Core Natural Resources Inc (CNR) 2010 Q1 法說會逐字稿

Hello this is the conference call specialist, welcome to the NCI Building Systems first quarter 2010 earnings conference call. As a reminder all participate pants are in a listen-only mode. There will be a opportunity for you to ask questions at the own telephone presentation. (Operator Instructions). For your information, today's conference is being recorded. I would like to turn the conference call over to Todd Moore, Executive Vice President and General Counsel. Please proceed, Mr. Moore.

Thank you. Good afternoon and welcome to NCI Building Systems conference call to review the Company's results for the first quarter of fiscal 2010. This call is being recorded. To access the taped replay, please dial 1-412-317-0088, and enter the pass code 419727 followed by the pound sign. The webcast archive and taped replay will be available approximately two hours after the call, and through March 16th, 2010. The replay will also be available on the Company's website, which is www.ncilp.com.

The Company's first quarter results were issued earlier today in a press release covered by the financial media,a release issued advising of the accessibility of the conference call on a listen only basis over the internet. Statements made on this call may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. And section 27A of the Securities Act. These statements and other statements identified by such words as "potential," "expect," "should," "will," and similar expressions are forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a number of risks and uncertainties that may cause the actual performance to do differ materially 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 factors that could affect NCI's operations and 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 reconciliation to the most directly comparable financial measure calculated according to GAAP on the Company's website by following the news link to see today's news release, Information being provided today is as of this date only and the Company expressly disclaims any obligation to release publicly any updates or revisions to these forward looking statements to reflect changes and expectations. At this time I will turn the call over to Norm Chambers, the Company's Chairman, President and CFO.

Thank you, Todd. Good evening everyone and welcome to the first quarter 2010 conference call. Joining me are Mark Johnson, our Chief Financial Officer, Mark Dobbins, our Chief Operating Officer, and Todd Moore, our General Council. I will provide a overview and Mark Johnson will provide our financial results, and Mark Dobbins will review our operations, then we'll be happy to take your questions. The first quarter results were in line with expectations. This is traditionally our seasonally weakest period, and as we anticipated our performance was negatively affected by a combination of current soft market, conditions in nonresidential, a 37% decline in steel prices and pricing pressures that in large part affected our longer cycle buildings group. While we expect the weak seasonal demand in a very competitive pricing environment will characterize much of the first half of fiscal 2010, we fully anticipate that we will see a seasonal pickup in the second half that will enable NCI to post positive operating results.

When you peel back the first quarter 2010 results, there are several positive points to note. First, NCI performed way ahead of McGraw Hill new construction starts, which posted decline of 42.5% in volume. Our volume was down only 1% in tons, which included the coding group's total processing tons while our components and buildings group were down 9% year-over-year. We improved gross margin, exclusive of special charges, by 30 basis points. That's in part to the benefit of cost reduction programs implemented in 2009. In fact, each of our business segments showed significant improvement in their expense to ton metrics, resulting from the cost saving measures we took last year and the continuing initiatives that are currently underway. These improvements can be see in consolidated manufacturing expense per ton, which declined 17% in 2010 first quarter, compared to last year. Both our codings group and components group succeeded in producing operating profit in this year's first quarter. These quick turn businesses have benefited from improved efficiencies, successful marketing initiatives, and the weakness in some competitive dynamics.

On the other hand, the buildings group because of its longer cycle times was the hardest hit by the uncertainty that existed before, our recapitalization was completed last year. Much of the backlog executed in this first quarter was below market pricing, as we chose to use discount pricing to counter customer concerns last year, when the work was booked in to the backlog. The good news is that in the months since the completion of recapitalization, we have been able to return to normalized value of pricing. But of course this remains a competitive environment. The entire Company is engaged in getting back to annual EBITDA in excess of $200 million within five years. It is important for you to know we are not merely waiting around for a recovery in nonresidential construction. Our coding group is exceeding our expectations for third party sales, particularly large manufacturers. Our components group has commissioned new insulated panel plant in Jackson, Mississippi. Our buildings group has a sales force that is on fire and focused producing a profitable growth supported by engineering and manufacturing efficiency improvements. Many good measurable initiatives have been implemented. On the corporate side, we continue to identify and act on improvements to our supply chain management that adds to the value of our hub and spoke delivery system. The focus of all initiatives is to provide superior support in marketing, sales, technical, manufacturing and delivery to enable our customers to be successful now and in the future.

With our previous balance sheet risk eliminated, our new Board in place, our employees reenergized we will have a good year regardless of the market because the work we will complete will enable us to maximize our financial results even with only a modest recovery in nonresidential activity. With that, I will ask Mark Johnson to take us through the financial highlights.

Thanks, Norm. Our consolidated operating results for the period continue to reflect the depressed levels of nonresidential construction activity, which have been widely reported, but also show the positive impact of our cost reductions and restructuring activities. Revenue for our first quarter was $183 million, which declined almost 30% from the year ago period, due primarily to reductions in sales prices, related to the 37% reduction in steel costs between the two periods. In addition, while our overall shipments measured in tons are only 1% lower, our buildings and components business shipped 9% fewer tons than the year ago period. Our first quarter shipments measured in tons are 23% lower than the preceding quarter which represents the normal seasonal pattern. Gross margins before special charges 18.2%, up from the 17.9% experienced in the first quarter of 2009. Had we not completed significant manufacturing cost reductions throughout 2009, our margins in the first quarter would have been substantially lower. Our adjusted margins are down sequentially from the 24.7%, earned in the fourth quarter, predominantly resulting from lower operating leverage, given the 23% seasonal decline in volume.

Selling general and administrative costs were $44.4 million, down significantly from the $54.3 million in the first quarter of last year, and down 13% sequentially from the $51 million incurred in the previous quarter. The decline from the year ago period reflects the significant cost reductions that have been made across breadth of our businesses, while the decrease from the fourth quarter also included seasonal cost reductions. Excluding charges, our operating loss was $11.2 million in the quarter compared to a loss of $7.8 million in the year ago period. The comparatively higher losses related primarily to increased operating losses in our buildings business, who's margins impacted by work produced in the quarter sub booked last year during a period which included customer concerns over the successful completion of our recapitalization.

Our individual segment performance showed some variation in operating income compared to the same period of the prior year, with our coders group margins expanding, while our components margins remain stable, and our buildings margins compressed. Higher margins in our coder segment reflected the return to more normalized margins after selling through higher priced inventory in the prior year quarter, as well as the expansion of external sales to new customers. The coders group volumes also benefited from the comparative increase in volume due to the prior year destocking that occurred in the first quarter, which related to both internal and external customers. The components segment maintained comparable operating margins, given their cost reduction initiatives and the underlying 7% decline in comparable volumes. The margin compression in our buildings group was driven largely by the production of orders booked during the last months of fiscal 2009. The profitability on the books reflected both the difficult external market environment as well as aggressive marketing by the buildings group to maintain market share despite customer concerns over the completion of recapitalization.

Moving to the balance sheet, we finished the quarter with approximately $78 million, in cash. And an additional $4.2 million in restricted cash, that will become unrestricted over the next six months as our collateralized levels of letters expire and their replaced under our new credit facility. In addition to the cash on hand, our $125 million ABL credit facility remains undrawn and provides an additional $62 million of availability based on current levels of inventory and receivables. Our only remaining debt obligation, the $150 million term loan, requires no financial maintenance covenants, until the fourth quarter of 2011. And amortizations 1% each year until maturity in 2014. In addition, approximately one-half of any income tax refund we receive related to the 2009 taxable loss, is required to be paid against the term loan, which we estimate will reduce the term loan by an additional $14 million in the second or third quarter of 2010, as tax refunds are received.

We estimate that our inventory measured in tons is approximately 33%, lower than this time last year, But approximately 31% higher than it was at the end of 2009, as we begin to restock for the seasonally stronger period. Our annualized inventory turnover for the quarter was 7.3 turns compared to five turns this time last year, and compared to 10.1 turns in the fourth quarter of 2009. Receivables are lower than the comparable periods as direct result of the lower transaction values derived from the lower steel cost and described lower shipping volumes. Our day sales outstanding calculated on a trailing three month basis was slightly better at be 38.1 days compared 40.8 in the same period last year and 32.1 days at the end of the fiscal 2009, which is reflective of the historically normal impact of seasonality on our industry.

During the quarter, we invested $1.3 million, in property and equipment. As we have previously discussed in light of the prevailing economic conditions in our industry, we have curtailed our capital spending to only maintenance activities and identified critical initiatives. On a similar basis, we expect to spend between $11 million to $12 million in 2010, about half of which will be spent on technology and systems. During the period, we recorded $1.5 million in impairment and restructuring charges, related to our previously announced restructuring activities. The primary cost in this period was additional $1 million non-cash charge to reduce the carrying value of our assets held for sale to market indicated value. Looking forward, we expect to incur approximately $1 million in additional restructuring cost in the remainder of 2010. Further, in our second quarter, we will recognize the remaining $231 million, non-cash beneficial conversion feature related to the preferred stock we placed in 2009, because the completion of reverse stock split on March 5, 2010 resolved the contingency related to the convertibility of the preferred shares. I would like to turn the call over to Mark Dobbins to discuss our operations.

Thank you, Mark. As mentioned earlier, each of the business units faced extremely competitive pricing conditions in the quarter, coupled with low demand levels. As Norm previously noted, nonresidential construction starts as measured in square feet, fell 42% compared to the first quarter last year. In addition our historically strong commercial industrial sector starts measured in square feet as well, fell by 52%, which is given rise to a more well defined tactical focus with builders and customers, in regions of the country and end markets which we feel will lead the economic recovery. The building segment's first quarter reflected the overhang from last year, where the entire industry experienced volumes declines by 40% to 50%, and huge swings in steel costs. Our own internal refinancing issues caused additional concern with some of our customers, leading sales group to be competitive in the pricing strategy. The completion of our recapitalization has taken away this last uncertainty. Our customers and others now see the resiliency and strength of NCI moving forward. We believe this is exemplified by fact that during our first quarter, one of our building brands booked numerous projects with builders of our main competitors.

During the end of the quarter, the buildings group began recognizing what appears to be slightly improving conditions. Bookings and quote activity for large projects, which was absent from the prior quarter, improved significantly. Among the builder community, some projects that had been previously shelved came back to life and others requested to be reestimated. Design built type work, which has been almost nonexistent for the last year, had a slight make up in activity as well.

We continue to find opportunities to take advantage of green or lead related construction projects which give us advantage with our product offerings. These projects were more prevalent in the institutional sector and accordingly, we have seen an increase in the percentage of our jobs sold in to the market. The Robertson-Ceco portion of the buildings group is realizing additional opportunities as they become more comfortable utilizing our hub and spoke manufacturing and delivery process. And the entire buildings group is benefiting from engineering and drafting consolidation efforts. The utilization of more advanced technical applications allows the entire group to participate in projects requiring building integrative modeling or BIM modeling, which is rapidly becoming a common requirement for some of the heavy industrial and Department of Defense projects.

The components group faced stiff pricing pressure in the quarter and demand levels remain low. The low activity level during the winter months left many of their OEM accounts with significantly reduced backlogs. However, the components group has found growing opportunities in retro fit projects and is implementing initiatives to make the solution many attractive to end users. We are beginning to get traction where Eco efficient product line of insulated metal panels. This coincides with the ramp up in final commissioning of our new insulated panel manufacturing plant in Jackson, Mississippi. In addition, volume in our agricultural related markets increased 26% year-over-year. We believe this sector will perform relatively well again this year, as its somewhat insulated from the overall commercial industrial construction.

The coders group enjoyed improving tons volume as compared to the same period a year ago and as noted earlier, some of this improvement is result of a 2009 quarter in which there was substantial inventory burn off occurring with both external and internal customers. However, this group is also benefiting from several sales initiatives, which are designed to increase the external sales volumes of both light gauge and heavy gauge products. Now, the heavy gauge coding volumes remain low as the products are predominantly utilized in the construction industry. But the light gauge coding volumes have improved as these initiatives targeted model construction sectors such as lighting and HVAC.

Each of the business units recognized significant improvements in their expense per ton metrics year-over-year, as a result of the cost saving measures implemented last year and continuing initiatives currently underway. These improvements recognized in several areas, but specifically the consolidated manufacturing expense per ton in the organization improved 17% year-over-year. And ESG&A expense per ton improved 17% as well year-over-year. That concludes my review of the operations and now operator we would like to open up the call for questions, thank you.

(Operator Instructions). Our first question comes from Arnold Ursaner from CJS Securities.

Good afternoon. My first question is on the financial side on your income statement. You have two items that differed versus my model, the convertible preferred stock dividend and accretion in the convertible preferred stock beneficial conversion feature. Can you give me a little better feel for items and if they are one time?

What was the last part of your question, one what?

One time.

One time. As I I was discussing in the script a few minutes ago we have a beneficial conversion feature we will be recognizing in the second quarter, which is approximately $231 million. So there will be a fairly significant charge that occurs relative to the beneficial conversion feature. That charge is related to the fact that the preferred stock was effectively in the money at the time the shares were issued because the conversion price was below the trading value of the common stock at that time. That charge represents the value of that differential. On an on going basis to the extent that we pay dividends in the form of a PIK, paid in kind, then those dividends would give rise to additional beneficial conversion features for those shares that are paid. Does that answer your question?

It's a pretty good slide, I'll read it again or look at the transcript later. The other question related directly to that is, in terms of the ongoing payment on the PIK preferred you have or the PIK convertible preferred, what's your expectation to cash versus stock payment in the next year?

It is clear Arnie that our intention is to as quickly as possible get to a position where we are paying cash only. We have certain stipulations within the bank agreements for the first year, which is from October of 2009, through one year, which prohibits us from making a cash dividend payment. Whether or not based on our view of liquidity and conversations with the banks, we are ability to alter that remains to be seen. Certainly as a Company, one of the advantages of a PIK, is that if the market is term terrible or continues to be terrible or gets worse when we have that protection. Certainly is our intention and frankly our view we will be in a position to pay cash as soon as we are able to do so.

Another income statement question you have about $1 million of other income, $1.1 million one of other income, can you comment a little bit on that? I know it's round error on all the moving parts you have, can you comment more on that item?

Sure what that represents is the change in value of an embedded derivative related to the preferred stock. That pertains to the potential penalty dividends that could be paled if we fail to have enough authorized shares to convert the preferred stock. With the effective passing stock split on Monday or the effectiveness of the stock split on Monday, that eliminated much of the risk associated with the penalty dividends and basically removed the liability from our books for accounting purposes. So its a non-cash gain related to writing down that liability.

Okay, that's a perfect lead into my next question. Share count, I know you in your press release speak about 18 million, but we believe your fully fully diluted share count is materially higher, could you comment on what you believe the correct way to think about share count in a profitable quarter for you would be?

Sure. And there are several questions that arise around earnings per share calculations given the complexities of our capital structure. The way that - - because of our capital structure we are required to use who is referred to as two class method of determining earnings per share. In the two class method, you do get a difference between periods where you have income and periods are you have losses in certain situations. So in our case, when we have periods of income, we will allocate the income that's available to the common shareholders, between those securities that would participate in those earnings. We would take the earnings and we would allocate it between the preferred shareholders percentage, and the common shareholders percentage, and then we would divide the amount allocated to the common shares by the average common shares outstanding.

Which would be the 18 million, Arnold.

Which would be in the 18 million. Now, in periods where there are gains or where there is income, I'm sorry where there are losses, the participating securities are not contractually obligated to share in the losses or in other words to fund those losses or contribute additional capital for those losses, so in that arena you don't allocate losses to them in that period. So you would take all of the loss for the period, not allocate any of it to the preferred shareholders and divide that by the average common shares outstanding for the purposes of determining earnings per share. There is a difference between period of earnings and loss but only in the rarest of circumstances could you take the earnings of the Company and divide by the total shares outstanding for the purposes of determining earnings per share.

Okay. I'll jump back in queue, I have a few more follow ups but to be fair I will jump back in queue.

Great, that's perfect, Arnie.

Next question is from Eric Prouty from Canaccord.

Thanks, good evening Norm, Mark and Mark. Couple of questions here, first you talked about believing we would be seeing a normal seasonal pick up in volume, can you just say historically what the volume pick up has been from Q1 to Q2.

There hasn't really been a volume increase from Q1 to Q2 of any significance. That's our seasonally slow period. If you look back off Q1 that's up and Q2 down, or flat when we think about the seasonality of our first and second half, it's clear that we see anywhere between 15%, maybe 40%, increase in our second half over our first half, particularly when it comes to revenue. Of course the way the leverage works in our business, we get a disproportionate share, of earnings as a result of the increase on the top line. This past year in 2009, was an unbelievably bad year, if you look at the Mc Graw Hill falloff in February on, it is drastic in 2009, but even in that year we have some seasonality. Probably on the lower ends of our scale put we had seasonality and return to profitability in Q3 and adjusted in Q4. My sense is what we are seeing in the improvement in the when I say improvement backlog I mean from the standpoint of value and tons, when I look at where we are, it's strikes us that we are not being overly optimistic to think we'll have a level of seasonality in the second half.

Great, maybe Mark a little comment on what you are seeing from a steel pricing increase, what are you guys expecting quarter over quarter the steel price increase in the April quarters opposed to the January quarter?

We are certainly seeing the mills flexing their muscle a little bit, and Eric, it's been driven certainly not from a demand perspective, but input cost at the mills. Raw material costs. We started seeing those early they have been fairly consistent through the quarter. And indications see going forward the guys are sticking to their guns as their input costs continue to increase they will try to push those on to us the best they can. The difference we seen in this trip as opposed to prior as in 2008 it's not quite the steep incline that we saw there, it's more of a progression if you will. As Norm mentioned several times as long as our steel products are competitive from a PPI perspective, we should be able to pass those along and do well.

The thing is Eric, when you look at the steel price increases, and in the trend that we seen over the last several months and that's what is -- forecast, it's still is way below the top of the increase we saw in 2008. I mean we are still way, way we low those levels thanks goodness.

Could we expect - - Let's take from a modeling stand point could we expect blended 10% plus increase from your bonded average cost in January to your April quarter?

I think you are right around the ballpark, Eric, we were discussing this a little bit earlier. I think 10% to 15% number is close. It's hard to see further out in to the year exactly what is really going to happen. But currently what we are looking at from the first quarter, then some of the pricing been pushed in front of us for April and May, you are around the right ballpark.

Yes, okay. So I mean we can also assume you will benefit a little bit from the inventory that you just picked up in this last quarter here as you sell through (inaudible) increasing price environment.

We certainly have a lot of practice in working in an environment with steel prices that are rising and if they have to rise we prefer that they are gradual and methodical and they are rising so our customers can adapt to it. We can handle as we have in the past.

Sure. Norm, on the same topic, can you comment on again this would be just a for example guesstimate but best guesstimate on what the impact on the January quarter's gross margin from the booking of some of these, I guess, win business at any cost type contracts how that might have impacted the margin in this Q1?

All I can tell you is that if you lack at kind of where we were able to stabilize our margins in our components group but compression in margins, you could make a case that our margin level should have been equal to where they were last year and you wouldn't be far out of the ballpark.

Can we assume you will get back to a blended gross margin in the low 20% going forward where some of the contracts have now rolled off?

We are talking about the buildings group.

That's right, yeah. I'm blending it in to a total corporate gross margin. I mean, can we kind of get back to that low to mid 20% gross margin level with some of these contracts now flush through the backlog in the order system?

Yes. And I would say that I wouldn't have expectations of getting there right on the second quarter, okay?

Sure.

As we see a little bit of the volume increase and that wouldn't be out of line for expectations for third and fourth.

Okay, that's fair enough. For final question, on the insulated panel plant in Jackson, you gave a little bit of update but maybe a little bit more of a detailed update about how the through put is going there, what kind of efficiencies you operating at there if you work the bugs out and then maybe just a little update given the continued tough environment out there is there still good demand for that product?

Eric, that product, we spoke in the past is the only product last year that didn't have a significant decline in demand. It was a little bit softener the first quarter this year. But we have seen signs of that coming right back. As far as the plant goes, the guys are working right along, probably not on the same schedule we would like to see it work but the plant is up running, we are running products through there for our customers. We certainly have a long ways to go as far as dialing in all the dials you know what I'm talking about from a scrap perspective. So on so forth. A bit of learning curve with a new piece of equipment like that. We certainly found that learning but as we move forward it's not something we can't get our hands around pretty quickly we feel pretty good about the quality of the product is excellent. It's about managing operation of the plant and getting used to it.

We are beginning to stack up pretty good runs which also helps. Where we got longer runs that give people a chance to really kind of get operating time there. We are pleased with the direction and frankly pleased with the demand.

Perfect. Then finally the engineer buildings backlog, somewhere in the quarter billion dollars range, give or take a little?

Yes.

Perfect, thank you very much.

Thank you Eric.

Next question comes from Mike Corelli from Barry Vogel & Associates.

Hi, good evening.

Mr. Corelli.

First I had a question about the inventory did you say it was down 33% in tons verses last year and up 31% versus the prior quarter?

Yes.

I mean as far as the build in inventories, I mean is that is this where we would see typically seasonally or is it they got so low because you were trying to generate as much cash as you could that there was a move back to equilibrium, is there optimism about what's going to happen going forward? How should we look at that?

I mean you are close on Michael, we certainly as Mark Dobbins said, and will speak to, we really focused on running that down and just bringing it down to real low levels, so some of what we have seen in this quarter is restocking but as Mark Johnson said we think a good place to be is 45 days of inventory, that's kind of our healthy turn for us. We can get more aggressive at certain times of the year. But that's where we want to be in a marketplace that is showing a little bit of brightness. Mark, do you want to?

You're dead on. The biggest GAAP there is that last quarter, last year we had decent volumes running through. We really concentrated on pulling inventories down. Did a good job of it in the year, we are going through restocking and trying to get back in to place with we can feel comfortable servicing customers going forward with the current pricing conditions.

Okay and then I just had a question about the cash balance. You know you have a good cash balance obviously you are going to get a sizeable tax refund and laugh of that you will be able to keep and half will go towards debt repayment. Is it is the attitude it's going to be a tough year so we want to hold onto the cash on the balance sheet to make it through the difficult times or is there, opportunities for growth initiatives or some other use of the cash that you are considering?

That's great question, Michael. When we think about the priorities, we certainly have taken a conservative view on cap ex this year. But I will also say we are not being shy on what we are spending in terms of the system side of this thing, as you heard me say before we still have work to complete on the engineering systems and we are getting that done. We are spending the money on that. You can imagine that we are seeing opportunities in the marketplace, and our cash position gives us some opportunity to look at kind of small things, but whatever we would do on the growth side would have to be really attractive. In other words, we are more inclined to kind of hang on to little cash so we can soon as possible start paying the dividend in cash. And have the flexibility that cash provides us.

Okay. So right now you are not allowed to pay the dividend in cash based on your agreement with the banks.

We have for the first year our PIK. Whether or not again I don't want to set anybody's expectations but if we are able to convince the banks to allow us to pay in cash that's something that given satisfaction as we like to be able to do. But that's really going to be the domain of Mr. Johnson here, who will be mining the treasury and making sure he is comfortable with our liquidity, and then we can move along.

Okay. Thank you.

Yes.

(Operator Instructions). We have an additional question from Arnold Ursaner from CJS Securities.

I want to follow up on a earlier question you had about the margin impact in the quarter you spoke about the fact you had to be competitive on pricing but spoke about under absorption of fixed cost and facilities, so two questions related to that. One is, could you comment a little bit more about the fixed cost under absorption and when we might see that be a less of a impact? You have a sizeable backlog is most of the backlog you currently have also at prices that are inefficient or low enough to not fully recover the margin you would like to get to.

So the last question for first, we are increasingly happy with the value in our backlog. Whether we have a little tail left, of some of that lower price work, maybe, but I don't think it's going be significant. I don't think you are going to hear me complaining about it this next quarter hopefully. And I think that the volume absorption, we got -- our capacity utilization, came up about 10 points to 45%. Which is still really pretty crappy. But is an improvement. My sense is that while we are not expecting a wildly improving first half, we will probably see some movement in the buildings group that's in the right direction. So I think we will have better indications, Arnie, with the second quarter results kind of, that the absorption is a little better. But I think the important thing for investors is to look at the backlog at the end of April in the way we speak about it, I think that will give us indications of the foundation we will have for a second half of the year.

Okay. Maybe perhaps another way to think about the leverage in your operating model at this point. You obviously cut a tremendous amount of head count out of corporate. You've reduced people all across the board as best you can. To the extent you see a pick up in volume where utilization, how should we think about the incremental cost or the incremental margin you are likely to earn on the next $50 million, $60 million, $80 million of revenue, how much incremental nonmaterial cost do you have to absorb for increase production.

That's a great question. For and I kind of point you to Q3 last year. That was a pretty clean quarter. And you can see the volume increase and the revenue increase, and I think get a pretty good handle Arnie, particularly if the buildings group what a little bit of volume increase really meant to them. If anything we will be in better position this year because we reduced cost more. I think the efficiencies that we are getting in the engineering side is really going to cut down on our cycle time. We will be expending less cost in man hours. We are definitely are improving the use of the hub and spoke, we had a little bit of increase in our transportation cost, we are managing that so my suspicious is that I personally would look at improvement to the Q3 in the buildings group as indication of where we would like to be.

Maybe try to ask it more directly, what do you think your incremental margin is at this stage?

It's a tough one. I can tell you that our belief is that the incremental margin is substantially better than it was before we made the cost cuts. I would tell you that when I used to speak about what levels of utilization we would have to have to get a kind of kick in the incremental, as you probably remember I would talk about 80%, I think we are way below 80% in terms of getting level out of operations if it's 60%, I'm not exactly sure, but I got to tell you it's a lot of lower than 80%.

Let me try one more time. If you got to 60% utilization, what sort of total revenue would you be looking at in your opinion?

I think about it more the tons, Arnie.

Okay, how about it tons?

I think about it more in tons and I would be thinking about maybe at least a 15% increase in tons.

From where we are now.

Yes. At least a 15%.

Okay. Norman in your outlook.

That's what kind of we did last year between the second and third quarter in the buildings group, something along those lines.

Norman in your outlook you spoke about important opportunities to achieve profitable operating results and highlighted three items but the driver of two of this three are market share gains. At this stage where are you gaining market share, who are you gaining market share from?

We have a significant number of new builders that had been with our competition that have joined us since really the beginning of the year. Since I mean at least the recapitalization. That's a very positive thing. I think that the -- we are focusing on our marketing and sales perspective like we never done before in terms of geographies, and some specific end markets. I don't want to go in to too much on the specific end markets because this is a public call. But one that we mentioned before, which is the mining side is very, is very good to us. It's complex work. And our engineering is really geared up to do this work. The supply or our factories, being able to use 32 factories around the country is critical. So what I'm saying to you is that the level of attention tactically to geographic areas end markets is something new to us and something that is really a benefit. Mark do you want to add to that?

A lot of opportunities as Norm said, the other areas that we touched on earlier are the insulated panel market, the green, this whole green build piece is rapidly growing environment for us maybe not necessarily just taking market share away from our competitors but we are taking market share away from other forms of construction.

That's a great point. That's a very very good point. I mean Mark had mentioned Arnie, this, I mean, where the Agricultural piece has been 10% of our sales, that is really doing well for us now. I think that's going -- that's appears to have some good legs.

Thank you very much.

Okay.

Our next question come from [Craig Shishler] from Basewood Partners.

Good afternoon, guys. How are you doing?

Good Craig, how are you?

Good, thank you. Just a couple of quick housekeeping things, one is on the reverse stock split, how does that free up more shares for the preferred conversion is it because your authorized shares don't change even though you did a reverse stock split?

That's it precisely.

Okay. Secondly on -- I appreciate the accounting explanation earlier but is 57 million or in the neighborhood the right share continue toto be using on a fully economic basis?

Well,.

If it's preferred shares were converted ultimately.

Depends how you treat the dividends.

Yes, that's right. one of the things you have to know about the various methods of calculating earnings per share is that when you use the as converted method, which would imply that there is only one class of stock, you add back or don't deduct any preferred dividends. Right?

Okay.

There were no dividends. So it's not a straight difference between the way we calculate under the two class method there are other factors that come in to play.

Okay. Fair enough, I'll follow up offline on that. Thanks very much.

There is about 39.4 million shares, when you look at the conversion price that went from $1.27 to $6.35, right.

Okay.

That's pretty straight forward math if you were trying to get to that number, unfortunately, the way the calculation works is a little more complicated than that.

Okay. Fair enough. Thanks very much.

At this time, I'm showing no additional questions I would like to turn the conference call back over to Norm Chambers, Chairman, President and CEO.

Thank you very much for joining us on the call. I hope you take away our enthusiasm and commitment because I will tell you that what difference a year makes. And we are pumped up and ready to go and see a lot of opportunities. Thank you very much.

We thank you for participating in the NCI Building Systems Q1 2010 earnings conference call. This concludes today's event, you may now disconnect your telephone lines.