NCI Building Systems Management Discusses Q2 2013 Results - Earnings Call Transcript

| About: NCI Building (NCS)

NCI Building Systems (NYSE:NCS)

Q2 2013 Earnings Call

May 14, 2013 5:00 pm ET

Executives

Layne De Alvarez - Director of Investor Relations

Norman C. Chambers - Chairman, Chief Executive Officer, President, Member of Preferred Dividend Payment Committee and Member of Executive Committee

Mark E. Johnson - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Lee Jagoda - CJS Securities, Inc.

Robert J. Kelly - Sidoti & Company, LLC

John F. Kasprzak - BB&T Capital Markets, Research Division

Dana Ford Walker - Kalmar Investments Inc.

B.G. Dickey - Stephens Inc., Research Division

Operator

Good evening, and welcome to the NCI Building Systems conference call webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Layne Alvarez. Please go ahead.

Layne De Alvarez

Thank you. Good afternoon, and welcome to the NCI Building Systems conference call. To access a taped replay of this call, please dial (877) 344-7529, enter the passcode 10029000 and the pound sign when prompted. The replay will be available approximately two hours after this call and will remain accessible through May 22. The replay will also be available at the company's website at ncigroup.com.

Some statements made on the call may be forward-looking statements within the meaning of applicable securities laws. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, and generally include words such as potential, expect, should, will and similar expressions. These statements reflect the company's current expectations and/or beliefs concerning future events. The company has made every reasonable effort to ensure that the information, estimates, forecasts and assumptions, upon which these statements are based, are current, reasonable and complete. However, forward-looking statements may be subject to a number of risks and uncertainties that may cause the company's actual performance to differ materially from that projected in such statements. Investors should refer to reports filed by the company with the Security and Exchange Commission and in today's new release for a discussion of factors that could cause actual results to differ.

To the extent that any non-GAAP financial measures are discussed, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today's press release, which can be located on the company's website by following the media link. Information being provided today is as of this date only, and NCI expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements, whether as a result of new information, future events or otherwise.

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

Norman C. Chambers

Thank you, Layne. Good evening, everyone, and thank you for participating this call in such short notice. Joining me this evening are Mark Johnson, our Chief Financial Officer; Todd Moore, our General Counsel and Layne Alvarez, our Director of Investor -- I will make some initial comments and then I'll open the call to questions.

There are several topics to discuss. First, I'm pleased to report that Clayton Dubilier & Rice have formally notified us that they have converted all their preferred shares to common shares. The conversion of CD&R's preferred shares will substantially increase shareholders' equity. Additionally, the conversion will simplify the calculation of our earnings per share, beginning in the third quarter of this fiscal year. In conjunction with the CD&R conversion, we plan to take advantage of the favorable debt market to refinance our $240 million Term Loan B. Based on current market conditions, we expect the refinancing to significantly reduce our interest cost, while giving us additional financial flexibility, including more favorable terms and extended maturity.

In connection with these announcements, we provided some indication of our preliminary results for the second quarter, which ended on April 28, 2013. While our results for the period are not finalized yet, we expect to report revenues of approximately $293 million for the period, which is below our previous internal projections. Specifically, we expected 6% more revenue than we actually had in the second quarter, due to slower release of work from our backlog caused by bad weather preventing site preparation.

Our April numbers were up substantially over March figures, but the shortfall from our forecast in a seasonally slow period like the second quarter had an outsized impact on our profitability. We now expect that adjusted EBITDA will range between $10 million and $11 million for the second quarter, which will result in a per-share loss for the period.

From what we can see today, it looks as though our manufacturing and freight delivery cost in the second quarter will come in similar to what we had expected. As you will recall, we had anticipated increased manufacturing costs compared to 2012 second quarter, following our decision to retain and provide ongoing training to skilled manufacturing personnel in a seasonally slow first half of the year. This will enable us to capitalize on the stronger demand we expect in the second half of fiscal 2013, and beyond, as nonresidential recovery takes hold.

Our year-over-year backlog at the end of the second quarter was $276 million, up 6% in value and 10% in volume. It was comprised of a greater percentage of higher-margin design-build projects then at the end of both last year's second quarter and this year's first quarter. This is a direct result of the success of our marketing and sales initiatives.

We continue to be successful in targeting industrial, manufacturing institutional opportunities. We have been pleased to see early indications of retail recovery linked to current recovery in the residential sector. In the second quarter, we have seen a strong 44% year-over-year increase in insulated metal panel sales for commercial and industrial applications, offset by higher-than-normal seasonal weakness in agricultural market demand due to poor weather conditions, on a comparable basis, within our Components group. Additionally, we have seen revenues from our core Components' top customers increase by 29% on a first half year-over-year basis, from very low comparable levels. We feel this is another indication of an early, broader economic recovery, albeit slow recovery.

As we look forward that to the second half of fiscal 2013, we are taking into account several factors. The pace of increased demand, in the short term, as a risk consistent with an economy in the early stage of recovery. Bookings progressively increased throughout April and quoting activity is steady at higher comparable levels. Our backlog looks solid.

Leading indicators, and McGraw-Hill data, point to significant increase in second half activity in nonresidential construction, and NCI is well positioned to achieve significant operating leverage as demand picks up. As you know, we are limited as to the detailed financial information. Our numbers for the second quarter have yet to be fully consolidated, but we'll do our best to answer your questions. Operator, please open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Alex Rygiel of FBR. Please go ahead.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

Norm, can you characterize the weakness from the weather in March and then the pickup in April? Was it as simple as maybe just a push into April or was there anything lost?

Norman C. Chambers

Yes, that's a good question, Alex. I think that what we saw, in both February and March, were really conditions that were difficult for both our building to pull work out of backlog to deliver, as well as just a slowdown and delays in delivery of projects that were scheduled. And that certainly improved in April, and it was a significant improvement. We returned to profitability in April. We saw leverage in April, and we benefited from a 445, but nevertheless, it was a pickup. So, we aren't seeing things dropout or go away, but we are seeing, during the weather conditions that we had, a higher-than-expected movement from periods that we expected to deliver to periods that were outside that.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

If you were to think about sort of the full year, has what occurred over the last few months changed sort of your 12-month outlook?

Norman C. Chambers

Well, at the end of the day, we are focused on doing all the things that we need to do to ensure that our performance is consistent with the potential that we see before us. And I can say that we do expect to see increased activity in the second half. We do expect to see activity that is consistent with us being able to produce the leverage that we would expect to see. And the only caveat is the rate of growth in nonresidential. The expectations are quite high.

Alexander J. Rygiel - FBR Capital Markets & Co., Research Division

And lastly, with regard to your plans to refinance your debt. What's the timing of that and any initial views or thoughts on annual interest savings you plan on achieving or hope to achieve?

Norman C. Chambers

Well, let me say that it's a transaction that has not yet been completed. So, I wouldn't comment too specifically on it. I would tell you that it is something we are already in the process of beginning and that it is something we would close within the next 2 months. I would also say that, given the high cost of our existing facility, given the timeframe for when it was put in place, which was about 11 months ago, there are significant amount of cost related to that facility that have been deferred on our balance sheet, which we obviously write off when we entered into a new facility. So, we expect a very significant decrease in the interest cost of the company on a cash basis, that would justify incurring those costs.

Operator

The next question comes from Lee Jagoda of CJS Securities.

Lee Jagoda - CJS Securities, Inc.

Mark, just following up on one of Alex's questions. Can you just remind us how the step-downs work related to your debt in terms of the penalties and when they step down?

Mark E. Johnson

Sure. The facility we currently have has a 102, a 2% premium, if you will, that is paid within 1 year, and then a 1% premium that is paid after that first year. So, we're right at the cusp of where we drop from 102 to 101. We'll try to manage that accordingly.

Lee Jagoda - CJS Securities, Inc.

Okay, and then Norm, do you have an approximation of what your capacity utilization was in Q2 and discuss the levels of incremental margins at current utilization?

Norman C. Chambers

Could you repeat that question, please?

Lee Jagoda - CJS Securities, Inc.

The levels of capacity utilization in Q2 and then the incremental margins that you would have hoped to achieve on the current utilization, given that you had some slippage.

Norman C. Chambers

Right. So, the level of utilization was fairly consistent in the Buildings group, roughly in the mid-50s. In the Components group, the level of utilization increased a little bit from Q2. And then...

Mark E. Johnson

From Q1.

Norman C. Chambers

I'm sorry, from Q1, and then in Coaters group the level of utilization increased by about 5 points.

Norman C. Chambers

So, when we talk about the 6% less revenue than we had forecasted internally, that would equate to about $17 million in revenue and maybe as much as $4.3 million at the gross profit line.

Lee Jagoda - CJS Securities, Inc.

Okay, that's very helpful. And then just one last question, and I think it's sort of an obvious one. But are there any other potential benefits to CD&R in terms of them converting their preferred stock to common other than, at some point, beginning to liquidate the holding?

Norman C. Chambers

Well, certainly, there are benefits to us. And the first benefit is that you'll see our balance sheet, which currently reflects net equity -- net negative equity I should say -- to swing to a positive -- Mark, do you want to kinda give them some idea of the range of that?

Mark E. Johnson

I'll answer that in 2 ways. One is, if you look at what happens our balance sheet, when we went into the downturn, we had some significant impairment and other charges. They were noncash but, nevertheless, they brought our equity into a negative position. And like before this conversion, it's roughly negative, $300-million-plus. And then with this conversion it will move the value of the preferred stock, which is about $620 million, into equity. So, it'll completely reverse from a negative equity into a positive equity situation. But from CD&R's perspective, about this time last year, we eliminated the dividends that the preferred stock pays. So, the real value of the preferred stock, at this point, is really in its ability to be converted into common stock. And when you look at that paper now, it had a very limited amount of value in terms of preference over the common stock. So, when you consider the fact that most lenders, and other folks who evaluate creditworthiness of companies, they tend to put the preferred stock category into a debt categorization. So, it makes the leverage of our company look higher than it actually and has resulted in us having a higher interest cost in the past than we would hope to have in the future.

Norman C. Chambers

So, the bottom line is the benefit is really all to us, the company.

Operator

The next question comes from Robert Kelly of Sidoti.

Robert J. Kelly - Sidoti & Company, LLC

Good afternoon. Just a question on the second half. Exiting 1Q, you kind of talked about everything went according to plan and the incremental labor cost, you gained more productivity there, 200 basis points upside from the prior year period in the second half from carrying and training those workers during the seasonal downturn. Is that something that we are still targeting based on what happened in Q2?

Norman C. Chambers

We are certainly targeting to see an increase in efficiency as a result of the investment that we have made and continue to make, right? And that will materialize as the growth in the volume increase, which is consistent with the backlog we have, and consistent with the quoting and the bookings activity that we're seeing. So, we are expecting to see an increase in efficiency. I would say that there is no question about the fact that we saw some, because of the weather, some additional levels of competition in terms of work that was for production, and we saw some very aggressive pricing that took place during the period on that front.

Robert J. Kelly - Sidoti & Company, LLC

Okay. So, the backlog exiting 2Q or the preliminary backlog, is that sort of what you had expected when you built your year?

Norman C. Chambers

I think that there were 2 things that are different from when we built our year. One a positive and one a negative. One, that we clearly have been successful in winning more design-build work, which brings a higher margin for us. And that has been evidenced through all of our brands. And that's been a very positive thing. On a slightly more negative note. In the period, there was more price competition that we would otherwise have expected, largely driven, as I said, by poor weather and the desire of all to chase work that was for production in the period. So, there's probably some of that in the backlog as well.

Robert J. Kelly - Sidoti & Company, LLC

Okay, that's helpful. Could you clarify something you said? I think you said $17 million in lost revenue that translated to $4 million in gross profit. Did I hear that right?

Mark E. Johnson

Operating income.

Norman C. Chambers

Yes, $4.3 million operating income, I'm sorry. So what it was, again just to be clear -- so we had expected, in the period, to have 6% higher revenue than we did, and that was largely the result of poor weather and not being able to pull things out of the backlog to deliver. And that equated to about $17 million in revenues and about $4.3 million in operating income.

Lee Jagoda - CJS Securities, Inc.

What was the missed opportunity at the operating line? What is it wholly in the Engineered Building Systems? It sounds like you are talking about weather really hurting Engineered Building Systems. Do I understand...

Norman C. Chambers

No, we really -- I mean, it had an effect across the Components group as well. I mean, they serve a different group of builders and customers, but nevertheless they're doing the same thing, which is installing buildings. And, frankly, there was a lot of delays as a result of the weather.

Robert J. Kelly - Sidoti & Company, LLC

Okay. So, that $4.3 million is kind of evenly split between those 2 segments?

Norman C. Chambers

We know that the Buildings group is roughly 50% of our revenue and the Components group is not quite 50% of our revenue. So, it's pretty evenly split.

Robert J. Kelly - Sidoti & Company, LLC

Fair enough. As far as the interest rate savings, there are some deferred costs of that you're carrying on the income line. Is that what we heard, and then that will go away once you refi? So, I guess the way you report your P&L. No matter what you knockdown the interest rate savings, it sounds like there's a bigger benefit coming from exiting the old facility. Is that the way we're supposed understand that?

Mark E. Johnson

Yes, that is a good way to say it. We would experience, in our expectation, both a significant reduction in the cash interest cost, as well as a reduction in the items that get amortized along with the last facility that we had.

Norman C. Chambers

So, another way of thinking about it is, that since we will be paying higher cost because of the penalty, we nevertheless wouldn't go about this if we were getting -- well we don't think -- if we wouldn't think we would be getting a substantial reduction in interest cost that make total sense to do what we're trying to do.

Robert J. Kelly - Sidoti & Company, LLC

Right. So, there'd be a big upfront kind of write-off once you exit the existing facility? But, once that's passed, your quarterly interest expense would jump pretty significantly? And of your completely cash interest expense.

Mark E. Johnson

That is our expectation exactly.

Norman C. Chambers

And we'll be able to talk about more in June, Bob. In the June call.

Robert J. Kelly - Sidoti & Company, LLC

Right, understand. Is there any help you can give us, sensitivity of the new debt facility? If you were to knock 100 basis points of your interest rate, what that would look like to the bottom line?

Mark E. Johnson

Well, our current outstanding debt is about $240 million. So, if we knocked 1% off of that, it would be $2.4 million.

Robert J. Kelly - Sidoti & Company, LLC

Right, but you're carrying some amortization and whatnot in the quarterly interest expense.

Mark E. Johnson

Right. So, on a quarterly basis -- I don't really have those numbers in front of me. I would say that -- I don't have those details in front of me. So, we'll have to get to that on the June call.

Norman C. Chambers

Yes, we'll be able to be very detailed about that in June.

Operator

The next question comes from Jack Kasprzak of BB&T.

John F. Kasprzak - BB&T Capital Markets, Research Division

Norm, I just want to make sure I understand some of your comments. You mentioned the leading indicators for non-res, still look very strong, which I think is still correct of course. But I think you had some comments around being early in the cycle. And I wasn't quite sure, were you trying to talk about maybe there's more of a lag in getting projects started and there's just a bit more uncertainty around the cycles happening but kind of the pace of recovery?

Norman C. Chambers

Yes. So, I think that it's clear from our past experience as well, that in the early stage of recovery there is an increased level of risk, if you will, as to what the exact pace of recovery will be. It tends to be a bit spotty at the beginning in certain sectors. I must say I was very pleased, and somewhat surprised, to see that we were starting to see some indications from the residential recovery, which is ongoing, that was affecting in a positive way our Components group. And that is specifically with storage, which is pretty heavily tied to the residential. And that's been pretty slow for some time. The second broader indicator that was encouraging, what we saw in the -- and this is a core group of customers who have been with us for many years in the Components group, in dealing in the core components -- and you know from past calls, we've really said that we have yet to see any meaningful evidence of recovery in the businesses they serve, which are more broadly to do with the economy, commercial and retail activities. And I must say, we're very pleased to see that, that group had seen an increase of that was really quite substantial. And while the comp, in percentage terms, looks quite high at 28% to 29%, we are comping back against incredibly low values. So, I don't want to overstate that, but nevertheless it was the first indication, probably since 2009, that, that group is actually seeing some recovery. So, my point is that there are some things that would lead us to be very positive about what we see. And, certainly, I just wanted to be somewhat thoughtful in terms of reflecting, that we are still at the early stages and I think we have to all see there's some risk and what that pace will be.

John F. Kasprzak - BB&T Capital Markets, Research Division

On your comments on price competition, is that continued into May? Do you think it's more of a problem or is it more concerned -- I'm sorry, isolated to 2Q, maybe 1 or 2 instances?

Norman C. Chambers

So, what we found was that in projects that we were able to target, particularly characterized by design-build, where we are working in an almost consultative way with our customers, we continue to do very well, both in the terms of securing that work and the margins in which we secure it. I will tell you that during the period, particularly in February and March, that there was such disruption because of the weather, any customer that came out with a job that was for production kind of now, holy smoke, it got chased really hard. I mean, it was priced very aggressively across the space. And I can tell you that, from our perspective, it's critically important that we continue to focus on getting our pricing up, and in large part that's a result of really targeting design-build work where we can add some value. And so that's the way I would characterize what we experienced.

Operator

[Operator Instructions] The next question comes from Dana Walker of Kalmar Investments.

Dana Ford Walker - Kalmar Investments Inc.

I presume the $17 million that would not have been shipped ends up in backlog, is that a fair statement?

Norman C. Chambers

It ends up kind of flowing through but, yes, it would be, in part, in backlog.

Dana Ford Walker - Kalmar Investments Inc.

The question was asked earlier, I'll ask it again in a slightly different way. Did you expect your backlog figures and your volume in backlog figures, thus, to look like they do now? Or, with the delay in the season, would you expect to have more turns business where you would have more intra-quarter or intra-second half receipts of bookings that you expect to ship in the second half?

Norman C. Chambers

Yes. So, I'll answer that this way. When I look at our backlog on a year-over-year basis, we take into account some fundamental things like the fact that, on a year-over-year basis, steel costs are down about 10%. And as you recall, that steel represents about 52% of our sales. So, I look at that dollar value in a couple of different ways, but I must say that the volume side was up about 10% , and that's a pretty true indication. I can also tell you that, during last year, from the end of the April backlog, our backlog actually grew each subsequent month for the next few months. So, my sense is, if we see the pace of recovery that the forward-looking indicators would demonstrate, then we would hope to see that we continue to do quite well in booking as we go forward as well. And that's what I speak to in terms of the pace of recovery.

Dana Ford Walker - Kalmar Investments Inc.

Understood. The panel number that you've described, if you were to call out the effect from the acquisition, what does that tell us about the health of that business, and your integration and blending of the 2 operations?

Norman C. Chambers

I will tell you that it speaks well of it because one of the criteria for acquiring that business was that we felt we could really help with the distribution of insulated metal panels in the commercial and industrial part of the market, which were particularly strong. And to see the growth in that product is consistent with our expectations, maybe even a little higher than our expectations. So, I'm very pleased with what I see there. There is still more to be done on the integration. We continue to look at opportunities to homogenize some of our process, which we will continue to do. But we are very positive about that part of our business and continue to be so.

Dana Ford Walker - Kalmar Investments Inc.

You mentioned that Ag was weak in the first half. Would you expect the tone of your Ag business to improve, not only compared to the first half but compared to year-over-year?

Norman C. Chambers

God, I would hope so. I mean, it's a quick turn business, but it was really majorly hit by weather across the country, and that really slowed down the season. So, we are very hopeful that we'll see a recovery there.

Operator

The last question comes from Trey Grooms of Stephens, Inc.

B.G. Dickey - Stephens Inc., Research Division

This is actually B.G. Dickey in for Trey. Norm, I believe, in the prepared remarks there, you talked about increase in personnel cost. Did you guys quantify that? I'm a little late hopping on the call here, but just see if you can give us any color on what the cost was in the quarter, either at cost or SG&A and kind of what you're expecting in the back half of the year.

Mark E. Johnson

That increase in personnel cost was approximately $1.2 million in the second quarter. And we would not anticipate that will be represented as an incremental cost in Q3 and Q4. It was really a cost that was specific to both Q1 and Q2.

B.G. Dickey - Stephens Inc., Research Division

Okay, So you're pretty much done there. Okay, and you talked a little bit about pricing trends, but can you talk about just overall demand and volume trends as the quarter progressed, and then what you're seeing today and kind of what gives you confidence in this rebound in the back half?

Norman C. Chambers

Yes. So, I mean, I think there's a couple of things. When I look at the quarter, how it laid out in February and March and then in April, again, we benefited from our 445, but even adjusting for that, we saw a significant uptick in our shipments in the fourth quarter, and saw it produce a level of profitability and some leverage which were missing in February and March. So, as a month goes, it was encouraging. And I think that we know, that historically, we always -- even in the worst downturns, starting in 2010 -- we always have seasonality just by virtue of the construction season. Sometimes that seasonality is amplified by how bad the weather is in the first half or how good the weather is in the first half, but there's always a level of seasonality. What we are expecting from all the leading indicators, and in fact the elevated but stable level of quoting, is that we'll see something better than seasonality, and that is yet to materialize but that's what we're in the game and working to see.

Operator

And now, I would like to turn the conference back over to management for any closing remarks.

Norman C. Chambers

Well, again, thank you very much on such short notice. We felt it was important to bring you up to speed in terms of the really very important changes that we made to our balance sheet, and hopefully our debt, and wanted to give you a bit of a preview of the quarter. So, I thank you for joining us and look forward to speaking to you with more details about the second quarter and beyond in our June call. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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