Core Natural Resources Inc (CNR) 2003 Q3 法說會逐字稿

Good morning, and welcome to this NCI Building Systems, Inc. conference call to review the company's results for the third quarter of fiscal 2003. This call is being recorded and a telephonic replay of this call may be accessed through September 5th, by dialing 719-457-0820 and entering access code 543863.

The replay will also be available at NCI's web site at ncilp.com. The third quarter results were issued yesterday afternoon 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 comments may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forwarding-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 & Exchange Commission and yesterday’s release for discussion of the factors that could affect NCI's operations and forward-looking statements made in this call.

To the extent any non-GAAP financial measures 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 web site by following the What's New link to press releases to see yesterday's news release. 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 and expectations. At this time I will turn the call takeover to NCI’s Chairman, Mr. A.R. Ginn. Please go ahead, sir.

Thank you. Good morning, to everyone and thank you for attending NCI's conference call today. NCI posted some reasonably good results for the third quarter of fiscal 2003, given the very tough operating environment that continues to affect the nonresidential construction industry, and in fact our earnings per diluted share was somewhat above our expectations.

In addition to covering the specifics of those results, we want to address some of the objectives we've initiated to strengthen our leadership position in the metal construction segment of the industry and to review the strategies that have enabled NCI to generate profits in a difficult environment, in contrast to many of our peers.

Here with me today are Johnie Schulte (inaudible) and Bob Medlock. After Bob and I give you a few remarks we'll open the floor to any questions that you might have. To appreciate NCI's third quarter performance, let me first address the industry environment in which we're operating. As you know, over the past two years the nonresidential construction market has reflected an economy that has not only dipped into recession, but that also has not yet demonstrated any signs of significant sustained growth.

As a result, the Metal Building Manufacturer Association, the MBMA, reports shipments for the first half of calendar year declined about 14% from the first half of 2002, and its shipments since 2001 are now down an aggregate of approximately 37%. While not an exact comparison, we believe these numbers also fairly represent what's happened on the metal component side of our business.

Consequently, some of our primary competitors have either declared bankruptcy or reported a stream of operating losses. This has resulted in some companies having significant layoffs and other declining to invest in new products or product efficiencies. NCI's performance offers a clear contrast during this same period. While our sales have certainly been affected by the industry's contraction, our shipments have generally declined at less than half the rate of the industry's, as we've successfully gained market share. In fact, we've added 110 new builders to our customer list year to date, which is about a 7% net increase over last year.

We are one of the industry's low cost manufacturers and because of our intensive efforts throughout this period to increase productivity and operating efficiencies, we have continued to operate profitably. We have also generated substantial EBITDA, which on a trailing 12-month basis, was 9.5% of revenues through the end of the third quarter. As a result, and again in contrast to the industry, NCI has continued to invest in initiatives to increase sales or improve operations during fiscal 2003,even as we have significantly strengthened our balance sheet.

One of the initiatives that we mentioned in our news release was the acquisition of our fifth and the opening of our sixth NCI metal depot retail store. These steps reflect our progress and ongoing development of our concept and business model. This initiative is absolutely a natural extension for NCI, leveraging our position as the largest producer and distributor of metal products for the construction industry in the country, with a nationwide network of manufacturing and distribution facilities which are already in place. Although we believe our retail stores will position us to tap substantial unfilled demand for metal components and small metal buildings, we do not anticipate pursuing a significant ramp-up in the number of stores in operation until we are completely comfortable and satisfied with the concept unit of economies.

We expect our acquisition of Able Door Manufacturing during the third quarter to provide immediate benefit. Able's metal sectional doors are complimentary to our product line of melts roll-up doors. This is both in terms of manufacturing processes and in customer applications. Through this combination of our product lines and distribution systems, we are supporting NCI's initiative to increase sales. In addition, through our broad commercial customer base, in both roll-up doors and buildings, in our presence and experience in the nonresidential construction market, we expect to provide a significant new channel for the growth of Able's commercial sectional door product line. In fact, our customers with the roll-up doors tell us that they do twice as many sectional commercial doors as they do commercial roll-up doors, and, you know, they're already beginning to buy from Able.

So therefore, we're enthusiastic about this acquisition and pleased with the progress we've made integrating Able into our operations. As mentioned in our press release, investment in our new frame plant in Lexington, Tennessee, which is scheduled to open in our fourth fiscal quarter, is another example of NCI's continued quest to improve operating efficiencies, enhance safety, and be the low cost producer.

There will be no one in our industry that will be able to produce frames as economically as NCI. So as you can see, NCI is not standing still in the face of difficult industry conditions. Instead, we're constantly at work to improve our market share in the metal construction industry, consistent with our long-term strategy to produce profitable growth and increase shareholder value. In fact, we have funded two small acquisitions in the Lexington frame plant and still managed to pay down approximately $24 million in debt in the current quarter.

While we are in no position to comment on the timing of the economic recovery, this long-term strategy is founded on our certainty that the cycle will improve and that the company with the strongest market share will be the best positioned to prosper. We will therefore continue to be relentless in our focus on cost controls and product invasions, and continue with our superior customer service and to strengthen our financial positions so that we maintain the flexibility to invest in our future whether through internal initiative to drive sales, or -- and increase profitability, or through additional accretive acquisitions.

At this time I'll turn it over to Bob Medlock for some financial results.

Thank you, A.R.. The third quarter NCI's sales of $236 million were down 8% from $258 million in the third quarter 2002. This decline reflects a continued overall weakness in the nonresidential construction market. The expected increase for the quarter resulted in an increase of sales of 19% over the -- over the second quarter of this year.

Gross margins for the three-month period were 22.6%, compared to 23.8% a year earlier. Gross margins improved in the current quarter from the 28.9% posted in the second quarter of this year, based on the higher level of sales activity. Pricing continues to be very competitive within the industry.

Administrative expenses for the current quarter were flat with the prior year, and represented 15.7% of sales in the current quarter, compared to 14.4% in the prior year, as a result of the lower sales volume. Interest expense for the period was $200,000 less than the prior year, reflecting the reduction in debt. Prior year numbers for the third quarter included, and other income included a gain on sale of equipment of approximately 3%, this accounts for the decline year over year and the other income number.

Income of 36 cents per share (net income) compared to 67 cents per share a year earlier, and was slightly higher than the guidance provided by the company at our last conference call. For nine months, sales of $643 million, or down 8% from the $699 million posted in fiscal year 2002. Gross margins for the nine months, 21.6% compared to 31% in the prior year. Operating expenses for the nine months were flat with the prior year.

Net income of 67 cents for the nine months, was down from the 111 posted last year, for a cumulative effect and change in accounting principle.

Turning to segments, engineering billing segments had sales of $74.3 million in the current quarter compared to $83.9 million a year earlier, representing a decline of 11% for the quarter. Demand for building systems continues to be weak, particularly in large industrial projects and the industrial end market continues to be very weak. Business continues to be very competitive. Operating income for the engineered building segment is $3.6 million in the current quarter, or 4.8% of sales, compared to $8.2 million in prior year, which represented 9.8% of sales. This decline was the competitive nature of the industry, and decline in sales, and approximately (inaudible) million in current quarter costs associated with the start-up of the new plant in Tennessee and the shut-down of a facility in Texas.

The nine months Engineered Building Systems segment sales were $213 million compared to $230 million in the prior year, again representing a decline of 8%. Operating income for the current nine months was $12.3 million, compared to $20.3 million a year earlier, which represented a decline in operating profit of 39%.

As of August 2nd, 2003, backlog of the Engineered Building Systems segment was $175 million, compared to $169 million a year earlier. Incoming orders for this group, year to date are down 3% compared to the prior year. As A.R. mentioned in the past 12 years the number of builders for this group has increased by 10%.

Our Engineered Building Systems segment represent about a third of total company sales. (inaudible) segment sales for the third quarter of this year were $162 million, this compared to $174 million a year earlier, representing a 7% decline.

Operating income for the quarter was $19.5 million, compared to $23.3 million in fiscal year 2003, this represents a decline in operating income of 17%, primarily from the lower sales volume in the current year. For the nine months segment sales were $431 million compared to $470 million a year earlier, representing an 8% decline, primarily in the industrial and commercial end markets of the component business. Since last year end, the company has repaid $29.6 million in debt, which included $24.3 million in the current quarter.

The company continues to manage its balance sheet as well as trying to maximize its earnings potential in order to produce the highest levels of free cash flow. In addition to the debt reduction for the year, the company made two small acquisitions totaling $4.3 million, and has spent year to date $12.5 million capital additions of the largest of which is our new frame plant in Tennessee.

Capital spending for the third quarter was $5 million, the company expects its total capital spending for year to be less than $18 million in fiscal year 2003.

Adjusted EBITDA is defined in the press release with (inaudible). EBITDA is defined in the press release August 2nd 2003.

Despite the decline in EBITDA over the past two years, resulting from the decline in earnings and the overall weakness in the nonresidential construction market, the company's ability to reduce debt has allowed to us maintain a debt to EBITDA ratio of 3.2 to 1, and interest covered ratios which exceed the minimum requirements contained in our current bank loan agreements.

Those conclude my remarks. I will turn the call back over to the operator and we can open it up for Q & A.

Thank you, sir. If you would like to ask a question at this time, you may ask it by pressing the star key followed by the digit 1 on your Touch-Tone telephone. If you are on a speaker phone, turn off your mute function before posing your question. Star-1 if you would like to ask a question. Our first question goes to John Diffendal at BB&T Capital Markets.

Good morning.

I was a little confused when you talked about the other income item, you said it was like 3%. Can you go back over that and make sure I'm clear on what the other income is this year versus last year?

The other income this year, there was significant drop in other income in the third quarter of this year compared to last year. Last year's number included about a 3 cent per share gain in the sale of real estate and equipment, which related to the five plant closures that we had announced early in beginning of last year. A lot of that excess equipment and two of the five pieces of real estate were sold in the third quarter of last year.

Do you have any additional that's sitting there to be sold that could come in this year, or pretty much done on that?

We have a contract on one of the two remaining pieces of property, there won't be any appreciable difference in book value relative to the sales proceeds. That's probably around a million and a half dollars and will close probably in September of this year.

Okay. And, its still astounding how well you've been able to reduce debt, particularly this quarter. Is there an,y sort of, annual goal you have currently on reducing debt for the full year?

Well, I think when we began the year, John, we, you know, expected a little better operating environment, and our goal was to reduce debt somewhere in the $40 to $45 million range. I would suspect that, you know, we should make some additional reductions in the third quarter, I mean in the fourth quarter. We will have, you know, if we continue to see some seasonal increase in our business, we will have some money that needs to be invested in working capital. But, you know, I'd like to say that we'll make further inroads in reducing our debt, $30 million in today's environment with the capital program that we have going on, you know, it's probably not bad results. That continues to be our short-term goal.

Is $30 million?

Well, we're in $30 million now. I would suspect we should be able to add to that during the fourth quarter.

Okay, I'll let some others ask questions. Thank you.

Hey, John?

Yeah.

We do have another piece of property that we're closing a plant in Grapevine(ph) Texas, the (inaudible) plant. It’s closed now, and there's a For Sale sign on the property. And that property will bring in quite a few bucks whenever it's sold. Now, when it's going to sell, we don't know, but it's in a pretty hot location, so we hopefully it won't be on the market too long.

Great, thank you.

We'll go next to David Hischak(ph) at Sanders Morris Harris.

Congratulations on a pretty good quarter. I think you’ve got to be encouraged, you saw some decent seasonal pickup. As far as that goes, in looking at the quarter, did you see much come from the second quarter to the third quarter because of and other stuff, or are you just beginning to see some better environments for what you would expect out of a seasonal pickup, as far as backlogged from second quarter?

David, I think it's more just the seasonal increase. If you look at the historical pattern of our sales, typically 55% to 60% of our total sales occur in the last six months of our fiscal year. So, you know, the increase, I don't think really represents any overall improvement in the marketplace, but I think more reflects what we see as, you know, the seasonal increase if we get --that we get every third quarter.

Well, at least there's some indications there that there's some signs of life just because you're getting a seasonal pickup. If you didn't see that maybe you would be a little more concerned. Do you suppose some of that pickup, though too is coming from the fact that you're seeing other competitors -- I mean, is it you guys financial position and capabilities to deliver relative to financial impaired competitors, that you're getting the market share, or in a sense as to -- you know, you're picking up the dealers, obviously the dealers are coming because of your financial capabilities as well as execution, but just kind of wondering if that's just continued market share penetration in this quarter versus the overall industry.

We've picked up dealers, and good dealers, and you know, we've also canceled some dealership with some marginal guys, but what we're seeing out there is the competition is -- we're walking away from some jobs because they're so cheap. We're just not going to sell them that cheap. The only thing we can figure is there's some people out there that's running for cash flow and trying to keep their doors open. And, you know, that's not the way NCI operates. We operate, you know, to make a profit and enhance shareholder value.

Do you suppose that just because it's the seasonal pickup that they're taking these kinds of strategies and once you get to the seasonal pickup and there's no real response on the part, you may have even more problems for these financially impaired guys? Going into next year, that they may not be as competitive, do you suppose?

You know, I would have thought some of them would have been gone by now, but they're not. You know, there's absolutely some people in trouble, in both components and in building, but you know, they haven't left, that's for sure.

As far as, you know, we're seeing capacity utilization rates that we haven't seen in decades in the industrial part of the economy, and you indicated on the -- in your presentation that the industrial side of it still remains weak. And maybe you can't answer it because these things are at such low levels, but does there come a time, as you look at your past and relative to industrial capacity, that you would expect some kind of pickup in the industrial side of the business? Just from historical analysis?

David, I think there's no doubt that, you know, if you look at capacity utilization, industrial capacity utilization, it's been in the low 70s for about the last few years, and base on historical trends, I think we begin to see expansion in the industrial segment when those numbers are in the high 70s and the low 80s.

Three or four years ago, they were in the low 80s, had been there for several years, began to dip into the high 70s, and then over the past two years have dropped to 71 to 73, and have kind of bounced around at that level. You know, if those numbers improve and we begin to see them in the high 70s, I would certainly think you would see some growth vis-a-vis not residential construction in the industrial segment.

So at this point in time because it's pretty far off right now, you wouldn't be that optimistic on the industrial recovery until probably late in the next fiscal year?

Probably not, but that's the reason we have, you know, concentrated on the commercial side of our business, through our national accounts and long faith program. That's the reason that we have taken the initiatives that we have relative to expanding our door business, and our expansion of our retail effort through our metal depots. The company is constantly looking for niche opportunities to replace our supplement some of these markets that have been weak, and appear will be a little longer term in returning from the standpoint of growth.

Now, just a couple other quick questions. Debt to cap ratios, where -- you know, do you have a range of comfort here that where you think you can pay down the debt but feel like if there should be opportunities developing for added asset acquisitions whether it's at least financially impaired competitors, or whatever, is there a level that you're comfortable with given your model that you would say you would prefer to emphasize growth versus debt payment?

I think we're probably in that comfort level now, and, you know, look at growth opportunities, although we haven't identified any of substantial size. I think the company's been very successful, if you think back to '99, 2000, our EBITDA numbers were around $155 million. So, we're seeing a substantial decline to the $85 million that we have now, but if you look at our credit statistics and our leverage in '99 versus where we are, they haven't changed that much.

We were about three times debt to EBITDA '99, and we continue to be around three times. So, I think we're, you know, we're in that comfort level, we're around 45% debt to total cap, you know, absent any opportunities to invest that money in growth opportunities, we will continue to use our free cash flow to repay debt. You know, we are looking for -- currently looking for opportunities and niche markets that will add to the overall revenue of NCI.

Looking at the debt to capital structure, then, on the upside as far as how far you're willing to take, it would be more consistent with acquired EBITDA than it would be consistent with some of your ratios even going back to '99 or so, would that be a fair statement rather than look at the topside debt to cap would be, given any kind of expansion program?

I'm sorry, I didn't understand your question.

I'm just wondering how far up you would take your debt to cap ratios, should opportunities present themselves.

Well, you know, I tend to look at the ability to service debt based on the cash flow you can generate and the coverage you can get in interest as opposed to traditional debt to cap ratios. So, I think what's much more important is the amount of free cash flow that you can generate to service debt, as opposed to what do you have -- whether you have a 40% debt to cap ratio, or 50%. Because, you know, cash flow is what's going to repay borrowed money.

I agree with you on that. I'll go back in the queue, I have a couple follow-ups but I'll go back in the queue. Thank you.

We'll go to Justine Ho(ph) at Grandview Capital.

Hi. Can you talk a little about fuel costs, the trends there, and then also on the decline that you've seen, can you talk about how much of that is volume versus pricing?

Steel cost, some of the heavier gauges are beginning to tweak up. We've seat corporate goal of offsetting any increases like this through more spot buying and mixed between suppliers, so we're seeing -- we do not anticipate that steel cost will affect margins either positively or negatively in the short-term, anyway.

Justine, I don't think we heard the last part of your question, so if you could repeat it.

I was just asking for the third quarter, the decline that you'd seen on a year over year basis, if you can talk about how much of that is volume versus pricing.

Are you talking about decline in sales?

Yeah.

I would imagine year over year, this year compared to last year, the majority of the decline relates to volume and not pricing, and I think that's pointed out by the fact that our gross margin ratios have remained fairly constant, and slight decline we've had can be more attributed to volume than it can to the fact that pricing may have gotten weaker.

Okay, thank you.

We'll go next to Steve Revel(ph) at Bonnie Brown Asset Management.

Hi, I actually just wanted to go back. You started with some industry commentary which can give us a sense of what's happening with market share. Could you repeat those numbers?

Yes. If you look at through June of the calendar year, the MBMA, the Metal Builders Manufacturing Association, shows a decline 14% year over year compared to 2002. And if you go back and compare to 2001, it's actually 37.5% decline, and if you look at the state of Texas, the state of Texas is down 40% with the MBMA numbers.

Now, there are no good statistics for the component segment, therefore we just have to assume that the component segment is about like the metal building segment, and in our business, I think the metal building segment, ours is off 8% and the component is off 7%, so that's reasonable enough to assume, you know.

Okay, that's great. Thanks very much.

Yes, sir.

And we'll return to John Diffendal at BB&T Capital Markets.

Turning to the fourth quarter guidance, which is up some amount from the third quarter, can you give us a sense of what is implicit in that improvement sequentially? Is it -- are you looking for -- typically the third quarter and fourth quarter are fairly similar traditionally. What's driving that gain?

John, it's probably being driven more by volume based on, you know, what our operating people at all our units are telling us now. They believe that our revenue base in the fourth quarter will be higher than third quarter. And, you know, having a highly variable cost business, that additional sales volume should add incrementally to our earnings.

Is it more on the systems versus component side or the other way around?

It's actually in both. Both we're looking for a little better revenue base in the fourth quarter, than we saw in the third quarter.

I know you've all wanted to go out usually a quarter in front of you, but looking to the new fiscal year which we're not too far from. Anything you can tell us about, any expectations you have for next year?

Not really, because we have not -- we've just begun our planning process for fiscal year 2004, and, you know, it's still very hard to read when the recovery is going to come. You know, the industrial side looks like it's going to lag any other recovery, but the short answer to your question is, I don't think we have currently any guidance for '04 that we'd like to share.

I hear you, okay. And then going back to the competitor situation again for a second, can you maybe give us some idea of some status on your large Canadian-based competitor?

I'm going to tell you, John, we don't know much about it, I mean, we know they're in bankruptcy. The only -- I mean, we've got one public competitor and you can read what they've done this year as well as we can. But the Canadian -- from everything we hear, and that's strictly hearsay, they're really struggling.

Have they closed actual facilities around you?

Not that we know of. I don't think we know if they have or not. I don't think so.

We don't know, John.

Okay, I hear you. Well, thanks.

We'll return to David Hischak at Sanders Morris Harris.

Do you guys anticipate that you will have any goodwill impairment charges as you look at the end of the year, at this point?

David, I don't think so. You know, the current requirements are-- we review that annually. We have just begun that process. So much of that depends on what you expect in future growth, because a great deal of the computation boils down to discounted cash flow.

We are probably fortunate in the fact that when we took the initial impairment charge a year ago, we did it in a marketplace that was already somewhat weak, and hasn't gotten a whole lot worse since a year ago. So, my initial reaction is that we're okay, but until we get to year-end, look at where we think '04, '05, and '06 may shake out, I'm just not in a position to give you a definitive response.

At this point in time, given the fact that your assumptions a year ago were based on some pretty depressed market conditions, all probability would suggest it's not gotten materially worse, to change some of the assumptions.

Our assumptions don't change a great deal, then our bottom line answer shouldn't change a great deal .

Now, on your credit facility, how much of that is unused at this point in time?

You know, I knew somebody was going to ask me that question, and I was going to look it up, but if you'll give me just a second, I'll tell you. Around $90 million dollars.

Okay. That's all I got, then, thanks.

Just as a reminder, press star-1 if you would like to ask a question now. And we'll go next to Justine Ho at Grandview Capital.

One follow-up. You mentioned, I guess when we look at the industry data, you've been able to outperform the industry. Can you give a little color on how you've been able to take market share and then I think you mentioned your competitors, some of them filing for Chapter, has there been any capacity taken out of the industry at all?

There's really been no capacity, until now, to anything taken out of the industry so far. I think the way we're outperforming them is that, you know, we are the low cost producer, and we have the broadest product line in the industry, and we've been able to attract new customers in building and components, simply because of having the broadest product line, customer service, on-time deliveries, that kind of stuff.

And the service level., and our products available.

Does that answer?

Yes, thanks. On mentioning your low cost producer, being a low cost producer, are you able to offer your products at a lower price than your competitors, and being able to be profitable while they have to walk away from it because being a higher cost producer, they cannot offer it at that low price?

It's really almost opposite. You know, we're trying to make money, and turn a profit on every job that we ship, and it appears that some of our competitors are willing to take jobs that cost today just to keep the doors open. So therefore, we're the ones really work walking away, and we've walked away from some pretty sizable work. Just because we didn't want to take it as cheap as our competitors are willing to take it, and you've got to -- you've got to weigh into this the risk-reward factor, and that is that, you know, if you're going to take the risk on a job, and there is a certain amount of risk every time you ship a job, there's got to be some reward for taking that risk. And we do have competitors that trying to keep the doors open, simply by turning jobs through cash flow.

Okay, thank you.

Yes, ma'am.

We'll go next to James Leonard at Leonard Management Group.

Good morning, gentlemen.

Good morning.

Considering your low cost position and the situation in the industry, would it make any strategic sense, for long-term strategic sense, to try to accelerate the demise of some of our competitors? It might hurt you in the short-term, but wouldn't it benefit you in the longer term?

Well, no, unfortunately, you know, Johnie has been doing this 50 years and I've been doing it 45 and we've seen other people try that before and never have any success with it. It seems like they manage to hang on somewhat. And you know, besides that, I mean, we're charged with taking care of shareholders' value and it's not in the best interest of shareholders to sell too cheap and take the risk associated with selling too cheap, you know.

Okay, I just wondered if that had been considered.

Well, we think about it. We'd like to figure out some way for a few of them to close their doors, it would make it better for all of us, but we haven't figured out how to get it done yet.

Okay, thank you.

Yes, sir.

And with no further questions, I'd like to turn the call back over to Mr. Ginn for any additional or closing remarks.

Thank you. You know, we'd like to thank each and every one of you for the interest that you have in NCI and for and for taking your time today to be with us, and please don't hesitate to give us a call if you have any further questions, and with that, we'll bid you good day.

and thank you for your participation in today's conference, and you may disconnect at this time.