Core Natural Resources Inc (CNR) 2006 Q2 法說會逐字稿

Good morning and welcome to this NCI Building Systems conference call to review the Company's results for the second quarter of fiscal 2006. [OPERATOR INSTRUCTIONS] The second quarter results were issued yesterday and a press release is being 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. Please go ahead, sir.

Thank you. Good morning, everyone. And we're certainly pleased that so many of you could be with us for our second quarter conference call. With me today are Norm Chambers, our President and Chief Operating Officer; Frances Powell, our Chief Financial Officer; Mark Johnson, our Vice President and Controller; and Ken Maddox, Executive Vice President of Administration.

The second quarter reflected the same strong growth that we experienced in the first quarter of this year. Revenue was up 31% for the period, compared to Q2 last year. Tons shipped were up 26%. The acquisition of Robertson-Ceco Corporation, which I'll refer to as RCC, which occurred a few weeks before closing, actually about 20 days of our second fiscal quarter; contributed under 10% of the growth in revenue and tons shipped. McGraw-Hill nonresidential numbers continue to show strength in the nonresidential sector. Year-to-date, April square footage was up 6.5% and dollar values were up 14%.

When we back out the one-time gains for health care and FAS 123R option expense, our adjusted earnings for our fiscal second quarter, compared to the same period last year, were up 15%. And if you look at the first six months the same way, on adjusted earnings, it was up 34%. While we are pleased with our quarter, we're pretty hard on ourselves. There's always areas to improve in.

Our margins for our building group were off slightly due to; a large low margin structural project, some lower margin high complexity projects such as searches, and a little bit of warranty rework. Our backlog of nearly 383 million, of which about 185 million is attributable to RCC, has better mix of buildings with low and moderate complexity work. Therefore, we expect to see improvement going forward in our building margins.

Now, our components group continued its strategy to regain market share it gave up last year. This led to a slight slippage in margins. Our coatings group benefited from strong family demand and a 30% increase in third party sales in the current quarter.

Our year-to-date SG&A as a percentage of sales is down a little for the quarter compared to last year. Now, we're committed and we're confident that we'll bring the SG&A back in line with our historic levels of 15% to 16% of revenue before our fiscal year end. I think it's also important to note that we expensed about $0.01 per share as a result of acquisition costs we were unable to capitalize.

As we've said many times before, the first half of our fiscal year has always been our seasonally slower period. We feel our strong performance for the first six months of this year, with the strong residential construction market, and the addition of Robertson-Ceco RCC group positions us well, really well, for the remainder of the year.

And just before we close to take your questions, I wanted to update you on the progress in capturing the $6 to $25 million in synergies that we mentioned in the call a few weeks ago that potentially result from the acquisition of the RCC group. First, we continue to be very encouraged by the positive response from all of our customers, now that's RCC customers and NCI Building customers. We've seen no erosion in revenue. In fact, Star had the largest volume of new orders during May as in anytime in the history of the Company.

Second, we have largely consolidated our purchasing and we'll begin to see benefits from that by the fourth quarter. Third, we've consolidated all of our paint colors and we've started to move the RCC light gauge painting requirements into our coating plants. Fourth, we're making good progress in rationalizing our design specifications. Now, this is the first step in achieving better utilization of our hub and spoke system. And this is -- there's no pride of authorship here. We're using best practice from the two buildings groups and that's the way we're coming up with the new design specifications.

Finally, we're migrating the pricing and engineered design portion of RCC's computerized pricing and engineering program into NCI Buildings. We expect to make it available to all our NCI builders by March 2007. This is very important because it will move NCI's pricing of buildings from tables, our pricing system today uses tables, to a system that prices off of an engineered design. This will enable us to have consistent and economical building designs at NCI.

Again, we're very pleased with the progress we're making and excited about the prospects for the third quarter and the remainder of the year. And with that said, I'll now turn it over to you guys for questions.

Thank you, sir. [OPERATOR INSTRUCTIONS] We'll go first to Arnold Ursaner, CJS Securities.

I want to try to focus on -- you mentioned the margin impact was caused by a large, low margin project. Can you give us a little better feel for the magnitude of how that contributed to revenue? And again, I think you need to expand a little bit more on the more specific items that did hit margin in the quarter.

Yes. Probably the best way to look at that, I believe the project was about $4.5 million, largely structural job, and we effectively produced that work on it for no margin.

Okay.

All right. We then, as we've said in previous calls, we have found that oftentimes on high complexity work, they oftentimes have a larger -- or a higher sales value, but the actual margin erosion oftentimes occurs. That's why we've said at different times that we look at our mix in our backlog and really like to see the moderately complex buildings, the 3, 4, and 5 range. And in the backlog we have, which we delivered in the second quarter, particularly, there was a disproportionate share of larger, more complex work.

Going forward, we have increased our bookings at the NCI Building group and we're finding now that we have a better distribution of lower complexity work. The work that A.R. spoke about with Star, again falls in this lower complexity work. Moderately complex, I really should say. So we're much more -- much happier with the mix of buildings we have in our backlog going forward. Now, oftentimes, I'll just finish up by saying, oftentimes during the winter, we will have a tendency to take in work, knowing it's our slow period, at lower margins. And in this case, some of it squeaked out into the second quarter.

Okay. Obviously -- can you comment a little bit -- you're changing your view of your cost of steel in your mix. Can you comment a little on what's causing you to do that? And also comment on zinc and how that might impact your coatings business, since that's gone up quite sharply?

Yes, again, A.R. will come in here as well. But what we've found is that we, of course, as we've said before, generally buy about one quarter in advance. In other words, we match up what our needs are going to be with our steel supply. Our purchasing power gives us the ability to move that around a bit. Sometimes if we're not happy with what we're seeing on the domestic front, we'll increase our purchase of foreign steel. We have done a bit of that now. And certainly, steel prices have been going up and continue to go up. When we look at it for the year -- and the reason why I changed that guidance from 9 to 12, is that when we look at the blend of our weighted average of cost of steel, over the remainder of the year, we reckon that we're going to be at about 12% increase rather than 9.

Okay.

And zinc does play a role in that as a rationalization or justification by the steel mills to raise their prices. It affects more the galvanized products on the zinc side than our products but nevertheless, it's a still a justification for the mills to raise their prices.

Okay. Just to kind of build in, when you had reported your Q1, you indicated that some of the strength in Q1 you felt you had borrowed from Q2, but you might pick it back up in Q3. Did in fact you pick it up in Q2? And will that affect your view -- in other words, can you comment on your view of timing of some business and how that may affect kind of the color in the upcoming quarter and the quarter you just reported?

It was a little difficult to hear the whole question, Arnie, but I think I got the gist of it. We definitely think our backlog is better -- has a better allocation of buildings that will enable us to regain our margin momentum that we had going in. We are pleased with the growth and the components side, even though we gave up a little margin on that. And again, find that in the second half of the year, which is always our strongest, that we would expect, and historically have shown, improvement in our margins that didn't occur then, during the third and fourth quarters.

Okay. I'll jump back in queue. Thank you.

Our next question comes from Matt McGeary, Sentinel Asset Management.

I think A.R. said something in his comments, when he was talking about the components group, about some of the margin erosion coming from activities aimed at gaining some market share back. Can I assume that you used a pricing lever to achieve that?

Yes. We're the largest in the component business and last year, we were very cognizant of the fact that if we lowered the prices, it would take the whole market down. So we maintained the price levels at the expense of losing some market share. And we have seen the opportunity now to gain that market share back, even though the margins are slightly lower. But you have to keep in mind, when components sell, they also are contributing to the throughput of the coil paint lines, which have extremely high margins when they run full. And with additional work from the components group and the work coming in from RCC, these paint lines that we own are going to produce some outstanding margins in the third and fourth quarter.

Just to highlight that a bit, I think that a lot of you have been on the calls oftentimes want to know what our capacity utilization is. And in the second quarter, we've done this a little more systemically now. And we reckon that our components group is running at about 65%, our coatings group is running at about 59% and our buildings group is running at about 70%. And we're forecast -- or we believe based on our guidance that we've given, that we'll see nice increases in the utilization in the third and fourth quarter. With probably some real possibility of getting up into the low 80's by the fourth quarter.

Is that on a blended basis or for one of those units?

It will be for the quarter. So, we'll still end up for the year in the 70's, but what we're saying is, we expect to see the utilization improve very nicely.

Right. But when you say utilization in the 80's, is that for the full Company or is that just for the --?

That's for -- the full Company will average about 85% across the board in the fourth quarter. And they're going to average -- the annual utilization will average probably about 73% for the year. But in the fourth quarter, they're almost equal. All three; coatings, components, and buildings are almost exactly equal in plant utilization.

All right, okay, thanks, guys.

Thank you.

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

Good morning. A few things, just wanted to keep knocking on this gross margin situation. So the gross margin was -- had been over 24 for the last few quarters and was a little bit below 23, are you -- I just want to get a sense of the magnitude of the different things you're listing, the building and the components deterioration a little bit. Was the building, that one building had a low margin most of this, or was it pretty much spread across the different reasons you listed?

Now, think about this just for a second, John. We also had RCC for 20 days or so.

Right.

And RCC, there was costs involved there that we had to expense that we couldn't capitalize. And if you really take a look at that, they helped to contribute to the erosion in that margin in the second quarter.

In gross margins?

In gross margins. You're going to see that turn around in the third quarter. Okay?

Okay.

It's -- they contributed about $0.01 to the bottom line and we had about $0.01 that we had to expense because we couldn't capitalize, so they were neutral. So, the gain that you really see quarter over quarter of 15% on adjusted basis is all attributable to NCI.

Got it. Got it. Okay. But what you're expecting is really a one quarter deal. And then we get into the second half, you seem to be quite confident you can have positive margin comparisons on a gross basis, gross margin comparisons. Is what I think I'm hearing.

We should start to see that move in the right direction and we are expecting to see improvement in our margins across the board and at the gross margin levels. That's for sure.

And it seems like with the -- I think the third quarter number, not that we weren't shooting a little bit in the dark, was slightly below the consensus number. It seems to me what you're kind of saying is that you particularly think this thing, seasonally and with the initiatives you're driving with, as you control Robertson-Ceco longer, that it's the fourth quarter that you really start to see the some of the impact. Because it sounds like there's going to be a little more movement up between the third and fourth quarter and might be typical, or am I reading that wrong?

No, you're not reading that wrong. As you know, or fourth quarters are always our strongest quarters. Always our strongest quarters. And I think that what you'll see is when you look at what we're suggesting we'll do in the third quarter compared to the guidance that we have for the year, you would conclude that our fourth quarter will be a little higher than maybe some folks have put in their guidance, or put in their consensus.

Right. And one last thing, just for my model and just more comparison's sake, the last couple of quarters, you've had this intersegment larger number that -- with everything moving around between the different areas. Can you give us a sales number that strips that out for the three different pieces?

Yes, and Frances will do that now.

Sure. Let me go through this particular quarter. For metal components, just third party sales, it's 151,586.

I'm sorry, I had a hard time hearing you. Is that components?

That was components, 151,586.

Engineered building, 144,929.

Okay.

And coatings, 32,847 and that's all for this quarter.

And that's with a zero sum intersegment for the quarter, got it.

Right.

Excellent, thank you.

We'll now take a question from Cliff Walsh, Sidoti & Company.

Good morning. You commented that the acquisition was basically a wash in the quarter. Were there other issues going on in terms of you focusing on integration? Did that slow down things at all, which maybe you might not be able to quantify or anything on the acquisition front from there?

I don't think so. If anything, I think it's -- we're really pleased with the pace. When we just talk about one group of synergies, which was the engineering piece, we had put that out that we wouldn't get benefits from that until 2009. Well, what A.R. says, and I think you need to hear, is that we hope to advance a bit of that and get some traction in 2007. And that's -- that for us is big. And it's difficult for us, sometimes, to explain how big that can be, but it changes the whole accountability, in fact, of our engineering group. So that where we have oftentimes, I'll say, overdesigned buildings, this system enables us to focus much more on the economical utilization of steel. And for us to be able to get that 2007, we think is huge.

And I know it's only been three weeks since the last conference call, but have you learned anything else about Robertson-Ceco, that might be useful from our perspective?

We -- the best way for me to say this is, there's no buyer's remorse. We're tickled to death with everything that we see. We're -- the people are bending over backwards to cooperate. They immediately -- NBCI, our component's group, is the most specified group in the United States by architects. Okay? They immediately move to the NBCI's colors, which NCI is also on. Also use -- they're just -- they are really happy to be owned by someone that's in the industry and someone that understands their problems and also understands their opportunities for growth. And they are seeing the advantage of the hub and spoke system that we have. The President of Star is already trying to utilize our Mexico facility and our Lexington frame facility. He sees that as a definite advantage for Star. I'd say that things are, with the acquisition, are much more positive from a customer-employee standpoint than we could have ever envisioned.

Just one more little example. Our [prillons] have a -- based --

8" rib.

Right. And theirs are 8.5. Well, that doesn't seem like much, but when you bring that down and rationalize that back to 8, we have a savings of 0.5 inch on lots of material. And our point is that this is a kind of a design specification that people get used to. Once both sides look at the advantages, they immediately move to that. And that's kind of a small thing, but boy, it reflects on the fact that people are looking at how to make this more economical and capture the synergies that we think are there.

Okay, great. And one last question with the backlog and steel costs rising, you feel comfortable with where things are pricing-wise in the backlog and in the work that you're bidding on now?

Well, unlike 2004, where we had very little forward warning of price increases, this year, we're getting warnings well in advance. So from the standpoint of us staying ahead of the curve, we think we can do as good a job as we did in 2004 and better, hopefully. But I think that we always say that on the building side, we have to be very sensitive of our customers. But we are rigorous, having just gone through 2004, of making sure that our backlog is priced properly and A.R. and I and the team have got to really focus on that.

Okay, great. Thanks, guys.

Thank you.

Our next question comes from Michael Corelli, Barry Vogel and Associates.

Just a question about the backlog. I believe you said it was 383 million, with 185 related to RCC. If you pulled that out, it would have been about 198 million on the base business versus 195.6 million a years ago, which is only a 1.2% increase. Could you talk about more a little bit? I would have thought it might have been more robust considering non-res activity.

We, on the buildings side, had actually got our prices out of whack on the small buildings, too high. And I think Norm said earlier, that we've had an influx of the buildings on the NCI Buildings' group during May that the low complexity to moderate complexity buildings, and that's due to a rationalization of the pricing. And so therefore, I think you're going to start to see that the backlog in buildings grow.

And another way of looking at it is that our backlog in January -- I'm sorry, the first quarter was 185 million. So, we've increased sequentially nicely. But this is at a period where we've had growth in tons shipped across the board. So what, in fact, you see is that we've been burning up the backlog at a higher rate than we would normally do in our seasonally slow period as well. So, we're pleased that it's up sequentially. And given the burn rate comparison between last year and this year, I'm really pleased where the backlog is. And I'm more happy with the bookings that we see right now. So, the booking levels are coming along very nicely. We're pleased with where the backlog is and expect that it will reflect well in the next two quarters as well.

Another piece of that puzzle is that the prices actually went down during the third and fourth quarter last year. And so you had higher priced buildings in the mix in the second quarter of '05, as compared to the price of the buildings in the second quarter of '06. And so the pricing at year-end is going to be up year-over-year. But the pricing in the first and second quarter was lower than it was in the second quarter of '05. So, that skews the backlog some. Did I say that clear enough?

Yes, I understand. Thank you.

We'll now go to Craig Bell, Sanders Morris, Harris.

I was wondering on the revenue, how much of that was driven by your tons delivered versus maybe an increase in the pricing?

Yes, we have that right handy, just one second.

Okay.

When we look at it for the quarter compared to the same period last year we had -- volume was by and large the largest portion of that and price was only about 6%.

Okay. So only about 6% on price.

Yes.

All right and then you had talked about on your SG&A and getting into line to 15% to 16% range. Do you see that happen -- is that a fourth quarter event, or do you see that coming in in Q3?

No, I purposely said before the end of the year. So, we're going to start to see that moving in the right direction. Certainly for the quarter, it was down a little bit even though our year-to-date is still higher than we like it. But you'll see it in the third quarter and improvement in the fourth quarter as well. So, we'll end up total for the year back in our range of 15 to 16. That's our goal.

Okay. And then looking ahead to next year, should we think that range as a target on the quarterly basis as well, or just on the annual?

Frances and I have spoken about this a lot. We have things like our IT charge, we've had a decision by the Board nine months ago that is corrective. We need to improve our disaster recovery. We've spent money on that. So, what I'm saying is that the variable piece of this is the engineering and the sales, and that kind of moves with the volume. But I don't see any reason why we shouldn't always stay in that 15% to 16% range and we'd like to be in the lower part of that.

Okay.

And I think you've got to realize that another part of the reason for the increase is FAS 123R because that's in SG&A. And that's not going to go away, even though -- we're going to control our costs, where we keep it in the 15% to 16% range. But we still have an absolute charge in there for FAS 123R that was not in the prior years.

Okay. All right. Thank you.

Our next question comes from Gregory Macosko Lord Abbett.

Could you talk just briefly about the bad debt? I see that went up a bit, it's still pretty small but is that from Robertson-Ceco?

Yes, of course, you're going to see the increase coming through to Robertson-Ceco but our bad debt for NCI hasn't changed at all.

Okay. And do you expect those numbers to come down then in context going forward? Is that something that will improve?

Well, I think we'll continue to look at improving the quality of -- to our credit department through the processes that we have. And we'll continue to manage that number.

Okay, good. And then, Norm, with regard to the second quarter, I know we talked about sort of a hole in the schedule in the second quarter previously. And was some of the backlog burned down because you filled that hole a little bit, was that kind of what I'm hearing?

Yes, that's a lot of it, to be sure. We certainly worked the backlog hard to fill our scheduling. And you can see that we had really considerable growth in the buildings side in terms of sales. So, we used some backlog but we also filled some backlog sequentially, which is not easy when you got a burn rate that we had. And as I said, when I really think about it, when we look at our bookings and the quality of the bookings, we think that our backlog will respond nicely to that, going forward.

And you spoke pretty specifically and positively about the capacity utilization for the year and for the fourth quarter. I take it that that's a strong reflection of how strongly you feel about the backlog?

That's right, Greg. And you know that I've spoken a lot about the whole notion of getting our sustainable utilization in our plants to 80% and above. And when we look forward to the fourth quarter, all things being equal, without some major hurt in the economy or something occurs, we should be in the 80 range and that's a good place to be.

Thank you very much.

Our next question comes from Dana Walker, Kalmar.

Good morning, all. Could you describe why your third party coating business was as strong as it was?

Yes. Do you remember -- yes. Do you remember when we said in December that one of the challenges we have in the coating group was that during the shortages of 2004, we hurt ourselves a little bit by keeping more of the output from our coating plant and a little less for our third party sales. And frankly, we've been working -- the team's been working pretty hard through 2005 to regain the confidence of our customers and third party sales. And have done, I think, a great job. We've got a great team in there, new leadership and they're really getting after it. And I think we'll continue to see that growing and doing well. Plus, as A.R. said, we've got a hell of an opportunity here in terms of our -- in family tons.

To the degree the market is stronger, which it is, I presume some of that incremental tonnage would be market expansion. But can you talk about the degree to which you think you're taking from that competitors and the degree to which if your competitors respond there might be a price consequence to that?

That's a good question. I'll try and let A.R. try as well. It's interesting to look at the spread. In our California plant, it's pretty much non-construction activity. It's -- there are stuff for lighting industry, for some appliances. In our coating plants back East, it's more construction and therefore, probably more a function of growth in the nonresidential side. But we don't -- I would say that we're not -- I don't to say we're not finding pricing pressure there, but there seems to be a lot of opportunities for the guys there.

On another topic, you're coming up on two years of having owned Heritage, I believe that was the late summer, early fall of '04. How is that business doing in this environment? And how are you struggling or how you succeeding in differentiating its role, given that you're adding a new leg to your business?

Its role will not change and Heritage has grew very well. I don't know if we have a number -- the accountants are saying they don't have a number with them, but Heritage has grew extremely well. It's the second largest building brand name recognized in the industry, behind Butler. I'm not sure they may not be -- even be ahead of Butler today. They're doing a fantastic job. The buildings and components group are doing a great job of supporting that business. Dot com, with a part of a Heritage group, it's grown significantly since we bought it. We've also taken the dot com store front into our depots and it's metaldepot.com. And that building business has really grown in the depots. So, it's been a great acquisition for us. And it's mostly low complexity, small buildings, many of which that we ship in three or four weeks and it's just a really good business for us.

And it's focus, Dana, as you remember from the strategy, at that rural agricultural side that is not captured in the Dodge numbers. So, it's a part of the market that is really showing some nice growth. And we're really pleased with that acquisition -- with those two acquisitions.

Remind us, is that a backlog-driven business or is that -- it strikes me that it might be more immediate ship?

Pretty quick turn, yes.

But they do have backlog, like the buildings group has and -- yes, it's shorter duration, much shorter duration.

Almost two years in, what is your -- you've talked how you're very pleased with the volume growth, how would you describe your level of pleasure on the margin front?

Well, the margins have continued to be where we thought they're going to be and we get pull-through benefit on the components side from it as well. We had said a couple years ago that we hoped that would be, between the two businesses, $100 million in revenue and I think we're on track for achieving that.

Two last quickies. Would you quickly run through the tonnage details that you provided for the quarter? And as well, summarize some of the end markets that you address, storage, ag, roofing year-to-date and how they are lining up for the second half of the fiscal? As we said, the tons were for the quarter 26%.

And when we look at that spread of activity, it's pretty much across the sectors that Dodge reflects, with the exception of what we just said about the Heritage and steelbuilding.com, which is in the rural agricultural. But we've found that certainly, we are still strong in schools and in churches, we're strong in retail. We've been strong in leisure time, new facilities, field houses and what not. Probably a little slower on the manufacturing side, yet we see some pickup in the backlog. We've got a couple of nice projects there.

So, it's pretty much been across the gamut and pretty reflective with Dodge. I think Dodge is probably a little stronger on the hotel side than we are. But we've seen pretty steady gain across the piece and really throughout the country.

And what we're seeing now that we didn't see in our first fiscal quarter is there are more large buildings on the horizon. And then Ceco, the part of the RCC group, is, has always been a company that was focused on the larger buildings and they're doing a great job with that.

And I'm sorry, just to repeat, you said that the RCC tonnage affect on the second quarter was --?

It was less than 10%. I think if memory serves me, it was like 6.5% or something like that, Dana.

So, your tonnage ex the acquisition was up 19% to 20%.

Yes, that's in the ballpark.

Thank you.

[OPERATOR INSTRUCTIONS] We'll now go to Pamela Brown with Gabelli and Company.

Thanks. I just had one follow-up question regarding the sales in the components -- or the coating group to third parties. With that 30% increase, is that a large component of what drove the margin increase in that division up 240 basis points? And would that be something that you would be looking for going forward into the third quarter? Just looking at your third quarter last year in that segment, you were about 13%. And I'm just wondering where that should go with the increase in the third party sales?

Pamela, a lot of folks have heard this before, but it's the balance between the family tons and the third party tons. So, we get it in the family tons, even if it's at lower margins in terms of absorption. So, we get some benefit there. But to be clear, that gives our coating group the ability to go out and look very carefully at work and try to get the better margin work. And I think the guys are doing that. So, we expect that to continue. I'm not saying that the growth is going to continue at 30% but I'm saying that we expect to grow the third party sales.

And you also haven't seen the affect of the RCC tonnage that's going to hit our light gauge paint lines, which will have a tremendous affect on their margins.

But that would be considered within the same range of the family?

Yes.

Yes, it would. But just to give you kind of an example, our coating group ran, as we said, at about 59% utilization in the second quarter. And with what we just said on the third party sales plus the RCC, we're expecting that utilization to go up maybe as high as 75%, 77% in the third quarter and then bump again in the fourth quarter.

And then maybe I should follow-up with you on this. But is -- do you know what the capacity utilization was last year in the third quarter?

It was certainly a lot less than that. Because the market was still down. We hadn't -- the market in July of last year was down 8.5% on square footage. So I don't know precisely, but I know it was a lot less than that.

And then one last thing on the question, in terms of the increase in third party sales, is that something that's been just ramping up sequentially or is that something that you're noticing that bumped just in this quarter?

It's ramped.

No, it's ramping, but I didn't want to lead you to conclude that you can expect 30% every quarter improvement. But I'm just saying that the team is working very hard and they are doing a good job and getting some good traction.

Okay, thanks a lot.

Our next question is a follow-up from John Diffendal, BB&T Capital Markets.

Your inventories were up about $33.5 million sequentially, what's going on there? Is that having RCC in there?

Yes.

And where do you want that to end the year?

The tonnage at the end of the year is forecast to be just slightly up from the tonnage at the end of fiscal 2005. And slightly, I mean slightly.

So what that means, is the pick up that you saw in the quarter was largely the RCC inventory.

Right.

And we're also going to have a purchase that's a sizable one to kind of take advantage of our purchasing power. So, we'll probably see a pickup here in the next few weeks. But then as A.R. said, our goal is to bring that down, so we're pretty much where we were at the end of last year.

But you're saying tonnage, I don't have it in my head where pricing would be relative to -- well, on a dollar basis?

On a dollar basis.

It would be similar?

It should be similar.

To where you ended the year?

Yes.

Okay. And as far as -- and I'm not sure if you've thought much about this, because you haven't certainly done much. But for an '07, what should we be thinking about in terms of CapEx?

We're -- I spent a lot of time on the RCC CapEx last -- yesterday. And we don't have 2007 put together yet. But I think it will be in a similar range to NCI?

Right .

I don't mean -- I mean as a percentage, not as actual dollars.

Okay --.

We're still trying to stay in that range of kind of D&A. And we -- as we've said before, we're going to do some improvement on the roll formers in the Robertson-Ceco plants. We're going to be upgrading our five facilities on the buildings sides with plasma and laser cutters. But on balance, we're still going to try to keep it within a reasonable range.

They pretty much -- we told you all this, we started negotiations with RCC last October. They pretty much froze capital at that point.

Right.

And we're estimating that we'll spend 4 million in capital by the end of this fiscal year just on RCC.

Okay. So, what would that mean to your CapEx for this year you're expecting to end up?

Well, I think it's going to come in around 27 to 30 million.

27 to 30?

Yes.

Any updates you can give us on the Gulf Coast rebuilding, as we get farther along and more being done down there? Any -- how's the activity down in Louisiana, Mississippi, Texas coast for you?

Ceco is really strong in that market. They're in Columbus, Mississippi. They have a large plant in Columbus, Mississippi and they're really strong in that plant. The components group is shipping in there daily.

Is that roof, primarily?

Sorry?

Is that retrofit roof, activity?

Correct, correct. And the NCI Building group is selling in there. There is still -- I seen it on TV this week, they've not fixed a lot of that yet.

Right.

And they're still waiting on insurance claims, there's big projects that hadn't come through. But Ceco has landed some really nice work out of that. John, this is pretty interesting. We talk about the multi-brands and we really sell buildings under 11 different names now. Okay? And Star, which is a part of the Robertson-Ceco group, was on a $1 million project, a $1 million building. That was the steel in this building in California. And Metallic is really big in California. And Metallic didn't have a whiff of this job.

So that just lends to our theory that the more bait you have in the water, the more buildings that you're going to sell. And that was just really enlightening to me, in the fact that there could be a $1 million project going on in California and our Metallic group didn't have a sniff of it. And Star had so many orders coming in during May that if Metallic would have been on it, we'd have tried to not through pricing, but we'd have tried to swing the building to Metallic. Because they could have stood it more than Star because of all the influx of orders that Star had during May.

But it's just amazing what having -- we've got three more names in the market and that's three more baits in the water. And we're just going to catch more buildings, that's all there is to it.

You made the point, A.R., that you were looking to start to have that integration of Ceco's design and engineering by March of '07. I think as -- I made a point in one of my writings that if that goes towards improving that 300 basis point improvement in the NCI system margins, right?

Correct.

Which my memory was, it was like a fiscal '09 event, that, I think, accounted for about half of the synergies. Are you saying that some of that synergy improvement that was '09 would be there for the second half of '07?

What we're saying, John, is that the first piece of their engineering is this pricing module and kind of the [pony] design. That's something that our builders in the NC -- that's something on the -- with the NCI side that we really need.

Right.

We're accelerating that. So yes, we will see some benefit. How much of that 300 is there, I'm not going to speculate on. But I do know that once we get the detail design piece in, which will come in 2008, then we'll be there. But it is definitely an advance over what we had thought was possible, that's for sure.

And lastly, you mentioned -- you seemed to be indicating that May bookings and quotings, and correct me if I'm wrong, but overall, May bookings and quotings have picked up. Is any of this trying to anticipate expected higher steel costs in the second half, or do you think you may be drawing business out a little bit?

That's a good question. I think there's always a chance that some of that is occurring. But what I would counter with is that the pricing from the mills has been pretty steady in terms of giving advance knowledge or forecasting. But I think underlying whatever is advancing is that there is just real strong demand. The quoting activities front, we continue to see very good market out there.

Great, thank you.

And we'll now take a follow-up question from Dana Walker, Kalmar.

Two rifle shots here. You mentioned in the buildings group that you had a warranty rework issue, would you elaborate?

We always have warranty work, just by the fact that we produce 10,000 buildings a year. And we're working through some fixes to buildings, which are fairly a normal deal. We saw a little bit more of that in the quarter than we would -- that we historically have seen and we're on top of it.

Second item, you've, over time, been in a builder aggregation mode. You've been signing more dealers than you lose, you're a market share gainer. How busy are you in pursuit of new builders in a time like now when you're adding a significant new business to your group?

Dana, we stay after them. Okay? Because most of these are smaller general contractors and they fill up with work and then they bill the work. So, the Robertson-Ceco group actually has more builders because of Star than NCI Buildings group. But Star has a bunch of -- close to 700, but there are builders that are focused more on the small buildings, where Ceco and Metallic are focused more on the larger buildings. But we are continuously recruiting new builders.

And as we said before, Dana, one of the things that we discovered, was that we were -- before the acquisition, we weren't having a lot of success getting the Robertson-Ceco guys to come on board with us. And in large part, it's because of this engineering system and pricing system, which we're going to put into our group next year. We think that's not only going to help us recruit but certainly keep the best ones.

Thank you very much.

Yes, sir.

And at this time, we have no further questions. I'd like to turn the call back over for any additional or closing remarks.

We'd like to thank each and every one of you for participating today. We thank you for your continued interest in NCI and we look forward to having a great second half of the year. Thank you.

Once again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.