Core Natural Resources Inc (CNR) 2007 Q4 法說會逐字稿

Good morning. Welcome to this NCI Building Systems conference call to review the Company's results for the fourth quarter of fiscal 2007. This call is being recorded and a telephonic replay may be accessed through December 18 by dialing 719-457-0820 and entering access code 835-4970. The replay will also be available at NCI's website which is ncilp.com. The fourth quarter results were issued yesterday in a press release that has 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 measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's web-site by following the News link to see yesterday's news release. Information being provided today is as 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.

Good morning and thank you, Scott. And good morning, everyone, and welcome to our fourth quarter 2007 conference call. I am pleased to have with me this morning, Frances Hawes, our Chief Financial Officer, Ken Maddox, our Executive Vice President of Administration, Mark Johnson our Vice President of Accounting and Todd Moore, our General Counsel. As in the past I will provide details and insights to our quarterly and fiscal year-end financial results. Then I will explain our action plan for fiscal 2008 including our guidance for the year. Then we will be happy to take your questions. Introduction. Our results came in $0.09 below our low end non-GAAP guidance of $3.30 for our fiscal year. The reason is our revenue was lower than our re-forecasted guidance for the year.

The revenue was approximately $16 million lower as a result of soft market conditions in the small buildings market which affected revenue in both our components group and our buildings group. Overall McGraw-Hill's low-rise new construction starts, that's for five stories and less measured in square feet for our fiscal year 2007 was down 4.4% compared to 2006 which grew at 5.7%. Although market conditions improved modestly during our Q4 this was the first year since 2003 our market has declined. The decline which occurred quite early in our fiscal year particularly in small retail buildings, personal storage, roll up doors and the activity from our small regional contractors had the greatest impact on our components group. These markets appear to have stabilized some what, but at lower levels of demand. This weaker demand in our components group was offset by demand for larger more complex buildings in manufacturing, energy, mining, aviation, and institutional markets that benefited our buildings group. Quoting activity remained good through the quarter, in line with the positive American Institute of Architects Billing and Inquiry Survey.

Our buildings group fiscal year-end backlog for 2007 increased by 20% to $447 million compared to $373 million at fiscal year-end 2006. Sequentially our backlog is lower by 1.3%. This is not unusual. In fiscal 2006 our backlog compressed by 14.3% from Q3 to Q4. We believe the backlog in our buildings group should provide an opportunity to deliver growth in the first half of 2008 compared to 2007. In addition to more favorable conditions of our Components group due to an absence of excess inventory in their market which depressed their pricing power in Q1 and Q2 of 2007.

While we are never satisfied when your financial results are below our expectations, there were several positive accomplishments in the fourth quarter. Gross profit as a percentage of sales in the quarter was up 150 basis points over the same quarter last year. Our Coating group continued to generate good operating income margins. Our Components group returned to operating income margins equal to our Q4 2006. Our Building group produced solid margins of 13% for the quarter. Our cash balance was $75 million. Inventory was down nearly 14% to $137.7 million from our fiscal year in 2006. SG&A was about flat for the year compared to 2006 when factoring in the effect of the acquisition of Robertson-Ceco.

Now we'll look more closely at our three business units. Our Coatings group continued to benefit from the synergies resulting from the Robertson-Ceco acquisition. Plant utilization was at 82% largely due to internal demand. While package sales were up 3.8% sequentially, they still remain 33.8% below 2006 levels. With an overall 29% shortfall in third party revenues, the team in our Coating group improved efficiencies which raised operating margins on third party revenue by nearly 43% during the year. They improved our Coating line speeds which will be critical to support future expansion of our family business and our third party sales. Our Components group continued to dig out of the hole create in the first half of our fiscal year. Sequential revenue increased by 5.3% while operating margins improved by 30% to 13% returning to their historical levels of operating income margins of 13% to 16%. Plant utilization was 74% for the quarter.

The team is focused on continuing the improvement they have shown in Q3 and Q4. Their end markets are clearly down from a strong 2006. In fact their small building sales through their direct sales and web based business are off some 23% compared to 2006. Our Buildings group continued to focus on operating margins, revenue in the quarter was down 7.5% or $22 million compared to 2006, but up sequentially 8.6%, as a result of selectively pursuing work that retained good margins. The effect produced margin expansion of 22% for the year to 11% and a record operating income of $101.8 million.

Plant utilization was at 84% in the quarter. We continue to make good progress in transferring the engineering systems from Robertson-Ceco to the NCI Building Companies. Additionally, progress continues in moving Robertson-Ceco into the NCI hub and spoke delivery system. Accomplishing these two internal initiatives is critical to further margin expansion.

2007, we started 2007 with great expectations for another year of growing our EPS. We expected our market to grow by 2% in line with the McGraw-Hill forecast for 2007 in new construction starts, measured in square feet. As I said, the low rise nonresidential market actually declined 4.4% during our fiscal year. We expected to ship 10% more steel than we did in 2006. Instead, we shipped 3% less tons and generated revenue growth of 3.4%. We had excellent performance from our Building group, good performance from our Coating group, which could not overcome a weak but improving result from our Components group. We spent $42 million in cap-ex, further automating our plants. We spent $15.4 million to acquire Garco. We bought back nearly 758,000 shares for $35.2 million. We ended the year with $75 million in cash. We had DSOs of 29.7 days and improved our inventory turns by 8.2% to 9.2 times. Overall plant utilization was only 70% compared to 75% fiscal 2006. While we had a good deal of improvement our results as I said were well below our expectations.

So for 2008, with keen awareness of our 2007 performance and industry expectations at 2008, we will see further erosion in nonresidential markets by as much as 6%, we are nevertheless cautiously optimistic that we can return to growth in EPS. Our cautious optimism in the face of potentially damaging macro-economic conditions is based on continuing to approve our operating efficiencies largely through technical systems, process improvement and improving our supply chain management. We will focus on growing external revenue but not at the expensive of margins. Commercial discipline in this uncertain market will be critical to growing our EPS.

We expect to improve our package sales in the Coating group while generating margins in excess of 26% in 2008. We need a higher level of operating income for our Coating group as a result of increasing their third party sales. Our Components group will continue their commercial discipline while completing the implementation of a web-based order entry system which will drive greater efficiencies and margin improvement. They have some solid but modest growth opportunities in 2008 through an expanded retail channel and energy efficient roofing systems. Our Buildings group has much remaining to do in terms of the technical engineering systems, integration and hub and spoke delivery systems with a goal of expanding the operating margins in our Buildings group to 15% by 2010.

Energy saving products as part of our broader green initiative will enable us to initially grow our institutional segment while we expand our capacity in insulated panel systems for our commercial industrial applications. A seasonally slower period of our first and second quarter is always challenging, one never knows what the weather conditions will be. We have a good backlog for our Buildings group and more favorable market conditions for our Components group because as I said the excess inventory that plagued them in Q1 and Q2 of 2007 is largely nonexistent at this time.

Now our guidance. In an attempt to improve the accuracy of our guidance, we will look to our Buildings group backlog, which gives us about six months of visibility and current market conditions for our Coating and Components group. Therefore we will give guidance for the first half of our year and use our 2008 adjusted budget for annual guidance. Our guidance for the first half of our fiscal year at the end of April 2008 is $0.90 to $1.05 per share. Not giving effect to any dilution from our convertible notes which [will be] dependent on the average share price in 2008.

Our guidance for the year of $3.35 to $3.70 per share, also not giving effect to any dilution from our convertible notes. Among the assumption supporting our guidance is that low-rise nonresidential construction will decline further by 6% in square footage new starts in 2008. We think that by the end of the year our average, our weighted average cost of steel will be about flat with 2007. We will continue to review our businesses and rationalize plans as appropriate and consistent with our goal to return to sustainable growth starting in 2008. Our longer-term nine step strategy that we are executing, we believe will give us an opportunity to drive significant growth on our earnings that will support a much higher share price over time. Now I will be pleased to answer any of your questions.

(Operator Instructions) We will go live to David Yuschak, with SMH Capital.

Norm, help us out here on this quarter from a volume point of view, because the backlog to me being as good as it is, maybe suggests to us maybe there were some shipment delays here or some problems in getting more volume into the quarter than you actually produced, therefore resulting in not so much new orders coming in to produce that backlog but a delay in orders to produce the backlog that you got for the year versus a year ago. Were there some things in there that pushed things out? Give us some softness, give us a sense of that. Because from my point of view, there was like a $50 million variance from what I was looking for in year-over-year being down on that building systems side of it does suggest that's had to be disappointing to a lot of people as well.

Yes, I can understand that perspective but I know why the revenue was down. The revenue was down because they have throughout the year been very much more selective in the projects that they go after. Okay? We have analyzed our backlog and I can tell you that if anything, they probably pulled work ahead rather than work slipping. That backlog that they have is really a function of the normal aging of the backlog and new work that they've been adding to the backlog. You know, we have continued to ask the Building group to focus on improving the margins. They have seen a significant increase in the complexity of the work they perform this year. They did not have as they have in the past years, the ability to fill in work with small buildings, and they have been focusing on, you know, larger work which in fact has produced very, you know good margin expansion. So, we are convinced that there's nothing in the backlog that is the result of slippage and that the revenue reflects as I said a much greater focus on selectivity of work.

Now, being selective on work, does that suggest that market conditions have gotten very competitive out there for the work that's out there, given like Nucor who has recently bought Magnatrax, I guess I'm interested in some of the bigger players. Does that mean maybe you are not getting the kind of market share you have seen in the past because of more competitive market conditions out there that's leading you to have to justify the quality of the work at the margin you want to take it on.

No, it is a much more progressive view. By that I mean that given the amount of opportunity, the team is being more selective about the projects that they pursue, and are discouraging movements to work just for the sake of volume. We could have had more volume easily, but it would have brought our margins down and we are convinced that in the marketplace we are in that focusing on our margins and focusing clearly on work opportunities that provide us a chance to add value is a much more beneficial group. Don't forget, we had record earnings in our Buildings group. The highest level of earnings that we've ever had. We've had margins that are very good. That's a result of focus, not a result of market conditions which are, you know, always what they are. There's always competition.

But, I thought you had ample capacity to take on additional work and building systems you didn't have to be selective to take maybe a little lower margin but get the volume of the work. Help us on out that.

Yes. When we look at it, Dave, pricing and margin are far more valuable than volume. By maintaining pricing discipline in our Components and our Buildings group, we enhance our earnings much more than the chasing of, you know, volume. We have analyzed this thoroughly, we've seen the results over time. I would much rather us be selective in taking good work from good customers than chasing, you know, volume and bringing our margins down, particularly at a time when we realize that the economical aspects might create a situation where we get into some bad debt and we are not prepared to do that.

One final question and I'll get out of queue. Are you seeing at this point in time any disruptions in the marketplace because of the concerns for credit quality and sub prime lending spilling over to the nonresidential side?

We haven't seen it materialize in a meaningful way but there clearly are examples of projects that have, that have slipped, projects that have gone off the books, and I would say that in the small buildings space, while it is difficult for us to get a precise linkage, we believe that there is some tie up. But just to kind of put it into focus, we have gone through the first year of our downturn. This is the first year of downturn since 2003. Now, in the first year of the downturn, the market from 2000 to 2001, the markets were up, 10.4%. We have lost 425 basis points on our operating income and 415 basis points in fact off our EBITDA. This year we have, I mean our markets were down 4.4% and from 2006 we lost 66 points from our operating income and 67 points of decline in our EBITDA. My point is this has been the first year of the downturn. And we think that we have performed reasonably well given that the markets are down.

Thank you very much.

Sure.

And next we will go to John Diffendal with BB&T Capital Markets.

Yes. Good morning. A couple of questions. On the notice that the corporate and elimination number popped up a bit in the fourth quarter. It's over $16 million, it's been running in the $13 million, $13.5 million for most of this year, and up nicely against a year ago. Was there something unusual, what drove that increase? Can you add, this is sort of after third party profits, looking at the corporate numbers that gets down to your operating income.

Mark, do you want to take that?

Corporate expenses $16.3 million.

This year we had a couple of things in the fourth quarter. One of the more significant ones was our self-insured health care plans had a little bit of a true-up to our self-insured accrual. And in addition to that, we accrued for our incentive compensation plans in line with the production of income. So in the fourth quarter, when we do the final year-end true up of those numbers, it is much more weighted towards the fourth quarter. Those are the primary two drivers.

Can you give us a sense of how much it was? I would think, I mean given that you didn't hit the hurdles wouldn't there have been a back off on the incentive compensation? Wouldn't that have rolled back off?

No, it doesn't back off because we had accrued in the previous quarter, based of the production of earnings at that time.

And the hurdle rate for the hourly wage folks, and the majority of our employees is based on our operating income with a hurdle rate of 16%, operating assets. We did get above that. For the management team, of course our bonuses were a small fraction of what they were in 2006, as they should be.

Okay. Is there any way, like you say you grew from $11.7 million to $16.3 million, are we talking several million dollars of net negative swing there between the health care and the incentive compensation that accounted for that.

Yes. Just a second, Dave. So we had the -- let me see if I have got it right here.

While you are looking for that. Maybe I can ask another couple of other quick questions. Cap-ex for this year, expectation?

We are going to go into the year, Dave with an expectation of kind of being in the mid-40 range. We still have some more automation work to do. And I think that's going to be important to get done. So, I think mid-40's is where we should be. We will review that, and if we see any of the macro-economic conditions that drive us or give us insights into a level of recession, then we will as we have in the past pull that back.

Right. Okay. Did you find an answer on the $16 million?

Yes, it was about $1.5 million. And on the insurance about $1.1 million.

The $1.5 million was on the incentive comp, $1.1 million on the health care insurance. In terms of swing.

Yes.

Okay. Got it. And you had a lot of cash in the quarter, obviously you mentioned inventories improving, your accounts payable and accrued expenses also contributed to that. Is that something we will see roll back off as we move into the first half?

Yes. Let me answer that question. Typically, we generate a lot of cash flow as we did in this quarter over $90 million in this quarter of cash flow from operations. Generally in the first quarter, the inventory turns decline a bit. It is just the nature of how the quarters roll out. And we have a very strong quarter in our fourth quarter every year.

Okay.

We'll see some cash in the first quarter of cash flow.

And just one last question, the--you mentioned maintaining your pricing discipline in the first half of the year. I mean of course your margins say for the system side falls off below 10% in the first half, I mean normally you have a margin decline second half to first half. Is that, is that margin discipline going to allow you to, in your opinion, to improve those numbers versus last year or just sort of hold them in line?

Well, we have expectations that we will end the first half of the year with margins that are better than the margins we had in the first half of last year. That's driven by two things; number one is that we had a rather disastrous second quarter in Components group.

Right.

And we believe that the commercial discipline that we are applying now will continue through that so that we expect to end the first half with improved margins. The same on the Buildings side. We think there are good margins in the backlog and if we execute well then we should show some improvement. But as you know, John, what occurs, and I am not using the weather card, but we are always more susceptible to disruptions in the first two quarters. Just the other day our Oklahoma facility was shut down (inaudible).

Got you. One more quick question. You mentioned small buildings for the year being down 23%. What sort of revenue base did that move to for the year? Just give us a sense of that overall revenue size.

We did something like $140 million to $150 million worth of revenue in our small buildings side in 2006. So when we talk about 23% I am talking off of that number.

Okay. Got you. Thank you.

You're welcome.

We will go next to Matt McGeary with Sentinel Asset Management.

Hi, just couple of housekeeping and then (inaudible). Do you have sort of a D&A estimate for 2008? Ballpark.

We don't expect it to be much different than our run rate at this point in time. So about $36 million.

Perfect. SG&A, is this sort of a maybe if I look, on an absolute dollar basis moving forward? How do you feel about sort of maintaining that ball mark, 270ish range?

We will be up a little bit because this is a year that we have to make sure that we are, we have adequate resources on the engineering side to both do the work we are doing and migrate the technical systems end. So the opportunities for a pure reduction in SG&A which we were able to accomplish in 2007 probably aren't there to the same extent. We will have some inflationary rise from the 272 that we are on this year, and as I said, we will probably have some expenses running a little higher on the technical side. That's kind of what we are expecting. But we are focusing on kind of another level which is our whole-- supply chain management, and we have got some great opportunities to reduce our transportation costs and look at our inventory in a more efficient way. So our focus is going to be more on supply chain than the pure kind of across the board SG&A reductions.

Okay. The small buildings comments, do you have a feel for sort of what end market is causing that or is there a particular industry or type of builder that you are seeing that weakness come from?

That is a very good question. And we are talking about small buildings. I want to be sure everyone is clear. We are talking about buildings we would sell that run probably you know, $15,000 to $20,000 per unit compared to the backlog that is in our buildings group which the average size of a building is between $110,000 and $120,000 in sales. Okay? So we're talking about very small buildings. What we find is that is largely for both personal use as well as kind of small contractors, HVAC, electrical, really small business opportunities. To be sure, that has been down. I personally think while we have not been able to make any rock solid link, that it has a lot to do with the residential piece in terms of people that both work in that as well as people that benefit from that.

Makes sense. Orders and sort of inquiries, you know, how do you feel about that today versus, you know a couple of months ago?

The quoting activity is still good. You know, we see some bright spots. We continue to be strong in the mining side, the energy side, institutional is improving some, the role in agricultural actually came back in the quarter which was pleasing to see. The aviation piece is continually strong. Schools and buildings still quite strong. Because of the diversity of what we do, it is, you know, it is encouraging that the other parts of our market continue to be strong which in some respect reflects the broader economic deal. Manufacturing continues to be strong. We are producing still lots of buildings in the manufacturing space.

Okay. Do you recall what Multiple Nucor paid for Magnatrax?

I don't know precisely but I think they paid $270 million, $280 million, and I think that, it was rumored in the marketplace that Multiple was somewhere nine or ten times, trailing 12.

Any idea were their operating metrics are better or worse than you guys?

When I looked at the numbers, our operating metrics have been across the board four or five times more profitable.

Okay.

Than any of our competitors I have seen.

So we are sitting here, you have got, and nice job by the way on maintaining your discipline on the working capital front. That was nice to see. End of the year you had $75 million in cash on the balance sheet. The balance sheet looks good, generating a lot of free cash flow. I guess I was a little surprised to not see, you know if I look at your stock today, where it is trading right now, you are talking about maybe five and a half times EBITDA, approaching 16% free cash flow yield. Do you have a lot of other investments that would produce better economics than buying back your stock right now at this level?

That's a great question. I am really, it is good that you asked it. I don't want to sound like Hillary, but the heck of it is when we look at it, it is clear that there are opportunities in terms of a share repurchase. It is clear. We are a great investment. But if the macro-economics drive a true recession, no matter whether we like to believe it or not, we are a cyclical business. All right? Now we think we can perform well in the cycles, we are going to continue to execute to a strategy that improves our strength, brings our cost per ton down, do all of those kinds of things but from a prudent perspective, I think it is much more important to accumulate cash and to look at our debt because if we dip into a real recession, we want to pay down some debt which is accretive to our shoulders as well. So I, you know, I know this isn't what people want to hear, but I think prudence at this time and seeing what occurs in 2008 is a better position to be taken.

Okay. Fair enough. Thanks.

We will go to Arnie Ursaner, CJS Securities.

Hi, good morning.

Good morning.

First question I have is on your interest expense line; you have it in two different places with two different numbers. I don't know if we could do that off line. One place you have 28.829 and another 28.6. Just so you are aware, your press release has two different numbers for interest and expense.

You are probably looking at the EBITDA table.

Yes.

I believe the difference there is according to the terms of our debt agreement, certain amortizations of our deferred debt cost cannot be included in that calculation. That's probably what you are seeing.

Okay.

So it is the higher number not the lower number.

Okay. Second question I have is what revenue assumption is built into your guidance for '08, please?

That's a good question, and you know, we are, we are, showing a--something around 5%, a little less than 5% growth in our revenue.

Okay. Again, going to the word you used in the prior person's comments, cyclical decline or even recession, why would you have a 5% revenue assumption built in.

Good question. The reason for that is that our backlog in our Buildings group is up 20% going into the seasonally slow period, and we think that the margins in there continue to look good and the Components business is clearly still competitive but is much stronger than this time last year. Okay?

Okay. I guess one question I have is given your volume outlook and kind of the cyclical issues, what actions can you take on the cost cutting side to better manage through essentially a recession.

There's one right off the bat, we spent $110 million in transportation costs. There is a great opportunity for us to bring that down. Our whole movement with our inventory is another great opportunity. So there's a couple of big things we are working on now that we think can provide some cost savings.

Okay.

I don't think it is going to be through head count this year. We did that in the past year.

Okay. Thank you very much.

We will go Jason Feldman with UBS.

Good morning.

Morning.

So first question, Norm I am curious, you said one of your assumption is that the steel prices are going to be fairly flat next year versus this year. Given some of the sharp price increases we have seen in some grades of steel, particularly sheet lately, how do you have confidence in that view?

Because I think at the end of the day while the steel producers want to see their prices increase, that, you know they may get a price increase at the beginning of the year but if McGraw-Hill Dodge is right and market conditions are soft again I think it is going to be hard for them to hold those prices and we are certainly going to be fighting tooth and nail to keep our steel prices down. And we will use every lever that we have.

Okay.

So, we have been through the cycles before and just because they want to get the steel prices up doesn't necessarily mean they will sustain that through the year.

Okay. And another thing kind of related to that with the steel mills; given their acquisition activity in the space and Nucor and some others are now competing here more directly, I understand your focus on commercial discipline and margins, but are the competitive dynamics changing somewhat? Because it seems that steel mills have different dynamics than you do. You have an interest (inaudible) past cycles to focus on margins, they're just trying to drive volume and keep their steel mills running at optimal capacity. Is that changing how the pricing is working in the space?

We have, I mean Nucor has been in the space for a while. And you know, they have purchased a company that requires a fair amount of work to get fixed up. And I think that they will do whatever they need to do. BlueScope has had the Butler Group for some time, but Bulter, frankly remains a competitor that seems to be focused on good results. My sense is that we have really not seen a manifest change in the dynamics of the building side. Will we at some point? Possibly, but you also recognize there are new entrants. You have [Tissen] that is coming in the marketplace as a supplier. We have the Russians that are now on-line. We have the split up of Sparrows Point, where Mattel is in the market, still in the construction piece. So, you know, we will see how it materializes but we still have good suppliers we plan to work with, but certainly in a way that we think reflects our best interests, which is their best interests. Steel prices need to be lower so we can compete more against the traditional materials and they will sell more tons of steel at fair prices rather than high prices and less tons of steel.

I guess I meant more for example with metal buildings themselves. You know, are, basically, are some of these guys trying to undercut you on price? For the finished product not for raw steel.

The market is competitive but the beauty of the building space is that the value add on the engineering side and the quality of the product and keeping of delivery times are vastly more important to the builder, to the customer, okay?

Okay.

And the ability to differentiate and the market conditions are what the market conditions are. But we continue to expand our margins and our focus. But as I said earlier we are selective. We are being focused on stuff we chase.

Okay. Also one other kind of related themes here is given some of the acquisition in the space, with Nucor and Magnatrax and a couple of others, have you been approached lately by anyone or are you considering other strategic alternatives? Given you know, where the stock price is today?

That's a great question, Jason. We review our strategy with our board in very detail. We review very, you know, very cleanly and with great sense of what we do and what we do well. We have got a nine-step strategy now which focuses on the hub and spoke, the engineering systems, end markets, our green initiative, our dot com business, new automation, our frame plants. We think that strategy can produce a share price that's significantly above the share price we have now because the earnings will grow. That's our focus. That's our discipline. That's what we are doing. The notion of more strategic thoughts strikes me to be, to be the wrong idea with a share prices as low as we have. You know, we need to build our share price up and focus on our execution. That's the focus that we have.

Okay. And then just the last quick question, one of the reasons that you said you were confident that in your revenue growth was the backlog at the Buildings business. If you look on fourth quarter the Buildings was down (inaudible) 7% on revenue despite basically a record backlog. Was that, you know, it didn't provide the clarity or the visibility that you thought it did. Was there something else going on there or did I just miss the explanation there?

No, I think it is that the backlog at any given time gives us six months of opportunities, right? So they burned off what they burned off in the, in the fourth quarter. They have added to their backlog. Again, we looked at this and it wasn't a function of slippage to any real extent. It was just what was scheduled and got shipped and what's scheduled for Q1 and Q2. The larger types of buildings do take us a longer time to get out and get through the permit and approval but that seems to have been managed in a reasonable way but again I think that the short fall with the revenue was a function of really focusing on selecting work that we could get a good margin on and we didn't have the opportunities we've had in past years to top up the backlog with small buildings. The small building piece of the business just wasn't there for us to do. In past years we have topped that up with work that we have won in a period and produced and shipped. That hasn't been the case the second half of the year for sure.

Okay. Thank you very much.

We will go to Scott Kimball with GLG.

Hey, Norm. How are you?

Good morning.

Just to kind of reflect some of the other questions on the call but I mean if we think we are potentially going into a recession. If you go back to the most recent trough which was in '03 you guys did about $80 million in EBITDA. If you include some of the acquisitions you made, some of the cost cutting, it's pretty easy to get to a trough EBITDA number of about $100 million. So right now the stock is trading about ten times trough EBITDA and more than half of that on current estimates but at the same time, the backlogs are extremely strong. It seems like the quoting activity from what you are saying is strong as well. I mean there's a huge valuation discrepancy between what you guys are getting and some of your inefficient competitors are getting. I mean they are getting over ten times EBITDA in the private market. And obviously like you discussed, they're much more inefficient than you guys in terms of margins etc. I mean when you look at kind of going forward, it seems like you are concerned about a recession, numbers seem like they're getting a little bit worse. What are you prepared to do to get the stock to reflect what I, you know as a shareholder and other shareholders see as inherent value?

That's a good question. I think it comes down to us accumulating some cash, looking at our alternatives then. It--we need to be mindful that we have our revolver that is due in 2009. So we have to redo that, and at that time we will be redoing our balance sheet. I think that we are, and I think prudent in viewing our debt as a more important, you know, focus until we get a sense of whether recession is on us or not. If it, you know, if it comes to pass that we are accumulating cash and we can pay down a little debt and buy back share, great. But would I go into further debt at this time to put a serious buy back on? I don't think that's a prudent thing to do. We looked at it and we think that it would be dangerous in terms of the covenants we have to take on more debt. This is a time that we should be cautious, that we should be looking at paying down debt. That is what we are going to try to create the options by accumulating cash so we can do that or if market conditions are different, you know, look at a share repurchase.

What do you think when you see some of the private competitors getting bought out at big multiples, do you think they're overvalued, and do you think you guys are fairly valued or vice versa?

I think that for us to consider our value and not be cognizant of the fact of where our trading values were for much of the last 12 months in the $50 range. When we look at our strategy which we think can support a share price of $70 a share. If we execute well on this nine-step, that is the value we think that we have to create here. And at the end of the day, that's our focus. And we will take whatever comes in terms of the misperceptions because we think it is a factor of timing. We think that as the market sees our performance, gets a greater sense of how we perform in the down cycle, gets a sense of when the cycle will come back up again, how we are positioned for it, that the market will reflect a valuation that's more consistent with what we think. Frankly we think we are way undervalued. But you know, our focus needs to be on executing and delivering

Okay. Thank you.

We will go to Michael Cox with Piper Jaffray.

Thank you for taking my call. Just to follow up on that last question there. In terms of activities to take on given the market conditions. With the plant utilization running at 70% in 2007, are there plans at this point to rationalize facilities looking ahead to 2008, given the softer market environment expectation?

Yes. I should have included that when I answered Arnie's. We as I, in fact as I said in the script we will be looking at our utilization in plants and doing all of the things that we have done in the past. For those who have been around in 2001-2003 during the downturn, we shut down five of our least efficient plants. We built a new state of the art plant and we will be looking at a whole host of metrics in that respect.

Okay. That's helpful. And you spoke very confidently about the revenue growth in the first half of the year coming off of the backlog from the end of '07, but as we look out to the second half of 2008 is it really too difficult to call at this point given we obviously don't know what the backlog will be heading into that period, or should we expect that sales will actually decline in the second half of '08 considering the outlook for low-rise nonresidential construction.

That's a good question. And what we had of course when we built our budget, we knew the forecast of McGraw-Hill Dodge. We built our budgets from the ground floor up. We then look at it from the standpoint of risking the growth in revenue, what people are seeing, and come up with a revised budget. And that is the basis for our annual guidance that we gave. We have, to my knowledge, never earned less than 66% of our earnings to as high as 76% or 77% of our earnings in the second half compared to the first half. Even through a variety of cycles. I think in 2007, we earned 74% of our bottom line the second half of the year. We have better visibility in the first half we believe as a result of the backlog and the conditions that we say, but we put together this budget for the year. Now, just one more thing on this. For 2007, our Coating group and our Buildings group came very close to the bottom line that they had budgeted for 2007. The miss was in the first half of the year in our Components group and the erosion of end markets and the excess inventory that really depressed their margins. So we have a pretty good track record, in some respects in terms of getting to our bottom line. That's what we are using for the second half of the year. But we will have a backlog at the end of the first half and we will take a good view then.

I appreciate it.

Next to Barry Haimes with Sage Asset Management.

Hi, Norm. I just have one follow up question on the end markets; I want to be sure that I understood. It sounds like you saw more weakness in the small building side and you attributed some of that to residential. Is it fair to say you are not yet seeing weakness more broadly in terms of things like, warehouses or things that would more pertain to business as opposed to the small size which as you described you know, might pertain to residential. Is it mostly residential or are you starting to see it spread out?

You know, it is clear that we, I think on the last call we said we had six jobs that slipped from the nearly 4,000 we expected to ship in the quarter. We haven't seen any real material change in that, but I think there's a deeper suspicion that funding for certain kinds of projects will be more difficult. But as of yet we haven't really seen that hit more broadly in the manufacturing or warehousing. If you look in the quarter we had still as we had expected to have a fair amount of our work is in commercial and institution. Sorry, in commercial industrial, still about the same level as we'd expect to have. Institutional about the same levels, you know, the agricultural was up a little bit in fact. We are not yet seeing it manifest but the drums are beating. We certainly saw it occur with the small buildings which I think while not having great proof is intuitively more linked to the residential.

One follow up on that, Norm. In prior cycles, has the small end led the bigger end or not necessarily.

Not necessarily. You know it depends, it depends on whether the recession is broadly across the industries. As I said, mining is going great guns. Energy is still very strong. Manufacturing utilization in plants for a whole host of industries continues in the 80%. So we are still seeing lots of good opportunities which we are well suited for. This green initiative, I mean it is very interesting. It is, you know, it is driven less by Al Gore and his minions and more by the desire to be more efficient. That's great for us. We have products that meet that demand and see some great opportunities there.

Thanks very much.

(Operator instructions) We will go next to John Diffendal with BB&T Capital Markets.

Just a couple of quick things. Tax rate for this year, any expectation to change much from last year?

I would budget 39.5% for the tax rate for 2008.

In terms of working capital change, you did some, a lot here in the fourth quarter. For the year, what's your expectations on any change in working capital?

We are optimistic that next year we will stay flat on our working capital changes. We've squeezed it pretty tight this year. We are very proud of that. I think that we should be budgeting a flat working capital change for next year for the full year.

For the full year. And Norm you said in terms of revenue growth, up a little less than 5%, between the different segments, Buildings, Components and Coatings, where would you expect greater growth and where would there be lesser growth?

We probably will get a little more growth just by the size of the business in the, you know, in the Buildings side. And a little bit more modest on the Component side. So if you, if you weighed it out, I would weight it on the 5% more heavily toward the Buildings, you know and a little less on the Components side, and we will probably see reasonable growth on the Coatings side; somewhere between what they did this year and probably not to the levels half way between, this year, and in 2006. Levels of revenue. We think the third party sales will come back on the package side. That will help the top line some.

You do have growth in each of the segments, it's just a little bit more and a little bit less.

Yes.

Okay. Great. Thanks.

We will take our question from Matt McGeary from Sentinel Asset Management.

Just one follow up. In the last recession, did you guys--you guys still generated a positive free cash flow; am I right?

Absolutely. If you look at the investor pack you can see it. We paid down debt; we squeezed our capital expenditure down about $9.5 million. On two of the years we had capital expenditures 17.5 one year, so we built a new plant. As I said earlier we rationalized five of our plants.

You are probably a more efficient company today I would imagine; right with Robertson-Ceco and loading the Coating facility, and all that kind of stuff right?

I mean just as I said without beating a dead horse, we have lost 66 basis points on our operating income and 67 basis points from our, from our EBITDA from 2006 on the first year of the downturn, the first year of the downturn in 2001, the market dipped more for sure but we lost 425 basis points and 415 between operating income. I am not proud of losing basis points, but my point is for those that are worrying about a downturn in 2008, we are in the downturn. We had it; we are in it. That's the reason why I probably seem more conservative and cautious on the cash side because I feel like we are in our downturn. Therefore I want to behave consistent with the past because that's stood by us well. when we came out of a cycle, we were stronger.

I appreciate that sentiment. I just, you know, there's conservatism and then there's too much. I think maybe you don't give yourself credit for how much financial fire power you might have even if we do get a recession.

I hope you are right. If we keep our options open it gives us a lot of things we can do. That's-- I am just trying to buy some options.

Thanks, Norm. Appreciate it.

There are no other questions left in our queue. Mr. Chambers, I will turn it back to you for any additional or closing comments.

Well, thank you very much. And we appreciate your time and also are not innocuous to being taken to the wood shed and pounded pretty hard, and that is the role we have in terms of meeting our expectations and yours. I just want to make sure that you are aware and focused that we are committed to increasing the value of the Company and we will do everything in our power to do so. Thank you very much for your questions and we will speak to you next time.

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