Core Natural Resources Inc (CNR) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to NCI Building Systems fourth quarter earnings conference call.

(Operator Instructions)

This conference is being recorded today, Tuesday, December 10, 2013. At this time, I'd like to turn the conference over to Mr. Todd Moore, Vice President and General Counsel. Please go ahead, sir.

Thank you and good afternoon. Before we get started today, I would like to address something that happened earlier this afternoon. While we were in the process of finalizing our earnings release and preparing for this call, we inadvertently posted our earnings release to our website about 45 minutes before we were scheduled to release it publicly. As soon as we learned of the inadvertent posting, we filed our Form 8-K, attaching the release and requested that the news services distribute our earnings release publicly. We apologize for any confusion or inconvenience that this may have caused to our investors.

At this time, I would like to turn the call over to Layne de Alvarez, our Director of Investor Relations.

Thank you, Todd. Good afternoon, and welcome to NCI Building Systems call to review the Company's results for the fourth quarter of fiscal 2013. To access a taped replay of this call please dial 1-800-406-7325 and enter the passcode 465-0930 and the pound sign when prompted. The replay will be available approximately two hours after this call and will remain accessible through December 17. The replay will also be available at the Company's website at ncigroup.com. The Company's fourth quarter results were issued earlier today in a 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 the applicable securities laws. These statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and generally include words such as potential, expect, should, will, and similar expressions. These statements reflect the Company's current expectations and/or beliefs concerning future events. The Company has made every reasonable effort to ensure that 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 that projected in such statements. Investors should refer to reports filed by the Company with the Securities and Exchange Commission and in today's news release for a discussion of factors that could cause actual results to differ.

To the extent 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 links. 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, Layne. Good evening, everyone, and welcome to our fourth 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'll make some initial comments about our performance, followed by Mark, who will provide some additional financial details, and then we'll be happy to take your questions.

2013 was disappointing because we performed below our expectations. While we had clearly expected to see recovery of nonresidential market take place earlier in the year, it did not. We did accomplish much in terms of working beneath the hood to enhance growth and improve execution. We expanded growth through investments in insulated metal panels, coil coating, and Metal Depots. We invested in territorial realignment to improve sales execution, as well as lean manufacturing to strengthen our operations and service to be in the industry's highest quality, most cost efficient manufacturer.

We incurred almost $20 million of incremental cost which reduced our fiscal 2013 earnings. We expect these investments will enhance profitability during fiscal 2014 and beyond with the absorption of ramp-up cost as revenue from new products grow, margins improve, and manufacturing costs are reduced. Although we will continue to invest in our businesses, we do not anticipate the same level of spend as we incurred during fiscal 2013.

For our full year 2013, each of our three groups, Coatings, Components, and Buildings, faced challenges due to macroeconomic uncertainty, and each group implemented strategies to drive performance even in a low-volume environment. The Coatings group and Components group succeeded in growing third-party sales to new OEM customers and expanding market share by penetrating market segments with higher-margin products. The Buildings group completed a systems integration that laid the foundation for further enhancements to operating efficiencies and began to implement lean manufacturing best practices to fully leverage operating capacity as volumes improved. As we move into 2014, we continue to pursue initiatives that streamline our manufacturing process and strip out in efficiencies.

When we invested in the lean manufacturing initiative in our Buildings group this year, it became apparent that we could scale the identified opportunities across all of our production facilities. Therefore, we are reorganizing our manufacturing platform as a single integrated organization, led by John Kuzdal, formerly President of our Coatings group, that will provide high-quality finished products to our customers in the most cost efficient and timely manner. Tom Prybyloski was promoted to President of the Coaters group. Tom has been integral in leading our growth and third-party sales with an excellent coating sales team. The Coatings group continues to perform well throughout the year. Third-party sales grew as demand for heavy gauge package shipments, HVAC, lighting fixtures, and appliances strengthened for the year.

Our Jackson, Mississippi, plant was back online in September after a fire at the facility in August. During the six weeks the facility was off-line, while we repaired the damaged ovens, we utilized capacity at other coating plants to ensure that our customers did not experience delays in their schedule deliveries. The high level of customer service during this business interruption characterizes the flexibility inherent in the geographic footprint of our paint lines which, with the addition of Middletown, Ohio, now fully service all regions in the US. The Components group grew third-party sales 14% year over year, aided by robust growth of insulated metal panels in the commercial and industrial segments. The two NCI insulated metal panel plants in Jackson, Mississippi, and Methuen, Illinois, were fully integrated into the metal span manufacturing process, and a seventh line devoted to high-end architectural insulated metal panels is on schedule to come online during our fiscal second quarter of 2014. The Buildings group did not fare as well this year, due to lower-than-expected volume that led to episodic pricing pressure, compressing margins as we discussed in our Q3 call. However, they did produce sequential improvement of 27% on the top line and 47% on the bottom line.

In August, the first month of our fourth quarter, we finally saw a pickup in activity, and that improvement has continued throughout this current period. This gradual and continuing growth is consistent with a modest recovery in nonresidential construction for 2014. First, we are seeing larger projects in our backlog that represent a broader segment of the economy, driven by a resurgence in industrial activity. Warehousing, manufacturing, and distribution also look very good to us.

Second, our focus is to deliver more value to our customers to enable them to generate greater prosperity for themselves. For marketing, sales, and order entry to engineering and drafting, through manufacturing and delivery to the job site, we will provide greater value. Third, the commercial discipline we've demonstrated in August across all of our businesses has been successful in raising prices. We believe it is important to remain commercially disciplined going forward reflected by value pricing and achieved improvements in manufacturing across all of our businesses.

Leading indicators we monitor continue to be positive. The architectural building index for commercial and industrial sector registered the 13th consecutive month above 50, indicating continued growth in design activity. The Institute of Supply Management index registered the highest level since April 2011. The ISM data, which leads GDP, has been in a range over the 2 quarters consistent with 3% to 4% real GDP growth. New orders index registered 63.6 and represents growth in new orders for the 6th consecutive month. Responders to the survey corroborate our own experience since August, noting that seasonable demand has not decreased at the typical pace but, in fact, is strengthening.

Most importantly, according to CB Richard Ellis, industrial vacancies space absorption combined with relatively weak construction is driving vacancy rate lower. They anticipate that the industrial vacancy rate will be at 11.5% at year-end which is 30 basis points lower than their forecast last quarter. Taken together, these indicators suggest the potential for upper-single digit year over year growth in nonresidential new construction in 2014. Our backlog is up 6% on a year over year basis. That growth is driven by four months of improved bookings which means improved volume, value, and margin.

While we are focused, intent, and accountable on improving performance, we remain cautious about a modest rate of recovery. Our caution will ease somewhat when we can report sustained growth in all financial measures during the ensuing quarters. Now, Mark will take you through some more details of our fourth quarter.

Thank you, Norm. As Norm already discussed, our result steadily improved as we progressed through our fiscal year, culminating in a solid fourth quarter. This morning, I will quickly review our results, concentrating to my comments where we have found opportunities for improvement. I will begin with a general overview, and then spend more time on our three segments.

Revenue increased by 11% to $400.2 million compared to last year's fourth quarter. Each of our three business segments grew third-party revenue. As we have previously noted, our fiscal year included an extra week of operations this year as compared to 2012. Overall, our volumes measured in tons increased by 14%. During the fourth quarter, we achieved improved commercial discipline for new work in all three of our business segments, and we are beginning to reverse some of the declining trends from earlier in the year. Adjusted EBITDA of $30 million was slightly ahead of the prior year and up 77% sequentially from the third quarter.

Now, I will discuss some highlights from our segment results. Our Components group third-party revenue grew by nearly 14%. Growth occurred in all of the diverse product lines comprising this division, led by commercial and industrial insulated metal panel growing by 27.9%, commercial overhead doors growing by 20.7%, and 16.9% growth in our legacy metal components business. Operating income grew 65% over the same period last year to $16.9 million. Similarly, the operating margin improved from 6% to 8% due to an improved product mix, increased operating leverage on the higher volume, and the short order-to-delivery cycle which allowed recent price increases to be realized during the period.

Our Coatings division third-party revenue grew by nearly 32%. Revenue mix improved with a 9% shift from [tolling] activities to complete packages which includes the underlying steel coil. Operating income grew 17% to $8.2 million. Earnings growth was out-paced by revenue growth primarily as a result of lower operating efficiency caused by an unplanned business interruption, as well as incremental operating costs for sales and marketing activities, and costs related to the extra week during the period.

As previously disclosed, the Coatings division experienced a fire related business interruption in our Jackson, Mississippi, facility during the quarter. We were able to quickly transfer production requirements to our other coating facilities, minimizing any disruption for both our internal and external customers. The damaged equipment has been repaired, and the plant was fully operational by the end of the quarter. As a result, our operating earnings include a $1 million gain recognizing on the insurance recovery for the damaged equipment, offset by approximately $500,000 in currently unreimbursed incremental out-of-pocket costs caused by the disruption. We are working with our insurance carriers and expect that further reimbursements may be received and will be recognized as gains in future periods as they become assured.

In addition, as expected, this quarter reflected the first period in which the ramp-up of the Middletown, Ohio, operations crossed over the breakeven point and produced operating earnings. As this facility continues to ramp through the seasonal cycles in 2014, we expect to see gradually improving operating leverage from this investment. The Buildings group results continue to be impacted by the preceding period's combination of weak demand and competitive pricing pressure. While all three of our divisions achieved commercial discipline with increasing price points for new work, the longer sales cycle the Buildings group delays the recognition of those improvements.

Third-party revenue grew 5.5%. Operating margins at just over 4% were consistent with the third quarter and down from 7% in the prior year. Operating margins are lower primarily due to margin compression in projects both earlier in the year. In addition, we incurred approximately $1.3 million in costs for specific growth initiative that will enhance our sales effectiveness and value delivered to our customers. In addition to these items, operating expenses in this division increased by $3.1 million, primarily related to the extra week of operations and increased sales activity. The foundational systems integration that occurred in the third quarter is now forming the platform for further operational improvement plans in 2014.

Looking now to the consolidated results, our consolidated gross margin was flat with the prior year at 21.8%, but increased from 21.1% sequentially. Improvements achieved in our Components and Coatings group were dampened by continued weakness in the Buildings group, due to the slower sales cycle delaying the recognition of benefits from recent price increases. Looking forward to 2014, we currently expect moderate, year over year improvements in our quarterly gross margins consistent with gradually improving activity level allowing us to further leverage the investments we have made in 2013, such as the Middletown coating facility, the Methuen insulated metal panel facility, and integrations of operations within our Buildings segment.

ESG&A costs were $70.8 million compared to $63.2 million in the prior year. The ESG&A costs were higher than expected due to approximately $1 million related to the year end finalization of accounting estimates, related to our outstanding share-based compensation awards, acceleration of certain expenditures previously planned for 2014, and higher volumes in the Components segment. The cost increase over the prior year is the result of expenditures in three areas. First, the extra week of salaries drove approximately $2 million in incremental costs.

Second, we spent approximately $3.4 million on growth initiatives, intended to improve our distribution channel, manufacturing capability, and marketing and sales effectiveness. Third, we incurred $1.3 million in incremental non-cash stock compensation in large part due to the aforementioned true-up of estimates for outstanding awards. With respect to stock-based compensation, we expect to see a meaningful reduction in these costs in 2014 as the amortization of overlapping prior awards begins dropping off after peaking in 2013. In addition, we're planning changes to our equity award program such that future awards will be performance-based, which will reduce the fixed nature of this cost and better align the cost with value creation.

Looking forward to the first quarter of 2014, we expect our ESG&A costs will range between $63 million and $66 million. As anticipated, net interest expense was down 46% to $3.3 million due to last quarter's refinancing of the term loan. Looking forward, we expect interest expense to be between $2.8 million and $3 million for the first quarter of 2014. Our effective tax rate for the quarter was 39.5%, consistent with our expectations and up from 35% in last year's fourth quarter, due to variations in the amount of Canadian net operating loss carryforwards which were utilized. Looking forward to our first quarter of 2014, we expect our effective tax rate to range between 37% and 40%, but reiterate the cautioned that our quarterly tax rate percentage can vary significantly, particularly in periods of seasonally lower net income. Our diluted shares outstanding following the prior conversion of all preferred stock were nearly 75 million shares. We expect a similar amount in our first quarter of 2014.

Now, a few comments on our balance sheet. We ended the quarter with $77.4 million in cash and equivalents, up from $55.2 million last year, and up from $16.1 million sequentially. We generated $64.1 million in cash from operations for the year of which $73.3 million was generated during the fourth quarter. Consistent with our seasonal pattern, our net investments and working capital declined significantly from the third quarter. With respect to accounts receivable, we maintained tight control on our credit terms, improving our annualized days sales outstanding for the quarter to 32.6 days, compared to 35.8 days at the end of Q3, and 33.3 days for the same period last year. Our investment in inventory at the end of the quarter was $122.1 million, up 15% compared to the same period last year primarily as a result of higher anticipated activity level. Our annualized inventory turnover for the quarter was 9.2 times, compared to 7.5 turns last quarter and 10.1 turns in the same period of last year.

On the other side of the equation, our accounts payable increased to $144.6 million, from $113.2 million at the end of last year. This increase reflects gradual changes made to vendor payment terms over the year, as well as improved timing of payments at the end of our fiscal year. Our annualized days payable outstanding increased to 34.2 days compared to 31.3 days at the end of last year. Capital expenditures for the full year were $24.4 million, which was lower than the projected range of $27 million to $30 million due to the slower timing of payments on ongoing projects. Looking forward, capital expenditures for fiscal 2014 are projected to range between $24 million and $28 million and include continued investments in the enhancement and expansion of our product lines and operations across all three of our business segments.

Now, operator, we would be glad to open the call to questions.

Thank you, sir. Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions)

Jack Kasprzak, BB&T Capital Markets.

Thanks, good afternoon everyone. First question is on the unique ESG&A expenses that you referenced, how long will those continue? And will they roll off at some point such that the dollars on ESG&A will flatten out or even go down at some point?

I'll answer the question in two ways. The first thing is that we expect that you're going to see our corporate ESG&A go down next year by maybe as much as 10% on a year-over-year basis. Second, the ramp-up of investments that we have made, like the Middletown facility, being profitable in the fourth quarter, will continue. We'll continue to see absorption of those costs as we go forward. The ramp-up of the Jackson and Methuen facility as well, will lead us to less cost exposure there. We do not expect and have no plans to engage consultants as we did this past year. We had some specific things on lean manufacturing and on the territorial realignment that we felt we should get done and decided to get done in 2013. I think there's a little tail left in the first quarter, but that should probably end the expenses.

Okay. Great, thank you for that. With regard to building products, engineered building margins, how long do you think the tail on the pricing pressure will persist in terms of those margins?

We would like to say it's immediate, but you know that's not the case. We have a backlog. I believe we said in the release or in the script that some 90% of what was shipped in our Buildings group was prior to the price increases. We still have a tail of that. I expect we might see a little bit of improvement in the last month of the first quarter, but I suspect it'll be the second quarter when we see the pricing improvement that we are witnessing in both our bookings and our backlog.

Okay, great. Last question is, Norm, you mentioned in your comments that you're optimistic but I guess cautious. What do you want to see that you're not seeing to make you more optimistic, if that's the way to say it, or less cautious, however you like to put it?

From August through to yesterday, we have seen a continuation of which is a solid indication of improvement in our bookings, and that's in the Engineered Buildings group. We are pleased to see our backlog grow. For me to be more confident, I really want to see us get through the first and second quarter with the kind of improvement that we're seeing in terms of literally month-over-month, year-on-year growth. If we can stack in a few more months of that, then I'll be pretty well damn convinced that we're in the recovery.

Great, thank you very much.

Alex Rygiel, FBR Capital Markets.

Thank you. Good evening, gentlemen. Norm, a couple of quick questions. First, in the Coatings group third-party sales were up very strong, 32%. What's the telling you about certain end markets either being resi or non-resi?

That's a good question. I think that there's some inventory things going on, but I think there's some real demand. I think the consolidation that occurred in that part of our business, particularly the light gauge, is been beneficial to us with our two biggest competitors joined forces. I think that gives us opportunities that we might not otherwise have had. I think the team is doing a particularly good job, in terms of really targeting their sales opportunities and are very focused on delivering a level of customer service. I know this is a much used expression, but I'll tell you we're getting it back from some of the big customers that the level of customer service that our Coatings group is providing is really distinguishing them.

That's helpful. Can you try to quantify the average price increase that you feel is sticking out there in the marketplace?

I prefer not to, and the reason for this is that I think that it's best that we speak about it retrospectively. Okay? But I will say this. There is clearly evidence in our Components group and our Coatings group that are quicker turn that along with our Buildings group increased their prices in mid-August. We clearly have seen some advantage. It's not uniform across all of our businesses, but it certainly is convincing and prevailing. On the quicker turn sales cycles, like our Coatings and Components, we're seeing the advantage. In our Buildings group, we're seen it in our backlog and in our bookings.

What's required, as I said, it really is having been through this several times in the past, it is the commercial discipline to continue to work with our customers in a way that they see the advantage of going forward with increasing their pricing as well. That's what has to occur and continue to occur.

Very helpful. Nice quarter.

Trey Grooms, Stephens.

Good afternoon. Congrats on a great quarter.

Thank you.

First off on the margins, the negative impact from the longer lead times you identified there, Mark, is there any way to give us a rough idea of what impact that had on margins, given what's going on in the Engineered Buildings group there?

I'll start and Mark will add some detail. If you look at the volume increase that we got in the fourth quarter in the Buildings group, and we were unable to drop value, incremental value on that, that really is where it materializes, Trey. We would expect, if our pricing has been post the August that we would've seen some leverage, some nice leverage. Even though our manufacturing wasn't as efficient as we needed to be, we would have still seen some leverage. We didn't. We saw negative leverage. Mark, do you want to add something to that?

Typically, projects will live within our backlog. Anywhere from 90 to 120 days would be an average cycle. With the price increase in August, you would expect to start seeing some of this improvement show up around January.

Okay. Said another way, did the rest of the businesses realize some decent margin improvement from the price increase in the quarter? On top of that, going into the second quarter next year, would you expect a similar improvement in Engineered Building systems?

Going into the second quarter, I think that's a fair statement, yes.

Okay, perfect. Then you mentioned moderate improvement in margins, as we go forward. In just a little bit of clarity, Mark, were you referring to year-over-year or sequential as we look going into the next few quarters here?

I was specifically referring to year-over-year improvement.

Okay, that's what I thought, just a little bit of clarity. You guys put up an outstanding free cash flow quarter. It looks like you guys are stretching the payables a little bit, more than what you have in the past. You touched on it on the call here, but curious how we think about that going forward through this up cycle? Is this more the type of AP numbers we should be thinking about? Just a little more clarity on that as far as days.

A couple of things on that. I think you can expect to see that there's continued opportunity for us to improve our working capital efficiency in 2014 and 2015. We do have a seasonal cycle to our working capital. We do a lot of our business in the last half of the year, so we tend to build a little bit of working capital preceding that. Then that culminates in our fourth quarter, which you saw this year, and you've seen in years past. We'll have similar cycles that look like that, but I would expect to see progressive improvements in our working capital efficiency going forward.

Great. One last question is for Norm on the depot rollout, where are we there relative to where you thought we'd be at this point? What kind of opportunity do you see on the depot part of things as we look into 2014?

We have a great team there, and we're going to be rolling out our signature store the first part of calendar 2014. We are going to be testing that model from the standpoint of the ramp-up in revenue. We believe that that is going to lead us to be willing to step out and to make some rather good moves in some good locations around the country. We want to do that in a way, Trey, that is not a drag on our earnings, and the ramp-up does take some time. We're going to manage that in a fairly careful way, but we're very optimistic with the opportunity and the team we have there.

Great, thanks. I'll jump back in queue. Good luck.

Robert Marshall, Davenport and Company.

Good quarter, guys.

Thank you.

Could you give us a little more detail pertaining to your comment on seasonal demand that really hasn't fallen off yet? And some commentary on the mood at the builder level? Have you seen, in fact, a renewed confidence of the end market customer, just expand there on that?

While I am answering it, Layne is going to have a couple of examples she'll share with you on some of the projects that we're involved in. But I'll say that the opportunities that we see are clearly broader, are clearly larger, and the distribution of these opportunities over the last four months or so have been pretty convincing in terms of, this is what you'd expect to see in a recovering economy. It's what we started to see in 2004 and 2005 in that recovery. Again, I still need to stay cautious because of the depths of how bad the market got hit and still the relatively low month of volume. It doesn't take a whole hell of a lot one direction or the other, to really have a disproportionate impact. Layne, do have a little color?

I was just looking at a list of our shipments out of the Buildings group in Q4, and what struck me was we are seeing larger projects based in manufacturing as well as the distribution and warehouse. I look at the end market segments and although oil and gas has declined in shipped tons in 2013, there are manufacturing and distribution centers being built in service to that industry. If that adds a little color, there's some well-known names that we don't mention.

The geography is --

The geography is diverse.

Coaters and all the current well-known names.

All right. And this is building on some of the larger projects you discussed last quarter?

Yes, it is. I think what you're finding is, that there are projects that are coming on now from the standpoint of the larger suppliers, the Fortune 100s that are suppliers to the oil and gas community, in terms of the upstream, midstream, and downstream. We're seeing those activities, things like pipe mills. Those things take a while but those kinds of investments are long-term investments. That's what you'd expect to see, something that has a lifecycle of 30 years or more.

Okay. In terms of quote activity at the builder level, do have any metrics you can attach to that, in terms of improvement on a year-over-year basis?

What we're seeing is, again, and it's difficult to tie bookings to backlog exactly, but I will tell you that we're up over the period of August through to yesterday, up about 11%, which is good. I think some of you heard me say that what I want to do is, when I think about our backlog, 5%, 6% is modest in recovery. If we get into the 8%, 9%, 10% that's a robust recovery. If our bookings can continue fairly strong, I think that's a pretty good indication going forward.

Great. Thank you.

Lee Jagoda, CJS Securities.

Hi, good afternoon. Norm, in Buildings, what elements of the higher manufacturing costs were most pronounced in the quarter? And do you see any of that abating? Then as a follow-up, how should we think about the current level of steel prices versus Q1 in last year?

Mark's going to have a look at the steel prices and he'll answer that. Let me just say that there are aspects of manufacturing where current practices and historic practices are being tested. Part of the lean manufacturing is such that you can look at something that you've historically done that has taken a period of time and analyze it to how much of that time is productive, and how much of that time is waiting to be productive. You can't get everything down to perfect strictly production time, but we're seen lots of opportunities and I think the other clear things that John Kuzdal and the team have seen already is there are a number of bottlenecks that can be fixed fairly quickly. I don't want to pin them down with a specific date and number specific in terms of when and what we'll see for an improvement. But I will tell you this, we've got a good team there. John Kuzdal has the support and the confidence of the Presidents of our business units. They work with John. John is the best manufacturing person we have, and we've got some very good ones, and we think he's going to do great job there for us.

With respect to steel prices, today steel prices are about 4%, 5% lower than they were a year ago. But they have been on an increasing trend for the last several months. We expect that trend to continue into Q1 and we'll see what happens from there.

Okay. Just one more, and then I'll hop back in the queue. You mentioned that the Components group, in particular the legacy single skin demand improved significantly. How much do you think is pent-up demand versus a sustained recovery in that product line?

That's a really good question, Lee. All I can tell you is that, you recall from the previous calls that we've been really, I won't say disappointed, just really surprised that the legacy products have really languished. That's both been in the agricultural as well as the single skin roofing and sidewall systems. The team over at Components has never given up on it. God bless them. They really have dug it out and are really making some great strides in improving their marketing, their sales, their focus. They were part of a realignment piece as well that we spent money and time on. I will say that we certainly saw significant year-over-year growth both in the volume of the legacy products as well as the margin improvement. I don't know exactly what that percentage is, but it's meaningful.

Okay, thanks very much.

Robert Kelly, Sidoti and Company.

Good afternoon. A question on, I believe in the prepared remarks, you talked about a $20 million incremental expense for growth related costs. I think the question was asked earlier, at what point do you believe you'll digest those costs?

I think that as we ramp up the Middletown facility, and we see it get up to capacity levels that are similar to the other facilities we have, that will be the demarcation point. It could be as early as this time next year. It could be a little later, but we will clearly start to see the benefit of being profitable there as early as probably the first quarter of this fiscal year. We have converted the Methuen and the Jackson facilities. They've been physically managed by the Metl-Span team, but now the chemistry and the product similarities are such that they're interchangeable, which is critical. That was not the case during the year. We would expect that their utilization rates will improve as well.

Then finally, the line seven which is a high-end architectural panel line won't be finished and commissioned until the second quarter of 2014, but the team there is doing a very good job there. That's a very good product, a product that has very high margins. The team are really well-positioned to take that forward. I would not expect to see us really ramp that up until probably early 2015. That'll be coming up, but that will be something that will take us a little longer because it won't be starting until the second quarter this year. Those kind of costs will be diminishing as we absorb those costs as revenue from those products increases.

Now, that things that I said were probably something on the order of $5 million was consulting activity. We got a little bit of that in the first quarter, but at the end of the day we don't expect, does it mean to say we won't, but we don't expect to have to engage as we did this past year. As you heard me say a number of times, I'm not going to walk by stuff that needs to get fixed because I don't want to be out two years from now saying, I wished I had. That's why we spent that money this year.

Okay, great. The corporate expense line, you talked about it dropping down 10% at 2014 potentially. What's the quarterly run rate there?

Give me a second.

I think it's down about $6 million in the year?

Yes, I think it's almost as easy, Bob, as taking this year's numbers and dropping it down by 10% each quarter.

Just as far as 1Q, it seems like you have some good momentum. You're guiding to 75 million shares. Are you going to be profitable in 1Q?

Bob, we'd love to give guidance if we absolutely thought we had control over all market conditions and stuff. I can tell you that I don't think you could speak to a group of people that's more committed to have clearly year-on-year quarterly improvements. Let's just play this out for a while.

Okay. One final one, you had strong volume growth in Components. Is there some feeling on your part that the volumes were strong to beat price increases, or some demand got pulled into 4Q? Any sense?

That was my concern on the third quarter call. I will tell you that this whole notion about cost, all of our customers and ourselves are seeing costs increase. Whether it's healthcare, whatever the hell it is, we're all seeing a cost basis that's increasing. We have all been through the worst five years in the history of the industry, and the value of what our customers build and do is something that requires them to value price as well. We're finding that this is a sense that seems to be quite real. I can't guarantee that commercial discipline and value pricing will continue, but I will tell you that we as a Company are committed to it.

Great, thank you.

(Operator Instructions)

Greg Macosko, Montrose Advisors.

Thank you. Hi, Norm and all. Just with regard, the margin increase in Components was quite nice. Could you talk about that with respect to Metl-Span? How much of that would be driven by Metl-Span?

Mark will try to have a look at that, and I'll speak to it from the standpoint that we clearly have seen our value pricing in commercial and industrial applications in a significant way. As you know, we distribute that product through our builder network, through several of our competitors' builders networks, through our distribution channel in the Components group which is largely architectural. The teams have done a really good job at pricing that, on top of that. The Metl-Span folks have always had a very good business in the cold storage. Their manufacturers reps are superb, and they do a great job for us. That product is highly valued.

One of the things about that particular product that has a margin impact is the fact that we've seen really high growth in the commercial and industrial side of that. That application of that product carries a much higher margin than other applications of that product. We've seen 27% plus growth in the higher end of that product, so that has definitely driven some margin for us.

It's strong from the standpoint of mix. Have the margins on the product itself improved as well?

The margins have improved, but a lot of that has to do with integrating our operations into the Metl-Span operations. The mix, those are the two primary reasons for the margin improvement.

Every part of our legacy business grew and grew quite well.

Yes, that's not to take away from that.

I've got to tell you that's been something, Gregory, really it's been absent from the market for us until the fourth quarter. We're very pleased to see that.

Good, good to hear. Just in your discussion of the ESG&A, the drop there of 10% or so, a big chunk of that is from the consulting. Is that where the consulting lies, that $5 million you talked about in consulting?

Actually, in the corporate side there was really no consulting. It was more cost reductions that we're doing and part because of our comp.

It has to do with layers of our outstanding restricted stock awards going away, as well as some small restructuring efforts. But just to be clear, the 10% reduction was specific to the corporate costs.

Right.

Okay, all right. Finally, with regard to the inventory, inventories are up 15% year-over-year and the backlog is up 6%. Just looking at that comparison, you mentioned the seasonality of demand is a little different this year. You didn't see as much of a falloff. If I look at that inventory increase, could you related it to the various segments? Is a lot of that with respect to the Buildings sector, or is that Components? Or is it pretty well mixed?

I think you may be reading more into that. What that increase really represents is four days' worth of activity for us. It's not as material as it may seem. There are some changes in our geographical footprint, like bringing on a new plant in Middletown, Ohio, and others. It really has us repositioning inventory in different places, so there's a little bit of that as well.

Okay, good. Thank you. Nice quarter.

Thank you.

Thank you. At this time, there are no further questions. I'd like to turn the conference back to management for any closing remarks.

Thank you again very much for participating in the call. We again, as Todd said, we certainly apologize for the kafuffle at the beginning, even though is was nice to see the market respond. With that, we look forward to speaking to you in our first quarter call. Thank you. Merry Christmas.

Thank you, sir. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation. At this time, you may now disconnect.