on a go forward basis, that's a full share count we should be building in assuming your profitable from here on out?

Right. But, on the stock options, as you know, you would apply the Treasury stock method.

Sure.

As you would with the unvested restricted shares. So, not all of the shares would get into the calculation, probably on the order of 500,000 of those shares would get into the fully diluted calculation.

Okay, very good. Thanks, very much.

You're welcome, thank you.

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

Great. Well, thank you, very much, for joining us on this evening's second quarter call and we look forward to speaking to you next quarter. Thank you.

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