Core Natural Resources Inc (CNR) 2008 Q4 法說會逐字稿

Hello. This is the Chorus Call conference specialist. Welcome to the NCI Building Systems fourth quarter 2008 earnings conference call. As a reminder, all participants will be in a 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. Please proceed, Mr. Moore.

Thank you. Good morning. Welcome to this NCI Building Systems conference call to review the Company's results for the fourth fiscal quarter of 2008.

This call is being recorded and a telephonic replay may be accessed through December 18, 2008 by dialing 1-412-317-0088 and entering the access code 419727 and then the pound symbol. The replay will also be available on NCI's Web site which is www.NCILP.com. The Company's fourth quarter results were issued yesterday in 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 other 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 as well as any forward-looking statements made in the call. 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 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 Chairman, President and Chief Executive Officer, Mr. Norman C. Chambers.

Thank you very much, Todd. Good morning, everyone. Welcome to our fourth quarter 2008 conference call. I am pleased to have with me this morning Mark Johnson, our Chief Financial Officer; 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 for closing comments before we take your questions.

Fourth quarter earnings came in above our guidance range reflecting the better than expected performance of our Coatings and Components Group and a 120-basis-point reduction in SG&A as a percentage of sales. Overall we were very pleased with our fourth quarter results, which came on the heels of our record third quarter earnings. As you will recall, this year's third quarter earnings benefited from some pull forward of work which shifted our traditional seasonality.

Q4 results reflected our anticipated reduction in demand as a result of extraordinarily high steel prices. In fact, Q4 2008 tons shipped volume was down 14.2% compared to the same period in 2007. Current customer reaction to high steel prices is precisely what we experienced in a similar steel price environment in late 2004 and early 2005.

As steel prices began to fall, customers held off making purchasing decisions anticipating further reduction in steel prices. Steel prices fell by approximately 15% in 2005 from the high point of October 2004 until customers started to commit to new projects. We believe we are experiencing the same situation now.

Steel prices for January delivery are expected to be down considerably from the high point recorded in August of 2008. In our lower backlog levels of $330 million at the end of the fourth quarter reflects the effect of these order pushouts. However, longer term, lower steel prices benefit our business by making our products more cost effective than the traditional building materials with which we compete.

Therefore, we believe the current pricing trends will help drive a pick up in demand during our seasonally stronger fiscal third and fourth quarters 2009. In addition to steel price fluctuations, the U.S. economic contraction has led to a substantial slowdown in business activity.

The AIA numbers for building index for October, which foreshadows to some extent new construction activity for the next six to nine months, is at levels similar to the 2003 which was the last year of the 2001-2003 downturn in nonresidential. However, the AIA inquiry index is still reflecting growth, albeit at very low levels. New construction activity measured in square feet is reflected by McGraw-Hill Dodge data was down 17.6% during our fiscal 2008 and McGraw-Hill is forecasting a further decline of 12% in calendar 2009.

We find that quoting activity is overall is mixed. In November, we surveyed a cross section of our customers throughout the United States, 68% reported quoting activity was down compared to the same time last year and 32% reported that quoting activity was the same or up compared to last year.

The good news is that while lower levels of quoting activity are are to be expected in a recessionary time, NCI has been able to find the pockets of relatively strong market demand and build share by winning business on the basis of our size, scope and overall value proposition. We did this in fiscal 2008 with increasing market share in the heavily fragmented components and engineered building segments.

In 2009, we expect to do more business with customers involved with government projects and green building initiatives. However, given the economic uncertainties we have just completed a cost reduction plan, or program, to ensure our continued market leadership in reasonable profitability levels. Our actions were focused, fast and effective.

We reduced total head count by approximately 20%. We closed four plants and began retooling two of these plants to manufacture insulated panels. Additionally, we invested in manufacturing efficiencies in other plants. Our previous investments in technology and automated manufacturing have enabled us to reduce the number of manufacturing plants while retaining the capability to scale up our remaining plants through our hub-and-spoke delivery system to meet demand when markets improve in 2010. Mark Dobbins will provide more color with regard to these actions a bit later in the call.

In the face of existing economic headwinds it is easy to lose sight of the past accomplishments. Pardon me. We think it is noteworthy that NCI completed a very difficult 2008 with excellent results. Significantly, we outperformed the industry. While our aggregate markets were up 17.6%, we shipped only 6% fewer tons than fiscal 2007.

For the full fiscal year, we earned a record $78.9 million or $4.05 per diluted share. At year end, we had a cash position of $68 million. We reduced our capital expenditure, in fact, during the year to $25 million, down significantly from the $38 million we initially planned without sacrificing any of our strategic plans.

In addition to the cash we have on our balance sheet, we believe our cash flow from operations even in a severe recession will provide sufficient funds to deal with the potential put $180 million in convertible funds in November of 2009. Obviously, our preference is to refinance our debt structure as capital markets improve during 2009.

We believe the 2008 performance and our recent cost reductions position NCI successfully to weather the current downturn and give us the confidence to reconfirm our objective of doubling our 2007 EBITDA of $177 million within the next four years. Now, Mark Dobbins will provide some additional operational color. Mark?

Thank you, Norm. During the fourth quarter, and throughout the year, we succeeded in implementing efficiencies across all three of our business segments which contributed to our solid results, and have increased our resilience to difficult economic and business conditions.

Our safety performance continues to improve indicated by a 31% reduction in total injuries which correlates with (inaudible). In the Coater segment, we continue to implement process improvements to improve quality and become more efficient. Our two metal prep facilities where we process heavier gauge hot roll material improved their daily throughput by 22% and 26% respectively with improved quality.

Our other coating locations added processes enabling better utilization of raw materials resulting in reduced costs. Also we have successfully trial coated aluminum substrates which will allow us to serve additional markets outside our typical customer base. The Engineered Building segment has begun implementation of lean manufacturing processes, which enable efficiencies within a specific location and also allow for consistency across our many locations.

Additionally, we have positioned this segment for further integration and higher utilization by combining the manufacturing responsibilities of both NCI and RCC engineered buildings under one individual. The Component segment wrapped up a very successful year, focused on customer service and ongoing cost reductions. Several initiatives are yielding solid results including component sales to family builders and the NBCI online Web-based customer service center.

Another initiative is having significant success is the new roof program. This program focuses on the roof retrofit of existing structures and is marketed via presentations to members of the American Institute of Architects.

Each of our four operating segments successfully navigated through the dramatic steel price increases that occurred in 2008, and have been quickly adapting to changing economic and pricing conditions. As Norm noted earlier, 2009 is expected to present additional challenges for the nonresidential construction markets, and we have taken action to respond by using this as an opportunity to resize and realign our manufacturing operations.

We have resized our operations by reducing the number of shifts at all locations, shifting volume to more efficient and cost effective locations and closing four of our least efficient facilities. Two of these facilities will be retooled and reopened late in 2009 and early 2010 as insulated panel manufacturing operations which is one of our strategic initiatives and a major part of our green initiative.

All capital spending has been temporarily suspended except for emergency requirements, safety, and items directly impacting our strategic objectives such as the ramp-up of insulated panel production capability.

These are significant changes and they are not based solely on our perception of the near-term weakness in nonresidential construction activity, but also reflect the ongoing integration of RCC into our hub-and-spoke delivery system and the continuing extension of the RCC technical software across both building divisions allowing for standardized manufacturing, efficiency gains from process and equipment improvements, all of which significantly enhance capacity at all locations.

Now I'd like to turn the call over to Mark Johnson, our Chief Financial Officer, for a financial review. Mr. Johnson?

Thank you, Mark. As Norm mentioned earlier, Q4 results came in above expectations after an unusually strong third quarter. We saw a shift in our traditional seasonality as the volume shift in the third quarter exceeded the fourth quarter volume by 7%. The last time we experienced this was in the 2004 fourth quarter when there was a similar spike in steel prices.

Consolidated revenue for the 2008 fourth quarter increased almost 10% over the same period last year and grew almost 7% sequentially. The year-over-year increase is due to increasing transaction prices based on increasing steel costs, partially offset by the 14% reduction in tons shipped compared to the fourth quarter of 2007.

Selling, general and administrative expenses for the quarter were $73 million, compared to last year's $72 million. Importantly, SG&A as a percentage of sales was down 120 basis points to 14.4% from 15.6% of sales in last year's fourth quarter. Our operating margin for the quarter remained reasonably steady at 10% compared to 10.3% in the prior year due to strong results from our Coater and Component segments.

Fourth quarter net income of $24.6 million, or $1.26 per diluted share included two special charges which are worth noting. Our Coater segment incurred a $2.7 million charge to cost of goods sold related to marking to market our hot roll steel inventory, and we incurred a charge of $2.1 million for foreign currency losses in our Canadian and Mexico operations due to the significant appreciation of the U.S. dollar against those currencies in the fourth quarter.

Turning to the balance sheet, our investment in working capital increased by approximately $90 million in 2008 driven almost exclusively by the rising cost of steel. Not only did our investment in inventory increase, but our investment in receivables increased because we grew our transactional sales prices to offset the additional steel costs.

Inventory, which declined from the end of the third quarter by $35 million, ended $54 million higher than 2007. However, we estimate that our inventory measured in tons is approximately 12% lower than it was at the end of 2007. Our annualized inventory turnover for the quarter was 6.7 turns, compared to 6.6 turns last quarter and 9.3 turns for the 2007 fourth quarter.

Receivables at the end of 2008 were approximately $4 million more than at the end of fiscal 2007. Our days sales outstanding, calculated on a trailing three-month basis, was 31.8 days, compared to 33.2 days in the prior quarter, and 31 days in last year's fourth quarter. During our fourth quarter, we invested $7 million in our property and equipment bringing our fiscal year investment to approximately $25 million.

As Mark Dobbins noted earlier, we have trimmed our investments in capital to minimum amounts without sacrificing any of our strategic initiatives. As a result, we have spent significantly less than previously indicated. With respect to our capital structure, we have the following debt obligations in order of maturity. Our revolver, which has no balance outstanding, matures in June of 2009.

Our $180 million convertible notes have a put call feature in November of 2009. And our $293 million term loan matures in June of 2010. None of these obligations requires any repayment or amortization during our fiscal year 2009. We are in compliance with all of our debt covenants and based on our stress tested 2009 financial modeling we do not expect to incur covenant violations in 2009.

Because of our historic ability to deleverage during cyclical downturns, even in a more severe recession, which we define 1.5 times the 12% decline currently predicted by McGraw-Hill, cash flow from operations combined with the current $68 million of cash on hand would exceed $180 million for 2009. We expect that much of our investment in working capital in 2008 will come back to us in 2009.

Our financial models are based on flexing the current McGraw-Hill nonresidential construction forecasts and take into consideration the high degree of variable costs in our cost structure, the recent cost reductions discussed by Mark Dobbins and an expectation that steel costs will decline in 2009. We have ongoing discussions with various banks regarding refinancing our existing debt agreements and we currently intend to complete our refinancing during the first calendar quarter of 2009 dependent on market conditions at that time.

In terms of segment financial performance, the Coaters Group operating results again grew as compared to the prior year, resulting in the mix shift from tolling to packaged sales, a disciplined approach to rising prices and reduced steel availability, and the further integration of RCC. Plant capacity utilization was down at 52% for the quarter compared to 82% last year and 75% in the third quarter.

As mentioned earlier, the Coaters Group recorded a $2.7 million charge in the fourth quarter relating to marking certain hot roll steel coils to market value based on recent price decreases for hot roll steel. We anticipate that the related inventory will turn sufficiently in the first quarter of 2008 and additional write-downs will not be required. The Coaters Group finished the year with an annual operating margin of 30% comparable to the prior year.

The Components Group's operating performance for the fourth quarter was again very strong. Third party revenue for the quarter increased 5% year-over-year resulting primarily from transaction price increases spurred by the rising cost of steel offset by a 26% decrease in volumes. Plant utilization for the quarter was lower based on lower tons shipped at 57% compared to 74% last year and 68% last quarter.

Operating income improvements resulted from the continued commercial discipline and passing on rising steel prices and cost reductions implemented earlier in the year. The Components Group finished the year with an annual operating margin of 14%, successfully returning to the 13% to 16% range we have reported in years prior to 2007.

Our Buildings Group revenue increased 13% 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 higher cost of steel. We have continued to experience increasing benefits from integrating RCC into our hub-and-spoke delivery system.

Plant utilization for the quarter was 69%, which is down sequentially from 76% last quarter and down from the prior year fourth quarter level of 84%. As we have previously noted, in contrast to the Components and Coaters Group, the rapid rise in steel costs results 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 14% of third party revenue in the fourth quarter of 2007 to 11% in 2008. As steel prices stabilize, we expect our Buildings margins will return to historical levels. As expected, our Buildings Group finished the year with annual operating margins of 10%. With that,I would like to turn the call back to Norm.

Thank you, Mark. Historically, seasonal factors have resulted in about a 25% or so fall off in volume in the first quarter of our fiscal year compared to the fourth quarter. In the first quarter of fiscal 2009, when you layer in the impact of continuing economic slowdown, and the order push backs as our customers anticipate lower steel prices we are looking at a sequential volume decline closer to 40%.

Under that scenario, we would report a slight loss for the period excluding the special charges that Mark had mentioned. However, because of the shipment seasonality that occurred in fiscal 2008 and the declining steel prices, we are confident that we will have both positive cash flow and EBITDA for the first quarter.

Also the actions we have taken to streamline our operations to create further efficiencies will not really benefit our results until the second and third quarters of our fiscal year. In addition to substantial dollar amount of annualized savings, we have positioned the Company to weather these difficult economic times while maintaining the amount to scale up our operations to capture the additional business activity when our markets begin to rebound.

The recession combined with steel price trends and production curtailments have reduced the short-term visibility, but as the market leader NCI has important competitive advantages that we believe will allow us to continue to significantly outperform the industry. Our three-segment operating structure works very well and has enabled us to build market share and we continue to effectively execute our EBITDA growth strategy by implementing technology and engineering improvements as well as developing new products.

At this point, I will be happy to take your calls. I will take your questions.

(OPERATOR INSTRUCTIONS) Your first question is from Mr. David Yuschak from SMH Capital.

Good morning, guys. Let's drill down for this year, as you mentioned, about the ability to produce internal cash. Could you give us maybe the devil in the details here of how you expect that operating cash to play out between the various components between inventories, receivables, CapEx spending and the rest, give us a sense about what kind of actual cash you can produce and when, how that may layer in on a quarterly basis because I would think some of that would have to be back end loaded somewhat in our your expectations?

In reality, it is not back end loaded because the seasonal shift that occurred in 2008 caused the fourth quarter to be less volume than the third which is very unusual.

Our typical pattern would be that the end of our year is where the working capital tends to free up and we would invest in the first half of the year. But that won't be the case in 2009 because we are coming off of a softer quarter and, therefore, we are not rolling a bunch of payables into the first quarter that will need to be paid.

So we would see the cash flow relatively evenly distributed throughout the quarters in 2009 and only slightly leveraged toward the back end.

So would your assumption be that if you get a recovery in, say, late third quarter and fourth quarter you may end up still because seasonal, traditional seasonality still free up cash then as well?

Correct.

Now as far as --

Dave, then we have this $90 million, we invested, that has started to roll out already.

Okay.

Okay.

So, and a lot of that will come out of your inventory reduction more than, in a softer economy you are certainly going to get some receivable release, but is a lot of the two going to come from inventories?

A large portion will come from inventory, but the other hidden piece of to all of this is accounts payable. If the normal seasonal pattern returns next year, the fourth quarter will be stronger and, therefore, the payables will actually increase year-over-year.

Right. That's kind of like I wanted to get some kind of sense as to how that, how the different components you expect will play out to get you what you need as far as -- so at this point in time you are thinking you can produce enough cash, it is possible to get to maybe $200 million in cash by the end of the year?

Well, we certainly believe we are going to be well north of $180 million, Dave. Again, when you look in our investor packet, the sources and uses, you see our working capital is normally a source except for 2004 in a steel price environment, right?

Right?

This is similar, and so, that $90 million, we invested will be rolling out and that rolls out pretty quickly.

If you got a lot lower lower steel prices then your inventories never do come back much in the way of acting as a drag on cash as well.

Right. We have been working to improve our forecasting so that we can get greater efficiencies and greater turns on our inventory as well. There has been an ongoing effort there.

Then on this $30 million or so that you expect to save, how will that play out between SG&A and cost of goods?

Yes, approximately 25% of the cost reductions will be in SG&A, and the rest will be in the cost of goods sold. But at the risk of creating some confusion on this topic I want to point out that the actual cost reduction steps we have taken as of right now, the actual cost reductions are closer to $41 million.

Okay.

But the reason we are using a $34 million annual number is because of the seasonal pattern in our cycle and that is relatively normal that our costs would increase towards the end of our business year.

So you are thinking at this point you can at least capture $30 million of that for this fiscal 2009?

$34 million is our prediction for 2009.

Okay. And one other thing, on the insulated panels you spoke to, having, your not backing away from your expansion there, is there anything right now that you are seeing in the way of this green initiative that whatever business is going on, at this point in time at this low level of activity that you are seeing some increased sales in that area, or potentially seen that increase sooner than later, so to speak?

Dave, we are seeing 20% growth right now as we speak.

Okay. So the inquiries on that is, also are showing the same kind of positive expectations?

Absolutely.

Rapid growth.

Okay. And how soon do you think you can get to where you need to be internally on the ability to produce that with as much optimism for total scope of work you can do?

One things we have done, as we mentioned before, is we have an OEM deal in place which enables us to ramp up our sales through our distribution, and then as we bring our production online in 2009 and 2010, we will be able to really address the growth in that market with the OEM piece as well.

Yes. Well, that's why I just kind of wondered how that might play out between the OEM piece and what you are doing internally?

We want to be able to absolutely blow this product through our distribution system, and get that going, right now.

Okay. So, in 2009, you're thinking that this could be a very meaningful percentage of your total revenue mix?

It is going to help the components and as you see we've done the reclass. So you can get a feel on the segments and that's now in Components. Mark, do you want to add any color to that?

The ramp-up we are talking about, I think Norm covered it pretty good. But the OEM agreement that we have cut there, allows us to go ahead with the Components Group and start marketing this just full bore and they have that in place today. So, we will expect to see growth in that revenue that we don't have to actually cover with our own production and as we do ramp-up the production in the fiscal year '09 and into '10 we will take that production back as internal.

Okay. I apologize, one more question to get some clarification on one other comment made earlier. You expect to have your financing, you said, done by the end of the first quarter of --.

(inaudible)

So it will be by the end of February, or the end of January I mean.

No, the calendar --

Calendar first quarter. Okay. And then to follow-up on that then does that mean that you anticipate that would take care of the needs even though you potentially can accrue most of your cash for that $180 million convertible that you could potentially include in that refinancing, whatever it is you want to do with that $180 million by the end of the first quarter? Or is that maybe something partially accomplishes that and you take care of the term loan as well? Give me a sense as to how that might play out.

The fundmental approach is we will manage our business to have sufficient funds to deal with our balance sheet, okay. That's our first line of defense.

The second, though, is we expect to get the refinancing done during the calendar first quarter. To the extent we have cash that we are able to apply to that refinancing which we, of course, do have, then that will help us refinance less. But we also know that the interest rates will be higher. So we need to manage our cash in a very conservative way to accommodate both possibilities.

Okay. Thanks. That's all I need.

The next question comes from Mr. Michael Cox of Piper Jaffray.

Good morning, gentlemen. Thanks for taking my question. My first question is on the inventory levels, it sounds like on a unit basis down about 12%, does that mean implicitly, I guess, that means that average selling prices for your inventory are up about 50% year-over-year, and does that mean then more inventory write-downs are to come now that steel prices have fallen?

If we were anticipating additional inventory write-downs we would have reserved for them. We do not anticipate any further inventory write-downs based on our foreseeable future. There's likely to be some level of margin compression in the first quarter. That's one of the reasons that our outlook for the first quarter is what it is. But we don't anticipate additional write-downs.

Okay, that's helpful. And on the payables side, considering that inventory was up sharply year-on-year it was surprising to see payables down as much as they were year-on-year. Could you maybe give a little bit more color around that divergence in working capital?

Sure. It tends to be the same answer again, and that is the shift in the seasonality that's partially driven by the rising steel prices. It pulled a lot of business into the third quarter where customers were trying to beat sales price increases. So what happens is a lot of our purchases of inventory in our normal year were forced into the earlier parts of the fourth quarter and the later parts of the third quarter.

All of the inventory purchases were paid for by the end of our fiscal year. Our payables are naturally lower because our purchases toward the end of the year are lower.

Okay. But you are carrying the inventory because of the, I guess, the environment we are in right now?

That's correct.

Okay. And on the additional questions on the balance sheet, given the type of credit environment we are in can you speculate on what the terms of a refinance would look like relative to your existing credit agreements right now?

The marketplace is extremely volatile. And any numbers that I would quote for you would be wrong for sure. So I really don't want to speculate.

Okay.

But it is likely, but it is likely, Michael, they will be more than what we paid before.

Sure. Okay. That's fair. And then, in terms of debt covenants can you remind us what key debt covenants you do have on the existing lines of credit right now?

Sure. There's really three financial covenants that we live by, and the leverage ratio. That has a maximum of 4 to 1. We have a senior leverage ratio which is a maximum of 2.75 to 1, and an interest coverage ratio which is a minimum of 5.

Okay.

Let me just tick off where we are on those for you. With the leverage ratio we are at about 2.47. On the senior leverage at about 1.56 and the interest coverage we're at 8.7.

Okay, and as you are stress testing -- you talked about earlier for the current market, where do you foresee peaking at those on say the first leverage ratio you mentioned?

With respect to the senior leverage ratio, we don't, in our stress tested models we with do not exceed a 3 times leverage.

Okay.

Again, Michael that is at 1.5 times worse than Dodge is forecasting new construction starts.

Okay. And that is on a net debt basis?

No, that's on an absolute --

Total, okay. And then my last question is cancellation rates, Norm, I believe you've commented on these in the past, I was just wondering if can we we get an update on what those were for the quarter and what the outlook looks like in terms of cancellation rates?

We certainly burned off more of our backlog in the Buildings Group in our forth quarter than we expected which in some respects is good. Cancellations in the quarter were approaching 10%, about $30 million. And just to answer the question that you haven't asked, but our incoming orders are about equal with our outgoing levels of shipment.

Okay. Okay. That's great. Thank you very much.

The next question comes from Mr. Arnie Ursaner of CJS Securities.

Thank you. David's 20 questions covered a lot of the ground I was going to cover, but you just mentioned one I want to follow up and be sure I heard you right. The book-to-build essentially since October is flat indicating your backlog would roughly be the same level at this point?

Yes, I am -- well, let me just say what I answer the question I think you asked and if I haven't you can ask me again. So, we were shipping at about the same level as we were booking, okay.

So what we would have expected in an environment where people weren't waiting to see what steel prices were going to do, we would be adding to our backlog, okay.

Okay. So you are running through a little backlog, but still getting in a reasonable amount of new orders to keep your booking.

Yes, yes, we are. Currently that is what is happening. We are -- our incomings are about equal to our outgoings and that's what we're expecting in the first quarter as well.

I will say, though, that when you look at our backlog at half way through the year, our backlog in April was $463.4 million and our actual revenue in our Buildings Group was 29% above that. So you I don't know we do get some, we do get some growth normally, we get more in the second half than in the first half, but we do normally get some growth.

Okay. I want to perhaps take another stab at the cash buildup you are likely to have in the next few quarters. You ended the year with $68 million of cash and I believe you indicated you try to reduce inventory by $90 million in the course of the year?

No, we didn't indicate that.

What do you expect to drop your inventories by during the course of the year?

Well, we will typically want to maintain our inventory in a 45 to 60 days level. So that will fluctuate as volumes fluctuate.

What sort of cash build might we get in the first part of the year?

I think it will be substantial. I don't want to put a number on it. You know, inventory timing is very tricky, but it will be substantial.

Okay. Did you have quarters out to buy steel offshore, are you still placing orders to have more steel coming in or are you basically running down what you have?

We have taken in very little steel, very, very little steel, and like most people in the industry, we are running our inventories down. Steel production in the United States now is less than 50% of what it was during the summer. Imported steel is still negligible, and we would expect, as Mark has said, to see a continued reduction in steel prices, but I have to the tell you that as soon as there's some pick up I think the steel producers are poised to bring the pricing back up a bit.

Sure. Again trying to focus on cash flow you mentioned in our prepared remarks you suspended all CapEx except emergency and the new facility, can you quantify what sort of level of CapEx you expect and given your plant closures, can you freshen up what your think your D&A would be?

Our D&A will still run at about $35 million, and what we would expect to spend, and some of this is really a carryover from 2008 with the two IPS plants, we are still going to spend probably within our forecast of cash close to $31 million. But of that, I think, Mark, how much of that is not associated with the strategic piece?

To pick up the strategic items you're in there at plus, over $20 million. So what we have lined out as far as emergency capital, safety, so on and so forth, is somewhere shy of $10 million.

Okay. And final question, if I can, regarding the insulated panels, you mentioned, obviously, you are expanding to retooling two plants, which won't come in until late '09, you also indicated 20% growth right now, what is the current level of activity that we are seeing 20% growth on?

We are at about, I mean, it is a fairly small part of what we do because of the limited capacity we have, but we ended the year around $25 million in revenue and expect that to ramp up quite considerably during the course of 2009. We expect that product line over time will be as much as $150 million or more in additional revenue to our Components Group.

My question is did you need the two plants to reach that level?

Yes, we will need the two plants plus the OEM deal to reach that level.

Okay. And remind us again what the primary use of these insulated panels are?

It is for roofing systems and sidewall systems because of the advantage of having an internal wall and an external wall in the level of heat retention. It provides a level of insulation that is four times better than what is currently being used in the marketplace.

It is basically a preassembled, preinsulated panel that you can put on a structure. Additionally, there is a relatively large market of freezer and cold storage for this same product.

I guess the question I have is are you building the capacity for growth you hope to see or are you actually getting specific inquiries you need to build this capacity to meet?

It is probably the highest growth area in building materials right now. It is currently showing a 20% growth as we speak in terms of new orders.

Okay. Thank you very much.

Yes. Next question? Operator?

Next question comes from Fred Taylor at MJX Asset Management.

Yes, thanks. I think at this point most of my questions were answered. I had the some questions on the covenants and [refi] but just maybe on the [refi] would you anticipate a similar revolver/term loan type of structure and although money is fungible it sounds like most of your cash flow over the next 12 months take out the converts, with maybe no cash left, but nothing on the revolver. Am I thinking about all of those things correctly?

Yes. The markets are very volatile, and the, which markets you approach just depends on what's available.

So, it might be a revolver/term loan structure, it could be revolver/term loan bonds, it could be a number of things. Is that --

That's correct.

Thank you.

The next question comes from Robert Kelly at Sidoti and Company.

Good morning.

Good morning.

Most of this, most of what I was looking for has been covered. I just had a question, maybe on the backlog, you guys talked about your assumption for, like a something a worst-case scenario being 1.5 times, the McGraw-Hill forecast, it looks like we are beyond that at this point. Is there a worse, worse case scenario where you are still in line with the covenants?

Well, Bob, that's for the year.

For '09?

That's right. That's for the whole year, and as we've said we will see that the enhanced seasonality, we normally have a reduction of volume of 20% to 25% between our fourth quarter and first quarter, and this first quarter will probably be an additional 25% worse than the first quarter of 2007.

You know what's interesting, during the period of 2004 and 2005, backlog in tons was down about 37%, and then came back up 52% as people started to move on steel prices. And that year only had growth in nonresidential of 1.98%. So it wasn't a booming year by any stretch of the imagination.

So we will have some swing back to seasonality, but it is, it could be a challenging year. That's for sure.

Yes. I wouldn't expect a boom year in '09.

No.

Could you comment on the weighted average cost of inventory, how it compares to the market? It sound like when you are talking about 1Q you are going to flush out some of maybe the higher cost raw material. Is the expectation that you equalize at some point in the winter, just maybe your thoughts on that?

We will get pretty close to equalizing during the first quarter. And it is really the hot roll piece that is primarily the case because the other materials we buy have not had a decrease in price that we saw with hot roll. So it is, hot roll is kind of the worst case piece, and that represents probably 35% of our steel that we normally buy in a year.

Okay. One point of clarification, I might have missed this. You had some reclassification for sales over the past eight quarters here. What was that in relation to?

Mark, why don't you explain it to him?

Sure. We have just realigned some of our products with the segments that they belong to. It is primarily our insulated panel systems which moved from our Buildings Group into our Components Group, but then vice versa we have moved our dot.com business from our Components Group into our Buildings Group.

Which is our small buildings piece.

So was the -- are you trying to tell us that the IP mix is better or worse? What's the indication there?

It is just that we wanted the IPS to be in distribution channels that we have in Components.

Understood, but it seemed like the operating profitability moved around a little bit, that the mix for IP is raising Components? Is that how we are to read that?

Yes, it is. Exactly right.

Thanks. Have a good one.

The next question comes from James Eustice at Churchill Pacific.

Yes. Most of my questions have been asked answered, but just to clarify. With the put, I mean there's basically, are there any restrictions on you using cash within your credit agreement for the put?

There's a number of considerations that we work through with our banks which will be part of what we are doing on our refinancing conversations. But the most important thing is we have the cash.

All right. Well, appreciate it. Thank you.

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

Just a little more detail on the inventories, at the end of July you showed 226. What was -- was that the actual absolute peak in dollars or was it higher maybe into August? Could you give us some sense as to how far the peak went?

I think it leveled out there, it might have gone up just a slight bit from there and then down.

Okay. So some of your margin compression here in the third quarter is running off the higher priced steel then?

Yes, exactly. And I think, Dave, you raised a good point. We really had market conditions in Q4 that were really unlike 2008 more like 2009.

And then your first quarter, the margin compression there and the expectations for a loss, some of that, I mean, I would think a good deal of that could potentially also be the run-off of high cost steel.

There will certainly be some impact of that, but what you do find is that when you're in the seasonally slow period, the operating leverage that you have ends up really being tested with volumes that are 25% lower than the normal seasonal 25% that we normally experience. So it throws into some question the operating leverage.

Yes.

We -- we continue to work to have the best possible results we can have in this quarter coming in every quarter.

But some of the gross margin because of the higher cost of, that is lower revenue certainly doesn't help, but the run-off of higher cost steel is still showing up in the first quarter as well.

Absolutely.

Okay. Then as far as your expectations on inventory going forward it has been very difficult managing inventories when you've got volatility of prices. It'es interesting, you were commenting about owners wanting to hold off on purchasing stuff.

We are finding as we talk to issuers, customers and all of that, that it is because of that volatility it gets tough to manage what it is you want to do, whether it is build inventories or build a facility.

How do you expect, because when inventories were, steel was relatively stable you guys managed around a 30-day inventory, boosted that up to 45 days on some occasions, and I'm just thinking as you look forward here how do you manage that steel inventory as far as days, when you have such kind of volatile markets right now?

One thing we are continuing to do, and frankly we are seeing some clear improvement both in our systems and process, is that we want to increase the terms of inventory. We want to get better at buying specific grades and types of steel which meet the demand that we have in the 45-day period. So our desire is to continually move to bring our inventories down and to have the turns up.

And I would just add that clearly going forward with the position that the steel mill industry is in today, that looking forward into 2009, the availability of still will be much easier to put your hands on at a quicker rate.

We can run a lower inventory level there, as opposed to in 2008 where we had spot shortages and it was tough to put your hands on the lighter gauge materials.

You said earlier, though, maybe you thought 45 to 60 days. That seems like a tight steel environment versus bringing it closer to 30 days.

Yes, I was just speaking to typical averages.

Okay. Now, how much do you think you can improve turns to help alleviate the volatility of the commodity?

What I would like to see is a 30% increase in turns. That would be my personal goal. We will see if we can achieve that.

And some of the things you have done internally suggest that's a realistic goal?

I have set some pretty outrageous goals for our folks and we set a goal to get the Components Group back to historical levels of profitability and they did that in a market where they shipped a lot fewer tons than the year before. So we are going to continue to push, Dave. That's all I can really say to you. Our behavior will be consistent with improving.

One last question on the financing that you expect to get wrapped up by the end of March. You said there's various different strategies that might take place. Is which way you go going to depend on the economic conditions you have and the kind of potential you see for the rest of the year?

I am just kind of curious as to if you got several alternatives of scenarios out there, what things do you think you need to see, to do to go to maybe one less optimistic scenario versus that more pessimistic scenario or one that is kind of in the middle?

That's a great question. That's a very, very good question. We want to ensure that our capital structure fits the cyclical nature of the business and our strategy. Fortunately, our strategy does not require that we make acquisitions, so it is not like we have to increase our debt.

We, obviously, want to decrease our debt. Okay. And I think there's a number of ways of approaching that, but we, we will take steps to make sure that we have the greatest level of stability in our balance sheet that we can achieve.

And then, along that same line then, what would be kind of longer term a debt to cap ratio you think is ideal for the business, given the volatility?

Well, I think we are running at 2.5, right?

Yes.

You know, 2.5, until we saw was a great place to be. Mark, you want to comment on that?

Yes. Well, I think our debt to equity capitalization is about 45% today, in that range.

Right.

And I think we would like to see that be below 40%.

On a sustained basis, is 40% optimal or is it more like 30% optimal?

Well, I would say that it is in range. I don't know that --

Because 30% to 40% depending on economic conditions, it could be 30% to 40%?

That's correct. It will vacillate in there. It is kind of a pilot we shoot for, not an absolute.

But that's more your comforts level versus being above who 40%, say for instance?

Yes.

Given the kind of volatility we are seeing.

Yes.

All righty. Thanks.

You're welcome.

There are no more questions at this time. I would now like to turn the conference back over to Norm Chambers, Chairman, President and CEO.

Thank you very much for your questions and attention and we look forward to reporting on our next quarter, as well, and you can continue to follow-up as you normally do with calls. We are happy to take them. Again, thank you very much for your time.

Thank you all very much for participating in the NCI Building Systems fourth quarter 2008 earnings conference call. This concludes today's event. Thank you for participating.