Norman Chambers – President & CEO
Mark Johnson – EVP & CFO
Mark Dobbins – EVP & COO
Todd Moore – EVP & General Counsel
Arnold Ursaner – CJS Securities
Jeff Rosenbaum – York Capital
NCI Building Systems, Inc. (NCS) Q4 2009 Earnings Call December 8, 2009 5:00 PM ET
Welcome to the NCI Building Systems fourth quarter 2009 earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to Todd Moore, Executive Vice President, and General Counsel.
Good afternoon and welcome to NCI Building Systems conference call to review the company’s results for the fourth quarter of fiscal 2009. This call is being recorded. To access the taped replay please dial 412-317-0088 and enter the pass code 419727 and then the number symbol when prompted. The webcast archive and taped replay will be available approximately two hours after this call and will continue through December 15, 2009.
The replay is also available on NCI’s website which is www.ncilp.com. The company’s fourth quarter results were issued earlier today in a press release that was covered by the financial media. A release has also been issued advising of the accessibility of this conference call on a listen only basis over the Internet.
Some statements made in this conference call may be forward-looking statements within the meaning of the Private Litigation Reform Act of 1995 as well as Section 27A of the Securities Act. These statements and statements identified by such words as potential, expect, should, will and similar expressions are forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are subject to a number of risk and uncertainties that may cause the company’s actual performance to differ materially from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission and in accordance with today’s news release for other factors that could effect NCI’s operations as well as any forward-looking statements made on this call.
To the extent that any non-GAAP financial are discussed on today’s call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the company’s website by following the news link to see today’s news release.
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 to reflect any changes in expectations.
At this time I will turn the call over to Norman C. Chambers NCI’s Chairman, President, and Chief Executive Officer.
Thank you Todd, good evening everyone and welcome to our fourth quarter 2009 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer, Mark Dobbins, our Chief Operating Officer, and Todd Moore, our General Counsel.
I will provide an overview and Mark Johnson will review our financial results followed by Mark Dobbins who will review our operations and then we’ll be happy to take your questions. In 2009 NCI survived the deepest decline of non-residential construction in the 44 years since McGraw-Hill has been compiling data and we have emerged in the strongest financial position in our history as a public company.
There is no question that we paid a high price in order to save the company and to put it on sound financial footing. But we are now have the resources to withstand the continued weakness projected for our markets and to restart our growth strategy and we are committed to significantly rebuilding the value of the company over the next several years.
Business conditions in our fourth quarter continued to be very tough across all of our markets. According to McGraw-Hill’s statistics non-residential construction activity measured in square feet was down 47% calendar year to date through October compared to 2008 levels. Our traditionally strong commercial and industrial markets were even weaker, down 60% year over year.
At the same time steel prices in our fiscal fourth quarter declined 47% from the similar period in 2008. Rapidly falling steel prices effect our business in two ways, first, our buildings group customers wait to commit hoping for lower steel prices and second, as steel prices represent 54% of our revenues drastically lower steel prices reduce our revenue in the short-term until rising demand counteracts lower steel prices with increased volume.
Within this business environment I think that we reported reasonably good operating results for the fourth quarter. The slight sequential uptick in revenues reflected our traditional seasonal patterns and if you back out the one-time change of control charge and net out the other special charges in both periods, our fourth quarter operating income was $10.5 million comparable to our third quarter levels.
This was a notable achievement in light of the fact that our fourth quarter revenues were off 52% as compared to 2008 fourth quarter. And it is attributable to several initiatives. First, we have done our best to maximize our revenue. Our people are excellent at pursuing business in markets that have remained relatively resilient in this downturn.
These include subsets of institutional markets which involve government funded work like schools and hospitals and army installations. And the heavy industrial market and the agricultural market. We have introduced new products and expanded our geographic reach to serve international markets as well.
Mark Dobbins will give you more color on that just a little later on. Second, we significantly reduced our costs by leveraging the previous investments we have made in technical systems and automation, we were able to close 25% of our manufacturing plants and reduce our workforce by nearly 40% without sacrificing quality, delivery times, or customer service.
These and related initiatives resulted in a $560 million annualized reduction in direct variable costs and $120 million annualized reduction in fixed costs. Third, we streamlined and reconfigured our internal structure in order to better align our resources with current market conditions. This involved flattening our sales organization to put senior sales people closer to the customer and supporting each of our brands and builders so that they can compete most effectively with our competition.
In addition to our operating performance I think it is also noteworthy that we have been able to maximize our cash generation throughout this very difficult year, reporting positive operating cash flow for each quarter in fiscal 2009.
Now that our recapitalization is complete NCI has one of the strongest balance sheet in the industry. Our net cash position at fiscal year end was $90 million plus there was another $12.9 million in restricted cash. Our outstanding debt has been reduced to $150 million from the $474 million that we had before.
We have $125 million asset based lending facility that has not been drawn down. As I said earlier this financial flexibility has not come without a price. Our cost of reshaping our balance sheet to avoid the potential bankruptcy into a stand of prevailing economic uncertainty resulted in massive dilution.
This was a terrible result for our pre-closing of shareholders compared to anything but the alternative we faced. The dilution occurs from the potential conversion of CD&Rs $250 million in preferred shares to NCI common shares and the retirement of the $180 million convertible note with $500.00 in cash and 390 shares of common stock for each of the convertible notes.
The convertible note retirement added 70.2 million shares bringing the number of common shares outstanding up to 90.4 at the end of the quarter. From the volume of shares, are traded in the week following the completion of our recapitalization, it is clear that many of the convertible note holders immediately sold their shares that they acquired through the exchange.
We think the longer-term investors will be better aligned with our strategy to significantly grow the value of the company over the next several years. This is the strategy that CD&R has bought into and the company’s management is committed to. Our five year goal is to surpass the $200 million in adjusted EBITDA that we generated in 2008 which would mean about a 4.5 times more than the $45 million in EBITDA that we generated in fiscal 2009.
Achieving this objective will not be easy given that there remains great uncertainty regarding the economic, the timing of the recovery. For calendar year 2010 McGraw-Hill is forecasting a further 4% decline in volume of non-residential activity before recovery in non-residential in 2011 and beyond.
Despite these challenges we have an excellent organic growth strategy. Our coaters group is gaining third party sales because of the substantial production efficiencies they have achieved and the fact that several of their competitors have closed their paint lines.
Our components group is enjoying growth from the investment we have made in the insulated metal panels including their eco efficient brand cool colors and reroofing initiatives. Our buildings group is poised to gain market share in the short-term from the financially weakened regional competitors and the recognized staying power that we now enjoy.
We are able to support our extensive builder network with very competitive pricing due to our hub and spoke system of delivery, short of design and delivery times and sustainable building products through our green initiative.
While our EBITDA growth does not rely on acquisitions we will be disciplined and attentive to potential accretive opportunities. We are keenly aware that the successful execution of our growth strategy will enable us to use our substantially levels of both EBITDA and cash to the best interest of our common shareholders.
Before I hand the call over to Mark Johnson I want to conclude this portion of the call by saying we are in a very secure financial position because of CD&R. We are executing a prudent strategy. We appreciate the loyalty of our builders and our customers and our employees and this management team is committed to an outcome from which long-term investors and shareholders will benefit.
Now Mark Johnson will take you through the financials and then followed by Mark Dobbins who will give you the operational piece as well.
Thank you Norman, consolidated fourth quarter operating results excluding charges were similar to our third quarter results but as a result of the severe economic conditions were significantly below 2008 levels.
Revenue for our fourth quarter was $244 million, up 3% from the $2385 million in the prior quarter but down 52% from the year ago period. The significant decline from the prior year reflects a 29% reduction in tons shipped as well as a 24% reduction in sales prices due in large part to declines in the cost of steel.
Gross margin came in a 24.8%, down sequentially from the 25.6% earned in our third quarter but similar to the prior year’s 24.4%. Our margins reflect competitive pricing in a severely weak demand environment, partially offset by our continued focus on minimizing costs.
Selling, general, and administrative costs were $51.6 million, up slightly from the $49.6 million in the third quarter but down 29% from the $73 million incurred in the year ago period. The decline from the year ago period reflects the significant cost reductions that have been made across the breadth of our business while the slight increase from the third quarter resulted from environmental and other contingency reserves and slightly higher bad debt expense.
While we continue to execute on cost reduction initiatives fourth quarter results reflected most of the benefit of the cost reduction actions that have been taken. Excluding charges, our operating income was $10.5 million in the quarter compared to $11.5 million in the preceding quarter and $54 million in the year ago period.
Our individual segment performance showed some variation in operating income compared to our third quarter results, with our coaters group margins expanding while our buildings margins compressed and our components margins remained stable.
Higher margins in our coaters segment reflected the return to more normalized margins after selling through higher priced inventory in our earlier quarters as well as the expansion of external sales to new customers and specialty products unrelated to the metal building industry.
Even more significantly the coaters group processed 14% more tons of steel for our buildings and components segments in the fourth quarter as compared to the third quarter. The margin compression in our buildings group is the result of further pricing pressures in our fourth quarter compared to our third quarter caused by the extremely competitive market conditions in a weak demand environment.
Also we know that this business segment was hurt by the financial uncertainty we faced prior to our recapitalization and was forced to give additional pricing concessions in order to retain orders. The components segment maintained comparable operating profits with the third quarter on a nearly 10% increase in shipments also reflecting the competitive pricing of today’s market conditions.
From a liquidity perspective we finished the quarter with approximately $90 million in cash and an additional $12.9 million in restricted cash that will become unrestricted over the next six months as our collateralized letters of credit expire and are replaced under our new credit facility.
It should be noted that we have accrued approximately $10 million of transaction related expenditures for the restructuring recently completed in the fourth quarter that will be paid out early in the first quarter of 2010.
In addition to the cash on hand our $125 million ABL credit facility remains undrawn and provides an additional $70 million of availability based on current levels of inventory and receivables. Our only remaining debt obligation, the $150 million term loan, requires no financial maintenance covenant until the fourth quarter of 2011 and amortizes 1% each year until maturity in 2014.
In addition approximately one half of any income tax refund we receive related to the 2009 taxable loss is required to be paid against the term loan which we estimate will reduce the term loan by an additional $14 million in the second or third quarter of 2010 as tax refunds are received.
In light of the unprecedented low levels of business activity and declines in material costs, we have reduced our investments in working capital. We estimate that our inventory measured in tons is approximately 49% lower than it was at the end of 2008 and 16% lower than the end of our third quarter.
Our annualized inventory turnover for the quarter was 10.1 turns compared to 6.9 turns in the fourth quarter of 2008 and 8.3 turns in our third quarter. Receivables at the end of 2009 are slightly higher than the end of our third quarter but approximately one-half the value they were at the end of 2008.
Our days sales outstanding calculated on a three month trailing basis was 33.6 days compared to 32.7 days in the prior quarter and 33.3 days in last year’s fourth quarter. In the fourth quarter we invested approximately $3.8 million in property and equipment bringing our total fiscal year capital investment to approximately $22 million which includes the $14.1 million invested in our new insulated panel plant.
As we have previously discussed in light of the prevailing economic conditions in our industry we have curtailed our capital spending to only maintenance activities and identified critical initiatives. On a similar basis we expect to spend between $10 and $12 million in 2010.
Our fourth quarter pre-tax loss available to common shareholders includes a notable total of $127 million in special charges primarily related to the restructuring of our balance sheet and operations which were completed at the end of the quarter.
First we recorded a $99.2 million debt extinguishment charge related to restructuring and paying down our convertible note and term loan with a combination of cash and common stock. Also included in our interest expense for the period we incurred a non-cash charge of $3.1 million related to the loss of hedge effectiveness for our interest rate swap which resulted from completing the amendment to our term loan.
We also incurred a $10.5 million non-cash charge related to the beneficial conversion feature for that portion of the convertible preferred stock for which we have authorized shares available for conversion. In addition we incurred charges of approximately $11.2 million relating to our preferred stock placement which represented a change of control as defined in certain employee related agreements.
The most significant of these charges related to the acceleration of vesting for a certain prior restricted stock award and totaled $9.1 million for the period. We also incurred approximately $1.9 million in restructuring and asset impairment charges related to the rationalization of our plants, products and workforce and finally a $1.1 million charge relating to adjusting environmental and other contingent liability.
Looking forward we expect to incur approximately $1.9 million in restructuring costs in 2010 related to the idle facilities from the cost reduction activities we executed in 2009. Further as sufficient common shares become available subject to shareholder vote, we will recognize the remaining $230 million non-cash beneficial conversion feature related to the preferred stock replaced in 2009.
Now I would like to turn the call over to Mark Dobbins.
Thank you Mark, Norman has already commented on the uncertainty of the economic recovery and the forecasted decline in non-res construction from McGraw-Hill, so I’ll go over the operating achievements of our three business segments and their growth opportunities.
Starting with the coaters segment this group continues to add volume to their external sales in areas outside of the typical metal construction market. These are areas such as lighting fixtures, ceiling grid products, [HC AC] and other specialty coated products.
Additional work is being won in areas where we have seen some of our competition close their coating facilities all where manufacturers had their own in house coating capabilities and have elected to outsource their coating requirements to our more efficient operations.
The group is also working with national distributors to coat products for other manufacturers who do not buy materials directly from the steel mills and may not have relations with existing coating facilities. Actually all these opportunities began to show results in the last half of 2009 and this enables us to plan for an increase of 10% plus in coated tons for 2010, in a year in which we just stated non-res construction is predicted to have a slight decline.
The building segment has struggled through 2009 with steel cost fluctuations, depressed construction activity, and a fiercely competitive pricing environment. They have been very effective in their cost reductions and continue to find opportunities to drive costs out of the engineering and drafting processes while actually improving delivery times.
The sales have been focused in several areas where construction activity remains relatively good. Some of the areas to mention are the high end heavy industrial, education, and government related projects. A few examples of projects either recently completed, in progress or in the backlog, are multiple military base expansions, support facilities for the nuclear energy industry, mining related projects, and numerous department of energy projects.
These are in addition to our normal commercial industrial projects. Export projects into central and south America continue to be another area where we are finding additional opportunities. The buildings group backlog was $253 million, down approximately 12% sequentially and down 23% compared to year end 2008.
However based on an estimated tons, the backlog is only down slightly from Q3 and its actually up slightly compared to the prior year. This is reflective of the significant decline in average price per ton as steel prices have declined, as noted by Mark Johnson earlier. The component segment also faces a very competitive business condition.
However along with their OEM manufacturing base of customers and [our protectoral] roofing projects they now have two significant areas of opportunity to improve their volumes. One of these areas is a new roof product. This is a retrofit products which converts buildings with a conventional flat roof design with all the typical problems and maintenance issues with a flat roof, into a roof that not only adds an architecturally pleasing design but also adds opportunity to improve the thermal efficiency of the building and the availability of a weather [tightness warning].
This product has multiple uses but is especially suitable for schools which may not be near the end of their lifecycle but where the roof needs replacement or in many cases where the size of the facility is being increased.
The second significant opportunity for the component segment is the insulated panel business. We have began producing panels in our new state of the art facility in Jackson, Mississippi, and we are very excited about the quality and the cost basis for this products. These products which consist of dense foam insulation, sandwiched between and exterior and interior metal panel fit the current and future demands of the more stringent thermal efficiency building codes being placed on all construction products today while actually reducing construction time.
As a side note, insulated panels was the only product category that did not post a decline in usage during 2009. As a wrap up from an operational perspective 2009 was a year of significant change for this organization given the plant rationalizations, and the general right sizing of the operations.
For 2010 we see multiple opportunities to benefit from all of these changes, improved efficiencies, and the reduced costs we enjoy today. With that I’ll hand it back over for questions.
(Operator Instructions) Your first question comes from the line of Arnold Ursaner – CJS Securities
Arnold Ursaner – CJS Securities
My first question relates to the numbers that you had provided in your public filing or 8-K from September 15. At that time you had talked about 2010 sales of $861 million and EBITDA of $36 million. Given that your 2009 number came in at about $967 and $44.6 or so of adjusted EBITDA how should we think about 2010 at this point.
As you know we have not given guidance at this time for next year but we recognize that the numbers that we filed in the S4 are out there and I think that there’s a number of assumptions on the filing that you probably can find on page 180 that go into some of the assumptions and just since that was filed, McGraw-Hill has reduced their view of non-residential construction even in this year and had a further drop of 20%.
So my point is that things are subject to change but one of the big considerations that I think you need to take into account on the revenue line for 2010 is that we had average steel prices at the beginning of the year where higher than they will likely be in 2010. So that’s going to have a direct impact on our top line and we are expecting that the marketplace is going to be challenging.
When you look at our backlog that goes into this next year, while we’re very pleased that the tons are up as Mark Dobbins said, the value is still pretty low. So my point is that I think the first couple of quarters of next year are going to continue to be very testing and our hope is that we begin to see some quoting activity and backlog and see some seasonality in the second half.
We saw a bit this year and I’m hoping we see the same next.
Arnold Ursaner – CJS Securities
Having said that though that’s still a fairly sizable decline from the current trends you’re operating at right now. Is that the right way to think, is that how we should be thinking about your business from your perspective.
You know the hell of it is that I wished I had the clarity to be able to give guidance but we don’t so we’re going to play it very cautiously and just go out and execute just as well as we can. We’re pleased that we have done better as you say than we had forecasted when we put the S4 out. And as you know from past we’re always going to try to do better than whatever numbers are in the marketplace but we can’t guarantee that.
Arnold Ursaner – CJS Securities
The other question would be obviously you’ve issued a sizable number of shares, we’ve done our own work on what we think the share count is fully diluted, but I know part of the formal or legal reason why you may not be able to disclose it is Clayton has to be able to get more shares authorized and things like that, has to be able to participate in a vote to get those shares out there, but how would you suggest investors think about your fully diluted share count for the full year next year.
That’s a great question and to be sure we have a contractual obligation in the investment agreement to provide adequate shares to CD&R. And we will do that. There’s a couple of ways of doing it, one is to issue more, or the other is to do a reverse, authorize more. And that is what we’ll be considering and working through the details of.
So we know its important to shareholders to be able to get a fix on that and we’re going to try to get that done as quickly as we can so people know what the state of play is.
Your next question comes from the line of Jeff Rosenbaum – York Capital
Jeff Rosenbaum – York Capital
I understand your situation in regards to not wanting to give guidance but I guess my one question is relative to expectations for the industry as a whole from price and volume perspective which I think people can make their own assumptions, how much share or how much incremental growth should we expect you to have from gaining share from some of your comments relating to some of the weaker players not being in business going forward.
That’s a really good question, and here’s the way I’ll answer it. It is clear to me that as hard as our team has done, or worked to generate the revenue that we generated in 2009 and market conditions that were trying, the fact that there was a constant fear that our financial stability was in question, certainly made the job getting work and winning work more difficult. To the extent that that no longer is a risk for our customers I think that puts us in very good position to in fact gain market share.
But it will be very difficult to see that until such time as we are reporting sequential improvements or at least a year on year improvements. Hopefully by our next conference call we’ll be able to report improvements in our quoting activity and our backlog which would be an indication. But I can tell you that our sales force is absolutely fired up because they’re now able to compete evenly with people.
Jeff Rosenbaum – York Capital
Asked another way if you take pricing out of the equation and you use McGraw-Hill as a base case and McGraw is a base case of negative mid single-digits next year from a volume perspective at a very high level or [inaudible] what would your expectation be in terms of outgrowing that negative mid single-digits from a volume perspective.
And I know you want me to answer this question and you know I’m not going to answer it but let me answer it—
Jeff Rosenbaum – York Capital
Put it directionally, is it flat, is it plus 10%, just directionally how should we think about it.
Well I think there’s two ways of answering it. Number one is historically we have done better than McGraw-Hill and we’ve done better by an order of magnitude. Now when you think about this year you can say, geez you didn’t do it this year because you were down 52% and McGraw-Hill was only off 47%.
But the hell of it is that within that the commercial industrial which is our sweet spot was off 60%. So my point is that we’re going to do everything we can to do better than McGraw-Hill numbers to do better than any of our competitors. And the point is that we are in better shape to do that than we were this past year because [inaudible] this is no longer over our necks.
Jeff Rosenbaum – York Capital
Is there any way of knowing how much of your competition is lost and gone forever meaning they were forced out of business and they’re not coming back.
That is a very good question. I think that its clear with the number of people that we know that have gone out of business and the number of books we see on people who are trying to sell their businesses that it’s at a level that we have never seen before. And when you think about it let’s just think about the buildings group, so there were three big players and then there are probably 215 that are small regional players.
A lot of those companies in this past year would have gotten by by working, by reducing their working capital, living off that. Guess what, that’s not available to any of us next year. We’ve all done that so unless you’re in the financial position and have liquidity to go forward, next year is going to be more challenging than this year.
So our sense is that while we’ve seen a larger number of companies go out of business, I think that’s going to escalate this next year and that’s where the opportunities are going to come to grab share.
There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.
Thank you very much. Its good to be able to have an opportunity to talk to you about something that is very much on the positive in terms of where we plan to take the company and the fact that we’re able to do so because of the financial shape that we’re in. So look forward to the conference calls in the future. Thank you very much and good night.
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