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NCI Building Systems, Inc. (NYSE:NCS)

Q2 2014 Results Earnings Conference Call

June 11, 2014, 09:00 AM ET

Executives

Layne de Alvarez - Vice President, Investor Relations

Norman C. Chambers - Chairman, President and CEO

Mark E. Johnson - EVP, CFO and Treasurer

Analysts

Trey Grooms - Stephens, Inc.

Lee Jagoda - CJS Securities

Winnie Clark - UBS

Scott Schrier - Citibank

Brent Thielman - D.A. Davidson

Alex Rygiel - FBR Capital Markets

Michael Dahl - Credit Suisse

David Cohen - Midwood Capital Management LLC

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the NCI Building Systems, Inc., Second Quarter Earnings Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded.

I would now like to turn the call over to Ms. Layne de Alvarez. Please go ahead, ma’am.

Layne de Alvarez

Thank you. Good morning and welcome to the NCI Building Systems' call to review the company's results for the second quarter of fiscal 2014. To access a taped replay of this call please dial 1-888- 203-1112 and enter the pass code 1277255 and the # sign when prompted. The replay will be available approximately two hours after this call and will remain accessible through June 18th. The replay will also be available at the company's website www.ncibuildingsystems.com.

The company's second quarter results were issued yesterday afternoon in a press release that was covered by the financial media. In keeping with SEC requirements I advise that during this call we will be making forward-looking statements that involve risks and uncertainties. Actual outcomes may differ materially from those expected or implied. For more detailed discussion of the risks and uncertainties that may affect NCI please review our SEC filings, including the 8-K filed yesterday.

Forward-looking statements speak only as to the date they are made. We undertake no obligation to update any forward-looking statements beyond what is required by applicable securities laws.

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

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

Norman C. Chambers

Good morning everyone and welcome to our second quarter 2014 conference call. Joining me this morning are Mark Johnson, our Chief Financial Officer; Todd Moore, our General Counsel and Layne de Alvarez, our Vice President of Investor Relations.

Our second quarter earnings were released yesterday afternoon. So I hope you had time to review our results and commentary. Before I give a brief overview of the company I would like to make a few points to assist investors to better understand the effect of the widely reported winter weather on our second quarter results.

First, our first two quarters are our seasonally weakest. Relatively small changes in volumes, mix or cost, either positive or negative have a disproportionate effect on our earnings and EBITDA. Second, while our revenue grew on a year-over-year basis we estimate the weather impact reduced our top line between $8 million and $10 million.

Third, we estimate the weather related disruptions to our operation, supply chain and product mix negatively impacted our gross margin by approximately 130 basis points. As a result the combination of the reduced revenue and impaired margins negatively impacted our EBITDA by more than $5 million. But on a positive [mix] as the conditions begin to improve our margins sequentially recovered each month strengthening a 130 basis points from February to March and an additional 90 basis points from March to April.

And finally sequential monthly improvement has continued into May, as volumes improve in our seasonally stronger second half we expect margin expansion to continue. As a seasonal business we know our earnings are backend loaded which is why we are not discouraged by our performance in the first half of fiscal year during one of the most severe winters in recent memory. In fact we’re energized by the earnings potential as a result of actions we've taken.

As the weather improved in April, shipments, bookings and backlog rebounded and May's bookings in the Buildings group jumped 28% year-over-year and our backlog continued to grow through May. The significant pickup in bookings combined with the value pricing we're achieving on incoming orders gives me confidence that in the second half of the fiscal year we can deliver growth and offset our year-over-year first half deficit, our end markets improve or decline with positive or negative changes in the economy. Therefore the U.S economy must continue to improve albeit even if slowly to support our optimism.

My confidence is buoyed when I think back to the last recovery in 2004 and remember that our legacy single skin business led the way reflecting broader economic recovery. In the second quarter of this year our single skin legacy business recorded double-digit growth and our shipped volume achieved levels not seen since 2008.

We're also just beginning to benefit from our substantial investment in our sales and service initiatives and expect to achieve accelerated growth in the second half of the year. We remain committed to our position as a price leader across all of our divisions. Competition is fierce but we believe we will maintain our position as the business partner of choice because we're intently focused on the providing superior products and service to every customer.

The manufacturing initiatives begun last year in the Buildings group continue to be afoot. Even with seasonally lower Q2 volumes operating leverage was evident in five of our eight building plants, and centralized scheduling improved manufacturing plant loading and the challenges that we faced in the first half of the year will diminish and we expect to achieve operating leverage across all the divisions in the second half of fiscal 2014.

Leading indicators for non-residential construction continue to see low growth for the second half of the year. The April's Federal Senior Loan Survey indicated an easing of lending standards and stronger demand for commercial and industrial loans. The industrial vacancy rate that registered 11.1% in the first quarter continued to decline for the 14th consecutive month with 80% of all major industrial markets, 80% of all industrial markets reporting positive absorption.

The manufacturing sector expanded in May for the 12th consecutive month according the latest Institute of Supply Management survey and the New Orders Index has signalled growth in new orders for 12 months running. The ABI Mixed Use Index, which declined in January, February and March recovered into positive territory in April. The Index has been above 50 for 16 of the past 21 months forecasting an increase in U.S. construction spending. Taken together the conditions exist for the economic recovery to build and sustain momentum beyond the second half of fiscal 2014.

Before I hand over to Mark for a more detailed review of our financials we expect in the not too distant future when the non-residential markets again returns to 50 year mid-cycle levels of 1.3 billion square feet that 2014 will be viewed as an important step in achieving our performance goal to generate between $280 million and $350 million in EBITDA which is four to five times our 2013 EBITDA level.

Our mid-cycle EBITDA goal can be delivered in part by successfully executing our manufacturing, pricing and growth initiatives. These initiatives can multiply the positive effect of a modest mid-cycle recovery in the non-residential market.

Now Mark will speak to our numbers and then we will be happy to take your questions.

Mark E. Johnson

Thanks, Norm. In our press release and in the CFO commentary both of which are available on our website we've provided a discussion of the key elements of second quarter financials. Now I'll take a few minutes to add some additional color to the results.

First let me comment on our consolidated revenue and the seasonality of our business. We were pleased to report a 4.2% year-over-year increase in revenue during the second quarter driven by volume growth in certain key businesses and our value pricing strategy. Each of our three segments was able to achieve year-over-year growth in revenues. In addition we were able to generate these higher revenues despite the fact that non-residential construction was down during our fiscal second quarter particularly for low-rise construction.

Although some of our product lines and therefore our sales mix continue to be negatively impacted by severe weather during the quarter we are achieving growth in certain key areas which we believe validates both our growth initiatives and your expectations for continued recovery in new non-residential construction activity. I’ll discuss these growth areas when I overview each of our segments momentarily.

As many of you know our business like many in the construction industry is highly seasonal. Historically we have typically generated between 55% and 60% of our annual revenue in the last half of the year. Accordingly and as a result of higher utilization of operating assets we generally have earned between 60% and 90% of our annual adjusted EBITDA in the last half. One of the key determinants of the level of seasonality we see in any given year is the severity of the winter weather and its impact on construction site conditions. Therefore we believe it is reasonable to expect that given the severity of the weather earlier this year the effective seasonality on our revenue and earnings should be closer to the higher end of the historical ranges.

Looking now at our gross margins, we were able to achieve sequential improvement from our first quarter primarily as the result of value pricing improvements in our Buildings and Components divisions. However similar to this year’s first quarter our gross margins were impacted by the severity of the weather conditions in both periods. One small measure of the magnitude of the weather variation versus the prior year is the increase in the number of plant closure days to 22 in this year’s second quarter from only two in last year’s quarter.

As I discussed in detail last quarter the impact of severe weather on our business during the seasonally slow period was pronounced. In summary weather-related impacts include lower than expected shipments to the poor job site conditions, disruptions to our typical product mix, less efficient manufacturing operations due to plant closures, material shortages and job rescheduling, higher material costs due to unplanned supply chain disruptions and higher operating costs including utility expenses and chemical usage in our insulated panel plant.

All together we estimate that the combined impact of these items reduced our gross margins by approximately a 130 basis points. Our ESG&A costs for the quarter were $2.3 million higher than a year ago primarily as a result of our continued investment in growth initiatives in our Components division and sales and marketing programs in our Buildings and Coatings segment. Offsetting these increases we are achieving our targeted reductions in our corporate ESG&A expenditures, which declined $2.3 million from the prior year including a $900,000 reduction in non-cash stock compensation charges.

I am pleased to say we are just now beginning to see the benefits of the growth initiatives we have been investing in and expect these costs to be progressively further leveraged in succeeding quarters. Our adjusted EBITDA declined $4.2 million from $10.6 million last year to $6.3 million in the current quarter. This decline is primarily attributable to two items. First the approximately 130 basis point decline in our gross margins for about $3.6 million due to the change in product mix and other weather-related impacts on our efficiency. And second, the incremental spending in growth initiatives in marketing and sales programs which totalled $2.8 million.

Offsetting these costs we reduced our corporate costs by $1 million exclusive of non-cash items, saw improvement in our foreign currency gains and losses and benefited from value pricing in buildings and components.

Now I’ll briefly review our segment results. Our Building segment third party revenues were a $144.6 million and represented 47% of our consolidated revenue for the quarter. This segment’s total revenue grew 0.9% over the prior year and declined 1.9% sequentially. The sequential decline and only slight growth over the prior year is a direct result of the comparable winter weather conditions that affected both first and second quarter periods and its impact on job site preparation.

Operating income declined by $4.2 million from the prior year driven by lower margins on weather-related inefficiencies and $1.2 million higher cost from marketing and sales program. In addition our engineering and drafting expenses were $800,000 higher than a year ago due to the increased level of approval work and job complexity in our backlog which should ultimately lead to higher margins in future periods as those projects are completed and shipped.

Despite these unfavorable results we began to see the expected improved pricing on jobs shipped during the quarter reversing the previous trend and expect to see this trend continuing in the last half of 2014. Bookings which have been lacklustre early in the quarter rebounded in April with an 8% year-over-year increase and again in May with a 28% year-over-year increase.

Our Metal Component segment, third-party revenues were $135.7 million and represented 44% of our targeted revenues for the quarter. This segment's total revenue grew 5.4% over the prior year and declined 2% sequentially. Importantly we noted mid-teen year-over-year volume increases in our legacy commercial and industrial components products. This is an important indication of our broader based non-residential construction recovery and also serves to validate the growth investments we've been making.

The improvements we saw in these markets were offset by weather-related declines in agricultural end markets, predominantly in the Northeast and commercial and industrial insulated metal panels which negatively impacted total revenue growth and our product mix.

Our Component segment operating income declined by $0.6 million from the prior year primarily as a result of the unfavorable change in product mix and $1.2 million incremental investment in growth initiatives to expand market penetration of our legacy component products and distribution channels and improve our sales and service capabilities.

Our Metal Coating segment third-party revenues were $25.5 million and represented 9% of our consolidated revenue for the quarter. This segment's total revenue grew 9.1% over the prior year and was flat sequentially. Third-party external revenue grew 16.5% as a result of our new Middletown facility which became operational in January of last year.

Despite the increased revenue our Coating segment operating income declined by nearly $860,000 from the prior year. Production efficiency and material costs were unfavorably impacted by weather-related disruption and temporarily higher utility costs.

In addition sales and marketing costs increased by $300,000 due to investments in marketing and sales programs to further brand and differentiate our products and services.

Now I'll turn to some highlights on our cash flows and balance sheet. We ended the quarter with $12.5 million in cash and equivalents, down from $77.4 million at the end of last year and down from $16.6 million sequentially. During the first half of this year we used approximately $30.5 million in cash for operations compared to $3.8 million last year. This is consistent with our typical historical pattern where we invest in our working capital in the seasonally weaker periods following the fourth quarter peak. The cash investment this year is higher than last year mainly due to the timing of accounts payable payments between our seasonally stronger fourth quarter and our seasonally weaker period.

Keep in mind that we generate the bulk of our operating cash flow in the second half of our fiscal year and this is likely to be even more seasonally weighted to the second half as discussed earlier. We use a net of $8.7 million for capital expenditures during the first half compared to $12.7 million last year, benefiting from insurance proceeds to offset repairs on our Jackson facility.

We used approximately $25.5 million in financing activities in the first half of this year compared to $11.1 million in the prior year. This increase resulted primarily from the repurchase of approximately $20 million of common stock at the end of the secondary completed in January this year compared to a $10.4 million reduction in long-term debt last year.

Now I'll provide a brief overview of our debt leverage and liquidity. Our net debt leverage at the end of the quarter remains low at 3.7 times compared to 2.8 at the end of last year second quarter. Our net debt leverage also fluctuates with seasonality as our cash balances tend to be higher in the last half of the year. We also maintain strong and flexible liquidity with an undrawn $150 million revolving ABL facility which based on the borrowing base calculation had availability of a $115.5 million at the end of the second quarter.

Now before we answer your questions I want to remind you that in the CFO commentary available on our website and filed as an 8-K, we have provided specific expectations for our third quarter for ESG&A expenses, interest expense, effective tax rate, the weighted average diluted share count and capital expenditures.

And now we will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first quarter comes from Trey Grooms with Stephens.

Trey Grooms - Stephens, Inc.

Hey, good morning.

Norman C. Chambers

Hi.

Trey Grooms - Stephens, Inc.

Norm, thanks for breaking out the April and May bookings numbers, it's very helpful. I know it's early but can you comment at all on the trends you are seeing as we've gotten into, I guess the early innings of June here has that continued?

Norman C. Chambers

Yeah. So one of the things that we always like to have a fairly consistent view of our expectations for a given quarter, particularly our seasonally stronger quarters and we know that we will generate the greatest amount of our profit in the last month of the quarter because we're 4, 4, 5. So we expect to see our activity grow throughout the quarter, May, June and July. And certainly the preliminary numbers for May look consistent with our expectations for the third quarter.

We really have seen the tail end of April of recovery and improvement in our bookings, in our backlog and in our shipping schedule. So it's difficult for people to grasp when they look at how bad the first half was and the weather. But I got to tell you things look to be stacking up where we expect them to stack up for the second half.

Trey Grooms - Stephens, Inc.

So turning other way, I guess you have taken the guidance you have given I guess for the end market demand. I believe you said in the most recent, the prior quarter sorry that you expected that end market demand can be up mid to high single-digits. I think in this press release it said mid-single-digits. So is that just primarily a result of the second quarter coming in worse than you had originally thought, and that the back half is shaping up at least from where you sit today looks likely to be shaping up as expected, is that the way to read that?

Norman C. Chambers

Yes. We expect the second half to be as we expected and it's consistent -- we think it's consistent with the growth in bookings and backlog in the Buildings group. And when we talk about what we're seeing in the other parts of our business that's pretty doggone important because while I want to think I am reaching by talking about 2004 I got to tell you there is some sense that our Components group sells more broadly to the market and when we see that our legacy business Trey as you know which has been sputtering at best really pick-up some steam I got to tell you that our guys in sales in the Components group are feeling pretty good about what they are seeing.

Trey Grooms - Stephens, Inc.

Well that's encouraging. Shifting gears to margins, Mark maybe this one is for you, looking at the margins, gross margins for the quarter, 19.5% thank you for bridging that for us, that's helpful with the 130 basis points reduction. The [130] from product mix and other weather affected inefficiencies including material manufacturing, transportation so forth, how much of this would be reoccurring in to the current quarter and I guess as a segue Mark how should we be thinking about gross margins as we get more into the more important back half of the year, I know Norm mentioned margin expansion but just wondering if you could quantify?

Mark E. Johnson

So we talked a lot about the 130 basis points from the weather related impact. And that's across all real segments. It's across the mix of the business that we ship, it's across the freight and the efficiency with which we can get freight at the right cost and it affects the efficiency of our operations and manufacturing. So it's pretty pervasive and we don’t see any of that continuing into the third or fourth quarter. We have that behind us. We began to see that dissipate in April and we don’t foresee that in June at all.

So that’s gives me good confidence that we won’t see that conversation in the future and we have consistently said and we consistently expect progressive improvement in our gross margins based on two fronts, three fronts really. First of all the increased operating leverage we will experience in the last half as we always do; second, the inroads we’ve made on value pricing have been very significant. We expect to be seeing the benefits of those and then third the dissipation of this weather condition.

Operator

And again if you please limit yourself to one question and one follow-up question. Next we’ll go to Lee Jagoda with CJS Securities.

Lee Jagoda - CJS Securities

Hi, good morning. Can you hear me?

Norman C. Chambers

Good morning Lee.

Lee Jagoda - CJS Securities

So last year in Q3 for buildings you were impacted by some shipping delays that slipped into Q4. This year I would think you’d see the benefit of not only that easy comparison but the benefits from some better pricing and likely some pent-up demand just because of the weather. You kind of, you care to comment any further on the growth rate expectations for Q3 specifically?

Norman C. Chambers

You know, I think that you have heard on a couple of very real differences between our expectations for this Q3 versus the past year. And our expectations are very high for our Buildings group in terms of all the work they’ve been doing and I mean really working very hard as you would expect both in terms of pricing and with regard to efficiencies. And I know I mentioned just a couple of things that are very different from last year, this year and that’s the whole central scheduling. And what that means to our ability to reduce the amount of overtime by scheduling more effectively to the whole quarter and that was really not existent last year and is very prevalent this year.

And so we are very encouraged about that. Even in a very short period of six months the improvements we’ve made in our manufacturing where five of our eight building plants have shown levels of operating leverage at utilization rates below 40% that we would have historically never seen until we were at somewhere closer to 70% utilization. Now we still have three of the plants that we’re kind of working to improve that but we are very encouraged and we have set high expectations for the team over in the Buildings group.

Lee Jagoda - CJS Securities

And then just a follow up Norm assuming the industrial renaissance that everyone is anticipating over the next three to five years in the Gulf state -- Gulf states actually occurs particularly in the energy and chemical space, can you talk about the role that NCS products play in the construction of those plants and then the percent of revenue that, that represents today and where that could trend over time?

Norman C. Chambers

Yeah. So what we know and you know I was in oil and gas for most of my adult life that the oil and gas market place isn’t cyclical so much in terms of the economy, but we’ll see expenditures that are consistent with our expectations on what utility prices are going to be. So there can be some movements from year-to-year. But I will tell you that we have invested in some additional human resources focused specifically on upstream, midstream and downstream oil and gas and we can participate and do participate in all those and certainly both our Components group and our Buildings group can participate in refineries and finished products in our painting lines.

So the activity opportunity for us in oil and gas is real, is significant and being based in Houston is a plus. So we still have formed because of the spread of our activity is very diverse that I think that we have yet to see oil and gas be above 10% of our revenue. But I would think that we could see that increase and I hope it's not at the expense that other parts of our economy are not increasing because our view is that we are seeing a broader recovery. So my hope is that the oil and gas will continue to be additive to our total revenue picture.

Lee Jagoda - CJS Securities

Thanks very much. And look forward to seeing you at our conference next month.

Norman C. Chambers

Thanks Lee, see you then.

Operator

Now we go to Winnie Clark with UBS.

Winnie Clark - UBS

Good morning.

Norman C. Chambers

Good morning.

Winnie Clark - UBS

Hoping you could talk a little bit about pricing, can you give us some color on the impact that you realized in the quarter and what pricing, and last quarter you talked about 190 basis points of pricing in the backlog, are you still running at about that level and do you still hope you can benefit, that can benefit you at about that level in the second half?

Norman C. Chambers

Yeah, so we're running at better than 200 basis points of improvement in our backlog and margins. And there is kind of two important gateways to actually realize that 200 points plus something above it. The first is managing the flow of the work from backlog into production, and doing that in a way that is responsible and reflective of the relationships we have with our builders and changes in deliveries and times that they have. That has to be very carefully managed to make sure that we don't leak any of the margins.

And the second piece is, this thing I was [inaudible] just recently is that the improvements in our manufacturing that we’re seen are really fundamental to not just preserving the margins that we won through hard work, working with our customers and their end users to increase our pricing but also we have a chance through manufacturing to yet improve on that performance, okay.

So my point being that I don't want you to think that the pricing is a walk in a park, it is a challenge that our sales force really have to work out. They have to constantly try to find where we can add value, that, that value is perceived by our customer and plus their end use. And they have done a first class job at doing that, a very, very real job of doing that.

So long winded, we expect to see all of that margin improvement to come out.

Winnie Clark - UBS

Okay, that helps. Thank you. And then just on the low rise construction start I believe you said last quarter they were down 5%, what was the trend in the second quarter and then what gives you kind of confidence that we're going to be at a mid-single-digit growth rate for the year?

Norman C. Chambers

Yeah that’s a good question and I think that it really falls into what occurred. So when we look at the second quarter actual non-res stats were just slightly positive at 0.4%, but low rise was down 4.7% in volume. And when you think about that, when you think of the first six months of our year November bookings on a year-over-year basis which kind of reflects the market going forward but positive and then we were negative on a year-over-year basis for the months of December, January, February and March and didn't see a pick-up until April.

So we have this period in the middle which by the way coincided with the U.S. economy dropping from an expected 0.1% growth to 1% decline. Right, so it really was hand in hand. So then we say what did occur is that we saw a market change in bookings from the last two weeks of April very strong bookings right through to May very strong bookings. And that's without really price erosion, I mean that's just activity based. I would suspect that our competitors saw the same thing.

So we're seeing those trends continue through May and into June. So our expectations are that with the level of growth we are currently seeing that we will end the year overcoming the first part deficit to show mid-single digit growth in volume in non-res markets for the year.

Mark E. Johnson

And by volume he means square feet?

Norman C. Chambers

Yes, square footage, new construction starts.

Winnie Clark - UBS

Okay, great. Thank you very much.

Norman C. Chambers

Yeah.

Operator

And now we will go to Will Randow with Citi.

Scott Schrier - Citibank

Hi, good morning. This is actually Scott Schrier in for Will. Thanks for taking my questions. First I wanted to ask about, you mentioned solid inquiries and are you noticing any differences in terms of the trends as the urgency of getting bids, the competitive nature of the bidding environment, your win rate. And also in which end markets are you kind of seeing more strength or unexpected weakness in the bidding process.

Norman C. Chambers

Yeah, that's a good question. And we always try to dig the current data to try to see if it's stacking up to our expectations for the year both geographically, redundant counties and end markets. And I'll tell you that the manufacturing, warehousing piece continues really to be quite strong, oil and gas are certainly showing some strength over the past year, which was down from the previous year, so we should see some uptick.

And I would say that there are regions of the country that were showing considerable growth, the Northeast being one and I am particularly talking about New England was slower than they have been for a while. But I'll say that when I think about our business across all fronts I am seeing in the Coating business more opportunities in appliances and HVAC which we think is quite positive.

When I look at their Components group and I see that the spread of legacy products which go to more retail, really some institutional, some much smaller kinds of activities and to see the growth there are really very encouraging. And then the Buildings group while it's focused more, certainly more on pricing and value, nevertheless their bookings and uptake in their business and inquiries reflect a larger types of projects which again kind of speak to an improving sense, an improving new sense of optimism. So I hope that helps you, it's what we're seeing.

Scott Schrier - Citibank

Great, thanks. And my follow-up is I wanted to touch more on the backlog. I know it's been head on and the margins in that segment. I know you said there was a $5 million hit to EBITDA. Is there any way to quantify, one, what was the -- how much of that was in the buildings and going forward I know there was a question about pricing and value -- pricing inefficiencies. But can we expect any changes as far as the operating leverage that we look at in the business?

Norman C. Chambers

So, Mark will add some color to this but I just want to correct one thing. So the $5 million hit, it really had very little to do with the backlog except that work that we would have hoped to have manufactured in the period was pushed out largely due to work site conditions, okay. And work that we had expected to book in the months that I talked about in the call before December, February, sorry December, January, February and March were down year-over-year. So our bookings were not at the levels that we expected to see during that period, pick up in April and May and continue in June.

So when I look at the backlog at the Buildings group being up that's pretty solid and that was at the end of April. But when we have a quick look at the first month of our third quarter we continue to see bookings improving and we saw the backlog grow as well. Now let me just get right to the first part of your question. One of the things that's clear to us is we are seeing a heightened level of urgency coming up on the season for people to say gee, I need space in your manufacturing schedule because I need this building at next date.

And frankly that’s -- we like to deal with those kinds of urgencies. That's a positive both from the standpoint that it helps us better schedule our plants and also it helps us differentiate the level of service by being able to accommodate our customers. Mark, do you want to add something?

Mark E. Johnson

Sure I was going to try to break that 130 basis points that we described in our operating efficiency down into the segments for you. So that 130 basis points equates to somewhere around $3.6 million and you can split that across our segments at about $1.8 million in the Buildings segment, little short of a $1 million in the Component segment and around $800,000 in the Buildings segment.

Scott Schrier - Citibank

Great, thank you very much.

Operator

Now over to Brent Thielman with D.A. Davidson.

Brent Thielman - D.A. Davidson

Hi good morning.

Norman C. Chambers

Good morning.

Brent Thielman - D.A. Davidson

Norm were there any specifics end markets as you got in April and May that have gotten worse or declining versus the prior year in terms of bookings?

Norman C. Chambers

I would show you that one of the markets that we find challenging is kind of in the Southeast is the Georgia, the general the General Georgia area and that historically has been, we guess there’s a population of very good small local builders here. And so our Buildings group is challenged at times to give what we consider to be our share of the action there. But by the same token on the flipside our Components group sells to a lot of those small builders. So we kind of benefit on that side. So it's kind of a mix in the story.

The Northeast in particular really showed early recovery and has staggered gotten a little bit slower through the winter and into this part of the year and we would expect to see that improve because of the seasonality was a bit more pronounced there.

Brent Thielman - D.A. Davidson

Okay, so it's more from a geographic kind of point of view versus building types.

Norman C. Chambers

It seems to be more geographic than end market specific, yes it does.

Brent Thielman - D.A. Davidson

Okay, great. And then just as a follow-up, may be one more for you Mark, in Components could you give us the costs associated with the ramp up of the Richmond facility I think there were some specific costs there, and do you expect sort of similar level going into Q3? I didn’t see that in the CFO commentary.

Mark E. Johnson

Sure, so there is more than one thing going on in the Components segment and what I was speaking to in growth initiatives was an incremental $1.2 million that was spent in ESG&A, and the total that we’re spending on these growth initiatives is about $2.8 million in the second quarter and that $2.8 million is now driving about $5 million of incremental revenue.

This is the first real quarter where an incremental revenue is now starting to be achieved, and we see that cost there being progressively more leveraged going forward. But those numbers I am speaking to are several different initiatives, the architectural panel in Richmond Virginia is only one of those and on the ESG&A front that’s only about $340,000 of that expense.

Brent Thielman - D.A. Davidson

Okay. Thank you.

Operator

And now we go to Robert Wetenhall with RBC Capital Markets.

Norman C. Chambers

Good morning.

Operator

Mr. Wetenhall, your line is open. Okay, moving on over to Alex Rygiel with FBR Capital Markets.

Alex Rygiel - FBR Capital Markets

Thank you. Good morning gentlemen.

Norman C. Chambers

Good morning.

Mark E. Johnson

Good morning.

Alex Rygiel - FBR Capital Markets

Norm, can you talk a little bit about the May bookings again? How much of that is what you had called catch up versus how much of that feels like underlying strength?

Norman C. Chambers

That’s a $64,000. I would say that the one thing that became clear in the tracking of inquiries which precede our winning the job and [booking] it, is that there were a number of jobs on the horizon that did not get bid and booked in the first half of the year. So I am not ever quite sure whether that’s catch up or whether that’s just a timing piece of the business. I will say that there were clearly some jobs and specifically every Tuesday we kind of recount these jobs that have really reflected a hesitation and then and then a pent-up kind of demand, a pick up but I'll tell you, I still think from the anecdotal information we have that at least half if not more in the early part of May was literally new work and it wasn't a pent-up demand. And I say that, that's a rough estimate. It may been as low as 25% was your pent up demand, demand has really should been in the first the first half of our bookings.

Alex Rygiel - FBR Capital Markets

And is there anything interesting occurring within the size of bookings, is the average size any larger or smaller than may be you've seen in the past?

Norman C. Chambers

Well we look at our bookings on a weekly basis and we look at the complexity from one to 10, 10 being the most. And historically it's a bit of bell curve with the four, five and sixes in the middle and the biggest part of our…

And I would say that bell curve is changing slightly in shape that we are seeing enhancing success with our expressed buildings which are smaller and we've seen nice success in the growth of that level of work which is quite good because it's stuff that moves very quickly through our manufacturing. And we've seen a pick-up in the more complex work.

And so what we have probably seen in the first half of the year was a more reticent kind of mid-bell curve in there was four, five to sixes were a bit less than we would expect. But that seems to be balancing out now in a more normal way which I think is a good thing.

Alex Rygiel - FBR Capital Markets

Thank you very much.

Operator

Our next question will come from Dan Oppenheim with Credit Suisse.

Michael Dahl - Credit Suisse

Hi, this is Mike Dahl on for Dan. I wanted to start with some of the comments on the outlook and so appreciate the seasonality here but it’s 60% to 90% of EBITDA in the back half, it translates into a pretty wide range and I know Mark you commented that you expected to be towards the higher end of normal seasonality but the comments still out there that it's 60 to 90 so what's driving, what's the thing that's keeping you guys from actually formally kind of increasing that range what are the biggest swing factors here? Thanks.

Mark E. Johnson

Well, the biggest swing factor for the second half of the year…

Norman C. Chambers

His question is what's causing us to not increase the range or increase the upper end of that range, even though…?

Michael Dahl - Credit Suisse

Well if you think it's towards the higher end of the normal 60 to 90 and we're midway through the year and you've got some positive commentary on the trends you are seeing in the business, that's still really wide range so what are the biggest swing factors here?

Mark E. Johnson

Well again I think that as I said not too much a caveat but as I mean I am not sure that there were many that expected to see the U.S. economy step from what was going to be a very modest growth of 0.10% down to a full 1% negative. That coincides with exactly what we saw in terms of our bookings as I think I said were year-on-year monthly negative and the words negative comp monthly year-on-year for December, January, February and March.

So my point of this is that our belief is that the U.S. economy is recovering, that we will not see a negative GDP in the second quarter or the third quarter or the fourth quarter. But if that were to occur then that affects our range, right, that affects our range. So I think that when we look forward, we see a very robust opportunity for us in the second half and that's exactly what we believe we're seeing in the bookings, we believe we're seeing in the backlog and we expect to continue to see.

Michael Dahl - Credit Suisse

So just to be clear, absent any deterioration in the overall economy you are very comfortable with the higher end of that?

Mark E. Johnson

Yes.

Michael Dahl - Credit Suisse

This you do 90.

Mark E. Johnson

Yes.

Michael Dahl - Credit Suisse

Okay. Thanks that's helpful. And then just shifting gears back to the complexity question. How should we think about the timing of some of the higher complexity projects that are getting bid and booked today or in May?

Norman C. Chambers

Well I mean there is no question that higher complexity utilizes more of our resources and takes longer. But we have on our on our Tuesday call, in our Buildings group we have a very good transparency of all the jobs that are in and how they are falling in the schedule and I was impressed with the -- I wasn’t on the Tuesday call, the week before that 92% of the jobs are coming out of our engineering and drafting and going to manufacturing on time.

So my point being that I don't think that would have been the case any year in the past, which means our ability to convert an order through the process of engineering and drafting and then get it to be able to ship has fundamentally improved. Now that doesn't change the fact that some end user sites are really dictated to have particularly up North are dictated to have things installed and kind of what not in the ice season when the ground is firm. And so there will be some of those kinds of things.

I think the other part of it is that when you look at the complexity in some of the mining facilities that we look at you see often times disruptions due to environmental requests that could slow up the schedule date. So in complexity does seem to run a higher risk of us having delays. But I will tell you that we really welcome that work because it's very important part of building up our backlog.

Michael Dahl - Credit Suisse

Okay. Thanks and good luck in the quarter.

Norman C. Chambers

Thank you.

Operator

(Operator Instructions). We will next go to David Cohen with Midwood Capital.

David Cohen - Midwood Capital Management LLC

Yeah. I'd like to go back to the prior questioners, question regarding this range for EBITDA which guys have been consistent on but arithmetically you have put out there a range or if just the math is you did $14.3 million of first half EBITDA so that's either 40% of the full year or just 10% of the full year by virtue of the complement of your 60% to 90% range. That leaves a range for the full year EBITDA that's a mile wide with the high end being the $140 million. Is this company going to do almost a $130 million of EBITDA in the back half, I find that hard to buy into?

Norman C. Chambers

Sure. That's hard to buy into. That would mean that we see growth vastly exceeding our expectations.

David Cohen - Midwood Capital Management LLC

But that's the math that occurs if the first half is 10% and the back half is 90% of your annual EBITDA?

Norman C. Chambers

Correct. Yes that's the math.

David Cohen - Midwood Capital Management LLC

That's just the arithmetic.

Norman C. Chambers

Yes.

Mark E. Johnson

Yeah I think we were confirming that we would be more towards the upper end of that range. We weren't confirming any precise number within that range.

David Cohen - Midwood Capital Management LLC

And is there some point at which you would consider greater precision around the financial objectives of the business on an annual basis or is this messaging likely to be just, this is your messaging as you look into next year this is going to be the same type of messaging?

Norman C. Chambers

So one of the things that those if any, with our messaging is our ability to actually deliver that, right? I mean we don't want to either understate or overstate what we think the future is going to hold. But to be sure in the first half of the year it is a son of a gun to get it right. We're easily disrupted, particularly at levels that are 40% lower than the previous beginning of the cyclical recovery in 2004. So volumes are very much still in a depressed mode. So our sense is that as we -- as the market recovers we will I am sure get better at providing you and others with insights as to where we think we're going to be. But I'll tell you within the recovery we're still a ways off from having that level of confidence for a given quarter.

We think that the second half of this year will produce results that are consistent with our expectations which would show year-over-year growth and that's what we're working towards.

David Cohen - Midwood Capital Management LLC

All right, thanks for taking my question.

Norman C. Chambers

Yes, thank you.

Operator

Now we'll go to [inaudible].

Unidentified Analyst

Good morning there, can you folks address some of the earnings drag that you saw on the Coatings group in the first half of the year and whether that will persist, you mentioned utilities and you mentioned the spend related to growth initiatives amongst a couple?

Mark E. Johnson

Yeah so one of the primary impact on the Coatings group that was a drag was the interruptions to their plant activities due to weather delays they had several plants that were forced to shut down by the utilities because they were using utilities…

And in addition to that the utility costs were higher. So you mix all that together with a very, very efficient operation and you introduced that kind of activity it becomes a less efficient operation. Outside of that the biggest single driver for the challenge to them is the disruption to the supply chain which drove some unforeseen cost into our steel costs that they had to therefore pass on when they sell packages of steel and so there was margin depression.

And then finally I mentioned the incremental cost there incurring for some marketing and sales programs, part of that's around marketing and branding the Middletown, Ohio facility and the rest of their sales initiatives.

Unidentified Analyst

Which of these do you foresee persisting?

Norman C. Chambers

Well I think that we have gotten through the steel issue and I don't foresee any of the disruptions to the plant operations so that part will not continue. We'll spend a little bit of that $300,000 on marketing in the quarters ahead of us and not less than half of that amount, so less than half of the $300,000.

Unidentified Analyst

And Mark could you comment again may be, I didn't quite get this when you talk about weather disruption are you under some obligation when there is a call upon power that you need to shut down so that, that power can go somewhere else?

Mark E. Johnson

Yeah we don't see that very often but there is a couple of places where we do see that, Ohio being one of them, where the utilities can really say we need the power to heat homes and therefore you need to have a plant shutdown day.

Unidentified Analyst

Okay. Second question, final question can you talk about the tone in your insulated panel business year-to-date and what you foresee in the back half of the year?

Norman C. Chambers

Yeah, so I will tell you that the level of cold storage continues to be quite good and the level of shipments of commercial industrial have been weaker than a year ago. But by the same token we have seen an increase in C&I applications of insulated panels that flow through our Buildings group. So overall we have seen a continuation of growth in commercial and industrial but it has been slower in the first half of the year than last year and we think that was more to do with weather. So we are expecting the insulated metal panel group to have a stronger second half of the year for sure and they are working very hard at that.

We again have been pushing them with other parts of our business due to the value price and sometimes in certain markets that they find that is challenging as some of our other folks do. But nevertheless we think it's important and we're going to continue to do that.

Unidentified Analyst

Norm, has there been any change in the capacity available to the market, particularly in the commercial and industrial side?

Norman C. Chambers

So there has been a bit of increase if we are talking insulated metal panels?

Unidentified Analyst

Yes.

Mark E. Johnson

Okay. So yeah one of our competitors brought on a line in Arkansas, late last year.

Unidentified Analyst

Very well, thank you.

Norman C. Chambers

Good, thank you.

Operator

All right. We'll go back to Robert Wetenhall of RBC Capital Markets.

Unidentified Analyst

Hi, thanks for taking my question, this is [Dazzie] filling in for Bob.

Norman C. Chambers

How are you?

Unidentified Analyst

Good. When you think about your mid-cycle guidance do you guys have any assumptions embedded in there with regard to your ability to grow faster than the overall market as you have historically or could that be a source of upside? Also what sort of incremental EBITDA margins are you guys using to arrive there?

Mark E. Johnson

Sure, effectively the way we've progressed that is using our fair share as the market as the primary under component. So when you think about the market recovery and we maintain our fair share of that, that's the foundation. Then we have some very specific initiatives, insulated metal panels being one and there are others where we expect to grow faster than the marketplaces because there are new investments to us.

So it's a combination of both of those. There is a really good page in our investor presentation I don't have in front of me but it's 31. It does a pretty good description of reconciliation of how we think about that incremental margin, but I believe it's a 23% incremental margin is what is huge.

Unidentified Analyst

All right, great.

Norman C. Chambers

Just more in line with historical levels than it is any extraordinary improvement, yes.

Unidentified Analyst

All right and then second question on pricing, you had touched on a few times and you pointed out that gross margin performance benefited from the 40 basis points of prices, is that impact do you think that could accelerate or is 40 basis points on the gross margin level what we should be thinking about for the balance of the year?

Mark E. Johnson

Well my view is that it should increase. It should increase, 40 basis points is what we are currently recognizing out of the 200 basis point discussion you were having earlier where we've seen improvement in our pricing and our backlog. So we should expect to see that incrementally improve.

Norman C. Chambers

Great, thank you.

Operator

At this time there are no further questions. I would like to turn it back over to our speakers for any additional or closing remarks.

Norman C. Chambers

Assuming there is anybody still left in the call we now thank you very much for joining us and look forward to the third quarter call. Thank you.

Operator

And ladies and gentlemen that does conclude today's NCI Buildings' second quarter earnings call. We thank you for your participation.

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Source: NCI Building Systems' (NCS) CEO Norman Chambers on Q2 2014 Results - Earnings Call Transcript
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