Core Natural Resources Inc (CNR) 2004 Q3 法說會逐字稿

The NCI Building Systems earnings conference call will begin momentarily.

Good morning. And welcome to this NCI Building Systems Inc. conference call to review the company's results for the third quarter of fiscal 2004. This call is being recorded and a telephonic replay may be accessed through September 1 by dialing 719-457-0820 and entering access code 396760. The replay will also be available at NCI's website 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 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 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 in expectations. At this time, I will turn the call over to NCI's Chairman and Chief Executive Officer, Mr. A.R. Ginn. Please go ahead, sir.

Thank you, Scott. Good morning, everyone. And welcome to NCI's conference call to discuss our third quarter results. With me today are Norman Chambers, Ken Maddox and Bob Medlock. We are going to change the call a little bit, and I am going to say a few words about an overview of the third quarter and the state of our business, and then I will turn the call over to Norm Chambers who will give you some information regarding our three operating units, and and then Robert Medlock will discuss our third quarter financials and we are going to keep this as short as we possibly can, and then we will be available to answer any questions you might have. Let me begin this morning by saying ta we are, you know, really pleased with NCI's performance for the third quarter. You're all familiar with the challenges we faced this year as a result of the steel availability and the pricing of steel, as well as continued mixed signals from the economy. And yet, we posted strong growth in sales and profits for the third quarter, significantly beating our original earnings guidance. In doing so, we produced record quarterly sales for the first time since the fourth quarter of fiscal 2000.

I just feel impelled to say right here that there is no way that we could have seen the third quarter finish in the way that it finished, that just the steel was not available, and the orders weren't in place when we made our third quarter forecast to predict where we really wound up. But there are some specific items that contributed to this performance and I will try to cover those in just a minute.

From a broader perspective, however, our third quarter results are further validation of the strategic planning and investment and the hard work we put in over the last several months. And this further strengthens NCI's position of market leadership. While many factors affect quarter to quarter results, it is the success of this long-term strategy that has positioned this company to leverage the opportunities we see in today's environment. And that's an environment that is much improved from where we were at this same time last year. The cautious note that we struck in our news release about somewhat softer demand clouding our short-term visibility is warranted. But we remain optimistic that our national economy is gradually strengthening and that as our third quarter results suggest, this trend will drive significant profitable long-term growth for NCI.

One of the factors that had a more tangible bearing on our third quarter results was the increased availability of steel, and the reduced pricing volatility as to the type suppliers, and rapid increases -- rapid price increases during the first half of this fiscal year. As a result of improved steel supplies, we were able to continue serving the increased demand from our existing component customers and to seek new business more aggressively than we were able to do during the second quarter of the year. In addition, this increased volume drove higher internal demand for our coatings business, even as we expanded our external coating sales. Now, the increased steel supply was also a factor in the stronger-than-anticipated results from our engineered building systems business.

With reduced pricing volatility, we made substantial progress in working through the backlog of contract signing, prior to the rapid increases in steel prices earlier this year. By renegotiating many of these contracts and higher prices, and by being willing to cancel contracts, and Norm is going to get into that in his comments in a few minutes, or which equitable agreement could not be reached, we set the stage for an improvement in the margins of this business. Another factor that accounted for our better-than-expected earnings performance for the quarter was the fact that third quarter demand was not cannibalized to a great extent by second quarter orders ahead of anticipated price increases. And this was a concern that we had going into the third quarter.

In addition, we still have not seen significant evidence to suggest that the steel price increases, which are continuing by the way, in a much more moderate fashion, have led to builders and contractors substituting other materials for steel. You have to keep in mind we told you a number of times, that the preengineered building is only about 20% of the total building cost. So we continue to believe that the recent price increases can be absorbed in the overall cost of the project. Based on conversations with many customers, we believe the softness we've encountered in the market, is more related to recent mixed economic signals after a period in the spring and early summer of stronger economic activity, and the softness we're seeing really could be just, you know, nervousness before the presidential election. Looking forward, we know that our industry continues to face some uncertainty in terms of the economy, and the supply and pricing of steel.

However, we believe NCI remains well positioned to push through these short-term challenges. As the acknowledged leader in the components industry, two times our largest competitor, and with strong market positions in our other businesses, we expect our low cost operation, broad and innovative product lines, and strong customer service, to enable us to capture additional market share consistent with our historic performance.

Unlike others in our industry, we have steadily strengthened our financial position as we simplified during the third quarter by the refinancing of our bank debt and the redemption of relatively high rate senior subordinated notes, based on our financial position at the end of the third quarter, as well as our continuing substantial cash flow, we are confident of our ability to finance our expansion plans in the upcoming fiscal year. We have also continued to demonstrate our ability to leverage our market position and financial strength to grow our business through accretive acquisitions, most recently through our announcement of a definitive agreement to purchase heritage building systems and steelbuildings.com. Through this transaction, we expect to expand our presence in the retail market for small engineering steel buildings, especially in the fast-growing agricultural segment.

The retail markets represents a significant growth opportunity that compliments our building group primary focus on medium to large commercial and industrial steel buildings. I think the important thing that I've said here is that this gives us two more unique distribution channels. And by bringing the two new distribution channels for retail products to NCI, we expect this transaction will enable us to further progress towards our goal of expanding the overall retail market. As such, we expect this acquisition to benefit both NCI and our existing customers. We will continue to evaluate other acquisitions that will contribute to our achieving our long-term growth objectives. Thank you. And I will now turn the call over to Norm Chambers to discuss operating units.

Thank you, A.R. Before I discuss in more detail the quarterly performance of our three business units I think it is important to reinforce a point that A.R. made. As most of you know, the 2001 to 2003 nonresidential construction market was hit by one of the worst recessions, some 30% reduction in spending, that has occurred in the last 30 years. NCI performed exceedingly well during that period. Just as that downturn has leveled off, we have been surely tested during this last nine months with the most significant price increases in the steel industry has ever witnessed. We have and will continue to work with our customers to deal with the shock created by these price increases from the steel mills. We see no evidence that these prices will abate.

This adversity has allowed us to reinforce the value we deliver to our customers through our engineering, product quality and service. Therefore we remain confident that the end users will continue to appreciate the benefit derived by our metal buildings and components we supply. We deeply appreciate the loyalty that our customers have shown us.

Now, each of the business units. First, components. Q3 results reflected the continued strong performance of the business unit in challenging market conditions of steel shortages and price volatility. Component revenues were up 21% to $154 million, compared to $127 million in the prior year. Gross profit improved by 35%. Aggressive efforts to further penetrate the distribution center's segment resulted in two large projects for a prominent national retailer. Additionally, we see opportunity to grow this business in both the architectural and the agricultural segments.

Components manufacturing overcame earlier shortages in materials and trucking to deliver impressive performance. Year to date tons shipped has increased by 9% over the same period last year. Operating income for the unit was up an impressive 59%, to $20.9 million, compared to $13.1 million in the prior year. While there is some softening in the market, as a result of steel price increases, transportation price increases, and election year jitters, during Q4, the components unit will continue it's aggressive approach to the market by leveraging our strong supply of material to retain customers and to attract new targeted customers. We expect to see growth in sales and operating income in Q4, compared to both sequential quarter and prior year period.

Now, the buildings business unit. Q3 results showed the buildings business unit was overcoming material shortages that had dampened performance in earlier quarters. Revenues for the business unit were increased by 54% to $114 million, compared to $74 million in the prior year third quarter. Gross profit improved by 22% to $24.8 million as a result -- as the business unit worked off older, lower margin backlog. As a percentage of sales, OI was 7.2% in current year compared to operating income of 4.9% last year.

Additionally, a thorough review of our business units backlog resulted in cancelling and removing jobs that were no longer active, due to permitting or extended delays, and jobs where the price could not be renegotiated. Therefore, the business units' backlog was reduced by $33 million, or about 18.8%, to $142 million. It is expected that this will accelerate margin recovery. The buildings business unit continues to work under the hood improving business process, order entry, engineering design and drafting. Market share has increased year to date as we have increased tons shipped by 18%. Our quote backlog is up. Our challenge will be to close these opportunities. A number of our more attractive opportunities draw on the quality and value of our long bay system. The increase in bar joists costs which competes with long bay, have enhanced the economic value of our system. We are encouraged and expect sales to grow. We have good visibility for the first two months of Q4. The final month of Q4, while traditionally strong, remains somewhat uncertain while sales opportunities remain to be closed.

Now, the third and final business unit, the coaters. The coaters business unit overcame materials shortage challenges and changes in the established steel mill business practices to post solid performance. Total revenue improved by roughly 43% to $65 million for the same prior-year period. External sales were 28 million, compared to 35 million in the previous-year period. Gross profit was up nearly 18%. The unit managed the balance between internal and external customers during this period of steel price volatility and shortage in material and trucking. Operating income improved over the prior year by 20% to $7.6 million. The change in steel mill practices caused us to change the way we recognize revenue at the coaters operation from time of coating to time of shipment. The change in established steel mill practices will cause a significant increase in the units inventory during Q4. Prior to this year, many steel mills offered stocking plans which functioned as if the clothes were on consignment. We paid for the steel when we used it. A coater business unit effectively hold the inventory for all of our business units. We must buy the steel when the mill is rolling. Our expectations are that the coater business unit will deliver Q4 modest improvement in revenues and operating income over Q4 2003. We expect our inventory to increase from just under $60 million in Q4 '03 to approximately $150 million in Q4 '04. Now, the advantage we have is the ability to use this inventory to ensure price and delivery to our customers. These changes in steel mill business practices will be difficult but less financially sound competitors.

In conclusion, we appreciate the effort and results being delivered by our management teams at components, buildings, and coaters and the corporate staff to support them. We remain focused on performing well in Q4 while planning for an exciting 2005. Bob, over to you.

Thank you, Norm. For the third quarter consolidated sales increased 25% to $296 million over the 236 posted a year earlier. Approximately 80% of this increase resulted from higher selling prices relating to the pass-through of raw material costs that occurred in fiscal year 2004. Consolidated gross margins of 23.1% in the current quarter, were up from the 22.6% last year, and on higher volume, margins were also up 2% from the margins obtained in the second quarter of this fiscal year. Improved plan efficiencies and operating leverage accounted for most of this improvement. Operating expenses were 40.7 million in the current quarter, up 10% from the prior year. Increased cost related to the sales expense necessary to produce higher sales volume, and increased costs for employee benefit programs were the major items that accounted for this change from the prior year. As a percent of sales, operating expenses were 13.8% in the current fiscal quarter compared to 15.7% in the prior fiscal year.

Better operating leverage resulting from the higher sales volume resulted in operating income rising to 9.3% and 6.9% posted a year earlier, and from the 6.7% that was posted in the second quarter of this year. Interest expense declined by 24%, compared to the prior year, as a result of lower outstanding debt balance, and somewhat the reduced interest costs related to financing that occurred mid quarter in the third period. Debt financing costs consist of the $5.8 million premium paid to redeeming the subordinated debt, and an approximate $4 million write-off of old debt issue costs related to our previous financing. Earnings per share of 41 cents were up 14% from the prior year, and this 41 cents included 28 cents per share charge associated with the debt refinancing.

For the nine months, sales were $766 million, or up 19% over the prior year. Approximately half of this increase relates to higher sales price associated with the pass-through of steel costs increase, and the remainder represents an increase in demand. For the nine-month period, gross margins were 23%, compared to 21.6% in the prior year. Again, operating leverage improved operating efficiencies, resulting from the higher sales volume accounted for the rise in margin percent. Operating expenses for the nine months are up 14% over the prior year. Again, most of this relates to the cost increases associated with the higher sales volume and employee benefit costs that were higher on a year over year basis. As a percent of sales, operating expenses were 15.4% compared to 16.1% in the prior year. Earnings per share for the nine months increased 63% from 67 cents in the prior year nine-month period to $1.09.

Looking at our balance sheet, as Norm indicated, the average price of steel has risen approximately 60 to 70% over the prior year. The company has seen its inventory levels rise from 59 million at the end of last year to 131 million at the end of the third quarter with approximately 41 million of this increase occurring in the third quarter of this year. Although steel prices are still increasing, they are doing so at a more manageable rate. We would expect to see some increase in inventory levels in the fourth quarter. We believe that our increased working capital needs will stabilize by the end of the year. And obviously, inventory receivables and payable levels will be higher in the future based on the inflationary impact of a high and rapid increase in steel costs.

For the nine-month period, net working capital investment has increased by -- I'm sorry, in the third quarter, net working capital investment increased by $24 million related primarily to the rise in inventory value. That, coupled with the $8 million that we spent to complete our refinancing resulted in our outstanding debt balance increasing during the quarter by $2 million. Capital spending for the nine-month period is 6.7 million, of which 3 million occurred in the third quarter. Capital spending for fiscal year 2004 should be down 25 to 30% from 18 million spent in fiscal year 2003. On a trailing 12-month basis, our EBITDA number was 109 million, compared to 87 million a year ago, and up from the 95 million at the end of the second quarter of this fiscal year.

Those complete our prepared remarks, I'll turn it back over to the operator and we'll open it up for questions.

Thank you, sir. At this time, ladies and gentlemen, if you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone for today's conference, please make sure your mute function is turned off in order for your signal to reach our equipment. Once again, if you would like to ask a question at this time, please press star one. We will pause for just a moment to give everyone an opportunity to signal. And we will take today's first question from John Diffendal with BB&T Capital Markets.

Good morning.

Good morning.

Just one thing, just want to be straight on this, on the systems, the number you gave for 24.8 million, was that the operating income for the segment? I'm a little unclear. I'm a little unsure if that was gross margin or gross profit.

Gross profit of $24.8 million.

And what was the -- that segment operating income for the quarter?

For which unit, John?

For systems.

Systems, current quarter was 8.2 million compared to 3.6 million in fiscal year 2003, and if you remember, we were just slightly profitable at $400,000 in the second quarter.

Okay. Okay. Let's see. On the guidance you've given for the quarter, I mean it is still -- and I'm trying to weigh this against sort of the cautionary note you've had, I mean the guidance certainly is for a better number than we had in the current quarter, and they typically are fairly similar, the July and October quarters. Your building -- I assume the caution is more related to sort of the last month of the quarter in terms of what you're seeing? Or maybe if you could give us a little more color on that.

Yes, what I said was that we have good visibility in the building systems for August and September. October is a little bit more granular and it is a function of us closing a number of the sales opportunities that we have before us now. So that was the extent of the cautionary note.

Okay. And even with that, you you feel comfortable with the 80, 83 cents, obviously.

Correct.

And one last thing and I will probably get back in line, is there -- you mentioned the acquisitions that you had announced beng accretive. Can you give us any sense of the level of accretion from those acquisitions?

Don, this is A.R. We're just starting due diligence, and what we did is we went into a definitive agreement with these guys rather than a letter of intent so that we knew that we had all I's dotted and the T's crossed, and we just started due diligence, and to give you a number right this minute I think would be inappropriate. It would be a guess, really. We've got -- we've got to complete the due diligence. And what we're hopeful of doing is completing the due diligence, and closing this as quickly as we can, after November the 1st, so we will have a full year of their results in, and then in 2006, we will have something to compare to, since we got a full year in. So that's kind of the plan. Is that good enough?

That's fine. Thank you.

Yes, sir.

We will take our next question from Dana Walker with Calmar Investments.

A.R., since were you just talking about the acquisitions, can you talk about their structure somewhat more? One reads in the press release that they are more of a marketing or both are more like marketing businesses rather than manufacturers?

Yes, they are -- they are -- with Heritage, they are telephone marketing and they've been very successful over the years. As you can see from the fee, there are about 80 million in sales, and they buy a great deal of their product, I would say 90, 95% from the NCI group, okay? And then -- I would invite to you go on steelbuilding.com on the web and look at their website. This is -- this is a distribution channel that we don't have today, because they have got the best -- in design your own building, and, you know, put in windows, doors, you can look at, it you can rotate it around, you can put the colors on it, and you can put your credit card in and buy it. And that's what people are doing. And they grew that business quite nicely in the last three years.

What has been their referral sources?

They work on Google and they work on Yahoo, and they -- in other words, those search engines, and they've got all these search engines, you know, in, and there have been some surveys done, Heritage is the second most recognized name in the pre-engineered steel building industry behind Butler. And, you know, so they just -- they do mass marketing in all kind of media, and do a great job with it, quite frankly.

The average selling price range of the types of jobs that they pursue would be where?

About 10 to 15,000.

I'm presuming that does not interfere with your normal dealer channel?

No sir. In fact, we really think because steelbuilding.com is so easy to use and so user friendly, I think some of our builders are actually going there and estimate, you know, estimate the smaller jobs, you know. And, you know, could be they even -- they even buy online like that, because they can schedule delivery, they can track their delivery, the whole nine yards, with steelbuilding.com.

And again, it has been focused on a segment of the market that we don't feel that we've had the market share that we should have, and that's small buildings in both -- in primarily the agricultural. So it compliments what we do on the larger buildings as A.R. said.

But your present ag business you would define as where average selling price wise?

The what now? I'm sorry, I didn't understand, Dana.

Well, as I recall, you have a fairly significant agricultural products business which is done through your traditional dealer channel or through other channels, how would you define the average selling price for that part of the business you are presently in?

That is -- that agricultural segment that we're in today is primarily in the components business. And it is primarily sold through distributorships and lumberyards, co-ops and so on, so forth.

Okay. Second question, I believe the numbers that Norm described for tons shipped were year to date for both components and buildings; is that correct?

That's correct.

So the 9% and the 18% were for year to date?

Correct.

Did you also -- are you in a position to describe that number for Q3?

We are probably still working through some of those numbers, but it appears that there was some softening in the amount of tons shipped, pretty much across the board in Q3: If you remember, we had quite a push during Q2, which really had things well ahead of last year.

All right. And the coating business, not seeking to come across as dense, but would you go through the revenue recognition change one more time and to what -- at what point you're making that change and how important that is from a profit recognition standpoint?

Dana, it doesn't take the profits at all. What happened was, you know, we had these stocking programs for the steel mill, so when we would make the coil, they would still own them, okay? And the only way -- I mean they might own them for two or three months, and it was not only for us but for other people. We would recognize the revenue. Now, we own the steel. So we're painting the coil -- and the paint, you know, he when it goes on the coil, that is an insignificant part of the overall price, and then -- So we're just recognizing the revenues for coating when we ship it. And, you know, I wouldn't think we would ever change back, but if the steel mills got back two years from now in some kind of stocking program, I mean we might need to go back and recognize the revenue the other way. But it didn't change the profits at all. It just changed when -- it changed which month the profits were in or -- but it is our profit is the same.

You're doing this because of the steel scarcity phenomena or for some other reason?

No because the steel mills have changed their business practices.

So they're forcing this upon you?

That is correct.

It is not a practicality that you and your auditors have surrounded? It is --

No, it is definitely a change in the steel mill practices.

The steel mills no longer have these stocking program. I mean the steel mills new quote is "we make it, you take it." In other words, when they make it, we got to take it, or they will give it to somebody else. So we own the steel now. That's the reason the inventories went up so drastically.

Final question on coating. Norm, again the number you cited was 28 versus 35 in external revenue. I did hear that correctly?

Yes, let me just check.

That's correct.

That's correct.

So the external revenue number declines but the profit or the value added rose or the margin rose on that external revenue. In part helped by increased throughput, both external and internal?

Correct.

Okay. I will get back in the queue. Thank you.

We will take our next question from David Yuschak with Sanders Morris Harris.

Congratulations, gentlemen on a good quarter. And excuse my voice. Bob, you mentioned earlier in your comments about how much the steel represented a pass-through. I just got interrupted. Could you repeat that again for me, please.

I'm sorry, David.

Earlier in your comments you commented about the steel, how much of the revenue was represented by just pass-through. Could you repeat that for me?

I'm looking at my notes trying to figure out where I talked about that. For the nine months or for the quarter?

Quarter.

Quarter, it was about 80%.

Okay.

80% of the sales increase related to higher prices.

Okay. Now, on that inventory issue, do you guys kind of look at it, because this is a change in steel mill policy, that this represents more of a one-step up process of needing more working capital to get the job done for your customers? And then you just manage it from there, or how are you guys, if you had not ad managed that inventory more on a longer term basis.

Well, what you said, what you described, it is one step up. Mine we don't have any choice and the other companies in our system don't have any choice. I mean, we just got to manage the inventory. And I will give you, if you don't mind, I will give you another little piece of information. The days of inventory is 41. And when you consider all the colors that we have to keep in place on the floor, these component companies, and all the different gauges we have to keep in place, you know, 41 days of inventory is not bad. It is -- in fact, it is pretty good. A lot of companies are running with 50 and 60 days worth of inventory. We believe that we will manage that down, because we made a big spot buy on hot rolls, we believe we will probably manage that down slightly, but I think you can look for us to have, you know, a high dollar volume of inventory levels, but if you look at the days of inventory, it won't be that bad.

And so longer term, it is a matter of just thinking the -- until steel becomes more available and the policy goes back to the old days, because now the steel mill guys have always been feast and famine for them so they take advantage of it, but do you think that 40 or maybe around that may be where it stays and then maybe ultimately work it down a little bit after that then?

Yes, sir.

Okay. Operating expenses were pretty much flat with the second quarter so that would kind of reflect what you guys said earlier, you said maybe the actual shipments were a little softer from the second quarter. Would that be consistent with that observation?

Yes.

Because you -- you know, you did keep good control of the operating expenses. One other thing I was just kind of curious about. With that steelbuilding.com acquisition, is it possible that you can take that platform and extend it into other business segments that you guys are operating in?

Yes, absolutely.

That's our plan.

So it is more of just getting your foot in the water here to see how this thing works, and then as you get comfortable, extend the distribution channel?

Yeah, it is a very good channel and it is one, you know, that we've -- that we've been watching for some time. But it is an area, as you know, David, that requires kind of continual activity to keep improving the product that you have in terms of the web-enabled piece, but that back -- that back office piece can be, you know, can go with a number of different new store fronts, so we're very happy about that.

One thing that is an interesting concept because I do think there is reason to believe that there is more and more of that going to be transferring where, as you said, with your current acquisition here, been successful getting the name out.

Right, and particularly in the rural side. You know, I need to be clear. It is -- when I say agricultural, I'm really talking about the rural piece which we haven't been as active as we want to be.

But you do expect to take that other places ultimately, though? Other than rural?

Yes, absolutely.

That marketing platform?

Right.

The first place we will take it into our depots, our retail depots. See, we give them an excellent way -- when a customer walks in, it gives them an excellent way to sit down with a customer, you know, put everything they want on that building, and you can upsell with this, you know, I mean you wind up upselling on doors and windows, and installation, and so on and so forth, and you know, you can -- I mean they can pick their colors right there, because you can put the color on it. I mean it is a great marketing tool.

Now, on those depots, as you look at your early evidence of them, what would cause you to maybe become more aggressive or what would you term aggressive at expanding that concept?

We're going to expand that concept, you know, we -- we actually -- the beauty of these depots is that, you know, you're usually in a small rented space, and, you know, we open one up, in Lake Jackson, which is 80 miles out of Houston, there wasn't the traffic count there, there wasn't the interest in it, and we closed it down a year later. So we're looking for a site now northwest of Houston -- excuse me, northeast of Houston, this was south of Houston, so, you know, and 80 to 100 miles away from Houston, but see, we have three of them in New Mexico that are doing rather well, one in Albuquerque is our best store, quite frankly.

One last question for you, Bob. The cost to debt capital as you look the next 12 months, what do you suppose that average cost will be.

Right now, David, it is a little less than 4%. Obviously, that changes as the Fed raises the rate. You know, based on what I've heard, it -- between now and next year, you know, it could go up 100 basis points.

So you're thinking maybe the cost of capital will range someplace between 4 and 5 on your debt right now?

That's correct.

For modeling purposes.

For the next 12 months.

Okay. That's good enough, thanks.

We will take our next question from Cliff Walsh with Sidoti and Company.

Good morning.

Good morning.

Can you talk about any interesting things going on in the industry possibly following the sale of Butler manufacturing to Blue Scope steel? Have you seen -- noticed any changes in strategy or any shifts in their business model?

We -- I mean rumors are rampant, you know, I mean there are two rumors that we hear, that we think are reasonably correct, and one is that they're going to close their big plant in Gailsburg and the other rumor is that they're going to build a new factory similar to the one we built in Lexington. I don't know how they can be similar because they haven't seen it but that's what we hear.

Thanks so much. All my other questions have been answered.

All right. Thank you.

We will take our next question from Warren Clifford with Clifford Capital Management.

Yes, I missed part of the discussion because my website went dead for some reason, and by the time I got on the telephone, I missed something. But in any case, on the -- you mentioned on the components, two large contracts for a national retailer. Is there this in the nature of a first business deal with these fellows that could expand over time into something bigger and more significant?

Yes, it is. But again, I'm not sure what part you heard, but it is in the large distribution center segment. And you know, we have been in that segment with others, but this is the first for this particular, you know, company.

Right. Okay. Thank you.

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

I wonder if you could kind of discuss -- I mean certainly to last year, we had a deal with huge price increases on steel. If for some reason we get kind of the reverse of that where steel prices come back off, they reverse tariffs or whatever, can you maybe just talk about what sort of operating environment that would present for you going forward? Would that allow margins to expand further? Or just kind of refresh us on what that would look like on the backside if we get in that situation.

I don't think it -- I don't think it would help us to expand, and if steel prices went backwards drastically, or if there was a substantial reduction in steel price, it will probably hurt us with the margins, you know, for some short period of time.

Right.

You know, we -- everything we see, and everything the mills tell us, they're not going to go backwards for some period of time. Now, we -- you know, we recognize that like hot roll is higher in this country than it is in China or in Europe, and you would think it is going to go backwards at some point. I mean it is 300 or 400 dollars a ton here, than it is in Europe or China, but, you know, steel mills in our opinion are doing everything that is humanly possible to keep the price up.

Okay. And going back just to the question earlier on the competitive situation, what are you -- I mean going into this, certainly, you -- a lot of your competitors were pretty much on the ropes losing money. Can you kind of talk about what you're kind of seeing at the margin pricewise from them, I mean the American buildings, and the people like that, in terms of just how they're dealing with the current market. I mean obviously your margin is improving, but there is something positive there.

They -- the building competitors are trying to price the marketplace under us, and it is even worse on the -- in the component segment. You know, there are some hidden value-added portions in the buildings group, so when you look at components, you know, you compare one sheet to another sheet and one purlin to another purlin, and you know, there is not a whole lot of hidden value, and you know, several component customers have really been cutting the prices lately, and you know, it is hard to tell if they're doing that trying to keep cash flow, keep the doors open, or, you know, what they're trying to do, you know, does that answer your question?

Absolutely. Thank you. And going back to the coating revenue recognition change a bit, it sounds like I think what I'm hearing from you it is that this is actually a new development in the current quarter, so on a go forward basis, there is no restatement of any of your prior periods on this. It is just a go forward basis, just changing the recognition timing element.

It is -- yeah, a prospective change, and you know, it is a change -- both methods are acceptable methods, so it is just a change from one accepted method to another, based on a change in circumstances.

And it was applied in this quarter we were in?

That's correct.

So, I mean, from a total dollar standpoint on the coater side, what -- if it didn't impact the bottom line of the segment income, how did it affect the revenue line?

It was about $4 million.

$4 million less?

That's correct.

Okay. And can you give us the income, the segment income in coatings, I mean since we've broken this out for the first time again, what was the segment income in coatings a year ago?

Segment -- coating income for the quarter?

Yes.

For Q4, it is 7.6 million. For Q3, of fiscal year 2003, it was 6.3.

Gotcha. Gotcha. Okay. Thanks very much.

And as a reminder, ladies and gentlemen, please press star one for any final questions. We will go next to Dana Walker with Calmar Investments.

On that topic of pursuing the present marketplace, with more steel available, how would you describe your present dealer pursuit tactics? And how well do you think you're doing?

When steel was short, we backed off and when we're back out actively pursuing, and our dealer count is -- if you give me one second, I will give you you -- the dealer count, at the end of July last year was 1599 at the end of July this year it is 1735. 136 difference.

Would it be a reasonable statement though with steel being in mildly better supply for everybody, that everybody's activities will step up?

I'm just going to tell you how I feel about this, and that is that, you know, Butler's got their problems right now, Magnatech still has problem, [Corporal Pru] is having problems, we're not having difficulty in recruiting builders. It is -- sorting through the good ones, the good ones is, you know, what we're doing. You know, we're not, you know we've had more success recruiting Butler's builders in the last six months than probably ever in the history of the company.

Okay. A couple last quickies. The point that you made about accounts or about inventory and accounts payable likely rising because of this revenue recognition change, is that reflected in the balance sheet we see in this press release?

I think it is reflected. I mean the inventory is up -- inventory is up about $70 million where it was, $80 million from where it was -- I'm sorry, $70 million from where it was at the end of last year, and payables are up around 30, 35 million dollars. So it is reflected in the balance sheet. I think the key point, Dana, is that, you know, even though we're going to stabilize our entire working capital investment, that we should stabilize that in the fourth quarter, which will leave us the opportunity to again finally start using free cash flow to -- (indiscernible). And for acquisitions and other purposes.

One last question which relates to long bay, I want to recall that Norm mentioned long bay. Did you -- were you suggesting that the environment for long bay sales is picking up?

Yes, it is. And as I -- I tried to point out that, you know, we compete against the bar joist systems, and it is clear that the increase in steel price has made our long bay even more economically attractive than it was before.

What evidence do we see in number of long bay units shipped year to date to support that? Or is that more a windshield issue?

It is more a windshield issue.

The two jobs that you won on serving a national retailer, are those long bay?

No, those jobs were not long bay. That was out of our components business.

Okay. Thank you very much.

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

Well, we really appreciate y'alls participation in the call today, and hopefully we've done a good job of, you know, answering all of your questions, and if you have any further questions, feel free to give us a call. So with that, I will bid you good day.

Once again, this does conclude today's conference. We thank you for your participation. And you may now disconnect.