Core Natural Resources Inc (CNR) 2003 Q4 法說會逐字稿

Good morning and welcome to this NCI Building System, Inc. conference call to review the company's results for the fourth quarter of fiscal 2003. This call is being recorded and a telephonic replay of today's call may accessed through December 18 by dialing (719)457-0820 and entering access code 779072. The replay will also be available at NCI's website at www.ncilp.com.

The fourth 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 statements made in this conference call may 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 and in yesterday's news release for a discussion of factors that could affect NCI's operations and the forward-looking statements made in this call.

To the extent any non-GAAP financial measure 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 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 in expectations.

At this time, I will turn the call over to to NCI's Chairman, President and Chief Executive Officer, Mr. A.R. Ginn. Please go ahead, sir.

Thank you, Scott. Good morning, everyone, and thanks for being on our call this morning. With me this morning are Ken Maddox and Bob Medlock, and after Bob and I give you a few brief comments, we'll open the floor up for any questions that you might have.

In many regards, our fourth quarter financial results mirrored our performance for all fiscal 2003. In that, given the industry's weak operating environment, our results are really pretty good. We were solidly profitable, we met the top end of our earnings guidance for the quarter. We also continued to generate the cash flow needed to cover our capital expenditures, strengthen our financial position, through a significant reduction in our debt. In fact, during fiscal 2003, we reduced our debt by approximately $48.5 million.

We produced the results for the fourth quarter, and for the year really, in the face of a continuing contraction in our industry, primarily by increasing our market share and through a hard, ongoing focus on cost control. As indicated in the news release, our metal components business had the strongest results for the quarter due to the counter-cyclical impact of the retrofit market.

We've continued to build our leadership position in this market because we truly offer our customers a one-stop solution for their needs. We have the most comprehensive product line of metal components, a broad national distribution network and we're certainly the low-cost producer. Our products have a well-deserved reputation for high quality and innovative design and we're focused on consistent and superior customer service.

At a time when many of our peers have experienced significant financial and operating difficulties, we have been a steady and certain presence in the market. During the fourth quarter, our other major business, Metal Building Systems, was still suffering from weak demand and often from -- let's call it irrational price competition.

While we continued to pursue various initiatives to generate additional revenues for this business, we believe we must see a greater rate of industrial manufacturing capacity utilization, and a clearer sense of sustained economic growth before we can expect significant improvement in this market. However, we continue to manage this business to earn an acceptable return, and we simply don't intend to chase business based purely on price that don't make any sense to us, our other customers, or the shareholders.

The real question that we face as we enter fiscal 2004 is whether or not there's a sustainable economic recovery on the horizon. We have certainly seen some signs of a firmer tone in the market that encourage us that fiscal 2004 will be better than 2003. But it's really too early to tell if any improvement would be material or sustainable. Furthermore, we think the benefit of any sustained improvement would fall primarily into the second half of fiscal 2004, which is already a stronger part of the fiscal year due to the seasonality of our business.

Let's talk just a second about steel and steel pricing. As all of you know, the lifting of the steel tariff by the Bush Administration, and we do not expect that to have any short-term effect on U.S. steel prices. And increased demand from manufacturers at a time when some mills are trimming excess capacity, combined with the weaker dollar, higher shipping costs, there was just another 10% increase announced on overseas freight, and the heavy Chinese demand will send prices up for much of 2004.

When the domestic steel mills announce price increases publicly, and that's the key word, "publicly", we are able to increase our prices. NCI and the majority of our industry has announced price increases effective the first of the year. To say it another way, historically, NCI and the metal construction industry have been able to pass through announced steel cost increases.

NCI will continue to operate under conservative assumptions about the strength of its near-term business, which is reflected in our earnings guidance for the first quarter of fiscal 2004. Consistent with our approach for the last two or three years, we will focus on strengthening our industry leadership position, expanding our customer base, and in improving our financial position. We will continue to evaluate opportunities to expand our market presence, either internally or through acquisitions. But the main thing that we want to keep in front of everybody is that we are really watching our costs.

Before turning the call over to Bob Medlock, I'd just like to say one more thing. I feel really good about NCI. I'm excited about the direction we are headed and our long-term growth opportunities. The team is in place to make this happen. We are very confident that the economic cycle in the U.S. will improve. All we need is a little help from the economy. And some relief from the competitive pricing pressure, and we'll be off to the races. In the meantime, NCI's focused on what we can control, such as cost and working capital, and things like that. We know we are positioned to generate profitable growth as the economy improves.

I'll now turn the call over to Bob Medlock for his financial comments.

Thank you, A.R. For the fourth quarter, our sales of $255 million were up $1 million from $254 million posted in the fourth quarter of last year. This is the first quarter in about the last 18 months that we've been able to see a quarter-over-quarter increase in sales activities. Sales in both the component and [inaudible] segments were up during the fourth quarter, with engineered building systems down 4%.

Gross margins in the fourth quarter declined to 23.0% from 23.8% the prior year. Continued price competition, particularly in the Engineered Building Systems segment, accounted for most of this decline, and we were hit particularly hard in the end-use market for industrial and larger-type commercial projects.

Operating expenses for the quarter were flat with the prior year, with increases in employee benefit costs, insurance and outside services being offset by the favorable impact of the compensation items discussed in the press release. As a percent of sales operating expenses were 14.4% the current quarter compared to 14.5% in the prior year's fourth quarter.

Interest expense for the period was slightly up with higher interest rates in our current lending agreement offsetting the decrease in overall debt levels. Other expense in the current period resulted from the further write-down of real estate held for resale to reflect current estimated value. In connection with our plant closings about a year and a half ago, we closed five facilities, four of those facilities have been slow, we have one that we've continued to try and market.

Other expense in the prior year includes the write-off of unamortized debt cost which resulted from the refinancing of our credit arrangements in the fourth quarter of last year. Earnings per share of 53 cents compared to 58 cents in the fourth quarter of 2002, as mentioned in the press release, approximately 10% of this net income number in the current period resulted from the reversal of the expected bonus accruals, since the company failed to meet its minimal return on operating assets for the year, and will pay no bonuses for the current year. This was offset by the accrual of retirement benefits of the former president of the company who retired at the end of the year.

For the fiscal year, sales of $898 million were down 6% over the prior year, sales of $953 million, both the component Engineered Building Systems group were down 6% and our coater operation was down 1%. Continued weakness in nonresidential construction, particularly in the industrial end-use market, and the lack of activity in larger commercial projects, accounted for the year-over-year decline.

Gross margins for the year of 22% were down slightly from the 22.3% posted a year ago, which continues to reflect the current pricing environment in a weak construction market. Operating expenses for the current year were flat with the prior year, representing 15.6% of sales in the current year, compared to 14.7% in the prior year for the same reasons as discussed in the quarter above. Interest expense for the year was down $2 million, resulting from the decline in outstanding debt offset slightly by the higher rates in our current credit agreement.

Looking at our segment reporting, sales and operating income of our coating operation have now risen to the level that they're required to be reported as a separate business segment. Beginning with the fourth quarter of this year, and in the future the company will be reporting three business units in its segment reporting. Engineered Building Systems sales for the fourth quarter were $84.8 million compared to $88.3 million in the fourth quarter of last year. This decline of 4% reflects the continued softness in nonresidential construction, particularly in the industrial segment of our business.

Operating income of $5.7 million compared to $8.3 million a year earlier. 42% decline in operating income resulted from lower selling prices due to competition, and the inability to pass through cost increase or employee-related benefit costs which also included $1 million in retirement benefits charged to Engineered Building Systems, higher insurance property tax cost, and other business services used in the operation. In addition, the Company provided an additional $1 million in doubtful accounts associated with the Company's Mexican operations.

NCI has agreed to sell its interest in a non-consolidated subsidiary which generated these losses, I believe that no further write-downs will be incurred. This nonconsolidated joint venture was formed a number of years ago to provide drafting and engineering services and to act as a sales organization, product sales into Mexico. NCI will continue to operate its manufacturing operation in Mexico, which primarily provides frames and long bank structural products to its U.S. operation.

For the year, sales of the Engineered Building Systems group were $297 million compared to $318 million the prior year, again, this 6% decline reflected the pricing environment and the general decline in several end-use markets. Operating income, this segment for the year was $18.1 million compared to $28.7 million, a decline of 37%, primarily the same factors discussed above, which included for the year a total $2.5 million bad debt write-down related to the Company's operations in Mexico. November 1, 2003, the backlog for the Engineered Building Systems segment was $168 million compared to $152 million at the end of fiscal year 2002.

Metal components segment sales for the fourth quarter were $136 million compared to $135 million in the prior year, a modest increase of 1%. This increase resulted from the operation of a new plant in Mexico, repairing retrofit business, and increased market penetration in existing markets, and was aided by the sales of Able Door, which was acquired late in the third quarter of this fiscal year. Operating income in the components segment for the fourth quarter was $16.7 million, compared to $17.1 million a year earlier.

For the year, components sales were $518 million versus $550 million in the prior year, and operating income was $46 million compared to $47 million in the prior year. Our coating operation, paints and coats, hot-roll material and light gauge material for use in construction and other industries, over 50% of this reduction [inaudible] operation was used by the Engineered Building Systems segment, and the metal component business of the Company, and these operations supply approximately 90% of the needs of our other two segments.

For the fourth quarter, coaters had sales of $34.2 million compared to $30.7 million in the prior year's fourth quarter, an increase of 11%. This increase resulted from a higher level of activity for several steel companies which are the major customers of the coater operations for light-gauge material.

Operating income for the quarter was $7.7 million, compared to $5.4 million in the prior year. Increase in operating income resulted from a higher level of sales, and was also aided by the elimination of the coater's portion of bonus accrual previously discussed. For the year, coaters sales were $127 million, compared to $128 million in fiscal year 2002, and operating income for the year was $21.2 million compared to $23.6 million in fiscal year 2002.

During the year, the Company spent approximately $18 million in capital expenditures, including about $9 million spent on the new frame plant in Tennessee, and in addition, spent $4.3 million for two small acquisitions. As A.R. mentioned, debt reduction for fiscal year 2003 was $48.5 million, achieved through a combination of cash flow from operations, and a reduction in net working capital.

The outlook for nonresidential construction remains uncertain. Although we expect to see some improvement in sales and earnings for fiscal year 2004, we believe that most of these gains will occur in the second half of the year, which is seasonally the strongest part of our year. As we're entering our seasonally low quarter, we expect sales and earnings for the first quarter of fiscal year 2004 will be flat relative to the results achieved in fiscal year 2003.

Capital spending for fiscal year 2004 is expected to be approximately $20 million, continued debt reduction continues to be a goal of the Company, and our goal for fiscal year 2004 is to achieve a debt reduction of at least $30 million before any cash that might be used for potential acquisitions. For our lender group, our adjusted EBITDA numbers for fiscal year 2003 were $83.4 million, although this is down from the $101 million in the prior year, the further debt reduction in the current year still provides more than adequate coverage well within the range of our requirements and our credit agreements.

That concludes my comments, we'll turn it back over to April who will open it up for Q&A.

Thank you. The question-and-answer session will be conducted electronically today. If you're wishing to ask a question, you may do so by pressing the star key followed by the digit 1. If you're using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, press star 1 to ask a question. Our first question today will come from David Yuschak of Sanders Morris Harris.

Congratulations, gentlemen, on a fine quarter here in this kind of environment. A couple quick questions. The impact on the bonus accruals, was that in the operating expense line primarily? And would you mind sharing the number with us, pre-tax?

It would be spread throughout the income statement, some of it would impact gross profit, some of it would impact operating expenses, but the net-positive impact, net of the accrual that we made for our retirement benefits, was approximately $3.3 million.

Okay. That was excluding the retirement?

Yeah, that's a pre-tax number now.

Right. Okay. And was there much of an impact for Able Door in the component sales then, for the quarter?

Not really.

Able made money in October, and we were cleaning up from when we bought it, we made a little bit of money in September, and we made a better return in October. And it's continuing to get better.

Okay. One last question before I turn it over. Butler Manufacturing had indicated that they were looking at strategic alternatives and you guys have commented in the past about other companies having financial issues, some bankruptcies, some cash flow operations. How do you guys see, in this situation, as you've finished out the fiscal year, because the thought would be if you can't get through the seasonally strong periods with adequate cash to go to these seasonally slower periods, that puts even more burden on companies who have had problems. How much has that played into the weak pricing environment? And I mean, with the company like Butler as big as it is, [indiscernible] strategic alternatives, doesn't this kind of shake up the landscape as to what the next 12 to 18 months might look like in this metal building industry?

Well, we'll have to see where that goes, but I mean, you also have the Magnatrax Group that is just now coming out of bankruptcy. We have other major manufacturers on the building side that have not performed well, and that's what's caused the pricing pressure on the building side. The pricing pressure, as you can see from the results, has not been nearly as strong on the component side, but Butler's not into components, Magnatrax is into components, but it's a third of their business or something. So Butler doesn't really -- they don't push the envelope on pricing as bad as some other folks.

Okay. Well, it may be very interesting how this all kind of plays out here, because I do think that stability ultimately has to help this space.

Absolutely. We agree.

I'll turn it over to the next guy. Thanks.

Moving on to John Diffendal with BB&T Capital Markets.

Good morning. First, I think you guys deserve a bonus this year, I'd be willing to take that $3 million, you did a great job, in a very tough year. But just to pull that string again for a minute, It was -- going into the quarter, did you expect that reversal was going to happen when you made your range estimate for the fourth quarter?

No, sir. We absolutely did not. We had a dismal August, and then September was better and October was better, but going into August, we thought we could make our bonus. We thought we could make our bonus point. Okay?

Help me in terms of -- refresh my memory on that, it's a return on asset calculation, right?

Yes, sir.

And what was the target and what did you actually achieve?

Well, the minimum threshold, it's return on operating assets, John, as defined, but our minimum hurdle in order to pay any bonuses is 15%.

Right.

Our maximum target is 25%. We actually achieved a little over 14% for the year, the way we calculate it. So going into the quarter, we were close enough at the end of the third quarter that we had expectations that we had a reasonable opportunity to make the minimum bonus level.

Right.

So, therefore, when we made our -- had our third quarter conference call and made our earnings estimate for the fourth quarter, we certainly did not anticipate that we were going to end up reversing this bonus accrual.

And I wonder if you can maybe just give us a little sort of overall sense, and you mentioned there's some signs of a firming tone. Can you go into a little more detail on what you are seeing out there that gives you some expectation of that?

On the component side of the business, we were above our forecast for November, and we're running slightly above the forecast for December. But the building segment is still very soft.

Right.

And it's the large commercial and industrial buildings that's missing from the scene. Now, we have refocused some assets on the smaller building market, and we're going to go after the smaller building market even harder than we have in the past, and I think that that will begin to show some results, certainly in the second quarter. So, we're not sitting still, it's just that there's not a large demand for the bigger buildings, and then when they were – when there was a building out there, the price on it got to the point where we didn't want to play in that market.

I see. One last question, I might get back in line, but can you give us an update on the Tennessee plant?

It's opening, I mean, it's opened, it's running well, it's going to allow us here, I'm talking about shortly, to eliminate some shifts at other plants, and it's pretty well doing everything we thought it would do when we started. Mike Young is the new President of the buildings group, he's headed over there next week, and I'm anxious for him to get back and we'll meet up next Wednesday night, I'm thinking he'll give me a new report on it. But the last report I had was like last week, and it's running good.

Right. Thank you.

Yes, sir. Thank you.

Rick Gouchill (ph) with Columbia Management has our next question.

I have a follow-up to one of the prior questions that was asked related to Butler. With that entity exploring strategic options, and I hear one of your goals is to continue to reduce debt, but I think you threw in the caveat "before acquisitions." Is that something that hits your radar screen, and maybe you can comment about whether it's just parts or whole?

Our legal attorneys advised us that we might have that question before we got on the conference call, and we was advised not to address that question. I hate to tell you that, but I have to take the advice of our legal counsel.

Okay. Maybe give me a sense of what the comfort level is on a capital structure, if you were to generically make any acquisition, how far would you go?

If it was a good acquisition, and if it was accretive, and if it had synergies, and synergies are putting more product through our paint lines, that can be one synergy, then I don't think we'd shy away from something south of $100 million. But I mean, I'm just saying, it's got to be the right one. Bob, you got any comment on that?

Rick, to kind of answer that question in another direction, we would look at anything that would not significantly increase our credit exposure. And I guess that would be the same answer as saying that from an earnings per share standpoint, we'd want it to be accretive, we would want an acquisition within a relatively short period of time from an EBITDA standpoint to be able to service the additional debt that we would take on.

Okay. So in other words, the coverage ratios would have to -- it wouldn't dilute the coverage ratios on --

That's correct. It might increase the overall -- temporarily it might increase the overall leverage, we're at about three times EBITDA right now. I certainly, I don't think we would want to do anything that would carry us anywhere above four times, even short-term.

Okay. And you are not -- I mean, it's fair to say, obviously on the building side with businesses as bleak as it's been, there's no need for additional capacity. Is that a fair statement?

Certainly right now that is absolutely a fair statement, particularly with the additional capacity that we created when we opened the plant in Tennessee.

The problem with a building acquisition, from anybody, okay, is that there's no metal building plant out there, including none that we own, that will produce at the same scale of economy that Lexington will produce at. So our thoughts are that perhaps we need another two or three Lexington-type plants in the future scattered in different areas of the United States to go along with the component plants, and shut down the older capacity. I mean, we're talking way in the future, but, it's really hard to look seriously at buying a business when it can't produce as well as one that you have.

Okay. And so you basically are saying that any production capacity that you'd be looking at, or that you'd acquire, is not something that you'd care to operate long term?

There's no capacity that I'm aware of in the United States that is as efficient as the Lexington plant. And the Lexington plant is just coming onstream. So that tells you that Lexington's even going to get better than it is today.

Okay. Thank you.

Yes, sir.

Moving on to Leo Harmon with Fiduciary Management.

Good morning. Could you all quantify the impact of pricing and volume by each individual business segment?

I'm not sure I exactly understood your question.

Okay. Revenues were flat, I'm trying to figure out why revenues were -- what was the price impact that caused revenues to be flat, and what was the volume of mix or mix impact that offset pricing in the quarter?

If you look at buildings on a per-ton basis, okay. And you look at a weighted average, the pricing is down 6%.

Okay.

And, if you look at components, it looks like, components is harder to compare to because of the mix, but it looks like components are down about 2%.

Okay. All right. And then secondarily, what portion of your steel is bought under contract and what portion is bought under spot pricing?

Ken?

Well, we at the present time, there's not much of a spot market in the U.S. Because of the tariffs and the weak dollar and the things that A.R. had addressed in his comments. But we do not buy under contracts and our industry really doesn't buy under contracts. We give estimates to the mill a quarter in advance, and it's usually done based on those estimates. But they're not firm contracts, they're just estimates we give the mills in which we order under.

Okay. Finally, could you talk about or quantify what was the cost savings in the quarter from the plant closures that you all have done in the previous year?

Well, those were actually done, I guess we've actually lapped 12 months now, but when we did those plant closures, we expected annual savings of somewhere in the range of $5 to $6 million. And I certainly believe that we've achieved that level of savings.

Okay. Thank you very much.

Thank you.

We'll now take a follow-up from David Yuschak.

Let's go back to that Lexington facility, you had indicated that you might have another two to three of these things hanging around since it's much more efficient than any older capacity, probably even from your competitor's point of view. What conditions would you guys need to see to do another one Lexington plant? And then, would that also entail closing some older capacity you've got then?

Yes, if we build another Lexington plant, Lexington-type plant, we'd certainly be ready to close older, less-efficient capacity. Strength in this economy, and then let's not forget that we have a very efficient frame plant, actually two frame plants in Mexico which produce a lot for us, daily, monthly, so on. So, we don’t have -- we've got 35 plants but we don't have many frame plants. We've got five frame plants, that's all. And then we ship those frames all over the country, and add the secondary framing and the cladding to them and then ship them to job sites.

On the Lexington plant, as that thing ramps up and you get pleasant surprises, I guess maybe from the market share, maybe penetrate or increase the share in those areas where those plants would reach, would that be another trigger that these things are having kind of an impact on a market share basis, even if you wouldn't have a strong enough economy, say?

I think they're going to have more [inaudible], David, from a cost standpoint than they are from a market share standpoint.

Okay. So it's going to be more of a lowering the cost of operations?

That's correct. If you remember the structural part of our business, it's labor-intensive and most skilled part of the product that we manufacture, the Lexington plant incorporates a great deal of material handling equipment. So we don't have to panel the equipment and don't require the same number of people that we require in our older frame operations.

Okay.

This is a more efficient -- should be a more efficient operation from a cost point than anything we currently operate.

Maybe it will generate the kind of margins your coating guys do. Just kidding.

Yes, we'd like that.

On the national marketing effort, just because you're probably more focused on some of the larger facilities, is that going to be put on the back burner right now just because it's more difficult to sell into that market at this point?

No, sir. We're out there in that market every day. That national accounts market is a market that -- when you make a sale in that market, it's usually a sale that you've worked on for nine months to a year and a half or two years, okay. You get in on the ground floor and the planning stages, I mean you work your way all the way through that. One of the representatives that we had in that area didn't pan out and we replaced him, but we have some good guys in that area of national accounts and we're confident that's going to pay off in the future.

Okay. Just a couple of other quick ones. Bob, I think you said there was a $2 million impact between retirements and the doubtful accounts on the operating income and [inaudible] buildings, so that would have been essentially 7.7 instead of the 5.7, did read that right?

No. I said the net impact on bonus accrual less the retirement benefits was about $3.3 million.

I mean, in the Engineered Building segment though, you indicated there was a $1 million retirement charge, and the $1 million doubtful accounts charge, so that would have -- because you reported $5.7 million, I think, in operating income in the fourth quarter from that segment.

That's right.

So there's a $2 million swing positively with those two charges?

Yes, the net negative impact of those was probably around $1.5 million.

Okay. And the tax rate for next year, what kind of number should we be using there?

I think we’re somewhere -- annually I think we're somewhere close to 40%, I think it actually is 39.8% for this fiscal year, so somewhere rounded around 40%, maybe.

And gentleman, that is all the time we have for questions today. At this time, Mr. Ginn, I'd like to turn things back to you for any additional or closing remarks.

Well, we'd like to thank everyone for your time and for your interest in NCI, and please don't hesitate to give Bob or myself a call if you have any questions after the conference call is over, and again, we appreciate everybody's participation. Thank you.

That will conclude today's conference. Thank you for joining us and have a great day.