Core Natural Resources Inc (CNR) 2004 Q4 法說會逐字稿

Good morning and welcome to this NCI Building Systems Inc. conference call to review the Company's results for the fourth quarter of fiscal 2004. This call is being recorded and a telephonic replay may be accessed through December 16th by dialing 719-457-0820 and entering access code 856069. The replay will also be available at NCI's website at 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 the factors that could affect NCI's operations in 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 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 NCI's Chairman and Chief Executive Officer, Mr. A.R. Ginn. Please go ahead, sir.

Good morning and thank you for being with us today to discuss our fourth-quarter and fiscal year-end results and our fiscal 2005 outlook. I'm here today with Norm Chambers, Ken Maddox and Bob Medlock.

I'll start off this morning with an overview of the fourth quarter and the full fiscal year. I also have a few comments on the state of our business and our 2005 earnings guidance. And then I will turn the call over to Norm, who will review the components, buildings and coaters businesses in some detail. Bob Medlock will follow him with his prepared remarks with a discussion of our fourth-quarter and full-year financial results. Then we will be available to answer any questions you might have.

I will begin my comments today by saying how proud I am of the team at NCI for the financial results we've produced for the fourth quarter and for the full fiscal year. All of you who have followed this company for a few years know that after 3 extremely difficult years for non-residential construction industry, NCI came back this year to post 4 consecutive quarters of comparable quarter revenue growth and complete the year with record earnings per share. There is no doubt that our results reflect the extraordinary steel price increases that took place during the year and also a gradually improving economy.

But that's far from the whole story. For instance, those steel price increases and the related supply shortages created tremendous pressures throughout the entire supply chain. Yet we rose to the occasion and protected our customers, often to our own economic disadvantage. As a result, we believe we've strengthened these relationships, and in so doing enhanced our growth potential with these customers and with potential new customers who did not fare as well with their existing component and building suppliers.

In addition, it easy to point to an improving economy in hindsight. But it had an uneven impact on our business from quarter-to-quarter during the year. And our gains are very much a tribute to the hard work of the people throughout NCI. Producing these results at the front edge of what we hope is a continuing long-term economic recovery illustrates the potential that is inherent in this business for top-line growth and efficiency-driven margin expansion.

Our preparation for future growth was evident in the substantial restructuring of our balance sheet during the past 5 months. This initiative began with the refinancing of our bank debt in June, then our senior subordinated note redemption in July and finished with our 180 million convertible debt offering completed in mid-November. As a result, we enter fiscal 2005 with significantly reduced net interest costs, stronger Standard & Poor's and Moody's debt ratings and nearly 300 million in available funding to pursue our expansion strategies.

As a quick aside I will add that none of this would have been possible without our firm commitment to debt reduction during the past 5 years, even during the worst downturn in our industry in the last 30 years. We saw firsthand the clear benefits of this commitment during our presentation to the rating agencies in advance of the convertible debt offering. Because of our history, the agencies were very positive about our industry-leading performance, our growth strategies and supporting of our convertible debt offering.

Our preparation for future growth was also evident in the Heritage Building Systems and Steelbuilding.com acquisition, which was consummated yesterday. We previously discussed our expectations of using the distribution channels these companies had successfully built to increase the overall retail market demand for engineered steel buildings. This transaction also serves as another example of the potential of our strategy to expand our customer base, our product line and our geographic reach through accretive acquisitions.

In addition, we also announced yesterday a definitive agreement to purchase our minority partner's 49 percent stake in our engineered building manufacturing facility in Monterey, Mexico, which we expect to consummate next week. This plant is truly an outstanding facility with a seasoned workforce, the latest and greatest equipment and high-quality operations. With the increasing activity we're seeing in the large building systems market and the increased interest in our Long Bay System among our builders, this purchase increases our flexibility and puts us more firmly in control of our operations and our own destiny.

With the closing of the convertible debt offering I previously discussed, (technical difficulty) initiated an organized process to evaluate additional potential accretive acquisitions more pro-actively. Let me say right here that we're only looking at acquisitions that complement our building components or coaters business units. Of course our earnings guidance does not include any impact from future potential acquisitions. But based on our history of successful acquisitions and our funding capabilities, we're confident that this strategy can contribute significantly to our future growth.

Less obvious, but no less important in preparing for future growth, we have continued our varied initiatives to develop the best management organization in the industry. We're not only working to refine our succession planning and enhance our executive management team through continuing education, but we are also now extending our advanced training and development initiatives into middle management. In addition, we welcomed 2 new Board members to our Board of Directors in the second half of '04. Their addition gives us 7 independent directors in a 9-member Board, and further demonstrates NCI's commitment to high-quality corporate governance through a strong independent Board.

To summarize my comments, we had an outstanding year in '04 and we're well positioned to execute our growth strategies in '05. Our extensive industry sources are all pretty much agreed that steel prices have stabilized for the near to intermediate term, and we expect continued growth in the economy. As a result, we expect further gains in revenues and profits, which is consistent with industry forecasts for 8 percent growth in nonresidential construction spending in '05.

Based on these and other factors we have established our guidance for net income per diluted share for fiscal '05 in a range of $2.80 to $3.05 and our guidance for the first quarter of fiscal '05 in a range of 40 to 43 cents. We expect these gains to come from all 3 of our business units.

As indicated in our release, and Norm will discuss in more detail, we have some near-term concerns about pricing pressure in both components and the building businesses. But we think this will resolve itself and that demand will normalize. More importantly, we will continue our pricing discipline in all our businesses, regardless of the short-term impact. We simply are not interested in driving revenues by chasing business that does not provide a profitable return.

Thanks for your attendance today, and now I will turn the floor over the Norm Chambers, NCI's President and Chief Operating Officer.

Our fourth-quarter financial results capped a year of strong growth for NCI on both a quarterly and annual basis, and for the first time since fiscal year 2000. As we expected, the steel price increases had a substantial impact on our revenues and operating leverage for the quarter. In addition, although we continue to maintain margins on our products, sales generally consistent with the levels we produced before steel price increases, significant improvements in productivity and operating efficiencies drove margin expansion for the quarter. Our quarterly results also benefited from the continued strengthening of our buildings group, which enabled us to beat our original earnings guidance for the quarter by more than 30 percent.

As noted by A.R., we look forward integrating Heritage Building Systems and Steelbuilding.com into our operations could which we expect will contribute to our strategy of expanding our overall demand in the retail market for engineered steel buildings in the rural (ph) segment. As we have mentioned before, we expect this acquisition to be accretive to our financial results.

Let's start our segment review with the components business, which really illustrated the disruption produced in our industry by the rapid increases in steel prices during the year. Components produced 18 percent growth in revenues for the quarter to $160 million from 136 million for the fourth quarter last year and operating income increased 59 percent. This revenue growth for the quarter is fully attributable to the higher steel pricing, because our component volume declined for the quarter compared to the prior year because of the record product volume we had in October of fiscal 2003.

In addition, we saw a flood of competitive product hit the market during the quarter as certain competitors rushed to liquidate their inventory positions. Again, as A.R. said, we are not only fundamentally opposed to chasing sales through pricing that prevents a profitable return, but we also have the financial strength to carry our inventory and avoid playing that game. We think some of our peers loaded up on inventory to secure their supply, but in the face of unusual patterns in the second half demand had to liquidate inventory to reduce their carrying costs. While our total NCI inventory increased from third quarter levels, they have been reduced by 18 million from the high point in September of 156 million and are trending downward.

Despite this situation, NCI produced growth in component product volume for fiscal 2004, although it was a very unusual year as pricing increases overwhelmed the normal impact of seasonality. While our first-quarter product volume was normal, our second-quarter volume surged as customers took shipments to beat rapidly increasing prices. Having analyzed our results carefully, we believe the second-quarter surge did dampen third-quarter demand, which in turn created conditions of the competitive inventory dump we saw in the fourth quarter.

I also want to make clear that throughout this period, including the fourth quarter, we strongly supported our customers by reinforcing the quality of our products and our customer service. In addition, we drove operating margin expansion from increased leverage of fixed operating costs to higher revenues, as well as improvements in productivity and efficiency. These improvements included increased tons shipped per employee and reduced variable costs.

Looking forward, we expect a more normal quarterly progression in fiscal 2005, with a demand perspective, especially with pricing -- from the demand perspective, especially with pricing and supply stability and the strengthening economy. We fully expect to achieve increased revenues and operating income from our components business in fiscal 2005, although on a quarterly basis we expect the second-half results to be the primary growth driver. In addition, because we won't begin to lap on a comparative basis the majority of the steel price increases until the second quarter, we clearly expect increased component revenues and operating income for the first quarter. We will be keeping an eye on our product volume, though in light of the fourth quarter results. We will then face a tough comparable quarter comparison for the second quarter due to the spike in sales we experienced in Q2 of this year in advance of price increases with relatively easier comparisons in the third and fourth quarters.

Now the building sector. Engineered building systems -- we're very pleased that this business rebounded from the sluggish demand in the first half and the backlog issues created by steel price increases. As a result, the buildings group was the primary driver of our revenue and earnings growth for the second consecutive quarter. Buildings revenues rose 48 percent for the fourth quarter to 126 million from 85 million in the fourth quarter of last year and sequentially from 114 million for the third quarter. In addition to the impact of steel pricing this growth reflects significantly higher shipments than expected. Operating income from our buildings group more than tripled on a comparable quarter basis and more than doubled sequentially. Contributing to these results were the continued gains resulting from our state-of-the-art manufacturing plant in Lexington, Tennessee which opened in the fourth quarter 2003.

The buildings group performance for the fourth quarter and second half of fiscal 2004 is very encouraging, especially with the revived activity in large commercial industrial projects segments of the market. We continue to see a lot of requests for proposals for this business, which we believe highlights the quality and value of our Long Bay System. The increase (indiscernible) costs which competes with Long Bay has enhanced the competitive economic value of this system in the large-sized building market. We expect this increased interest, combined with strengthening prospects in our other commercial and industrial building segments, to help drive significant growth in the buildings group financial results for 2005. We also expect our fiscal 2005 building group results to reflect impact of our purchase from 49 percent stake in our Monterey, Mexico manufacturing operation, as I described earlier.

Now the coaters business. Our coaters business also performed well for the fourth-quarter and full-year 200, although to appreciate this performance for the fourth quarter one needs to factor in a significant change in revenue mix from the external to greater internal sales. This shift reflected growth in our buildings product volume for the quarter, and clearly illustrates how having this integrated operation in-house gives us flexibility in responding to our customer needs. While our external revenues had a slight decline of 3 percent for the quarter, the combined coaters revenue increased 26 percent to $65.5 million. Operating income for the quarter declined due to an increase in accrual for potential environmental costs, as well as higher employee benefit and health costs. But operating income for the full fiscal year increased 25 percent. As with our other businesses, we expect stability from steel pricing and supply, as well as an improving economy to produce increased revenues, margins and profits for our coaters business in 2005.

Thank you, and now I will hand it over to Bob Medlock our Executive Vice President and Chief Financial Officer, to give you some additional details on our financial and earnings guidance.

Consolidated (ph) sales for the 3 months ended October 30th of 319 million compared to 255 million in the fourth quarter of the prior year, representing an increase of 25 percent to the current quarter.

Gross margin in the current quarter rose to 27 percent of sales compared to 23 percent a year earlier. This improvement in margin resulted from the improved margins in the engineered building group as (indiscernible) business worked its way through the backlog and plant production. Combined with a higher level of operating efficiencies in all segments of our business, this produced a favorable trend in overall margin performance.

Operating expenses for the fourth quarter increased at a slightly higher rate to sales due to increases in employee benefit costs, higher professional fees and other variable costs associated with producing a higher level of revenue (ph). Operating income increased 76 percent for the quarter based on the higher sales volume and improved margin performance.

Interest expense for the fourth quarter declined by 51 percent from the prior year, resulting from the refinancing of our 9.25 percent (inaudible) with variable rate debt which has a current cost of around 4 percent and a reduction for fiscal year 2004 in outstanding debt of $32 million.

These factors produced net income of $1.13 for the quarter, up 113 percent from the 53 cents per share earned a year earlier.

For the year, sales of 1.08 billion (ph) were up 21 percent of the prior year. Approximately 80 percent of this increase came as a result of higher selling prices with the balance of 20 percent due to an increase in year-over-year demand.

Gross margins improved to 24.2 percent compared to 22 percent in fiscal year 2003, reflecting the improved performance of the building group and improved operating efficiencies in all segments of our business for the current year.

Operating expenses increased 18 percent, which is in line with increase in sales volume. Operating income for the year increased to 8.9 percent of sales compared to 6.4 percent in fiscal year 2003. This produced net income of $2.24 per share, up 87 percent over the prior year after a 29 cent per share charge in the third quarter related to the debt refinancing.

On a segment basis engineered building systems for the fourth quarter were up 48 percent to 125.7 million compared to 84.8 million in the prior year. Operating income for the buildings group in the quarter rose to 18.6 million from 5.7 million, resulting from an increase in demand, improved margin performance and better operating leverage during the period. For the year, sales of 385.2 million were up 30 percent from the 297.3 million produced in the prior year. And operating income rose to 31.3 million compared to 18.1 million in the prior year, an increase of 74 percent. Backlog in the building group is 146 million at the end of the current fiscal year compared to 167 million at end of fiscal 2003.

Turning to the components group, sales for the fourth quarter were 160 million, up 18 percent from 136 million in the prior year. Operating income improved to 26.5 million compared to 16.7 million last year, an increase of 59 percent. For the year, component sales were 577 million compared to 474 million in the prior year. And operating income of 76.7 million was up 67 percent from the 45.9 million produced a year earlier. Component segment sales for the fourth quarter were 33.2 million compared to 34.2 million. This slight decrease resulted from the change in mix between internal and external sales. Operating income of 5.8 million declined from 7.7 million last year. This decline was primarily due to an increase in the accrual for estimated environmental cleanup costs during the quarter.

(indiscernible) sales for the year -- pardon me. Coaters sales for the year were 122.8 million compared to 127.3 million in the prior year, again reflecting a change in mix between internal and external sales for the year. Operating income of 26.4 million compared to 21.2 million in the prior year, an increase of 24 percent.

Turning to our balance sheet, the increase in receivables of 12 million reflects the higher sales volume for the fourth quarter and the inflationary impact of higher selling prices. Day sales outstanding and receivables improved to 31 days at the end of fiscal year 2004.

As Norm mentioned, inventories increased to 138 million compared to 59 million last year. Inventory levels peaked in the fourth quarter at 156 million and have begun to decline as supply has become better. Given the current level of supply and improved stability in pricing, we do not believe that additional working capital will have to be devoted to inventory in fiscal year 2005.

For the year capital spending totaled 9.3 million, down from 17.9 million spent in the prior year. Earlier this year the Company decided to defer some capital projects until the raw material pricing environment stabilized. As a result, capital spending will rise in fiscal year 2004 to a higher level and is expected to be around $27 million.

(indiscernible) our compensation of adjusted EBITDA increased 127.7 million for the trailing 12 months compared to 84 million at end of fiscal year 2003. Debt to total capitalization was 35 percent at the end of the year. And total debt to EBITDA was 1.7 times.

This completes the Company's formal remarks. I will now turn it back over to the operator who will open it up for any questions.

(OPERATOR INSTRUCTIONS) John Diffendal, BB&T Capital Markets.

First question, Bob, you mentioned environmental costs that depressed the coating operating income. Can you give us a sense of what magnitude here and maybe (multiple speakers) about that?

It was about $1 million.

Is that something that is going to be ongoing or is that -- is this part of a larger project you're doing there?

We believe that we've pretty well identified the costs. A lot of increase is related to some additional testing that the state has requested that we do in connection with that cleanup project.

So are you expecting there to be further depressant (ph) on that portion of the business, say for example in Q1?

I would -- at the current time these are our best estimates. And obviously as we go through the testing phase, if things change then that could result in either an increase or a decrease in the amount of ultimate expected costs.

John, I think there's 1 thing that's worthy of mentioning, and that is that we have an environmental policy that we will do a deductible on it. And also another thing that's worthy of mention is that this problem existed on a piece of property that we purchased in 1987, and we're going back against the prior owner's on this deal. It's nothing that we created.

Okay. And let's talk a little bit about buying in the remaining piece of the Monterey, Mexico and Long Bay business. Give us a sense of why you did that. I remember you had a partner there who hardly was helpful I think just in operating in Mexico. Was that sort of viewed as no longer necessary? And then maybe just talk about -- expand a little bit on your thoughts on what Long Bay is doing going into this year. I know that's been a frustrating thing in the past, but it sounds like things are breaking loose a little for you there.

You know, in a public company it's very difficult to have a venture partner in a small operation like Mexico. It takes an extreme disproportional amount of management time. You have to go down there for Board meetings and shareholder meetings that don't exist if you own it 100 percent.

The other thing is, like I said in my opening remarks, that's 1 of our most modern plants. The quality out of this plant is very good. It just enhances our ability to control our own destiny. And we've hired a general manager that's an American, that's been down there that we've known for 27 years. And he knows how to deal with the union down there. So we don't -- we just didn't need a joint venture partner, if you will.

Can you still have a big labor advantage in terms of that plant? Is that still true today as it was before?

Have a what?

A labor, a cost advantage.

Absolutely. We still absolutely have a labor advantage.

And then 1 last question. I wonder if it's possible for you. You mentioned I think on the component side that the volume I guess in terms of tonnage was down. Can you give us a little breakdown? It's hard with all the price increase coming in. Give us a sense of just how much of the increase in sales is tonnage versus price in the different segments or however you can break it down for us. Was systems up 10 percent in volume and 20 percent in price, whatever that is? And break it down in the 2 other areas if you could.

I'll try to take at this. And we're smiling here because we're a little conscious of being somewhat careful in terms of the competitive environment to give precise indications on tonnage. But let's just say this, that from what we can gather from Dodge forecasts and from our analysis, that it looks like on a tonnage basis the industry was only up about a percent, even though the dollar values are much more than that. And in both components and in buildings we were up more than the industry growth. Buildings was certainly recovered and rebounded much higher than the industry average. But components did beat it as well.

Are you talking about for a full year or for the quarter?

Yes, for the full year. I am talking about the full year.

Now, we did see, and in fact the Dodge third quarter report talked to this, that there was a softening in our third and fourth quarter. And we saw it in terms of just demand. And whether you put it down to elections or whatever you wanted to put it down to, but the forecast, and as A.R. said and I said, the quote activity is substantially up. So while it's been a little soft, we're very positive about 2005.

But you did say that components, your actual volumes were down in the quarter. Did I hear that?

Yes, you did hear that. That's correct.

Thank you.

Cliff Walsh, Sidoti & Co.

Can you talk a little bit about your capacity around the country in the different business units?

About the capacity?

Yes, capacity utilization.

That's not something that we look at. I can give you a best guess if you want me to. We're probably running at 70 percent capacity. In the components business we are probably running at 65 percent capacity. In the building segment we are running closer to 80 percent on the light gauge on our coil coating and maybe like 60 percent on the heavy gauge on our coil coding. Is that helpful?

That's very helpful.

Don't hold me to those exact numbers. I told you that is a guess.

That's fine. In the press release you talked a little bit about cost cutting opportunities in Mexico. Can you elaborate a little bit on that (multiple speakers) greater efficiencies?

Well, there will be a lot of efficiency gained from not having to conduct business with a joint venture partner, okay.

Okay, so just taking out some of those expenses. But from an operating standpoint there --

You understand the model that we have with the coaters, components and builders is integrated.

Yes.

And by integrating it, that gives us great flexibility from the standpoint of being able to flex whether we are doing components or buildings and to use our resources in really a controlled and focused way. By not having a partner it gives us that level of control that really we need to have. And that plant is, as A.R. said, is 1 of our most efficient plants. And you know the history of this Company has been to constantly improve its efficiency. We've shut down plants, brought on new plants. And this is consistent with the way the Company has always done their business, looking to improve their competitive position. So that's really what it is.

Final question. Can you talk a little bit about your ability during the quarter to add new builders?

Yes. We have definitely added new builders. And we had a competitor, and I won't use their name, that just absolutely closed its doors during the quarter. And we've picked up several very nice builders from that competitor. In fact, 1 of them was in the office here yesterday. We've actually added 15 new builders during the quarter.

Thank you very much, guys.

David Yuschak, Sanders Morris Harris.

Congratulations, gentlemen, on a great year and a quarter. Norm, I would like to circle back to you on a comment you made earlier about the inventory dump that was going on in the fourth quarter. Could you help us out as to is that inventory issues? Do you people believe it is pretty much over with right now? And I noticed here recently the steel industry is also talking about another price increase here beginning in January, which would suggest that inventory dump is over with. Could you just give us an idea how much that may have affected your business in the quarter and maybe into the first quarter here as far as margin issues?

That definitely had an effect. And we reduced -- our inventory has increased 133 percent from 59 million to 138 million. And it was at 156, so we reduced it 18 million. That was primarily -- that 18 million primarily came from the middle of September until the end of the quarter, October -- the end of October. We didn't lower the prices in the marketplace to get rid of that inventory. We quit bringing inventory in and reduced our inventory that way. We have competitors that are probably up against the wall from a cash-flow standpoint, and they're trying to dump inventory to have cash-flow. And we don't have any insight really into how much over inventory that they have.

But there's another thing that affected the components in the third and fourth quarter. If you go back to the second quarter when the components raised the price increase, components moved really fast and they had record second quarter. I mean really high tonnages in the second quarter. We were way, way over the industry growth. And what happened is those customers stockpiled that inventory at a lower price, and they've been building out that inventory in the third and fourth quarters. So that also had an effect on the components group during the third and fourth quarter.

But if you look at the component group results during the fourth quarter, they are really outstanding. When you go to talking about that operating income of 26.5 million compared to 16.7 million a year ago. And their tons shipped per employee is way up. Do you know what percentage that is? I don't have that percentage in front of me. And all of their indicators are up. So it's efficiencies is the way we have gained it on the component side. But to tell you what the competitors are doing, I don't think we can do that. We don't know where they stand from an inventory standpoint.

I was thinking though if you guys have run down your inventory and the steel industry is talking about a price increase here, maybe it's suggesting that the competitors have kind of wound that down too. As you indicated, your point of view was you took it down by operations; yours wasn't a dumping strategy.

Going back to the whole steel price increase, and again you guys indicated you will begin to anniversary those price increases in the second quarter. As you give guidance here for this year, for the rest of -- for 2005, how are you approaching the steel price increase end of the equation versus just maybe more real growth?

We certainly are expecting to have a reasonably stable marketplace in terms of steel prices. We're not including any significant increases or decreases. We have of course been cautious, as you would expect. But we certainly are planning to manage in pretty much the environment we find right now.

So you're more thinking that steel prices -- steel is likely to be maybe neutral, maybe up a little bit maybe in the year as you look at the total year compared to this year?

We have tried to take into account some cautious improvement flex, both plus and minus to the current (technical difficulty) there's nothing we see or hear that gives us a sense that we're out of that range.

As far as the building systems side of the business, it would seem to me that has to be 1 of the better prospects for you in 2005, given the fact that you really have just begun to see this thing turning around here in the quarter, and given what expectations are for nonresidential spending next year. How do you guys view the potential pipeline that can be out there? What factors would you kind of highlight as to an indication of where this business could be a year from now? What areas of focus would you think could represent the business opportunity --?

(multiple speakers) I like, and that's the increase in the size of the shipment orders and the job size. I don't want to go specific in detail, but we do like what we're seeing there in terms of the return, as A.R. said, of the more complex big projects. And we again think with the .com and Heritage piece as well that we're well positioned now in the small building side.

I want to say just 1 more thing, David, that the team at the building side has done a great job. Both A.R. and I have been really pleased with how that team has really worked beneath the hood in improving their systems, reducing their cycle time. There's a lot of under the hood work still going on to improve that business.

Was backlog down in the fourth quarter versus the third quarter then, because you said I think it was down from the year ago, right?

I think it was basically flat third quarter to fourth quarter. Remember earlier this year when we could not get any price concessions from some of our customers, we took the opportunity to cancel a substantial amount of backlog. The backlog numbers for fiscal year 2003 would have included probably some 40 to $50 million in backlog that ultimately was canceled because we could not come to an agreement relative to current price (ph) for those customers.

So ending the quarter with as good a backlog as in the third quarter, because generally speaking you should have -- given the kind strength you had in the metal buildings, does that suggest that you finished the quarter with a pretty strong pipeline?

The orders I believe -- incoming orders held up and were sequentially up year-over-year. I think the important thing is the amount of quotation that we're seeing right now, particularly in the building side of the business, is -- I don't know that it's been a record high, but it's been an extremely high pace. We're beginning to see some activity in the industrial segment, which is kind of a segment of nonresidential construction that has been extremely weak for the past 3 years.

1 last question -- the tax rate. What is your assumption on the tax rate for the 2005 fiscal year?

Somewhere in the range of 38, 39 percent. I think for the quarter we were around 30, almost 38 percent.

Okay, thanks. Appreciate it.

Here's something that might be of interest to you. The order -- in the fourth quarter the average order size as compared to the first quarter is up 31 percent. And average quote size as compared to the first quarter is up 115 percent. It's over double. So that's also -- that's the indication that Norm was mentioning earlier.

That's why I would think when you're looking at FW Dodge and others it does look like nonresidential spending next year could be the growth driver instead of what we have seen here in residential the last 12 months or 3 years I guess.

And that's why the Mexican acquisition makes a lot of sense to us. When you look at the fit in our business it just made a lot of sense.

Appreciate it.

Greg Macosko, Lord Abbett.

Very nice quarter. I'd like to follow up just a little bit on Mexico. With regard to utilization, would you say that that facility is a little less utilized than the rest of your building systems?

Previously?

Yes. You say in the quarter or so, in the quarter just completed, was it kind of lower utilized? You suggested maybe that building systems was around 65 percent. Would you say that was more or less than that number? Is there more opportunity there to push out, put out going forward?

We're going to push -- we're going to increase the output in Mexico and decrease the output in 1 of the other plants that's less efficient than Mexico. That's the plan.

Because of the flexibility, etc. Do you have any feel for the revenues that are generated out of Mexico versus -- for that plant by that location?

We don't look at Mexico relative to revenues since the majority of the production comes back into the United States and becomes part of building sales. We tend to look at that operation as being a more efficient and lower-cost operation than some of our other US locations. Also, the majority of our Long Bay product is currently being produced in Mexico.

Right.

So we tend to look at it from a production cost standpoint as opposed to a revenue standpoint.

How about the Heritage? What kind of revenue volume did that location generate?

The Heritage.com should increase our external revenues by 30, 40 million. And we were already selling them. So their total revenues for this year were about 70 million, I think.

I see. So --

(multiple speakers) eliminate the inter-company shipments.

The inter-company shipments.

They will be inter-company shipments now see. So in other words, the revenues are going to show up as Heritage.com, but I can't tell you that we're going to have 70 million in revenues when we were shipping them 30 million. That is what I am saying. I think you'll see a revenue boost of about 40 million due to that acquisition.

Okay. And in terms of kind of what you paid for that, I assume you're assuming some accretiveness there?

Yes sir.

Well, it seems like that was a --

The financials and the Chief Financial Officer told us it was accretive.

And I assume the same on Mexico as well.

Answer that question, Bob, on Mexico. We don't look as Mexico as a profit center, so I don't -- it's hard for me to say that it is accretive. We look at Mexico as a cost center.

If it lowers our cost, I guess ultimately you could say it is accretive.

Exactly, and so given the productivity and moving things around and better flexibility, I would assume that that would improve things as well.

Finally, I guess if we look out into fiscal '05 and your expectations there, my sense is that the components business is the difficult 1 kind of in the first half of the year. Is that where we would expect -- where the less fast -- slower growth in terms of profitability in the early part of the year for components?

We're still expecting -- as you can see from by our first-quarter projection, we're still expecting to be very strong in components, as well as buildings. But to be sure we think the second half of the year should be even stronger for components than the first half. But by comparison, we're expecting first quarter to be kind of do as we say we're going to do, and that components contributes a significant amount of that.

Are you expecting any further price dumping or inventory dumping at this point?

Well you know, it's a competitive industry. And components, as you know, is quick turn. An order comes in and goes out within a day or 2. So we have to be really sensitive to the marketplace. But we're very happy when we look at what our price per ton is. We still seem to be hanging onto our margins pretty well. So as A.R. said and I said, we're not going to chase price; we're going to be very careful how we do it, and continue to support our customers and try to differentiate ourselves on something other than price.

With regard to the bids that you're making in the business systems area, how are you doing that? How long are those bids open for relative to steel price? I know we talked about that last quarter too.

We've got some fail-safe mechanisms in our quotes and our contracts now that we didn't have prior to those rapid steel price increases we had last year. But basically, 15 days is a quote on building. If everything is normal and somebody insists, we will give them 30 or 45 days. Right now we can see 45 days in the future on steel, so we're not concerned at all about the telling somebody the quote is good for 45 days. But the standard quote is 15 days, that's how long it says it's good for.

And you see that perhaps even getting better going forward?

We don't see any significant change in steel through the first quarter of '05. I'm talking about January, February, March, not our quarter.

But again, as A.R. said to the last caller, our quotes are up in terms of the size of the quotes, up over 100 percent from first quarter. So we like the return of the big buildings, the complex building.

And then with regard to the SG&A, Bob, you said it grew faster than revenue. Could you go through that again in terms of what we are seeing now and what we might be seeing in sort of the first half of this year?

Obviously as a percent of sales the first half of the year is the seasonally weaker period, so as a percent of sales SG&A will probably rise percent on a dollars -- probably you will see increases that are similar to what we had for the year.

What is behind that? Is that the benefits and --?

It's primarily, as everyone is aware, health care and workman's comp costs continue to rise. That's what has driven part of that. Benefit plans drive that too. Obviously the Company had a good year. If you remember, in fiscal year 2003 we paid no bonuses. In fiscal year 2004, based on our performance we will be paying bonuses all the way down through the organization. So that has had an impact on the numbers when you look at 2004 versus 2003.

So there was some true-up there with regard to the bonuses in the fourth quarter, perhaps?

In fact, if you remember last year, we made 53 cents a share in earnings. But since we did not achieve our minimum bonus level, we actually had a reversal in the fourth quarter which amounted to about 10 cents a share in money that had been approved in anticipation of paying out bonuses for fiscal year 2003. So you've actually got a positive impact for the fourth quarter fiscal year 2003 versus what we have in 2004.

I understand. So for this year, roughly speaking how did those bonuses go? Were they given out at the maximum rate?

They were given out pretty much at the maximum rate and based on the performance that we had even down into the discretionary area of bonuses for I guess you could say substantially better than they were for fiscal year 2002, which was the last year that we paid bonuses.

Given your expectations for this year of 2.80 to 3.05, I would assume they're going to be up modestly again.

No, they would probably -- based on those expectations, they will probably be a little less in fiscal year 2005 versus 2004. If you remember, the majority of our bonuses to senior people are paid on a combination of return on operating assets and increase in earnings per share. And we had about a 113 percent increase in earnings per share for the year. So given the guidance for 2004, the bonus level is probably -- overall bonus accrual would probably decline in fiscal year 2005.

Okay. Well, I hope it doesn't. Thanks very much.

John Diffendal, B&BT Capital Markets.

First off, on the inventory, I want to try to connect together the inventory increase and the coatings business. You said in the past that your customers, the outside customers, are kind of demanding if you hold inventories. 1 big reason why the inventory number was up and holding the inventory for the coating business. Was not a factor -- when you add the $1 million of environmental it was still down, even though you had a higher internal use. Did that come into play? Maybe try to work my way through that a little bit.

I'm not sure I understand your question.

You had indicated before that the steel mills that you were doing coating business for were in effect making you take the inventory. So you were holding their inventory to do coating, if I'm reading what you said I think really 2 quarters ago. And it didn't affect your bottom line, but it meant you were holding more inventory. I guess my question was with the inventory levels and the earnings levels you generated in coatings, did any of that interplay to affect earnings number which was down year-over-year?

I don't think it really affected the earnings number. I think it's more just a change in mix and transfer pricing versus outside pricing.

What happened with the steel, prior to the second quarter the steel mills were putting steel into the paint lines, our paint lines, on a consignment basis. And when they got the upper hand, they cut out all the consignment programs, and that's the reason that our inventory went up. And it did affect the working capital of the Company, but it didn't take the probability of the coil paint lines.

I just wanted to make sure that it wasn't some inventory change or you bought steel that had some -- there was some -- you were caught a little bit behind with steel prices moving that somehow flowed through the income statement there.

No, that wasn't the case.

Secondly, in years past when the systems business takes off, 1 of the complications is your engineering and drafting areas became a bottleneck or a limiting factor. It is that -- where do you stand on that now, since it sounds like when your are talking about quote activity being as high as it has ever been?

Let me give you 1 example. I mentioned that a company had closed and 1 of the builders was in office here yesterday. And he bought a sizable job from us and we're delivering it in 4 weeks. And we can't deliver every building that we sell in 4 weeks, but he needed in 4 weeks because he had had it on order with the company that closed their doors, and brought it to us, and he's trying to make his delivery commitment.

But right this minute, we're in as good a shape as I've seen us in on engineering and detailing. 1 of the reasons is that we have got our automated detailing system working on Class 1 through 4 buildings, the simple buildings. Not only is it working, but it's working really well. And that took a lot of pressure off.

The other thing, that we changed the way that we do the detailing on the building side. We used to -- you have squads that will detail jobs. There may be a squad leader and 3 detailers in that squad. And they would just get the next building that came along. What we did was we set up squads for the 7, 8 and 9 Class buildings. In other words, we used the more experienced people on the more complex jobs. And then for the 5, 6 and 7s we use the lesser experienced and then right on down the line. That really seemed to help the throughput.

I se. Still, with Long Bay coming back and I think I heard you all your industrial side after along period of being kind of dead in the water coming back, you feel like you have teams enough in places in the country you need them to deal with the business, the level of business you foresee going into '05 on the systems side? You don't see that as a --?

We feel very good about that and we continue to work on the engineering side. And I will tell you, we're just really happy with the progress that we've made and see opportunities for increasing that efficiency.

That's great. Thanks so much.

David Yuschak, Sanders Morris Terrace.

A.R., you had indicated earlier you felt like you really have substantial capacity yet ahead of you that you can use in this recovery in 2005. Given that kind of capacity, does that suggest that maybe your acquisition strategy maybe to consolidate or whatever that might be that you have in mind can be a little more patient because you've don't really need somebody else's business as much as maybe you can continue to grow yours and take market share to make your position on putting a value on any acquisitions less because you're taking market share and becoming more dominant, even though it's still a relatively fragmented industry?

Think about what we just accomplished with Steelbuilding.com and Heritage. They have 0 capacity. They are only a sales machine; 1 over the Internet and 1 is just strictly a selling machine. Think about the way that we approached that. I think that answers your question.

The other thing is that after we put MBCI and NCI together in 1998 and 2000, we closed 5 plants, 4 component plant and 1 building plant. We would be willing to make an acquisition that was the right acquisition in our industry in 1 of the core businesses and shut down capacity if we had to. We really believe, and there's other people in this industry that believe this strongly too, that there's got to be some consolidation in our industry in both components and buildings.

So from an acquisition strategy, it's just a matter of just being patient and getting the right price for what you think the value of the asset that you are acquiring?

Right, but we are -- clearly took on and raised this capital with the idea that we are looking very carefully and very cautiously. But we're definitely looking.

You know, kind of what we're hoping is that somebody out there says, "I'm going to get left in the cold here. I better get in touch with these people and see if they want to buy me." Quite honestly it's already happened.

Appreciate it.

Cliff Walsh, Sidoti & Co.

Can you comment at all about where you stand with the lawsuit with the non-compete with Johnie Schulte? I'm not sure if you can comment on that for legal reasons, but any info you can share on that would be great.

Just as we were at the last call, no further action has been taken. We expect that at some point, probably early next year, we would get into depositions side. But it's pretty much as we said in the last call.

Thanks so much, guys.

We are standing by with no further questions. I'd like to turn the conference back over to Mr. A.R. Ginn at this time.

They were some great questions today. And we appreciate your interest in NCI. And we expect to have another good year in 2005. And again, thank you for participating. Talk to you. Bye.

Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation. You may disconnect at this time.