Core Natural Resources Inc (CNR) 2005 Q4 法說會逐字稿

Good morning and welcome to the NCI Building Systems conference call to review the Company's results for the fourth quarter of fiscal 2005. This call is being recorded and a telephonic replay may be accessed through December 15th by dialing 719-457-0820 and entering access code 5846503. A replay will also be available at NCI's website at NCILP.com. The fourth-quarter results were issued yesterday in a press release as has been covered by the financial media. A release has also been issued advising of the accessibility of this conference call on a listen-only basis over the Internet.

Some statements made in this conference call may be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the Company may differ from that projected in such statements.

Investors should refer to statements filed by the Company with the Securities and Exchange Commission and in yesterday's news release for a discussion of factors that could affect NCI's operations and the forward-looking statements made in this call. To the extent any non-GAAP financial measures discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's website by following the news link 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.

Thank you, Scott. Good morning, everyone and thank you for being with us today to review our fourth-quarter and our full fiscal 2005 year-end results. We will also hear a review of our outlook for fiscal 2006. With me today are Norm Chambers, our President, Chief Operating Officer; Francis Powell, our CFO and Ken Maddox, our Vice President of Administration. We have a lot of material to cover this morning and as with our last several calls, I will give you the review of the fourth quarter and the full year, highlight particular aspects of the detailed financials you received and offer some color to deepen your appreciation of our market and our performance. We will then try to answer any questions you may have.

Before I start, I think it is important that you refer back to our investor presentation and in particular to the transcripts of our second-quarter 2005 conference call when I explained in some detail our strategy for growing NCI's earnings over the next few years. Both the presentation and the transcript can be found on our website. While we can't promise what the future will hold, it is important for you to know that the Company is committed to growing our earnings through organic growth and accretive acquisitions.

The fourth quarter. The fourth quarter ended very strong with a significant uplift in all of our businesses. Overall, we shipped 8.3% more tons than we did in the fourth quarter of 2004. This activity primarily materialized in October, the last month of our quarter and helped to partially offset a very soft year in nonresidential construction. We experienced continued softness in our markets during August and September. However, October was very strong with all our plants achieving high levels of utilization.

During the fourth quarter, our coating plants processed 9.3% more tons compared with the fourth quarter of 2004. In our last call, we projected that components would ship at least 10% more tons in the fourth quarter than for the same period last year. In fact, components shipped 20% more with most of that increase occurring in October.

Our buildings group shipped 12.6% more tons compared with the fourth quarter of 2004 overcoming a comparatively soft August and September. However, due to the increase in business activity not occurring until our final month of the quarter, we did not drag through the level of incremental margin that we would expect to experience from a more sustained level of activity.

Operating margins in each of these three business segments stepped up in October compared to August and September but could not totally overcome the weakness we experienced in August and September. October operating margin percentages were components and buildings were 16% and coaters achieved 45%. All three business segments were up sequentially versus third quarter 2005.

Our operating margins for the fourth quarter 2005 compared to the fourth quarter 2004 in components and buildings were down again due to the soft August and September. It is very important to note that we should see improved incremental margins due to higher levels of sustained utilization in our plants in the first quarter of 2006. The reason we're saying that is that it appears that the increased level of business activity that we witnessed in October will continue into the first quarter of '06. Components and coating business continues strong. Our buildings group is not quite as strong but they started the first quarter of 2006 with a backlog of approximately 200 million, which is up 39% over the same period last year.

Let's talk about the full year now. In a year in which Dodge nonresidential construction was down year-to-date through October by nearly 3% in square feet compared to 2004 and up only 1% in dollar value, we grew our revenue 4.2% to 1.13 billion while our tons shipped was down slightly from '04 levels. Our net income after taxes grew 25% to 55.9 million, up from 44.9 million in 2004.

It should be noted that the effective tax rate of 41.8% for fiscal 2005 increased primarily due to various immaterial tax adjustments as we completed our SOX testing. We project our fiscal 2006 tax rate to be approximately 40%. Our GAAP earnings per share are up about 20%, adjusted EBITDA increased from 2004 fiscal year-end by 13.4 million to 141.1 million. The earnings increase we generated was a result of our commercial discipline and our focus on operational issues by the entire NCI team.

During the fiscal year 2005, we accomplished considerable improvements in our operations. Our component operating income margin finished flat year-over-year on reduced tonnage. Our building group improved operating income margin compared to 2004. Components finished the year with operating margins 13%. Buildings achieved our previously stated goal with operating margins of 11%. Coatings was negatively impacted by lower demand from components but still achieved 18% operating margins. And for all this fine effort, we generated 109 million in free cash flow from operations, up 75 million from 2004.

Most importantly, our safety performance improved across the entire Company. And this is something that I am extremely proud of. We successfully integrated our acquisition of Heritage and Steelbuilding.com. The increased levels of SG&A compared to 2004 resulting from these acquisitions enabled us to generate incremental earnings in our direct sales channels. We believe we have established a good foundation to grow these distribution channels over the next few years.

The integration of our now wholly-owned Mexican frame manufacturing plant has been completed in an efficient and very profitable manner. We have successfully completed the implementation of Oracle 11i in three of our five coating plants with the scheduled completion of the remaining two to be completed in our first fiscal quarter of '06.

In our corporate organization, we have strengthened our control, treasury and finance functions. Sarbanes-Oxley preparations are on track. Additionally, during '05, we renegotiated our bank agreement removing the requirement to pay down our term B loan with unused funds from the $180 million convertible note, which we issued in November of '04. This increases our flexibility and enables us to be patient in our attempt to make acquisitions. We also reduced our debt charge by 50 basis points and increased our pool for stock repurchase.

As announced, we have repurchased 1,063,000 shares of NCI stock at an average price of $38.23 per share. We strengthened our balance sheet, which has approximately 200 million in cash, and reduced our inventory levels by 18% to 113.4 million. While never satisfied, we feel we achieved much and generated a good year for the shareholders. The stock market responded favorably with our price improving about 26% by the close of our fiscal year. Therefore, we are well-positioned for the opportunities and the challenges of 2006.

Now just this morning, we have issued a corrected earnings release to clarify guidance for the first quarter of '06 and the full fiscal year, which did not include the effect of FASB 123R. Our guidance for fiscal 2006 is $3.02 to $3.27 per share, which includes expected expenses of approximately $0.18 related to the adoption of FAS 123R. Our guidance for the first quarter 2006 is $0.50 to $0.55 per share, which also includes the expected expenses of approximately $0.05 related to the adoption of FAS 123R.

I believe it is also fair to mention that we believe that Sarbanes-Oxley expenses related to compliance had a negative impact on earnings per share during fiscal 2005 in excess of $0.10 per share. We also expect Sarbanes-Oxley ongoing compliance costs to negatively impact earnings per share by approximately $0.05 during fiscal 2006. All SOX compliance costs are included in the guidance for 2006.

Our annual guidance is based on our underlying market growth in nonresidential construction of 5% in square feet. If we achieve this range, we would expect to ship 6% more tons of steel than in 2005. We anticipate our weighted average cost of steel to increase about 9% during the fiscal year. One thing that I think that we should mention right here is if you pro forma '05, I believe you would come up with 243 and if you look at the low end of 302, that is almost a -- a 25.6% increase in earnings per share that we projected for fiscal '06.

Now, as I have said at the onset of these remarks, the men and women of NCI are committed to create opportunities that will enable us to grow our earnings over the next few years. We believe that our strong financial results in '04 and '05 demonstrate that commitment. We will work extremely hard to continue that momentum through '06. Now we will be happy to take any questions that you may have.

(OPERATOR INSTRUCTIONS). David Yuschak, Sanders Morris Harris.

Congratulations, gentlemen on a good year. First question, I think you said that the weighted cost of steel in 2006 you're estimating at 9.5?

9%

9%?

Yes.

What was it in 2005?

Hold on one second, David. We are all sitting here looking at each other. I don't know if we have calculated that number. You know, it came down and then it went back up towards year-end. Do you have any idea?

At October versus October, we were at about a weighted average of about 11.4% lower weighted average cost of steel. But that was comparing those two periods. Between time, we had some -- we had a price increase in October. (multiple speakers) Right. We could probably calculate that but we'll have to go offline to do it.

A couple of questions on both the gross margin and the operating expenses. As far as the option expense for next year, you had $0.05 in the first quarter. Do you have any sense as to how that may lay out? Is it going to be like 5-3, 5-4, 5-4, 5-4, something like that?

I would expect to see it on a declining basis as some options start falling off the table. So yes it will decline down.

So we should just kind of build something like that for the balance of the year.

That's correct.

As far as gross margin, operating expense potential going down the road. I think one of the problems you guys had is not having a paying (ph) revenue gain because of the complications in the marketplace, as you guys indicated. The square footage hasn't been that robust. And then you saw some very strong results in October when you finally saw a pickup in demand. Is it going to be more difficult to try to sustain those things because you're maybe getting more lumpiness going forward or what do you think you need out there for the ingredients to sustain a good level of top-line performance so that you can get the benefit of the efficiencies that you guys (ph) had inherently built into your system?

One of the things that --, as A.R. said in the script, we are looking for an underlying market growth in nonresidential of about 5%. We said we expect to ship roughly 6% more tons than in 2005, which is baked into our guidance. We always do better if we can come out of a chute with a good first quarter. We certainly like what we see to date in terms of the level of activities that A.R. set. We also know that the last new quarter of our year is our strongest. So it if we can come out of the chute and we see the economy continue to chug along like it is, we think we're going to be in pretty good shape.

So you're thinking 2006 will be more of a sustained improvement as the year progresses compared to some of the lumpiness we have seen here over the course of the last 18 months?

Yes. I mean that is our view. Of course we don't have a crystal ball but that is our view. When we compare it to 2005, as you know, we started off the year with a dampening effect because the steel price and other building material increases that we saw in 2004. That certainly had a dampening on the whole nonresidential infrastructure starts.

David, I heard a report this morning on the radio driving into work that said that 62% of the people surveyed in Texas were much more upbeat about the economy and their general state of affairs than they were a few months ago. And I think we're seeing that. I think people are a little more upbeat about the State of the Union if you will.

Just on the gross margin potential, it's a balancing act when you have steel prices being as volatile as they are. Then seeing pickup and improvement in the top-line demand. What kind of potential do you think you could have in looking at gross margins down the road as to where they can potentially recover?

When you look at the investor presentation on page 23, we lay out our EBITDA and our operating income. You know margins going back to '99 and 2000 and '99 and 2000 were the top of an eight-year growth phase, which was really excellent. And to be sure, we have made, as you know, lots of improvement in the Company. The team during those down years of 2001, 2 and 3 gained all kind of efficiency; shutdown plants, added new plants, improved line speeds. So we think we are really well-positioned going into 2006 and with a little bit of tailwind in terms of tons shipped, we think we can do better than the margins that we achieved in that high period of '99 and 2000. That is consistent with what we're all trying to do here.

So you are thinking, ex out or put back in, whatever, your option- related expense, you think sometime here in the course of the next 18 months or so, you can get back to those (indiscernible) numbers from EBITDA point of view?

Well, I think EBITDA that we generated -- 140 is not bad. But the thing I'm most thrilled about is that we generated $109 million in free cash flow. That is a record. We have never even come close to that in the past.

David, one other thing is that we have said on the calls before that if the components business started reducing prices that they could take the whole market down. We got to a point back in the fourth quarter that we thought the prices were about as low as they were going to go and the components people turned a switch on and you can see the effects of that in October. Again, that balancing act that you're talking about and we don't want to take the market down but we want to get as many tons as we can and that has sustained for components through November and through December. What we see so far in December. Buildings is a little bit soft right now but they got a big backlog that is just getting everybody to kick it loose. The weather isn't cooperating a great deal up in the Northeast.

Just one more quick follow-up and I'll get back in the queue. As far as that balancing act between components and coatings and I think your strategy was kind of take a look at that as piggybacking on each other. So it sounds like, judging from what you're seeing in October, that you've got that figured out as far as the kind of balancing act you need between pricing components and what you need out of coatings to get both of those guys on the same page for profitability.

We had a tremendous month from coatings and as you look back historically coatings have always been profitable. That profitability is in part because the components demand baseloads the coating plants by as much as 50% at times. So it enables the coating guys to be more selective on their third party folks that they work for and that is a benefit. So we've liked our balance. That is a powerful part of our model, the coating and components piece.

So you are getting more third party business into coating. Is that what you're saying to us?

No. I'm saying that the advantage for coatings is to have that baseload that comes from components demand so that covers your cost if you will and then they are able to really focus on good customers on the third party side. They can get some value.

John Diffendal, BB&T Capital Markets.

Good morning. I wanted to flesh out a little bit more post October. It sounds like October really did extremely well and I guess there is a normal seasonal fall off as we move into the January and April quarters. Are you seeing -- and it sounds like there is some of that happening on the system side but walk us through what is happening on components. Are we continuing it on a full-blown improvement in November and through December to date or has there also been some seasonality fall off there?

All of our plants south of the Mason Dixon line are at real high utilization. From what I gather talking to the operating guys yesterday, our plants up north have suffered a little bit from the weather, particularly Rome, New York. But we are really happy with the level of utilization we're seeing at the components plants. That of course has the benefit that carries over, as we just spoke about with Dave Yuschak, on the coatings side. So when we look back in the past and we see if we come out of the chute strong with components in the first quarter, that usually bodes pretty well for us because -- I think, as A.R. said, we feel pretty dog gone good to have the backlog we have with the buildings group.

I wonder if -- I remember when we had our last conference call, it was shortly after Katrina. Is there any update you can give us in terms of rebuilding activity in your business down in the affected areas after that hurricane or the other hurricanes as well?

We are shipping orders, primarily component orders, and it is for patch jobs and reroofs and rewall building. It is still a little bit early for the bigger buildings to turn loose. We are in the quoting process on some large projects and it just takes awhile for them to work through their insurance problems and so on and so forth.

We feel so strong about that that you're going to see us spending some money to expand our Adel plant, which we think is going to help us even serve that area in a more strong fashion than we could. So we are that confident that we are seeing the level of demand that has been sustained.

Where is that located?

Adel, Georgia.

Adel, Georgia.

And that will also serve as -- that plant services Florida also. But I personally have been to New Orleans and met with the people there and the city of New Orleans is actually broke. You have heard that. We are having problems created for us here in Houston because of all the refugees, if that's what you want to refer to them as or the displaced New Orleans citizens that’s here. We had a massive fight in one of the high schools yesterday. They arrested 25 of them. There's going to be work come out of that and it is unfortunate for those folks. But they will be better off once it is over.

The other thing I might mention is that we are working on a house that will take 145 mile an hour winds. Now we're trying to see if we can get it up on stilts and take that same 140 mile an hour winds. There are some complications with that because if you just put the house up on stilts, then somebody comes along and frames the walls in, you've got to take all that into your calculations, and you never know what they're going to do. But we are working on that, which could be something that really takes off for that Gulf Coast area.

Any update you can give us on potential acquisitions?

Just as we've said before, we don't have anything to say at this time. As we've said in the past, whenever we do have something to say, we will say it.

But as far as -- I remember that earlier you said it has been difficult trying to find pricing. I assume with the business a little better, hasn't that also been more difficult to get pricing in line with what you're trying to achieve?

As you know, that would normally follow the case. But there are all kinds of reasons for people to buy and all kinds of reasons for people to sell. And we just keep working, as we've said, since November of last year, just keep working that space until we are able to tee up something we think makes sense for our shareholders.

And one last thing, I'm a little confused about the adjustment to last year's quarter. I thought in the past it was $0.06. You're saying now $0.05. Is that just a rounding difference or there's no actual change on that number from last year, right?

You are absolutely correct. There is no change in the number. It is rounding as you run out your weighted average on your shares.

On the new share count or something?

Correct.

John, I want to ask you a question. Maybe you don't answer it today but maybe you could give us some feedback on it. How is the street or how are the analysts going to look at FAS 123R?

I think everybody has certainly been incorporating that. I'm a little concerned that you actually did it late here right after reporting yesterday. But I think everybody has been pulling the numbers in once the companies have been comfortable about where that actual number is.

Are you going to like pro forma it against -- you'll just pro forma it against like '05?

Yes. I don't think you'll give us enough information to really show it, break it out. I think we'll just go forward incorporating that number and footnote it. I don't know what my other brethren analysts will do but probably something like that.

Right. Thanks.

Thank you.

Michael Corelli, Barry Vogel & Associates.

A couple of questions. First a question about capacity utilization. Where were you in the fourth quarter and I guess versus were you might have been at the end of October?

Yes. We certainly -- we've said we've been running 65 to 70%. We certainly -- we are running on the low end of that in August and September. It picked up considerably through October. It is hard for me to calculate it for a month. But I would say we're 70, 75% with October.

Okay. How do you compare now? Does seasonality bring it down at this point?

We are still very busy in the component side. So I think that level is sustaining itself and that is why we have a level of confidence we will pull through some incremental that we didn't in October in the first quarter when we had a more sustained period. And we like what we see in the building side. We like -- we are real happy with the backlog being up and they have got a good shipping period ahead. We will see that -- I think it'll come through for the second quarter.

I had a question with regard to the backlog actually. I noticed even though it was up 39% versus a year ago, it was down 4 million from the last quarter. Is that a seasonal thing? Is it just timing of orders versus shipments? How come that came down a little bit?

We think that's what it is and we think that it still bodes well in terms of the level it is going into the year. But they had a record shipping month or quarter. So we've kind of burned off a bit more than we thought we would that's for sure.

And then as far as cash use, if you aren't able to make acquisitions -- obviously you've bought some shares here. Did you buy any shares after year-end and what are your thoughts about cash uses outside of acquisitions?

No. We didn't buy any shares after the year-end. We will maintain a level of cash consistent with our strategy, which is still to focus on seeing if we can do some consolidation. At some point, when we get out here a ways, if that strategy isn't meeting fruition then we can look at either paying down some debt or doing some more stock repurchase where we like the repurchase shares and we will do the right thing out there when we have the decision to make.

Cliff Walsh, Sidoti & Company.

Cliff, are you there?

Actually, it looks like he removed himself from the queue. We will take Barry Hanes (ph) from Phased (ph) Assistant Management.

I had a question. Do you have your budget numbers for CapEx and depreciation for the new fiscal?

For the next fiscal year?

Yes.

What we are basically saying is you'll see our CapEx in line with D&A.

And then the free cash flow for the new fiscal relative to the 109 I think you said for the year just ended, would you --?

No.

How should we think about -- in other words, if CapEx and depreciation are in line, you have given us the net income piece. How should we think about changes in working capital I guess is the question for the new year?

Probably the best thing to do is look on page 23 of our investor presentation. You can see what it has been historically. This was a record-breaking year. I mean we just -- between the inventory and the cash, we just -- to generate $100 million in free cash flow, we are really pleased about that. Going forward, we haven't made any -- we don't forecast that information.

Cliff Walsh, Sidoti & Company.

I didn't remove myself from the queue. Not sure what happened there. Can you comment on the timing of orders in the backlog for the building systems group?

Generally speaking, it gives us about six months of visibility and if there is a group of orders from California or Florida sometimes the firm need to extend a bit. But we generally think that our backlog gives us about six months of visibility or so.

In terms of Florida, have you seen anything -- people are talking about availability of materials down there and in the Gulf Coast region. Has that been a concern for you?

I think we have been okay on materials. I haven't heard of any known shortages on our side. In fact, one of the things we're doing, as we mentioned, is expanding our capacity there because we are so certain -- we really think that it is going to be a sustained demand.

What are you looking for again in CapEx for this year?

Pretty much in line with D&A, maybe up a little.

Can you take us through some of the major projects you have in addition to expanding in the regions you just mentioned?

Well we certainly still see a number of opportunities in the aviation side. We see some opportunities on the big box retail side. We still are strong in school and education. We are really across the whole market as reflected by a Dodge. But those three areas are areas that we see some activity, some pickup.

The Dodge numbers that you mentioned, is that what you're basing the 5% industry growth on?

Well it is not entirely that but it is gut checking with that. Our guys use the actual details of Dodge or go out and drum up some work as well on their project bid side. But we think that 5% looks pretty good and that is on the square footage side. They are projecting 8% on the dollar side.

Final question. Norm, you talked in the past about essentially putting kiosks into home centers to allow customers to design I think it was sheds and things like that. Can you talk about that opportunity, what stage you are in that development?

Yes. We, as we've said in the script, in the present release, not in the press release, but the script, we think the experience of our depots has given us a better feel for the retail channel. We think there are opportunities there. We're going to try to tee them up. We like leveraging the technology that we acquired with Steelbuilding.com. We have seen some benefits of how we have used that in our depots. We are at the early stages but we think we can expand our channels on the retail side.

And how long do you think it takes before you really get that strategy up and running?

I don't think anybody should expect to see anything out of it in 2006. I think we will be working through beta tests and a bunch of things. I think it will be really more 2007.

We are opening a new depot store, a retail store, about 60 miles northeast of Houston scheduled to open December 19th and it is on schedule.

(OPERATOR INSTRUCTIONS). Brad Dewey, Viper (ph) Capital.

Just want to clarify on the strength of October, the backlog and guidance into the first quarter. Can you separate out October by the month itself and give us some guidance of how strong sales and/or order growth really was? I want to dovetail that with a question of how much of the 204 million in backlog of last quarter got burned this quarter so I can get an idea of how much new order growth was in the current quarter. And than what is your guidance -- do you have guidance for volume growth in the current quarter we are in?

Let me try to get the order. First of all, if you look at the segment information, you will see what the buildings group burned in terms of revenue in Q4. And you will also note -- and I can't quite remember if we -- I guess someone said we were 204 million in backlog going into the quarter, quarter four, and we are now at 200 million going into the first quarter 2006. So that will give you a way of calculating that.

Second of all, A.R. gave you the percentages, the operating income percentages for the three segments for October. We have never done that before and we probably won't do it again but we just wanted to share just how strong our October was compared to August and September. You can compare that with the historic percentages in our segments as well. We don't give guidance on volume per se but we did say that we were up 8.3% in tons shipped for Q4 over Q4 '04. And that is the first time we've really seen this fiscal year our comps comp out on the tons shipped side. So we're pleased with that. And I think what we have said is that demand, particularly in components, continues to be good and strong as we speak now. The backlog in buildings is good and I think that that will come through. Whether it comes through a little on the lumpy side because of some weather remains to be seen. But we are pretty happy with where we are positioned.

And the year-over-year weighted average pricing -- you mentioned cost of steel will be 9%. Do you have a weighted average of where your pricing will be on a year-over-year basis?

That's it. What we're seeing on the -- we would expect the price of steel -- and again, this is our estimate -- if you look at the pundits, the pundits are saying flat. So we are saying that the weighted average cost of all the steel we use, we are expecting to, and we have baked into our guidance, about a 9% increase phased in during the year.

And some of that is hitting us right now because there are actually shortages of some items today like beams. We are having to pay more than 9% up for beams. But when you put it across the whole productline, it is not going to have a negative effect on the first quarter. But there are some shortages of some steel components today and we are having to pay more money for them.

More on the structural steel side.

Right.

My question being is that from a pricing standpoint, have you priced your material so that is a pass-through to the P&L so that it’s not an impact to your cost?

Yes. But we also phased in a reality check meaning that are components group generally stays ahead of the curve and it takes us a little longer to get our pass-through through the building side. But we eventually get it through.

John Evans, Coker & Palmer (ph)

Can you just give us the ending share count?

It's about 20.3 million.

It's 20.3? Great. Thank you so much.

Bruce Geller, DGHM.

Glad to hear things are moving along nicely for you. A question on the incremental profitability, you mentioned that it is quite good. Based on the guidance you gave, it seems to me that the incremental operating margins are in the 20% range. Does that sound about right?

Yes. We would expect to see that level based on us keeping our utilization in our plants. As we have said before, if we can sustain utilization up above the 80% range in our plants, which we haven't achieved yet, that we think we can get that incremental margin north of that.

That's really terrific. So I just wanted to clarify, you said that Dodge was projecting shipments or shipments to be up 5% but dollar value to be up 8%.

That's correct. And that's again, -- don't forget they are on square footage. But their square footage protections for the calendar year 2006 is about 5% in square footage and about 8% dollar value for that square footage.

So if it is 8% dollar value and you guys typically gain a little marketshare each year and your pricing is going to be up a little bit because of steel prices, how come your top-line estimate is more in line with the square footage growth as opposed to the dollar value growth?

Well because we just want to make sure that we give out stuff that we think we can achieve and attain and let you guys paint the blue sky in.

Great. That's what I'm trying to do here. If in fact you are more in line with the dollar value growth with those types of incremental margins, it seems to me that there could be some pretty good earnings leverage.

Well, what I will say and I want to be cautionary here is that we did get hurt in 2005. Our tons were off. We didn't expect that. So I just want to be a little cautionary because we don't want set anybody up for expectations that are not realizable.

Well, you guys did a great job considering your tons were off in an environment where you didn't expect them to be. So congratulations on that.

Thank you. If you really look at -- the only competitor, large competitor that you can see is owned by a foreign public company and if you really look at their results compared to our results, they lost money. We are pretty pleased with where we are and we are going to do better. We are getting better every day.

That's great. On the steel, again, you said you are anticipating about a 9% increase next year. What is the sensitivity to steel prices? If they do come in flat or if in fact they come up 15%, what type of earnings sensitivity do you have if your steel price projection is off?

The only thing we can really do is look historically. If we looked at the volatility in 2004, we were able to stay ahead of the curve nicely with the component side. As you remember Q2 of 2004, we earned almost no money in the building side because we're upside on the steel prices. We have corrected a lot of those contractual terms but the fundamental is that those folks are our builders. They are small business people and even though our contractual basis is better, we are still going to help them along. So it just takes us a little longer on the building side to put steel price increases through. Having said that, when you look historically, we have made a lot of money when steel was half the price it is now. So we just -- I wish I could be more scientific but we just figure out a way of managing through it.

I am just curious because you guys are pretty smart steel buyers obviously, you said that the pundits are anticipating a flat year in pricing but you're anticipating +9. What is it that you guys think you know that the pundits do not know?

Well, here is what I think and again I'm not a pundit but if I were a supplier to a group like us and demand for our products was going up, I would sure be thinking about increasing my prices to them. We think that demand in nonresidential is going to be up in 2006 and so we could be wrong. We could be wrong for sure.

Just two other real quick questions, financial questions. Does your earnings guidance include projected dilution based on where your stock price is now from the convertible that you had done?

Yes. There is no dilution.

There's no dilution?

No and Francis can maybe say a few more about that but it would be good for her to say it because I think it is important for everyone to hear.

Well, first of all, you have to remember the conversion price is at $40.14. So when you look at the dilution impact, you have to pro forma as if the convertibles were converted at the beginning of the period. So you take your weighted average shares and when you do that pro forma you back out the full interest. So at this point, those numbers turn out to be antidilutive.

But at this point wouldn't the additional shares dilute your earnings more than the benefit you would get from not having the interest since the rate is so low?

No. For example for this fiscal year, the breakeven point would have to be approximately $55 per share to be dilutive, to be a zero dilution impact versus an antidilution.

Well then let's hope it is a dilutive year.

I am with you Bruce.

And last question speaking of dilution, the $0.18 options expense, that seems to be a little higher than what I have heard from some other companies. Is this based on options you anticipate issuing this year or is this based on options you've issued in the past?

It is a combination of issues that we will be issuing for '06 and historically.

Don't forget we give out shares to about 128 of our employees. We give options twice a year as part of our comp plan. And that has been important to us in terms of keeping our better folks in our plants and whatnot. But the other -- anyways.

Fair enough. Well best of luck to you.

Thank you.

Stephen McCoyle (ph), Lord Abbett.

First, can you just talk about the pricing strategy in specifically components in the upcoming year relative to what it was this past year and also any commentary on the competitive pricing landscape?

Let me -- first of all, we are not going to really tell you what the strategy is for 2006 because I think you'll tell our competitors. That was a joke. But what we will say is that historically we have, as A.R. said and we have said I think in the last three calls, we really apply commercial discipline in terms of trying to maintain a pricing structure as consistent with the marketplace and the structure we think it should have. At a point when demand increases, we are able to adjust our price a bit and look at the volume side. We saw a bit of that certainly in October and that approach to the marketplace is, as you know, it is very quick turn. We get an order and we ship it in a day, two or three. So that is a daily approach. The team over there will continue to do that and try to do what's best for the market.

So to the extent that you were disciplined through the latter twelve months, I'm curious if there's a metric one can look to just based on historical experience where if you give up a basis point in price what you may gain in volume given that you have got a very different favorable underlying demand level today?

I don't know how to help you too much there. But if you look at the gross profit margins in the segment for components in the quarter and you look at roughly what we said we shipped, about 8.3% more steel across the whole businesses, you might be able to get a sense of what that is. We also said in the script that components shipped 20% more tons than we did in 2004. I think you can back into it that we are able to gain quite a bit of share with a fairly modest decrease in price.

Fair enough. It seems like the window of opportunity to ask this question, to the extent that you broke out the October margins by segment, is it possible to get the August, September like numbers just to get an appreciation as to the "depressed" margin level there that you were able to offset in one month?

Well you have one number and that is the margins for coaters was 45% in October and for the year it was 18%. And if you look, the margins in October compared to August and September were about up 100%. Almost double is what I am trying to say in October and not quite as high for components.

Exactly what A.R. is saying. We gave you the three margins for October, which was 16, 16 and 45. You have got the fourth quarter, which are 14, 12 and 26. So I think you can do the math and if you straight line it back, I think you'll be in the ballpark.

Okay. Just on the steel issue, just refresh me. I don't think you folks buy forward. Is that correct?

We buy about one quarter in advance when we know our demand. Once in a while, we will by forward on some foreign steel if we think we can get an advantage on it but by and large we buy one quarter in advance.

And on those purchases for the quarter forward, I think you said you're not seeing any steel increase effect through the first quarter but you're obviously guiding for conservatively a 9% increase on a year-over-year basis.

The price is flat on all our big usage items. January 1st we have got a small increase on bars and plates but we are paying above our standard price for beams, some beams, at this time.

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

We certainly appreciate your attendance today. We appreciate your questions on the call. We look forward to producing some good results for the shareholders in 2006. Again, thank you for your participation. Good day.

This does conclude today's conference. We thank you for your participation. You may disconnect at this time.