Core Natural Resources Inc (CNR) 2008 Q3 法說會逐字稿

Hello, welcome to the NCI Building Systems 2008 earnings conference call. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for to you 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 call over to Mr. Todd Moore, Executive Vice President and General Counsel. Mr. Moore, you may begin.

Thank you. Good morning, and welcome to this NCI Building Systems conference call to review the Company's results for the third quarter of 2008. This call is being recorded and a telephonic replay may be accessed through September 10th, 2008, by dialing 412-317-0088 and entering the access code 419727 and then the pound symbol. The replay will also be available on NCI's website at ncilp.com. The Company's third quarter results were issued yesterday in a press release covered by the financial media. A release is also 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 with the Securities and Exchange Commission, and in yesterday's news release for a discussion of a number of factors that could affect NCI's operations. To the extent any non-GAAP financial measures are discussed on today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the Company's website by following the news link to yesterday's news release. Information being provided today is as of this date only and NCI expressly disclaims any obligation to release public 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 Chairman, President and Chief Executive Officer, Mr. Norman C. Chambers.

Good morning, everyone. And welcome to the third quarter 2008 conference call. I'm pleased to have with me this morning Mark Johnson, our CFO; Mark Dobbins, our Chief Operating Officer and Todd Moore, our General Counsel. I will provide an overview and Mark Dobbins will review our operations followed by Mark Johnson who will review our financial results. Then I will return with some closing comments before we take your questions.

This is another quarter of very strong operating results for NCI, achieved under tough business conditions dominated by a weak economy and extraordinary steel price increases. Our guidance for the second quarter -- our second half of fiscal 2008, was for earnings per diluted share of $2.04 to $2.29 which we had originally expected to be split about 45, 55, between Q3 and Q4. As you have seen, third quarter earnings came in significantly above our expectations at $1.63 per diluted share. Sequentially beating Q2 by 114%, and Q3 of 2007 by 60%. Our trailing 12 month EBITDA at the end of the third quarter grew $200 million.

There were six major reasons for these record results. First, our components group and coatings group significantly outperformed their operating profit targets benefiting from higher revenues and order pull through from customers moving up their orders from Q4 to Q3, in order to lock in pricing. Second, NCI has succeeded in capturing an increasing amount of business from those markets where demand remains good and where the intrinsic benefits of steel are important and recognized, namely energy, mining, manufacturing, schools and government buildings and agricultural end markets. This has been a good counterbalance to the continued low levels of demand in commercial and retail. Courting our activities in the stronger markets continues to be fairly good and we are seeing very little further erosion in the commercial and retail end markets.

Third, we are utilizing the engineering technology we acquired in the Robinson-CeCo acquisition to work with our customers to design buildings that more efficiently utilize steel, reducing the total weight and cost of the buildings we manufacture. Fourth, our three business units called coatings, components and buildings effectively communicated steel prices which enabled our customers, for the most part, to pass on the 40% increase in steel prices that we experienced during our third quarter. Also, higher steel prices caused the pull through of work into our third quarter from our fourth quarter, and caused us to draw down our backlog at the end of the quarter to $424 million.

Fifth, although volume was down 6% on a year-over-year quarterly basis, sequential volume increases and tons of steel we processed leveraged our manufacturing performance across our business units. Sixth, as the largest independent company in our sector, we have developed and continue to maintain purchasing relationships with steel producers which benefit us during tight supply periods.

As many of you know, the extraordinary steel price increases we have faced in 2008 are very similar to the steel price increases of 2004. We have stated before that our short-term goal for 2008 has been for our flee business units to perform better than they did in 2004. On an operating income percentage basis for the first three fiscal quarters, coatings out performed 2004 by 21%, components by 10% and buildings by an astounding 88%. Our performance is even more note worthy when you consider that the low rise nonresidential new construction starts, measured in square feet, was down 15.8% for the fiscal year through July, compared to the same period of 2007. Additionally steel prices increased by 40% during our third quarter, which required our business units to perform with the right balance of commercial discipline and long relationship we have with our customers.

While coating activity remained quite good through the quarter, we would expect to see some slowing in demand due to record high costs of steel. If this slowing occurs, it would be similar to that which we concerned in late 2004 and early 2005. Therefore, we need to remain cautious, conservative and flexible as we have been so far this year, and through the remainder of 2008 and 2009. Our expectations are consistent with McGraw-Hill's forecast, that nonresidential markets will not start to grow until 2010. We will see new domestic US steel production start to come online in 2010, which should ease some of the tightness in supply we have experienced this year, and bring steel prices back to more competitive levels.

Now, Mark Dobbins will update you on the strategic initiatives to enhance our operational performance.

Thanks, Norm. I will provide a quick update on several of the operating initiatives that we've talked about as important action items for 2008. First, on the efficiency side, we have engineered process improvements at certain of our coatings facilities. These improvements have resulted in high prime yield and run time efficiency, which has increased our ability to capture short lead time business, and contribute to the growth in hot weld package sales.

We are beginning to see the benefits of our new web-based customer service center, which was rolled out in our components group earlier this year. Known as NBCI Online, this system gives our customers 24/7 access to our component, get realtime quotes, check shipping status and review any order they have placed. Now while this is not intended to replace the personal interaction between our sales coordinators and customers, it does streamline the process and increases staff productivity.

The buildings group is benefiting from the continuing development of our common engineering and drafting systems. While the end to end solution is not yet complete, we have significant phases implemented, which are allowing better utilization of our component group manufacturing and shipping facilities, and allowing entire buildings group to take advantage of all of NCI's spring fabrication facilities. This is generally what we refer to as our hub-and-spoke manufacturing and distribution system, which sets us apart from our competition and allows us to produce projects in the most cost effective location.

As an organization, we are implementing supply-chain management efficiencies across all divisions. Additional, we have significantly improved our safety record. And while NCI has historically outperformed our SIC code peers in the industry, we continue to make important year over year progress against our own benchmarks. Year to date, we have reduced reportable incidents by 23%, from 2007 levels.

On the marketing side, we will be formally launching our green building initiative this month. Because of the recycled content of our steel products, the recycle-ability of a steel structure, and the energy savings that our insulated panels offer, we can provide a compelling value proposition for customers seeking to take advantage phone incorporated green building requirements into new construction and building retrofit. That's about all I have for today. Norm, thanks.

Mark Johnson will take us through the financial results. Mark?

Thanks, Norm. The operating results for third quarter were very strong, due in large part to the exceptional performance in both our coaters and components segments. Our consolidated revenue for the third quarter increased to $478 million, up 10% year-over-year and up 15% sequentially. The increase over the prior year is due in large part to increasing transaction prices, driven by passing on increasing steel costs, partially offset by somewhat lower volumes.

On a year-to-date basis, our tons shipped are just short of that shipped in 2007. Our total selling, general and administrative expenses of $72.8 million were 15.2% of sales, compared to $67.8 million or 15.6% of sales in last year's third quarter. For the fiscal year, we anticipate our total operating expenses, including the retirement charges taken in the first half of the year, will range between $284 million and $286 million, which is up from our previous indication due primarily to increased incentive compensation on increased operating income expectations. Our operating margins grew to 11.7%, compared to 9.7% in the prior year and 7.1% in the prior quarter. The increased margins occurred in both our coaters and components segments, which I will discuss in a few moments.

Now, I will cover some of the working capital and balance sheet matters beginning with our accounts receivable. Our day sales outstanding, calculated on a trailing three month basis, was 33.2 days, compared to 32.9 days in the prior quarter, and 31.5 days in last year's third quarter. The total value of our accounts receivable grew by 8.7% compared to our prior quarter end, due in large part to the 15% sequential revenue growth, as well as the higher transactional prices. We have maintained our high level of credit discipline and have not seen any significant increases in our bad debt writeoffs or aging of accounts.

Inventory increased by $68 million or 43% from the end of the prior quarter. This increase occurred as we ramped up for the seasonally strong part of our fiscal year, similar to our historical pattern, and also was due to the significant increase in steel costs. Our annualized inventory turnover for the quarter was 6.6 times, compared to 8 turns last quarter and 7.3 turns for the 2007 third quarter. However, the current year turn calculations tend to be understated due to the velocity of rising steel prices.

During the quarter, we generated $7.6 million in operating cash flow which is net of $34.8 million in the working capital, primarily in inventory and accounts receivable as a result of the higher transaction prices driven by increasing steel costs. Looking forward, as is our normal seasonal pattern, we expect to recoup some of the incremental working capital investment incurred so far this year. However, we continue to expect that the increased transaction values will result in a net increase in our working capital investment over fiscal 2007 in the range of $50 million by the end of the fiscal 2008.

Capital spending. During our third quarter, we invested $4.6 million into our property and equipment, bringing our year-to-date investment to $17.9 million. We expect to spend approximately $12 million in the last quarter of our fiscal year, bringing our total fiscal year spending to about $30 million. Our more significant capital projects include the initial phases of a new insulated panel plant and automation and software development costs. With regard to our capital structure, we are currently in discussions with various banks to refinance our existing debt agreements which have maturities in 2009 and 2010. Our intention is to complete our refinancing transaction in a prudently timely manner based on market conditions.

Now, I will cover the segment financial performance beginning with the coaters. The coaters group operating results for the third quarter grew both sequentially and compared to the prior year. Third party revenue increased 20% year-over-year, primarily resulting from both rising steel prices and a shift in product mix, from tolling coating services to package sales, which was partially offset by lower third-party tonnage processed. Year-to-date, package sales were 54% of coaters revenue, compared to 38% for the same period of 2007. Plant capacity utilization was 75% for the quarter, compared to 79% last year, and 75% in the second quarter.

Operating income in the quarter was up 39% year-over-year, and by about 69% sequentially. The earnings improvement resulted primarily from the mix shift from tolling to packaging sales, the exercise in commercial discipline and rising steal prices and limited availability to steel and increased inner company sales with the further integration of RCC. The coaters operating margin as a percentage of third-party sales was 41% for the quarter, compared to 35% in the same period of the prior year. We expect that our fiscal 2008 coaters operating margin will be in the 28% range, which is slightly higher than previously indicated due in large part to the superior performance in our third quarter.

The components group operating performance for the third quarter was exceptionally strong. Third party revenue increased 8% year-over-year and 20% sequentially. The year-over-year revenue increase resulted primarily from transaction price increases spurred by the rising cost of steel, offset somewhat by decreased volumes. Year-to-date, components tons ships are flat with the same as last year. The components margin, on external sales, increased 19%, up from 10% in the same period last year and 12% last quarter. Plant utilization was approximately 68%, compared to 72% last year, and 65% last quarter.

Operating income improvements resulted from commercial discipline and passing on rising steel costs, higher intercompany sales on the integration of RCC, cost reductions implemented earlier in the year and a $1 million out of period favorable adjustment to cost of goods sold. The effect of the cost reductions are evident in the fact that despite the increasing revenue, our components operating expenses have decreased by 6%, compared to the same quarter last year. For the fiscal year, we now expect operating income margins to be around 12%, still short of the 13% to 16% we have reported in recent years, but continue to make forward progress.

Our buildings group revenue increased 10% year-over-year and 13% sequentially. Similar to our components business, these revenue increases are due in large part to increasing transaction prices, required by the increasing costs of steel. Measured in tons, we shipped slightly less product this quarter than the same period last year. On a year-to-date basis, tons shipped are flat with the same period of 2007. We continue to experience increasing benefits from integrated RCC into our hub-and-spoke delivery system. Plant utilization for the quarter increased sequentially from 71% last quarter, to approximately 76%, which was approximately the same level in 2007.

In contrast to the components and coaters group, the rapidly rising steel costs are resulting in some margin compression at the buildings group, while we are effectively passing on steel price increases in the short run, we generally do not capture the incremental margins on increased revenue. Accordingly, our operating margin in the buildings group decreased from 13% of third-party revenue in the third quarter of 2007 to 10% in 2008. As steel prices stabilize, we expect our buildings margins will return to historic levels. We continue to expect the buildings group operating income margins to be around 10% for fiscal 2008.

As Norm mentioned, our buildings backlog was $424 million at the end of the quarter. During the quarter, we saw cancellations of approximately $22 million, which were less than the $30 million experienced last quarter, and which we believe were primarily the result of price increases forcing some projects to be cancelled. 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 or advancing shipping schedules to avoid higher costs from delays, and others reevaluating their project economics.

Thanks, Mark. As a management team, we are proud of the way we operated within this period of very tough market conditions. As we came into the recent down cycle which started for us in 2007, our objective was to perform not only better than we did during the recession of 2001, to 2003, but also better than we did during the extraordinary steel price increases of 2004. And as I said earlier, we clearly have. We are a company of seasoned managers that continuously improves our internal systems and our understanding of the importance of commercial discipline, and we are committed to our 2008 strategy, to double the 2007 EBITDA that we generated within five years time.

In the down turn, we have grown earnings in large part because of our operating structure, which is comprised of a balanced portfolio of products and services that not only create value across the coating components and buildings group but also support growth through economic cycles. We are performing at record levels in the most challenging market conditions that we have faced in decades. As we move forward in 2009, we will execute our 2008 strategy, focusing on organic growth, from technology advancements, engineering improvements and new products. It is clear to us that we will achieve an EPS not only over 2007, but also over our very best results achieved in 2006. THerefore, our revised guidance for fiscal year 2008 is $3.85 to $4.00 per diluted share, before giving any effect to dilution from our convertible notes if any.

In closing, I would like to thank all of my colleagues for their extraordinary efforts so far this year, and I'd be happy to take questions.

Thank you. (OPERATOR INSTRUCTIONS). And our first question comes from Tom Haines from Piper Jaffray.

Hi, thanks, good morning.

Good morning, Tom.

Good morning. I wonder if it's possible to provide a little color on the impact that the pull through on the back orders had. You mentioned that people were maybe accelerating their anticipated delivery day. I wonder if you can provide a little color on that effect.

You know, it's a very difficult thing to calculate precisely, and -- but we clearly saw some movement and we would guess that it's maybe something on the order of $20 million, but it's a real rough guess. But it kind of looked to us anecdotally of $20 million.

Okay. Great. There doesn't appear to be any debt pay down in the quarter. Do you expect that there will be some further pay down in 4Q where you typically have a strong cash flow position?

Yes. I mean, we would like to accumulate cash to have that flexibility, that's for sure. And as Mark said, when the steel prices increased in 2004, we to invest more in -- more in our steel inventory. So that sucks up a little bit of cash but we would expect that to come back in the fourth quarter. We will accumulate some cash and then decide what we need to do when we go in the banking period.

I guess just lastly, if you look at the great margin performance and the components segment, excluding the $1 million impact, could you give a little more color as to what may have also drive than positive growth in the margins?

You know -- and I've got to tell you that it is clearly the case that this 6% drop in the operating processes really drove some efficiencies. They were able to do a whole lot of things on improvement of scrap, as Mark Dobbins had mentioned, but commercial discipline and the quick turn nature of their business, enables them in the coatings group to perform well in rising steel price environments. And what we find is that as steel prices begin to flatten or come down a little bit, that we will see some stabilization in our coating and components group and we will see improvement in the buildings group as their backlog catches up with the pricing. But commercial disciplines is a hugely important thing to us.

Okay. Great. Thank you very much.

Our next question comes from Arnie Ursaner from CJS Securities. Please go ahead.

I can't believe they are not congratulating you on an excellent quarter.

Well, Arnie, they probably knew you would.

Yes. The concern that people have is on the shipment seasonality that you are highlighting, and I guess I'm trying to get a better feel, if it's kind of August, September, October that we are dealing, with I would assume that August normally is not your most critical month and that typically it would be the activity you see in September and October that really drives Q4 and utilization. Are you seeing something specific that's causing you to be much more cautious about the next few months.

Well, that's a great question, Arnie and you are absolutely right. Our September and October is where we normally get the deal done in the fourth quarter. But I have got to tell you, August was pretty much, did -- we haven't gotten the final numbers but pretty much in line with what we had hoped to see. So, again, as all year long we intended to be cautious and very conservative, we really need to watch now to see if there's further demand erosion or if there is in demand erosion from steel prices. And my memory just keeps blaring at me from 2004. You know, we saw steel prices increase just like they did now and then there was demand erosion, and it took a little while for that to improve. So we're trying to be cautious. We're not saying that that is what will occur in terms of the demand erosion, but I think it's much better for us to be cautious.

Okay. And my second question for the backlog, obviously people are focusing on the fact that it's down a little bit sequentially, but wouldn't you also look at it as a pretty strong number relative, if you worked down that much order book in the third quarter.

Yes, very much so. I mean, if you look at it on tons basis, we are down, I don't know, 4% or 5%, which is not bad at all in the market that we are in. No, we are actually very pleased with the backlog and as I said, quoting activity is still pretty good in the good parts of the market. And it defies kind of the media hype, but the retail and the commercial stuff really hasn't gotten any worse. You know, it's pretty steady as she goes there. So, you know, we have our fingers crossed that we continue to be in an economy that shows some resilience.

My final question is one that may be difficult or impossible to answer, but I am going to take a stab anyways. With Robinson-CeCo now fully integrated, you spent the time and energy building out the hub and spoke system, the engineer capability. Can you look back and give us a sense of the cost savings you had from this initiative and how we should think about margin performance next year, given that you are now pretty well completed with this process?

We had a pretty good view that we picked up about $12 million in operating income in 2007. If you look at it from one perspective, Arnie, the big difference between 2004 and now, the business group out performed 2004 by 88%. And that in large part was certainly some discipline, but the Robinson-CeCo piece is huge in it. The goal is to have the buildings group achieve a level of sustainable of 15% by the end of 2010 and that comes from the technical systems and we're probably -- something like three-fifths or four-fifths along getting the technical systems in and as Mark said, the hub-and-spoke thing is coming in really very well. But we still have a lot to gain there, Arnie. We are probably only halfway there.

The peak margins that you would get above 8% operating rates in. This quarter, sever of your operating rates were lower and yet you had extraordinarily good margins. Is there a changing of business where something has caused your incremental margin to change materially even at lower utilization rates?

Well, I think, it depends on what part of the business. Clearly the commercial discipline was across the coatings and the components group but the cost reduction piece with the components group is huge. The intercompany sales which boosted from 60% internal to 63% is a very big thing. And finally just to give an example, as -- with the hub and spoke, the company we bought in January of 2007, in Spokane, we have improved the top line of that company by 34% a year, and improved the bottom line by 43% in the year and that's all to do with what Mark Dobbins had explained in this with the -- with the hub and spoke. Mark, do you want to add some color there?

Yes, a good example of using that as an example. That group was awarded a large project for a mining industry in Colorado recently. And on that project we produced components out of the Salt Lake City plant and additionally produced cranes out of two other NCI frame manufacturing facilities to put that job on track and on time. Now, in previous years, DARCO is a smaller regional manufacturer. Those guys would not have been able to take on a project of that size and scope in the time frame that it was required. And that's -- like I said earlier, that's a description of the hub and spoke type process.

Thank you very much.

Okay, Arnie, thank you.

Our next question comes from Timna Tanners with UBS. Please go ahead.

Yes, good morning.

Good morning, Timna.

Two questions. Steel prices are flattening or rolling over. Are you starting to see any discounts from your supplier or any change in pricing towards you?

Well, I never want to give specific insights into the -- with regards to relations that we have with suppliers, but we have always done particularly well on the margin, meaning that because of our financial strength, we are able to pick up steel at different times, small amounts at good pricing, but we are clearly have seen that the steel producers acknowledge that the demand, is slow. And that I think that they are cognizant of the fact that they want our business to grow and they are seeing some reasons why steel prices can't come back on a bit.

A lot of what you talked about in the margin, revenue benefits coatings and components has been the higher average selling price and the volumes haven't done as well. Can you tell us how sticky those sellings prices are in an environment where the steel price is coming down?

Well, in 2005, we were able to pretty much hang on to our margins at the end of the year, and our components group and the coatings group and that's when we were in the 13% to 16% rate. So in the components group, we are still a point below that. We haven't recovered to that level but one thing we always do see is that phenomenon of working through the backlog. When steel prices start to slow a little bit, it gives the buildings group a chance to kind of catch up. So we -- we normally would expect to see some improvements in the buildings group, fourth quarter, maybe first and second quarter of next year. You know, if steel prices stay flat.

I can see that and I can see the margins but what I was asking about is the selling price. Does the selling price remain as sticky in a declining sales price environment, theoretically?

Well it stays sticky on the building side and a little less sticky on the coating side.

Got it. And then final question, is there a break out in the revenues? Again you talked about average selling prices and volumes within the group, but can you say overall that the percent increase of average selling price and then the direction and the percent change in the volume?

Well, I think Mark spoke somewhat to the volumes. We said volumes were reasonably flat. You know, going forward Mark has said we would expect to see the coating group kind of finish the year around 28%, and, you know, that implies that the margins that we saw in the third quarter will come back down a bit, right? But that's still better than I had thought we would do at 25%. So I'm pleased with that.

Okay, but on the revenue side, can you say the direction of volume for the quarter?

You know, volumes in the fourth quarter will probably be, you know, off a little bit from the third quarter. But, we are expecting that we'll be in the range of what we said in the guidance. So you kind of back into the math.

Okay. Thank you.

Our next question comes from Robert Kelly from Sidoti. Please go ahead.

Good afternoon. Just a point of clarification. I think in the prepared remarks you talked about f '08 margins and the components being 12%; is that correct?

Yes, sir.

Just to get there for 4Q, we are talking about significant margin deterioration versus 3Q. What is the driver of that or are we being overly cautious again.

I said we will be on the cautious side for sure. All right? We have been cautious all year long. We are going to continue to be cautious and the big part is that we are still -- we still need to be concern about whether we see -- you know, the demand erosion that we saw in the tail end of 2004 and 2005. And, you know, we have seen the preliminaries, the August numbers and they are looking pretty good. They are kind of where we expect them to be. But we have to stay cautious because the steel price increases, Bob, could really slow things down.

Right. I understand the conservatism, but I mean you are implying like a sub double digit margin for the quarter. I just -- it just doesn't seem to add up. All right. Just -- and then maybe on the backlog, the demand scenario seems relatively solid and you kind of outlined why that is. Does it help you in EPS? Is that a positive for you?

Yes, it is. Absolutely a positive.

Thanks.

Our next question comes from David Yuschak with SMH Capital.

The hub and spoke is helping you with the sales which should give you a tightly integrated business model. I'm wondering, to look at it as a percent or absolute level, how much of your internal utilization could go to internal sales to make that -- as you describe with that mining contract, a tremendously efficient operation.

Well, we're running at the levels of efficiency that we are running at now, we have a lot of head room, Dave. And we are investing in plants. We are increasing our automation. So we expect to continue to increase the efficiency of our plants. We certainly have on the coatings side and we have on the buildings side and, you know, the components side as we move to the -- you know, to the panels business. That's a fully automated line as well. So we are expecting to increase our productivity for sure. So we don't see any major bottlenecks in our ability to support the hub and spoke. You know, we see opportunities, really in terms of our supply chain management and bringing our cost down.

Ultimately, though, what achievement -- a strong, tightly integrated model, that your building systems have become the driver to make this thing really work with the components and the coatings feeding that?

No. No. I think that's -- it's complimentary to be sure, but if you think about the distribution we have on our components side, you know, they sell to thousands of customers, right?

Right.

I mean, their third party sales we expect to continue to grow. We think this panels business could be worth $100 million, $150 million to us.

The concentration of new products to help third party but ultimately -- so looking at your internal sales, it's not fair to look at it -- it's not so much to look at it as a percentage of total, but the direction of the absolute total of sales being driven?

Right. And when you think about it, the way to think about it is that the hub and spoke -- you know, what Mark described ends up driving our profitability so we can achieve our goal of 15% in the biddings group. You know, that's a big increase and could be hugely beneficial to us.

So the you hub and spoke helps you?

Absolutely. That's the key. That's the key that people should take away.

Now, let me just ask you about these cancellations. You said you had $30 million in the last quarter, and $22 million in this quarter. And as you know, I've not been bearish at all about nonresidential construction. In fact, I would be surprised -- I have been pleasantly surprised given how things have come in this year. Where is the cancellations, and the cancellations that did occur, one, that they are abating and, two are they abating the traditional retail space and some of the other places where they have been visibility, compared to the other parts the nonresidential construction market.

Probably retail and probably a little bit on the warehousing side. Institution is finding steel price increases difficult but I'm not sure we have seen any meaningful decline there, Mark?

No. It's mainly on the retail and commercial side of that piece.

It's really the commercial and retail piece.

That's where it has consistently been for the market. The rest of the market has been buoyant.

We have been blessed by strong markets that are building steel components.

From what I'm seeing I don't see where there's any excess in that non-residential market to suggest that there will be serious problems, but that's just my opinion.

Well, I mean, they are forecasting a year in 2009 of 7%, you know, decline in square footage on top of this year, which they are expecting to be down, you know, 13%. So in many respects, it's, you know, 2009 is not expected to be as bad as 2008.

Yes. Now, as far as your finally, with the steel prices abating here, did you guys give us an idea of what your EBIT assumptions are for the systems -- for the year? If you did, I missed it. Could you give it to me?

Let's just see -- Mark is going to dig that up. Generally EBITDA is $200 million in the quarter. Mark is just flipping there right now.

The building systems operating projections.

Yes, right for the full year. What are your assumptions on the margin.

About 10%.

10%?

Yes and, again, I keep stressing because that's -- you know, that's down, but, boy when I look back at 2008 and see them performing at, you know, 88% better than they did, I'm -- I'm tickled. It really speaking to the strength of that group.

Now, one last question on the bidding side of it. You said that bidding still looks pretty good here. Does that bidding still come from the same resources or are you seeing people coming back?

Pretty much the same stuff, Mark?

It's the quotes. Pretty much the same group of customers and users.

That's all I got. Thanks.

Thank you. (OPERATOR INSTRUCTIONS). Our next question comes from Dennis Delifield from Delifield Asset Management. Please go ahead.

On your balance sheet, you pointed out that inventories were up and up very substantially and you sometimes have in the past gotten special deals on steel. Did you buy some excess steel in the quarter. Your payables or receivables aren't up a lot but inventories are up enormously. I wonder even if steel prices are up, why the inventory levels were up so high.

Well, it is directly related to the steel price increases, number one. Our actual, you know, inventory levels, I'm pleased to say at the end of the third quarter were down 10%, you know in tons. That means we are turning the inventory very quickly. We, of course, take advantage of being able to buy on the margin, 3,500 tons here, 5,000 tons there when mills have some extra steel. And they tend to offer that to us at -- you know, at good pricing because we buy so much. So we try not to go too long, and we order steel one quarter in advance, right? And we try to true up what our demand is going to be and our inventory and that's kind of how we tackle it.

And you turn your inventory how many times a year?

We only turn it 6.2 times, something like that.

Yes.

We turn it 8 to 10 times a year.

8 to 10 times a year for the steel?

Yes.

I see. So -- okay. So you should wash out a lot of this $226 million in the fourth quarter?

Right. We will.

Yes, we would expect to see a pretty significant decline in inventory, similar to last year's patterns.

Okay.

What we do -- for those who have been with us for a while, we go into our seasonally slow period of the fiscal Q1 and Q2, so we really try to work our inventories back down.

All right. Thank you.

Okay.

Our next question comes from John Brogan with Goodnow Investment Group. Please go ahead.

Hi, good morning.

Good morning.

I was just wondering if you could estimate what the gross profit margin would have been in the quarter, had you used a LIFO accounting treatment.

Oh, God, we couldn't. But, we probably picked up a little benefit on FIFO. You know, a small amount. It's really tough to calculate because you have the commercial discipline in there on the pricing side but we -- I'm afraid we -- it's difficult for us to, you know, to get a LIFO count.

Okay. Thank you.

Yep.

Again, if you would like to ask a question, please press star and then one on your touch-tone phone. We have a follow-up question from Mr. David Yuschak from SMH Capital. Please go ahead.

Thank you. I had some optimism going into the fourth quarter about business conditions to support that type of steel buying, wouldn't it?

I'm sorry, can you say that again?

The level of steel buying that you did go, boosted by that much would suggest that you have some optimism going into the fourth quarter that the business was still in pretty good shape.

Oh, yes. And, again, I want to be consistent with how I have been all year long. All right? We need to be cautious. We need to be conservative. We need to not let expectations get ahead of us. We just need to keep performing in what is a challenging market, Dave. So, you know, we will continue to run this conservative.

The one last question about the debt for the next 18 months, is it your strategy -- help me understand this, where you can't take down debt, you will pay it down otherwise you will keep that cash to have better options on how you will ultimately restructure the balance sheet.

Yes, Dave, that's -- yes, that's spot on. One of the beauties of our strategy for 2008, it -- I mean, if it doesn't require us to take on more debt. So we'll be effectively, as we go through the period and pick up the right time, we will be replacing our balance sheet, you know, as Mark has said and we will try to, layer on, as much of the new debt that we can with prepayable debt so we can pay that down because we know we will need to pay more for the debt than we have in the past. So, we are going to go into this in a way that, you know, maximize our advantage and cash flow.

Okay. Generally, you have not kept the cash -- much cash on the balance sheet historically, right?

Except back in the acquisition mode.

Yes. That's right.

I think it's important that we roll back on this inventory piece for just a minute and just reiterate what you said earlier. On a year-over-year basis, we are actually going into the quarter slightly less than last year.

Right.

That's right.

Okay. And that's pretty good because the fourth quarter was right smack in the middle of credit crisis.

Yep. It was for sure.

Thank you. Our next question is coming from Michael [Currelly] with Barry Vogel and Associates.

Good morning. Just a question on the backlog. What is the decline in tons versus a year ago? I know overall it's down 6.4%.

Yes, I mean, as I said, we look at our tons in the quarter, we are down about maybe 5%, something like that. You know, year-on-year, and our tons are a little bit, you know, less than our backlog for sure but pretty good quality work there. That's the good news. We got, you know, good backlog with good projects, good margins. So, you know, we are pleased with what we see. You know the commercial discipline is something that's important to us.

But as far as the percentage decline in tons versus a year ago, maybe down 6.4% overall on the steel cost in there is up, wouldn't the tonnage be down more than that on a backlog base in addition.

I mean, if you -- if you back out was pulled forward, if we had $20 million in pulled forward, you know, and our fourth quarter, you know maybe is going to be less than our third quarter, yes, tons are down. But as I said, it's -- it's more important to us what's actually in the backlog for projects. Mark?

I think there's a couple of pieces of color to add to that as well. When you look at the backlog and some of the rising steel conditions, it may be a little bit under priced. Secondly in a year like this when the steel costs have escalated the way they have, that backlog is very active. It's a lot cleaner backlog as Norm referred to there. The cancellations that Mr. Johnson referred to early, that's -- that's proof of activity in that backlog. You don't have any old jobs hanging out there kind of cluttering it up, if you will.

And Michael, another way of looking at this -- and actually if you look at our backlog at the end of Q2 at $450 million and then once we get through the year and most people would expect that that backlog would be the basis of our revenue and our buildings for Q3 and Q4. I think what you are going to find when we look back on Q4 is that on top of that Q2 backlog, we probably had 20% or 25% increase which was reflected with the revenue numbers and that's just as Mark has says as we take work from the backlog, we reprice it into going into production.

Okay. Thank you.

Yep.

There are no more questions at this time. I would like to turn the call back over to Mr. Norman Chambers for any final comments.

Thank you very much. I thought the questions were great and gave us a chance to clarify some things. I think when you look back on the transcript of the call, there's a ton of information on there, which will help you as well and, again, we really appreciate your interest in the Company. Thank you very much. We look forward to the fourth quarter call.

Thank you very much for participating in the NCI Building Systems third quarter 2008 earnings conference call. This conclude today's event. You may now disconnect.