Core Natural Resources Inc (CNR) 2003 Q2 法說會逐字稿

Please stand by we are 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 would like to turn the call over to Mr. Scott Briton with Corporate Communications. Please go ahead sir.

Good morning and welcome to this NCI conference call to review the company's results for the second quarter of fiscal 2002. The telephonic replay of today's call maybe accessed through June 04, by dialing 719-457-0820 and entering access code 487112. The replay will also be available at NCI's website. The company's results were released yesterday in a press release that has been covered by the financial media. A release has also been issued advising of the accessibility of this conference call on a listen only basis over the internet. Some statements made in this conference call may be forward-looking statements as defined in 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. Natural performance of the company may differ from the debt projected in such statements. Investors should refer the statements filed by the company with the Securities And Exchange Commission for discussion of those factors that could effect NCI's operations and the forward-looking statements made in this call. To the extent that any non-GAAP financial measures is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the company's website at ncilp.com by following the what's new link to press releases to see today's news release. The information being provided today is of this date only and NCI expressly disclaims any obligations released publicly, any updates or revisions to these forward-looking statements to reflect any changes and expectations. I will now turn the call over to A.R. Ginn, Chairman of NCI.

Thank you, Scott and good morning everyone with me today to help discuss NCI's results for the second quarter of fiscal 2003; our guides will be Ken Maddox and Bob Medlock. As usual I've got some very brief comments about the second quarter and then Bob will discuss the specific financial results and at the end of his comments we will open the call to any questions that you might have. All of you listening today are aware of the challenges in non-residential construction industry has faced due to the ongoing weakness in the national economy. Our segment of the industry has experienced declining shipment for the past two calendar years and we haven't seen any significant strengthening and demand thus far in calendar '03. In addition, during the second quarter of our fiscal year, which covers February-to-April unusually poor winter weather, damping the calendar cyclical benefits we normally expect from the repair and retrofit aspects of our metal components business. Against the context of this difficult environment, the good news is that NCI's operations were solidly profitable for the second quarter unlike many of our industry competitors, and we met our established earnings guidance. A number of factors contributed to our achieving this goal. Starting with our ongoing efforts to increase market share in a period when many in our industry had to cutback for operations to stand increased operating loses. In contrast, and despite the decline in sales for the second quarter, NCI improved its market share position and its prospects for future growth by adding 51 new system builders to bring the total count to a net 1614 up from the 1582 at the end of the first quarter. The component costumer account list is also up, however it is really difficult to quantify due to the large number one time sales in the component group. Our ability to gain market share on tough market is no accident. Because of the cyclical economic downturns are inevitable and beyond our control, our long term growth strategies had not only been designed to lessen the impact of these downturns, but also to position NCI to take advantage of the many opportunities that arise when difficult times cause others to take their eyes of the end zone. A key competitive strength in these times has been a corporate culture that values long term customer relationships made possible through high quality products, outstanding customer service, being a low cost producer, and constant innovation. This culture has been complimented by a conservatory financial philosophy that has given us the resources to pursue increased market share aggressively in a very difficult time. As a result, our corporate performance for the past 2.5 years has consistently been better than the overall industry. The incremental sales this performance has generated has contributed significantly to reducing the profit margin impact of the declining total sales in higher fixed cost business. The opposite of the current margin pressure typically occurs when the economic cycle begins to improve because of the inherit operating leverage in our business. Since we remain very confident that one, the economic cycle will improve in time, and two that the Metal Construction Industry will grow as a percentage of the overall non-residential construction industry. We have continued to invest significantly in the future through new capacity additions that is new brand manufacturing plant we announced during the second quarter at Dickson in Tennessee. These investment help us rationalize our operations to remain a low cost producer even as they strengthened our ability to respond quickly and efficiently to any increase demand or market opportunities. While we continue to believe in NCI's long term prospects for extending its historic records of profitable growth. The current environment remains too murky to offer much in the way of short term, intermediate term guidance. Certainly, we expect our financial results for the third quarter to be much improved from our results for the second quarter owing to the seasonal volume increases as we move into the late spring in summer building season. And while our components business has rebounded from its weather related lows in February and March, it is currently not on place with comparable components sales for the third quarter last year. In addition, while the backloads for our systems business is essentially flat with our backlog at the end of the first quarter. The Long [inaudible] associated with the higher complexity business; lead us to expect that it will not match last year results either. As a result, we are presenting guidance today for third quarter earnings for deluded share of 32-35 cents, which assumes that the current softness in the economy continues. We are currently not prepared to provide guidance for the full quarter or the full year fiscal '03; although we do expect that the seasonal nature of our business will continue in the fourth quarter. As we entered the second half of fiscal year, we believe that NCI remains well positioned and an industry capable of considerable growth in an improving economic environment. As the leading supplier to the American construction industry we offer products with tangible costs and durability advantages over traditional building materials. And as a result we clearly expect to achieve further market share gains in the nonresidential constructions. We have the financial strength to weather the current economic environment and act decisively as this difficult environment increases the potential for increased industry consolidation. Finally, because of our strong industry position and all the factors report this position, we believe that with the strengthening economy, we will produce additional growth in earnings and enhanced shareholder value. Thanks for your attention and now Bob Medlock will address our specific financial results for the second quarter.

Thank you A. R. Sales in the second quarter of $199m were down 7% from the year-ago reflecting the continuing weakness in non-residential construction particularly in the industrial segment of our business. Compared to the first quarter of this year, second quarter sales were down 4% primarily from the impact of component sales and poor weather during the quarter. Gross margin percent in the second quarter is 20.9% compared to 21.3% in the second quarter a year-ago and down slightly from 21.1% posted in the first quarter of this year. The decline in sales volume accounted for the majority of this change in margin performance. Operating expenses in the second quarter were up $1.5m over the prior period primarily in the area of insurance, taxes, and health care cost, a lower volume that represented as percent of sales 17.1% compared to 15.2% a year ago. This produced net income of 11 cents per share in the current quarter compared to 26 cents in the second quarter of last year. For the 6-month period, sales of $407m were down 8% from the prior year, again reflecting the continuing weakness in non-residential construction and continued price competition for existing business. Gross margins for the 6-month period were 21.0% compared to 20.6% in the prior 6-month period. Operating expenses for the 6-month period were down $400,000 from the prior year and represented as a percent of sales 16.3% compared to 15.1% in the prior year. Pirate policy controls during the quarter or during the 6-month period offset year-over-year increases in insured taxes and healthcare costs. This produced 6-month income of 31 cents per share compared to 43 cents per share in the prior year before the accumulative effect of the change in accounting principle in the prior year. On a segment basis, engineered building system sales for the 6 months were a $196m down to 3% in the prior year. Operating income of $8.7m was down 28% from the prior year. This decline resulted primarily from the combination of lower volume, price competition, and increases in operating cost for the items mentioned above. Incoming orders in the building -- engineered building segment from the 6-month period are down 8% compared to the prior year 6-month period and backlog at the end of the period was a $161m compared to $162m a year earlier. Metal component sales for the 6-month period of $269m were down 9% from the prior year. Majority of this decline occurred from the weaker demand in the second quarter related to weather. Operating income for this segment was $23.2m down 6% from the prior year. Majority of this decline results due to the lower volume of sales. Turning to the balance sheet, receivables compared to the year-end are down $13m or 14% reflecting a decline in sales volume and a continuing effort to control our DSO. Debt for the 6-month period was down $5m compared to prior year, we would expect further reductions in the second half of the year based on the improved earnings. Capital expenditures for the first 6 months were $7.5m compared to $4.2m in the prior year reflecting the activity on the new Tennessee plant, which is under construction. EBITDA numbers for the trailing 12 months ended May 3rd were $94.3m compared to $99.2m a year earlier. With that, I will turn it back over to the operator and we will open it up for questions.

Thank you sir. Today's question and answer session will be conducted electronically. At this time, if you would like to ask a question, please press the "*" key followed by the digit "1" on your touchtone telephone. Once again, if you would like to ask a question at this time, please press the "*" "1." We will pause for just a moment to give everyone a chance to signal. We will go first to John Diffendal (ph) with BB&T Capital Markets.

Good morning gentlemen. Typically, yes in the fourth quarter, I know you are really looking to a third quarter guidance and not fourth, but firstly every year the fourth quarter looks very similar from a bottom-line standpoint to the third. Any reason to think that, you know, given we're sort of establishing where the third quarter is with your guidance -- that will change this year? We are seeing that it will not be still a similar sort of mid 30-cent number.

We don’t think -- John we don’t think the fourth quarter will be much different than the third quarter assuming that the economy phase [inaudible] is right now. It's a little difficult to tell if there has been any improvement in the economy because you know this is when we normally get our seasonal upswing or seasonal bounce. So, it's difficult to, you know, pair up any of the economies showing up in these numbers, you know.

Right. And it seems to me that -- correct me if I am wrong, but it's seldom like that you were sort of hinting that there is. You do expect some consolidation in the industry and that you intend to be a player there. Did I pick up that thread, that it sounds like you may be signaled some more acquisitions looking at over the remainder of the year or early part of next fiscal year?

Well, I think you know that at least one major competitor, you know, has some pretty significant problem. And there is a portion of that business that we would like to have if, you know, that became available. Our understanding today is that they're going to try to run it. Even if they do so, they won't sell the whole lot. The whole lot don’t fit with us because there is too many overlapping plans, but one segment of that business that we'd certainly like to, you know, to have if it was available and perhaps, you know, reasonably thought it'll be accretive to us.

Right. And one last question. Bob, you gave the six months total for the breakdown between systems and components. I don’t think I picked up -- but you did it for the quarter. Can you just simplify having to back it out, give us the same sort of numbers for the quarter?

I am flipping John to see if I have those numbers with me.

Are we still on the call John?

Yes. I'm still here.

The phone rang.

That's my phone. Sorry. Well maybe I can -- if you find it later Bob, may be you can.

Yes. John if you give me a call or if anyone else is interested and not having the [inaudible] I'd say give me a call, I'll be glad, should follow you the second quarter number.

I just want to be consistent. Okay thanks.

Thanks John.

We'll take our next question from Justine Hove (ph) with Landview(ph) Capital.

Hi. Your EPS guidance for third quarter, would you like to translate to in EBITDA terms?

Justine, I don't think we actually translated it to an EBITDA number but obviously, they showed what we earned in the third quarter last year on a trialing 12 month basis, that $94m number would probably drop to the high 80s.

Okay and on your insurance and healthcare cost, how much has that increase in dollar term?

In terms of dollars?

Yes.

I would imagine on an annual basis it's probably ramped $3m on a year-over-year basis.

You know, one of the places if they are -- one of the places we really got hit hard with D&O insurance and everybody's suffering. I guess there where company in United State that’s suffering from the effect of what some of the other public companies did. But D&O insurance we went through the root.

Okay. And on your cost saving initiatives, has that all been worked through and fully realized up the -- till today?

I think we have done aback everything we could do and like any other company we rationed with how do you continue the plan for the long term and I think we're at a point now any further cuts would begin to impact our ability to grow the company as -- when the economy recovers, so unless we saw a prolong continuation of what we see in the non-residential construction market. You know we will continue to look for opportunities to reduce our cost but I don’t see anything major on the horizon that would have a significant impact.

Okay. And lastly can you talk about the pricing environment; has it -- has there been continued increased pressure on pricing and also on the other side on your raw material cost, we feel -- what do you see there?

I think our raw costs have remained somewhat stable over the period and our business is always price competitive and I think when you are in an industry that suffered the kind of declines that we have declined then obviously price competition does intensify. I wouldn’t say our current pricing environment is any worse or any better than where it was 6-9 months ago.

Okay. Thanks.

We will take our next question from Walter Kirchberger (ph) with UBS Warburg.

Hi. Good morning everyone.

Good morning.

Kind of a quick question. I just wondered what if you got an other income, it's 622,000 this year and for the six -- for the three months, that's a sort of a big number for three months.

I guess it's comparable to last month and basically the only thing that goes into other income, Walter, is we try to have some gains on the disposition of the equipment. We had cancellation income where customers cancelled jobs and we have incurred engineering in drafting time owned (ph)and we get reimbursed for. There is some runnel income, but there is no one component that's makes number within that category.

Okay. It sort of bounces around, I mean, it was 78,000 in the first quarter and 615 or stuff like that in the second quarter. So I just kind of was curious about the large sequential change.

I would say that's probably anomaly that we probably took the opportunity in second quarter to plan at some of these old contracts and then our cancellation income would have done little higher in the second quarter than normal.

Okay. Okay.

I wouldn't read a trend in there.

Yes. We won't model that kind of number forward. Great. Thanks a lot.

We will go next to Lee Brady (ph) with Wachovia Securities.

Hello. You mentioned that -- I guess the third quarter you did give some guidance on the EPS line. I was just wondering if you could provide, I guess, a little more detail maybe on the top line. You did say that it looks it's turning down year-over-year. In the last couple of quarters, you basically we on kind of high single digits on the decline roughly 7% in the second quarter and 9% in the first. I kind of wonder if we should be in that same ballpark probably for the third quarter?

Lee, we would hope -- we expect that we will probably see some year-over-year decline third quarter last year to third quarter this year. We would certainly hope that it would be or expected to be in the single digit range and hope we would begin to move a little closer to the numbers that we had in the prior year. And that’s probably about the best guidance I can give you.

Okay. Any update on CAPEX guidance for this year?

Surely, we will be $16m-$18m?

It will probably be in the neighborhood of $16m this year.

I think it’s somewhere in the range of $16m-$18m, Lee.

Okay. I mean, thank you.

We will take our next question from Greg Mocosco (ph) with Lloyd Abbott.

Yes. Good morning thank you. Could you talk about the components? You mentioned Rob that I guess components were down 9% year-over-year revenue -- but profitability was down only 6%? Profit--

Yeah.

That I mean -- that’s I -- I mean that sounds pretty good given the top line decline. I mean how are you able to offset that -- really get some positive leverage to the bottom line?

If you recall, we closed some component plants at the end of fourth -- ’01…

Okay. End of ’01, but actually it was in the ’02.

It was in the ’02, but what you really --not what you're saying is a result of those plant closing. We told you that we would be more efficient from closing those plants and we didn’t think we would lose market shares in closing those plants and we don’t believe that we’ve lost market share. In fact we believe we’ve gained market share with the components group, but we’ve actually reduced the cost because of all overheads associated with those plants and that’s one of the reason that their costs are down and you know their buying -- revenues were down nine and earnings down six.

Okay. Well good, good. And with regard to SG&A, you mentioned insurance, taxes, healthcare, etc., but I guess there was a pretty strong bump up sequentially. Looks like it rose from first to second quarter about almost $2m.

Yes about $1.5m-$2m and again that’s -- we do our -- we are basically self-insured for healthcare and workmen’s comp and we basically have to adjust these numbers based on our experience through the quarter and what feedback we get from our insurance carriers. Typically our first quarter is down a little bit because as we start the new year, people have to go through the process in satisfying their individual deductibles. So they pay a higher proportion of their cost earlier in the year. Though a lot of that has to do with renewal of insurances AR mentioned our D&O insurance renewed earlier this year, and we had previously had a 3-year deal in price. So it has been three years that we -- since we’ve been in the marketplace and our costs were substantially higher in this renewal than they were a year ago. I would imagine somewhere in the range of…

Three times.

Three times higher for the current year than they previously were.

Okay, fine and that that will continue on for the coming quarters.

Well, it will continue on, but as I mentioned we continue for 6-month period. We are still somewhat flat in terms of dollars and...

Right.

We continue to look for areas in SG&A that we can tighten our controls and reduce our costs that offset some of these increases that we're seeing.

Okay. And tax rate is up from 40% -43%; is that what we expect for the year and is--?

I think on a year-over-year basis, if you want to an annual number somewhere around 41.5% would be a decent number. We have a certain amount of non-deductible items and when your earnings are down, those become a larger percent of your tax computation, so as the earnings improve and those become less of an impact in the third and fourth quarter. I think you'll see the annual rate adjust out somewhere around 41.5%.

And then finally, it looks like the diluted share count went down sequentially?

That's primarily a function to stock price and the biggest -- other than shares outstanding, the biggest dilution you have is the impact of stock options which we figured into that calculation. Of the options that we have outstanding, I would say the majority are probably currently under water and are not part of that calculation.

Okay. And then finally, just I am assuming that your outlook includes what you're sensing in May there has been -- what you're saying is there has really been no change in May with regard to the marketplace?

Not really, other than the fact we had seen some improvement from the component side just based on the fact that we had a fairly miserable second quarter. We had a number of plants that were down for one or two days because of weather during that period of time and it certainly impacted our ability to ship. So, we have seen a rebound in that area in the downside of the business. I guess the good news is business is not getting any worst; so the bad news is it's not getting currently appreciably better than it was during the second quarter.

Okay. Thank you.

We'll take our next question from David Yuschak (ph) from Sanders Morris Harris.

A couple of things. Adding builders as you have been doing here successfully over the last several quarters, is some of that a function of some of the problems that with other providers in this space that want maybe more short support [inaudible] and when this thing does recover?

I think that the majority of our builders, yes, they've -- some of them [inaudible] with some of the conditions area and we're pretty aggressive in the market and I think that [will] acquire to availability, we have an opportunity to go out and show these people once they get into situations like this, so that's helped, sure has helped us in the last couple of quarters. I think it will continue to get a little bit better. I think that -- and that's one reason our sales continue to be somewhat better than the industry is because we do have that opportunity.

Just as -- just looking at your own internal business currently versus where you were in the second half of the last year and we all know about the macro events of the economy and all that; is there anything in your own read of your customer base as to some of that geographical that is having more of an impact. Can you maybe give us some -- a little more depth as to where the differences are in your own book of business versus where you think it could be this time as far as where the variances maybe?

Well in the building group, I think that the West Coast is [inaudible] and the southeast was much lower than it is right now, so I think it’s kind of moved around a little bit. I think in the system part of the deal and I think components has [inaudible] addressed that. I think it's pretty much all over within it's whether that had in a lot occasion but it has moved around. So we see some people with -- that are really optimistic about what's going to happen but we will have to wait and see that it happens, but our builders are really optimistic that things are going to get better; but the southeast has certainly picked up compared to what it was.

That's compared to a year ago you mean?

Yes.

And West coast is--?

West coast has always been kind of stable through this deal. It hasn't -- we [have] any drastic measures out there.

So, if you are to look at where the primary weaknesses have been, it is maybe the mid West and the North East then primarily?

Mid West has been throughout I mean during this time now as it has beginning to pick back up in the North East because of the weather. But the South -- the mid West has been a problem area for the system.

For a long period of time…

Yes it has.

…Which has been happened in the other areas?

Right.

Is there anything I mean other than maybe just the economics there need to get better I suppose what anything else?

That is what it looks.

The other areas you feel pretty comfortable that they can sustain the kind of stabilities, as well as, increase in your model as you look at the second half anyway that is the kind of which assumptions are then?

Correct.

Then one thing on the National marketing effort, could you just give us an update there as to what you are finding, what you are learning, or what maybe some of the things that these guys need to start ramping up a building program in sales?

Well I thing that in the national accounts [inaudible] you are talking about?

Right.

Well, you know, we are making progress in there and that is part of our cause, you know, is that in the national accounts area, but that takes time. We have got three people full time into that program now, and we have made progress there, and I think that we will continue to be able to show our product to the national account customers and it will get better and better. The best [inaudible] of long loan idea is not something that happens overnight, but we have continued to make progress there and I think that it will continue to get better and better.

That the as you mentioned earlier that particular cost component would be in your operating expenses right now as you try to work that program up, is that right?

That is right.

Okay, and from the gross margin point of view as you look at your own operations is it merely just a function now or just getting business going or is it competitive element still keeping -- keep making an issue?

I think that truly a combination of both, obviously volume would solve, we have got a pretty unbearable cost of sales, obviously, volume would help the margin, but you know when this is against the straight thing and then demand takes up that's going to alleviate part of the price pressure that we currently have also, so I think it is a combination of an increase in volume and the overall market getting better so there is less price cutting and less price compensation for existing work. I mean there is nothing fundamentally different about our business that it says if we could not achieve the margins that we achieved a couple of years ago when the economy begins to improve.

The second half this year that finally focus on more a debt reduction then anything else at this point?

Actually being able to capitalize on the opportunity to acquire something our continued focus with the use of our cash flow is to reduce debt, so we did not make this significant stride in that area during the second quarter, but with improved operating results in third and fourth quarter, we would certainly expect to see a reduction in our debt in the second half in the year.

That is all I got for now. Thanks for your help.

David, in the source of this information I want to give you is C. B Richard Ellis, but industrial vacancy index between '99 and '01 was on the 7%-8% range; it is 11.4 now, which tells you that with that vacancy going up that much and then there is another piece of information, the industrial capacity utilization is the lowest that it has been since 1983, and one of the effects on margins is that we have got people, competitor selling for cash flow, [cheap and vulnerable], and you know I mean that is not why we run, hence we are, but when you got people with willing to sell for cash flow we keep the doors open it certainly hurts your margin.

Well I think one of the problems you have too is when you -- that will build up throughout the late 80’s -- throughout the late 90s did bring a lot of capacity on. Just because you had some pretty strong win in the sales from the economy, but you know that’s -- lot of these guys are like you said living with this excess capacity and trying to do everything they can to keep the doors open while in the meantime like you said some of these numbers are pretty darn depressing and almost does suggest you need some exit strategies or somebody wherever that may be or however might be to get some contraction on that capacity because it is kind of what you said in line with what was seen happening in the numbers. You can't justify some of this stuff staying open.

Well and some of it is staying open is really old and antiquated and it's -- you know we are hack of plans and you know we are trying to keep them open and they really are to be like you say close them.

Appreciate your perspective on it.

Thanks.

We will go next to Dana Walker with Kalmar (ph) Investments.

Good morning. Forgive me I was disconnected and I might ask a question that has already been posed to you if you'll pardon me for that. What if any industry data do you have year-to-date to compare yourself to?

Dana about the only industry data that we really have that you know is somewhat reliable is the information we get from the MBMA that only pertains to the metal building side of our business, that information would indicate that the industry continues from the stand point of incoming orders and from the standpoint of shipments continues to be a little bit weaker than NCI although it appears year-over-year that the rate of decline is beginning to slow, you know from I guess 2001-2002 we saw something approaching a 20% decline. We are now in the area of something that will approach 10 or 11% decline in industry sales. Even though we don’t have any information industry information on the component side of the business, we do try and monitor you know what our competitors are doing and the best intelligence we have will indicate the -- that the majority of them are struggling more than the component side of our business.

Dana this is some factual information. If you look at January, February, and March on incoming orders, the MBMA result 11.95%, NCI was up 5.66% okay and you know I think that’s a pretty good indicator. We've always said that we'd out produce the industry. It's really hard to go by the 2001 because there are some members that fell out of the MBMA, but you know Johnny and I were looking at [inaudible] today and we reckoned that the group that’s in the MBMA is off 30%-35% from 2001 and you know we think that's a reasonable number.

You were approaching this topic with a prior questioner, but has there been any capacity reduction in the industry to your knowledge on other side of your fence?

There has actually been capacity open up on the building side and the component side, probably more on the component side and there has been one or two plants that were closed by one of our large competitor and whether they are going to stay close enough, we don’t know. You know and I'd just rather not say where those plants are but there is one large competitor who has got two plants mothballed right this minute.

Dana most of the capacity reduction has been our capacity reduction that occurred early in 2002.

We didn’t really reduce capacity we just closed some plants that reduced the cost.

May be we need more rationale people, perhaps you ought to share some of your management with the rest of the industry.

We'd love to.

Well finally, I am not sure if this is -- something you have ever talked about publicly. I know we have talked about it privately, but what are the magnitude the company that you have an apple's eye interest in if it were to be available would be how large revenue-wise?

Their numbers are not posted, but a best guess would be $150m-$200m range.

Okay.

I mean you know this is really a drain at this point. I mean it is -- to our knowledge there has been no decision made so that segment of a larger company.

I believe a lot of your shareholder base though has been hoping that you have opportunities to take advantage of such situations during the down-cycle, so that you would disproportionately benefit if and when the up-cycle comes and the absence of such activities thus far I think has been mildly discouraging. It is not an indictment of anything you folks are doing just an absence of possible positive fallout. So --

Yes. We have had some discussions with people and absolutely nothing has taken place, but if this one -- if we could make this one acquisition it would really -- be a real plum because it would put a lot of change into [inaudible] land which is very possible for NCI.

Looking at the weather that you had suffered through, can you talk about other comparable periods when you have had just a white bout of a weather period. I understand the economic climes are different and thus the comparability might not make a lot of sense, but how would this season acting similarly or not similarly to prior Q3 environments when you had a white bout of a Q2?

You know one segment of our component division is very sensitive to the weather, and like in January, I forget, I believe it was January of 2000 they shipped 8m and in January of 2001, they shipped $2m and it was all weather related. And that is one of the reasons in '01 that we had such a hard time differentiating if it was an economic downturn or it was a weather-related downturn. You know and it wound up as we all know being an economic downturn. But that is how big a plane you can get. I mean -- and that’s not even -- that’s not what they do in the peak months -- you know in the summer months that's what they do. That's what they did in January, and then February this year they were down close to that '01 numbers. So that really hurts you whenever that weather kicks in like this.

I am just curious about from a builder-activity standpoint or from a lender-activity standpoint or from a pricing standpoint whether you are seeing a script being followed or a script that is being diverged from?

I'm not sure we understand your question Dana.

Well I presume that when you go through a soft seasonal environment that's made even worse because it is damp. I presume that that would tend to push forward demands that were supposedly going to be associated in Q2, but I suppose it might also change some of the developer's plans for the summertime and I suppose whatever business that remains out there the pricing might tighten up. But I am just wondering if there is sort of a game theory dynamic that is chartable and whether you are seeing the game theory as it plays out in your business similar to how it has worked in the past or not similar?

I am not sure that there is and this is something we have debated and always evade internally that is if you have weather-related delays do you ever make those up, you know we've got some people internally. So it shouldn't impact to year-over-year or quarter-over-quarter. But I think it does. I mean you know the construction seems it is only so long depending on where you are located in the United States and your capacity to do work is limited by the amount of the viable good weather that you have had. And I am a proponent that if you elucidate this is at a minimum what you do pushing it into the next fiscal year that there is not lot of way to recover that momentum once its gone.

Final question, is there anything new on the new product front?

Yes. We have a new product that will be on the market in the next few weeks. It's another [Galvalume](ph) roof panel, it's called [Trilok] (ph). It is what -- we believe it will be the strongest [Galvalume] roof panel in the industry. It will illuminate or alleviate a need for second very framing in some areas of roof system and tray would do with a lighter gauge than the competition is doing it with. So we think that not only will we have a better product, we think it will give us a slight advantage cost-wise.

One last thing comes to mind, Bob, do you have a rough feel for how much free cash flow you would hope to generate in the back half of the year based on what you described from a profit outlook standpoint?

Dana not really but as we talked about many a times there are use of free cash flow has always been directed towards the reduction in debt and as I mentioned earlier, we certainly expect to see a further reduction in that second half of the year.

Fingers are crossed for you. Thank you, gentlemen.

We will go next to John Diffendal with BB&T Capital Markets.

Guys let me come at the debt question little differently. I guess you were down about 5m I guess in total debt for the year. You are actually up about 6m in the second quarter. I think you had said prior to fourth quarter call that a sort of a goal was a maybe another $50m debt reduction this year now, since then you added the plant in Tennessee, you are doing that. Is that $50m number still operative? I mean the questioned numbers have also come down. Maybe the latest on that number?

I would think that the $50m based on our revised capital spending and obviously the fact that our third quarter is going to be weaker than it was a year ago, I would say that $50m is probably on the optimistic side. I mean that’s a goal we will continue to try and meet but we are fairly comfortable with our capital structure now, worried about even with a significant reduction in EBITDA. We are still about three times debt to EBITDA and our interest coverage is now over five times. So, we are certainly comfortable with the current debt structure we have, but absolute an acquisition opportunity. Our immediate goal would be to use whatever cash flow we have to reduce our debt.

And that the incoming order number you gave -- in meeting MBMA is down 11.9 for the industry and up 5.7 I think I heard from you say, what period was that?

January, February, and March.

So, it's Q1 basically?

Well, it's calendar Q1.

So, you were up while the industry was down…

It has been…

And this is on the system side?

That's orders.

Incoming orders on the system side.

Right.

Alright. Well thank you.

As a reminder ladies and gentlemen, that is "*" "1" for questions. We will go next to Justine Hove with Landview Capital.

Actually I had my -- my question had been answered. Just only thing is that I was wondering on the pricing side. What kind of decline do you guys tend to see? Is it 2%-3% price pressure or is it more, 5%-6%?

Did you understand --?

I don’t think. The question was…

But the pricing pressure that you see on your products. I am just wondering the magnitude, is it at 3%-5% type of pricing declines that you see? As you know, it's more of a 5%-6% type declines in price?

That's really hard to quantify because, I mean, on the building side, if it's a large building you could see pricing pressure of 10%-15%. On the smaller projects, you might see pricing pressure of 1 or 2%. I mean we just hadn’t looked at it as across the board type of pressure, and the component is that pricing pressure probably in the 2%-3% range most of the time. When the large project begins, it could be much higher, but it's -- we just don’t look at it that way. So, it's kind of hard math. It's been about the same. Nothing has changed over the -- it's firmly stabilized in the pressure pricing right now.

Okay, thank you.

This concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Mr. Ginn for any additional or closing comments.

We really appreciate everybody's attendance today and we appreciate the questions that you had and we certainly appreciate your continued interest in NCI and don’t hesitate to call us if you have any further questions. Thank you and good day.

This concludes today's conference call. We thank you for joining us. You may now disconnect.