Core Natural Resources, Inc. (CNR) Q3 2013 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the NCI Building Systems Third Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded, Wednesday, September 4, 2013. And at this time, I would like to turn the conference over to Layne de Alvarez, Director, Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon and welcome to NCI Building Systems call to review the company's results for the third quarter of fiscal 2013. To access the taped replay, please dial 1 (800) 406-7325 and enter the pass code 4636317 and the # sign when prompted. The replay will be available approximately 2 hours after this call and will remain accessible through September 18, 2013. The replay will also be available at the company's website at ncigroup.com. The company's third quarter results were issued earlier today in a press release that was covered by the financial media. A separate release was also issued advising of the accessibility of this conference 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 projection in such statements. Investors should refer to reports filed by the company with the Securities 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 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 to turn the call over to NCI's Chairman, President and Chief Executive Officer, Norm Chambers.

Thank you, Layne. Good evening, everyone, and welcome to our third quarter 2013 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer; Todd Moore, our General Counsel; and Layne de Alvarez, our Director of Investor Relations. I will make some initial comments, followed by Mark, and then we'll be open the call -- we'll open the call to your questions. To summarize our third quarter, the market volume for low-rise nonresidential construction starts was down 10.7% on a year-over-year basis. Our consolidated volume was up 9.6% and 5.8% on a pro forma basis over the third quarter of last year. However, pricing pressure eroded the benefits of the growth in volume. Therefore, our third quarter was below our expectations to deliver year-over-year growth and earnings and EBITDA. We have instituted price increases in mid-August across our businesses. As expected, third quarter performance improved sequentially with an 8% increase in revenue, 10% increase in gross profit and a 61% increase in EBITDA from the second quarter. Clearly, the nonresidential construction market has not recovered as quickly as we had anticipated. But we're not waiting on the sidelines for this recovery to gain traction. We are investing substantial resources to upgrade our level of customer service, improve the efficiencies of our manufacturing processes, and further integrate our operating systems. I've spoken in the past about being well positioned to take advantage of the recovery, and I am confident that the investment being made at every level of our business this year will lead to significant performance improvements when the recovery finally gains traction. Leading the industry in performance and customer service will create greater value for our customers and us. In the third quarter, we continue to benefit from a solid performance of our Coatings group and the…

Thank you, Norm. As Norm already elaborated, construction activity did not rebound to the levels we had anticipated, putting pressure on our results. However, we continue to invest substantial resources into making our organization stronger and more responsive to our customers. So this afternoon, I would like to quickly review our operating results, focusing my remarks on what we are doing to continually improve our operations. I'll start with a general overview and then dig into each of our segments. Revenue for the quarter was $317.2 million, up 6% from last year's fiscal third quarter, primarily as a result of the inclusion of Metl-Span for the entire period. On a sequential basis, revenues grew 8.1% from $293.4 million in the second quarter. Although our overall third-party volumes were up 9.6%, we continue to experience lower pricing levels in the prior year due to both competitive market pressure and lower steel input cost. We estimate that the pass-through of lower steel cost to our customers reduced our revenue by approximately $16 million as compared to the prior year period. We generated adjusted EBITDA of $17 million for the quarter, down from $18.9 million in last year's third quarter. Sequentially, our EBITDA increased 61% from the $10.6 million in the second quarter driven primarily by the seasonal increase in activity. Now I'll discuss some highlights from our segment results. Let's start with our largest revenue and earnings contributor, the metal Components group. Compared to the prior year's third quarter, it posted a 13% increase in total sales and a 17% increase in third-party sales, largely due to the acquisition of Metl-Span in late June of 2012. Last year's results included 6 weeks of Metl-Span versus the full 13 this year. We experienced volume growth in each of the underlying business units comprising…

Great, Mark. We're ready to take your questions and provide you with some answers. Operator, please?

[Operator Instructions] Our first question is from the line of Robert Marshall with Davenport & Co. Robert R. Marshall - Davenport & Company, LLC, Research Division: Can you give us a little bit of insight in terms of what you're hearing from the engineered building customer level? Are things kind of -- still a lack of confidence out there? And are things getting worse, or do you think people are kind of getting their sea legs here slowly but surely?

Well, I think it does fall into a slowly but surely. But I think to really set the context on the question, we benefited and our competitors benefited in the engineered building space from 25 consecutive annual month-on-month improvements from October of 2010 to October of 2012. And that really helped the improvement, the movements that we found in terms of engineered buildings group. And it definitely helped -- it didn't bring about a lot of price competition. But since November 2012, that has really slowed. And by that I mean that it's not like going back to 2010 or '11, but it was clear that on a year-over-year basis, we really struggled to see improvement in the -- in particularly in the engineered buildings group in terms of market opportunities. When I look at what McGraw-Hill Dodge is forecasting for actual -- not forecast, but reporting for actual new construction starts in our third quarter, I have to tell you, down 10.7% with the manufacturing piece being down 25% is pretty damn drastic. I mean, that's a pretty good fall. I will tell you that we are encouraged that even in that actual downturn, which did affect us, we were seeing at the same time the beginning of what we think could be some recovery. We had 3 consecutive months through to August of improvement, and August was a nice year-over-year improvement. But as I said in my script and I mean sincerely that until we can stack up because demand is improving, number of months in improvement, then that is really what will dictate whether or not that we're seeing a recovery. But to give you the short answer of the question, I think we are seeing some activity levels that are more encouraging across all of our businesses right now. Robert R. Marshall - Davenport & Company, LLC, Research Division: All right. And can you kind of give us any -- or explain the disconnect between the AIA data and what you're seeing in the order environment?

Well, the AIA data has been 10 months, and it's been above 50, and that's a good thing. We know there's normally about a 6-month lag to affecting our business. And it is clear that we haven't quite seen, certainly up till the end of our third quarter, that materializing into a big improvement. And as I said, we also saw this industrial piece, which had been strong for -- improving for a couple of years, really kind of slow down. So where I think we are is when I look across all of our businesses, I am -- we believe we're starting to see some meaningful improvement. Now I must caveat that by saying that we have put a price increase through, whether that's driven a little more activity, trying to get ahead of the price increase remains to be seen. But nevertheless, I think it's -- I think I am correct to say that we have definitely seen a bit of a pickup across our businesses. Robert R. Marshall - Davenport & Company, LLC, Research Division: Last quick question. What is the backlog data look like without Metl-Span?

Without Metl-Span, reported on the same way we reported before we had Metl-Span, last year, backlog was about $281 million. This year, backlog is about $282 million. Robert R. Marshall - Davenport & Company, LLC, Research Division: Yes, so flat?

Flat.

Your next question is from the line of Alex Rygiel with FBR Capital Markets. Alexander J. Rygiel - FBR Capital Markets & Co., Research Division: Norm, you talked a little bit about price increases, but yet it sounds like demand is a little bit soft. Can you expand upon sort of your confidence level of price increases can stick in the demand environment that we're in right now?

Well, that's always a test. I will say that we believe that the price increases, in the way we went about them, are beneficial to our customers to enable them to in fact increase their prices. I suggest to you that it is a case that there is, I think, always opportunity to add value. And that's fundamentally why we are investing so much to try to build a distinguished offering that enables our customers -- our builders and customers to frankly compete more favorably against our competitors. So at the end of the day, we are encouraged. We're a ways into this. We're not quite a month into the price increases, but we're encouraged with what we see. Alexander J. Rygiel - FBR Capital Markets & Co., Research Division: Okay. And then could you clarify whether or not the ESG&A guidance for the upcoming quarter is $66 million to $68 million, or $56 million to $58 million?

$66 million to $68 million. Alexander J. Rygiel - FBR Capital Markets & Co., Research Division: Perfect. And any thoughts on a tax rate that we should be using for 2014?

Our longer-term tax rate is about 38.5%, statutorily. And it will vary from that just depending on the level of nondeductible expenses we have relative to our ordinary income. So I would use that as a longer-term tax rate.

Our next question comes from the line of Robert Kelly with Sidoti & Company. Robert J. Kelly - Sidoti & Company, LLC: Question on the backlog. The drag from lower steel prices, was that about 5% as well?

Yes. So the lowest steel prices definitely brought the backlog down. Yes. And 5% would that be...

In backlog, that's probably a good estimate.

Yes. That's pretty good, Bob. Robert J. Kelly - Sidoti & Company, LLC: Units are up about 5%, is that the way to think about it?

Yes. Robert J. Kelly - Sidoti & Company, LLC: All right. There's a lot of noise between the Middletown facility integration driven [ph] from Metl-Span. If you could kind of give us the total drag that you expect for F '13 from some of these nonrecurring things and then maybe think about what may spill over into F '14, just to give us a sense like if volume weren't to grow at all in F '14, what would you get just from some of these items going away? What kind of savings or benefits to the bottom line?

So I think -- I'm not sure if you've seen, but we have posted kind of a CFOs report, which will shed some light on that. But I think that in the press release as well, we try to indicate in the SG&A side, those things that are -- really fall as kind of a more one-off -- I don't want to get my accounting terms kind of misconstrued here, so I -- some of it, a little bit will reoccur in the fourth quarter as we continue to expend money. But when I think about drag, I'm not thinking, Mark Johnson, about a whole lot of drag going in.

Yes. So the items that I mentioned this period are in total about $2.3 million in ESG&A costs that are really focused on some growth initiatives that we have. And of those items, about $1.6 million of that go into the Components group. And each of those items is something that we are pursuing because there is a payoff at the end. Those are items that could be turned off. We would expect to see a similar level of spending in our fourth quarter and probably about 1/2 of those amounts falling into our first quarter of next year before you actually see some significant benefit. Robert J. Kelly - Sidoti & Company, LLC: 1/2 of that $1.6 million?

That's right. Yes. I'm sorry 1/2 of the $2.3 million. Robert J. Kelly - Sidoti & Company, LLC: 1/2 of the $2.3 million. So what's the total going to be for F '13 of incremental spend or operating drag from these price increases?

We're going to have to go off-line to figure that out for you, Bob. Robert J. Kelly - Sidoti & Company, LLC: That's a number that will help. As far as the pricing story, you talked about Components being pretty competitive. I think this is the first we're hearing about engineered building. Is that just a function of lower steel prices? Is it the lack of demand, people are getting antsy and dropping prices trying to get demand volumes out the door?

Antsy, antsy, antsy. When you have a follow-up on starts, like McGraw-Hill said, of 10.7% in the third -- fiscal third quarter, when you have within that a serious drop in the manufacturing sector new buildings, which we and our competitors all covet, then it doesn't surprise me a whole hell of a lot that we've seen some folks hustling around to get some price. But by the same token, I am encouraged that we have been able to put a price increase through in a way that is -- that enables our customers to work with it. And we think it's an important thing to do, and we'll continue to try to drive the price up as our quality and service continues to improve. Robert J. Kelly - Sidoti & Company, LLC: Is the -- are the price pressures, the concessions related to quality and service or just lack of demand?

Well, I would put it the other way around. With quality and service, we have greater justification for pricing increases.

Our next question is from the line of Brent Thielman with D.A. Davidson and Company. Brent Thielman - D.A. Davidson & Co., Research Division: Yes, Norm, the weakness in the manufacturing piece, obviously, there's this economic backdrop, which acts under decisions to move forward. But is there anything more granular you're seeing there in the sectors of manufacturing that you serve that may be particularly soft and were stronger for you last year, or is this sort of across-the-board in terms of that market?

No, I could be a bit more specific. And I spent most of my life on oil and gas, and I know how efficient they are at turning on and turning off. And I will tell you that we benefited last year in retrospect from an oversized demand particularly driven by gas, and that falls into the McGraw-Hill manufacturing sector, right? And it certainly is something that has been off this year for us. I think the overall trends, if oil and gas continue to be hugely favorable for the next 20 years, but there will be periods where our friends in the oil and gas field will not spend as much as they do in other times. Brent Thielman - D.A. Davidson & Co., Research Division: Sure. And can you remind me what exactly you were doing for gas last year?

So when you think about all the developments going on, whether it be in Bakken or out west or the Marcellus Shale, all that is pretty virgin area. So therefore, all of the support services in all aspects, whether it be pipelines, upstream drilling, maintenance, all require facilities to work from. And they have to be fairly localized. So we were supplying -- and our competitors were supplying lots of buildings that would fall into kind of the manufacturing category that would be used for warehousing and support and maintenance activities for all aspects of the -- I'm sorry, of the drilling, the production and the transportation of gas into pipeline systems. Brent Thielman - D.A. Davidson & Co., Research Division: Okay, that's helpful. And just thinking about Q4, obviously, you made a comment in the last couple of years, you've seen a seasonal uptick. Is it your expectation that volumes or revenues, or however you want to phrase it, will be more consistent with Q3?

So -- it won't surprise you that we hadn't expected a 10.7 decline in starts to have the impact on our third quarter, but it did, right? And we expect it to actually have a third quarter that was a year-over-year improvement across the line. And that didn't come out. So I'm more than a little reluctant to get too far over my skis in fourth quarter even though everything points in a northerly direction. Brent Thielman - D.A. Davidson & Co., Research Division: Okay, no, that's fair. And then just on I guess from sort of the margin expectation as well, I mean, you have this impact of lower pricing levels. But I think before, you were thinking some more complex projects would flow through. Does the combination of those things sort of offset each other as you think about margins into Q4?

I tell you, I really do believe when I look at the shipping schedule, particularly in the Buildings group, that we will continue -- we will see the benefit of some of the work that they have been winning. I will tell you that we've seen an improvement in what we refer to as for production work, which means that there are things that people want right now. I will tell you that the higher complexity work, which often times attracts some of the margins I talked about in the last quarter, sometimes a little slower to get out the door. But overall, I mean we're expecting improvement. I mean, we're expecting the Buildings group to show improvement, and I know that team is working very hard to produce it. Brent Thielman - D.A. Davidson & Co., Research Division: Okay. Appreciate that. And then just last one. Mark, I'm sorry, if I missed it, but did you provide what the organic growth for the quarter was?

We did.

Yes, I did. Yes. In volume it was 5.8%.

[Operator Instructions] And I'm showing no further questions at this time. I'd like to turn the conference back to management for any closing remarks.

Well, I thought we start -- okay, very good. Well, again, thank you very much for listening in the call. We try to provide more data for you, both in terms of scripts as well as submission that we have put on our site. But please don't hesitate to call us if you have any further questions. Thank you. Good night.