Cornerstone Building Brands, Inc.
Q2 2013 Earnings Call Transcript

Published: 5 Jun 2013

[Operator:]

Good afternoon, and welcome to the NCI Building Systems, Inc. Second Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Layne Alvarez, NCI's Director of Investor Relations. Please go ahead.

[Layne De Alvarez:]

Thank you. Good afternoon, and welcome to NCI Building Systems' Call to review the company's results for the second quarter of fiscal 2013. To access a taped replay of this call, please dial [phone], and enter the passcode 10028871 and the pound sign when prompted. The replay will be available approximately 2 hours after this call and will remain accessible through June 12. The replay will also be available at the company's website at ncigroup.com. The company's first -- second quarter results were issued earlier today in a press release that was covered by the financial media. A separate release is also issued advising of the accessibility of this call on a listen-only basis over the Internet. Some statements made on the call may be forward-looking statements within the meaning of 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 the projected in such statements. Investors should refer to reports filed by the company with the Security and Exchange Commission and in today's news release for a discussion of factors that could cause actual results to differ. To the extent of any non-GAAP financial measures are discussed, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP in today's press release, which can be located on the company's website by following the media link. Information being provided today is as of this date only, and NCI expressly disclaims any obligation to release publicly any update 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 welcome to our Second Quarter 2013 Conference Call. Joining me this evening are Mark Johnson, our Chief Financial Officer; Todd Moore, our General Counsel; and Layne Alvarez, our Director of Investor Relations. I will provide an overview and review our operations followed by Mark Johnson, who will provide additional color on the CD&R conversion to common shares, progress on our new bank loan and a review's of our financial results. Then we'll be happy to take your questions. Second quarter performance was similar to that of the first quarter and in line with the estimates we provided in our May 14 release and conference call. On the plus side, we did achieve 17% revenue growth, thanks to the contribution of our June 2012 Metl-Span acquisition and the success related to our commercial and industrial distribution channels. However, we estimate we lost about 6 percentage points in revenue growth largely due to adverse weather conditions that caused a slower release of work from our backlog and reduced demand from our Components and Buildings Groups products, particularly from the agricultural market. And for the additional reasons we discussed on the call 3 weeks ago, namely our investment and manufacturing personnel and normal seasonality of Q2, adjusted EBITDA for the period came in at approximately $11 million. There were several business highlights in the second quarter that are worth noting. Our Components group posted a 29% year-over-year increase in sales to OEM customers, which signals a broader economic pickup, including light commercial and retail. Additionally, we generated 44% increase in insulated metal panel sales for Commercial/Industrial application. We purchased Metl-Span last year because we believe the C&I market provides excellent growth opportunities for us given our manufacturing footprint, breadth of product offering and established distribution channels. The market recovery in the first half of 2013 has been choppy. Our performance has been mixed. This is very similar to what happened to beginning of 2004 recovery in nonresidential construction. I remember having to explain weak performance and uneven demand in several of our end markets in geographic areas during our second quarter 2004 conference call. By fiscal year end 2004, the nonresidential market was well into recovery, registering 100 million square feet of improvement, driving a $44 million year-over-year increase in EBITDA. From trough to top of the full year cycle, our EBITDA grew by 139%. Of course, today, we're coming out of a much deeper recession as the nonresidential market has been below 800 million square feet since 2009. The same time, however, we have improved our position in the marketplace and stand significantly -- and stand to significantly benefit from the growth in nonresidential construction. Today, each of our businesses is now either first or second in their respective market segments. The acquisition of Metl-Span 1 year ago and its integration to our Components group has made us the market leaders in one of the fastest-growing building products in North America. The purchase and ramp up of our new light gauge paint line at Middletown positions us to add efficiencies and reduce cost in our supply chain and equally important, to attract new third-party customers in appliance and the lighting industry. Second, the continuous improvements made to our integrated business model through process efficiencies and automation enables us to leverage our manufacturing footprint for our hub-and-spoke delivery system that significantly reduces delivery times to our customers. Our integrated business model also provides a natural internal hedge against fluctuations in steel prices, our largest input, through the complementary sales cycle of our 3 business groups

[Mark E. Johnson:]

Thank you, Norm. Let me first comment on the recent conversion of our convertible preferred shares. As we had previously indicated in our May 14 press release, CD&R, the holders of our preferred shares, delivered formal notice that they would convert all preferred shares to common shares. As a result, effective on May 14, we converted all the outstanding convertible preferred shares into 54.1 million shares of common stock. This conversion simplified our capital structure and the calculation of our earnings per share by eliminating the preferred class of stock. The conversion will increase the stockholders' equity reported on our balance sheet by nearly $620 million, returning our stockholders' equity to a positive balance. All of this will be reflected in our fiscal third quarter results. A short-term impact of the conversion was that NCI no longer meets the technical requirements for inclusion in the S&P Small Cap 600 Index because our public float fell below the required 50% of total common shares after the conversion. This temporarily increased selling pressure on our shares as certain index funds were forced to trade out of our stock in about in about a 7-day window. This was evidenced in the elevated trading volumes between the date of the index change announcement on May 22 and the end of the May when our trading volumes were approximately 5x the previous daily average and represented 3.7 million shares or approximately 19% of our public float. Now to an update on our debt refinancing. In our May 14 release, we also noted that we were planning to refinance our existing $240 million term loan. Since that time, we have marketed, syndicated and priced an amended term loan, and we expect to close the transaction by the end of June. During this process, both Moody's and Standard & Poor's upgraded our credit ratings based on our improved performance, acknowledging the improved outlook for our industry and the simplification of our capital structure. In addition, the debt markets have significantly improved since last July when the initial loan was put in place in the very tight window available for the acquisition of Metl-Span. As a result, under the revised terms, we expect to reduce our annualized interest expense by nearly $12 million, cutting our effective interest rate by half to approximately 4.5%, which includes both the cash interest cost plus the amortization of any deferred financing cost. In addition, the new loan eliminates financial maintenance covenants and extends the maturity to 2019. In connection with the earliest extinguishment -- in connection with the early extinguishment of our existing facility, we will incur noncash special charges in our third quarter results ranging between $20 million and $22 million to write-off existing deferred financing costs and original issue discounts and a cash payment of a 1% early termination fee. These charges are predominantly noncash items and are not significant compared to the true economic savings the company will gain under the new structure. Turning now to our operating results. Revenue for the quarter was $293.4 million, which was 17% higher than the prior year, driven primarily by our Metl-Span acquisition in late 2012. We did experience mid-to low single-digit volume growth in each of our 3 segments. However, much of the volume growth was offset by lower sales prices on lower material costs compared to the prior year. Despite the underlying volume growth, our earnings compared to the prior year were negatively impacted by investments we made to build our manufacturing capabilities in all 3 segments

[Norman C. Chambers:]

Thanks, Mark. In closing, first, I want to emphasize we are much better positioned than ever before to deliver superior growth and superior operating leverage during the market recovery. Second, we believe that this market recovery promises to be much longer cycle than the previous 2004, 2007 period because the starting line for this recovery is 750 million square feet compared to the 40-year average for nonresidential construction activity, which is 1.3 billion square feet. Third, our product offering is broader and deeper than ever before. Our proven strength in Commercial/Industrial building products is particularly well-positioned for the likely leading sector in this recovery. Fourth, our management team is aligned with shareholders to drive performance. So with that, I will be happy to take your questions. Operator, back to you.

[Operator:]

[Operator Instructions] Our first question comes from Trey Grooms at Stephens.

[Trey Grooms:]

Norm, could you talk a minute about what kind of demand trends you've been seeing in May, any changes there in Coating activity, that sort of thing?

[Norman C. Chambers:]

Yes, Trey, it's been interesting because as I think we said on the first quarter call, the first quarter was flattish year-over-year. And through the second quarter, we saw improvement every month in February, March and April and now in May, meaning that the deficit to year-on-year comparisons got less and less throughout that period. And in fact, May on a weekly basis, was about 5% ahead of April. So we are clearly seeing some movement. It is at a pace that is recognizable, not particularly robust, but is sustainingly moving in the right direction.

[Trey Grooms:]

And are you referring to shipments, Norm, or are you...

[Norman C. Chambers:]

Sorry, I was referring to bookings.

[Trey Grooms:]

Well, that's encouraging. And then, looking at the pricing pressure you guys have been seeing, I mean, have you seen any relief there? Is it your thought that this could persist as we kind of go into a stronger back half? And then also, do you think it's -- or has it been isolated or has it been more widespread as far as just the pricing pressure you've seen there?

[Norman C. Chambers:]

So I think that the pricing pressure has clearly been bifurcated from the standpoint that the design-build work within our backlog, within the Buildings group continues to increase as a percentage of that backlog. And the pricing and the value that we're able to bring to our customers in that particular approach continues to lead us to higher profit margins for that kind of work. So that's a particularly positive thing. On what we saw particularly in the first quarter and certainly for part of the second quarter that was more opportunistic and weather-driven, we would clearly expect to see, as the market demand improves, that we would see a lessening in that tension from pricing. I'm not saying that it goes away entirely, but I think we will see that the pricing pressure does release it a little bit as we move forward. And of course, as the non-res market recovers, we would expect to see, as we have in the past, that the pricing pressure would abate to a very large extent.

[Trey Grooms:]

Okay. And then lastly, and then I'll just jump back in queue. But lastly, with the investments in the personnel that you've made in the last few quarters, you guys took out a lot of headcount, I think it was 40%, you said, since the downturn. And so it's reasonable that -- to expect you guys to bring back some of those folks. But as we look into the second half and kind of going forward, do you think that you're pretty well positioned where you want to be for now? Or should we expect this kind of bringing back some of these folks to continue?

[Norman C. Chambers:]

No. I think we're well-positioned now. I think that on the margin we may add a person or 2. But in terms of our plant productivity, we're about where we need to be. Now as you know, we are looking at a couple of growth initiatives. And as we move forward on those, we would add -- we have some people specifically for that initiative.

[Operator:]

Our next question comes from Robert Kelly at Sidoti.

[Robert J. Kelly:]

First off, on the interest expense for the refi. Did I hear it right, the all-in cost will be 4.5% or is that the cash interest cost?

[Mark E. Johnson:]

No, that would be the all-in effective cost, including the noncash amortization.

[Robert J. Kelly:]

Okay. So the $12 million is not including some of the one timers. $12 million of payments. . .

[Mark E. Johnson:]

The $12 million was the reduction in cost over the previous annualized interest cost.

[Robert J. Kelly:]

Got it. Got it. Okay, so that's the new run rate, okay, helpful. As far as the outlook for the second half, you kind of talked in the release about what the forecasts were for. Is that May pace of improvement, is that pretty much consistent with what the forecast was or what your budget was going into F '13?

[Mark E. Johnson:]

No. It's not. It's really -- it's a bit below that. But I must say that when we look at the volumes at our backlog being up by 10%, that's not a bad situation. And when I answered Trey's question that our bookings have continued to improve, and particularly, April was a very good month in that respect and to see May on a weekly basis kind of increase, it -- we're seeing -- we believe we're seeing more than just a seasonal -- a seasonal -- a pickup. But it is not at the pace that we would have expected. But it's not far below that pace, if that can answer your question.

[Robert J. Kelly:]

No, I understand. That's good. That's a good description. As far as Engineered Building in Components segments, quite a bit of drag there. Can you talk about what the depression on margin is going to be? You talked about those cost drag easing and productivity increasing and then I guess the third leg of margin expansion would be price discipline getting a little bit better. How should we model the second half as far as the margins go? It seems like you had some pretty big negative margin drags exacerbated by weather in 2Q. What should we be thinking about -- what should we be thinking about margin wise for Components and Building Systems for second half?

[Norman C. Chambers:]

So we should expect to see some margin improvement over the first half. And that margin improvement should increase asymmetrically from the third to the fourth quarter, meaning that we would expect to see more margin improvement in Q4 than Q3. And part of that, Bob, is that we are increasingly pleased with the job that our Buildings folks are doing in terms of winning higher value work in the design/build part of their backlog. I was listening to the call today and the team are doing a very good job where our shipping schedules look good. They're strengthening. So we're expecting to see the Buildings group have a nice rebound in Q3 and Q4, but it'll be more loaded in Q4.

[Robert J. Kelly:]

Right. I mean, just seasonally, that should happen. How about compared to the year-ago period? I mean you have cost going away and volumes up double digits.

[Norman C. Chambers:]

Yes. So we should see -- we should expect to see our margins improve in Q3 over Q3, I would expect we'd see some improvement, may not be much, but I expect in Q4 that we'll see some substantial impact because of the work that will be going through in Q4.

[Operator:]

Our next question comes from Lee Jagoda at CJS Securities.

[Lee Jagoda:]

So you cited elevated costs related to the investments, competitive pricing pressures, the facility ramp up expenses and integration costs all impacting the margin. Can you quantify each of those buckets? And then what if any of those costs are ongoing versus behind us and completed?

[Norman C. Chambers:]

Mark will do the best he can. He's got a little cheat sheet in front of him

[Mark E. Johnson:]

So I called a lot of these out, but there's a lot of numbers, so I'll resummarize. Speaking first the items that would impact the gross margin of our company, the Middletown ramp up cost us about $900,000. The integration of Metl-Span and the addition of our Mattoon, Illinois panel plant adds about $1.6 million of cost.

[Lee Jagoda:]

This is on a year-over-year basis?

[Mark E. Johnson:]

Yes, these are year-over-year incremental costs. And the Buildings group, the elevated investment in manufacturing cost is between $500,000 and $600,000. The growth initiative is only about $300,000 of that is included in the gross margin impact. And then the net of the volume and pricing impact in the period was about a $2.6 million impact. Now there's a couple of items that are specific just to ESG&A costs. I mentioned that last year had included some unusual recoveries, of which we have spoken about previously, but $2.9 million of cost recovery was included in the second quarter of last year, that doesn't recur this year. Our noncash stock compensation cost is primarily in our corporate group. And that has now reached its mature annual run rate level because we've now topped the plan up to its 4-year run rate. And that added $1.3 million of cost. Growth initiatives are primarily in the Components group and those added about $1.3 million of cost. And then lastly, the conversion and registration cost that hit our P&L are about $200,000. That's a mouthful. All of that together adds up to about $10 million, almost $11 million of items.

[Lee Jagoda:]

And of that $11 million, what, if any of that, will occur in Q3?

[Mark E. Johnson:]

As we progress that through into Q3, a couple of items will continue. For example, the noncash stock compensation cost will continue. That will continue because we've now reached a mature annual run rate and that cost will be fairly consistent going forward.

[Lee Jagoda:]

At what level?

[Mark E. Johnson:]

I don't have that right in front of me. But it added $1.3 million of incremental cost this year and we'll have that same incremental cost in Q3. The integration, in addition of the Mattoon, Illinois plant, that will add about $500,000 of cost in Q3 and then just a couple of hundred thousand dollars in Q4 before we're past that event. And then Middletown will be a little bit of a drag as we've planned it for Q3 of about $300,000, but it will be a contributor to earnings in Q4. And then the growth initiatives in the Components group will add about $600,000 of cost in Q3 and then dissipate to about $400,000 of cost in Q4. That's effectively all of the items.

[Lee Jagoda:]

Okay. And then Just switching gears a little bit to the backlog. With the increased complexity, does it provide greater medium to long-term visibility than in recent past? And how should we think about the trend of backlog as we move through Q3 into Q4?

[Norman C. Chambers:]

That's a good question actually, and I wish to have mentioned that. It clearly provides more balance in our backlog. And generally speaking, higher complexity work takes a longer time to be moved through the system and to be delivered. So that kind of extends the backlog a little bit. But it also provides us with a greater opportunity to add value and to work with our customers in a whole host of ways, so it's a net positive. So our backlog should give us, at least, 6 months of good visibility. And then our booking rates gives us a more immediate sense of market conditions on a go-forward basis as well.

[Lee Jagoda:]

Okay. And one more quick question and I'll hop back in the queue. Just as it relates to the share count, I you know you give us the 54.1 million that represents CD&R's portion. Do you have the basic and the fully diluted share count on a go-forward basis? Just because we really haven't had a profitable quarter to see the fully diluted share count in a little while.

[Mark E. Johnson:]

Yes. Let me try to answer that for you. So as you know, before the conversion, there's about 19.4 million shares that would be included in the basic calculation. In addition to that, there is approximately $2 million or, I'm sorry, 2 million shares -- let me say that again, 1.2 million shares of unvested restricted stock and about 2 million stock options with a strike price in and around $8, almost $9. So all together, that would be about 21 million shares. And then in addition to that, you would add the 54.1 million shares that were converted to get to the fully diluted shares.

[Lee Jagoda:]

Okay. So on a go-forward basis that's sort of the full share count we should be building in assuming you're profitable from here on out?

[Mark E. Johnson:]

Right. But on the stock options, as you know, you would apply the treasury stock method. As you would also with the unvested restricted shares. So not all of those shares would get into the calculation. Probably on the order of 500,000 of those shares would to get into the fully diluted calculation.

[Operator:]

This concludes our question-and-answer session. We would like to turn the conference back over to Norm Chambers for any closing remarks.

[Norman C. Chambers:]

Great. Well thank you very much for joining us on this evening's second quarter call, and we look forward to speaking to you next quarter. Thank you.

[Operator:]

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