Core Natural Resources Inc (CNR) 2004 Q1 法說會逐字稿

Please stand by.

Good morning. Welcome to this NCI Building Systems Inc. conference call to review the Company's results for the first quarter of fiscal 2004. This call is being recorded and a telephonic replay of today's call may be accessed through March 4th by dialing 719-457-0820 and entering access code 178021. The replay will also be available at NCI's Web site at NCILP.com.

The first 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 (sic). 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 new release for a discussion of the factors about NCI's operations and the forward-looking statements made in this call.

To the extent any non-GAAP financial measures are 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 new 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'd like to turn the call over to NCI's Chairman, President and Chief Executive Officer, Mr. A.R. Ginn.

Thanks, Doug. Good morning to everyone. Ken Maddox and Bob Medlock are here with me this morning. I will have a few brief comments and then Bob will talk about the financials and we will then open floor up to any questions and answers -- try to answer them for you.

I'm sure most of you know, from having seen the news release, our financial results for the first quarter were much better than we had anticipated. We produced our first increase in comparable quarter net income per diluted share in a year and the second consecutive quarter of growth in comparable-quarter sales. In fact, this with the highest first-quarter earnings per share since the first quarter of 2000.

In addition, we were able to reduce our debt by almost 33 million in our first fiscal quarter. As Bob will discuss in more detail, most of our growth in sales came from our metal components business, and we also got a substantial lift from our coating (indiscernible). This growth enabled us to take advantage of the inherent economies of scale in our business to drive growth in net income at a significantly higher rates than sales.

In our conference call last quarter, we said the central question we face in fiscal 2004 is whether we will get sustainable growth in the economy. Although we still see too little demand and too much capacity on the Building Systems side of our business, the good growth in our components business supports our belief that the tenor of the market has improved over the fourth quarter, even though the first half of our fiscal year is a seasonally slow part of our year.

We went on to say, in last quarter's call, that we expected steel prices to rise for 2004 despite the lifting of the tariffs. As we indicated in the news release and as the Wall Street Journal discussed in a front page article this past Monday, this expectation is coming true and it's coming true in a fashion that is creating some real problems in the manufacturing industry across our country.

Now, let me immediately add that we think this situation will resolve itself over the short-term. Also, I will remind you that NCI is well positioned not only to withstand any near-term market dislocation caused by rising steel prices, but also to take advantage of any opportunities that might arise as a result of the difficulties faced by less well-positioned companies. However, even we face a reduced ability to predict short-term earnings as a result of what's going on in the steel market.

The problem, in a nutshell, is that steel pricing is increasing at a faster rate than steel users, such as ourselves, can adjust to. For instance, when NCI entered a contract for an engineered building system, our quote to our customer is based on current steel prices, which historically don't vary significantly over a seven or eight-week leadtime that it can take for us to ship our finished product for that particular contract. With relatively stable prices, this window of pricing instability has not normally created an issue for us. However, with steel prices climbing at a rate we haven't seen in more than 30 years, we are seeing a significant pricing gap between the time we quote a job, get the order from our customer, and the time that we are able to produce the steel and the steel will actually ship.

It's important to realize that higher steel prices are not necessarily the problem; it's a rapid rate of increase. Again, as I mentioned last quarter, we can normally increase our prices to our customers in response to increased steel prices but when they are increasing as fast as they have been in the last three months, any material delay between our quote, receiving the order and the delivery of the finished product creates a pricing risk.

Now, we expect this phenomenon to be relatively short-term because the absolute growth in steel prices will reduce demand and attract more supply. As prices stabilize, our pricing risk will begin to normalize.

In the meantime, we're taking a number of steps to mitigate the impact of this situation on our bottom line. First of all, let's talk about the building side of the business. Let's keep in mind that buildings are only 33 percent of total NCI revenues. Now, on the building side, our customers consists of small to medium-sized contractors and general contractors, which we call builders. They sell our buildings, for the most part, on a fixed price to their end customer. In other words, in a majority of instances, they cannot raise their price to their customers.

If we force the price increase through to them the way the steel mills are forcing the price on the us, it could actually put some of our builders into bankruptcy. Therefore, we plan to work with our loyal builders and customers, many of whom have been with us for a number of years, in an effort to raise the price when they can pass the price through to their customers.

On other jobs, we will work with our builders to help them through these times with some degree of price-protection. Protecting the price for some jobs will have an impact on margins for the Buildings Group. However, the impact should be short-lived and is reflected in our second-quarter forecast.

Now, the Components business comprises slightly more than 50 percent of our total revenues. On the Components side, we are able to effect the price increase with shorter leadtimes. The time from order to shipment on Component jobs averages about five working days. Therefore, the rapid rate of a steel price increase does not have exactly the same effect on Components as it does on Building.

Now, I'm going to talk about Building again now. As an example, while we intend to protect our customers on some active Building Systems projects, we are exercising our contractual rights on projects in our backlog to make sure that they reflect the current realities in the steel market, especially those projects that have been on hold for some period of time or with less-than-firm start dates. We are particularly focused on approximately $30 million worth of these jobs or projects that we've essentially removed from our backlog and that we are in discussions with our customers to reprice. As a result, our Building Systems backlog is down at the end of the first quarter from the end of the fourth quarter of '03, and it's about flat with where it was in the first quarter of '03. We don't think this step will have a substantial impact on our volume for the year but it will enable us to avoid producing jobs or projects at a loss.

Steel pricing is the reason we are cautious with our second-quarter earnings guidance, and we are hopeful that pricing will have stabilized by the start of the third fiscal quarter.

As you know, late spring and early summer is when the building business really gets underway. We will closely monitor this situation and update you on the next call.

You know, if you could set this steel issue aside, we are really pleased with NCI's performance and its positioning. We have continued to maintain a tight rein on our controllable costs, and we are reaping the benefits from efficiency investments like the Lexington, Tennessee frame plant. That plant is coming on stream nicely and it has allowed us to discontinue a less-efficient night shift in another building plant.

The repair and retrofit side of our metal components business is producing expanded volumes, which is an encouraging indicator that investments may be finally increasing in nonresidential construction after a substantial, three-year slump.

We completed these first-quarter reviews just this week. During these reviews, we asked the division presidents to put capital spending on hold except for any item affecting safety. We want to put these on hold until this steel situation settles down. All agreed that this was a prudent thing to do. As most of you know, we normally spend capital in our slower, seasonal first and second quarter and then really produce strongly in the third and fourth quarter. All we are doing is postponing these capital projects until we get this steel situation settled down.

NCI also continued to strengthen its financial position during the first quarter, as Bob will describe.

Before I turn the floor over to him, let me close by saying that NCI's growth strategies are designed to produce long-term growth and shareholder value despite the short-term gyrations of the business cycle. If current indications of better conditions ahead prove incorrect, we are ready to respond, just like we have during the past three years, a period that we feel has left us more firmly on top of this industry that ever. We are optimistic, however, that we will still see a better environment in the second half of fiscal 2004 and that we can begin once again to leverage this position of industry leadership that we've all worked so hard to create.

Now, I will turn the call over to Mr. Medlock.

Thanks, A.R. Sales for the first quarter of 215 million were up 3.6 percent over the prior year first quarter. The increase, as A.R. mentioned, came from higher demand in the components business and oil-coating segments, while our Engineered Building Systems segment was down 5 percent compared to the prior year. This represents the second consecutive quarter of increased comparable quarter-over-quarter sales.

Gross profit margin improved to 23.3 percent, compared to 21.1 percent in the prior year's first quarter. This 10 percent increase in margin performance resulted from the better leverage of our manufacturing costs, resulting from the increase in volume and demand and more efficient operations as we moved production to our more efficient frame plant in Lexington.

Operating expenses for the quarter were up 12 percent year-over-year. This $3.9 million increase in costs exceeded the increase in sales as a result of higher healthcare costs, increase in other employee benefits, higher year-over-year costs for property taxes, and a higher engineering cost, as projects remain very complex. These items accounted for about 3.5 million of the increase in expense for the period.

As a percent of sales, operating expenses were 16.8 percent, compared to 15.6 percent in the prior year's first quarter.

Interest expense for the quarter of 4.6 million was down 11 percent on the lower level of debt outstanding during the period. Net income was up 50 percent with diluted earnings per share up 45 percent to 29 cents per share for the first quarter, representing the best first-quarter earnings performance of the Company since fiscal year 2000.

Looking at our business segments, Engineered Building Systems segment sales for the first quarter were 66.9 million, compared to 70.4 million in the prior year, representing a 5 percent decline. Operating income of 4.1 million was down 14 percent from the 4.7 million posted in the prior year. Price competition, increased complexity of orders, which increased engineering and drafting costs, and the continual decline in demand for larger products accounted for the change in operating income. In the first quarter, this segment accounted for 31 percent of consolidated sales.

We have seen a 30 percent increase in building orders during the first quarter of fiscal year 2004. Obviously, some of these relate to orders placed to beat announced price increases, but some represent an increase in demand.

Our backlog at the end of the first quarter of 149 million was flat with the backlog at the end of the first quarter of fiscal year 2003. As A.R. mentioned, this excludes a net of $30 million, which we have removed from our backlog and are currently evaluating its status.

Metal Components segment sales for the first quarter were 118.4 million, compared to 108.1 million in the prior year. This represents an increase in 10 percent for the period. Operating income of 11.2 million was up 28 percent from the 8.8 million posted in fiscal year 2003. Improved plant efficiencies due to higher utilization accounted for improvement in margins for the period. First-quarter components accounted for 55 percent of consolidated sales.

Our Metal coil coating segment sales for the first quarter were 30.1 million compared to 29.4 million in the prior year, an increase of 2 percent. Operating income of 5.9 million was up 51 percent from the 3.9 million posted a year earlier. Although external sales were only up 2 percent, internal production for the other two segments of our company increased by 20 percent in the quarter. Overall increase in production and total sales lead to better plant utilization and a better leveraging of operations while resulting in higher operating income performance for the quarter. In the quarter, metal coil coating accounted for 14 percent of sales.

Our asset management continues to be excellent. Compared to last year, Receivables were down $5 million and inventory had declined by 12 million. This has enabled us to reduce our debt $33 million in the current quarter and $70 million for the trailing 12 months.

Capital spending for the first quarter was $2 million. Although we have not changed our capital plan for fiscal year 2004, as A.R. mentioned, we are deferring any projects that can be deferred without impacting our existing business until the current steel supply situation resolves itself.

Adjusted EBITDA for the trailing 12 months ended January 31 was 85.8 million, compared to 83.2 million at the end of fiscal year 2003. This is the first quarter that we have had a quarter-over-quarter increase since fiscal year 2000.

Our debt-to-cap show improved to 38.5 percent from 48.1 percent a year earlier. Our total debt to adjusted EBITDA at the end of January 31, 2004 was 2.6-to-1.

With those comments, I'll turn it back over to Jennifer and we will open it up for Q&A.

Thank you, sir. (OPERATOR INSTRUCTIONS). Kathryn Thompson of BB&T Capital.

Good quarter. I have a few questions. First, touching on debt, do you have goals for your debt reduction update for the fiscal '04?

Kathryn, we don't really have any defined goals. As we've stated, we are comfortable with our debt-to-cap ratio and our leverage at the current time and, you know, continue to look for acquisition opportunities. In the interim, though, as we generate excess cash, that cash obviously will continue to be used short-term to reduce debt.

Okay. Could you also give an update on your new Tennessee plant?

Yes. I was in that plant last week and the good news about this plant -- they've had one quality problem since they began producing frames in September, and that's really unheard of. They are coming up to speed really, really nicely. We have about 50 total employees there. The plant is working as we expected and as the design showed it would work. All in all, it looks really good to me. You know, it's going to take a few more months to get everybody trained and everybody up to speed but all in all, it looks really good at this point.

Great. Could you also discuss the impact of changes at Butler on the marketplace?

We don't know what those changes will bring about. You know, it's according to how they decide to run it. You know, we don't know -- I mean, I think it's really too soon to even venture a guess as to what's going to happen.

Okay. I guess my last question is, are you aware of any competitors who are closing capacity or who are planning to close capacity?

You know, not only are steel prices increasing rapidly, we've seen some of our products with over 100 percent increase, but supply is very short and you know, our belief, at this time, is that we will have competitors that maybe struggle paying their bills to the steel mills and they are cutting them off. This could have some pretty serious impacts on some of our direct competitors.

Now, don't be misled by what I'm saying. We don't see any shortage for NCI in buildings or components at this point in the game.

Okay, great. Thank you very much.

Steve Ravelle (ph) with Bawdy Brown (ph) Asset Management.

It's actually John Bawdy (ph). One of the things that you have said a couple of different times is that you think that a lot of the steel price issue is short-lived. I guess I can understand how, at some point, we will get a stabilization and the rate of change or the rate of increase will slow. Therefore, your seven-week lag -- the impact in that seven-week period will start to mitigate. But I'm looking kind of longer-term at what the increased steel prices does ultimately for demand and what kind of impact might that have on your business.

There's probably more than one opinion here but actually, what we think is going to happen -- and I think -- we think they're going to raise the pricing and go too far with it. Then we will see the prices come back down and stabilize to some effect, As you know, there's a world shortage of coke right this minute and there's 900 pounds of coke to produce one ton of steel; almost half of it's coke. There's more coke batteries being built in the United States that will come onstream next year. I think there's a lot of things that will help mitigate this problem. But you know, I don't think we can predict -- even the experts are not predicting -- but the prices could start coming back down, you know, by this fall.

Okay. With regard to the plan to work with a lot of your builders that are dealing with fixed-price contracts, can you give me just a little bit better detail on what the plan is here and what -- is that the 30 million you took out of backlog? Are we talking about the same numbers or can you give me some way to quantify what kind of impact that the projects that you're going to help these builders on (sic)?

Well, you know, each project is going to have to be looked at on an individual basis. If you take a smaller-sized building, like a 30x40, you're talking about maybe a couple or $300 worth of impact. You know, that's not going to kill the project for us or one of our builders.

You take a big project -- I was on one last week and went to see the customer along with the President of our Buildings Group -- and it's a $2.5 million project and the steel increase has a $600,000 effect. There's no way that we can eat that and we've got to get through to the end customer. Fortunately, this end customer uses steel in his products; it has nothing to do with the building industry -- but they realize that there is a real, live, price increase and so we're going to have to negotiate that. But each one of them is going to be a separate set of negotiations.

Okay. Thanks very much.

Dana Walker with Kalmar Investments.

Good morning. A.R., what posture is it your sense that your competitors are taking towards the steel price volatility as they deal with their builders?

I've got price increases from competitors raising the price the same way we have (LAUGHTER). We got one price letter from one of our customers -- competitors -- that says that they've got enough steel to run them through June. I think what's going to happen here is I think they're going to lose their (indiscernible) this is over with; that's my real thought because there's no way they have got enough steel to run them through June. Talk is pretty cheap. I think NCI has taken the lead in this and we're trying to be the responsible company in this industry.

I've got to say that we have some other competitors that have done the same thing, and I'm proud of them, because if we are all telling the same story, it makes it easier, and the story is the truth. You know the steel mill has raised the price through the roof.

Are you working with your builders, though, on projects that have yet to price, or where you're trying to reprice, where you carve out the price of steel and how that (inaudible) be somewhat more fluid to market conditions and/or have some type of a (indiscernible) price on the day of shipment or something that's transparent and yet works for both?

The part of the steel mill's price increase is a surcharge. On the building side of the business, what we have done is we're going to implement a surcharge. That way, you are raising the price only on the steel and not on everything else in the job. So you know, that's the way we intend to approach it right this second. We're trying to be as flexible as we can and respond to the market conditions. That's what we will do.

We do not know, at this time what the -- excuse me, we know April. We don't know what the May pricing will be. We've announced what the April pricing will be to our customers but we do not know what that May pricing will be. That makes it difficult.

If we were to go back for a moment and talk about Q1, given that most of this conversation has focused on what is about to happen, what about Q1 was a positive surprise to you? Were you just setting a conservative bar or was there something that developed in the business, both profit-and volume-wise, that was pleasant?

The component company was -- their plan reflected flat first quarter. It has been well-recognized by the media. You know, we had some pretty severe weather with rain in the southeastern part of the country and heavy snows in the northern part of the country, and the Components group shipped about 10.3 million more than their plan. That helped a lot with the margins. You know, their operating income was up 28 percent over last year, and that's a big part of this. I mean, the Component Group is still shipping strong. Buildings were down 5 percent in the first quarter compared to quarter one year ago, so that was a surprise.

When you cite weather, though, I presume you're suggesting that weather could have been an impediment rather than what ended up being benign or at least not affecting your ability to drive more volume than you thought you would.

The weather did not affect component sales like we expected the weather to affect the component sales. You're exactly right in what you say. That was the surprise.

How much of the improvement in the Component business, though, would you consider to be volume or mix rather than passing-through of having to pay more for steel?

In that first quarter, there's no price increase on the component side. That's the same price that we had in the first quarter last year and the second and third and fourth quarter last year. The prices didn't change. The prices changed starting with the second quarter.

Dana Walker; We will see an inflation effect from this point forward in your Components business?

In Components and Buildings.

My final question and then I will get back in queue if necessary -- Bob, will you provide a once-over or again go over lightly on the (indiscernible) coil profit improvements? I didn't quite get all that.

Well, you know, basically, about half of the production of our coil paint line is used internally by our other two business segments. So, that obviously -- those sales and that production does (sic) not show up in our external sales numbers. Although our external sales numbers were only up slightly, the production in our full paint lines was up about 20 percent for the first quarter. This is very much a marginal cost business. When production goes up, particularly at those levels, we have a lot of efficiencies operation. So, that was a little bit -- you know, the amount of throughput was a little bit of a surprise in the first quarter. The fact that we earned $5.9 million in the first quarter was above our expectations when we put out our external forecast for the first quarter during our fourth-quarter conference call.

Do you have certain costs, though, in that business that would have been lower? They must have been meaningful lower in dollars, because even if you were to play the math and say -- well, I guess about 30 million is all external, so the half that you use from a utilization standpoint doesn't affect the revenue number.

It doesn't affect the revenue number but it certainly affects your operating profit because internally, they have a transfer price that is very similar to what they would charge their external customers.

Your utilization, though, internally -- is that for both Buildings and Components?

That's correct.

So the fact that your volumes, although slightly down in Buildings, were up in components would have created positive cost leverage (sic)?

That's correct.

Or overhead leverage?

That's right.

Would there have been anything else, though, in the cost make-up of that business?

Not particularly. In fact, we've struggled the last two or three years with natural gas prices. Our gas prices in the first quarter may have been slightly higher than they were a year ago. But this is a highly marginal sales business. You know, when you can get utilization in these plants, you certainly have an impact on how profitable they are.

One final question on the paint coil operation -- can you talk about the influences in terms of your market share and/or your outlook for external volume in that business?

Well, there are two pieces to that. One is the -- (technical difficulty) -- business; that's material that goes into the side wells and the roof panels. We are probably about the fourth largest producer of material that goes into that market. We have some competitors that are much larger than us from an external standpoint.

In the heavier gauge material, the material that's used in the secondary framing of component and buildings, we and a company called Hannah Steel (ph) are probably the biggest people in that industry and we probably have about a 40 -- (technical difficulty) -- we probably have a 40 to 50 percent market share in that business. Now, there are only about three or four companies that actually are in that business.

Now, the advantage I think we have, Dana, in both segments is the fact that we are the only one of those companies that actually processes its material for its own account. Therefore, we are able to baseload our coil paint lines for the production that we use internally. So, you know, we were able to use that leverage to increase our profits based on what we sell externally.

Are there interesting developments, though, in the mix between heavier-gauge and light-gauge? How would one playing off the other affect you?

The components uses, on a proportional basis, a lot more light-gauge than the Building side uses. Then Components and Building use about the same volume of heavy-gauge. So, on some orders in components, you've got to have the heavy gauge to go with the light gauge; on other orders, it's 100 percent light gauge. So, you take a big industrial warehouse that's going (indiscernible) to us, it don't have any heavy gauge (sic) in it from the component side of the business; it's just got the roof panels, which could be a million square feet, you know?

Dana Walker; I suppose what I'm fishing for here -- has there been any change in your customer line-up or in the regional play of how you are performing that supports this improvement in profitability, or is this just a flat-out reflection of an improvement in the steel business generally in which you are participating?

There's been no change in the customer base. It's an improvement in operating efficiencies, based on volume.

(OPERATOR INSTRUCTIONS). Justine Ho (ph) with Grandview Capital.

I don't know if you mentioned it already. Can you quantify how much steel prices have increased in the first quarter and for the year?

If we talk about from what we know now until April 1st, -- let's go back to October, that's when the prices were steady. In (indiscernible) that you use for secondary framing, you are up over 100 percent, 112, 115 percent in some cases. In light-gauge, we're going to be up April 1st like 35, 40 percent, is that right, Ken? In plates and bars, we are up at this point right now 80 to 90 percent, based on the supplier. So, there are substantial increases.

Now, components ships mostly steel. There's a lot of other parts that go in a building, so if you looked at the building mix -- and I'm just giving you an idea -- you know, you might have to raise the price on a building 25 or 30 percent. But on the Components side of the business, it's strictly steel and so you are almost raising the price the full amount of the increase.

Justine Ho; Okay. So hot rolled (ph) is 112 percent, light gauge 35 to 40 and plate (indiscernible) 80 to 90 percent -- that's for April versus October?

Right.

It appears we have no further questions. I will turn the conference back to you for any additional or closing remarks.

Well, we really appreciate everyone joining in on the conference call this morning. If you have any further questions after the call is over, we will be happy for you to give Bob Medlock or myself a ring. Thanks, everyone, for participating, and good day.

This concludes today's conference. Thank you for your participation. You may disconnect at this time.