Core Natural Resources Inc (CNR) 2005 Q1 法說會逐字稿

Good morning and welcome to this NCI Building Systems conference call to review the Company's results for the first quarter of fiscal 2005. This call is being recorded, and a telephonic replay may be accessed through March 10th by dialing 719-457-0820, and entering access code 462-5162. The replay will also be available at NCI's web site at NCIlp.com.

The first quarter results were issued yesterday in a press release that has been covered by the financial media. A release has 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 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 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 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.

Thanks, Scott.

Good morning, everyone and welcome to NCI's conference call. With me today are Norm Chambers, Ken Maddox, and our newly appointed Executive Vice President, Chief Financial Officer and Treasurer, Frances Powell. And we'd like to welcome her to her first NCI conference call. We'll begin this morning with prepared remarks about our first quarter results and the state of our business, as we move forward in fiscal 2005. Then we'll be available to answer any questions you might have.

We're off to a good start to fiscal 2005, with sales growth of 14 percent for our first quarter, driving a 59 percent increase in net income to $0.46 per diluted share, excluding the benefit related to more favorable group medical claims expense than was previously estimated. These earnings exceeded our established guidance of $0.40 to $0.43. They also highlight the economies of scale that growth and sales can produce in our operations, our firm control over our operating costs, and our ongoing ability to implement productivity-enhancing refinements in our operations.

Our sales growth was primarily attributable to price increases in response to the rapid climb in steel prices last year. Last December we mentioned in our fourth quarter conference call that we were seeing some softness in tonnage volume in both buildings and components. As it turned out, this trend remained with us through the quarter, with both business segments slower in tonnage demand than the first quarter of fiscal 2004.

It's worth noting here that according to the Dodge report, overall industry shipments also slowed in November and December, which is the latest Dodge data that we have available. Dodge is still predicting much stronger growth for calendar 2005 than the industry produced for 2004. And based on the strong level of our quote activity, you know, we have to agree with this assessment.

Before discussing the individual businesses, let me give you the bottom line. We are not overly concerned with our tonnage volume results for the first quarter. We are certainly keeping a close watch on this situation. But we continue to feel that the underlining market dynamics, such as the strengthening economy, very low real interest rates, and pent-up demand after a 2 or 3 year industry downturn, will more than offset the first quarter. Our high quotation activity and the growth in our backlog support this stance.

As a result, we reaffirmed our established guidance for fiscal 2005, earnings per diluted share in the range of $2.80 to $3.05. We also expect our earnings for the second quarter to improve from the second quarter last year. Although they reflect the normal seasonal pattern, we expect earnings to be $0.50 to $0.53 per diluted share versus $0.39 we earned last year.

The business statement financials were published with the press release and rather than discuss them in detail, we'll simply answer any questions that you may have when we open it up for questions.

However, we continue to see some of our competitors, in both buildings and components, try to buy market share during the quarter with prices that we doubt can be sustained. I'm convinced that this lack of pricing discipline on their part is a sign of weakness and certainly not a sign of strength. We have worked very hard and successfully over the years to create product line depth, quality, and a service organization that differentiates NCI on items and qualities other than price. We clearly recognize the value we bring to the markets as a result of this investment. And as I stated before, we are not at all interested in discounting this value for a short-term gain.

Let me add that, for both components and buildings, our quote activity is about as high as we've ever seen it. This strong pipeline of potential business accounted for the 14 percent sequential quarter increase in our backlog to $170 million in buildings at the end of the first quarter, and our quote activity has accelerated during the second quarter.

I also want to update you on our acquisition strategy. We're fully engaged in a thorough analysis of our markets to determine the most attractive candidates for potential acquisitions. As you know, we raised 180 million specifically for this purpose, and we can supplement those funds with approximately 100 million availability on our credit lines. We are working with an investment banking team in this process and have a number of opportunities we're seriously evaluating. I want to stress that our history of successfully completing and integrating accretive acquisitions demonstrates our ability to implement this strategy.

Our funding is not burning and I want to stress that it's not burning a hole in our pockets. And at an interest rate of slightly over 2 percent, it provides us with a lot of credibility in our discussions at a relatively inexpensive price. Finally, just to be clear, we're only interested in transactions that will be accretive to our financial results and increased shareholder value. Unfortunately, we will not be able to discuss any additional details today about potential acquisitions, candidates, or the timing of an acquisition.

In summary, we're very encouraged about our prospects for additional substantial profitable growth. If you think back to last year at this time and remember the uncertainty that we all faced about the economy and the impact of the steel pricing, you can appreciate how the outlook and our visibility has strengthened. Over the last several years, we have often discussed our continuous efforts to broaden our market leadership position to be able to take full advantage of an improving economic and industry environment. As fiscal 2005 unfolds, it looks like this time has arrived.

If so, we're well-positioned with the products, the distribution network, the financial strength, the management expertise, and the best employees in this industry to leverage market opportunity and to increase the shareholder value.

We have changed the way we approach the conference call, and I will be the only one with a narrative this morning, as we included the business segment financials in the press release and we want to leave more time to answer your questions. We hope this approach meets with your approval. This completes our formal remarks and I will now turn the call over to the operator and we'll be glad to answer any questions that you might have.

Thank you Mr. Ginn. (OPERATOR INSTRUCTIONS) And we'll go first to John Diffendal with BB&T Capital Markets.

Yes, good morning. Congratulations on the quarter. A.R., I wonder if you could talk more about the -- you said the quote activity is as strong as you've seen. Could you be more specific? I remember the last quarter, you talked about the size the quotes being up dramatically -- in terms of the size of the order being ordered. Could you give us some metrics on the quote activity to the degree that you can?

John, we're seeing more large building quotes. At this time, our average order price is up 35 percent over the same period last year. You know, to say that we are almost working night and day to get the quotes out -- I'm not over-exaggerating that. The quotes are -- the quote level is at an all-time high in buildings and in components.

And, John, this is Norm Chambers. Just to add a little more detail to that, we're seeing that strength reflected in both manufacturing facilities, as well as warehouse facilities. And that is -- that's a trend that seems to be consistent with the Dodge report as well.

Did that change? Did the type of orders being placed or quote activity that you are getting, did it change much in terms of that -- the type of building from the fourth quarter?

Yes, larger buildings continue to come through. We saw that in the fourth quarter, as we told you. And larger buildings are very much more prevalent in our backlog and in our quote than they were a year ago.

Got you. And the -- can -- last quarter, of course you made -- you bought in the remainder of the Monterey facility. Can you maybe talk about how you may be treating that facility today? I mean how is it being -- are you running more business through it? And maybe just talk about how that's -- Monterey is doing right now?

The Monterey facility is, you know, probably our low cost producer. And it's also -- has some of the highest quality that we have within the company. You know, and we're trying to, you know, fully utilize that facility. We've still got room for growth down there, as that we're only running one shift, and, you know, it's pretty easy to bring the second shift on down there because of the labor forces that are available. And they are really pleased -- the employees in Mexico are really pleased that we own it all now.

That's good.

And one last question and then I'll let others ask. The margins on the systems side -- I mean you're up nicely versus a year ago. And it's not surprising that they would fall off from your seasonally stronger period in October but it was, like pressing on 15 percent there and about 8 percent here. Did they do about what you expected? Maybe just -- with that margin sequentially falling off to 8, is that any surprise here? I mean I know we're talking the January quarter now, I don't want to overplay it. But there's nothing else going on there that we need to be aware of, and it doesn't imply that when we get in the second half of the year, we can't get back to the sort of double digit 15 percent plus that you showed in the October quarter?

No, there's nothing there. It's just the seasonal dip that you are seeing. And, you know, even though we've done a great job of controlling our expenses and our manufacturing costs are down year-over-year, we are -- we get -- you have to carry some of key folks through that slow period. Otherwise, whenever -- you know whenever the business hits, you wouldn't be able to produce it.

Absolutely. Thank you very much.

Yes, sir. Thank you.

And we'll take our next question comes from Allison Fish (ph) with (indiscernible). Go ahead, ma'am.

Hi, I just have a couple of quick ones. First, looking at your inventories, they look pretty high, both in terms of days and then, you know, year-over-year, versus what's going on in sales. Is something going on there?

Well, the -- you know the steel mills discontinued the stocking programs that we had, and as of -- at the end of December, we had to take all of the inventory that they had in the stocking programs and that increased our inventories. You know, at year-end we were at 138 million, and I believe we're at 148 million, but we expect our inventories to be, when we finish the year, in the 125, $130 million range. That's -- that's the forecast.

Okay. And then my other question was -- looking at the coating segment, I know this is sort of a new thing to report, so I'm trying to learn exactly how it works. But I just want to -- it looks like sales and margins are both down there. What's the story?

The story is that they are 50 percent captive. In other words, they do -- 50 percent of their business is from the buildings group, the NCI Buildings group and the NCI components group. And both segments, buildings and components, were off in tons, and that's not a business where you can just go out and overnight pick up new business.

So we are already seeing their tonnage improve for the second quarter. It has to do with the seasonal downturn and so on and so forth. There's nothing wrong with the coating operations, except that they are 50 percent captive but that's a good thing whenever we are running full blast.

Right.

Just a bit more color on that, Allison. During the period of our first fiscal quarter, which is November, December and January, that would be a period that Dodge non-residential construction spend was off 26.7 percent. And that reflected both the seasonal downturn, as well as -- you know, we think the really poor weather we have seen around the country. So, you know, that was the market that we were selling into. So backs dropping out, as we say, is the great quote activity and the backlog increasing. So we're poised and positioned, as this thing kind of comes back to its seasonal levels.

Okay. And then just finally, your guidance for the year, does that include the extra after-tax benefit of $0.06 that you had this quarter?

No, it does not.

Okay. Thanks. That's it.

Thank you.

Just a reminder -- and we'll take our next question from David Yuschak with Sanders Morris.

Thank you and congratulations on a great quarter there. One question. With quote activity up and, you know, prospects and bidding pipeline looking good, shouldn't we begin to expect to see some of the pricing issues begin to abate as everybody gets a little busier? I was wondering if you can give us a profile as to why we may not be seeing that as of yet.

Yeah, well, I tell you, I think we are seeing it, but it's -- it's anecdotal at this time. But when we look at how our prices are holding at quote, we think we are seeing a little abatement on that, but it's too early to really nail it for sure. You would think that, if people have been trying to dump their inventory and get rid of it, now there's more stability and demand is picking up. We would expect to see ourselves do quite well over that period. We are certainly poised and as you know, we have really tried to be commercially responsible. And as A. R. said, not really chasing the market share.

Now, as far as needing to carry more inventories, -- you guys have you to carry more steel inventory and the rest of the industry has to carry more inventory. Does that present a problem for those who are in the private sector, as you said, A.R., that maybe they are financially needing to do some things to move that inventory, therefore are more pressed to try to get rid of the inventory for jobs. Is there some of that logic in why that pricing in this environment? Because they have to carry more steel and therefore they are more likely to try to move faster, even though it may not be as economically sensitive to do that, given the margin they may be getting on the projects?

We certainly believe that's the case, David.

Okay.

And we're not 100 percent certain that tonnage follows the Dodge square feet, you know. But let's just hypothesize that it does. If the market is soft by 26 to 27 percent, and you are sitting with a bunch of inventory and you don't have the financial strength to do that, then you are probably going to try to liquidate that as low as you can. And I think that's been a part of our pricing pressure, that we have gotten through in the first quarter.

So the private sector guys are just going to have to learn how to manage this whole new issue of inventories. Or --

Or exit.

Because the working capital is so darned important in the business.

You're absolutely right. And we know for certain that one company absolutely tried to buy market share during December, January, February, and it looks like right now, they have backed off of that.

Okay. Let me just address the guidance a little bit too. Given you are off to a good start in the first quarter and, you know, even in the second quarter it looks like, from my view anyway, that your numbers are a little bit better than what I might have thought. Are you just being kind? Because the second half, generally, because of the optimism we all have for non-residential construction spending that you would thought that maybe you had moved up the lower end of your guidance. Are you just -- give us the rationale for just keeping it the same at this point in time.

David, let me -- let me tell you how I see this. I think when the -- I think that we'll probably have to revise our year-end guidance when the second quarter is over. The guidance that you see for the second quarter is a stretch. And the reason that it's a stretch is because we had two quarters last year that we had to come out and announce early that we were going to do better than our guidance. And we're trying to hit the guidance, you know, and be -- so the second quarter is a stretch. Let us get through the second quarter and you may see something on the year end. That's about as honest as I know how to be.

Okay. Then one last question. As far as your guidance for the rest of the year -- last year you guys did benefit from the positive environment for steel prices. What are your assumptions on steel being the benefit it is in this year's remaining quarters compared to how much you benefited last year? Is it neutral on your assumptions? Just give us some sense as to how much steel pricing can play in the guidance?

It's neutral or slightly down.

Okay. That's all I got for now, guys. Thanks a lot.

Thank you, David.

As a reminder, ladies and gentlemen that is star, 1, if you would like to ask a question and we will go next to Cliff Walsh with Sidoti & Company.

Good morning.

Good morning.

Can you comment on the geographic concentration of the backlog and the quote activity? Are there any pockets of strength or weakness around the country that you are seeing?

Just one second. Let us look at something right quick.

You know, Cliff, it is, as I said. This -- first of all, it's somewhat difficult for us to really be able to see -- to see where some of the end products go, particularly on the components side. But, you know, we're fairly certain that this warehousing, manufacturing, you know, office piece is growing. And that seems to be consistent with the data that we see in Dodge as well.

You know, we like what we see in the southeast of the United States. But, again, because of the weather, it is kind of is murky. So we really have to look at our quote activity and our backlog. But I would think that you continue to see some pretty good strength in the southeast, you know, the southwest where we are here. We're hopeful that the northeast -- the northeast will be stronger as well. But I -- you know, I think it is going to be driven, we think, we speculate, by the growth in warehousing and manufacturing primarily.

Okay. Any comments on, you know, difficulty in February, in terms of weather conditions?

I made the comment the other day that I'm wondering if we are living in Seattle rather than Houston. Because, I mean, it's raining every day. I have been personally trying to pour a slab at my place here in Houston since January 17th and don't have it poured yet. So that -- I mean, that is almost 2 months and -- you know, it's just so wet, you can't get in with trucks. You cannot hardly get anything done.

But, you know, there are other parts of the country that are okay. So some big work up in the northeast, and one of the markets that we're really penetrating is churches and schools and parochial schools. So all this is good news, as far as I'm concerned.

Okay. Now in terms of those markets typically aren't your traditional markets. Can you talk about where they are in terms of total revenue at this point, and what you see over the next couple of years?

That's really hard to do.

Okay.

That's not something -- we don't track it that way.

Okay.

But we are -- you know, as we said before in the calls, we are looking to expand our rural and our agricultural. We know that the acquisitions we did with the dot com business and with the heritage were focused -- you know, pretty focused on that area and we're seeing -- we like what we are seeing so far. And we are developing relationships, as A.R. alluded to, on the national account side to try to further our ability to penetrate some other markets that we haven't participated in before.

One other thing I would like to say is that we have emphasized the large manufacturing buildings and the large warehouses. I don't want you to get the impression that we are losing sight of our bread and butter business and that's the small building business and servicing the small fabricators because that's our bread and butter. And in fact, we took some new initiatives during February to enhance those sales.

Okay. Fair enough. Final question. Any updates in terms of the legal action taken against Johnie Schulte back in 2004?

I don't think that -- we're continuing with the discovery. We certainly don't want try this lawsuit in the press and, we think we have a good position with that. And that's about all we can say at this time.

Okay. Thank you very much, guys.

Okay. Thank you.

It appears we have no further questions at this time. Mr. Ginn, I would like to turn the conference back over to you for any additional or closing remarks.

Alright. Well, we really appreciate your participation in the call today, and I want to thank you for being with us and thank you for your interest in NCI. And please don't hesitate to give us a call if you have any further questions. And with that, I will bid you good day.

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