Core Natural Resources Inc (CNR) 2007 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 2007.

This call is being recorded and a telephonic replay may be accessed through September 12th by dialing 719-457-0820 and entering access code 8824884. The replay will also be available at NCI's Web site 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 Web site 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 President and Chief Executive Officer, Mr. Norm Chambers. Please go ahead, sir.

Thanks, Scott. Good morning, everyone, and welcome to our third quarter 2007 conference call.

I'm pleased to have with me this morning A. R. Ginn, our Chairman, Frances Hawes, our Chief Financial Officer, Ken Maddox, our Executive Vice President of Administration and Mark Johnson, our Vice President of Accounting.

The purpose of today's conference call is to first report to you on how we performed against the five specific drivers we identified at the end of our Q2 to ensure recovery from our weak performance during the first half of our fiscal year. Second, to explain the actions we are taking to deliver the best possible result for the final quarter of our fiscal 2007. And third, review our plans for driving growth in earnings in the intermediate and longer-term.

Before diving into the specifics of our performance, I'd like to update you on the nonresidential market and specifically the low-rise sector which is our primary focus. The nonresidential market continues to demonstrate renewed strength consistent with our expectations for the year.

The American Institute of Architects Billing and Inquiry survey posted numbers in July that were the second highest since the survey's inception in 1995. As in the past from this high level of architectural activity, we would expect to see strong quoting activity for our businesses through our fourth quarter. Therefore, we should see growth in our backlog at fiscal year '07 compared to the prior year backlog of $373.5 million.

A concern we have is the potential for disruption as a result of the liquidity issues affecting of funding for the nonresidential construction projects. We have witnessed very little negative impact to our shipping schedules as a result of project funding difficulties.

McGraw-Hill Dodge reported that nonresidential new construction starts measured by square feet was down some 7.2% for the calendar year through 2007. Through July, I should say, compared to the first seven months of 2006.

McGraw-Hill is forecasting that this deficit will be largely erased by calendar year-end to finish the year about flat with 2006. Achieving flat growth for 2006 would mean strong demand for our products in the last five months of the calendar year.

When we look at the Dodge data for our fiscal year starting in November of 2006 through July of 2007, the low-rise nonresidential construction new starts defined by buildings five stories and less is down 7.4% compared to the same period in our fiscal 2006.

It should be noted that nonresidential starts measured in square feet during our fiscal Q3 '06 was the highest level in 19 quarters. Our current quoting activity remains strong with larger, more complex buildings consistent with the architectural survey data and the rebound forecast by McGraw-Hill.

Our comparable backlog at the end of fiscal Q3 of $453 million is up slightly from our record backlog at the end of Q2 '07 of $449 million. Since we are in the busiest time of our year in which we are burning off our backlog, it would not be unusual for our sequential backlog between Q2 and Q3 to actually go down, therefore, we're taking a good backlog into our final quarter of 2007.

We have the same challenge that we had at the end of Q2 in that we have a higher portion of permit and approval work in our backlog as a result of our backlog being populated by larger, more complex buildings. We are working with our builders to expedite the permitting process and assisting them in starting the process to secure permits much earlier than has historically been the case.

Another observation of our backlog is that we serve diverse end markets. Within the broader industrial and commercial institutional and agricultural rural sectors, we have more than compensated for slowness in smaller retail type of buildings by winning work with a larger, more complex manufacturing, assembly, processing plants in addition to facilities in mining and engineering, I'm sorry in energy, in aviation, educational and recreational segments.

Through our strategic initiatives to develop this diversification over a number of years, we have broadened our end markets and growth potential while cushioning the impact of weakness in any particular industry or geographic market.

Third quarter. During our conference call at the end of Q2, we stated that we must achieve positive results in five key areas to deliver a strong second half performance. One, our Engineered Buildings group had to overcome a higher level of permit and approval work in their backlog to manufacture and ship the forecasted number of buildings.

Two, that our Engineered Buildings group had to demonstrate sequential improvement in operating income of margins consistent with our goal to improve the year-over-year operating income margins by 100 basis points to 10.2%. They achieved both results.

Sequential revenue up from $209.2 million to $244.3, some 17%. Operating income profit margins improved sequentially by 600 basis points and versus Q3 of '06 by 500 basis points to 13%, or $30.6 million.

Three, that our Metal Coil Coating group had to continue to capture the synergies from the Robertson-Ceco acquisition that resulted from higher base-loading of their coating facilities to achieve year-over-year 400 basis points in improvement in operating margins to 26% for the fiscal year-end of 2007. They achieved this result by generating operating income margins of 35% in Q3 on higher than expected levels of toll coating revenue.

Four, that our discipline to reduce our 2007 budgeted SG&A had to continue even in the face of seasonally busy second half of the year. We achieved that result. Our Q3 SG&A was flat with Q2 and 6.1% lower in Q3 of '06.

Five, that our Metal Components group had to improve from a weak Q2 '07. They achieved this result. The sequential sales improved by 21% to $166.3 million. Their operating income improved by 85% to a 10% margin.

Since the low point in February, we have seen continued, steady improvement and tons shipped and pricing. I realize that while I'm proud of the sequential improvement, we're really only flat with Q3 '06. In fact, sales are 3.5% lower in the same period last year.

As I said earlier, while we are comparing back to a Q3 '06 which had the highest levels of activity in 19 quarters, it demonstrated we can improve margins and manage our costs. As a result of managing our margin and costs, our cash flow generation improved in Q3.

Sequentially, our inventories were reduced by $21 million. We used our cash flow to repay $44 million in debt we had incurred on our revolving credit facility in Q2. We also used cash to fund $11 million in Cap Ex for the quarter and in July and August, we purchased 247,500 shares of our stock at an average value of $47.58, or $11.8 million.

Before I turn to the fourth quarter, I will comment on tons shipped and plant utilization. Overall, our tons shipped increased sequentially from Q2 by 16%. The Coating group was up 10% on third party sales. The Component's group was up 19% and the Buildings group was up 17%.

Comparing Q2 '07 with Q3 '06, the Company was off 6%. The Coating group was off 2% on third party sales. The Components group was off 9% and the Buildings group was off 5%.

It should be noted that low-rise market for fiscal Q3 '07 compared to fiscal Q3 '06 was off 15.7%, but again, fiscal Q3 '06 was an extraordinary quarter for nonresidential low-rise construction styles. Fiscal year-to-date, the Company is up 1% largely as a result of the Robertson-Ceco acquisition while the low-rise nonresidential market to fiscal year-to-date is down 7.4%.

Overall plant utilization is at 75% for the quarter compared to 62% in Q2 and 78% in Q3 of '06. In the quarter, Coatings utilization was at 79%, Components at 72%, and Buildings at 76%. We expect to be in the mid 80% range in Q4 of this year.

Now, we'll turn our focus to the fourth quarter. In order to produce the best results we can in the fourth quarter, we must stay focused on execution. Our fourth quarter has historically been our strongest for performance in part due to the seasonality of construction market and in part the desire of all employees to earn a bonus.

While I cannot guarantee where we'll end up, I can guarantee that our collective behavior will be consistent with producing the very best result we can. Much like Q3, our Buildings Group has to ship its backlog, successfully dealing with permitting issues and potential slippage due to project funding constraints.

They have to continue to demonstrate improvement in margins to achieve our expected 100 base points of improvement year-on-year. Additionally, they have to win their share of new work to add to the top line improvement in Q4 while generating a solid backlog to take into fiscal 2008.

Our Coatings group has to increase package sales while continuing to capture the base-loading synergies from the Robertson-Ceco acquisition to end the year powerfully with margins north of 26%.

As we have all year, we need to stay disciplined in managing our SG&A costs. We believe we should end the year with a total SG&A cost at about $280 million down some $30 million from our budgeted levels of $311 million.

Our Components group needs to produce a big quarter with sequential improvement similar to that which they produced in Q3 to get back to the historic levels of profitability.

Finally, we will continue to review the performance of all of our business segments to ensure that the business segments we have will enhance our ability to grow our earnings over time. As we've done in the past, we'll always streamline our operations to produce the best possible results. This is consistent with our long-term growth strategy we expect to deliver through organic growth and accretive acquisitions.

Intermediate and long-term, while all the focus I've explained that we have on the short-term and it is critically important that our shareholders understand that we are working on external and internal initiatives to grow our EPS in the longer-term. Externally, our Buildings group will continue to recruit new builders to supplement our geographic footprint throughout the United States and Canada.

We will position our various building solutions in end markets such as aviation and energy efficient green building applications. This will enable us to proactively create opportunities for our builder network.

Our Components group will continue to roll out its retail initiative with our retail partner to potentially some 300 stores across the nation. Additionally, we'll increase our manufacturing capacity in insulated panel systems. This product offers excellent growth potential for many years to come.

Our retrofit roofing initiative, sound wall and Energy Star cool roofing provides solid product growth which will translate into greater levels of utilization for our Components plans. Our Coatings group will increase package sales to corporate accounts which should enhance their top line growth while benefiting from the base-loading from internal demand.

Internally, our drive for greater efficiency rests on our ability to implement IT systems. Our sole focus is to drive improved earnings through technology applications. The engineering systems integration from Robertson-Ceco goes well and to plan. Oracle 11i implementation continues which will lead to cost savings along our supply chain management.

Our Web-based order entry system will greatly improve our customer's ability to reduce time and cost when purchasing our products. Greater value to our customers and great efficiency for us will deliver growth in earnings.

In conclusion, while reconfirming our guidance of $3.30 to $3.80 for fiscal 2007, we are well positioned from all perspectives to produce good earnings even in the face of uncertainty surrounding the economy and liquidity.

Our cash flow is strong. Our balance sheet is in order. And we are a company committed to creating value for our shareholders by improving our bottom line results.

Thank you for your support. We're now ready to take your questions.

Thank you, Mr. Chambers. (OPERATOR INSTRUCTIONS) And our first question will come from Arnold Ursaner from CJS securities.

Good morning, Norm. This is Casey Flavin standing in for Arnie.

Yes, good morning.

In terms of your, [are] backlog and your quoting activity continues to be strong, can you provide a little more detail on the mix of jobs for production there in your backlog? And is this the primary reason for your conservative view for the remainder of the year?

Well, we certainly are happy with our quoting activity and I think it's important to appreciate that we have historically seen a pretty strong correlation between what the Americans (inaudible) architects see and quoting activity we might see 30 to 60 days out.

Quoting activity is strong. It's largely driven through plant expansions, the energy sector continues to be strong. The mining sector, institutional is good. Manufacturing assembly is strong. We had a pickup, a nice pickup in the agricultural piece as well.

So we're seeing pretty uniform growth but in the higher end meaning the average size of a building in our backlog is probably about $110,000 up from probably about $90,000 this time in 2006.

Any sense of conservatism is just that, just like in Q3 we've got some extra things to do in terms of the permitting and, you know, we expect to ship something on the order of 4,500 buildings in our Q4. We've identified a total to date of six jobs that have slipped as a result of funding. So, six out of 4,500 isn't bad but we certainly are monitoring that with great attention.

Great.

Now, regarding your budgeted SG&A reductions and the synergies expected from the integration of the Robertson-Ceco acquisition, where are we in terms of the original range of that 6 to $25 million and do you see room for further improvement on these initiatives going forward? And then lastly, is the engineering system rollout that is, is that still on track for completion in the first half of fiscal '08?

Yes, kind of starting with the last piece of that, we are on track. We have rolled out the front end, training of our employees is nearly finished. We're commencing the training of the builders as well. So that's going very well.

When we look at synergies in the year, we had said that we would hope to see improvement in the Robertson-Ceco margins to 10% or more. When we bought them, it was about 8.4%.

So, we've seen probably 160 base points of improvement on virtually half the revenue that you see in the Engineered Buildings group. So that's a big chunk of the synergies.

The second piece that we said we'd see comes from the base-loading of our coating plant. We're clearly, you know, capturing 400 points there. So, when you kind of roll those together, that kind of gets us halfway up to 6 to $25 million in synergies.

We see additional synergies in 2008 and 2009 as we roll both the engineering detailed drafting and design sectors out or marginals out. And that then leads us to the hub and spoke which we expect to have in place in 2009. I won't comment exactly on the amount of synergies that we see but suffice it to say, we see synergies totaling greater than the $25 million that we had originally estimated.

Great.

And then lastly, can you comment on the mix of package to toll work that you saw on Coating during the quarter and what you expect in Q4?

Yes, we're still dominated by toll coating and I would say that it's probably 60/40 and we would expect to see that improve in the fourth quarter and I mean the team there is focused on that. I mean I will say that the operational improvements that we're seeing in the Coating group have still been superb. They're doing a great job.

Great. Thanks, Norm. I'll hop back in the queue.

Our next question will come from Michael Cox with Piper Jaffray.

Good morning. Nice job on the third quarter.

Thanks.

My first question, on your last conference call, you indicated that the second quarter backlog of about $450 million would amount to about 77% of second half revenue in the Building Systems segment. With the third quarter now complete, do you still feel that that, it will be the case?

You know, I haven't run that calculation but I think that that's probably down a little bit but I still think we're carrying a backlog that is higher than historically has been the case. And again, the caveat here is that there is more permit approval, the whole permitting bureaucracy kind of throughout the United States and continues to be troublesome but knowing that, you know, we really need to expedite and start the process as early as we can.

So, we know we still think we're carrying a good backlog in with still very good quoting activities for a [chance] to adding to the top line in the quarter and carrying a good backlog into 2008.

Okay.

In terms of the SG&A guidance that you provided, the $280 million for the full-year, that would imply a fairly large step up in the fourth quarter. I was wondering if you could give us some color around what that planned increase would be for?

Well, you know, we always have some true ups in the fourth quarter. We will do our final bonus true ups then so we're giving ourselves a little cover, I think, but we will manage it to the tightest amount we can. So, maybe being a little conservative on that side. I hope I am.

Okay. That's great.

My last question is on the Components business. I was wondering if you could give us your outlook on the margin potential for that business as you look out beyond this year but looking out to 2008, did you feel that getting back to the historical levels of the low to mid teens is a realistic expectation there?

That is a great team we have there and it's shown over the decades of introduction of new products whether it be standing seam roof or architectural panels and products to be able to reinvent themselves in terms of product offerings.

They've got some great new products now. The panel systems will help them a lot as well. We think that group will be in the 13% to 16% range. It's taken us a little while to get back to where we need to be but the team is working with great discipline and I believe they can get back to those levels.

Great. Thank you very much.

We'll take our next question from John Diffendal from BB&T Capital Markets.

A couple things.

Going back to the Component side for a minute. I guess the overall number on a third party basis for the quarter was just a little over 10%, 10.1%.

Can you give us a little color on sort of the run rate? I mean, obviously, I think the last couple of months were probably better than the first month in the quarter. Give us a little bit of a sense as we go into the fourth quarter there because you do need that to step up a bit to make the numbers, I guess, for the year.

Yes, I mean we needed a good quarter and to be sure, we have seen steady improvement since our February low. Almost every month was an improvement in tons shipped and price per ton.

The team has managed its costs well and we clearly see that we have the opportunity to continue to improve, you know. We will I believe we'll have a good fourth quarter that we'll, again, show the kind of improvement that we saw sequentially in Q2 to Q3.

I mean their market isn't fabulous but the fact is that they had the best June they had in five years. Their July which compared to July of 2000, I'm sorry, to July of 2006 which was the second biggest shipping month in the history of the Components group was still very good by any comparison except to July of 2006.

So, the team is focused and I think that they are doing all of the right things to get their margins back to the historic levels that we've enjoyed.

And given we just passed through August, August did show some improvement in terms of pricing and relative to July.

Yes.

Okay.

July was better than June.

Better than June. Okay.

And June was better than May.

Okay.

And May was about equal with April but April was a pretty good month. The competitors' situation is, you know, is really pretty drastic meaning there is a lot of competition and we seem to be holding our own very well indeed.

(Inaudible) you raise the point about that you're focused in the fourth quarter to make a bonus and obviously making or not making will affect corporate expense and some other expenses there.

Just to make sure I'm clear on this, the bogey to do that is a 10% bottom line, and I assume, diluted earnings per share gain for the year. And am I correct that to achieve that or hit that threshold, you need $1.98 in the fourth quarter?

Well, your math, I'm sure, is good. The bonus scheme for the whole company is based on return on operating assets with a hurdle rate of 16%.

So, for all of our employees to get a bonus, we need to cross that hurdle. For the top 150 or so, it's that plus growth and earnings per share by 10% on GAAP.

Right.

So, we haven't given up by any stretch of the imagination to do the very best we can. As I said before, I can't guarantee where we'll land but we haven't given up the ship yet that's for sure.

Right. And that GAAP is before or after the dilution from the convertible?

The GAAP is fully diluted.

Fully diluted. Okay. Great. Thanks.

Okay, John.

Thank you. (OPERATOR INSTRUCTIONS) Our next question comes from David Yuschak from SMH Capital.

Good morning, guys.

On debt reduction you guys paid down some nice debt in the quarter. What's your thoughts on debt here as you go through the rest of the year and into 2008 knowing that you've got some pretty favorable terms on your existing debt?

I'm just wondering if at what level do you maybe want to start paying down a debt because of those terms given in what's happening in the credit markets now and start storing cash as a reserve for whatever you might want to do with it?

You're spot on, Dave. When we look at the debt markets we're at LIBOR requesting 150 on term loan B and if we have to go back in the market to replace that, it would probably be LIBOR plus 300, Frances believes.

So, the sensible thing to do we think is, as we did, to pay off the revolver which was the $44 million and to now to accumulate some cash, take advantage of at times buying some shares but accumulating cash is probably what we'll continue to do into the rest of this year and probably the early part of next year.

So, the existing debt level right now is kind of where you want to do and that's just a matter of how much you maybe monetize your cash. How quickly can produce the cash to do whether it's an acquisition or a share buyback.

Sure. Exactly right.

And as far as we mentioned about the square footage being down but it would kind of indicate, though, that the average cost per, or the average revenue per square foot has to be up quite a bit. Is there some issues that are driving the dollar value higher relatively to square footage? And is it more complex buildings and stuff like that that you alluded to earlier or give us some sense?

Yep, that's exactly right. It's the level of complexity that's driving the dollar value. And, you know, we have benefited in the past by small buildings and we are taking steps to make sure that we're getting our share of what's available there.

We have made some moves in terms of bringing our building groups advantage by being able to sell small buildings online which is something new that's just rolled out. But we're not displeased at all with our ability to service markets that provide us with the opportunities that we see in our backlog. That's a very good thing for us.

Then on the, you said earlier, you really expected the hub and spoke to really be of a major beneficiary in 2009 but given the kind of margin improvement you did here in the third quarter with what the Building Systems and knowing that that potential hub and spoke productivity is still out there, does that suggest that -- you mentioned earlier about 15%, 16% operating margins but given what did you in the quarter and some of these other potentials are still out there, particularly in 2008 as well, does that suggest that there's just a lot more opportunity here to probably do more volume maybe than you would do margins?

Well --

If you shoot for a 15%, 16% bogey, for instance, on your EBIT margin for that segment.

I mean what we think is that that group has the potential once we are in a homogenous engineering system, once we have a hub and spoke fully implemented, that we think the Buildings group will have a new target of 15% operating income margins. We still got a long ways to go but you're right in saying that there's a lot of opportunities here. We're seeing it right now.

When A.R. went to visit the plants it was great to see that our three structural or frame plants are already performing in a hub and spoke. Now they're doing it more in a manual way because our systems aren't linked entirely now, but our Monterey plant, our Lexington plant is producing frames I know for all of our brands.

And frankly, for me, that's ahead of schedule so we're seeing the benefit of that. And we think once the hub and spoke is fully in place that there'll be great benefits to our customers and to ourselves.

So that really, that will be more of -- while you get the operating leverage off the hub and spoke in the way of improving EBIT margin, it really should be a lot more sensitive to driving a lot more throughput through as far as revenue growth and market share gains.

It provides us with sustainable growth that is greater than the individual assets that we have.

Okay. And one last thing.

On the operating expense, you said 280. Would that be the max, then, we're talking about in the quarter?

Yes. As I said earlier, I hope I'm being conservative. We're very pleased with where our run rate is, I mean we really are, and we will continue to work that very hard.

Okay. That's it for now. Thanks.

Thanks, Dave.

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

Good morning, everybody.

Hello, Dana.

Would you comment on whether you believe there are nonrecurring benefits at work in your SG&A?

That's a good question.

As we work through this year and look into '08 and '09?

I don't think so. We always have ins and outs in a quarter but it about balances out, you know. The only thing that of course, as you know better than anyone, is that variable is the bonus. So, if we are showing less growth in 2007 than 2006 then our accrual will be less. So that's the biggest variable probably.

Have you been accruing year-to-date?

Yes.

I presume the accrual would rise, though, if the four accrual results were to support it in Q4.

That's exactly right. And that's why I'm kind of trying to play it a little safe in the fourth quarter.

If we were to look at the permit approval mix that you've described as being part of Q3's reality which you seem to have dealt with well and as well Q4, is that the nature of the type of work available today or would you say that your mix is higher than industry?

No, I'd say that the permit approval is consistent with the complexity of the buildings we have. It was less of an issue in 2006 because we had a larger portion of smaller buildings which don't have the same constraints on permitting and so I think it's more a function of the type of backlog we have.

And you know, if you take just the city of Houston, they are really only expediting lead buildings that fit their environmental standards which our buildings are in good shape to do. But nevertheless, we're finding a number of different issues in permitting.

Stormwater is now a big thing that frankly we didn't face a year or two ago and making sure that we're helping our builders to calculate the stormwater runoff and to be able to answer permitting on that.

If last year included a larger proportion of smaller buildings, is that work less available this year or was there just a dearth of larger buildings and thus the mix seems to better favor that because it wasn't there last year?

No, Dana, small buildings are off, there's no question about it. In the first half of the year, small buildings was off by 20% and I don't think it's just us. I think that the small retail type of buildings are down.

We have seen a pickup in storage, mini storage which was down in the first half of the year. But small buildings have come back a bit in Q3 but still down compared to what was a great year in 2006.

To allow you to elaborate on the comment you just made, is that because there's less strip center development at work or is there something else?

It's hard for me. I would love to be able to give you a correlation between residential and us but, frankly, it's a very weak one.

But intuitively, it just seems to be that if there's a slowdown with the residential that we might see it in some of our work and I think we probably are in the retail space, in the strip malls or strip centers and that work, it's definitely less. We're very pleased we serve the markets that we do and can compensate on other forms of work.

I'm going to ask you to shift gears to Components for a moment. To what degree is there any type of an inventory costing flow through effect at work that might force your reality to lag what the market might allow you to do in your Q3 results?

That's a good question. You know, we, of course, try to buy our steel one quarter in advance. We went a little long in the second quarter, bought a little more steel than we probably needed with the idea of trying to advantage ourselves in the second half. You know, we probably on the right side of that curve meaning that we haven't hurt ourselves.

Steel prices are pretty flat with the exception of structural which has continued to try to show some movements north on pricing which is a function of the fact that there are too few steel structural suppliers in the United States. And (inaudible) your protectionism on structural steel which we'd like to see come to an end.

But across the board, steel mills are trying to put their prices up and we are, of course, pushing in the opposite direction. We think lower steel prices are better for our industry.

When you were dismayed by what you saw in the earlier part of this fiscal year in the Components business where demand was slack, you had perhaps too much higher cost inventory at the time. You weren't able to benefit from volume-related efficiencies compared to the prior year and you were trying to hold price versus your competition.

If you were to revisit some of those factors and describe how they might affect your present tense as well as how you see '08 playing out, that would be helpful.

Sure. One of the things we did in February, we agreed to try to, as we refer to it, free up some tons. And we lowered our prices in the Components group, we chased some tons see if we could bring volume in and we were not successful.

We had probably the worst February we've had in the history of the Company in Components. You know, we have prior to that been disciplined. We all agreed that we'd give this a shot in February just to see if we could get some movement. We didn't.

We returned to the discipline in March and the discipline that we now have in the Components group is exactly the discipline we've had for all of the years that A. R. has been here, okay, and it's showing up and that discipline will continue. We know it's the right thing to do.

So, we continue to see improvement even in a very competitive sector. It's just in time to deliver, as you know, Dana, but you know, the team there have got a bit of tailwind. They've got some activity that's better than it was in the first half.

They're doing all of the right things. And I have no doubt that we'll continue to see improvement and that they will return to the levels of profitability that we have had in the past.

Do you view that as an intermediate term goal or do you think that that is hard to put a finger on?

Well, I think you'll see in the fourth quarter, you know, God willing and the creeks don't rise, kind of a quaint Texas statement, that we'll see margins in the fourth quarter that are in the historic range and above what we saw in the third quarter.

Now, I could be wrong. We might have some things go bang in the night but my view is the team is focused. They're doing the right things and we should see that in the level of improvement.

What's more important to me is the sustainability of that and the sustainability of that comes from the products that I mentioned in the script, the sound wall, the cool roof, doing more on the panel side. That is where the growth will come for the Components group and has in good margins.

What part of your mix could those newer products play a role in?

We think that they'll play an increasing mix as we look at the energy efficiency drive leaving aside the green building side. Just the energy efficiency within the green building portion. We're seeing more and more opportunities there and we will make sure our products are in line with capitalizing on that opportunity.

Final question.

On SG&A, looking at '08, we can all use our crystal ball to discern what we might view in a revenue change but how would you, given that SG&A is something that you have more control over than your top line, how would you expect it to look in '08?

We're just starting that process now but I think that we're going to make every effort to keep our SG&A intact. And as I've said before, we've historically run in that 15 to 16% range in a year. 15 to 16% of revenue. I would like to see that come down some.

And the team did a fabulous job in December and January of tackling that. We won't wait until December or January this time. We'll tackle it in October which is when we do our budgets.

We'll see where we come out because we still need to be investing and getting the synergies from Robertson-Ceco, getting the hub and spoke done and that means we have to dedicate some people to do those things.

The IT piece, we spend a lot on IT because we can see the value of bringing down our cost per ton by doing it. And so that's kind of SG&A expenditure that we're going to continue to have.

Thank you for your thoughts.

Thank you, sir.

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

Yes, refresh me a little bit. On the corporate overhead cutting, I think after Q1 or in early March, the number that was pegged at that time was 15 to $20 million and I think after the last quarter it sort of added $20 million, the release indicates $30 million if I'm correct.

Where is that, so that number is bigger than originally intended which is great. Where's the difference coming from?

We're just continuing to do all the things we set out to do. When you think about it, when we originally looked at our SG&A reduction, we said that it will be kind of split along our engineering costs, our selling and our administration and corporate costs.

We believe that we could still do all the things we need to do in engineering but take advantage more of the Robertson-Ceco systems which have a 300 basis point cost advantage over the way that NCI has done it. We knew that we could look at our commission plans and our bonus plans in terms of sales and make sure those are tight in this role as possible. We've done that.

The admin piece has come down as well. And our corporate piece is just -- I know a function of managing all of our costs. I think people know that we said that we took 7.2% of our head count out.

We took out between our head count and our expected additional positions in our budget, we took something like 84 people or spots out of a salaried staff of 1148 and that kind of has continued through the year. We don't want to cut into the muscle but we want to make sure we're not carrying around a lot of extra fat.

But with the additional $10 million, so does that mean there's more than the 84 or 84 is the correct number today?

It's probably -- each of our groups have been running a little tighter than we had expected or had forecasted. They're all coming in with greater savings than they had forecasted.

And that's dropping. That's pushing that number to where it is. Okay. Got it. Thank you.

Thanks, John.

We have a follow-up question from David Yuschak from SMH Capital.

Back to Components, guys. When the kind of the bottom fell out of the operating margin and revenues here in the early part of this year, could you give us a sense as to when you began to, when you saw this happening, the new initiative to sustain this business longer-term with the new product introductions and other things you're doing, was that part of your -- is that part of a reaction to that or was that something ongoing that could not help you during that downturn at that time because you weren't that far into the program?

Exactly what you said. It was initiated, some initiatives in early 2006 and they just hadn't reached a state of size and impact to offset the slowness that we saw.

And if you recall, we sell small buildings and our steelbuilding.com and our Heritage brand and our metal (inaudible) posts through the Components group. That was a fairly significant part of their growth in 2006 so that end market slowed down by 20% in the first half of the year. So they were hurt by that and by lots of inventory in the marketplace which affected their basic [and] component types of products.

So we have been doing things like with the order entry system which will help us a lot in 2008. And the initiatives that they have are ones that are more intermediate and longer-term.

But nevertheless, I mean you're right. There wasn't enough there to compensate for the shortfall in the first half and we expect as we go into 2008 we'll be continuing to improve the competitive posture that we have in the Components group.

Now, these initiatives to develop these new efforts, was there incremental costs there that you needed to absorb as well that helped, that had further impact on the performance of the EBIT?

Sure. I mean of course. You don't get something without investing time and energy and people. So we were carrying that in our overhead in 2006 and been carrying it in 2007.

As I said from the get go, we're still going to do the things that we think are right long-term. We're going to invest in things and SG&A and try on the same hand to reduce the variable cost of things that we don't need to be spending good money on.

Is there any, can you give us any sense as how much incremental cost that may have been for some of the new initiatives that you did (inaudible)?

You know, it's hard for me to say. I know on just the order, just the order entry, we probably spent a couple of million dollars since this time in 2006.

And that was all (inaudible) operating expenses then.

Yes.

Okay. Well, pretty significant number.

Sure.

Appreciate it.

But the opportunity, Dave, I mean, it's phenomenal.

Oh, yes. But it's one of those things where you sometimes you don't know how much your under performance was associated with new initiatives or is it just kind of maybe some potential structural weakness that led to that cyclical fallout. Appreciate it.

It is the end markets and small buildings in the inventory overhang. That's what really hurt the Components group in Q4 of last year, Q1 and Q2.

Appreciate it.

Thanks, Dave.

And with no further questions, I'll turn the call back over to Mr. Chambers for closing remarks.

Well again, I thank you very much for your continued interest and good questions. And if there's anything else you need, please don't hesitate to give us a call and we'll do the best we can to answer your questions. So with that, we will say good day and speed to you until the next quarterly call. Thank you.

Thank you, ladies and gentlemen. That does today's call. We appreciate your participation. You may now disconnect.