Core Natural Resources Inc (CNR) 2009 Q1 法說會逐字稿

Hello. This is the Chorus Call conference specialist. Welcome to the NCI Building Systems first quarter 2009 earnings conference call. As a reminder, all participants will be in a listen-only mode 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, the floor is yours, sir.

Thank you. Good afternoon. Welcome to the NCI's conference call to review the Company's results for first quarter of fiscal 2009.

This call is being recorded. To access the taped replay, please dial 1(412) 317-0088 and enter the pass code 428378 and then the pound symbol. The webcast archive and taped replay will both be available approximately two hours after this call, and will continue through March 17, 2009. The replay will also be available on NCI's website, which is www.ncilp.com. The Company's first-quarter results were issued earlier today 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 over the Internet.

Some statements made in this 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 today's news release for a discussion of facts -- factors that could affect NCI's operations, as well as any forward-looking statements made on this 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 website by following the News link you see in today'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, Todd. Good evening, everyone, and welcome to our first quarter 2009 conference call. Joining me this evening are 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 Johnson will review our financial results, followed by Mark Dobbins, who will review our operations. Then I'll return for some closing comments before we take your questions.

During the period when our end markets just shut down, NCI managed to hold its own on a number of fronts. Absent charges, each of our business segments generated an operating profit. We succeeded in producing significant operating cash flow. Each of our operating segments generated a reasonable price spread over material costs, and we were able to refill our backlog to offset the quarter's production and a portion of the cancellations. In fact, the value of our quoting activity in January and February was up 17% compared to the same period in 2008.

Of course like most every company, we're facing significant challenges caused by the economic downturn. The Company's addressing three major challenges. First, the downturn of the economy and the impact the economy has on nonresidential construction. Second, the volatility of steel prices. And third, the maturity of our convertible bond in November 2009, and the crushing impact that concerns about our ability to refinance have had on our stock price.

The slowing economy started to have a negative impact on our business during the second half of our fiscal 2008, and caused us significant pain in the first quarter 2009. Until then, we had successfully addressed the slowdown by aggressively capturing share of the nonresidential construction markets, where demand was still solid. But in 2009, first quarter, we faced a significant, across-the-board falloff in tons of steel processed through our manufacturing plants. Even though our variable costs are 84% of our costs to goods sold, the amount of tons we processed was insufficient to absorbing our fixed costs.

Anticipating the effect of a worsening economy on nonresidential activity, we have been cutting costs throughout the Company. Two phases of costs in SG&A and costs of goods sold have yielded a cost reduction of nearly $68 million. We expect to realize an annualized cost saving of $59 million, because we expect to add back some employees to our manufacturing plants during our seasonally stronger fiscal Q3 and Q4.

On the revenue side, our sales force is focused on winning new business across the 19 end markets that we serve. We continue to cultivate opportunities in the institutional market, which has shown solid growth over the past three years. The institutional end markets consist of projects funded by Local, County, State, and Federal Governments, as well as houses of worship. This sector represented approximately, 24% of our fiscal 2008 sales.

Also, we see excellent opportunities as a result of the recently-passed stimulus package, which Mark Dobbins will talk about more later. As you know, our projects tend to be smaller and, therefore, more quickly implemented than the larger infrastructure projects.

The volatility related to the extraordinary steel price increases was a challenge that we successfully overcame in fiscal 2008. However, in the first quarter of fiscal 2009, we witnessed a complete reversal of the entire steel price increases of 2008, and I would say that we are now back to pricing that is equal to late 2007. This pricing rollercoaster has caused significant dislocation of our business. First, we have to write down our inventory because our volume of tons shipped was off dramatically at the same time that steel prices fell precipitously. Second, those of our customers who have had projects to build have been the sidelines, waiting to see where steel prices will bottom out. This is a very similar situation to what we experienced in 2005 after the run up of steel prices in 2004.

On the positive side, some projects that were previously on hold are moving forward. Other projects that were not economically feasible at higher steel prices are now repricing. Most importantly, over the intermediate and longer term, lower steel prices improve our competitive position against block and cement tilt-up wall construction, and enable us to gain greater share of the nonresidential construction sector. And more stable prices are better for us and the steel producers in a recovering, slow-growth economy.

With respect to our capital structure, we continue to work diligently with our key relationship banks to deal with the November of 2009 maturity of our convertible notes, and made progress. We're analyzing the execution of several capital structures that would address not only the convertible notes, but also the revolver and Term Loan B, which mature in June 2009 and June 2010 respectively. We're considering a variety of options, and are actively engaged in negotiations to pursue appropriate alternatives. We've retained JPMorgan to assist us in this process.

NCI has a track record of excellent financial results and cash flow. Even during this unprecedented level of economic contraction, we've produced and retained substantial levels of cash. We're committed to achieving the best possible capital structure for our Company, particularly in light of the current economic turmoil. We believe that once this uncertainty is removed, NCI will regain the investor confidence that it has built over the years.

I will now ask Mark Johnson to review our financial results.

Thank you, Norm. As you know, our first quarter 2009 operating income came in within our most recent guidance range, but significantly below our initial expectations. This was caused by the sharp fall off in volume, particularly in our Components group and our Buildings Group, where tonnage was down in the aggregate almost 20% more than we had originally projected. As a result, our utilization rate dropped to 35% for the quarter, which reflected some lag time in taking capacity out of the system. That being said, we did see operating costs coming in at or below projected levels, which reflects both announced cost-cutting programs as well as ongoing efficiencies, as Mark Dobbins will discuss momentarily.

Also on a positive note, the shift in the traditional seasonality that took place over the third and fourth quarters of 2008, combined with declining steel prices and activity levels, reduced our working capital requirements and enabled NCI to report positive cash flow from operating activities of approximately $30 million for the quarter. Consolidated revenue for the 2009 first quarter declined 28% over the same period last year on a 40% fall off in volume, reflecting our ability to achieve a reasonable price spread over material costs, even in these very tough times.

Gross profit declined significantly, due to a special $29.4 million lower cost of market inventory charge, and due to lower fixed cost absorption at these depressed volume levels. The inventory charge directly resulted from the combination of both a precipitous sequential decline in steel prices, and significantly slower sales volume in both our Components and Buildings segments. Both of these factors exceeded our previous expectations. The charge affected all of our business segments, with about half of the amount attributable to our Components group. The amount of the charge is an estimate based on our projection of the volume and price levels we will achieve in subsequent quarters, and a required normal profit.

Based on those projections, we expect that most of the higher-priced inventory will be depleted by the end of the second quarter. If our estimates of volume and price prove to be incorrect, there could be a corresponding effect, either positive or negative, on our gross margins in subsequent periods as the inventory is depleted.

Selling, general and administrative expenses for the quarter were down 15% year-over-year to $54 million, reflective of a portion of our cost reduction initiatives to date and lower activity levels. Including the inventory charge I just mentioned, NCI incurred a total of $550 million in special pretax charges. The largest component by far was the noncash goodwill and intangible asset and impairment charge of $518 million.

Lower than expected volumes in our first quarter, combined with the worsened outlook for 2009 nonresidential construction starts, presented an impairment indicator requiring a goodwill impairment test as of the end of our first quarter. As you know, part of the impairment test requires the Company to reconcile the fair value of its individual reporting units to the Company's publicly-quoted market cap, including a reasonable control premium. Our low stock price near the end of our first fiscal quarter contributed to the magnitude of the ultimate impairment charge. The charges taken were based upon preliminary estimates, which will be subject to revision once the final appraisal evaluations and other analysis are completed in our second quarter.

In addition, if further impairment indicators occur, requiring an additional impairment test, this could lead to additional goodwill impairment in future quarters if our stock price continues to be lower than it was at the end of our first quarter. The magnitude of the impairment charge was also increased by the estimation of significant value in identifiable intangible assets and the fair value of property, plant and equipment, which are in excess of the historical cost basis carrying values on our balance sheet.

In addition to the goodwill and the inventory charges, similar to our expectations, restructuring and asset impairment charges for the period equaled $3.1 million related to the severance costs and plant closings associated with the cost reduction programs that were initiated in the October and November 2008 timeframe. Respectively, we expect to take approximately $1.8 million in additional charges, mostly in our second quarter, relating to severance costs and other costs for phase two of our cost reductions, which will be discussed by Mark Dobbins momentarily.

On an adjusted basis, which excludes all the special charges incurred in the first quarter, the Company posted an EBITDA loss of $800,000, calculated to conform to our credit facility definitions as presented in our financial tables, an operating loss of $7.8 million, and a net loss of $8 million or $0.42 per diluted share.

Turning to the balance sheet, post-charge inventory levels were at $143 million, down $49 million from year-end levels and $10 million below last year's first quarter. Our annualized inventory turnover for the quarter was 4.8 turns, compared to 6.7 turns last quarter and 7.3 turns for the 2008 first quarter. Receivables at the end of the 2009 first quarter were almost cut in half to $85 million from $163 million at the end of physical 2008, and down about 33% from $128 million at the end of last year's comparable quarter. Our days sales outstanding, calculated on a trailing three- month basis, was 35.8 days, compared to 31.8 days in the prior quarter, and 34.6 days in last year's first quarter. Despite this very tough business environment, we are seeing only a moderate increase in the past due account levels, with a corresponding increase in our bad debt reserves. Finally, post-charge, there is almost $108 million in goodwill remaining on our balance sheet.

During the first quarter, we invested $7 million in our property and equipment. As Mark Dobbins will discuss momentarily, we have trimmed our capital investments to minimal amounts without sacrificing our key strategic plans. We expect capital spending in our fiscal second quarter of '09 to be slightly less than it was in this year's first quarter.

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 2009, and are now carried as short-term debt. Our $293 million Term Loan matures in June of 2010. As they stand today, none of these obligations requires any repayment or amortization during our fiscal 2009.

As of February 1st, 2009, we were in compliance with all of our debt covenants. But if the current trend of depressed sales volume continues or worsens, in addition to the inventory and impairment charges already taken, we could violate our leverage ratio covenants and be forced to seek amendments and/or pay down a portion of our bank debt from our cash balances or operating cash flow. As Norm said earlier, we are pursuing all avenues -- all available avenues to refinance our debt, and we expect to be in position in the near term to update the market on our progress.

Each of our segments was negatively impacted by -- was affected by the impact of worsening economic conditions on our end markets, and the sharp decline in steel prices. As you can see from the tables included in our release, the [Coaters] group experienced a 41% year-over-year sales decline, the Component group's sales were down 18%, and the Buildings Group sales were off 32%. Utilization rates range from 32% to 59%, significantly below year-ago levels. Adjusted for charges and corporate expense, the combined direct operating income contribution of our business segments was $5.4 million in the quarter.

Now I'd like to turn the call over to Mark Dobbins to review our operations.

Thank you, Mark. As mentioned earlier, our operations have been struggling with a more severe demand contraction than previously expected. This additional pullback in volume caused us to move into phase two of the cost reduction plans that we previously announced. The reductions implemented to date involve the closing of five facilities; the transition of work from these facilities to other more efficient operations; short-term idling of select operations; and a workforce reduction in excess of 25%, inclusive of manufacturing, SG&A and corporate employees. We have managed capital spending to minimal levels, operating in what we refer to maintenance mode, except for projects that involves strategic initiatives. As a result of all these actions, we have taken $59 million in annualized costs out of the business.

Now it is important to note the while the current economic downturn has been the stimulus for many of these actions, it is the determination and dedication of employees throughout this corporation that allow us to make these changes without sacrifice to safety, quality or customer service. Additionally, the reductions and changes that we are implementing will not impact our ability to respond to an improving market. In fact, we'll be much better positioned and more efficient as we begin to ramp back up.

We continue to move ahead with the integration of the manufacturing operations within our Buildings Group, driving efficiency improvements and reducing costs. By utilizing the advanced technical software and the automation efficiencies within the RCC organization, together with our hub-and-spoke operating expertise, we'll continue to be the low-cost producer in the industry.

We are beginning to see significant benefits from the integration of our Insulated Panel Systems Group into our Components organization. And now while Insulated Panels continue to support the Buildings Group as an element of the engineered building package, these products are now getting additional market exposure by being part of the Components group, oftentimes outside the traditional metal building markets. In a recent visit to the components group headquarters, it was easy to see how the integration is mutually beneficial to both Components and our Insulated Panels systems. Additionally, the development of our state-of-the-art Insulated Panel manufacturing plant in Jackson, Mississippi is continuing on schedule, and will be operational before the end of this calendar year.

All of our segments experienced a fall off in business in the first two months of the quarter, but booking trends seemed to flatten out in January. We saw a significant increase in quoting activity across all segments toward the end of the first quarter, which we believe signals an increase in seasonal activity, pent up demand, and a view that steel prices bottomed out, which should get some customers off the fence with their decision making process.

As Norm mentioned earlier, the economic stimulus package contains a significant amount of funds targeted for new construction, as well as facility repair and restoration of many areas of the Department of Defense, Department of Interior, Department of Agriculture, Homeland Security, and Education. Now these are areas where has NCI historically excelled, as these projects fit well within Engineered Buildings systems, retrofit applications from the Components group such as their New Roof program, and the increasing demand for energy-efficient construction provided by our Insulated Panel systems. Our Buildings Group and Components Group are currently positioning themselves to take advantage of these opportunities by targeting specific builders and contractors who concentrate on this type of work.

With that, I'll turn the call back to Norm.

Thanks, Mark. As we noted in today's release, visibility is very limited. Therefore, we are reluctant to provide specific guidance with respect to our future results. While economic conditions remain very tough, we think we're beginning to see some of the positive signs for our business. First, we expect to realize most of the full quarter's benefit from the $59 million annualized cost savings in the second quarter, which will improve our operating performance. This significant reduction in our cost structure, combined with the lower capital investment, should result in positive operating cash flow in the second quarter.

Our Buildings Group backlog stabilized at $302 million at the end the first quarter, and as Mark Dobbins and I discussed, uptick in quoting activity across our business signals to us that our customers believe that steel prices are at, or close to, the bottom. Good news for near-term as well as for the long-term perspective. And as a market leader, NCI has an important competitive advantage in the marketplace, and we believe that our integrated business model will enable us to continue to build share.

With that, we'd like to open up to your questions.

(Operator Instructions). The first question comes Mr. Michael Cox of Piper Jaffray. Please go ahead, Mr. Cox.

Thank you, and good afternoon, gentlemen.

Hi, Michael.

My first question is on the comment you made in your prepared remarks about burning through the high-cost inventory by the end of the second quarter here. Can you give us some sense for what sort of sales assumptions might be embedded in that? Would it be consistent with the trends you saw in Q1, or would you expect some sort of improvement in Q2?

You know, we are, you know, seeing levels of activity in Q2 that are fairly similar to Q1, and we have about less than a quarter's worth of inventory to fall through. Mark Johnson, do you want to add any color to that?

No, that's an accurate assessment. Our inventory in general is made up of several different grades and calibers of steel. So while it will all turn within the quarter, some grades turn a little bit slower.

Okay. That's helpful. In terms of the capacity utilization rates that you called out, you noted you plan to close five facilities, and I assume that's off the base of 39. Noting those capacity utilization numbers, how deep will the facility closures go as you look out over the balance of the year?

Mark?

Actually -- we've actually closed five of the facilities already in the quarter, and we're wrapping some up tail-ends of the last one. And as the period continues, we continue to look at areas of opportunities to reduce costs further. But at this point we've pulled back to five facilities, and are really concentrated on bringing down their costs from pulling out shifts in each location and, like I said earlier, we've actually idled out some locations temporarily.

You know, one of the things, Michael, that I think is important is that we begin to see positive benefits in operating leverage when our utilization rate historically starts to go above around 60% or 65%. With the reductions that we've made, and the reductions in shifts, that leverage point will be somewhat lower than what has historically been the case.

Okay. That's very helpful. Then a last question on the balance sheet, you noted that you have had some progress in the refi activity. I was just wondering if you could give any color around those discussions? And what that may look like either in terms of higher interest rates, or whatever you can disclose at this point, I guess?

It is very difficult since we're right in the middle of it, Michael. It's one of those things that, really, we'll be speaking about, you know, after we get it done. But we are making good progress, and are really pleased with the progress we're making.

Okay. Good luck, gentlemen.

Thank you.

The next question we have comes from Timna Tanners of UBS. Please go ahead.

Hello, good afternoon.

Hey, Timna.

So just a follow-up with a couple of the questions. Can you give us an idea of what the cost of inventory is relative to current selling prices for steel? Or just -- because you said you have another quarter that you think you need to work down higher costs and steel in the inventory?

Right. We have written our inventory down near to current replacement cost levels, or replacement cost levels at the point in time when that inventory would be sold. There is still some margin above what replacement costs would be, but the actual writedown is based on assumptions around what selling prices will be and what the volumes that will flow through the system will be.

Okay. Got it. And are you seeing competitive pressures from some of the -- certainly some of the mills, at least, I would think have already reduced their costs, and were telling us that they're already -- have written down or have worked through their high-cost inventory. Are they undercutting prices much? We're certainly hearing it on the steel side. Are you seeing it on the process side?

Mark, you want that one?

From what we're seeing, they've just taken out more capacity. The guys - - it appears to us the guys are trying to hold, you know, a bit of a pricing discipline out there by peeling capacity out as much as anything.

Right.

There just doesn't seem to be a ton of steel moving in the market.

But there's not battles for market share? I mean, certainly there's been a lot of capacity taken out already, but there's less market share and more challenges, and pretty much people are holding the line on price, you think?

Well, they're trying to, for sure, and I can understand that. You know, I'll say that, you know, one of the advantages we have is that we're not owned by a steel producer; so therefore, we are independent. So, I mean, it follows that our, you know, business is attractive to a number of suppliers. And that's a good position to be in.

But you could also make the argument, because you're sitting on higher costs [for] steel, you haven't reduced your costs, and may be would be slower to lower prices, no?

Well, we have lowered our steel costs, so we are now working from -- not from a disadvantaged position, as we were in the first quarter.

Okay.

I think that's really important to get. You know, we've written our inventory off.

Okay. So you're pretty close to current selling prices, and that shouldn't be a distinction then?

Absolutely.

Certainly, we're working towards what the current market is, yes.

Okay.

If you were to think that our guys and gals in our business units were at disadvantage in Q1, but still were able to even, you know, reduce volumes, get a reasonable spread, you know, we've really now enabled them in a huge way to work with steel prices that are really consistent with, you know, where the market is.

Okay. I was curious, Norm, on your comment on State and local Government strength, because it seems to us with the short-falls in a lot of the budgets that that might be something that could be waning? Certainly, the Federal Government's strength should be a little more stable? Can you give us a little bit more color on if you're seeing any weakness from State and local Government spending?

Yes, that's a great question. And you know it is interesting, because I really thought we could start to see that, but I think what we're seeing, and I hope I'm right, that we're seeing a tail of work that was bonded and provided for last year. So a number of the school projects that we're, you know, working on are really from last year, and that has been a good thing. We definitely have seen an uptick in both the activity and opportunity in Federal Government work, particularly the Department of Defense.

Okay. So defense is holding up well, but that's not State and local, right?

That's not State and local, correct.

All right, and the final thing I wanted to just follow up on, the point you just made about how, usually, you're 60% to 65% of the threshold above which you see more positive leverage. The cost reductions will help. If I got you right, and I'm sorry if I missed this, you talked about utilization being what, 35% for the quarter?

Correct.

What gets you, do you think, from 35% to -- okay, so you said you'll have a lower base for benefit. I don't know if that's 50% or 55%? But what gets you to that level in this current environment?

You know, we think just the seasonality. If you look at the last six years, if you look at McGraw-Hill Dodge [sheet] data, the level of seasonal activity in our fiscal year, you know, averages about 20% more business activity in the seasonally strong -- you know, sector that is seasonally strong, our Q3 and Q4. What that represents over the last six years is that we've had about a 30% increase in revenue over -- our Q3 and 4 over the first half of the year. And that has corresponded to a 137% increase in net profit. And that's -- when we kind of work back into where that leverage point starts, it historically starts around the 60% or 65% percent range. We think that with the cost reductions and efficiencies that we've made, we've brought that leverage point down.

Sure. Okay. So point being that maybe not in the near term, but certainly the seasonality would suggest second half of your fiscal year is when you could see an improvement? Not - - I mean, just in the current environment, moving from 35% percent to whatever, 50%, 55% is a big move, but it is possible in your view that that can start to play out more in the second half of the year? Is that a fair assessment?

Yes. It really takes -- it doesn't take a whole lot of an increase in sales with, you know, with the current structure we have, to give us that impact.

Above the -- above your threshold for the benefit that you talked about?

Correct.

Okay. All right, thanks very much.

Thank you.

The next question we have from Robert Kelly of Sidoti. Please go ahead.

Good afternoon, thanks for taking my questions.

Hi, Bob.

Is 2Q a profitable quarter if steel prices stabilize?

We're not - - you know, giving guidance, but we have a level of confidence that we will be in positive cash.

I mean, will the cost cuts get you to -- is that the expectation for 2Q? I mean it doesn't seem like seasonality will kick in maybe as strongly this 2Q as it has in past years?

Well, you know, we have seen -- as you know in the past, our Q1 and Q2 can be (inaudilbe), we can have a Q1 up and a Q2 down or vice-versa, and we've had some years where Q1 and Q2 are flatish. You know, we are certainly seeing the level of activity, at least to this stage of the game, are pretty consistent with the levels of activity that we saw in Q1. You know, we'll see, you know? And in some cases it looks like it could be up a little bit. But we want to be very cautious about what we say about Q2.

That's fair. You talked about quoting being up significantly here in February. I mean, are the quotes turning into orders? Is that how we should read that? Or is it just prices have dropped, people are getting ready should the ready-to-go projects from the Federal stimulus package come through.

I don't think, Bob -- I don't think there's anything in what we're quoting that has anything to do with the stimulus package at all; none, zero. What we have, and again it is short data point, it's January and February, clearly the value of our quoting compared to the same period last year is up 17%. Now, to be successful, we've got to turn those -- you know, turn those quotes into orders and backlog, and that's what our team is working on. That's why lowering our steel prices, you know, should enable us to be as successful as we have in the past.

Okay. Great. And, then I just -- for 1Q new orders, do you have that number?

I don't know. We have our backlog. We know what our cancellations were. Our cancellations --

What was that?

5% or 6%.

About 5% or 6%.

So cancellations dropped relative to 4Q? You guys had talked about 10%.

Yes. Yes, it's interesting. It really is interesting that our cancellations were our highest as a percentage in Q3, dropped in Q4, and dropped again Q1.

Okay.

They're about half what they were.

Right. And then you had talked about, during the 4Q call kind of, I guess -- nothing solid, but you had talked about a cash flow goal or a cash reserve goal at the end of this year being excess of the $80 million; is that still the case?

You know, we're going to struggle to get to 180. But at the end of the day, it -- the whole intention of the 180, it was to really depict and show and indicate that our behavior, which was with generating and holding as much cash as we could, but it is only in service to our refinance.

Right.

And it really is the refinance that we're working on to get done, well before that. Well, well before that.

Okay, guys. Thanks.

Thank you.

The next question we have comes from Fred Taylor of MJX Asset Management. Please go ahead.

Thanks for taking the question. I'll -- we sort of beat this to death, but I'll ask it another way. If you do the balance sheet restructuring prior, you know, to November, is it a deleveraging exercise?

That's a very good question. I would say that it clearly is a deleveraging situation --

Net of cash?

Oh, well. That - - that remains to be seen. That certainly is within the alternatives that we're looking at.

Okay. Thank you.

Yes.

The next question we have comes from Arnie Ursaner of CJS Securities. Please go ahead.

Hi, good afternoon.

Hi, Arnie.

One of the things I think you said in your prepared remarks was that your tonnage was down 20% more than you expected, but I'm not sure, did you give us how much tonnage was down?

Yes. In the press release we said that tonnage was down I think 45%, Mark?

45% down from the fourth quarter and 40% down year-over-year.

And I think Mark gave some color on the units. Do you want to go -- just say it again, Mark?

If it's in the press release, it is fine.

I'm not sure the units.

I don't think we did. Year-over-year the decline in the Coaters Group was 31%. In the Components Groups it was 38%, and in the Buildings Group it's 46%.

Okay. And thinking of the product, or selling a building perhaps, with the various movements in the price of steel, can you give us a feel for what a selling price on a particular building, how it might have changed over, let's say, the last six or nine months given all of the volatility of steel?

Well, that's a good question. I will say that in one regard, even though the volumes were really quite low, the spread that we had over material costs was fairly consistent with the past. But it is clear that we really started to see the effect of the high steel price in the negative impact it had on selling buildings, it really started to occur in, you know in, backlog terms, in our third quarter, and as you recall the fourth quarter, for first time in our history, we had lower revenue in the fourth quarter than we did in the third. So my sense is that, you know, we're going to see probably an average value for a class of building -- it will be lower. And it - - that is part of the -- you know, part of the whole notion of it being more competitive against other forms of materials. And, you know, ultimately that's a good thing in terms of volume.

Okay. A couple more questions about the potential for a refinancing type of transaction. You retained JPMorgan Securities. Remind me again, who are the lead - - are they the lead bank you have in your syndicate?

No, they are not.

So are they --

Our lead bank is Wells/Wachovia.

Okay. So to be clear, have they been hired strictly as an adviser? Or what if they came back to you and said that we think you should do an equity-related offering? Will they be able to in fact suggest a transaction that would favorable for their economics?

They are assisting us on all aspects of our refinance.

But are they strictly hired as an adviser, or can they also choose to elect themselves to do the transaction they recommend?

No, they can't elect to do the transaction, no.

Okay. What is the leverage ratio that would be the closest to tripping your covenants? You mentioned it, but what is the actual ratio?

Our covenants are -- there's really three maintenance covenants that we maintain. There's the total leverage of 4 times, and we're currently at 2.9 times. There's a senior leverage at 2.7 times, and we're at 1.8. And there's an interest coverage minimum of 5 times. So the leverage ratios, both the senior and the total leverage, are the ones, and they acting pretty similar to each other. I wouldn't say that one leads the other one.

Okay. And again, to just clarify, your intention is to try to resolve all of the upcoming debt that you have on your balance sheet? Or are you considering it more a separate transaction?

No, our intent is to do a holistic approach.

Okay. And to be clear, I think you are certainly as -- one of the arrows in the quiver would be an equity-related offering, even down at these prices?

Let's just say that we're looking at alternatives, including both the amount and the type of equity that, you know, could be used to facilitate a refinance.

Okay. Thank you.

The next question we have comes from Michael Corelli of Barry Vogel & Associates. Please go ahead.

Hi, Norm.

Hey, Michael.

I'm sure you've gone through the numbers, I mean although you haven't given specific guidance. I mean, if business conditions stay the way they are, is it that you might have a breach of the covenant as early as the second quarter, or would that happen later in the year?

It really depends on circumstances. Michael, we go into pretty fulsome review of this in our Q that will be coming out tomorrow.

Okay. All right, and then I guess the covenant breach, would that be related to the Term Loan?

No, well --

Yes, yes.

I'm sorry.

The senior credit facility which includes the Term Loan, yes.

Okay. So is Wells Fargo/Wachovia, is that on both the credit facility and the Term Loan that they're the lead bank?

Yes, it's one and the same, but yes.

Okay. All right. And as far as CapEx and depreciation and amortization, could you give us some guidance for the year?

Currently, we're guiding toward an '09 expenditure of just under $20 million, with the majority of that spend oscillating toward strategic initiatives, IPS/IT, so on and so forth. Prior year's, you know, our budget -- CapEx budget was in the $34 million to $35 million range.

Mark will give you kind of the DNA here in just a sec.

Yes, the DNA will be in the range of $34 million to $36 million for the year.

Okay. All right. So as far as the refinancing, I guess, you know, your biggest cash need is clearly the potential put on the convertible. But if you were to breach the covenant, I guess that would -- you know, that would be the next thing that would require you, I guess as far as a deadline, to do some kind of a negotiation or refinancing. Do you have a target date by when you'll have this completed?

You know, we certainly are working to a date, and it would be consistent with what we said in the past, that we, you know, would like to have something to announce by the end of March. And we'll see whether, you know that, works out. We -- you know, whether it is that or the first part of April kind of remains to be seen. But we've got adequate time to get done what we're working on, I'll say that.

Okay. Thank you.

The next question we have comes from Dennis Delafield of Delafield Asset Management. Please go ahead.

Good afternoon.

Good afternoon.

One question, and that is I saw the -- noticed that the accrued expenses went down very sharply, from $129 million to $90 million. I wondered what the majority of that was?

Sure. It's a couple of items. Give me one moment. The largest item is the accrued compensation and benefits, which decreased $27.6 million. Also accrued income taxes was a liability in the fourth quarter; it is a receivable on the balance sheet now, it's $4.5 million. Then sales tax payable is lower by about $5.5 million.

Okay. Thanks very much.

Yes.

The next question we have comes from David Yuschak with SMH Capital. Please go ahead.

In your press release, you did indicate that you're going to have -- you expect to have positive cash flow from operations in the quarter. Could you give us a sense as to where the sources of that optimism is on your cash flow? And as far as CapEx spending, you gave a 20 -- 20 -- is that going to back-end loaded, depending upon your cash flow that you produce here in the second quarter?

The answer to the last question is, with the exception of the Insulated Panel plant, other capital expenditure from the projects can be pushed some. And those decisions will be taken based on our cash flow projection, just as you suggest. With regard to the first part of the question --

There's continued mining of the working capital that will occur in the second quarter, primarily from the inventory area.

Okay. Is -- and as far as mining it from inventory, what is your strategy there to push it down materially to make a difference?

We're basically adjusting the purchasing to the current volume levels, which will bring the inventory level down.

Okay. So, it is -- the mining, that will depend upon the strength of the production of sales in the quarter, then? Tonnage, delivered, I guess is where you're -- the variable is how much you can actually produce in the way of cash out of there?

And obviously, with the volumes we're seeing, you know, we're not adding back inventory to our current position.

Okay. That's all I got, thanks.

Okay, David, thank you.

(Operator Instructions). Looks like we have a question from Jay [Grier] with Miramar.

Hi, I just had a few questions. First is on the run rate corporate overhead, I thought I saw negative $13 million; is that a safe assumption to use for the next few quarters or is there a different rate?

You should see that number come down some over the next couple of quarters, probably by about as much as 10%.

Okay. On the business that you're quoting, I understand there's a lot of charges and so on right now, but could you talk a little bit about the cash margin that you're seeing on an EBIT margin basis, as opposed of sort of the noise that we're seeing with inventory writedowns and so on? Just trying to figure out on a clean basis what -- how have margins come down versus say, you know, past performance?

You know, it is clear that margins will come down some. And, you know, if you think back to other periods in our downturn of 2001 to 2003, you know, it would not be surprising to see gross profit margins come down by, you know, maybe 200 or 300 basis points, and I think that we'll have a better -- you'll have a better view of that, you know, at end of Q2.

Okay. But so far you're seeing about a 200 to 300 - - is that what you expect or is that sort of where you're currently seeing business?

Well, that's kind what have we expect. We're not -- we didn't see that -- you know, we didn't see that in terms of our material margins in Q1. We were better than that.

Right. And then I just -- last on the working capital, could you talk a little bit about flexibility you might have in terms of payables and inventory, in terms of ability to stretch payables to some extent, or work on different terms of inventory consignment or otherwise with your vendors?

Well, there's no question about it, as I said with Timna that, you know, we're an attractive partner to a lot of the steel producers. Historically, we've had very good terms and conditions consistent with that partnership. And I don't want to speculate as to whether, you know -- you know, that would be the case in the future. But you can appreciate that they and us are working together in a partnership.

I see. So you could see different terms from what you've been currently experiencing? Is that terms of days payable and so on? Or is that --

You know, I don't want to overstate, but I will say this, that the steel mills have been through these periods before. They have independently and individually worked in different ways with us, and we've had a very constructive, you know, and positive relationship, you know, will all the mills we deal with, and I suspect that that will continue in the future.

I'm sorry, just one other issue, just kind of putting together some of the comments you've made about the refinancing, I guess in light of the situation with the banks and covenants and the like, and the refinancing, should we assume that among other options you're exploring, there may be a possibility to do something which is somewhat of a basket of securities to offer in some sort of exchange for the converts?

That's a very good question --

It seems that there would be some tension over the use of the cash and, you know, you mentioned sort of equity and, you know, I guess, you know, new securities and the like. So just trying to figure out how that might -- whether that might be sort of an interim answer, given the competing forces here about uses of cash and the uncertainty?

That's a very good question. And the way I'll answer it is by saying we really are looking at all possibilities, and haven't, you know, ruled any out. But we are progressing down a path that would provide the best outcome we can have for the Company, and that's taking into account the broad range of considerations.

And so the timing on that, you mentioned, is that sort of a March -- end of March timeframe for an announcement? Or -- I guess, what -- what is it hinging on, I guess, at this point? Is it sort of waiting on the banks or -- because it seems like you've been working with JPMorgan for a little bit of time?

You know, it's one of those things that we certainly are making good progress. We're still in a whole range of conversations. And it is best -- it's one of these things that's best that we -- you know, we tell people about it once it is done, you know. So we're going to do it as quickly as we can, and that's what you'd expect.

All right. Thanks for your time.

Thank you.

(Operator Instructions). Our next question is from Robert Kelly with Sidoti. Please go ahead.

Hey, guys. Just, I -- I think you talked to this already, just maybe one clarification. 1Q came in, I think you said this in your prepared remarks, 20% lower than you had expected?

Yes. When you look at -- you know, if you look at all of the volume declines in the Buildings Group, specifically, the Components group, and the Coating Group, that combined to be 20% worse than our worst-case estimate.

Right. But you had said coming in, you were expecting a 40% sequentially decline? So I'm just trying to reconcile what the incremental negative in the quarter was?

The -- that was a decline over the fourth quarter.

Right. And it came in --

So --

-- down 60? Or?

No, the declines in the Buildings and the Components Group were more significant than we had anticipated.

Okay, so it's just the [two], got you.

That's the real difference. It's where the declines occurred, not the total amount.

And then one final one, you had talked about hoping that credit markets eased up for you as you went through the renegotiation process. Any positive moves on that front as we got into the first calendar quarter here?

I got to tell you, the first fiscal quarter wasn't very good, Bob, you know? I mean the markets were in total disrepair for -- you know, for people that are just below investment grade. So that --

So you're still facing similar terms, you know, that you were two, three months ago?

Well, what -- what --

As far as --

I think some of the spreads have come back some, that's for sure.

But it remains very volatile.

It's very, very volatile. That's -- you know, that's why the approach really are -- you know, has to be a holistic approach, and frankly that's what we're in the middle of working on.

Understood. Okay, thanks guys.

Welcome, thank you.

There are no more questions at this time. I will now turn the conference back over to Mr. Chambers, Chairman, President, CEO.

Listen, thank you very much for participating in the call today, and we appreciate your questions and the insight behind them, and we look forward to talking to you in the not too distant future. Thank you.

Thank you, gentlemen, and thank you, all, very much, for participating in the NCI Building Systems first quarter 2009 earnings conference call. This concludes today's event.