Core Natural Resources Inc (CNR) 2005 Q3 法說會逐字稿

Good morning. Welcome to this NCI Building Systems conference call to review the results for third quarter of fiscal 2005. This call is being recorded and a telephonic replay may be accessed through September 8 by dialing 719-457-0820 and entering access code 6054289. The replay will also be available at NCI's Website at ncilp.com. The third quarter results were issued yesterday afternoon in a press release that has been covered by the financial media. A release has also been issued advising of the accessibility of this conference call on a listen-only basis over the Internet.

Some statements made in the 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 such 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 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. Good morning everyone and welcome to NCI's third quarter 2005 conference call. Before I get started with my prepared remarks, I'd like to apologize for being tardy last evening with our press release. Our audit committee signed off on the numbers and our external auditor signed off on the numbers yesterday afternoon about 3:00. And we had some technical difficulties with our systems. Norm and I were both here, along with Francis and we were scrambling trying to get the press release out. And we got it out last night rather late, then we found that we, in scrambling, we made a mistake. So I'd like to apologize for that also.

The mistake was just on the adjusted EBITDA page. And it had the wrong net income and the wrong earnings per share, and I'd be happy to address that during the question-and-answer period. With me today is Norm Chambers, our President and Chief Operating Officer, Francis Powell, our Chief Financial Officer - - I believe I called you the Chief Financial Officer didn't I Norm?

I'll accept it.

And our Treasurer - - and Ken Maddox, our Executive Vice President of Administration. As we've done in the past, I'll provide color and insight for the quarter, guidance for the next quarter and year end. And then we'll take questions. Since we've supplied with you specific consolidated and statement financial information we won't recite those numbers again. We will, however, spend a little bit of time discussing the condition of the nonresidential construction market.

As we stated in last quarter's conference call, our strategy is to increase our earnings annually through organic growth from our existing businesses and through accretive acquisitions that fit into our integrated business model of metal components, engineered building systems and metal coil coatings. Our third quarter results are in line with our guidance and consistent with our strategy. To help you appreciate how solid our third quarter performance was, let's discuss the industry context in which it occurred. As indicated in our news release the market has been extremely soft throughout the first three quarters of our fiscal year. As one indication of this, the July McGraw Hill/Dodge Report, which reflects in square feet and dollar value the nonresidential construction project starts in the market segment we participate in. And for those of you that are new, we participate in the commercial, industrial, manufacturing, education, health treatment, public building, religion and leisure, and usually two stories and below.

That sector is off 8.26%, calendar year to date, in terms of square feet compared to the same period in 2004. This corresponds to a 4.73% reduction in dollar value. By way of comparison, our tons shipped correlates directionally with the Dodge reported square feet. We have continued to outperform the industry consistent with our historic performance. For instance, in 2004 Dodge reported that the nonresidential sector grew 2% in square feet and 4% in dollar value compared to 2003. For the same period, NCI generated 6% growth in tons shipped and 57% growth in adjusted earnings.

Now, a variety of factors produced industry conditions in our market segment to date through 2005, which were softer than any year during the 2001/2003 downturn. A period many believe was the worst downturn in 30 years. We believe that the economy, combined with the rapid increase in the cost of all construction materials - - and I want to underline "ALL" - - had negative impact on the demand for nonresidential construction. As a result, we are encouraged by the 17% sequential improvement reported by Dodge in June over May. And by further improvement in July, although July's sequential growth was considerably lower. However, to the extent we continue to see improved demand for the remainder of our fiscal 2005, it currently appears to us that it will materialize too late for us to reverse the loss in tons shipped we experienced through the end of our third fiscal quarter.

So, while we remain committed to increasing our earnings each year, including fiscal 2005, the relative lack of visibility for September and October led us to revise our guidance to a level with which we are more confident. In the final analysis, we are never satisfied with our performance. There are always opportunities for improvement. Within a calendar year's date when Dodge is down 4.73% in dollar value, and 8.26% in square feet through July compared to 2004, our latest nine-month results show net income up, operating cash flow up, and net debt down. We feel these numbers reflect our continued attention to our customers, the costs, and to the contribution we expect from all our fellow employees. I hope we've given you a sense of where the market is.

But before I speak about the three business segments, I'd like to comment briefly on steel prices and supply. Since the end of April our second fiscal quarter, scrap steel prices fell from about $270 a ton to $140 a ton. Since then, scrap prices have rebounded to about $230 a ton. And the moderating prices we were experiencing for hot roll and light gauge appear to be stiffening. In fact, we expect to see moderate steel price increases this fall.

Now, steel prices on average remain about 11% lower than the October 2004 time period. With most of the decrease attributed to hot rolled bars and plates. We are pleased that we have been able to bring our inventory down to just over 110 million. I think in the last call we told you we would be at 120 million. Which in part is reflected in our balance sheet strengthening to 195 million in cash at the end of the third fiscal quarter.

Now I'll give you a little color on the segment quarter. Our component group, which represents just over 50% of our third quarter revenue, continues to experience difficult market conditions and lower volume of tons shipped. I'd like to say right now, that this is - - the components group had forecasted to ship 10% more tons in the fourth quarter than they shipped in the fourth quarter of 2004. Sales were off 1.74% to 151.3 million for the same quarter in 2004. Sequentially, the third quarter revenue was up 14.7%. Reflecting a pick up in seasonal activity, with pricing pressure reduced operating income margins as a percentage of sales from 14% to 13%.

Even facing difficult market conditions, components generated 52.7% of our operating income. In addition, we're pleased with the performance of our recent acquisition of Heritage, Steelbuilding.com. As we had planned, we have transported a technology base from Steelbuilding.com to our retail depots. This has led to a pick up in small building orders through our depots.

Engineered building. This group continues along the path of improvement and drove our results for the third quarter. Sales for the third quarter were up 1.1% to 115 million compared to the same period in the prior year. Sequentially, engineered building systems revenues increased 23%. Operating income compared to prior year increased 65% to 13.6 million. We're very pleased with the building's group continued improvement in operating margins. And while achieving 12% operating income margin is good, we believe there's still room for improvement, and we'll endeavor to deliver higher levels of efficiency and customer service.

Buildings' backlog increased modestly by 4.3% to 204 million. We're going to remain focused on getting the full potential out of this backlog in the fourth quarter. This means that we have to successfully work with the builders to get the building through the permit stage, engineered, detailed, manufactured, and shipped.

Our metal coatings business was significantly impacted by weak market conditions. The fact that components were down had a correspondingly negative impact on the base loading it provides to the coating plants. Revenue was off 6.1% at 26.4 million compared to the same period last year. Sequentially revenues were up 4.6%. Operating income was down 55% to 3.4 million compared to the third quarter of 2004 due to pricing pressure, volume, and the impact of the cost of natural gas. As the components group activities improved during the fourth quarter we should see improvement in the coating group's operating income.

Now, as we indicated in our press release, we decided to lower our guidance from the previous $2.80 to $3.05; and lower that to $2.60 to $2.70 for the complete year. While we're disappointed that the market has been so soft, we're not at all ashamed of what we've accomplished. And we're very pleased that achieving this reduced guidance will not only be a record year with net income up over 20% and operating cash flow at or above historical levels. But it's also - - reaffirms our commitment to grow our business even in a down year. Now we'd like to turn it back for questions and answers.

[OPERATOR INSTRUCTIONS] We'll first take a question from John Emrich with Ironworks Capital.

Thanks. Couple unrelated questions. I'll ask them separately. I guess your guidance - - correct me if I'm wrong. It just looked to me as I read the press release that the Dodge data implied getting back to flat for the year, implied growth still, maybe not as much as expected, but still growth in the second half. Your guidance for the next quarter is really down year-over-year. Am I reading that right, and why the discrepancy?

Well, I think there's two things, first of which Dodge speaks to the whole calendar year. And, of course, we lose November and December. So our fiscal year kind of shortens our chance to get all the up-lift. We were really positively impressed and had corresponding business like Dodge did in June. The June pickup was good. But July petered out. And we certainly see with the terrible storm that's occurred down here in the South that we're likely to have difficulty shipping some of our buildings to states like Louisiana, Mississippi, so we're yet to assess those aspects in the short term. But the long and the short of it is that we expect to experience a significant increase in our tons shipped just as A.R. said, from the third quarter to the fourth quarter. But we're stacking up against a very solid and one of the largest fourth quarters that our buildings group had ever had, which was 2004. So on balance we're still going to end the year, as I said, 20% up, if we achieve our guidance.

And then the implications of all that would be that the outlook is sequentially improving beyond the October quarter?

We wish we had better visibility. Certainly, as you know, we're really strong in the Southeast. And so I'm sure there's going to be some disruptions at first. But we - - we're not opportunistic, but by God when you look at the TV it's awfully clear that there's going to be a tremendous amount of rebuilding. And it's going to take awhile for it to come through but I'm sure we'll be participating in that.

Just assuming that your markets aren't down in kind of the next calendar year, if you will, what about margin trends relative to '05 that we should be thinking about?

Well, we're not going to give that guidance just yet. But you can look at the margins and the sectors - - in our segments and kind of get some view. We've said all along that we would hope to get the buildings group up to 10% to 12%, OI. And clearly the work that we and the team have been doing has been in that direction. As A. R. said, we reached 12% this quarter. We're not stopping there. We see lots of room for further improvement. But we're not going to really go out on a limb and say exactly what those margins are going to be for next year.

No, I wasn't asking you to tell me what the margins would be, just what the pluses and minuses would be. The things you've done this year that will help margins next year, that type of thing.

We certainly, in terms of the buildings group, we continue to work on processes there on the engineering side. Customer service side, delivery side, there's a lot of internal work that has been done and a lot more to be done. On the components side, that's a good business. It has been constrained somewhat by volume, but we're seeing that volume come back. Just as A. R. said is, we're going to have the first quarter in components where the volume is going to be up comparatively, so that's a good sign. Components is the family jewel, and the link it has to our coating group is fundamental. If we see that improvement, as we believe we will, then that's a good sign.

And what did Heritage add in the quarter in revenue?

We don't break that out, but it was ahead of plan. And pleasantly ahead of plan. And, again, as A. R. said, one of the things that we had hoped to do, to transport that technology into our depots. And I've got to tell you, that was really much more successful than I thought it could be, and we're seeing some great results in that.

Great. Thank you.

Our next question will then come from John Diffendal with BB&T Capital Markets.

Good morning.

Good morning, John.

I wondered if you could first give us an update on the acquisition plans? I know we're getting close tube bout a year since raised the money, the war chest for that. How do we stand on that process?

John, we have some things working. We know we're getting close to the year. We feel confident that the banks will extend that period for us. May even extend that period indefinitely. The money that we are - - the interest that we are drawing on the money is higher than the interest rate that we're paying. So, the money is not really hurting the performance of the Company. Unfortunately, everyone is wanting to trade on one-off profits from 2004. And they're wanting a multiple higher than we're used to seeing in this industry. And so it - - to make an acquisition today just makes it difficult. I'll give you one example. We looked at one little business. Revenues were 125 million, their EBITDA was about 16 million, financial buyer bought that for 125 million. Now, I don't think that you would be very proud of us if we did that.

No, I think we'd like to see some discipline in not overpaying for things, absolutely. Secondly, just want to pull the string a little bit on Katrina. Two questions on it. One, give us a sense of your overall roofing business in terms of the size of it both in retrofit roof and just whatever roof business that's there that we - - and your thoughts on how you're going to go into those areas that were affected. And then secondly, just watching the reports down there, I remember seeing a guy last night on the news saying one of the things that we need the most right now are 50,000 square foot warehouses to take care of all the stuff that's sort of piling - - needing to be piled into that area to help those poor people. Are you positioned - - I mean, are you all putting people on the ground there trying to see if there's business that can be taken from that standpoint?

We are really doing two things, John. First of all, from the humanitarian point of view, we are very active in that area. We have factories, which fortunately are back up and running. And employees that we're concerned about. So, we're - - you're going to see us being very active in that space as NCI. The second thing is that we have the predominant roofing business in the country and the predominant roofing technology. And to the extent, as you'll probably remember, we actually license our standing seam roof to our competitors. So we get a piece of every - - virtually every roof that's constructed. So, all I'm going to say, is that without sounding too opportunistic in a very bad situation, that we are clearly well positioned. And we also are extremely sensitive to what is going to take to replace those buildings, to replace the roofs, to provide temporary types of shelters as well. And we're going to be all over that.

Can you give us a dollar number of what your roof business is?

We don't break that out, John. But it's - - it is a considerable portion of what our components group does.

Just the last question. It you did - - A. R. sort of indicate that implicit in the fourth quarter numbers was a 10% increase in volumes in the component side. Can you give us a little back up on what's sort of backing that up? Is the run rate of what you're doing now kind of running there? What's - - like I say, it's been a weak year up to this point. What is moving that number to get that 10% gain?

We have a number of sales guys in the field for components and then another group for building. When we get ready to forecast, they poll all of these sales guys on upcoming orders and so on and so forth. And we go through a pretty scientific evaluation of where we're going to be. And, in fact, the components group was forecast being down in tons of the first three quarters of this year. And they were down in tons. One reason that they were down is we work hard to keep the pricing up. We're two times our nearest competitor in size. And if the components group takes - - goes to cutting price, it will take the whole market down. So we've let some tons go by at the expense of keeping the market up.

And I remember you were very concerned the last call that pricing, particularly one competitor that was out there beating the price up in the market. Is that stabilizing, where you have less concern about that today than did you, say, three months ago?

I'd say a little less concerned, but not a great deal. We still have people out there that we believe trying to run on cash flow. And are selling for any price, so that they can keep their doors open.

But, John, we definitely, just as Dodge has seen, we've seen a pick up in demand, pretty much across the board in a bunch of markets that we do service. And that's pretty - - that's really the first time we've seen a real pick up pretty much this year. I hate to keep coming back to Dodge, but as A. R. said, the Dodge numbers for the first six months of this year were lower than any year in the last five, including some downturn in 30 years. The first half of this year was a bear. We're just now starting to see a pick up. And that's what's reflected in our optimism in terms of components coming back in the fourth quarter.

Right. And then on the systems side, I know going in - - you said at the end of last quarter that some of it was that there was a - - the backlog, a lot of it was sort of to hit in the fourth quarter. Has any of that been pushed out that's part of what's going on here as well?

Well, we caveated the last call that we had some concern because of the size of the buildings, that we were more vulnerable to those buildings being less predictable in terms of shipping precisely at a certain date. And we've seen some of that. We sure have. And we have a couple of big jobs that are supposed ship into Louisiana. So we have some question about that. But the backlog, I was quite pleased, because we're really, very hard on making sure that we follow a very disciplined backlog approach. Meaning that it's the backlog from the period, less what we shipped, plus new orders. And we vigorously look at that backlog to make doggone sure that it's good jobs. That something that shouldn't be kicked out this. So I was quite pleased to see that we had modest growth.

I - - you would point out that is sequential, versus a year, it was up 21%. Right.

Right, John.

Thank you.

Our next question will come from Clifford Walsh with Sidoti.

Good morning everyone.

Good morning.

Can you talk a little about, the impact from the hurricane in terms of the near-term disruptions? What you think that could do to some of your competitors who have kind of been teetering with disaster? Is this something that could finally take one of them out and maybe see some pricing pressure ease up a little bit?

I don't really see that happening. We - - the components group has a very nice customer in mobile. And you know what happened in Mobile. So probably getting an order out of that customer in the next month or six weeks just won't happen. I think they're forecasting now that it may be weeks or months before they can get back into New Orleans. I think Biloxi and Mobile will move much faster because they're not sitting in that bowl and covered up with water. But we've got people all over it, and not only are we going to try to sell product, we're going to try to help these folks.

Can you comment on the competitive landscape and if - - you mentioned that there's - - for the last couple of quarters that there have been a couple of companies that have had some difficulties and have been discounting. My original question was do you think that that will - - this hurricane could, and the disruption from it, could take one of them out in terms of - -?

Cliff, it's unlikely. I'm not - - this might hurt some of the small regional guys, but the bigger guys are going to be diversified around this. But I think one of the things you may want to look at is if, in fact, Dodge is right that we're seeing a pick up in demand, which we say we are as well. And if you subscribe to their theory that the demand that they expect to see in 2005 is going to be in 2006 they're projecting 6% to 9% growth in 2006 and '7. And then you layer on top of that the unfortunate pick up in demand that's going to come from this storm. Then I think what you're going to find is if demand picks up, we're going to - - we're likely to see, from an economic perspective, maybe a lessening of the competitive pressure that the price hag been under in a down market. So, I guess while we can't forecast rationality in terms of our competitors, if there's more work, then I think there's a little less pressure on price most normally.

And then un terms of the pricing that you have been seeing is there any region across the country that you've seen more or less activity?

Not really.

I don't see any one region being that weaker than another region.

In sectors, pretty much - - like I said awhile ago, I think we look at the Dodge stuff and see education being down in one part of the country, and we look at you are builder who is strong education and he's up. It really depends on the mix of builders we have and their strengths and weaknesses but I think we're seeing pretty stable stuff across the whole piece.

And in terms of education and some of your more nontraditional markets like retail and government type work can you comment on what you've been seeing recently in those market?

Retail was pretty good to us. We talked about stuff we did with some of the big retail names, in terms of distribution centers, and that continues. That's one of our strong suits. You look at big boxes, we're awfully good at that. And then as A. R. said, if you look at the complexity and the size of the buildings that we have on our backlog on buildings that kind of speaks to that as well. Manufacturing was strong in the first part of the year and slowed up a little bit. But it's hard for me to take a moment in time and give you anything that really necessarily reflects a trend.

All right, thanks very much, guys.

Our next question is from Alan Organski(ph) with Sandel(ph) Asset Management.

Thank you. Should we expect a little bit of an up-tick in SG&A costs this quarter? Because it is your fiscal year end. I'm sure you're going through the Sarbanes-Oxley process and the 404 compliance. And is there any issue surrounding that, that you foresee?

Well, I'll let Frances kick in here as well, but we've certainly have had some extraordinary with Sarbanes-Oxley. I'll let Francis talk about that more specifically. But we've been pretty good at kind of bringing costs along quarter by quarter. And you'll see that our SG&A is up. And Francis, as I said, will talk to that. But I don't think we expect anything extraordinary to hit us in the fourth quarter. Nor do I expect - - we're working through the process of Sarbanes-Oxley. It is not a perfect process from the standpoint of really making sure that we have the minimum conditions of satisfaction. But we've got a really good team involved in that. I'm really pleased at what I see. Our auditors, while, of course, holding off until the very end, have been working closely with us. So, my view is we're trucking along. Francis.

Just a couple of comments. We're pushing pretty hard on our 11i conversion. We'll see some more costs coming through there, and, of course, SOX. Those are the two big drivers that we're looking at. But I think on a comparative basis, not a significant increase. So, we will see some but not a significant increase.

Very good. Thank you.

Next question then comes from David Yuschak with Sanders Morris Harris.

Couple things. Follow up a little bit on that SG&A. Because it was a little higher than what maybe I had thought you could do in the quarter. Is there some kind of normalized level we should be shooting towards as far as when you take some of these incremental costs, whether it's Sarbanes-Oxley or other things; that could give us a little more beat on whether it's a percentage of sales? Or when we get to a certain point where we can continue to anticipate inflation related growth from there? Or - - can you help us out from that point of view as far as when we can maybe achieve some kind of normalized, so to speak?

Yes, I think you'll see some leveling off in the fourth quarter that will give you probably a better reflection of the year. But to be sure we've got embedded costs, as Francis said, that are higher than last year, and Sarbanes-Oxley certainly is one. We continue to accrue for our bonuses. If our performance is less, doesn't get us to the performance, as you know, that we have to be greater than 15% on our return on assets, then we'll be backing that back out of there. But I think if you - - that third quarter probably is fairly reflective. If you look at the average on the nine months, that's probably fairly reflective of kind of where we are at this stage of the game.

So next year, some of these - - next year should be more normalized then?

I would hope but we are spending a lot on IT. We have chosen that. We believe that we're going to be better off as a Company, and the integrated business model we have, to have 11i throughout the Company. We believe from a controlling standpoint it's better, from a visibility. We're continuing with that. As you know Dave, we're working hard in the building side to improve our IT piece there. A. R. was reviewing that a couple weeks ago and very impressed with the products that we're producing from that side. So some of that in the SG&A is really of a strategic nature. I hate to kind of say it that way. But we're making investments in that that are - - that we're expensing and that are clearly of a strategic impact to us.

Let's just talk a little bit about the - - sequentially you guys have done a great job in getting your engineered building systems back to where they need to be from an operating margin point of view. You're to be congratulated for that. And one of the things I think we had been looking for, that coming around while your components and coatings business continue to be steady performers. What we've been seeing happening is that components and coatings are now kind of flipping compared to the nice recovery you've seen in engineering and construction. I know, in the last quarter you indicated how the components in coatings are really kind of hand and glove as far as being able to get the margins on coatings where they need to be. Sequentially, when you had a 20% increase - - $20 million increase in components and the profitability and the operating margin, operating profits were the same. Is a lot of that just competition on pricing, or can you maybe help us out a little bit more on that?

It's again, as I think we've said before, the relationship between coating and components is driven by a large part on the volume. And as A. R. said, we really had commercial discipline in the first half or so of the year, on purpose, consciously. Okay? And with that, we have given up some ground in terms of our volume. And we did that with absolutely eyes wide open. Now, as demand is picking up a little bit. We're kind of rebalancing that. So I would expect that you'd see, just like A. R. said, you're going to see, Dave, a movement back in the direction you'd expect from both components side and the coatings side in the fourth quarter.

Can that - - what you're kind of saying then is with the inventory run downs that you had was most of that kind of related to component spend so that once we get inventories back to where they need to be the components and coatings can begin to kick in on a replenishment as well as an increased demand?

I don't think so. I think it's more of the case that it really comes down to demand and volume. And demand has not been where we had expected it to be in the first half of the year, seeing a little pickup in the third. But clearly seeing some pickup in the fourth. Now, whether that's sustainable, we think it's going to. And we're forecasting, as A R said, an improvement in tons shipped for the first time. In a comparative quarter we're going to have up-lift in components for the first time in three or four quarters.

Now, question I got for you too is; last year you guys benefited significantly from the steel price increases. And as you look at the rest of this year and into next year from a pricing on steel point of view, and then you mentioned earlier, A. R., how steel prices have been kind of whipsawed here lately, how much of that can you hold as you increase utilization of your facilities?

First off, let me say that's a really good question. And I'll answer that by saying, how much of it we can hold is somewhat going to be controlled by our competitors. And it's difficult when you're as competitive as we are, as individuals, and as a Company to walk away from business because we feel like it's too cheap. And we've done that in the first half of the year. But, as Norm said, we're balancing that back a little bit now. And I think we'll see the result in the components group from that.

I guess what one of the issues maybe your competitors is doing is knowing that you're disciplined. That they'll take the business that a little bit below where you guys are on the idea that you guys won't take it anyway and so that does hurt your volumes. And at the same time, it keeps your competitors still alive and relatively healthy.

This is - - there's some of that for sure. One of the things that components has done better than anyone is their service level and quality has been superb. And therefore, they've really held on to their bid guys. It's that kind of Tier 2 side that maybe we've seen some erosion on. But, Dave, I tell you, it comes back to, if we just experience one of the slowest periods in five years, which we have, in terms of Dodge and ourselves. And now we're seeing a pick up, all I can tell you is that this sucker hunts when the volume is picking up. And in components in particular we have no doubt whatsoever that that's the best part, run of our Company, they are just going to perform. Given a little improvement in the marketplace. If you put on top of that, as I said, what's clearly going to be extraordinary, out of the norm, demand that is out of the storm, I would think that we're positioned pretty well in the components side.

One last question. As you look at the last three to four years and coming through this tough times. In the past, you guys used to always comment too about how capacity utilization was kind of an important number to watch and manufacturing was relatively important. How have you seen things shift in - - manufacturing is not as important to this country as things used to be with things going offshore and all that. How are you guys seeing things shift as far as your end markets are concerned? And what maybe more important for you guys going ahead as you look at those kind of shifts in final demand?

We've seen more schools, more churches, more large distribution centers, I'm talking about 1 million square feet buildings. That's where we've seen the shift in the last - - I'd say the last 12 months. It's been in the larger projects. We have more large projects on the books now than we've had in the last five years.

And we're supplementing that with this move to the Internet. Which still confounds many of us in terms of how much business we're seeing come through the Internet, in terms of small buildings. And these tools that we haven. Now, I've got to tell you, Dave, without going into a lot of detail, we are working on some pretty nifty things on the components side of business. And that part of the business has had a history of looking at the market and going to market in different ways. And all I'm going to say at this stage of the game you can rest assured, we're not resting on our past performance. We're working on some pretty nifty things right now.

Dave, there's one more thing. I don't believe we've mentioned this, but we shut down the frame capacity in Tallapoosa, Georgia. And the reason that we shut it down is because we now own 100% of Mexico. And our cost per ton produced is substantially lower in Mexico than it is in - - than it was in Tallapoosa. We had to give the 60-day notice for the Warren Act, and it's up now. And that's going to help the building group in 2006. We're running Mexico full now. When we added a joint venture partner there, to make a little money or break even. And most of the time we was losing money and now Mexico is producing good profits for this Company. And I don't think we've mentioned that we're shutting down the frame capacity in Tallapoosa. Now, we had moved the manufacturing of the panels and manufacturing of some other small items to the component plant in Douglasville, Georgia, which is not far from Tallapoosa. And we're going to keep Tallapoosa as a shipping point. And we're going to ship frames in there from Mexico and from Houston and from Lexington, Tennessee. And we're going to ship sheets in there from Douglasville, Georgia. And we're going to produce trim in Tallapoosa and we're going to put buildings together there, just like we do. In other words, it's going to be a spoke instead of a hub, like it was. And that's absolutely a cost savings measure. And it's not going to show up - - what do they say? Too little too late this year, but it's going to show up in 2006.

As far as that goes, is that helping you considerably in your engineered segment as far as those changes and what you can do going forward to further boost the prospect of engineered?

Yes, I'd say so, but the bottleneck in - - on the buildings group is the same place it's been ever since I've been in this industry. And that's almost 50 years. And that's in engineering and detailing. And Norm said earlier that we are spending capital to get to the point where we can automate a lot of engineering and detailing. Let me give you an example. If you look at Steelbuilding.com, when a customer goes on the Internet and designs that building for himself and places the windows and the doors in that building and whatever else that he wants, all we have to do is push a button and we get the design for that building. They're normally small buildings, and class 1 through 4. As you know, we class buildings the simplest 1 and the most complex 10. And they're smaller buildings. And, when they stick their credit card there and order that we have the engineering and the building material.

That's where we have to get with the buildings group. Okay? And you could say, well why don't you just put that program in the buildings group? Well, it's too simplex for the buildings group. But we now have the buildings group where they can engineer, detail and will have a bill of materials for class 1 through 4's, November 1. We're using the engineering and detailing today. We'll have the building materials on November 1. This is going to be a huge help to the buildings group. We also have another group working on the 5's through 10's. And we've got eight or ten people in this group working every day to - - streamline is not a good word. What's the word? Automate. Automate this process of design and detail on these 5 through 10's.

That's where you're seeing some of that IT spending is coming into play then is kind of online?

Absolutely.

Right, Dave.

So most of your extraordinary spending, if you want to call it that, is technology spending.

It is.

We've spent quite a bit getting the coaters on 11i, the freight lines. Because they were on a DG system, data general. And there was no support for that system. And so we had to migrate them over to 11i. And then the components are on Oracle, the coaters are on Oracle and the next step will be to get the buildings group on Oracle.

When's that going to get done?

The coaters will be fully migrate in the first quarter '06. It will probably take us 18 months to two years to get buildings on - - it won't be 11i, it will be 11-56 or 11-59, or whatever it is now, their newest version. But you have to have the engineering, detailing and a bill of materials, and that's what's held us up. You have to have an automated bill of materials. And that's what's held us up on the buildings all these years. Okay? Hey, we're not in this by ourselves. None of our big competitors are able to do this. And I don't think - - I think we're getting ahead of them from a technology standpoint today.

I appreciate the comments. I'll turn it over to others who might be in the queue, but appreciate your comments guys.

Our next question will come from Dana Walker with Kalmar Investments.

Good morning, all.

Good morning.

Are you in a position to describe your tonnage by segment in the quarter?

I'll give you some directions. The - - when I say that we are directionally comparable to Dodge, I will say that when we look about - - when we look at this year to date compared to 2004, buildings are a little better than Dodge, components are a little worse than Dodge. Okay? And, of course, the components piece has a direct impact on our coating, as we said. When we look forward forecasting to year end, we see continued improvement, but maybe a little slower on the building side. Substantial improvement on the component side. And, of course that corresponds nicely on the coatings side. We'll still - - as I have said before, embedded in our original guidance was probably 6% increase in tons. And it's clear to us now, and one of the reasons why we struggled a bit with, really trying to get our hands around our forecast and whether we needed to guide lower has been the fact that we will not - - we'll probably not get back to a positive number in tons shipped 2005 to 2004.

So your present guidance would be build around flat tonnage?

Probably less than flat.

If you were to look at your tonnage by segments not comparing to Dodge but comparing to your prior year numbers in Q3, what do we have?

Everything down, buildings less so. As I said components a little more so and coating more so.

What do you suppose your pricing discipline in the components group has done to your market share and thus your ability to recover with the market or more rapidly than the market as the market tone improves?

Well, there's two things that we do now know. First of all that there has been, as a result of 2004, some changes in the components marketplace in terms of some of our smaller customers going out of business. And - - but I think that when we look at the larger customers we've done a pretty good job of holding them off, holding them together. We are absolutely convinced that we can regain some of that market share as we choose to and we select to. And the forecast that A. R. has been speaking about with components increasing is in part that. It's also part that demand is improving some. But in and of itself, as I said before, we're really looking. And the guy that heads up our components group is leading a team. And they've come up with some really very interesting alternatives for us going to market. Which we won't go into detail now but will you hear much more about in the next several quarters.

When you raised money last year to preempt the need to raise money should you come across an acquisition target, you mentioned that some of that might be returned if you didn't have a candidate. A. R. mentioned that the rates on your cash now exceed some portion of the debt structure you put in place but I can't imagine it exceeds all of it. Can you describe what if any positive you might have if you were to pay off debt?

I think there's two things. The first thing is that we still are of a mind that our strategy and our shareholders are better served from us if we're able to make accretive acquisitions in the buildings sector and the components sector as well. We believe that the integrated model that we have is superior, has produced superior results. This has been a down year. We're going to be up 20%. And that's a good thing. So what we're saying is that we think we can make better use of that capital by investing it in businesses rather than paying down our debt.

We always have that alternative. And as A. R. said, we're beginning to work with the banks, the banks are generally very pleased with how we've managed ourselves. Our cash balance at the end of the quarter was, I think, $195 or so million. That continues to grow. It's well over 200 right now. And our view is that we're going to stay patient. We could have closed a deal this year already if we wanted to pay more than we felt was correct. We're going to stay patient, we're going to keep the money on our balance sheet and continue to review our options.

Would you remind us, though, what you're earning on your cash balances and what the different tiers are of interest rate obligation within your balances?

I think we can. Francis you want to take a stab?

Well, the bonds are 2 1/8, and we're getting it over 3.5 right now on our investments. So, we're rolling.

Alright, but how about the bank financing?

Well, the bank is running about 5, 5.5.

It was LIBOR plus - -

plus 200. It's LIBOR plus 200, Dana.

So the spread, if you were to pay off some of that, would let's say 150 to 180 million, might be a couple hundred basis points on that amount, so it's 3 to 4.5 million at most.

Something like that. That's probably a fair -- I think we're picking up 1 million a quarter on the interest on the - -.

Well, I think we continue to look at all of our options there from our acquisition strategy and the cash that we have on hand.

Final question is this. Can you talk about how you amended your operating plan for Q4 based on Katrina? And can you also update us on what I believe at the time were described as fluid timing on a variety of big jobs when you reported Q2? And how you now expect those things to flow in Q4 or to flow out of Q4?

Well, I think we said already, we expect that the buildings group will continue to see some slippage on big jobs but also they'll ship a lot of jobs, too. That's a very fluid deal. We do know that we have a couple of buildings that were destined to go to Louisiana. I would imagine that they're in some jeopardy of shipping on schedule. So that's that part. We have not adjusted our fourth quarter, save, as I said, some of the sold on that we think we might see in terms of buildings getting out the door. But we haven't factored any plus, as A. R. said, probably be into our next fiscal year before we'd see any pick up as a result of that.

So the negative delta on Q4 compared to what you might have said a week ago might be a few million dollars?

I don't know if I'd say that.

We don't really know what the extent. It's just happened. And some areas are affected worse than others. If we had a building going into New Orleans, it's not going to go. But there may be - - they may have had a slab poured in the Mobile area or the Biloxi area that they can go ahead and take the building and then they may use it for another purpose. They may use it for storage of supplies to help the victims of Katrina. So it's just really early to say.

So it's a negative number, but it might not be as big as I've just described?

Well, I think what we really need to say is we don't know what size it is right now.

But you didn't toed your Q4 outlook based on Katrina?

No, we absolutely did not.

And it sounds like you subtracted from your Q4 outlook based on guidance, based on whether it's Katrina and slippage and industry conditions. Compared to three months ago.

There you go. I think that's a fair statement.

And we adjusted Q4 guidance because we had a sizable building going to Alaska that they couldn't get the crane over to erect. They couldn't find the right boat to get it on. We had had another sizable building that fell out because while they were doing the site work they found an endangered species bird and shut the site down. And these were jobs that we had engineered and detailed. And they were huge jobs. And there was one more that fell out. I just can't remember what that was right now, Dana.

Okay. Thank you for your candor.

Yes, sir.

[OPERATOR INSTRUCTIONS] We do go to a follow did you know from John Emrich with Ironworks Capital. John your line is open. You may have to unmute your phone. Not hearing a response, we do have Bruce Geller with DGHM.

Good morning, guys. Do you feel that your types of buildings are losing share at all within the industry segment? Because it seems like, from what I've seen, some other construction related material companies seem to be reporting better macro environment than you guys seem to be citing with relation to the Dodge statistics.

Bruce, you're breaking up a little bit but I think the question you asked was whether or not we were seeing an erosion in market share in our buildings group?

No, relative to other types of building materials. Because I've seen some other companies reporting better macro environment that you know guys seem to be reporting. So I'm not asking if you're losing share amongst your direct competitors. But if maybe you're losing share to other types of materials?

That's a good question. I guess when I look at it, the low rise marketplace is about 70% or 75% of the marketplace that's reflected in Dodge. Okay? And when I look at kind of how we stack up, and a bit of this is extrapolation, because it's not perfect science. It looks to me like the components part of our business was hurt a little more on the buildings group a little less. And then when I look at the MBMA, which is the association the builders are in, we seem to be doing better than our peers. On balance, I think - - and Dodge actually speaks to this a little but in their latest forecast - - they were quite positive about steel recently because of the prices coming down more rapidly than other building materials. And I'm not sure that we're not seeing a little bit of pickup as a result of that. It's hard for us to determine. It's hard for to us really put our finger on it. But if steel prices are in a historically competitive position, we know we are, so I wouldn't imagine we'd be losing to other materials or forms of construction. But I don't know what companies that you are following. But as I said, they could be in a different sector than we are.

Right. And then, again, how come the coil coating operating margins were down so much in the quarter?

Components, and I'm going to say it a certain way, and A. R. will probably give us some color on this. But our components effectively base loads our coating business. So if our components tons are off, it has a material effect on our coatings. Okay? Now, as we said, as you'll see the components business come back in tons, you will a corresponding pick up on the coating side as well.

So there's obviously significant operating leverage there, so that could - - you feel pretty easily get back to the types of margins you were earning last year if you get that pick up?

That's a well run part of continues. And if we see a little pickup in the marketplace, I have no doubt that we'll see that continue to come back very strongly. And it has a double impact. Because it benefits both the components as well as coatings. So I mean, if we see volume impact, it will be positive.

This settlement you had with Johnie Schulte, is that - - there weren't many details provided around that probably for legal reasons. But does the settlement give him any ability to solicit customers or employees from you guys? Or does is he have to - - does he basically have to stay away from the Company at this point?

We're supposed to stay away from commenting on that. But, the attorneys say that you can't restrict someone's ability to call on customers because it's fair trade issue. But we handled the employee situation.

It was a positive event from our standpoint. We got pretty much everything we wanted to get out of the settlement, and we're pleased with it. And don't forget, I mean, their operation is like 30 people. It's a small operation. But it was more the principle of the thing. We didn't want to have to keep paying money in a situation where someone was going to be competing against us.

Well, that's good. Lastly, I know you've discussed this somewhat, but with this cash balance, really weighing heavily here, and you obviously have tried to make several acquisitions. If your outlook for the market is correct that things are going to get materially better, at least based on the Dodge statistics going into next year. It would appear to me that valuations and prices on acquisitions are going to remain high. And people are going to continue to demand a high valuation for their company. So at what point do you guys decide that your stock, which is trading at less than 6.5 times EBITDA based on today's market action, is a much better investment than trying to pursue something else?

Like maybe right now. If we get hit hard enough.

Are you sincere in that, though? Are you willing to step up right now? I mean, if someone said you could buy the best company in the business at 6.5 times EBITDA, you guys would jump on it. So how come you're not jumping on your own?

I think the thing you have to remember is the shareholders get a one-time pickup if we buy shares back.

It's not one-time pickup. It's permanent, because you permanently take those shares out of the market. And any shareholder that owns your Company permanently owns a proportionately higher proportion of the Company. So it's not a one-time pickup. It's a permanent pick up.

Well, it is if you compare it to buying a business that has ongoing profits, and a business that is accretive. But we agree with you.

Your business has ongoing profits, too. That's what I'm saying. If you're buying back your stocks you're buying into your business, which has ongoing profits. And any future growth in your business spread over a lesser amount of shares outstanding will have a correspondingly strong impact on your future earnings per share growth. It's not a one-time event. And it's frustrating when people view it as a one-time event because it's not a one-time event. You have to - -.

Bruce, we've got that loud and clear. And I can tell you that there is room to do both. Okay? And as A. R. alluded to, you can better believe we're looking at all our options right now. But we still think that when we layer in what consolidation can bring in accretive earnings, that we think we can earn you more money over the long haul by making acquisitions. But that doesn't mean to say that we can't do a stock repurchase as well.

Bruce, I'm going to say something that - - we have always funded our 401(k) plan with stock, because we wanted the employees to be stockholders. Now, they have the right to pull out day one, but they don't do it. But they still have the right. So we don't have a situation like the Enron employees were in.

Right.

But we're changing the 401(k) plan so that we can fund that in cash. And the plan administrator will go on the open market and buy the shares. So that we don't continue to dilute shareholders' shares by creating new shares for the 401(k) plan. So that's the - - along the same lines you're talking about, okay? And if you look at the last five years, that's been several hundred thousand shares. Okay?

But again, just so you don't lose faith, we are looking at exactly what you're talking about.

I mean I just - - It's not that I'm losing faith, but you've got almost $200 million sitting on your balance sheet earning next to nothing, and that money could obviously be earning a much higher return. And it's frustrating to see the stock reacting the way it is to such short-term issues. And if you guys had the ability and wherewithal to step up at a time where the market seems to be trashing you guys, then I think it's not only a strong statement, but it is also very positive for shareholders in the long term. Because you're buying into a business, a growing business, at below 6.5 times EBITDA. And that has very accretive impact over the long term relative to buying another company or just having the cash sit on your balance sheet earning 2% or 3%.

Bruce. There's nothing in the bank documents that prevent us from buying shares back. We have approval from the Board to buy shares back. There's certain guidelines set forth by the SEC that we have to buy shares back under those guidelines. And we hear what you're saying loud and clear.

Thanks, guys. Good luck.

Thank you.

With that, that was our final question. I'd like to turn the conference back to A. R. again for a closing remarks.

We'd like to say thank to you each one of you for participating in the call today. And we appreciate your interest in NCI. And one thought I'd like to leave you with is; that even though we downgraded the guidance for the year, we're still going to have a record year in earnings and a record year in net cash flow. So, it's - - we look at it as being pretty positive. And we look forward to Dodge being correct in 2006. Thank you.