Core Natural Resources Inc (CNR) 2005 Q2 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 second quarter of fiscal 2005. This call is being recorded and a telephonic replay may be accessed through June 9th by dialing 719-457-0820 and entering access code 1122184. The replay will also be available at NCI's website at ncilp.com. The second quarter results were issued yesterday afternoon in a press release and 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 in the forward-looking statements made in this call. To the extent any non-GAAP financial measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's website by following the "what's new" link to press releases to see yesterday's news release. The information being provided today is of this date only and NCI expressly disclaims any obligation to release publicly any updates or revision 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 second quarter 2005 conference call. In our prepared remarks today, I will provide some insight for the quarter and guidance for next quarter and year-end and then we will take questions. As in the last call, we won't recite our specific consolidated and segment financial information since that was supplied to you in the news release. With me today is Norm Chambers, our President and Chief Operating Officer, Frances Powell, our Chief Financial Officer and Treasurer, and Ken Maddox, our Executive Vice President of Administration. Before I speak about the quarter, I would like to -- I think it would be helpful to re-establish the strategic context for our results. We completed and implemented our strategic plan at the beginning of 2004. The plan answered the question, how can we significantly increase the value of the Company over the next five years?

At fiscal year-end 2003, our earnings were 22.8 million and our share price was 21.75. NCI's trailing 12-months earnings as of the end of the second quarter of fiscal 2005 were 52.9 million, and yesterday's closing share price was 34.16, which we believe points to the fact that we are implementing the '04 strategic plan to increase shareholder value. When we speak of value, we believe growth in earnings matters most, keeping in mind that any growth strategy to achieve this goal must be controlled and balanced without undue reliance on debt. Rest assured, we would never increase earnings using levels of debt that would jeopardize the future of the Company. Therefore, our approach calls for a series of steps that we believe can significantly increase the earnings of the Company over five years in a -- in a financially sound fashion.

The plan calls for organic growth, accretive acquisitions, and disposal of non-core businesses and assets. Organic growth includes manufacturing plant expansions and the recruitment of new builders and customers to the NCI family. The purchases we completed last November of Heritage and SteelBuilding.com to forward our strategies to increase our market share in the small building market and end the rural and agricultural segment these businesses serve. The recent acquisition of the name, customer list and intellectual property of STEELOX is consistent with our growth strategy through the penetration of geographic segments by way of smaller, more opportunistic regional acquisitions. The decision to build or buy manufacturing plants will be driven by economic returns and execution considerations. I think you all know NCI is not a bottom feeder.

We target acquisitions that fit our integrated business model of Coating, Components, and Engineered Building Systems, and can be purchased at a fair price based on a multiple of normalized, and normalized is an important word there, trailing 12-months EBITDA. This provides us with a high degree of likelihood that our acquisitions will be accretive prior to taking advantage of any synergies. On the other hand, decisions to build or expand manufacturing facilities will be based on traditional financial measures of NVV and IRR, ensuring that recurrence will likely exceed our cost to capital. Returning to the organic growth aspect of our plan, we believe the returns earned in 1999 and 2000, you know, like plus 15% EBITDA and plus 12% operating income, no longer represent a challenging objective for us to strive towards.

We are working to achieve returns in excess of those once lofty achievements and believe our new goals are attainable. During the worse downturn in the history of our industry, 2001 through 2003, NCI shut down five of our least efficient manufacturing plants and built an incredible state-of-the-art building frame plant. Recently, we bought our joint venture partner in Mexico out, and this operation is one of our most efficient manufacturer of frames and Long Bay System. Additionally, we have been diligently working under the hood in our Engineered Building Systems group to raise their operating margins from 8% at year-end 2004 to 10 to 12% at some time in the not too distant future. We believe that in addition to economies of scale, our operating income margins will continue to increase through improved manufacturing processes and integrated, computerized design solutions.

The result of these actions and other improvements we have taken, leads us to conclude that we finished 2004 operating at a plant utilization rate of about 65% to 70%. Full capacity for our plants should be realized at close to 95% utilization. While we were near full capacity in the 1999-2000 time frames, the increase in operating efficiencies at our existing plant, combined with the production at the new frame plant, has more than offset the production loss from closing the five plants. During fiscal 2004, we shipped approximately 10 to 12% fewer tons than we did in our very best years of 1999 and 2000. Therefore, it is our belief that if we were able to increase tons shipped at 6% per year for a few years by taking market share from our competitors and growing organically as a result of an improving economy, we will certainly generate higher incremental margins. As you can see, a lot depends on our ability to execute.

The market place is very competitive. However, we have a history of disciplined performance. Our real strength is embodied in the teams of men and women who want to succeed and know how to. Now I'll turn to a short discussion on our second quarter results before taking questions. I said during the first quarter conference call that making the second quarter projected earnings would be a stretch and, believe me, it was. At the end of April, Dodge reported nonresidential square footage to be down 6.9% compared to 2004. The MBMA was off 9.3% for the same period. Simply being in the range we forecast speaks well of the effort put forth by the employees of NCI.

I want to confirm that steel prices continue to be fairly stable. We have seen some inventory driven moderation in hot roll prices, but light gauge continues to remain close to the 2004 price levels. We believe steel prices will be much the same for the second half of 2005. Our Components business delivered good results on lower shipments. But I think you have to remember that last year their shipments were driven by the price increases, and they had a big influx of business in the second quarter to beat the price increases. The discipline we spoke about at the end of the first quarter continued into the second quarter. Our customers utilized our roof and wall panels and secondary structural steel throughout the commercial, industrial, and institutional sectors of the nonresidential construction market.

The depth and breadth of our product offering, coupled with the speed of response to our customer needs from our plants and depots throughout the U.S., underpins our performance in a competitive market. We have recently put our full efforts behind the MRA, which is a new Medical Roofing Alliance. It is made up of industry participants such as ourself, and their industry in this deep(ph) to capture a greater share of the roofing market for metal roofs. Now we believe we have the product, innovative capability to expand our share of the roofing market, which is valued at several million dollars annually. During the first half of fiscal 2005, we have demonstrated restraint and commercial discipline in the face of aggressive attacks on our market share. As we now see construction demand rising, we will focus on gaining market share in certain markets in geographic areas.

We expect our Components business to ship more tons in the second half of the year than it did in the first half. We will strike a balance between price and our wish to manufacture more tons of steel consistent with our year-end guidance. Engineered Building Systems continues to demonstrate their ability to grow their customer base with the recruitment of strong builders from our competition. We have been pleased with the work that the continuous improvement teams are accomplishing with their business and manufacturing processes. Their success is evident in improving customer satisfaction and a rising backlog. Large buildings make up a significant percentage of our backlog reflecting an improving economy. However, you have to keep in mind that larger more complex buildings require more time to engineer and emerge from the permitting process than the smaller less complex buildings.

That is why it is important to have a solid base of these smaller buildings that historically ship more quickly. We're redoubling our efforts to increase our share of smaller buildings during the second half of the year. And with our Component's business we expect to ship more tons in the second half of 2005. In line with this effort, we are pleased with the response from STEELOX builders to join the NCI family. As a result of our purchase of the STEELOX's name, intellectual property and customer list, I think it is important to say that we plan to ship the STEELOX product from our existing manufacturing plants. The STEELOX's name and IP provides an excellent opportunity for NCI to fill the need of their strong and lull(ph) builder network while increasing the utilization from our existing plant.

Finally, our Coating business performed below its normal levels as a result of both lower family and third-party demand. We expect the second half of the year to be much stronger than the first half due to the rise in construction activities. The Coating segment rolled out the first of its Oracle 11i ERP installations. We are on schedule to complete this before the end of fiscal 2005. Based on our first-half performance and the strength of business conditions as we enter the second half of our fiscal year, we have reaffirmed our established guidance for fiscal 2005 as detailed in our news release. Our business levels in May were consistent with this guidance and with the strengthening in the overall market predicted by Dodge and other industry analysts, which supports our confidence in achieving our second half goals.

But as you've come to except from us, we're not going to get ahead of ourselves from a guidance standpoint. So after a challenging second quarter we will continue to monitor bookings and operations very closely to gain greater visibility about the ongoing strength of both industry conditions and our performance for the second half. We'll now ready to take your questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Steven Weiss of Mind Flow capital investment.

Nice job, guys. I love what I am hearing. A couple of questions. A lot of your competitors have recently implementing strategic initiative to reduce their sourcing costs for the raw materials, especially in this raw materials, given the economy, and by establishing a better line of communication with their suppliers and opening up a better line of communication and collaboration with their suppliers. I am interested if you can provide some color as to what you guys are doing to reduce the raw material cost by opening up a better line of communication with suppliers and establishing better collaboration as well to improve the bottom line.

I think -- I think we heard your question. I'll try to answer the question we think we heard. We have excellent lines of communication with our suppliers. We're actively in the market, and as you know from previous calls, we generally buy steel one quarter in advance. And -- and what that -- what that means is that our purchasing folks are constantly speaking to both the domestic sales supplies as well as the foreign sale suppliers. And that's a game and a position that we have played historically, you know, and continue to do so. So we're -- so we're able to -- to anticipate what's going on with supply and demand. We are able to anticipate, you know, price moderations, increases. And we act accordingly.

Have you guys been looking to consolidate your supplier base? Or are you satisfied with the levels they are at right now?

We certainly have a good supplier base, now. We have some long-serving relationships and we have some new relationships. It's -- you know, it is a matter of really being sensitive to making sure that we are always seeing the best deals and the best opportunities.

How are you managing trade-off? Basically for a certain situation when steel may be high in a particular part of the country. How are you guys managing trade-off, are you running any cost models to figure out --

Sure.

-- supplier base that you're ordering from at one time?

Yes, we have detailed analysis that we do both on the demand side in terms of, you know, our forecast and all the different new types of steel. Plus, we -- we, as I say, are -- you know, constant communication. Now, some of that communication is our competitive advantage, because we buy more than any of our competitors. So we take advantage of all of our strength and -- but try to maintain good relationships. But it's -- it's based on performance. We have suppliers that have to perform by virtue of their pricing and by virtue, you know, of their ability to supply the materials that we need and want.

When you say it's performance are you guys doing scorecarding to measure those suppliers?

It is a scorecarding, in fact, but it's really making sure that the quality of the products continues to be good, and that is the case with all of our suppliers, and we -- you know, we just monitor that, because it is a constant level of, you know, dialogue.

Right. To make sure you guys get the lowest price, are you guys running auctions? Or just keeping that line of communication with the suppliers open? Or are you doing several -- ?

No, no, we don't run auctions, but we negotiate -- we negotiate from the strength of knowledge.

Okay. Final question. What's in your supplier feedback? How -- obviously you guys are at the leading edge of, you know, communication with the supplier base. What is your feedback. Are they open to this type of communication?

Sure, it is a historical way we run our business. It is by contrast to taking long-term types of taker pay agreements. We have found historically that we performed even better by being actively in the market. And as you can see -- see by our inventory levels, we carry something less than a quarter's worth of inventory.

Okay. Great. I really like what I am hearing. Continued success down the road. I wish you best of luck.

Thank you.

Our next question comes from John Diffendal of BB&T Capital Markets.

Good morning, gentlemen.

Good morning.

I hope we can discuss a little bit more your guidance for the third quarter, which, I guess, on an operating basis, is relatively flat, up a little bit when you exclude the -- the charge last year. Give us a little -- a little more color on that. I mean -- I think -- my brother analysts and I probably had a little higher expectation the third, thinking the fourth quarter is a tougher comparison for you given that the systems business in margins were so much stronger last year. It seems to be that you are kind of implying more of a flatter second half. Are you simply just going into it with just wanting to see how things play out? In seems to be that's part of what you were implying in your comments, A.R., but I want to get a little better sense on why you think it is a flatter number given the backlog numbers and, quite frankly, an easier comparison on the systems side than we certainly have in front of us in the fourth quarter.

John, you know, based on Dodge and based on what we are seeing with the MBMA, and that's certainly not all of the participants in the industry, you know, they were down the first four or five months of the year, okay? And Dodge is -- is forecasting an increase by year-end. But the way that -- the way that we -- we modeled this is that we modeled our biggest increase in the fourth quarter. And, you know, when -- when we reaffirmed our guidance for the year, which is, you know, 25%, 30% increase over 2004 on GAAP numbers and a 10% to 15% increase on non-GAAP numbers, I mean, we -- you know, we were pretty serious about that. But we modeled that based on the fourth quarter being our strongest quarter and not the third quarter.

Now, we -- you know, we think third quarter is going to be -- you know, be a good quarter, but it is just not going to be as -- we don't think the economy is going to come back as quickly as we thought. Now speaking to the backlog that you mentioned, there is -- there is a lot of large buildings in that backlog. And when I'm say large buildings, I am talking about $8 million buildings, $10 million buildings, and those just take longer to get through the system.

Does that mean that -- that stuff falls more in the fourth quarter is what you are saying?

Yes, sir. We had -- we had an $8 million project fall out of the third quarter and into the fourth quarter because of -- of permitting issue, okay. And that absolutely had an effect on -- on the third quarter. You know, we had it in the third quarter and had it scheduled for the third quarter and it fell out. It went into the fourth.

So, when you say we had a stronger fourth quarter, sort of line-up implied in the guidance range for the year, is that -- is that a just absolute basis versus third quarter or actually an up number versus a year ago? And part of it's just in helping us in terms of delaying these quarters out. If we put the third quarter where it is and keep a flat fourth quarter number, I think all of our estimates will come down toward the lower end of the range. I am trying to understand if that's what you are trying to tell us or not.

Well, first of all, as you know, we -- we've got -- we want to be careful on this, okay?

Right.

And, you know, one of things that you -- that you -- that you readily do point to is if we just stay flat with equal to fourth quarter, you know, of last year which was a very good quarter for us, we would be in our bottom part of our range. You can rest assured, as you know, that we are working very hard to -- you know to do the very best we can. So, you know, that's -- you know, we are going to continue to work this to try to earn the most amount of money we can. And that's -- you know, that's -- and that's no different. But we don't want to -- we don't want to overstate -- overstate what has to occur in the third and fourth quarter in terms of the rebound that we -- that -- from the -- you know, from the deficit that we've had in the first two quarters in terms of, you know, the overall, you know, business. So it -- you know, the range is the range.

Right. But you say -- as you mentioned, I mean, we have May under your belt. Was there a improvement in sort of -- in tonnage and I guess just momentum in the business that would give you every reason to think the seasonality will play out as it typically does from what you have seen before. I mean, was the winter -- I guess one of the big questions is was this winter period just something that has delayed stuff to be pushed into the more seasonal part of the year? Is that what we're -- is it just looking like it is playing out that way?

I think that's -- that's some of what we've seen. If you see that our backlog is up, what, almost 15%, and -- and if you look at what has to occur in the second half of the year to get to Dodge's forecast of 3% growth in square footage, you can see that our -- that our backlog is in line with that kind of result, okay?

Right.

And what we are looking to see is -- is -- is the -- is the comeback on the -- on the small kinds of buildings that we can ship more readily, you know, more quickly. And that's why we are talking about redoubling our efforts there. You know, we -- we give the guidance with all the confidence that we always do, okay?

Right.

And we are going to -- you know, we would much rather, you know, have our performance speak for ourselves, you know what I mean? And not -- not get too far ahead.

And we certainly appreciate that, but I just -- with only two quarters to go, and with an implied flat third quarter and where the numbers were of a flat fourth quarter, I mean, am I hearing -- it does sound like what you are saying is some business shifting into the fourth quarter as these larger building orders are tending to hit more in the fourth quarter. So, it may imply to me, I want to make sure I am understanding this correctly, that a flat fourth quarter number is probably too low if there is a shift of business as some of these $8 million or $10 million orders hitting in that quarter, that we can probably ought to push the fourth quarter up a little bit relative to a flat number, and like I say, with a tougher comparison of nearly a 15% margin in the structures business a year ago.

You know, the -- the caveat to that, I guess, John, is, is that Components had an outstanding fourth quarter last year. And, you know, --

And so did Systems.

Do what?

Yes.

And so did Systems.

Yes -- And so -- you know, -- .

But if you look historically for the last eight years, our fourth quarter have always been strong.

Yes.

Our fourth quarter has always been strong.

And there is nothing, what you are saying, that would dissuade -- that would say that we're moving off of that -- that normal tendency.

You know, we -- I would say that the only -- the only reservation is the fact that the market is been down deeper than, you know, than Dodge had initially forecasted, and we had expected.

Yes, no, I hear you.

So we have -- we have managed, with lots of discipline so that we have produced the bottom-line we do and that's -- as you know, that's what our focus has been and will continue to be, to try to get whatever we can from the market.

I will ask one more question and then I'll get back in line. What about -- certainly the last couple of quarters you all were saying that your quoting activity had -- had accelerated . That was also a positive going forward. Where does that stand right now?

We're seeing -- we are seeing some of those quotes finally close, okay.

And quoting activity remains very good.

And it does remain very good. But, you know, it's the older quotes, now, that seem to be closing, you know. The -- we weren't losing the Buildings necessarily. We lose a job once in a while, but, you know, it was -- people just wasn't signing. They wasn't buying.

Right. And so -- certainly as you look at some of the economic statistics and concern about just where capital spending is and the manufacturers report yesterday. Are you finding that there -- that -- you have been asking to quote. There is not any sign at this point that they're -- that they are saying, Oh, well, thanks for the quote but we've decided not to do that project? I mean, your conversion rate of quoting, if that's a statistic, is that -- is that changing one way or the other?

Our close rate, I'd say, is about the same, and we don't -- I mean, you get a few quotes where people say, yes, I decided not to buy it, but, I mean, that's -- I guess, in any business you get what I call tire kickers, you know. But basically, I just -- I just don't think -- I don't think people have been spending the money, but I think they are beginning to turn loose with it now.

Right. Thanks.

Hey, John. I want to mention one more thing.

Yes.

I think when you look at us, you've got to look at the -- you know, there are four more guys in the Building segment that are close to our size. And three out -- three out of those four has had dismal first four or five months of this year. We had a 31% increase in earnings. I mean, you know, I think some place along there, we need to get, you know -- that needs -- we need to get credit for that.

Oh, absolutely, I'm not denying that.

I mean, those other -- those other three guys, it wouldn't surprise me if any of them closed the doors any day. I mean, it -- that's how dismal their business is. I mean they fired presidents, they've -- they've brought in hatchet men. They have done whatever you want to talk about, you know. They've had -- and I hate -- but I think when we do get compared, you got to compare us to our peers, you know.

Which have been the positive story going back to your beginnings. And since you have opened that door, let me just ask one last thing and I would hate to ask too many questions, but can you give us an update on -- on your acquisition -- I mean, the ability to more fully deploy the $180 million you took down in debt back last year. Where does that stand right now?

You know, there was -- there was a lot of companies that had like a one-off profit from the price -- steel price increase last year. And what we are finding is, is that they are wanting us to pay them a multiple of that one-off profit, and we are not going to do that, okay? That money is not burning a hole in our pocket, and we are not bottom feeders, as I said earlier, but, you know, we're -- we're not going to make an acquisition just to make an acquisition. It has got to be the right one and it has got to be at the right price.

And we continue to work that space just as hard as we did at the beginning. There is no let-up in that and as soon as we have something to announce we will be sure to do it.

Excellent, thank you.

Hey, John, just before you go I want to acknowledge, you know, the celebration of your getting the award on being the top, you know, broker -- sorry -- top analyst in the -- with the automotive side. That's pretty neat.

Pretty weird because I don't even cover any automotive companies.

I know, but they gave it to you anyways. I think it's all those RBs you cover.

I guess so. Thanks so much.

Our next question comes from Allison Fisch of Pzena Investment Management.

Hi, just a quick question on the guidance. Does the full year guidance include the $0.06 gain from the first quarter or is that excluding that?

The $0.06 from the first quarter is not included in our guidance.

Okay. So -- so if you were to include it, then you would be talking about a $2.86 to $3.11 range.

That's correct.

Is that right? Okay, thanks.

Our next question comes from Michael Corelli of Barry Vogel & Associates.

Hi, good morning.

Good morning.

Just following up on some of the points John Diffendal was making. What was your tons shipped, actually, in the second quarter versus a year ago?

It was down. We don't give the precise number of tons, but it was -- it was down. And what we've said is -- is that -- is that directionally, not on a perfect kind of correlation, but directionally, we track the same direction that Dodge is going.

On square footage.

In the square footage. So if Dodge is down, -- let's say we're down 9 -- what was Dodge?

6 points.

6.9%, then that is a down and we would be directionally down as well in terms of tons shipped.

So that 6.9 is for the six month period?

That is what Dodge was down, yes.

What was that in April?

It was -- it improved in April and, in fact, April was up almost 10% for Dodge, but it -- it had to -- the period before that I think was -- was down -- was still down as much as 12, so what Dodge saw was an improvement, in fact, in April, but still down year on year -- calendar year on year.

Okay. Just talking about your third quarter projection, and John made a lot of the points, but do you think there is a problem with the elevated steel costs causing people to delay projects, not pursue projects, or maybe look to other nonmetal Components?

You know that is -- that is a good question. I'll tell you, we have been looking everywhere to try to come to a conclusion on that. You know, I think it is going to be one of these things that we turn back retrospectively and say, you know, there might have been some dampening because of steel price increases. You know, I just -- we don't seem to be losing market share at any great pace to tilt up or would, but, you know, steel -- the steel price increase certainly was real, and it was -- it was, you know, drastic, but maybe A.R. has a different view on it.

When the steel prices started to rise, you know, early in 2004, I was concerned that they would price us out of the market. But fortunately, or unfortunately, for the end user, I guess, the other materials such as cement and, you know, the -- the single ply roofings made out of petroleum products and so on and so forth, they all rose about the same level. I don't -- I really don't see at this point the -- the price of the building, or the price of a steel roof, you know, having an effect on -- on what we are selling.

Okay, thank you.

Yes, sir.

Our next question comes from Cliff Walsh of Sidoti & Company.

Good morning.

Good morning.

Can you comment a little bit on how scrap metal -- you know, how much scrap metal you generate and how lower scrap prices might affect you?

Yes, we have a minimal amount of scrap and it really has no material effect on our numbers.

Okay. And in terms of the Coating business, can you just comment a little bit on what the pricing environment has been like? I know there has been some pressure in recent quarters.

It has been pretty stable. It was pretty stable in the last -- in the last -- our last fiscal quarter.

Okay.

And you realize that -- you know, that the relationship between Components and Coating is as we see -- see an increase in tons shipped, that has a beneficial effect on the Coating business. You know, they are linked pretty closely there because we base load the Coating, you know, business with our inhouse demands.

Okay , fair enough. Thanks very much.

Yes, sir. Thank you.

Our next question comes from Brendan Hartman of Kramer rosenthal.

Good morning, guys.

Good morning.

Norm, a question for you on the difference in margin between the big jobs versus the smaller ones. The larger jobs at a higher margin because you've got the same amount of engineering and design costs but it is a bigger or spread over a bigger amount of revenue?

I am not sure we can say that. We have a lot of engineering on the -- on the bigger buildings. I mean we -- we probably, as a percentage, maybe even earn a little less on the percentage side but drive more to the bottom-line because it is a bigger number. We haven't seen a great difference in margins between the small buildings and the bigger buildings.

Okay. And then just back to the market share question and ton shipped issue . If -- assume Dodge is right and the full year comes in at up 3%, shouldn't you guys materially outperform that given the fact that, as you mentioned, as A.R. mentioned, many of the competitors are really struggling?

We have historically -- you know we have outperformed Dodge historically. You know, our guidance would show that we expect to outperform Dodge.

The problem is that with those three major manufacturers in trouble, they are low-balling every job they get on, and, you know, we are just not going -- you know, we are not going to get into that. If -- if we -- if we start taking the price down, we will take the whole market down, okay, especially in Components. Components is twice as big as its largest competitor, and if Components starts lowering their price drastically, it will take the whole market down, and, you know, I don't think anybody wants to see that.

Yes, understood. And just on the Coating segment for a second, the Oracle implementation, how much is that costing you and is that weighing on the margins and does that go away in the end of fiscal '05, as you complete that installation?

Well, I tell you, we are doing ERP installation throughout the whole Company and we're starting in with Coatings. And if you saw the increase in our G&A, one of the chunks of that, I think it was 450 million increase in the IT spend.

450 -- 400,000.

400,00, sorry, sorry.

That is a lot of money, Norm.

Thanks very much for that catch. Anyway, a large, you know, chunk of that is dedicated to both the 11i installation as well as the engineering work that we are doing in the Building side. So we are going -- you know, we are going to continue to spend, but it is within our guidance. But we're going to continue to spend on the 11i installation.

You know what happened on that, too, is the -- they have more stringent rules on what you can capitalize today as far as ERP installation, and they -- than the way it used to be done.

So the full year is around 1 million?

Probably about right.

Okay. And then just review, Norm, what is the CapEx for -- for this year?

Frances?

The CapEx budgeted for the year is about 27 million, and we have recurred about 7 to date. So we are looking at about 20 left for the remainder of the year. Our guides say that they expect to run that through with requests. Whether we ultimately spend that for the remainder of the year, but our plan is to spend another 20 for the remaining six months.

Okay. And where is that going?

It's going into engineering on the Building side. It is going into the 11i installation. It is going into modifications and improvements to our manufacturing plants. We -- you know, we -- we are spending a fair amount on improving our plants.

We spend about 10 million a year, roughly, on maintenance capital, okay? And -- and that's -- you know, a lot of that has to do with safety, but we got fantastic safety records, and, you know, and then keeping the machinery state-of-the-art, you know . So we spend about 10 million a year on -- on -- .

Just on the maintenance side. Okay. And final question. Norm, what -- I know you have answered this in the past, but assuming that you don't do any major acquisitions, you know, kind of timing-wise, what do you do with the cash on the balance sheet? And what are the other uses of that cash other than acquisitions?

I mean, the obvious one is to pay down our debt. We have that -- we have said, you know, publicly that that's what we would do if we did not get an acquisition. But at the end of the day, our banks are our partners in this and, I think, buy into the strategy. So, you know, we are not going to rush to move that money off our balance sheet.

So there is no time frame where you say if we don't do a acquisition by such and such a date we're going to -- ?

There is a time frame but it would probably have anywhere between six months to a year to have to, you know, make a reaction.

Gotcha. All right, guys, thanks a lot and keep up the good work.

Thank you.

Thank you.

Our next question comes from David Yuschak of Sanders Morris Harris.

First question. On your inventories, down, I think, about 25 million, 26 million from the first quarter, was there any positive or negative impact to gross profits in that quarter because of where that steel may have been worked off, at what price compared to the current markets.

Don't think so. Dave, don't think so. I think that that was pretty much in a steady state. I don't think we gained any big pickup there.

Okay. As far as winding down those inventories more. What is your objectives there, at this point in time, as far as going back to some of the earlier discussions about partnering and -- .

I believe our total at year-end is 120 million and we are 126 now. And that is down from 148 million at the end of the last quarter. We told you all, I think, in the last conference call that we bought a whole boatload of hot roll and that is what is running the inventory out and we are working our way through this. Run the inventory up and we're working our way through that, now.

So the 120 is kind of what you'd consider kind of a steady state normalized level for your expected -- ?

It is with the mills, you know, doing away with the stocking programs that we used to have.

Right, yes. Now, one of the issues, I think, I've had with you guys, particularly as it relates to the second half, was that last year's second half benefited substantially by steel products -- steel improvements and profitability. Because I think if I remember right, for most of the second half your tons delivered were down. So factoring in, you know, when does that begin to stabilize or become neutralized versus when you begin to get a ramp in your demand on the -- the metal Buildings and Components going forward. I guess what I am looking at in the second half then is some assumptions from you guys that the metal Building side of it, although it's going to be tougher year-over-year as far as that improving the profitability versus what you're going to deliver this year, that your capacity utilization is low enough, and given a more positive environment that I see out there for nonresidential spending, that you should be more than be able to offset that tougher steel profit contribution you had in the second half of the year.

Is that a fair conclusion here and is that one reason, maybe, why you are a little more conservative is just because the profitability last year second half from steel -- steel prices were -- were probably of greater impact, but that it is just a matter of how fast a ramp comes in the second half?

Well, there are three things. And really the ramp-up is the important thing. We have to see the pick-up. And we see some evidence of it, but we want to be able to talk retrospectively and say, well, you know, it did happen, and the -- you know, the -- the second half of the year has historically been, you know, as you know, between -- for the past recent years between 70% and 75%. You know, so -- so we -- we -- you know, we don't see any break in that, but, you know, we have to, you know, earn it. The point is that we have -- you know, Buildings was at -- at 8%. Their OI was 8% for -- in 2004. You know, we ran this quarter about -- at 9%, okay.

We've said that we expect that -- in that business to get to 10 to 12%, and we don't say when, but we are working to get that, you know, to happen. You know, we think that we are doing the right things in the Building side, and it will, -- you know, and we'll see -- you know, see good comps, okay? We expect that both Buildings and Components will ship more tons in the second half, and, you know, that's -- that's what we are basing it on.

Going back to your comments earlier, A.R., about competition and price competitiveness of the -- of the -- these guys is because of, you know, having lost market share as you guys have gained some market share, and can one conclude here that these guys are, basically, give back some of the steel profitability? As you mentioned earlier, the acquisition side of it, they want to price in the steel profitability they incurred in the last 12 months, and you guys don't want to throw that into the pot, but are they giving back some of that steel profitability in trying to get the volumes back to where they need to from an operations point of view?

Absolutely. And not only on the Building side, it is -- there's one of the components of customers is -- you know, I mean, cutting the bottom out of the prices. One of the -- excuse me, competitors. One of the components' competitors, and a major competitor, is just cutting the bottom out of the prices, and we don't understand why. It is all about trying to gain market share, but, again, if Components take the price down, the whole market is going to go down. If -- if MBCI took the price down, it would affect Buildings also.

So you are of the conclusion that you have enough going on operationally and with customers that you don't need to chase that route as -- as much as competitors had to do here recently?

We rely on our products, rely on our service levels, and it's -- it stood by us, and, you know, that's what we are going to continue to do. You know, it -- and it's -- you know, as you said earlier, we do have the capacity. So what -- you know, what we -- what we expect to see is an increase in demand and for this pricing new situation to be a little less of an issue as demand increases.

Now the -- you guys have plenty of capacity. One could argue, if you really wanted to be bearish about the competition out there, that everybody else has that tremendous amount of capacity as well and you guys are taking market share at lower levels of capacity utilization. Is it possible that -- is there financial constraints, maybe, that some of these competitors may not be able to take them down too much more even with the lost market share because of their financial situation or because everybody has substantial capacity that it could get a lot worse on pricing before it gets better because of the giveback in steel profits from last year.

This is just -- this is just a guess, okay? But they've changed the heads of two of our major competitors on the Building side, and I suspect that the two guys that they put in there are not going to want to sell cheap. That's -- that's -- that's just an opinion that I have, and, you know, I -- I may be right and I may be wrong, but they were sent in there to fix that, and by fixing it, that means they were sent in there to make money and they can make money on a lower volume and quit -- if they'd just go ahead and sell at the right kind of price. Do you see what I am saying? They -- do you agree with that? I don't think -- especially the one guy they sent in. I don't -- I don't think he is going to put up with that price cutting.

Is it -- go ahead.

So --I mean, if the guy we know, and we just think he's going to take a more rationale approach and he is going to look at cutting costs rather than selling cheap and try to make money on the volume that they have.

Going back to your acquisition strategy, then, with this kind of turmoil that's out there, it would suggest that it increases your odds to close an acquisition of a material amount -- size here in the next six to nine months. But, I guess, you are going back to saying that people -- the owners still are looking at price being a problem with getting this thing done.

Well, you know, it is a movable feast, Dave. And if we -- if we see the -- if people are experiencing a slowness because the first habit's been slow, than you could make a case that says that they are working through, maybe, the blip they had this past year and that our -- and our chances might -- may be better in the second half. We are just going to play it straight, just like we are in terms of just focusing on the customers we have and increasing that base, and having good products, good reliability, and we will keep -- you know, we'll keep diligently in conversations with targets that we have and when we're -- when we are ready to move we're ready to move.

Then let's just go back to just one more question here on competition. You are taking market share. More success with bigger buildings, probably then they've been what you've historically have had because you've been more known for your small -- smaller building expertise. What things are you finding that are giving you the ability to gain that kind of market share in the difficulty environment, and particularly on the large side of it. And I think you indicated that you needed to really kind of go back and re-look at the small building side of it to get better positioned there since that's been historically where you have been strongest. Have you done anything there that has been -- been neglecting small versus the big because you have been going after the bigger or is it -- what might it be that needed to do to ramp up to the small project business as well.

One of the things we are doing is that we have really worked on shrinking the amount of time it takes us to close a small building and to ship it. And the folks, the Building side has been doing that. On the other side, we've seen good success from steelbuildings.com and from -- and Heritage. So we like what we see in terms of where we are positioned and it is just a matter of really focusing and getting active in there. I think the STEELOX piece will help as well. We have people in place, we have systems in place, but at the end of the day, the small buildings are really receptive to being able to get the building they want as quickly as possible and I think our guys are working real hard at that. A.R.

The other thing -- I heard you ask another question in how we were gaining market share, and, you know, the national accounts group that we have talked about over the last couple of years, we've got some good people in that group and they are doing a good job and one customer came to us generated through that group, that's ongoing business, you know, it's not a one off job, that's $20 million or $30 million that went directly from -- that we took directly away from one of our major competitors. We took that away based on service and quality, period.

Okay. One -- as far as that small building, Norm, how quickly have you shrunk the time horizon from where it was, maybe where you were not happy with it to where it is today and what kind of potential can you do to squeeze out more time to shrink the time to market from the time you get the order to the time you get it out at the site?

Through the continuous improvement process, they have taken as much as six or eight days out of what was a schedule of maybe in three weeks and they continue to work that space. There was, as recently as two weeks ago, a big initiative there as well to look at just how we can improve the quoting on that and moved our estimators into focus more, you know, regionally on that. So they are taking steps all the time because that's in focus. Mike and the team over there can have that in focus. The Components side sells into the small building space as well. So we are, you know -- we're just sticking to and measuring how long it takes us, taking steps to change our processes to make sure that we are improving on that. But as A.R. said, the really biggest thing is while our competitors, you know, are struggling, we are spending of capital expenditure, you know, money. We are working up diligently to improve the quality of our manufacturing, and we continue to, you know, to really focus on that. It's the nuts and bolts of it.

Okay. Thanks a lot, guys.

Thank you, Dave

Our next question comes from Dana Walker of Kalmar Investments.

There may or may not be anything left to explore, but I'll try.

We know you would, Dana.

Give us your best shot, Dana.

One thing that has not been talked about, since you did a convertible financing last fall, I presume in the higher seasonal quarters, that's dilutive, in the lower seasonal quarters it is anti-dilutive. How does that affect your EPS comparisons in the back half, and if you were to be flat with last year in the back half, what does that suggest about operating income comparisons?

That's an interesting question. First of all, you do remember in the convertible that the power is cash. So the only part that would ever be dilutive is when the share price is above $40.14 a share. Okay? So that the -- we -- we have seen no impact in terms of EPS in the convertible but would begin to see some slight dilution when our share price is above, you know, 40.14.

So it plays no role in your back-half comparisons?

No.

Question number two. Can you talk about how Heritage is going?

Yes, I would. Heritage and dot com?

It is going well. It is on -- the integration has gone even better than I thought it would go both in terms of keeping their key salespeople and them being a part of the family. You know, we always have some question about whether that does in itself to reflect it in -- in the sales in that group, a rate on line with our plan. And they are doing well in the small business on the small building side. No, we are very pleased with that.

We -- they've already been integrated over on the Oracle system and we've taken the dot com of the Internet portion of that and this month we will have that in our depots to help the depots sell small building, okay? In otherwards, the sales guys will have that Internet where they can sit down there and show people the building and turn it around and the windows and the doors in it and all that stuff, that will be in the depots this month. So I think it is going as well as you could have ever expected it to go.

As I recall last year on a net basis, they did about $50 million, is that right?

In revenue.

Was your plan to be similar to that? Or was it a different number?

No, we sold -- they did -- if memory serves me correctly -- I am on the go -- they did 80 million, and we sold them 40 million, and we had 40 million in revenues in our plan except that we didn't close it until December. So that took a month for it for that away. If we closed it mid-December and it took a month and a half of that 40 million that we had included in our 200-- revenues away.

On another topic. A.R. you commented, and I didn't quite hear the explanation, about why the Coating volume and profit was lower. If you would repeat that, and then talk about why you believe that will be better in the second half.

Okay, the tonnage is -- their tonnage -- they get 50% of their tonnage from Components and Building and Buildings and Components tonnage were down and that had a adverse effect on the oil pipelines(ph). Not only that, but the -- the third-party requirements were also down. So that -- it just had an adverse effect on -- on the coaters all the way around. Now they were profitable, but they just wasn't profitable like they normally are.

The reason why you see that being better in the second half, though, than the Q2 run rate is normal seasonality or is there something in addition?

No, normal seasonality, and then, you know, we've said that we expect the tonnage for both Buildings and Components to be up in the second half. And we have seen a little f that in May, already. Not much, but a little. And when we see that our -- the way we have modeled it is -- is working.

And just so I understand your tonnage comments, you have said in both Buildings and in Components that you expect second-half tons to be better than first-half tons, which you would expect based on normal seasonality, but you have not commented on second-half tons versus prior year second-half tons.

No, no, I mean, we haven't, but you know -- and we've said at the end of 2004, we said we shipped 6% more tons than we did in 2003. You'll also know from the new model that we probably had 6% or so tons imbedded in our -- in our guidance for 2005, okay? So what we are saying is that -- that -- you know, we expect the second half of the year to -- to start moving back on track by shipping more tons than we did in the first half. Now whether we get to the tonnage that we had hoped for remains to be seen, but we have historically outperformed Dodge on a square footage. Our tons have generally been higher than their percentage, you know, increase in square footage. So if they are still projecting a 3% increase in square footage, which they are, then, you know, we would -- we would hope that we would get our market share, that we would, you know, do better than that.

Final topic for me relates to Building mix. You talked about large buildings being a larger part of your backlog than has been the case. You also mentioned how you would hope to add more small buildings activity to your base. Are you of the mind that you are executing a bit less well on small buildings? Or is there something going on in the demand profile that is not favoring small buildings.

I think it's the demand is not favoring small buildings. You know, I just don't think the consumers are -- are buying them or didn't buy them the first half of the year like we had expected that they would. I was talking with one of the sales guys in one of the depots last night, and he was telling me that, you know, the demand of people requesting quotes even for the small buildings in his particular depot was down, and, you know, now our -- our overall Building quotes are up, like we said. Quotes remain strong, but I am just talking about that one depot in the small buildings. And that's just kind of what we are seeing. The demand is just not there for the small buildings. But we have taken some very positive steps to get that -- to get more than our fair share, if that is a good way of saying it, the small building market.

And yet I believe you were hopeful that integrating Heritage would improve your competitive position in small buildings. Have there possibly been some negative overtones overlaying that within your business?

Nope.

No, not at all. Not at all.

And I suppose the corollary comment on the Building mix is the improvement in what's going on with large buildings with you, is that an environmental matter or is that a maturation of your attention to national accounts.

Probably national accounts has something to do with it because we are working hard in that space, but it just seems that the economy is giving us more opportunities in terms of manufacturing and distribution and just -- just the quality -- the quality and the size of the Buildings, you know sporting facilities as well. There just seems to be more of it right now.

I mean that's -- you know, just -- there is more -- more requests for quotes for large buildings now than there was during 2004.

One thing comes to mind. Now that you own your Mexican facility outright, are the economics of your large buildings trade likely to be better than they have traditionally? Because you own it outright, and you have been able to make whatever adjustments you might need to make to improve your productivity?

We've -- we have made those adjustments, Dana. That -- Norm has been in joint venture partners before in Mexico and that was just a -- that was a deal that was in effect before I even got here, and, you know, getting out of it was certainly a breath of fresh air, and the employees love it, and we love it, and the productivity down there is fantastic. The quality is fantastic. And, you know, we lowered our cost down there.

And we did not put capacity through there because it was a bad situation.

That's right.

So now we have the capacity to -- you know, to -- to handle that. And that's one of our -- I think one of our real advantages.

Thanks once again.

Our next question comes from Greg Macosko of Lord Abbett.

Yes, thank you. Could you talk about the backlog? Would you say that the margins of the backlog, are they the same, better, less than the margins for the -- that you experienced in the second quarter?

Yes, we like to backlog, Greg. And when we talk backlog, that is predominantly in the Building side, and we are -- we're happy with the margins that we see in there. You know, this time last year, we were still struggling through a backlog that was mis-priced to the steel prices they were shipping at, and we are not in that situation now. We are in a good position here. As A.R. said, the only reservation we have in the backlog is it's a -- the -- the larger buildings do take us longer time to ship. And -- but we are real happy with our backlog.

Okay. So I am hearing that it's at least comparable to what you have experienced in the quarter.

Yes.

And given that you say that you have -- typically you buy your steel one quarter in advance, suppose that the price of steel did fall, let's say pretty significantly. Would that change your bidding procedures with regard to systems and the likes, such that if the price of steel came down, would you drop your price to perhaps increase -- gain more share or gain business based on -- you have, say, in the fourth quarter because you would be buying steel in the third quarter for the fourth quarter?

Yes, we have to be very careful on the pricing side of this, as A.R. has stressed. But one of the things that is clear to us is that we -- you know, we have -- we have much better protection in our contracts on the Building side. We are pretty disciplined on our margin approach, and, you know, feel that as we've said that we -- we feel that we can manage a moderation in steel prices at least as well if not better than we did with steel price increases. Now, again, we're not seeing, you know, huge shifts in steel prices. You know -- you know hot roll was down some. But, you know, the light gauge is holding, you know, pretty firmly. So, you know, we -- we just -- we think we can manage it in both directions.

And then finally, your comments about the Dodge numbers. I just wanted to make sure I understood. April was down year-over-year?

No -- I am sorry. April -- April year-to-date for Dodge on a calendar-year basis was still down because the first, you know, three months were down.

Right.

But April for Dodge was actually up and up quite considerably.

So April year-over-year '04 -- '05 versus '04 was up 10% you said.

April month.

Month.

Sequentially was up 10%.

Sequentially but year-over-year?

It was -- Dodge was still down for the year, year to year it was still down. I think it was -- I have it right here. 9% down, I think, if memory serves me.

So down 9% year-over-year for April?

Yes. Let me just say that what I do have in front of me is we have taken Dodge on the fiscal year, so it compares to our November through April period and Dodge was down on square footage 6.9%.

Okay. But the quarter -- the month, excuse me -- the month itself, the month of April, was that down more than 6.9 or less?

The month of April was up compared to the month of March.

Right but --

but still down compared to April of 2004.

And it was down 9%?

No, it was -- that is the -- that is the year-to-date. I can tell you -- just one second I'll tell what you it was down -- it was down about 6% April versus April.

Okay.

Okay?

All right. Thank you very much.

Thank you.

[OPERATOR INSTRUCTIONS] We will now go to a follow-up question from John Diffendal of BB&T Capital Markets. John Diffendal, your line is open.

I am sorry. I had the muted on. On the STEELOX acquisition, I know I seem to remember that they -- when they kind of went out they were about a $40 million sort of business level. Can you comment, now that -- that you've made the acquisition and talking to the dealers on what sort of level of conversion of that amount of money you sort of expect to be able to hold on to at this point.

We probably won't get 40 million.

Right.

And we will definitely get more than 0. But --

There's a range, okay. [ LAUGHTER ]

But, all I can say is that the guys are working really well. Both A.R. and I were in the meetings with the STEELOX folks, five out of six of their biggest builders, and, John, it was very positive, it was very good. And if we were to pick up 10 million on -- you know, as -- . We haven't said publicly but can now, I mean, we spent, you know, $1 million to buy that. So whatever we pick up, 5, 10, 15, 20 million is just -- just a real good deal for us.

Right. No, I hear you. And -- and -- I am looking at the Dodge data. Just FYI, the dollar value of nonresidential building was actually down just slightly. It was like 14.2 versus 14.4. Now you may be looking at square footage.

I was. I was looking at square footage.

And that was down about 6, you're thinking?. Okay, good. Thanks so much.

Thank you, John.

Thank you.

With no further questions, I would like to turn the call back over to you for any closing remarks.

We appreciate each of you being on the call today. We appreciate your questions. We hope we answered them in an adequate manner. And if you have any follow-up questions, you know, we would invite you to -- to, you know, call Norm, first, or Frances or myself and we will be happy to discuss anything with you. And, again, thank you for your interest in NCI.

Ladies and gentlemen, this does conclude today's teleconference. May now disconnect, and management please remain on-line.