Core Natural Resources Inc (CNR) 2008 Q2 法說會逐字稿

Hello. This is the Chorus Call operator. Welcome to the NCI Building Systems second quarter 2008 earnings conference call. As a reminder, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (OPERATOR INSTRUCTIONS) The conference is being recorded. At this time, I would like to turn the conference over to Todd Moore, Executive Vice President and General Counsel. Mr. Moore.

Thank you. Good morning, and welcome to this NCI Building Systems conference call to review the Company's results for the second fiscal quarter of 2008. This call is being recorded, and a telephonic replay may be accessed through June 10, 2008 by dialing 412-317-0088 and entering access code 419727. The replay will also be available at NCI's Web site, which is ncilp.com.

The Company's second quarter results were issued yesterday and a press release that was 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 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. Investors should refer to statements filed by the Company with the Securities and Exchange Commission and in yesterday's news release for discussion of factors that could affect NCI's operations as well as any forward-looking statements made on this call. To the extent the present time that any non-GAAP financial measures are discussed on today's call, you may find a reconciliation of that measure to the most directly comparable financial measures 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 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 the NCI's Chairman, President and Chief Executive Officer, Mr. Norman C. Chambers.

Thank you, Todd. Good morning, everyone, and welcome to our second quarter 2008 conference call. I am pleased to have with me this morning, Mark Johnson, our CFO, and Todd Moore, General Counsel. I will provide an overview, and then Mark will discuss in detail our business units performance. Then I'll return with closing comments before we take your questions.

Our very strong second quarter results were achieved within a challenging business environment with rising steel prices and weakening overall demand. As we review NC -- NCI's operating performance for the period, we hope to provide further insight into how we have addressed the prevailing head winds. Second quarter. As you know, our guidance for the first half of 2008 was for earnings of $0.64 to $0.79 per diluted share. Our actual results now stand at earnings of $1.15 per diluted share with upside having taken place in the second quarter. Our trailing 12-month EBITDA-R at the end of the second quarter was $187 million. Backlog at the end of April was $449 million. There were five main reasons our results were better than expected. First, we worked extremely well with our customers, proactively communicating expected steel price increases, giving them the best opportunity to price their work accordingly. Our steel price volatility is broadly in line with the crude North American steel price index. The crude index was up some 20% during our fiscal second quarter. This was a lesson we learned from having to deal with the 2004 steel price increases, and we are applying that experience to effectively work with our customers to overcome the increase cost of steel. One aspect of the initiative to work with our customers is to assist them in getting end-users to pre-fund the early purchase of steel for their projects. Second, contrary to earlier concerns, we did not experience any meaningful slippage in our second quarter shipping schedule of our buildings group, which significantly benefited from planned utilization. Our quoting activity was good and several important end-markets, such as mining, energy, manufacturing, industrial warehousing, transportation, institutional, which includes schools and government buildings. This represents about 60% of our second quarter revenue and our backlog at the end of the period. Third, our Components group experienced a greater demand than we anticipated, and their focus on cost and manufacturing efficiencies resulted in significantly improved operating margins. Fourth, our coating group benefited by both improved internal demand and a shift to more packaged sales during the quarter. And fifth, as the largest independent company -- a company in our sector, we continue to benefit from good relationships with a number of steel -- steel mills. This is critical during periods of price volatility and shortages of certain types and grades of steel. These relationships provide a level of quality and availability that we are able to use to support our customers.

To summarize, we are very pleased with our performance for the second quarter and our first half of fiscal 2008. In the second quarter, we posted volume growth across all of our business and shipped 3.5 more tons, 3.5% more tons of steel on a year-on-year basis. During this same period, McGraw-Hill data shows low-rise, non-residential, new construction starts measured in square feet decreased. The swing factoring for us has been the solid demand we have seen from the industrial and institutional and even some small improvement in the agricultural end-markets. And, we believe that certain pockets of low-rise, non-residential segment are stronger for metal buildings and components than they appear in the published data. Of course, we still face some difficult business conditions in the second half. Steel price increases -- increases will accelerate in the third quarter. The crude index forecast a 40% increase during our third fiscal quarter. We are uncertain whether this will continue into the fourth quarter. My belief is the steel producers will recognize that there is a level of which steel prices will potentially slow demand and/or promote switching to other building materials. Steel prices are too high for our customers and the end-markets our products serve. As a result, we are seeing some modest levels of cancellation and some rebates. At the end of the second quarter, our Building group backlog was $449 million, up 9% sequentially and about flat a year-over-year -- on a year-over-year basis. This is a snapshot number that is made up of some 4,500 projects. Some of them reflect the most recent steel price increases, and others will only be adjusted as they move into our production. Measuring in tonnage, I would say that the backlog was slightly up sequentially.

We want to be cautious and conservative in our projections. Now, however, if we continue to execute well and continue to build our backlog with good value-added work, we should be well positioned to meet the challenges that we face and more on that later. Mark Johnson will now review our performance of our three business units. Mark.

Thank you, Norm. I will begin by discussing the Coatings group performance. The Coatings group operating results were up from the same quarter of last year and showed significant sequential improvement over first quarter results. Third- party revenue increased 31% year-over-year, primarily resulting from a shift in product mix from toll coating services to packaged sale, which was partially offset by lower third-party to be tonnage process. Packaged projects for the first half of our year were 55% of coating sales compared to 35% for the same period in 2007. Sequentially, our Coatings group third-party revenues increased41% due to the continued increase in package sales and higher sales prices resulting from higher steel costs. Plant capacity utilization reached 77%, compared to 72% last year and 67% in the first quarter. Operating income in the quarter in creased by almost $1 million year-over-year and by about $4 million sequentially. The sequential earnings improvement was the result of higher revenues, higher capacity utilization, and the fact that the first quarter earnings were unfavorably impacted by a $900,000 inventory charge, which we discussed in our last conference call. The Coatings operating margin was 25% for the quarter, which is down from 28% in the same period of the prior year, but up sequentially from the first quarters depressed 14%. The 3% reduction in operating margin from the prior year was primarily the result of the product mix shift from tolling to packaged sales, which are higher dollar, but lower margin transactions. As previously indicated, we expect that our Coatings operating margin will be in the 25% range for full fiscal year 2008 as the result of the change in product mix during our seasonally strong third and fourth quarters. Components. The Components group has continued its operating performance -- operating performance recovery from the low point experienced in the second quarter of 2007. Third-party revenue increased 9% year-over-year and 13% sequentially. These revenue increases were directly related to volume growth. The Components volume measured in tons shipped increased 6% year-over-year and 11% over our first quarter. First half Components volume is 5% higher than in the same period of last year. In addition to volume growth, our revenues per ton shift increased by more than 4% reflecting the increasing cost of steel our most significant raw material. Components operating margin increased to 12%, up from 7% in the same period last year and 8% in this year's first quarter. Plant utilization was approximately 65%, compared to 61% last year and 58% last quarter. Operating income improvements resulted from higher volumes, which led to higher capacity utilization combined with cost reductions initiated this fiscal year. The effect of the cost reductions are evident in the fact, that despite our significant revenue and volume increases, our Component operating expenses have decreased by 3% compared to the same quarter of last year. Included in this quarter's numbers were net special charges of $600,000 related to the exit of our Components residential overhead door product line, which was completed in the quarter. For the fiscal year, we expect operating income margins to be between 10% and 11%, still short of the 13% to 16% we have reported in recent years.

Buildings. Our Buildings group revenue increased 14% year-over-year and sequentially. Similar to our Components business, these revenue increases are directly related to increased volume. Measured in tons, we shipped 10% more product this quarter than the same period last year and shipped 14% more product than last quarter. On a year-to-date basis, we have shipped slightly more volume than the first half of 2007. While we see overall declines in small building projects, we continue to find reasonably good business conditions for certain end-markets and for more complex work. We believe our ability to successfully compete for these higher-end, complex projects is leading to higher average sales prices and project margins. In addition, we are beginning to garner the benefits of integrating RCC into our hub-and-spoke delivery system. Accordingly, our operating margin in the Buildings group increased from 8% of third-party revenue in the second quarter of 2007 to 10% in the 2008 second quarter. Plant utilization for the quarter increased to approximately 71%, compared to 63% in both last year's second quarter and this year's first quarter. As Norm mentioned, our Buildings backlog was $449 million at the end of the quarter. During the quarter, we saw cancellations of approximately $30 million, which we believe was primarily the result of price increases forcing some projects to be canceled. We saw similar levels of cancellations in 2004, the last period of significant steel price inflation. In general, announced price increases tend to cause mixed results, with certain customers adhering to shipping schedules to avoid higher cost from delays and others re-evaluating their project's economics. We expect the Buildings group operating income margins to be around 10% for 2008.

Operating expenses. Our total selling, general and administrative expenses were $73.9 million for the quarter, compared to $68.1 million in the prior year. Included in this quarters operating expenses were special charges of $2.2 million (sic -- see Press Release) related to previously announced executive retirements. When combined with the Components group exit charges, previously mentioned, the special charges in this quarter amounted to $0.09 per share. Also, we had incremental selling costs of $1.2 million and incremental accrued incentive compensation of $1.2 million. For the fiscal year, we anticipate our total operating expenses, including the retirement charges, will range between $278 and $282 million. Excluding the retirement charges, this will represent a 1.5% to 3% increase over the prior fiscal year.

Working capital and balance sheet matters. Our days sales outstanding calculated on a trailing three-month basis was 31.2 days, compared to 33.1 days in the prior quarter and 31.9 days in last year's second quarter. We have maintained our high level of credit discipline and have not seen any significant increases in our bad debt write-offs or aging of accounts. Inventory increased by 5.6 million, or 3.7% from the end of our first quarter. Our annualized inventory turn-over for the quarter was 7.9 turns, compared to 7.2 turns last quarter and 5.7 turns for the 2007 second quarter. During the quarter, we generated $15.8 million in operating cash flow, which is net of investing $14 million in our working capital primarily in inventory and accounts receivable as a result of the higher volumes and higher transaction prices driven by increasing steel costs.

Looking forward, we expect to generate healthy operating cash flow in our seasonally strong second half, despite the fact that continued steel price increases could require additional working capital investments ranging from $5 to $10 million. Capital spending. During our second quarter, we invested $7.5 million in our property and equipment, bringing our year-to-date investment to $13.3 million. We expect to spend approximately $25 million in the last half of our fiscal year, bringing our total fiscal year spending to about $38 million. Our more significant capital projects, include the initial phases of a new insulated panel plant and automation and software development cost.

Thanks, Mark. We believe that the challenging market conditions will likely persist for the remainer of fiscal 2008. On the positive side, historically, our third and fourth quarters generate our seasonally strongest demand. And longer term, we think steel prices will stabilize as somewhat, and the economy will improve modestly. As many of you know, the 2008 strategic plan to double our 2007 EBITDA-R in five years assumes a mild to a deep recession until 2010. Our challenge is to grow our earnings during economic times while improving our competitive position for better economic periods. As I said earlier, it is a difficult environment to forecast. I know we left many investors concerned on our first quarter conference call by saying we would review our year-end guidance at the end of the second quarter. Many interpreted those remarks as foreshadowing a further reduction in our expected 2008 results. That was not our intention.

Within this uncertain business climate, we need to monitor our operational execution and our quoting activity attempt to guide as effectively as we can. Having said that, our third quarter shipping schedule looks pretty solid. To that end, and based on the current data, we have narrowed our guidance range to $3.19 to $3.44 in earnings per diluted share for our fiscal year. Therefore, our EPS guidance for the second half of our fiscal year is $2.04 to $2 -- $2.29 per diluted share. As we have at the end of this quarter, at the end of the third quarter, we will review our results and the data to determine the appropriate level of guidance for the remainer of the year. In closing, I want to thank all colleagues for their dedication and hard work. We are challenged to both perform well in the current period while also being engaged in designing new systems, products and executing growth initiatives for our future. Now, we'll be very happy to take your questions.

(OPERATOR INSTRUCTIONS). The first question is from David Yuschak of SMH Capital. Please go ahead, Mr. Yuschak.

Congratulations, gentlemen. The quarter kind of -- is kind of thing we like to see after what we seen in the last couple of years. So, congratulations on it, and it looks like you are heading in the right direction. But, the question I'm having for you is we have been more positive on non-residential construction than, probably, a lot of people. But, I am looking at your -- your ton shipped year-over-year up 3.6%. Backlog growth that had been a pleasant surprise for you as well as interest segment sells, and I am wondering where is it a head wind? Where is this kind of black hole that people been expecting and kind of squeeze on steel margins that you could get because of it being so bad. Because looking at the numbers in this quarter and what you are -- what you are showing here in the way of activity for backlog and segment sales, Norm it is tough to see the head winds are as head windy as you might want to suggest.

Yes, Dave That's a great question. As you know the aggregate numbers by McGraw-Hill continue to be -- to be really low. And, when we -- when we cut that that data, it is clear that is end-markets that we serve, that, frankly, metal building and components are better suited -- are very strong right now. What's weak is the commercial and the retail. But, even with that, it strikes us that the weakness was more prevalent in that area, which is the commercial and retail in 2007 in the second quarter and third quarter because our Components group deals a lot in that aspect, and their demand has really been quite -- quite encouraging.

Does the inter-segment sales strength in the quarter help? Did that help you also a lot in getting the EBIT margins where they were in the quarter because that inter-segment sales was as, was better than what you produced in the third quarter last year, which was reasonably your strongest period of time?

Yes, Dave. It was good, and it really speaks to the level of integration and the value chain that we have. The hub-and-spoke and the synergies from the Robinson-CeCo acquisition are beginning to take hold in the second phases right now. And, we are seeing real benefits there, and we're still just beginning to go scrape the surface of that.

So, this inter-segment sales are kind of the early reflection of that.

Yes, sir.

So, that -- looking at the second half that should even get better if we have a positive environment for spending then.

Well, as I said in the script, we really are trying to be cautious and conservative because the uncertainty, okay.

Okay.

And, I am -- we are very mindful of missing our guidance twice in 2007, just to correct you we were okay in 2006, Dave.

Right.

But, we really, we want to -- we want to continue to let our numbers speak and be the place we stand in kind of how we're doing.

Okay. And, one last question as far as your cash was up $9 million or so, $10 million from the first quarter. No debt repayments yet. What's your thought about cash and your net debt position versus paying down in debt as you look in the rest of this year --

Right.

Because you should be producing some pretty good cash to increase our net debt position?

Yes, I mean, as I said before, we are in the accumulate-to-cash mode. And, that makes it a little bit difficult because we have to invest in working capital in the short term. But, we should accumulate a good -- a good level of cash, and then we will, we will look at when we go into the markets again to redo our balance sheet. But, we want to let things settle out still a bit further.

All right. Good. Appreciate it. Thanks.

Thank you.

The next question is from Mr. Michael Cox with Piper Jaffray. Please go ahead, Mr. Cox.

Hi, good morning. Congratulations on a very nice quarter.

Thanks, Michael.

My first question is on the cancellations that you noted in your prepared remarks. I am curious just where you see that trending as you look out at the balance of the year? Do you action expect that to continue to rise, or what levers can you pull to bring that under reign?

Well, the interesting ting with cancellations is that they have a habit of coming back. Some times folks cancel because they think that steel prices will come down, and they want to wait and can wait. In some cases, the job just doesn't happen for a year or more.

But, we would expect to see kind of the same level of cancellations, which is about between 6% and 6.5%. And, that is still about half of the cancellations we saw in 2002during the downturn, and pretty much in line with what we saw in in 2004 with our steel price increases. So, we are expecting things to continue along that line. We have been communicating the steel price increases, so the -- the crude index of 40% in our -- in our third quarter, I mean is expected. It is what people have been able to see, and we have communicated for the last, God, probably, three months.

Okay. That's very helpful. And, just going through the -- the numbers you provided in terms of your expectations for operating expenses and to flow through to your earnings guidance, it looks like you are anticipating gross margins to be down in the second half of the year versus a -- on a rate basis versus the second half of '07. Is that a function of the steel price increases, and -- or is there something else we should be cognizant of there?

Well, we are going to see improvement in the Components group, probably, up a little higher than I had first thought which I was kind of at the10.4% range. I think we will see them maybe closer to 11%. The Components -- in the Coating group will be where we said, which is about 25% and packaged sales will be up. We should drop a little more of the bottom line that way. And, I am giving ourselves some caution at the Building side. I hoped we can hold 11%, but I think with the steel price increases and their ability to get those through that will, probably, experience a bit of erosion there So, we want to be cautious on that side.

Okay. That's helpful. And, my last question is on -- just on the components of the sales growth in the quarter. I believe you mentioned that the tons shipped was about 3.5%. So, it is fair to say that steel price increases added about 10% from an average selling price perspective, or is there something more on a mix side that we should be aware of?

There's a lot on the mix side, but, I mean, volume was the biggest part of the change.

Okay. Great. Thank you.

Thank you.

The next question is from Arnie Ursaner of CJS Securities. Please go ahead, Mr. Ursaner.

His. Good morning, Norman. Congratulations on the quarter. First question, which utilization in each of the segments is embedded in your guidance for the balance of the year?

That's a good question. It is pretty -- pretty flattish with the second quarter. Pretty flattish. And, again, we are trying to -- we are trying to stay on the cautious side of this, Arnie. And, even though we know that our third and fourth quarter are our strongest, we are trying to -- trying to forecast in a way that's -- that's cautious.

Right. Maybe asking a similar question in a same -- in a different manner. To the extent you normally get close to 70% of your revenues in the back half of the year. Given your views, what percentage are you embedding now? Again, I am trying to get a feel for how cautious you are. Maybe another way to say the same thing, do you view the current trends as a pull forward of demand, or is demand in your view still pretty strong?

Demand is still strong, Arnie. Our third quarter is looking pretty good on the Shipping side. We -- we have been as low as 62% in the last two quarters of the year and as high as 77%.

If you do the math, we are probably pretty similar to 2007.

My final question to you, you indicated in one of the key uses for capital would be for an insulated panel plant. You haven't talked much about it. I am assuming you are building this plant because you are seeing very strong demand. Can you tell us your revenues in insulated panels, and what's its capacity with your potential revenue opportunity is?

Sure. We check -- we currently do about $20 million in panels, and we expect to see some increase in that this year to maybe up closer to $30 million. And, we think that the plant that we are building and the opportunity is in the short, I should say to the short term. Within a couple of years to have that up to maybe $150 million, between $100 and $150 million in revenue.

Okay. Thank you very much.

Thanks, Arnie.

The next question is from John Diffendal of BB&T Capital Markets. Please go ahead.

Yes, good morning, and congratulations as well. First off, just -- you have given margins, and I know in the prior sort of presentations you had there was an embedded sort of sales assumption for like $1.62 billion to $1.67 billion. Norm, can you give us any help in updating that number, especially given the price in steel changes?

Well, we are probably going to be in the $1.7, the $1.7 range, maybe $1.7 to 1$.8.

Got you. And, I know you mentioned cost cutting helping Components, and I know there was an effort to reduce cost initiative, kind of coming into this year. Anyway to sort of quantify how much cost cutting is helping you right now?

Well, I mean -- well, I mean, it definitely helped the Components group. We -- we leaned out pretty good in 2007 and have really been diligent in not adding back a lot in 2008. And, we are, frankly, busier than we had anticipated to some extent.

And, we have made some adjustments on the Corporate side. We probably brought our run rate down in Corporate by 5%, or maybe between 5 and 6%. And, so I -- we have -- we have two sets of kind of plans -- contingency plans that if the economy worsens we have got two plans in place. One is for mild recession, which we still feel we are in even though we are doing better than -- than the aggregate. And, we have a plan ready if things turn worse.

Yes. I think in your earlier expectations you may down $70, $80 million in debt. You mentioned some working capital needs in the second half. How would -- how does that change that sort of debt reduction plan?

Well, that's still our goa, and accumulating cash. And, whether we pay it down, or it is part of a refinance at some point, it will be rolled into that probably.

Okay. And, then just one last question. When you step back and look at the quarter, relative to sort of budget, where were the real surprises in both directions? It looks like it was pretty much across the board, but where was it really different from your expectations?

Really the Components and Recovery is -- the men and women if that group have just done a superb job. I got to tell you, across -- I mean they're just managing, managing that. They were so disappointed with their results in 2007 that that team has just been as focused as you can believe. The Coating group continues to do things well in terms of efficiencies. The steel market is very tight. It is we are seeing some delays on shipments. Our guys have had to hustle on the purchasing side. They've done a first class job. In the Buildings group continues to go from strength-to-strength. I will tell I mean I really am pleased with what everyone has done.

Good. Thanks, Norm.

The next question is Timna Tanners of UBS. Please go ahead.

Good morning, Norm.

Morning, Timna.

Morning. I wanted to ask a little more about if there were inventory gain that is might have contributed also to the key two -- to the quarterly results? It seems like when you talked about the ability to communicate expected steel price rises in advance of maybe having to pay some of those increases. Can you talk about how that -- how that works for you and what you might be expecting going forward?

Well, you know better than anyone that the steel market's very tight. The consolidation in the steel market has led to pricing power, that has similar to 2004. Whatever benefits we get, from our relationships are really on the margin.

And, so we, we weren't real long in inventory. What happened was our inventory turns really increased. So, we were hustling to find material to be sure. And , we didn't get a lot of benefit you know from inventory that was hanging around at lower prices because, in fact, inventory bumped up in 2007 toward the end. But, I would say that it is, it is on the margin. It is just really being focused on purchasing, try to go get a little better here and a little better there. And, just trying to work with customers to help them absorb this. In some cases, we eat some of the cost. We try to work with them, pass it through. And sometimes we are successful, and sometimes we are not successful. And, we have to

Right. But, in your five points, how you are able to best your expectations. The first one was proactively communicating steel price gains. So, I was just wondering if there was any ability to raise prices to customers in advance of paying that additional price increase?

Most of the benefit we got in the period was from volume. That's -- that's where we pick this up. We -- I don't think we picked up very much at all on the pricing differences. It was just really effectively maybe being able to work with the customers to pass on more of that than we would have expected.

Okay. Great. Then so you are buying mostly on the spot market Are you able to buy galvanized? Are you looking at different kind of input costs there or are you working with the same kind of material?

Same kind of material, but we did pick up a bit on the galvanized side. Because galvan was a little light.

Yes.

Well, it has been a lot of movement with Sparrows Point and whatnot, but again our steel mill partners have really stood by us and done a first class job. I still think the steel prices are too high, but I understand that. Understand where they are, but I have to say that the partners that we have in the steel mills did a first class job for us.

Okay. And, just confirming then, you are buying mostly on the spot market. You don have a lot of contract tons.

We don't have a lot of contract tons. We would, historically, with the foreign steel. We go a little longer on that, but as you know there's no foreign steel to be bought. So, everything we do -- we generally buy probably one quarter in advance.

Okay. All right. Great. Thanks very much.

Thank you.

The next question comes from Robert Kelly of Sidoti and Company. Please go ahead, Mr. Kelly.

Hi, thanks for taking my question.

Hey, thank you.

Not sure, if you covered this. I might have missed it. The tons shipped versus mix and price in the Components division?

Mark, tons, what did we say tons were up in components?

I believe they were up -- Let's see. Tons were up 6% year-over-year and 11% over the first quarter.

Okay. Great. And, then as far as 50,000-foot view of Components. Are we seeing better discipline in the market? Does that explain the improved performance there? Have the inventory excess been worked off at this point? Just maybe just some of the competitive dynamics of the Components market in Q2.

That's a good question. I would say that the Components marketplace is very competitive. There are a lot of small producers and good competitors, and -- but they have experienced the steel price increases as well. And, unlike in 2004, I think some were thinking that it was just a short-term event. I think that that experience has led people to believe that steel prices are high and will stay high. So, I think that's contributed to a dynamic that's more positive. But the big difference in Q2 this year and Q2 of last year is that there isn't the, that we had a -- an excess of inventory in the marketplace in Q2 of 2007 that really damaged the Components group.

Got it. So, the low end of the market is cooperating, if you will?

I wouldn't use that -- that term, but I will say that the pressure of steel price increases is felt across the board.

Okay. And, then just on EBS, backlog, you mentioned being flat year-over-year. As far as volume, is that also a flat number?

It is flattish, yes. And, but,, we, I mean as most of you know. But, I need to say is that if you looked at our backlog going into the second half of 2007, we actually generated revenue for the second half of the year in the Buildings group about 13% more than the backlog we had going into that six months.

So, we are seeing quoting activity is still very good. We know that the backlog will, in some cases, will be repriced and as it moves into -- into our production schedule. So, that number will move a fair amount, I think.

Okay. So, the second half of the year, with you saying F '08 operating margins for EBS being around 10. The second half of the year, that's, that weakness versus QH '07, that's all the steel price increases?

Yes.

So -- so, you don't expect to get pricing through?

What I am saying is that -- that we will, we will be as successful as we can working with the customers to absorb these increases, and the reason for our being cautious is that the velocity of steel price increases will be double in the -- in the third quarter of that what we saw in the second quarter.

Okay. And, then you had talked about the level of cancellation being around 6%, 6.5% thus far, in May is that still the case?

Yes.

Okay. And, someone had asked a question about the debt repayment, you possibly doing the refinance. Is that a near-term event, the refinance on the balance?

It depends on the markets. I mean, we are in good shape. Stan's Poor improved our rating. We are in good shape across the board. But, we -- we will look to get into the market here at some point once it settle down some.

Okay. Thank you, Norm.

Thank you.

(OPERATOR INSTRUCTIONS). The next question is from Michael Corelli from Barry Vogel and Associates. Please go ahead, Mr. Corelli.

Good morning, Norm. Great quarter.

Thanks, Michael.

Just a couple of questions. First of all, on the Components side, your revenue was up about $15.4 million, your operating income about $6.6, which was a 43% incremental margin. Is that basically just capacity utilization gains on top of cost cutting that led to such a great incremental margin there?

Absolutely. And, as I said and I will say again, that team is just doing a Hell of a job.

Okay. And, then, as far as acquisition activity, it sounds like your -- your focus really is to try to get your debt down or redo the balance sheet here. Are acquisitions on the back burner at this point?

Let's put it this way. If you look at our strategy to double our 2007 EBITDA-R, it is largely driven by internal improvements and systems. But, there is, is a number of acquisitions. They will be smaller than we have done in the past, but we, we are, are constantly looking at opportunities because the market is what the market ism and it provides opportunities at times.

But, we don't have anything to announce. That's for sure.

Okay. And, then, just a question about the special charge, just to make sure I got it right. It sounds like it was $2.2 million in SG&A, and that other $600,000 would have been in cost of sales?

That's correct.

And, then as far as the segment break out, it would be $600,000 in the Components, and would it be $2.2 million in the Corporate? Is that where that would be?

You got it exactly.

Okay, great. Thanks a lot.

Thanks, Michael.

The next question is from Gentry Klein of Situs Capital. Please go ahead, Mr. Klein.

I believe at the beginning of the call you mentioned that some customers were interested in pre-funding purchases. Can you just talk about the magnitude of this, and if there was a large amount that was kind of pulled forward from -- from the Q3 and Q4?

Well, we don't recognize that as revenue. It goes on the balance sheet, but it -- it is a couple of larger types of projects. And, when I say larger, in the -- north of $10 million range, and it made sense in that circumstance. But, it is a fairly small amount to be frank.

Got it. Thank you, and, in terms of -- in terms of this recent Q2, it seems a lot of the growth was volume driven, and you mentioned mix. With hot roll basically doubling from the beginning of the year, how do you view that impact going forward in terms of the cogs line and your ability to, kind of, maintain margins?

Well, as I said and reflected -- I think we will be, we will do okay in the coating group in line with our expectations Our Components will be maybe a little better than we thought. And, the difficult part will be in the Buildings group, but, as I said, if we can stay in the 10 to 11% range, I can assure you that the team is working hard to have growth in margins. But, at the end of the day, the reality of working with the steel price increases and working with our -- with our customers takes precedence.

Okay. Thank you.

Thank you.

The next question is from David Yuschak of SMH capital. Please go ahead, Mr. Yuschak.

Nucor is coming up on one year of ownership of buying MagnaTrax out. We have got BlueScope strengthening its beach head in the space. I am just wondering what you see here after about a year of Nucor's expansion in the space as well as what we are seeing coming out of BlueScope that gives you some sense as to what they may be doing in the marketplace relative to maybe some concerns that they're going to go after market share and potentially take away opportunities for you guys.

Well, it is interesting because each company is different, but they're both come good competitors and very professional, well-run organizations. And what I would say is that -- that not much has changed. I mean I think that, that the, that the level of professionalism of both organizations makes them inclined to understand the dynamics in their business, and the steel price -- steel price increases are part of everyone's approach.

So, my sense that is that -- that I don't -- I don't think there has been a lot of change in mark share, Dave. We are still kind of off at the top in the Buildings group, but now we have two others that are close by us. So, they're both good competitors.

Okay. And, then, as far as availability, with the prices rising as much, there to had to be a real scramble for getting that supply. You mentioned that kind of the velocity of curing supplies was pretty intense in the quarter. Can you give us a sense as to what things you were having to do? Because, when you get that kind of, obviously, given the quarter you produced here, and shipments up like they are, it would have to at least alleviate some concerns that availability to you guys because of the integrates have, having to build a beach head, that availability to you may not be as much of a problem longer term as much as being able to have a reliable source. I am just, kind of, curious what things you did in the quarter because the quarter, certainly, showed exceptional results, given the dynamics of velocity and availability of steel.

Dave, there's a school of thought that says being integrated is a disadvantage. I mean, we are independent. So, we can deal with all of the mills in a very straight up way. We don't have any conflicts. We are integrated might have some conflicts. I don't, and I haven't, believed in the theory that we are are disadvantaged. I would say just the opposite.

I mean, we are advantaged. People want to work with us. We are a good company. We pay our bills. We work with our suppliers. We have got great relationships. Yes, I am concerned about the steel prices being up, but at the end of the day, we --we are in good shape with our suppliers. I mean we have to hustle because their capacity is limited. So, working on the supply chain side, our Purchasing group did a Hell of a job in terms of the logistics and being able to move material and organizing transportation. That's the kind of stuff in a -- in a centralized approach that we have is where we have the competitive advantages through the downturn of 2001 to 2003. This is why we tend to do better, and -- and I hope that we continue.

Does the hub-and-spoke process help on that process, too, as far as doing a move and have availability at any one point in time to get it there sooner so you can process it faster?

Absolutely. And, Dave, I mean you know our strategy. You have studied this and been around us for years. We really put a lot in that and believe that we are seeing the next part of the synergies with Robinson-CeCo side, and -- and that is going very well indeed.

All right. Thanks a lot. Appreciate it.

Thank you.

The last question is from John Diffendal of BB&T Capital Markets. Please go ahead, Mr. Diffendal.

You guys gave the 00 a break down on tonnage on the Coating side up 6% in the overall number. Can you give us a similar, sort of, cut on Systems, and -- and, it wasn't for coating, but I think it was for Components. But, for Coatings and for Systems?

Sure. Sure. I will give you that. Measured in tons, we shipped 10% more product this quarter than the same period last year in the Buildings group. And, we shipped 14% more product in the first quarter in the Buildings group.

But, if I flip that around for the Coaters. Let's see here. The total third-party volume was actually down slightly. But, the -- the overall volume process, including family demand, was up about 3%.

Okay. So just -- I am try to go make sure I can split this. So, if Components was up 6%, and the Buildings side up 10%. Coatings just down slightly, the overall number was up 3.5%. It seems like it ought to be a little higher number overall.

Yes, it is the -- it is the weight of the amount of steel.

Okay. So, the rest of it is mix?

Yes, it is. It is mix.

Okay. Great. Thank you, guys.

Thank you.

At this time, I would like to turn the conference over to Todd Moore, Executive Vice President and General Counsel, for any closing comments.

Actually, I will give the comment at the end, and it is again thank you for your interest. We have -- we have tried to be as open and straightforward as we can in the conference call, and we look forward to speaking to you at the end of the third quarter. And, thank you very much.

Thank you all very much for participating in the NCI Building Systems second quarter 2008 earnings conference call. This concludes today's event. You may now disconnect your lines.