Core Natural Resources Inc (CNR) 2016 Q2 法說會逐字稿

Greetings. Welcome to the NCI Building Systems second-quarter earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. Is now my pleasure to introduce your host Darcey Matthews, Vice President of Investor Relations. Thank you, Ms. Matthews. You may now begin.

Thank you, Rob. Good morning, and welcome, to NCI Building Systems' call to review the Company's results for the second quarter of FY16. The Company's second-quarter results were issued last night in a press release that was covered by the financial media.

In keeping with SEC requirements, I would like to advise that during the call, we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For a more detailed discussion of the risks and uncertainties that may affect NCI, please review our SEC filing, including the 8-K that we filed last night. We undertake no obligations to up date any forward-looking statements beyond what is required by applicable Securities law.

In addition, our discussions of operating performance will include non-GAAP financial measures. A reconciliation of these measures with the most direct comparable GAAP measures are included in the earnings release and the CFO commentary, both of which are available on our website.

At this time, I'd like to turn the call over to NCI's Chairman and Chief Executive Officer, Norm Chambers.

Thanks, Darcey. Good morning, everyone. As you know, our second quarter earnings were released last night. I will provide a few brief comments before I turn the call over to Mark, who will offer more details on our second quarter financial performance. After that, we will be happy to take your questions.

I will start by sharing with you key highlights from our second quarter. First, I'm pleased to report our value chain of commercial manufacturing supply chain management delivered meaningful year-over-year improvement in gross profit margin and earnings in our second quarter. Gross profit margin expanded 290 basis points and adjusted EBITDA increased over 60% year-over-year.

Because CENTRIA is now fully included in both our current year and prior-year comparable quarter, our results more clearly demonstrate the continued year-over-year improvement in operating performance. Our teams did a very good job managing steel cost volatility and quite extensive flooding in the central US. The commercial team has ratcheted up our commercial pricing discipline as we face rapidly rising steel costs, something that we have dealt with successfully many times in our business. Most notably in FY04, FY06, FY08 and FY11.

Second, not unlike the past several quarters, our performance was the result of our focused and integrated execution across our commercial manufacturing supply chain activities. As a result of our restructuring efforts, our organizational changes over the last 18 months, our supply chain management focus has enabled us to collect, analyze, take data-driven actions with better clarity and speed to enhance our commercial opportunities to improve margins.

Third, our year-over-year volume increased by 15.8% far exceeded the 3.4% growth in revenue as lower year-over-year steel costs prevailed during the second quarter. While all three of our segments performed well relative to our internal expectations, our Components business was particularly strong due to increased demand for both our legacy single skin components and insulated metal panel projects. Likewise, the Coatings segment continues to benefit from the base loading of the coating plants with internal volume.

Our Building segment also had strong year-over-year improvement in gross profit. We remain focused on taking advantage of our operating leverage created by volume increases that drive greater manufacturing capacity and utilization. Manufacturing was a significant contributor to improved margins by lowering total manufacturing costs per ton by 6% on a quarterly year-over-year basis.

Last but not least, we continue to generate above market growth in insulated metal panels, IMP. In large part, we believe driven by substitution from traditional building products resulting from stricter energy codes throughout much of North America. Demand for CENTRIA proprietary architectural foam panel has led to good growth of this high-value product as a percentage of its bookings and backlog.

Additionally, external and internal inter-company demand from the large market segments; industrial, commercial and institution, which is called ICI, and cold storage, has driven a 25% growth and METL-SPAN's bookings, which has added nicely to its impressive backlog during the first half of our FY16. We accomplished all this against a background of uneven but modestly strengthening growth in nonresidential construction in new markets.

Our Buildings group's bookings in April and May, have shown encouraging year-over-year improvement with high single-digit growth in April, followed by double-digit growth in May. We believe part of this increase likely resulted from rising steel price costs and concerns about restricted steel supply.

Now, a word about the immediate future. The leading indicators that correlate most closely to actual volumes of low-rise new construction starts are the residential single-family starts, ABI mixed-use index and leading economic indicator. Taken together, these indices continue to suggest a 4% to 6% growth for low-rise construction starts in FY16, with the majority of that growth occurring in the second half of our fiscal year and consistent with the slow growth economy.

In closing, our overriding objectives continue to be one, take advantage of the market leading positions in our legacy businesses while accelerating higher growth IMP through our multi-sales channels. And two, expand our gross margins through our internal initiatives around commercial discipline, manufacturing efficiencies and supply chain management.

Now, Mark will take you through the second-quarter of financials.

Thank you, Norm. As usual, we have provided a review of our 2016 second-quarter financials in both the earnings press release issued yesterday, and the CFO commentary posted on our website. I'll now take a few minutes to add some additional insight to those results.

Overall, the second-quarter results came in at the top end of our guidance ranges and slightly above consensus expectations. Our business segments are collectively benefiting from the past two years of improvement initiatives as well as our manufacturing and operational restructuring efforts. The key drivers of our second-quarter performance continue to be both volume growth and margin improvement.

As Norm mentioned, our gross margin expanded by 290 basis points to 24%, which was at the upper end of our guidance range. Our improved margins point to the positive results of optimizing our manufacturing footprint and enhancing our supply chain management, while at the same time, remaining focused on our commercial discipline.

We have continued to refine our raw materials sourcing strategies and practices, which is serving us well as we navigate through notable swings in cost for our primary raw material steel. We're purchasing steel with more precision and managing our inventory quite well. In addition, we have progressed our manufacturing reorganization plans, which we have previously said are expected to result in annual cost savings and efficiency improvement of between $15 million and $20 million annually that will be phased in through the end of FY18.

Production and other logistic efficiency improvements resulted in an estimated 80 basis point improvement in our gross margin during the second quarter versus the prior-year comparable period. As part of our plan, we also recognized a $900,000 gain on the divestiture of an idled manufacturing plant, which increased our gross margin by 25 basis points versus the prior-year period.

Partially offsetting these items we also incurred costs and inefficiencies in ramping up our recently acquired Canadian insulated panel plant as well as closing and relocating operations at another of our insulated panel facilities. These incremental costs associated with our manufacturing and restructuring reduced our gross margin during the period by an estimated 65 basis points.

Our adjusted EBITDA rose by 60.8%, or about $9.6 million during the quarter, from the same period last year. About $7 million of this increase was attributable to underlying volume growth and about $4 million resulted from margin expansion. Offsetting these positive items were approximately $2 million of cost and inefficiencies from the previously mentioned transitions in our insulated panel facilities.

Now, I'll turn to our operating results. In the 2016 second quarter, our consolidated revenues increased by approximately $12 million, or 3.4%. The year-over-year revenue improvement was primarily driven by volume growth across all three business segments, but particularly strong growth in our Components and Coder segments. Total external sales volumes measured in tons on a consolidated basis rose by a total of almost 16%, including a 16.4% increase in Components' external volumes, a 26.3% increase in Coaters' external volumes and a 2.8% in Buildings' external volumes.

Notably, the Components group not only saw increased demand for insulated panels, but also strong demand across virtually all of our legacy metal component products. The Coaters group benefited from not only strong external demand, but also saw similar increases in internal volumes to support the Components and Buildings segments. Our Buildings segment, which has historically seen more activity in industrial and manufacturing end markets than the other two segments, has experienced more subdued growth rates as a result of weaknesses in those end markets.

Despite these volume increases, lower steel prices also impacted our revenues during the quarter. As you probably know, steel prices have declined over 20% from the second quarter of last year. And the pass through of these lower costs to our customers, reduced our revenue by approximately $17 million to $20 million compared to last year's second quarter. Steel costs are now increasing steadily and the negative impact on our revenues will lessen significantly in our third quarter and will likely not be a negative factor on our fourth quarter revenues.

ESG&A expenses increased slightly by approximately $1.6 million during the second quarter from the same period last year, primarily because of higher underlying volumes and incremental incentive compensation costs on higher earnings. Overall, we remain pleased with the level of bookings and quoting activity across our three segments so far this year, and we've seen no discernible trend to change our expectations for moderate new nonresidential growth for FY16. Our consolidated backlog stands at $533.4 million, which is up 5.7% versus the comparable period of the prior-year and is up 11.6%, sequentially.

Now, I'll take a brief look at some items on our balance sheet. We ended the quarter with a cash balance of $77.9 million, compared with $73.8 million at the end of the first quarter. Free cash flow for the second quarter defined as adjusted EBITDA minus net CapEx and net changes in working capital, was approximately $31 million for the quarter, compared with only $2 million in the year ago period.

During the second quarter, we paid down another $10 million of long-term debt, which takes us to $20 million repaid in the first half of 2016, and we continue to anticipate paying down a total of $40 million in FY16. Our net debt leverage ratio at the end of the second fiscal quarter was 2.3 times, so we are getting very close to the pre-CENTRIA acquisition level of 2.2 times. In addition, as previously reported, we spent $7.4 million during the second quarter as part of our stock repurchase plan.

Turning to our third-quarter outlook, we continue to outperform the low-rise construction markets as reported by Dodge in terms of volume growth and have delivered material year-over-year improvements in both gross margin and adjusted EBITDA in the first two quarters of FY16. More importantly, our ongoing restructuring and reorganization efforts over the past two years are beginning to contribute to our earnings growth. Over the remainder of this year, we will continue to further these initiatives and look for opportunities to trim costs, eliminate redundancies, identify synergies and align our capabilities with our customers' needs.

In the third quarter, we estimate consolidated revenue will range between $435 million and $455 million, with gross margins ranging between 23% and 25.5%. As per our normal seasonal cycle and consistent with past patterns, we expect our revenue and adjusted EBITDA in the second half of FY16 will exceed the first half.

Further, as we have previously stated, we continued to expect that for the full-year, FY16 will be a better year than 2015 in terms of both gross margin and adjusted EBITDA. Finally, as a reminder, we have provided additional financial guidance for the third quarter in the CFO commentary posted on our website.

Now, operator, I'll turn the call back over to you for questions.

(Operator Instructions)

Bob Wetenhall with RBC Capital Markets.

Good morning. Very nice quarter.

Thank you, Sir.

Norm, I wanted to jump into insulated metal panels. I think IMP is probably a quarter of sales and more than 40% of EBITDA. You've got a year of CENTRIA under your belt, so it's clearly a big piece of the business. I wanted to ask, has the business lived up to your expectations in the past 12 months and what are your expectations for revenue growth for IMP specifically during the balance of the year?

So I think that the opportunities that we have with insulated metal panels across the product offering that CENTRIA has on the high end and METL-SPAN has in terms of the industrial, commercial and cold storage is unprecedented. And we continue to see opportunities to improve our distribution through our network of builders, through our Components sales channels and frankly, through the great customers that both CENTRIA and METL-SPAN have.

So we really like what we have going on there, Bob. We like it even more. We've got a great leadership team in both companies. Manufacturing is doing very well. And our focus on maximizing the value we can bring to our customers by being disciplined about our sales channels is another kind of fundamental thing we're doing. We are really happy with the role it's playing in our growth and expect that to continue.

Any view on growth rate for that as well?

I think it's going to continue to grow at a pace that's greater than the market. And that's largely driven by the substitution of products driven by energy codes. That's a great opportunity for us to expand our penetration into markets and replacing more per traditional kinds of building products and that's a great opportunity for us.

That's very exciting. It's a good tailwind. Mark, I was hoping on steel prices, if you could just spend a minute? It sounds like the headwind from steel prices declining is going to recede as you go into the back part of the year. Can you walk us through segment by segment how higher steel prices will impact revenue performance and segment profitability?

And also in conjunction, Norm spoken about a natural hedge. How should we think about revenues and market performance in each segment in concert with this natural hedge commentary in a rising steel price environment?

Great question. The first and foremost thing to understand about our business in particular, is that everything we sell, everything we make, is made to order by our customer. So there's no manufactured product to sit on a shelf and wait for a customer to buy it. A customer is determining the price point well before we ever start manufacturing it.

So steel price changes, steel price volatility flows through very rapidly in our industry and we have the advantage of having three separate business segments that all react differently as steel prices move. And those three reactions tend to fall 50% on one side of the equation and 50% on the other where as rising steel prices or as steel prices rise, we tend to be able to expand margins of some parts of our business. And as steel prices decline, we tend to see some challenges in other parts of our business.

But on a consolidated basis, we tend to see a very consistent gross margin produced by the consolidated Company. So that is a unique advantage we have by the three integrated business segments that we have.

So if prices rise, can you walk me through Coatings, Components and Buildings, what's going to happen top-line and what's the margin impact? Just so we can kind of get a more specific view as we go into 2H.

So the most important thing to take away from this is that our Coating Components group are able to by the short sale cycle to stay in stride with steel price increases. They will largely be advantaged from steel price increases.

The Buildings group will ultimately be advantaged, but there will be a period of compression of their margins because of the longer sales cycle that they have. That is a very normal occurrence. We would expect to see some pressure to the Buildings' growth in their margins in Q3 and Q4.

But you're going to get a tailwind on Coatings and Components that will offset the weakness you get in Buildings. Is that the right way to think about it from a margins standpoint?

Yes, so it consolidates as Mark said, it really balances out.

Congrats on a terrific execution. You guys have made big progress in a pretty short amount of time and I think you deserve to be recognized for that. And good luck with next quarter.

Thank you, very much. I appreciate that.

Mike Dahl with Credit Suisse.

Thanks for taking my questions. Norm, I just wanted to start out with maybe a high-level question for you because while you're still talking about it being a somewhat slow and uneven recovery, I think some of, first of all, the revenue growth this quarter, or volume growth this quarter, the guide for the third quarter and then some of the bookings numbers gave for April and May, it does sound like there maybe a bit of an upgrade in your expectations for end markets. Can you -- is that the case and can you walk us through where the puts and takes have been relative to earlier this year?

So I tried to in the press release to talk about that in terms of end markets that are showing growth in areas of the country that are showing growth on a year-over-year basis. And I think that by virtue of choosing those and not choosing others, you can kind of tell that isn't the case in some other areas. Certainly, when we think of the broad definition of manufacturing, that has clearly been slow in the last six months on a year-over-year basis, driven both by oil and gas and a number of other things that are going on.

So when we look at our shipments and our bookings, our industrial commercial side is still the biggest part of our business, but manufacturing has been slower. That has been countered by commercial, by healthcare and by, I will use the broader term, kind of the amusement and entertainment areas. For instance, we do a lot of work in sports arenas from a community to an NFL team and those have been very good to us.

As you know, we are very diversified. We don't have an end market that's greater than 5% of our sales. We don't have a customer that is 2% of our sales. So that really is an advantage at times when we see certain places where there is -- the headwind you've seen manufacturing.

Got it. That's helpful. And then Mark, shifting gears. The progress around deleveraging has been pretty tremendous over the past year and you're back at what's more of a comfort level, just over 2 times. Can you just talk about as you get past the $20 million of additional debt repayment this year, how you're thinking about capital allocation?

Sure. I would describe it as being very committed to the debt reduction plans that we've spoken to and continuing those. And maintaining the right amount of flexibility and focus on returning value to all the stakeholders of the Company and balancing that through all types of cycles, all types of periods. So maintaining optionality, maintaining flexibility is really our current stance.

Okay and any thoughts specifically relating to executing on the remaining buyback?

That's something that is definitely been approved by our Board of Directors and remains firmly in view.

Okay, thank you.

Thank you.

Lee Jagoda with CJS Securities.

Good morning.

Good morning, Lee.

Norm, just want to start with the Coding segment. Obviously, volumes were up 26% and it was the first time in I think six quarters that the segment showed some year-over-year revenue growth. I guess the question is, what portion of that is a function of just the increased demand versus you internally getting past some of the operational issues and taking on more business from your customers?

I've got to tell you, I'm glad you asked that question because Don Riley and Dan Happel have really done an incredibly solid job of putting that business back together on a footing that is consistent with our very successful past and being selective and thoughtful about the customers that we wish to work with and taking advantage of the internal demand and just doing it in a really solid methodical way. And it's taken us a year or more to get back to the position that we prefer to be in and we are there. And I will say that the team is still very focused on some growth opportunities, but are very mindful of the kind of customers that we need to work with.

And do you think we are at the point yet where we can say the business is back to a place where we can see the historical margins from two years or three years ago come back?

Yes, I do.

Okay. Just one more for me. In terms of the slope of steel prices since the quarter's ended, it seems like the increase has been pretty steep in a lot of the steel products. Are you seeing any problem in terms of either managing your customer orders with regard to steel price or customers kind of backing away temporarily saying they may want to wait for steel prices to come in a little bit?

So there's two things going on there and one is what we normally experience and one is not. So the first, what we normally experience is in fact the reality of costs going up in the short intermediate term and having to work with our customers to kind of get that.

In the past years and as you can tell by my script, we've done this a lot, Lee, over the years, as you know. And at the end of the day, what's different about this one is I can't remember in my tenure here where we have outside forces like the tariff laws having such an immediate and dramatic impact on the reduction of the availability of alternative steel during a domestic steel price increase.

I will tell you that is a different deal because what happens is that if you will safety valve that a lot of our competitors have had to reach out to foreign steel, just simply isn't there. And if it's there, it's at a much higher cost because of tariffs. So, I'm very encouraged and frankly, I find myself firmly in the camp that says, higher steel prices are good for the industry and are good for our suppliers, steel companies and are a good thing for our customers because our pricing compared to other materials is still very low and competitive. So there's room to grow.

I think that's a key point. Thanks very much. I'll hop back in.

Thank you.

Steven Fisher with UBS.

Thanks, good morning.

Good morning.

I wonder if I could just follow up on Lee's question there on the Coatings group and the third-party volumes. If you could just clarify what really did drive the volume there? I know you said you are sort of getting that organizationally back on track, but was there a particular end market? Was there a particular region? And would you expect this kind of growth to be sustained? Or is there maybe any one-time benefit in the quarter that might not repeat?

No, there was no one-time benefit. It really is the result of hard work and realizing that in many instances, for the customers we wish to work with frankly, there is a trial period of which we are on trial to produce materials at the quality that they want, at the time that they want, at the price they want. Dan and the team have been going through that in a yeoman like way and have really kept their patience and discipline. And Don has been husbanding that and making sure that the guys don't get anxious to try to get more work. And the net result is we are ending up with a customer base that is much more in keeping with our traditions.

One of the advantages that we have is we have the Middletown facility and that's a new facility that is new from a standpoint of we didn't have that facility during the last recovery I am talking about. A very long time ago, 2003 to 2008. And at that extra capacity, coupled with frankly, more intelligent supply chain management that we have, really gives us an opportunity to satisfy our internal needs, which are usually important to us, and to grow our business modestly with third-party sales. So I think we got a good hand to play yet there.

Okay, that's helpful. And I wonder if you could give us your big picture thoughts on the cycle? I know you said a slow growth economy, but where are we now for the low-rise products? What visibility do you have to growth in 2017 at this point? Are there any particular places where you think the market is still under supplied?

So let me just start, then Mark can add more detail. One of the things that is still clear and you hear us talking less about it, is that I'm not sure we've crossed 1 billion square feet yet. We've had relatively weak to slightly negative growth and that has largely been driven by the fact that low-rise construction really has followed the normal pattern since 2011, of growing in line with the economy.

What has been different is the mid-rise and high rises growing at a more rapid pace. It appears to me by looking at the numbers that that is still a very big part of the market, but that rate of growth is decreasing some. My point is that we still see frankly, a lot of market left. We don't see any impending reduction slow growth economy, particularly when we look at the relationship of low-rise non-res construction with single-family starts. And man, that still looks real good to us.

I was going to add to that. We've done some work with our own teams on leading indicators for low-rise construction starts to something we are very tied to. That gives us 12 months to 14 months of visibility which extends into next year and we continue to see that moderate growth continuing into next year for that visibility that we do have.

Okay, terrific. Thank you.

Thank you.

Alex Rygiel with FBR Capital Markets.

Good morning, Norm and Mark.

Good morning, Alex.

Could you comment a little bit on capacity utilization rates right now? And secondly, could you comment on gross margins in the quarter up 290 basis points? Obviously at the high-end of your range, so theoretically, inside your range. But any anomalies? Any positive or negative surprises relative to what you're expecting coming in?

Sure. First, with respect to capacity utilizations, we're of course higher than we were this time last time by 4 basis points to 10 basis points in each of our divisions. Our Components group is approaching a 50% capacity utilization. Our Coaters group is just over 50% and our Buildings group in this last quarter was just under 30% utilization.

So still have significant amounts of capacity. With respect to our gross margins coming in at the higher end of our range, the really, the big reason for that is that the volumes came in at the high-end of our range, or just actually outside of the top end of our range, and that drove increased operating leverage across all three of our segments.

Very helpful. And Norm, you sort of addressed it without addressing it, but clearly it sounds like the South Central, Southwest Texas/oilpatch market, a little soft. I know it's a smaller component of your revenue stream, but any color, thought, views there?

So what's interesting, we look at the seven production areas that are gas and fracking and actually saw a pickup in Marcellus I believe. So, at the end of the day though from my perspective, anything to do with our upstream oil and gas is going to struggle for quite some time to come. So we are pleased.

We are seeing manufacturing opportunities increase and it's interesting the automotive side looks particularly interesting to us. And that's both good for insulated metal panels as well as -- sorry, as well as it is our Building group. So we're seeing some brightness there. And the other thing is distribution centers, we are really do very well on those and we're seeing that not only from the bricks and mortar economy, but from the dot com economy as well.

That's great. Thank you very much.

You're welcome.

Brent Thielman with D.A. Davidson & Company.

Good morning, nice quarter.

Thank you very much.

Mark, you mentioned steel likely wouldn't have an impact on overall revenue by Q4. Should the lower steel prices still weigh on Buildings group sales and to the end of the year, given the longer lead times?

They should not have an impact in the fourth quarter. We do still expect some moderate level of impact in the third quarter.

Got it. Norm, of those end markets you mentioned where internal bookings are gaining, is there something specific about those markets and your product offering that might be allowing you to take some share there? Or do you look at these gains as consistent with the underlying growth of those markets?

So, what I am seeing that would be a reflection of a change is that we expected when we invested as heavily as we have in insulated metal panels, that we would be pushing those products through our builder network and through our Components group in addition to the existing great sales channels that CENTRIA and METL-SPAN have. And what we're finding now is that that push is still there, but we're getting a pull.

What do I mean by that? Is that because of our presence in insulated metal panels, we are being brought into some larger types of projects that we frankly, wouldn't have seen before. And in these cases, our insulated metal panels are providing us the opportunity to provide the whole building envelope. And that's the an exciting change. Now, we will see how that plays out. It's still early days, but we really like what we're seeing there.

Okay, great. Congrats again.

Thank you.

Scott Schrier with Citigroup.

Thanks for taking my question and as everyone else said, good quarter. I wanted to ask about the 65 BPs of gross margin headwind from less favorable product and segment mix. Perhaps what some of the drivers were and how we should think about those trends going forward?

Sure. A lot of that has to do with just the relative weight amongst the three segments of the volume. You noticed we had out paced growth in the Coaters and Components segment relative to the Buildings segment. Buildings segment has the highest gross margin, so it's relative weighting came down.

Also within our products, we have high-end products and we have lower and more commodity-based products. And at any point in time, we can see some underlying shifts there. We saw some of that in the Components group during the period that lowered the mix-related margins.

Got it. I wanted to follow up on some of the margin questions and specifically on the natural hedge. It looks like given your guidance and your margins, that like you said, you should have some pretty good incremental margins going into Q3, not taking into account the Buildings segment possibly having some headwinds.

But when I look at Components, it looks like that could suggest that the cost of CENTRIA you might have a structural change in margin to a level where we might not have seen in about five years or six years in your business. I just wanted to see if that's fair to say -- fair comment to make?

Yes, so I think that the notion that the insulated metal panels are at higher margin generally, does help our legacy blend. That's for sure. So we would expect to see that play a role in the improvement of the margins in the Components group. But I also want to say, which is frankly, a very pleasant surprise for us and it is a surprise to some extent. The execution of the legacy business in a marketplace when the steel prices were going down as they have been for the last 18 months, is a market that that part of our business has struggled with historically.

Let me tell you, they've been doing very well in the last 18 months, both growing volume, top line and profitability, largely by their incredible focus on sales and service. And the team led by Bill Coleman and Joe [Banicki] has just done a first-class job there. So we have some advantages we wouldn't necessarily expect to have in the market that we are in, but we are also pleased with the investments that we've made in insulated metal panels and the role that plays.

Got it. Thank you.

Matt McCall with BB&T Capital Markets.

Good morning, everybody. This is Reuben in for Matt.

Good morning, Reuben.

I just wanted to see if you could give us a little color on your top line guide for Q3? Can you tell us what your volume and mix and steel price assumptions are after -- Q2, you had 16% volume growth, but you had a little bit of segment mix impact the price per tonne I guess. Can you talk about what you are assuming in your Q3 guide?

So I think broadly, we are expecting a similar blend of work as we had in Q2. We don't see a big change there. And we see, as Mark has said, we will still have a bit of a headwind on steel costs, but it will be less than we've experienced in the first half. And that as you can imagine, is a linear approach, meaning that by the fourth quarter, that will be gone completely. So over the course of the third quarter, we will see that headwind decreasing.

Aside from that, the reality is that we go through this and have for a decade or more, the notion in working with our customers to pass all that on. So that is baked into our view of the future and making sure we don't get ahead of ourselves in terms of how quickly we can get all that through. So that's all kind of wound together in what that guidance is.

Okay, great. And then the gross margin guidance, the midpoint, it looks like it's about flat year-over-year. Can you guys just expand it close to 300 basis points and it looked like you had what I assume is a near-term drive from those plant startup and wind down costs. Can you just talk about the puts and takes from the low-end of the higher end of your guidance and how you came up with it?

Sure. I think the best thing to understand about the gross margins is we are now in our third quarter going to lap some significant improvements over the last several years. Most notably though, the third quarter of last year was a substantial uptick in our margin and we've maintained those higher margins since then. So we're basically getting to higher comparables. You combine that with any level of uncertainty there would be around the steel prices that Norm was just talking through, creates a little bit wider range than we've used in the last couple of quarters that provides for that variability.

Okay, that was very helpful. And if I could sneak one more in? You've talked in the past a little bit about any SG&A opportunity and maybe some accelerated savings last quarter. Did you realize any this quarter? Do you have any expectations for the next year or so that you could quantify on that line?

I would tell you that each of our businesses is very focused on all of the different reorganization efforts and while we have seen reductions in certain areas, certain other areas we've seen some expansion in. Overall, our expectation is that our ESG&A as a percentage of our revenue will be coming down each year, and we will see that this year. We will see that again next year in a meaningful way. But beyond that, I couldn't quantify anything for you.

Okay, great. Thanks, guys.

Thank you.

(Operator Instructions)

Trey Grooms with Stephens.

Good morning, Norm and Mark. This is Drew Lipke on for Trey.

Good morning, Sir.

Congrats on a good quarter.

Thank you. We appreciate that.

I was curious. You mentioned earlier that you guys have faced rapidly rising steel prices many times in the past. And I'm curious when you see a short-term spike or jump in steel prices like we have, have you seen a level of call it maybe pre-buy activity from your customers in Coatings or Components ahead of that price increase? Is there any kind of front load there historically?

Yes, and I think I said in my script that we saw some nice bookings in the Buildings group in both April and May and single-digit growth in April and double-digit growth in May. And I wouldn't be surprised that a little of that was getting ahead of the steel price increases. That's a normal occurrence.

And what's also normal is that in the past and when we've had serious steel price increases, there have been a number of increases. The steel mills have in a serial way increased their prices over a period of time and we certainly have seen some of that this time. So what happens is that event of pulling ahead some more kind of continues on every time there's a steel price increase.

Now, I will tell you that I like that structure because it gives a chance for the market to react to it and to adjust to it and to move on. So what I'm seeing in the market is consistent with the better, if you will, the better steel price improvements in the past years.

Okay, thanks. That's helpful. And then on the Buildings group and looking at the volumes there in the quarter, I'm guessing the reason that under performed the other segments was partially maybe due to weather, which you referenced in your prepared remarks. I'm curious, can you quantify the weather impact that you guys saw in the quarter and what you've seen here recently?

I tell you, man, at the end of the day, we're trying to get out of the weather business and I will tell you what helped us though is having Easter in March. Having five weeks in April is a great thing because we had some really horrendous weather in the Houston area, but we had a week to recover from that.

So we're kind of trying to get beyond the notion of impacts on weather and trying to really encapsulate that in how we work. But I will say that we have seen all of our businesses across the entire things we do really be very focused. Very focused on the job they are doing, communicating and making sure things don't fall between the cracks and that's making a hell of a difference.

Thanks, guys. I appreciate it.

Thanks, Trey.

I would like to turn the floor back over to Darcey Matthews for closing comments.

Thank you, Rob, and we thank everyone for joining us today. The Company will be participating in two non-deal road shows this month. The second week of June, we'll be heading to Boston in the mid-Atlantic region but Citibank, and the following week, we will be with CJS Securities in Chicago. We hope to meet you on one of these trips or some of our upcoming conferences later in the summer. Again, thank you for joining us and have a nice day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.