Core Natural Resources Inc (CNR) 2002 Q4 法說會逐字稿

Please stand by, we're about to begin. Good day, everyone and welcome to this NCI Building Systems, Incorporated, conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Burton Rice. Please go ahead, sir.

Thank you, Lisa. Good morning, as well. And welcome to this NCI conference call to review the company's results for the fourth quarter and full year of fiscal 2002.

The results were released yesterday afternoon in a press release that has been covered by the financial media. Let me also note a release has been issued advising of the accessibility of this conference call on a listen-only basis over the Internet.

As we start, let me express that some statements made in this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations, or beliefs about future events or results, or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission for a discussion of those factors that could affect NCI's operations and the forward-looking statements made in this call.

The information being provided today is of this date only. And NCI expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations.

I'll now turn the call over to A,R, Ginn, Chairman. Please go ahead, A,R,.

Thank you, Burton. Good morning, everybody. Johnie Schulte, Bob Medlock and Ken Maddox are with me to comment on our results for the fourth quarter and the full year results for fiscal 2002.

Needless to say, we believe that the GAAP net earnings of $1.72 per share for 2002 speak very positively about NCI and the progress that we have made and also the accomplishment our people have achieved in perhaps the most difficult environment that I can remember.

It's especially interesting to start my comments on fiscal 2002 by looking at the fourth quarter. You'll note that we reported lower revenues, a 6 percent decline, in fact, but we still showed a significant increase in earnings. We have emphasized before in these calls that we're going to offer customers value and service, but we're not going to do it at prices that jeopardize our ability to serve the customers down the road.

We compete hard but there was some business in the fourth quarter that just did not offer the margins that can support the return on capital that we need to continue to introduce new products, improve information technology capabilities, and, you know, grow with our customers.

We know the importance of growing the business at the top line but the bottom line has to be there, as well. Considering the current shape of the economic conditions we're operating in, we believe that the year-to-year gain in earnings for NCI in the fourth quarter should be the comparison that's important to you and to the investors.

Our revenues for the full year were flat. But in a year in which the industry as a whole was off at least 10 percent, and we held the top line while still reporting a respectable gain in earnings.

We've gone through some short-term cyclical dips before, but this slump in demand in the metal construction industry has lasted over a year and we're not out of the woods yet. A year ago the whole country was reeling after the September 11 attack and new projects of all sizes were put on hold. A year later, the economic picture remains uncertain. And our customers, along with their customers, are still somewhat hesitant to proceed with new construction. Sure, there are still new buildings going up and we're benefiting from the repair and retrofit sector of our business, but we are not yet at a point where we can see the start of a sustained uptrend.

Everyone on this call knows that this softness is going to end. The big question is when? And our estimate, quite frankly, is no better than yours. We do hear encouraging comments from customers who indicate that some projects that have been deferred are going to start in the spring.

But let's leave this discussion for now and focus instead on the factors that NCI and the factors we can control. I thought a good way of doing this this morning was to look back at the year-end call a year ago and review our forward-looking comments and the results we achieved in 2002. There are five measures by which to grade our performance.

Number one, we said that we were going to provide clear guidance for earnings for at least the next quarter and, where possible, on a longer-term basis. The record shows that we hit or surpassed our forecast for earnings in each quarter. Our earnings per share of 62 cents in the fourth quarter, for example, was 4 cents ahead of the public guidance we offered in the third quarter release. At a time when corporations are being painted with the same brush stroke in terms of broken credibility, NCI certainly is an example of a company that has tried to give a reliable earnings forecast for at least the next quarter.

Number two, we said we were realigning our resources to gain operating efficiency and improved customer service. We emphasized that this was not a retrenchment from any market but, rather, an opportunity while demand was slow to shift some equipment to other facilities and rationalize our operating scope by closing certain facilities. If you look at a market like South Carolina, for example, where we closed a plant, our sales for fiscal 2002 were actually up from the prior year in both buildings and components. In terms of operating efficiency, the facility changes we implemented led to improvements notably in our ability to respond to customer needs and deliver products even faster than before.

Number three, we said we're going to use NCI's strong balance sheet to take advantage of expansion opportunities. The new plant in Big Rapids, Michigan, that was opened in August 2002 is doing very well. We were already selling into this market, but we knew that having a local facility would give us the potential to really build market share.

Trade publications of late have been full of stories of cutbacks, layoffs and plant closings. Big Rapids went squarely against that grain, underscoring NCI's commitment to the metal construction market and the staying power that we have.

Now, I don't want to overemphasize this one new location, but it really served as a positive point in our sales efforts to expand our customer base in areas even well away from Michigan. As I've said before, the strong healthy contractors have gotten that way by building solid, long-term relationships. Those are what we strive for. And I believe that the new class of customers that we have recruited in 2002 for NCI will serve us well in years to come.

Number of four, we said we were going to continue enhancing our balance sheet by using cash flow to reduce borrowings further. Borrowings at the close of fiscal 2002 were 298 million, down from 368 million at the end of fiscal 2001. That's the lowest level of debt for NCI in more than four years, leaving us with debt to total capital of 49 percent.

As Bob will detail in his remarks, we worked hard at managing our balance sheet during fiscal 2002, knowing that this slow period that we're in, or the recession if you want to call it such, posed real risk. He'll probably repeat this, but over the past 4 years, we have repaid our debt by a total of $260 million.

Number five, we said that fiscal 2002 should show a good solid improvement over fiscal 2001. Even after adjusting for the adoption of SFAS 142 relating to the amortization of goodwill, we did reach that goal. I'll let you put your own spin on good and solid, but I will say that showing any gain in 2002 in the metal construction industry has to qualify for those adjectives.

You know, we recognize that we're not perfect. We had expected our long bay system to show further gains in its third full year but there were just too many big boxes, you know, big metal buildings, standing empty to warrant building any new ones, regardless of the advantages our system offers.

We also, frankly, expected that the industry would start to show some recovery in our second fiscal half, and that simply did not happen. All in all, I'm very proud that hitting 5 major marks -- namely, making our numbers, getting the full benefit from our plant rationalizations, expanding where practical, improving our balance sheet, and showing overall net improvement in earnings.

That's an obvious lead into fiscal 2003. We do believe that the year will build on the improvement shown last year. I don't believe that we have the platform established yet to offer a full year forecast, but I expect that we will beat the earnings of 17 cents per diluted share reported for the first quarter of last year. The first and second quarters are difficult periods, you know, for us to forecast, especially since those are not strong periods for construction. Our target now would be earnings of at least 20 percent higher than last year for the first quarter.

In summation, I like our prospects, not just for the short term but also for the longer-term growth of the metal construction industry. Given the sustained recovery in nonresidential construction and our current cost structure, I am confident we can hit record earnings. And remember, we hit 2.39 per diluted share only 3 years ago. We have the people, the tangible resources, to take full advantage of a recovery and to capitalize on the longer-term growth and demand for the metal construction industry.

I'll now turn the call over to Bob Medlock.

Thank you, A.R..

Sales for the fourth quarter of this year were down 6 percent compared to the fourth quarter of fiscal year 2001. This decline reflected the general softness in nonresidential construction for the period particularly in the commercial and industrial segment and particularly for larger type projects. During the same period, we believe industry sales were down around 10 percent year-over-year.

Gross margin percents increased to 23.8 percent from 21.2 percent a year earlier, an increase of approximately 12 percent. Improvement in plant efficiencies and better plant utilization resulted in the closing of five facilities earlier in the year, accounted for the majority of this change. Compared to our third quarter this year, gross margin percentages were unchanged.

Operating expenses for the period increased by 10 percent, reflecting the increase in employee benefit costs for Workmen's Comp., healthcare, and general property taxes, and also reflects the ongoing investment in our sales effort to increase our market penetration and develop new markets such as the national accounts program. As a percent of sales operating expenses were 14.5 percent in the current quarter, compared to 13.6 percent the prior year. Improvement in margins allowed to us achieve a 9.3 percent of sales in operating income compared to 6.6 percent a year earlier.

Interest expense for the quarter was down $2 million year over year reflecting the lower level of outstanding debt and lower interest rates. Earnings per share of 62 cents for the quarter compared to 29 cents reported a year earlier.

Excluding the impact of goodwill amortization and the restructuring charge in the year earlier, earnings per share would have been up approximately 15 percent compared to the prior year. Gross margin improvement accounted for the majority of this change.

Earnings per share were 4 cents a share higher than the company's previously-announced guidance for the quarter. (Indiscernible) loss of $808,000 or 4 cents a share represents the after-tax effect of the write-off of debt issue costs associated with the bank refinancing which was completed in September of this year. On a separate basis, engineered building systems sales for the quarter were 87 million compared to 85 million in prior year.

Operating income of 8.1 million was down from 10.8 million reported in the prior year's fourth quarter. Industry price competition, cost increases due to more complex work and orders accounted for the majority of this decline.

Backlog of the engineered building systems segment was $159 million at year end compared to $149 million a year ago. Metal component segment for the quarter sales totaled $166 million compared to $185 million in the prior year. A decline in sales resulted from a weakness in the commercial and industrial segment and the company's concentration on margin improvement which resulted in sales activity for marginally profitable business to decline.

Intersegment sales, which are obviously eliminated in consolidation, increased by $7 million in the quarter. Operating income for this segment was 22.5 million compared to 15.9 million in the prior year. Excluding the impact of goodwill amortization last year of approximately $3 million, this represents a 22 percent improvement in operating income. Margin improvement resulting from better pricing, better plant utilization, and improved operating efficiencies accounted for this positive change.

For the year, sales of $953 million compared to 955 a year ago in an industry that was down 10 percent allowing the company to increase its market penetration and outperform the industry.

Gross margins for the year were 22.3 percent, flat with prior year. Heightened price competition was effectively offset by improved operating efficiencies.

Operating expenses for the year increased by 5 million, primarily in the area of employee benefit costs, plus, again, the investment made in sales costs increases to improve our market penetration and develop new products and new markets. As a percent of sales, operating expenses were 14.8 percent compared to 15.2 percent a year earlier, and operating income margins were 7.6 percent compared to 6.8 percent a year earlier.

Interest expense for the year declined by $12 million, or 35 percent, based on the lower level of outstanding debt and lower interest rates.

Earnings per share of $1.72 before the extraordinary loss compared to 91 cents a share in fiscal year 2001, and excluding the restructuring charge and the impact of goodwill amortization, earning per share still showed a 7 percent year-over-year increase.

In the engineered building systems segment, sales for the year were 313 million compared to 314 million a year earlier. Operating income of 27.7 million compared to 42.4 million a year earlier. Again, the decline resulting from lower selling prices from the competition and a higher cost due to an increase in the complexity of orders processed. This segment accounted for a 33 percent of consolidated sales in the current year.

Metal components segment had sales of 640 million compared to 641 million a year earlier. Operating income of 70.4 million compared to 50.1 million in the prior year. Excluding the impact of adopting FAS 142, this segment still showed about a $10 million increase in operating income.

Turning to our balance sheet, strong balance sheet management resulted in a $17 million, or 10 percent decline in investment in inventory and receivables, which resulted in improving our DSO and our inventory turns in an economically weak period.

With a $40 million reduction in mandatory debt repayment as a result of our refinancing, our net working capital at the end of fiscal year 2002 was $80 million compared to $50 million in the year prior. A new debt financing with five- and six-year maturities provides the company more flexibility for growth and provides a debt-to-capital base sufficient to handle our financing needs over the intermittent term.

For the year, the company repaid 70 million in debt, bringing the total since our 1998 acquisition of MBCI, to over $260 million. And as A.R. mentioned, our debt-to-cap ratio at the end of this year was 49 percent compared to 73 percent immediately after our 1998 acquisition.

Total capital expenditures for the year totaled 9.2 million. As you are aware, we sold some facilities and equipment during the year, which brought in approximately a little over $5 million. So the company's net investment in capital for the year was slightly less than $4 million.

The company believes that its capital structure, increased market penetration, the deployment of our assets, and our balance sheet management, places us in a strong position to take advantage of the recovery when it occurs.

Although we believe sales will be flat the first quarter of fiscal year 2003, as compared to the first quarter last year, the improvement in margins over last year should result in earnings improvement of at least 20 percent in the first quarter. The balance of the year will depend on whatever improvement comes in nonresidential construction activities.

Based on our current expectations, capital spending for fiscal year 2003 is estimated to be around $11 million. For our debt lenders who may be listening, our EBITDA number for the (indiscernible) 12-month period was $100 million.

Lisa, that concludes my comments. We'll turn it back over to you and open it up for questions.

Thank you, sir.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone telephone. Once again, that's Star 1 to ask a question. If you are on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We'll go first to Mike Kender with Salomon Smith Barney.

Yes. Just a quick question on your revolver. I was wondering what the outstanding balance was at the end of the year and what your unused availability was.

I'll try to add these numbers up, Mike. It's a question I didn't really anticipate. Let's see. 250... , our borrowing under our revolver would have been around 47 million. So that would give us around $75 million in unused capacity.

Great. Thank you.

We'll go next to David Yaschoc (phonetic) with Sanders, Morris, Harris.

Congratulations, gentlemen, on a great quarter. You guys have certainly done well in keeping the costs in line in a tough environment. You're to be commended for that.

Question I'd like to pose for you, because we're all kind of looking for the recovery here, and, you know, what this thing's going to look like as we get to this '04 launch in nonresidential construction spending. You had indicated earlier that there was some positives coming out of the potential spring of some projects going ahead. Other than for economics and interest rates, could you maybe give us a little more color as to what maybe some of the underlining fundamentals could make some of these projects look more valuable to the potential owners?

Well, I think that, you know, the people still, you know, are -- are -- with the war, you know, maybe hanging over our heads, things like this, people just haven't got a good feeling of turning projects loose. And I really -- I don't know whether there is anything that we could put our finger on that would kick it gear and things will take off. I think that, we hear some good things that people are talking about bringing some of the projects on that have been on hold. But, you know, there again, there is a lot of factors there.

So what you're maybe suggesting to us, then, is that the pipeline at this point in time for potential projects is getting bigger, but it's only issues like the potential for war that could be a disruption that is holding these things back?

Oh, I --

Is that fair to say?

I think there's a lot to do with that exactly right.

So everything you're talking to as we look into the spring is something to be done in the way of some of these macro events, the pipeline could be really let loose?

I think that's the case.

And probably some of that just because of interest rates and where we are in the economy for needing some extra capacity on the recovery?

I think the other thing that you have to consider is that last year, a lot of people with a December 31 year end were putting their capital budget together for 2002 when 9/11 happened. And I think they were very conservative with their capital budget. And I think they now have put their capital budgets together for 2003 and, you know, we're certainly hopeful that some of that work that was postponed in 2002 will come forth in 2003.

And like Johnie said, the possibility of war could have some effect on them turning it loose early. But we're certainly hopeful that it will get turned loose, you know, by midyear.

So it's probably impossible, then that 2003's capital budgets at this point in time in the year could also reflect some of the same conservatism that was in 2002 and if anything, if some of these events could go away, that capital spending could be better as we get through the rest of the year.

I think you're right.

Okay. And then, you know, on the margin side of it, you guys have, you know, the gross margins have been, you know, pretty attractive here, given what's happened in the -- with pricing and all that. How much has the Michigan facility helped you guys, as well as product mix, maybe helped offset some of the pricing pressures in the space?

Oh, Michigan -- you know, if you look at Michigan this year compared to 600 and something million for components, I mean, it was not very big. It had very little effect.

Okay. And so it's been more product mix because of the components that's helped offset some of the pricing?

Actually, components -- you know, I said in my opening remarks that I was really proud of the accomplishments that our people have achieved, and the component group really put forth an effort to bring their margins up and they accomplished that goal.

So it's really more productivity improvements than anything else that's helping -- ?

It's more getting the price up and productivity improvement.

And how much better has price been, then?

We've actually just walked away from some business that was at lower prices than we wanted to sell for in both buildings and components. We walked away from -- from some pretty sizable buildings, you know, on the building side, because the price was just down to the point where that we didn't -- there is no reason to run this equipment if we can't make money on it.

All right. Well, I think you guys have certainly done a good job here this year under some tough operating conditions.

Thank you.

To be commended. Thanks.

Thank you.

We'll go next to John Defendal with CB&T Capital Markets.

Yeah, let me offer my congratulations in this tough year, as well, guys. Can you -- Johnie and A.R., can you give us a little sort of competition update? You mentioned earlier there's some plant closings out there. Give us a sense on how much capacity may be coming off the market that hopefully will help you when things turn up? Either pricing or whatever? Can you give us a little sense of what's going on with you know, American Building and some of the stuff that's been absorbed by the Canadian companies and what's happening out there?

John, one thing I think that -- we don't know the length of the shutdown or the closing of any plants or -- you know, we just hear that they are shut down for -- I don't know of any permanent shutdowns of any plants that we know about. I think that most of them are temporary and waiting for -- for the economy to kind of turn around and come back.

We don't know if there is any way to put a capacity on that, but I think that when a company the size of Butler or one of the other companies has facilities shut down, they take that capacity out of one of their other plants. So it's not like you're doing away with the capacity at that plant and it's eligible for all others to be out there fighting for it, because they are using their other plants, they're utilizing them a whole lot better.

So I don't know whether we can even put a number on what the number would be. I don't think that -- the larger companies have other facilities that they take up the slack.

Thanks. One other -- you mentioned the national account program. Can you give us a little update on that? And also, you know, the -- just, you know, the new accounts and what that might have contributed to holding your sales flat when the rest of the industry was so weak this year?

Our quotation activity is really high in the national accounts field. I think that over the last, oh, five or six, seven months, we have put about 5 million that we have sold in the national accounts arena. And we feel like we have made a lot of progress there. I think it's going to continue to get better and better. A lot -- there are a lot of good things happening there. It's nothing you can just hang your hat on that you can just put a revenue number on at this point. But things look good there for us.

And in terms of just new accounts you didn't have a year ago, what that contributed to last year in terms of sales?

Yeah. Our sales from new accounts are up probably -- Bob, what's that number?

I would imagine that probably accounted in both sides of the house for somewhere between five and seven percent of our total sales.

Maybe a little higher than that, maybe a little bit higher than that, don't have that number exactly in front of us.

John, one thing that happened is it -- it's real easy to put a pencil to business that you have lost because people bought a roll former or something like that. On the component side of the house, they actually tallied up 24 million in lost business but, you know, their sales actually increased for the year, so on the-- just on the component side of the house, they had to have picked up 24 million in new business just to stay even.

And the lost business being just people internally producing it or what?

They went-- Some people that started internally producing. Now whether they will continue to internally produce it -- one company, the founder died and the company just went away. Okay?

Okay.

But that's lost business. I mean, we didn't lose it to a competitor. And then another company that was a big account started roll forming for themselves. You know, but, you know, we have made that business back up. And in a down market.

One last question. Can you give us an update on your dealer account and how you see that sort of proceeding next year?

John, our dealer account year-over-year is up around 13 percent in the building side, and it's a little harder to track the component side, but I know that they have added a number of new customers to their customer base in the past 12 months.

Can you give us a sort of absolute number there to think about?

The building side I think our current dealer count's around 1600.

Great. And would you --?

So that would be --13 percent would be around 200 new dealers.

Do you expect that number to continue to climb this year?

Well, we hope our people are -- we hope our salespeople are as aggressive as they were last year in recruiting new customers.

Okay. Thanks, guys.

Hey, John?

Yes.

One of the things that we have really accomplished this year is we have upgraded the sales staff in every division. You know, when other people got slow, there was some good people that come on the market. There got three people in national accounts now and they are just excellent guys. You know, like --

I'm here.

Mesco upgraded, almost turned over their whole sales department, but they really did a great job of upgrading the representation that they had in the field. So I mean, I think that's a real plus for us.

That's excellent. Thanks, guys. Once again, congratulations.

Thank you.

We'll go next to John Walthousen with Paradigm Capital Management.

Yes, good morning. Congratulations. Good results. I was wondering if you could give us some thoughts about what you see happening in steel prices for the new year and where your position as far as, you know, how much of that is contracted in and how much you can buy on the spot?

Well, there has been some slight price pressure in some of the heavier gauges due to the new capacity -- or not the new capacity but the capacity that's been brought back on stream. 201, the tariffs under 201, have really prevented much pressure at all from the lighter gauge coated material which is the predominant amount that we buy or utilize. We are in our purchasing estimations, we are looking at utilizing about the same tonnage in the upcoming year as we did this year. However, we feel like there's enough capacity where we could jump back in with larger tonnage if the market demands.

Okay. Are you saying that you are not significantly contracted for steel?

We don't contract like the auto companies do. We really set our pricing on a quarterly basis. And we order on a quarterly basis. And that's how we do it versus the automakers.

Okay. Good. Thanks.

We'll go next to Robert Manowitz with UBS Warburg.

Hi, good morning. I understand the outlook of the industry remains, you know, ambiguous, to say the least. But your cash flow has stabilized and it's stabilized for all the reasons you discussed. And I'm wondering whether that stability changes your approach to the utilization of your free cash flow next year. Will you continue to pursue debt repayment, or will you readdress opportunities on your equity?

Well, I think, Robert, I think our -- obviously, our first priority, if we don't have a better use for the money, is to reduce our indebtedness because that does have a positive impact on earnings per share. I think with our current capital structure that we're in a position to look for other growth opportunities. Unfortunately, you know, we don't have any that are imminent. We continue to look for opportunities to increase our sales base and we'll continue to do so in fiscal year 2003.

And those opportunities, assuming they would entail acquisitions, what kind of multiples do you think are out there in the market?

Well, I think right now the multiple's probably too high. We try to buy things that we can manage during downturns like we're currently experiencing. We try to buy things in the 3 to 5 times cash flow range. Despite the fact that the industry has been down, there does not appear to be a large number of companies that are in financial trouble to the point that they are looking, you know, for someone to acquire.

Okay, great. Thank you.

Next we'll go to Jerry Bruney with J.B. Bruney & Company.

Earlier you mentioned that you walked away from some business that didn't seem to be profitable to you. And with that observation and my understanding and expectation that NCI is a relatively efficient producer, that would imply that the people who are taking the business must be taking it at razor-thin margins. Is my reasoning wrong?

We think that they are taking it just for cash flow to keep their doors open.

Okay. So that would in turn imply distress on their part, but in answer to the, just, prior question, I think you had indicated that you didn't see that much distress, or did I not understand that correctly?

What we're seeing now is, we have talked to a couple of people, you know, there's a couple of people that we'd be interested in acquiring that would fit well within NCI. And they are not companies that are necessarily in the tank, but you know, they were experiencing some problems. But they just think that the markets the -- timing's wrong.

And you know, they think that the price that they would get for their company at this point would be a lot lower than they would -- could get in good times. And you know, so what's got to happen is, it's -- either it's got to get worse for them or else it's got to get good times, you know, where they can realize the prices they're anticipating, you know? We have not had any luck with anybody trying to do an acquisition right now.

Okay. Second question, you had mentioned earlier that your debt-to-total capital is 49 percent at the end of the fiscal year. Do you have a target for that?

Jerry, I don't think we really have a target. I mean, we would feel comfortable, you know, since we've gotten down below 50 percent, we would be comfortable, I think, in taking on new debt if we could find the right opportunity to grow the business. And I don't think we've ever, you know, backed away from doing a deal just from the standpoint of trying to maintain a certain debt-to-capital ratio.

But you know, we feel comfortable where we are. I think we would feel more comfortable in the 35, 40 percent range. It's obvious at some point in time interest rates are going to go back up and then we have obviously benefited over the last 12 to 15 months from the fact that interest rates are probably at their lowest level in many, many years.

Okay. Last question. To the extent that tariffs and all affect steel prices, is it correct to say that higher steel prices help NCI competitively or hurt you less or whatever?

We think it helps components and probably hurt buildings.

Competitively speaking? You know, to the others.

It probably -- not competitively. But from a margin standpoint, it probably helps components and hurts buildings. Competitively, probably about equal. You know, everybody got about the same price increase. And so I don't know if it helps us competitively or not.

So you source your steel in similar ways to your competitors buying from the same people?

Yes.

Okay.

Yes.

Thank you.

We'll go next to Dana Walker with Cal Mar Investments.

Good morning, all.

Good morning.

Could you talk a little bit about how receptive the national accounts that you are targeting appear to be in working with a primary vendor?

Well, we continue to bring on more accounts in the national accounts region. We really have just started our national accounts program in the last 18 months, so we are kind of in the infant stages of it. So like I said earlier, we have a lot of quotations out to national accounts, but to put a number on it right now, I wouldn't be able to do that.

Could you talk about maybe -- would you be willing to talk about the terms of engagement on somebody where the relationship seems to be progressing versus how you might thought it would play out?

At this point, I wouldn't want to. I think that, you know, we're in the infant stages, and I don't think that we need to expose that at this time.

Dana, I think that we can say that we are talking and trying to work with some fairly large companies who, if we were to give you the name, you would recognize it -- people probably will be expanding their business in 2003 and 2004.

When you work with a national account, though, would the way you would approach this be that you would hope to get a disproportionate share of their business, or just have an understanding as to how you would price and they would have greater familiarity with you from region to region so that would you have a greater shot of getting local business?

You build a relationship. And then -- and you develop the product that they want in their buildings, and that's -- once the relationship is developed and you have the product to service their needs, you kind of, you're eligible for all their projects throughout the United States.

Let me give you one example. We've got one national account, and they've got four cookie cutter models that they build. And they build all over the country in a town like Houston, for instance, they may have 20 stores. And what they will do is they will call you up and they will say, you've got a price with them until there is a price increase, and they will call up and they will say I want four number ones and I want six number twos and I want three number threes, and this is where I want them delivered. And it's that simple.

After you get that relationship and after you ship them one and after you get this worked out -- now those are rather small buildings. Okay? They are not big buildings. Then you have another national account where you're building a million square feet, and I mean, you're their primary supplier. Yes, they have a secondary supplier. But if there's 12 of them built in a year, we try to get eight of them. And, you know, that's our record with that company right there.

Is it your supposition that you'll have to compromise on your expected gross margin in building such relationships?

We haven't.

Okay.

We have not had to. What they're really after -- these big accounts, is they want a quality product, they want it delivered when you tell them you will deliver. And with this one large account where I'm talking about, we're doing 8 million-square-foot projects in a year's time, you stub your toe one time, you're out. I mean, what they're after is service and quality more than price.

Dana, one place that we obviously save money when you are talking about, you know, having a building that's kind of a prototype that doesn't change a great deal from one location to the other, that allows us to save a lot of cost in the engineering and drafting errors because we're not having to redesign that building time after time.

The other thing that you have to consider is that we've got 35 locations. That's many, many more than anybody else that competes with us. Therefore, we can put a job on a jobsite from a much closer location than anybody else. You take one of these million-square-foot warehouses, when you go to run a roof for it, I mean, we run that out of our plants, you know? So we don't overload one plant and (indiscernible) [ poor audio ] We have the ability to service customers better than anybody else in the industry. I think that's why everybody else is (indiscernible) [poor audio]

That's very helpful. Perhaps, gentlemen, you would offer some thoughts on some of your product lines and/or end markets, including paint coil, storage, agriculture, and roofing.

I'm not sure I understand your question, Dana.

Well, just... relative tone of, let's say the two end markets, storage and agriculture, and then perhaps based on my sense, roofing, replacement roofing and your paint coil operations tend to be something that I would also be interested in. -- how they're doing

Relative to how they're operating now or what we see for the short term?

How did they do in the year? How did they do in the quarter? And what sort of visibility do you have?

Well, you know, relative to what probably didn't perform well in the quarter would be primarily in the area of the industrial and commercial segments. The mini-storage business was somewhat flat quarter to quarter. I think our agriculture rural business was fairly strong during the quarter.

The coil paint lines, you know, 60 -- 60 percent of the production of coil paint lines we have used internally. So, the operations of the paint coil lines are fairly closely aligned to how well the rest of the company does because, you know, we pretty much drive the amount of production that goes through those facilities.

And roofing?

Retrofit has been strong. Let me -- let me tell you what I hear from vendors that come in to call on us. And that is that throughout the country, the components side of the business has fared better in 2002 than the building side of the business.

Now, you'll have to remember that when the component side of the business for NCI service an OEM account, and that's probably 25 percent or 20 percent of the components -- [ audio cutting out ] also, and what Bob said, commercial industrial part of the business, a large (indiscernible) is what has been down this year. But new roof housing has been strong. [ partial transcript missing due to poor audio ]

One final thing on your coil paint area. That had been cited as a positive swing for profitability year-to-date. Did that continue to be the case in Q4?

I think our margins fell in the full paint line. Again, a lot of the margin results in the coil paint line is going to be driven by the amount of production we have in those facilities. And obviously, we have produced more and shipped more in the third quarter than we do in the first half of the year. So... you would expect margin improvement in the coil paint lines in the third and fourth quarter just based on increased volume.

Final question on payables. I presume it's a timing issue, but your payables were down 23 some odd million dollars from prior year.

Part of that is timing, Dana, and part of it was this time last year, we had a major supplier who had gone into bankruptcy. And we obviously held off on making payments until we could establish what was prepetition and what was postpetition.

But you're absolutely right. A lot of that is just a matter of timing and when checks are written. But I would say our payables last year were probably a little higher than they normally are.

So I suppose one could say that you paid down 70 million in debt and 60 million net of cash change, despite the fact that you allowed your payables to be 23 some odd million lower year-over-year, which is even more impressive.

That's absolutely true.

Okay. Thank you, and good work.

Lisa, how many more questions do we have in queue?

We have two.

Let's take those and then we'll end the call and management can return calls later in the day.

We'll go next to David Verlander with (indiscernible).

Hi. I just wanted to follow up on something you said in your press release which is, you, you know, with your low cost structure, you should be able to get back to the earnings number of 2.40 or 2.39 that you had achieved in '99.

I guess My question is, you know, if you look at your last 12 months of revenue, that you're above where you were in '99 and you know, using your wording, in the press release, which was if you have a sustained recovery in nonresidential construction, you know, I would think that would bring your revenue up above a billion, you know, call it 1.1 billion. And using the margins back where you, you know, the 11, 11.5 percent operating margins, with the lower debt that you have now, I mean, I mean, I'm getting EPS numbers closer to, you know, $3. Am I missing something there?

I'm not sure that you're missing anything. You know, obviously, it's going to take a sustained recovery, one, to get our volume up and our -- a lot of our business is volume-driven. Secondly, the question is, how quickly during that recovery period we're going to see other competitors strengthen their pricing model so that we can get back to the margins that we achieved three years ago.

So it's a combination of volume, margin improvement and, yeah, you could make the case based on, you know, a billion one, a billion two, that you could achieve those kind of numbers.

From one standpoint, we do have a higher cost structure, you know, the costs from labor, the costs from services continues to go up. So, you know, we're -- you know, we have been asked and I guess it's the reason we put it in the press release, we've been asked quite frequently that if we had a recovery, would we be in a position to achieve the margins that we achieved three years ago? And the answer to that is, we would certainly expect to.

But -- but it sounds like you are going to have to get your revenue up well above where it is now to get back to the operating margins where you were before. Is that what you're saying?

Unless we saw, you know, a lot of strengthening in pricing.

Right.

As business begins to improve, you know, a lot of our business is price-driven. It's bid business.

Let me ask you this. The operating margin that I see now with a comparable revenue base to where you were, you know, back in '99, do you have lower margins now because, you know, you've bulked up the infrastructure, or is it just a function of, you know, pricing's a lot lower?

I think it's primarily, pricing. But I think it's a combination of the two.

Right.

The infrastructure costs has gone up.

But it's not in people. It's in soft costs like insurance and utilities and, you know, I mean, insurance costs is up substantially over three years ago.

But it sounds like I -- you know, I have been listening over the past couple of years, you have been more specifically over the last few quarters, it sounds like you have been doing everything you can to, you know, promote efficiency. You've closed, you know, a couple of locations. So if I -- I would think that you know, going into recovery, the business would be more efficient than you were before.

From a people standpoint. But that still -- we have had, like, just last year alone, the health costs went up 12 percent.

Right.

And I mean, that's a big number for this company and 4,000 folks. You know? And I mean, that's a number that we can't do anything about. Property taxes are going up. And utilities have went up. And workmen's comp has went up even though our safety record is great. You know, those are costs that, you know, we really have no control over.

Right.

I think that the one thing is, that once the economy gets in gear and it starts to take off, I don't think you'll see the top line, you know, go up real fast. I think that with people that are now in need of more than their -- they've got more production than they're able to sell work for, I think you are going to see them grow up at a gradual pace.

But hopefully the gross margin over some time is going to go up. I think that's the key to the whole issue right now is that if we get the gross margin back up, that's the name of the game right there. Get the gross margin up, we can make the money. I think it will happen, but I don't think it will happen, you know, over one month, two months or one quarter or two quarters.

Okay. And one quick follow-up. You -- in past conference calls, you've, you know, compared your top line versus the industry. Maybe you did that and I missed it. You know, your top line, year-over-year, it's down 6 percent. Do you have a sense for what the industry's done, you know, this quarter year over year?

Our top line year-over-year was actually pretty much flat, 953 versus 955. In the quarter, we were down 6 percent. And we believe that the industry, both in the quarter and the year, was down at least 10 percent in both those periods.

Right. Okay. Thanks, guys.

Thank you.

Our final question comes from Greg Mucosco with Lord Abbott.

Hello. Nice quarter.

Thank you.

Just to follow up on the last question about the margin, what share of that 11, 11.5 was goodwill amortization, in basis points, roughly?

You're talking about in the gross margin improvement?

Well, we talked about peak operating margins of 11 to 11.5. Some of that back then, you know, there was goodwill amortization. And so... in other words, now if we get back to that, we've, you know, the goodwill is gone now.

The goodwill was around $10 million, so on $1 billion I guess you would say that is 1 percent.

Okay. All right. Very good. And if we -- I heard you say with regard to the steel, you talked about sort of planning for flat tonnage in '03. And I realize that's just a plan and you're obviously hopeful you can do better in the second half, as you said. If we look out, and let's just say everything just sits there and nothing changes much, what kind of opportunity do we still have in the gross margin and operating margin line?

I mean, if I take your -- the 23.8 and the 9.3 percent margins in the fourth quarter and compare them to the full year, obviously they are not, you know, it's not the same. But do we -- my sense is we still have some opportunity going forward even on flat revenue to improve those margins?

If the revenue stays flat, there will be more pressure on margins. That's my opinion. The reason being is that there's people out there that are taking work at awfully low margins now. To keep their doors open, they are operating on cash flow. If this -- if we stay in the economic slump that we're in today, I think there will be more pressure on margins and it will be even harder to attain our margins. You know, we pushed a lot of costs out of this company and there's not a lot more we can push out.

Okay. So... maybe focus on the SG&A line? I mean, I understand the gross margin line and, yes, if there is cost pressure you'll feel it in that line. But is -- you mentioned the increased sales, you know, spending there. Is there anything much in SG&A?

Not a great deal, Greg. A lot of the cost increases that you have had in SG&A relate to areas that we don't have a lot of control over. As A.R. mentioned, we have a great safety record, that the costs of healthcare as it impacts workmen's comp policy and claims continues to increase. Healthcare costs continues to increase.

General insurance has just been, you know, has been totally out of sight for the last 12 to 18 months. You know, a lot of these are services and risks that we have to go outside to protect the company. And we don't have a lot of control over those cost factors.

There is no doubt that we could have made more money this year if we had decided not to invest in some of these sales initiatives that we think are going to help our growth in the future. But that's not the way we've run this company and not the way we've built the success of this company. We have always tried to invest money and invest really means expense. Project costs that are going to provide a basis for us to have growth in the future. And you know, I think we will continue to do that.

What was long bay? You mentioned long bay as being weak because there's just excess demand out there. For the year, roughly, what are we talking about in terms of revenue?

About -- between 20 and 25 million.

And was it down in the quarter? -- year-over-year?

Yeah, it's down year to year --

Last year --

I don't know in the quarter.

Last year was about 35.

35, yeah. We're down 10, 12 million.

For the whole year?

For the year, yeah.

Okay. And that's obviously a fairly reasonable profit margin product, right?

It is.

Okay. You mentioned I think you said, did you say 4 million in cap ex?

I said net cap ex, you know, we sold three facilities and some excess equipment that brought in over --

Oh, I see. And what is your expectations for capital expenditures for next year?

We're starting out at around -- somewhere 11 or 12 million.

7 to 12 million?

No, 11 to 12 million.

11 to 12. Okay. And that -- and is that with -- is that with any expectation of growth in the second half? I mean, can you -- even if you have a, say, we have a recovery like we're hoping, would that cap ex go up?

Cap ex would go up. It would go up if -- if we have a recovery, you know, we've ran this company for the last 2 years and then we're planning for 2003 with very low capital. And if the economy comes back and it picks up, you know, the capital will go up, you know, probably three or four million dollars. We're looking at one project now that would be outside -- a special outside the capital that's already approved, that is $5 or $6 million. And we are just not ready to talk about it yet.

Okay. And then finally, do you still have a couple of assets to sell on the books at this point?

We still have two facilities to sell. One I think we will get done probably in very short period of time. The other is in a pretty depressed economic area, and it's going to take longer to dispose of.

Okay.

They are relatively small. The three facilities we did sell were the larger facilities that we had.

Okay. Thanks very much.

Thank you.

Mr. Ginn, I would like to turn the conference back over to you for any additional or closing remarks.

All right, thank you. As always, we want to thank you for joining us this morning. We believe that fiscal 2003 is going to be a good year for NCI. And we will be working hard to present our story to investors seeking a means for participating in the growth of the metal construction industry.

In closing, I'd like to wish each and every one of you, and all the people that support NCI, a happy and safe holiday season. Thank you, guys. Bye.

This does conclude today's NCI conference call. We thank you for your participation. You may disconnect your line at this time.