Core Natural Resources Inc (CNR) 2006 Q3 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 third quarter of fiscal 2006. This call is being recorded and a telephonic replay may be accessed through September 7th by dialing 719-457-0820 and entering access code 8245371. The replay will also be available at NCI's website, which is ncilp.com. The third quarter results were issued yesterday 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 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, Scott. And good morning, everyone, and welcome to the third quarter 2006 conference call. I'm pleased to have with me this morning Norm Chambers, our President and Chief Operating Officer; Frances Powell, our Chief Financial Officer and Treasurer; and Ken Maddox, our Executive Vice President of Administration. Ladies and gentlemen, I feel like that I just must say to you that the market for our product is good. Our business is sound. The assimilation of Robertson-Ceco Star Buildings, which we refer to as RCC, is on track, and our future looks bright.

Tons shipped for the third quarter were up nearly 40% over the same period last year. RCC contributed 21% of our tons shipped in the quarter. Our same-store tons shipped were up 10%. Revenue increased 54% compared to the third quarter of 2005. Same-store revenue increased nearly 12%. Our operating income was up 53.4% compared to the same period last year. Same-store operating income was up over 15%, and net income increased 47.6% compared to the third quarter of 2005. Now what did I just say? On our same-store tons shipped, we were up 10%, same-store revenue up 12%, and same-store operating income up over 15%, and we're very pleased with that result. Quoting activity remains strong. Our building backlog is up nearly 115% to $436 million over the same period last year. Same-store backlog is up 21% over the same period last year, and 20% sequentially. This supports our belief that we will continue our growth in 2007.

On a year-to-date basis, FW Dodge non-residential construction is up 3.7% in square feet, and 15% in dollar value. We are up 15.8% in tons shipped on a same-store basis, and up 17% in revenues. Now, on an as-reported basis, we are up year-to-date 29% in tons shipped, and 36% in revenues. Net income is up 27% year-to-date. While we still have much to accomplish, we believe we're on the correct path to increase our share of what we estimate to be a $40 billion 2006 market for non-residential buildings, including rural and agricultural. We believe that this will support our expected growth in profitability over the next few years.

Our Coaters group had an outstanding quarter, with operating income margins of 29%. As most of you know, our Coaters group benefits from supporting our internal demand for painted coils, as well as a continued successful focus on increasing their third party sales. Our Components group continues to generate over 50% of our operating income. As we expected, our Components group demonstrated commercial discipline, increasing it's operating margins on third party sales to 16% in the third quarter. Our Building group margins were dampened as expected by both the assimilation of RCC, and working with our customers to recover the steel price increase during the period. As we have previously explained, we will continue to assimilate RCC into our integrated business model, with our Coaters and Components group throughout our fiscal 2006. Additionally, we will continue to work with our customers to recover the steel price increases we have experienced during the year. We believe the Buildings group will be well positioned for fourth quarter 2006 and fiscal 2007.

Just a little about RCC. In our April the 30th, 2006, press release, we laid out our plan to capture an additional $6 million to $25 million in potential synergies, in addition to the accretive earnings generated by RCC. We have made good progress to date. We are pleased that our customers continue to support our effort as we work to bring their businesses greater value by improvement in quality and efficiency. We have made significant advances in bringing RCC the advantages of centralized procurement. We are now painting all of their light gauge coils for use as roof and wall panels for RCC and our Company-owned paint line. We will commence painting the RCC requirements for heavy gauge for use as structural framing, in other words Z's and C 's, during September of '06, with the transition complete during our first fiscal quarter of 2007. We've made good initial progress of providing additional NCI products, such as our Long Bay System, our standing seam roof systems, and architectural panels to RCC.

The opportunity to transfer the superior RCC engineering systems to NCI is one of our more significant synergies. We have 2 teams working diligently to thoroughly complete product, system, and engineering rationalization. And I feel like I must say that this is 2 separate teams; 1 working on products, 1 working on engineering. And there's no pride of [authorship]. We're just using the best practice, the best product, to get the best result for our customers, and they're really working great to get this done. And we expect these teams to complete their work before the end of this year. We have accelerated the technology transfer from RCC to NCI. We plan to rollout the front end module of their design and pricing system, called SBS, to NCI builders starting in 2007. With the detailed engineering system called EDS in place by early 2008, which is sooner than we had earlier told you. Ultimately, this will enable us to better utilize our well proven hub and spoke delivery system.

Just a little about plant utilization. Plant utilization came in at 78%, slightly ahead of our forecasted 76%. We continue to expect to be in the mid-80s range in the fourth quarter. If we achieve that goal, that will give us an annual 2006 estimated plant utilization of about 75%, up nearly 10 percentage points from 2005. Plant utilization is important, and is one of the key drivers for us to reach, and potentially surpass, profit and EBITDA margins earned at the top of the last cycle in 1999 and 2000.

Now, I want to take just a moment to share with you our view of the non-residential market cycle. The last cycle started in 1991 and continued through 2000. The current cycle started in 2004, after one of the worst downturns, 2001, 2003, in 30 years. Even with the FW Dodge forecast for growth in square feet of new construction in 2006 and 2007, the non-residential square footage would still be 13% below the levels of '99 and 2000. An interesting observation: during the last cycle of 1991 to 2000, there were 4 years, '92 through '96, below the previous top of the last cycle, and 4 years, '97 through 2000, above the previous top of the last cycle. And you know we don't have a crystal ball to see into the future. We believe from both macroeconomic considerations, i.e. modest economic growth, and micro economic considerations, is our builder network, we're in the early stages of recovery from the 2001 and 2003 downturn.

Just a little about cash. We remain committed to reduce our debt over the next 18 months by as much as $125 million. Additionally, we will also utilize free cash to repurchase shares of Company stock at appropriate opportunities. And I feel like that I need to tell you that we initiated the repayment of $25 million this morning. And as most of you know, that will take us 2 or 3 days to get that accomplished. While we're pleased with our third quarter results, we have much yet to do that can drive the levels of our performance to even greater heights. Our management team is committed to growing this Company, and the earnings of your Company. Now we would be happy to take your questions.

[OPERATOR INSTRUCTIONS] Arnie Ursaner, CJS Securities.

My question relates to the Engineered Building Systems segment. Your operating margin in that segment was materially lower than where it was last year. And I know you had earlier in the year talked about some projects that had impacted margin. And I think we were expecting a little more margin improvement this quarter, as those kind of problem projects worked themselves down. A) can you update us on the projects that were problematic? And perhaps discuss your view of margins in that segment going forward, please?

Yes. This is Norm, Arnie. What we have is, we absolutely had flushed through all of the problems that we talked about in the last quarter, last quarter. What we have seen, as I -- we've explained to people, is we expect to see some dampening in terms of the assimilation. A.R. talked about the 2 groups that we've got working on the products and the engineering. But really, the biggest thing is that it takes us longer to get our price increases through in our Buildings group than it does in our Components group. And I think that's the major factor here. And as you know in 2004, we had a very bad time getting that through, and almost earned no money in the second quarter of 2004. We're much better this year, and we expect to see that improvement start to come through in the fourth quarter.

My final question relates to your SG&A spending line, both as a percent of revenues year-over-year, and absolute dollars. Both had very substantial jumps. And I know obviously, Robertson has a major impact in that. But again, what do you see going forward in your ability to reduce your SG&A as a percent of revenue going forward?

We are committed, as we have said on every conference call, to have our SG&A back in line with our traditional levels of 15% to 16%. We took a charge of $1.3 million in the quarter for environmental. Which had we not taken that, we would have been at 15.7%. And we also have FAS in, which would have brought it down to 15.5% in a comparable basis. So what I'm telling you is that we're moving steadily to get that in line, in the face of wanting to and needing to spend some money to make sure that we accelerate the synergies.

And tax rate guidance for the year, please?

Frances Powell, our CFO, has just done a superb job of putting together a great team, and they showed some real, real good work in the quarter. But I think we're expecting to be a little better than 40, maybe at 39%.

Thank you very much.

John Diffendal, BB&T Capital Markets

Just taking that a step further, I mean, the tax rate was a little bit lower than it had been running in the quarter. I think you said in the release that you still expected, and that the guidance was based on 39. Does that -- 1) why was the rate lower and, 2) does that imply that it's going to be higher than 39 in the fourth quarter?

I can answer that for you, John. We had some one-time benefits at the state tax level that came through in this quarter, which adjusted the effective tax rate. And because of that, we also are seeing a lower effective rate for the full year, as you know. So pulling that together, that's really impacted that to like 3%.

All right, 3%. So the full rate, full guidance, or the full year would be expected to be what the 9 months rate is. Is that correct ?

We're going to be seeing, I think we put in the press release about 39%, maybe slightly lower for the full year.

Okay. All right. And Frances, can you give us, with the big intra-Company number in each of the categories, can you give us the sales number that strips that out? That kind of takes it back to the old sort of presentation, so we can kind of strip that out?

Yes, John. It's in there. It's on page -- .

I'll find it if it's there. I just didn't see it.

We purposely put it in so you guys would have that.

Oh, good. Okay.

And it's the old form, John, so it strips it out and shows the incremental and third party.

Great.

The operating income on third party.

Excellent. And the inventory number, I believe at the last quarter, you were expecting that to drop back down. It was a little bit higher at 175 million, I think. What do you expect to happen in the fourth quarter on inventories?

We've got an outrageous goal our team is working on, to try to achieve the same level as our inventory at the end of last year with Robertson-Ceco in this year. I don't think -- the guys are going to work like crazy to get there. I expect to see some substantial improvement in the fourth. And as I said, the goal is to really bring that down, and I think they will make significant improvements in that.

Great.

John, you know steel has been a little short. And we've had to make some one-off purchases to make sure that we had enough steel. I mean, it's up now, but it should be -- it should be down by the end of the fourth quarter. And you also have to take into consideration that we've had a 16% price increase on steel during the year.

Right. Which was a change. You were using 12% as your embedded assumption, and now it's 16.

Right. We experienced a steel increase in the third quarter of something around 8%. And we had in the previous 2 quarters, a quarter or 3 something and 4 something. But we think we're flat steel prices into our fourth quarter, and hopefully the first quarter of next year.

And this is the last question. You say you're ahead, and I know ahead on synergy implementation. But can you give us a number that you -- that you're sort of looking at? Do you feel like you're running at X sort of annualized synergies, that may be pulled in? Or shooting to be X by the end of the year? Anything you can kind of tell us about the current sort of run rate on synergies that you're seeing?

We're making good progress, but I'd much rather talk about it in retrospect. So I think at the end of the fourth quarter, we'll try to give you some sense of where we are on that. And of course, when we give our numbers for 2007, you'll be able to, I guess, surmise some of what we're going to have in the way of expected synergies.

Excellent. Thank you. Great quarter.

David Yuschak, Sanders Morris Harris.

Congratulations, guys, on a great quarter. Let's talk about cash flow first. Very strong quarter for cash flow. Was that in line with your expectations? Or were some -- I think basically net income and D&A accounted for about 30 of the 45 or so that you produced in the quarter. But I was just -- is there anything other extraordinary things that may have helped boost it more than what you might have thought?

Well, I mean, there's 2 things we're working on that you know. One is that our accounts receivable, the Robertson-Ceco side, has days receivable of about 36 days. And our guys have always been tied at 26 or 27 days. So we continue to try to work on that to improve it. And I think it's just as the Company has always been, A.R, huh?

John, you -- it's difficult to explain the effort that the team here has put together to bring these 2 companies together. And I've been in this industry almost 50 years, and there's no one ever consolidated the way we've consolidated, and made acquisitions the way that we've made acquisitions. And here we are, 3 -- and a little over 3 months, I guess we're about 4 months into it now. We've got all of their painted coils for light gauge in our coil paint lines. We've consolidated all of the colors. Everybody, Robertson-Ceco, the NCI Building group, MBCI, are all on the same color chart. This allows MBCI to be able to ship architectural and standing seam, and so on, for the Buildings group and the Robertson-Ceco Buildings group. We've made tremendous headway. I just can't tell you how hard these guys have worked to consolidate these products. This Company is going to be really hard to beat once all these products are consolidated, and once we have the NCI Buildings group on the RCC engineering and detailing systems, the pricing and -- system and so on. I just can't tell you what a great job our people have done to get to this -- make this happen.

What was suggested going into the fourth quarter with your guidance that cash flow, given some of the potential that you've mentioned, even with working capital, that the cash flow in the fourth quarter should be even more robust, to the point where that debt paydown could become sooner than later than maybe in some of your expectations for that even that 125, A.R.

I'd say you're spot on.

So the 125 could be a conservative number for debt pay down in the next 18 months, because that the kind of what I was thinking.

But we also said that we were going to buy back stock at the appropriate times, and during this first part of this quarter, we bought back quite a bit of stock.

Well you're basically getting close to that million share dilution from the offering, and when it gets to 65 or so -- so you're even thinking at this point in time, even if you do that million share buyback, that even at these prices, you may be willing to buy more back, even though you kind of got that hurdle for that million share potential dilution off the stock?

Well the main thing is, as A.R. said, we initiated today to pay back $25 million in our term loan B. That's what we have done today -- we're in the process of doing today. So we've got to stay focused, as you know, Dave, on paying down debt. And -- but as A.R. also said, we're going to balance that when we can at the right times, appropriate times, and buy back stock.

Okay.

We're still going to have some CapEx next year for sure. There's some stuff we're got to spend. So we've got to be frugal. And I don't want to have Frances give me a frown, if I talk about spending all of her money.

What kind of -- do you have any idea about capital spending for next year then, at this point?

It's going to probably be D&A plus some, but we'll give clear guidance on that when we finish our process here in October.

But it's not going to be materially above D&A at this point, you're thinking?

I don't think so. But I want to reserve the case until we see all of the planning done, because A.R. has got some great ideas on what we need to do. So we're going to wait and go through all of that.

There's some really nice opportunities for growth, okay, that we just can't speak about right this second. But there's some nice opportunities for growth, and we want to take advantage of those.

On backlog, backlog should become more important because of Ceco, where backlog may not have been as important to you overall until Ceco. Is that fair to say?

Well, backlog is always important in the engineering construction world, as you know, David. And you've got a situation where it's a combination of quoting activity, which starts at the top of the funnel, then to orders, and then to contracts, which goes into backlog. And in our quoting activity, when we talk about it, it gives us a little further distant view. Our backlog we say, normally gives us 6 months of visibility. Our quoting probably gets us out there 9, maybe 12 months, we're looking at stuff that be well in the tail end of 2007. So, it's a combination of those 2 things that are important to us. And translating good quoting activity into good contracts is the name of the game.

But 15% growth in backlog sequentially in a period where business activity is seasonally pretty strong, is that one of your best performances on backlog additions that you have seen here historically, or ever, or whatever? Give me a sense.

It's very strong. It's very good. We're really pleased with our backlog growth, and the guys and gals have done just a first class job. And as you know from the past when A.R. has spoken about this, we really -- we don't pay any bonuses on backlog. So we really try to be strict and scrutinize and make sure we're only keeping good contracts in there.

And then customer attrition, you were concerned maybe losing 10% of the revenue off of Ceco. Could you give us an update on that?

Just as A.R. said -- .

It does not appear that we've lost any customers from either of Buildings group. And we have a quarterly review, which went on last week. And the Buildings group, each of the Building segments was in Tuesday. Nobody knows of any substantial -- they don't know of any customers they've lost.

And in fact, we may be picking some up.

That's right.

And then one last question on this whole steel pricing issue. A couple years ago when business wasn't as robust on tons shipped, you was able to at lease pass price increases through. That was that period of very robust steel price increases. You guys basically did well on just shipping steel and processing [inaudible] and the margin you've captured off that. Is it getting tougher, because I think your steel pricing assumptions right now are higher than what you maybe initially thought at the beginning of the year? Is it -- the ability to pass that on quick enough, is that just getting tougher to do? And if so, why?

It's tougher in the Buildings business. And as Norm said earlier, last year in the second quarter in 2004, we didn't make any money to speak of in the Buildings group, because we didn't get the -- we couldn't get the price increases passed through. Now, we're doing a much better job today. But you still have to take into consideration that we deal with a lot of small contractors, and you could push a price increase through that could break them. And so a lot of times we wind up splitting a price increase. Sometimes we don't get any of the price increase with some of those smaller builders. Even a larger builder sometimes is in a bind on a job. And it's basically -- it could be a government job, where just the government just won't allow for an increase. And so in the Components group, it's pretty easy to get the price increases through, quickly. But in the Buildings group, it's more of a steady, systematic process to get those price increases through.

And again, just to add to that, if you look at 2004 in our investor presentation, I've got a chart in here that shows the profit after-tax in the fourth quarter of 2004. And frankly, our Coating group and Components group carried us for the first quarters of that year. And then the Buildings group had a tremendous fourth quarter. We're not suggesting that kind of magnitude for this fourth quarter, but I -- but we are expecting that we will pick up some of the lag in getting the prices through.

But David, our presidents of the different buildings groups, Star and Ceco and Metallic and ANS and Mesco, they have been extremely disciplined in putting through these price increases.

Well I would think ultimately though, that division, that segment could be producing 13%, 15% margins, long term.

You know, Dave, we're working in that direction and as A.R. said earlier, this product consolidation in the engineering piece is huge to us.

And that will get you there?

We couldn't get there without it, let's put it that way.

Okay, thanks a lot.

Brendan Hartman, CRM.

Good morning, guys. Nice quarter.

Thank you.

I'm glad you all survived the heat wave you've been having down there in Texas for the last couple of weeks.

We had a cold front come through yesterday. I think it was 96.

Good stuff. A.R., can we go back to your opening comments? I'm just a little confused on the numbers when you talked about the increase in tons shipped, and then same-store tons up 10%, same-store revenues up 12%. That implies only a 2% pricing. What am I missing there? Is that a blend of the different segments?

I think you're right on. But, we had a 15% increase in operating income, which means that we did a good job. Okay, the extra volume helped us.

Yes.

Basically on the Components side, and we did a good job with controlling cost.

Okay, so the fact that the same-store revenues were up only 200 basis points ahead of same-store tons, goes to the fact that the Components group would obviously be higher than that, and the Buildings group would be below that?

Correct.

Okay. Got you. And then A.R., can we just talk a little bit more about the steel market for a second? It seems to me you've got auto production getting cut pretty dramatically here in North America. You've got residential housing rolling over, new construction rolling over pretty hard, and obviously your non-res construction is picking up. But it's not -- you know what I mean, if the Dodge numbers are what, 4% [inaudible] in tons year-to-date. So wouldn't you expect at some point for things to loosen up, and for your steel costs to rollover?

You know, one of the things that they're doing, is they are shutting down production to keep supply and demand on an even keel. And that's the best picture that I can paint for you, and that is that as the demand goes down, they shut down production. We've got furnaces shut down in this country right now.

And one of the things we've been doing, as you know, we try to balance our foreign steel purchases as well. So we -- Ken Maddox and his team are in the market all the time trying to make sure that we're getting the best position we can get. So we're going to keep working that. But I think that most of us feel that we would probably see flattish prices going in 2007, which for us is good news.

You know, I would agree with that. It was just A.R.'s comment about there was some spot shortages, or use some one-off purchases in there, I would just think that's got to ease up. Are you doing anything differently, guys, in terms of your contracts, or the way you're purchasing things now that you're a larger entity and you continue to grow?

Well we're certainly leveraging that, and we're beating people up in the nicest possible way. But Ken and his team are very aggressive, and I'd say that we tend not to go long. We like to match up our needs with our supply quarter on quarter, but we're spending a little more time looking at some foreign stuff, as well.

Okay, thanks a lot, guys. Nice work.

Jason Feldman, UBS.

Back to the question of the difference between tons shipped and revenue. Overall, tons shipped were up 40%, revenue up 54. The 14 percentage point difference, do you have a sense of how it was split between sustainable cost price increases and steel pass throughs?

Yes, we can probably give you some sense on volume and price. Mark, do you have that? Just one second, Jason.

Sure, thank you.

I think if you look at on a price and volume -- well you look at really 3 ways. 78% was probably the Robertson-Ceco add. Change in volume was about 18%. And change due to price, about 4%. And that 4% goes back to what we just said with Brendan, that A.R. said, was that our Components group was able to effect their prices a little more effectively than our Buildings group, and that's the blend.

Okay, but so that 4% price though is, in theory, kind of sustainable price increases, as opposed to just passing on the extra steel cost?

Did you say sustainable?

Yes.

Yes it is sustainable, and that's what we continue to do through the fourth quarter.

Okay. And then one more question, I guess somewhat related to that. In terms of the industry guidance relative to the last time you gave guidance, it seems like your view of the industry is up a little bit higher, 6% versus 5%, but your estimate for total tons shipped is unchanged. Is it just that it was such a small difference it didn't flow through, or does that reflect some difference in your view of how quickly you can gain market share or something?

Well, 25% growth for the year is pretty doggone good.

Agreed.

And we would -- we'll look in retrospect to see if we beat that or didn't at the fourth quarter. But you know what I think you know, I believe you know, that we're going to be doing everything we can to maximize our shipments.

Okay. Last 2 questions are just real quick housekeeping. What share count are you using in the full year guidance?

What's the share count for the full year in guidance?

20,000,400 before the convert.

Before the convert? Okay, and if you have the year-to-date average stock price that you used for the convert calculation?

Yes, I do. Hold on a second. 52 average price is -- .

But that's through today. That's through the end of the third quarter.

Yes, 52.45.

52.25. I'm sorry, I meant through the end of the third quarter, that's right, I know I said year-to-date. Okay. Thanks a lot. I appreciate it.

Jason, she said 52.45.

Oh, 45. I'm sorry.

And for the quarter, it's 56.37.

56.37 for the third quarter. Got it. Thank you.

Fritz von Carp, Sage Asset Management.

Let me ask a couple questions. First, what was the -- you said the organic backlog growth. I want to make sure I have that right, because somebody else said something different in a question. It was 21% year-over-year, and how much was it quarter-to-quarter?

It was 21% year-over-year, and 20% sequentially.

Okay, so it was 20%, not 15 sequentially? Okay, thank you.

That's the same-store, now.

Yes, organic, right, same-store, right. Thank you. Also, I wanted to -- you made some comments in your opening remarks about margins relative to the last peak of margins. And as I just pull them out, it looks like your operating margin was let's say a little above 12% back before the last recession. Could you just -- you said -- I thought you said you think you can get back to that, and over what time frame? And what are the issues around that?

What we have said, and said for the last 18 months to 24 months, is that we're committed to meeting or surpassing the margins at EBITDA and operating income level that you'll see in the investor presentation on page 34, that we expect it to be above that when we can have sustainable plant utilization above 80%. That's why you hear us speak about our plant utilization. Furthermore, we believe that it only requires modest growth, and that's what we talk about in Dodge numbers with the economy, 2, 3% is fine. And we're saying that if we continue to operate doing the things that A.R. has talked about on the synergy side, we've got a very good opportunity over a number of years. We never said by year such and such we're going to be at that level. But we need a couple years of growth, and we think that we can be moving well in that direction.

And one last question on the margins, if you don't mind. In the quarter, in response to a question, you said that why the margin wasn't up more sequentially after the bad projects were gone. And you said maybe integration was part of that? Are you saying that you're spending a little bit more on integration expenses than you thought, or what did you mean by that exactly?

Well, yes, we're expensing all of these committee meetings on the engineering and on the products. That's an expense. You can't capitalize that. So all of that is an expense in the quarter that we've had. And this is something that you just can't do over the phone. You just have to get people together to do that. And we had like 30 or 40 at the training center here, one group on the engineering and one group on the products. And we're making great headway with that. So that's just an expense that's in the quarter.

Sure, but I mean none of that should have been unexpected, however, it doesn't seem to me.

Well what's unexpected is that, as we got into this we saw opportunities to accelerate this. These particular things we're talking about, we had said on the April 30th call that we didn't expect to really get to, to 2008 and 2009. When we look at what the magnitude of this could be for this Company, we've decided to accelerate that effort. So we're definitely spending more than we initially had thought to get that done. But I want to make sure that you don't leave with the wrong impression. The biggest thing that dampens the margins in the Buildings group, as A.R. has said, is the ability to work with our builders to pass these costs on. And we've done a better job in 2006 than we did in 2004, but we're still working that piece. And that's why we're saying we should start to see some improvement in the fourth quarter.

Great. Thank you, gentlemen.

Cliff Walsh, Sidoti & Co.

Can you comment on kind of the end market breakdown where you're seeing strength versus weakness, and maybe what geographic regions are performing better than others?

You know, Cliff, we started to get our hands around this, but it's interesting that if you look kind of year-to-date at some of the numbers -- and it's not -- it's very similar to Dodge, when you look at Dodge numbers. About 70% of what we do is in the commercial and industrial. And as you know, our builders work in all of the different segments, and production and manufacturing really have been quite strong for us. Warehousing and storage continues to be strong for us. But the other part is we've got about 15% of our activity is in -- is with the institutional side, the educational, [inaudible] and the government. And that is on a different cycle than the industrial and commercial, and continues to be very good for us. And then of course, we have the agricultural piece which is probably just under 15% of our activity, which is where we've been expanding, with both our ABC line, as well as Heritage and steelbuilding.com and our Metal Depots, as well.

Okay. And with respect to geography, how did you perform?

We're all over the country. But we've always been real strong in the Southwest, Southeast, stronger than Northeast really, to a large extent. A.R., do you want to shed light on that?

The best way I think I could describe this, is we do not see what we would call a weakening in any of the markets at this time. It's -- the West Coast is still strong. We're going to have a record year on the West Coast. And we picked up another plant. There's a Star plant in Lockeford, California. We don't see -- a lot of times you'll see that maybe the Southeast is a little weaker, the Midwest is weak or something. But right this minute, we don't see a weakening any place.

Okay, great. Thank you very much, guys.

Dana Walker, Kalmar Investments

Good morning. I have a few. Aside from the environmental charge, were there other one-timers In the quarter? And that environmental charge, where would it fall segment-wise? And I presume that would be in SG&A?

It's in SG&A, and that's for the environmental problem that we have at the metal prep plant in Houston. We feel like this money is -- will be recoverable. But we also are obligated to accrue that money, since we don't have iron clad facts that it will be recoverable.

But I think the important thing is, on this environmental piece, is it's complete. It's over. It's finished. We finished all of the work. The state is pending to give us a clean bill of health. And now we start the litigation. Because our view is that all of this was there prior to our purchasing. And in that, we picked up a one-time on the state tax thing of 1.3, Dana. Of course, we had FAS 123, which is an ongoing, but that was really 1.3 million. We had some bonus accrual as you would expect as we go along. We have continued to have increased spend in our IT side on our disaster recovery, that was about 0.5 million. And while we're never -- how should I say this? We're never soft on ourselves in terms of our cost and our SG&A, the heck of it is that we're spending some money in areas that we think we need to spend it in.

That metal prep plant, remind us, is that a Components operation or a Buildings operation?

That's a heavy gauge for purlins and girts -- for secondary framing line that we've owned since '87. We found iron clad proof of who caused the environmental problems, and we feel like that it will be recoverable.

Understood. The Coatings business which had such glorious bottom line contribution, do you consider that to be unsustainable strength?

No. No. It will be -- those coil paint lines, when they run reasonably close to full, they make really, really nice returns. And that was one of the synergies of Robertson-Ceco, to be able to put their tonnage into our coil paint lines, and by accelerating that process, it certainly helped. Now, we had almost 100% of their painted requirements in one of our coil paint lines July the 1st. That made a tremendous difference in that operation, as the costs in the coil paint line are mostly all fixed. The variable is paint, you know? And when you can run that thing -- that's, in the line we put it in, is the fastest coil paint line in the world. And I mean, it's just -- when you run it 24/7, it's a money making machine.

A.R, you described how you are moving heavy gauge in. You had light gauge in. Would that suggest that the Coatings strength ought to become stronger still? Because you haven't had all of those things running thus far?

We'll have the 2 heavy gauge lines running full by the end of the first quarter of fiscal '07. We found that the machinery at Robertson-Ceco would not run the pre-painted heavy gauge without some modifications. And that's what we're working on today. And some of those modifications have taken a little longer than we would have liked, but we're not trying to get there for today. We're trying to get there for the long pull.

When you folks talk about how you expect sequentially your Buildings margin to improve, the margin in the most recent quarter was roughly 7.7 or 7.8. Are we talking about hundreds of basis points of sequential improvement, or something more modest?

I think in the fourth quarter it will be something more modest, but it wouldn't surprise me if it was 100 basis points or more. I'm going to be disappointed if it's not 100 basis points or more.

Yes, me too. You know, Dana, just to get back to a previous point you were making, one of the things that we look to see as we get our utilization efforts are incremental, and our Components group had very good incremental margins of up 33%. Our Coating, 40%. And that's the kind -- that's what we've been, if you will, talking about for the last 18 months or 2 years, that utilization it can bring if we can sustain it.

What, if any, evidence do you see thus far that the RCC builders are beginning to help your Components volumes?

We haven't seen a lot of that, but we've seen some. And this deal is only 4 months old. And we're working that, and working it hard, and we have already shipped and helped the RCC Buildings group out of the Components. But that's inter-segment sales. But RCC is absolutely buying into the hub and spoke philosophy. They love what they see out of the Components group, and the more products that they have. They willingly -- they suggested going to the MBCI colors, that's what everybody settled on. It's just been remarkable how this has all come together. And you've watched this industry for a long time, and we've been very successful over the years doing this and nobody else has been able to do it. So we're really proud of that.

We're very pleased here. Thank you very much.

Stan Westhoff, Paradigm Capital Management.

Excellent quarter. I've just got a quick question about with the RCC acquisitions information. Can you give me a breakout of like the revenues, what the RCC contributed?

No. We're not going to do that. We're going to -- because of reporting, we don't want to go in that direction because we end up in a situation where we might have to separate it out, and we don't want to do that. But I think in the script, we tried to give you some same-store information.

Yes.

That would hopefully help you get there. I don't mean to be difficult, but we really want to try to avoid that if we can.

That's quite all right. All right, that was it.

Joanie Jensen, McMahan Securities.

Thank you, but my questions have been answered.

John Diffendal, BB&T Capital Markets.

Just wanted to make sure I'm clear. You mentioned that a big piece of the integration is moving over the engineering and design stuff from RCC to NCI. And my memory before was that in the last quarter, you were expecting to have that -- it was going to be earlier, but in the second half of fiscal '07. How is -- it seems like you're breaking down in 2 pieces now that portion. I just want to make sure I'm clear on what the timing of those -- I mean maybe a little greater description of the 2 pieces, which I think you called EDS and SDS or something, what the difference is, and what the timing differences from what your earlier thought was.

We had said all along that we were bringing what I refer to as the front end. This is the pricing and estimating piece which is the SBS. And we are on schedule to do that and get that in as early as we can in 2007.

But is that saying -- before you were saying that was going to be in place to your dealers in the second half of the fiscal year. Now are you saying that that's going to be as early as the start of the fiscal year?

No. No, we're not saying that. And the reason why, because it links in to the detail piece, which is the EDS piece, and what we've effectively done is accelerated the EDS piece by virtue of the work that A.R. talked about in the reconciliation of products in the engineering side. So what we're attempting do, is to bring the whole system in ahead of schedule, but we'll still lead with the SBS, which is the pricing, which is the estimating piece, as early as we can in 2007. Our 2007, our fiscal 2007.

Right. And the earlier expectation, I seem to remember there was a March date or something of that nature. Is that what you were looking to do?

We're still about online with that. But as I said, I think when we've dug into this, we now appreciate the importance of accelerating this detail piece as well.

Yes, the whole package?

Right.

I've got you. Great. Thank you very much.

Tim Curro, Value Holdings.

The increase in manufacturing and distribution facilities from 37 at year-end to 44, is that all RCC-related?

Yes. We picked up 7 manufacturing plants with RCC -- 6, sorry, 6. 4 in the U.S, 1 in Canada -- sorry, 5 in the U.S, 1 in Canada.

I see. Are you planning to consolidate any of those, or are you happy with the 44?

No, we need all of the capacity that we have right now, and we would probably look over time at maybe moving some stuff around. But by and large, we need all of the capacity that we have with this acquisition.

[OPERATOR INSTRUCTIONS] Arnie Ursaner, CJS Securities.

A couple of follow-up questions, if I can. What percent of your work right now is done with steel surcharges?

Steel surcharges? Well, there are no steel surcharges this year, Arnie, from the steel mills.

No, I'm talking about from you to your customers, meaning are you trying to implement specific steel surcharges with any of your customers?

It's not so much steel surcharge as it is increase in the cost of what we're providing to them by virtue of the steel price increases.

Okay. And have you actually made any offshore purchases to dramatically -- to lower your cost of purchasing steel?

We have. We've -- Ken and the team have done a great job. And they have made some purchases of Korean and Chinese steel. But we again , as you know, we try to stay kind of modest on that, and we try not to get too long. But we've been able to take some positions that are going to help us.

Okay, and my final questions are both related to utilization. Can you comment on the trend you saw during the quarter, and also update us on what you're seeing in August? In other words, you gave us the full quarter utilization, but can you give us any feel for how that evolved during the period of the quarter, and also for what we're seeing in August? And a follow-up to that will be what utilization specifically is embedded in your guidance?

Let me start with the last one first, and A.R. will come in as well. We're still on a guidance of mid-80s for the fourth quarter.

Okay.

Which will get -- which will, if we achieve that, will get, as A.R. said in the script, will give us a 10 point improvement over last year. It will give us in the mid 70s blended for the year versus mid 60s in the past year.

Okay.

We always -- I shouldn't say always, but it seems like we're geared up to push, push, push, and our last month of the quarter seems to always be a big month. Do you have a feeling on that, A.R?

Well, I think the best thing that I can tell you is that the quote level is still good, the backlog is up, the plants are scheduled full through the fourth quarter, we're trying to push additional work in where what we can, engineering and detailing is still the bottleneck in this industry, not only for us, but for everybody in the industry. And that's why we're pushing so hard to get the RCC programs into the NCI Buildings group. And I think it's also important to say that plant utilization, and the way we figure plant utilization, is based on the number of shifts that we run, and we could -- we wouldn't want to leave you guys thinking that we was going to run out of capacity. That's based on the number of shifts that we run today. That's the way we compute plant utilization. If demand went up substantially and we had the engineering detailing programs to push it through, we could add more shifts and increase capacity.

Okay, thank you.

David Yuschak, Sanders, Morris, Harris.

As far as the -- given a very positive non-residential construction market, is it possible given decent weather, that the seasonally slower first half may not be as seasonally slow, particularly as you take a look at the bidding process that's going on out there, and the interest in projects?

Well you know, Dave, we're going to be comping it back against 2 very good quarters for us, first and second of this year. We were up 20% each quarter. But I certainly like our chances, given our backlog and the quoting activity. We would like to see everything continue to rise. But as you know in the past, our first 2 quarters are seasonally slow. If we get blessed with some reasonable weather and things work through, maybe it will be a little softening.

Well, the first 2 quarters will be better because we didn't have RCC in the first 2 quarters of last year. So they are definitely going to be better than the first 2 quarters of '06, but there's a lot of factors that play on that.

Well, that's why I was just kind of curious about the incremental growth both off of the RCC, as well as your own operation. It would seem to me that we got a good shot at a pretty good first half, just because of the increased demands out there, given favorable weather conditions. And I just was just kind of curious as you looked at the bidding activity, that could potentially suggest that, isn't that right?

Quoting activity, when quoting activity is strong, that's always a good indication.

Now, is the quoting activity right now, because you're going to be going into the seasonally slower first half, is that a lot better than it has been in the past, as well?

It just seems real steady to us. I mean, we really, I think that we're pleased that it's good, steady, strong, you know? That it's not a tidal wave. It's not like the market is taking off. As A.R. said, gee, we're still 13% below the top of the last market and square footage, Dave. You've been pointing that out for some months. There's still a lot of good growth left, we think.

Well I've always preferred a good, steady solid growth than boom/bust because investors don't pay much for the boom/bust. Appreciate it. Thanks.

That does conclude the question-and-answer session. I'll turn the call back over to Mr. A.R. Ginn for additional or closing remarks.

We certainly anticipate -- appreciate, excuse me, your questions today. We hope we answered them in a satisfactory manner. And if you have any further questions, you certainly feel free to call Norm. Our Board meeting commences right after this call, so it will be later this afternoon or tomorrow before he can be answering those calls. But we certainly appreciate your interest in NCI, and thank you for joining us on the call today.

That does conclude today's conference call. You may disconnect at this time.