Gibraltar Industries Inc (ROCK) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Gibraltar Conference Call to discuss its First Quarter 2009 results. We'll begin today's call with opening comments from Ken Houseknecht from Gibraltar's Investor Relations Department. After the Company has concluded its presentation, we'll open the line to your questions. At this point, I will turn the call over to Mr. Houseknecht. Please proceed.

Thank you, Kama, and welcome to Gibraltar's first quarter 2009 conference call. Before we begin, I want to remind you that this call contains forward-looking statements about future financial results. Our actual results may differ materially as a result of factors over which Gibraltar has no control. These factors are detailed in the Company's 10-K, which can be viewed on Gibraltar's website at www.gibraltarone.com. If you did not receive the news release on our first quarter results, you can get a copy on our website. A set of the presentation slides that we will be referring to during this call is also available on our site.

On our call this morning are Brian Lipke, our Chairman and CEO; Henning Kornbrekke, our President and COO; and Ken Smith, our CFO. Thank you for joining us. At this point, I would like to turn the call over to Brian.

Thank you, Ken. Good morning, everyone, and thanks for dialing into our call this morning. Before I turn the call over to Henning and Ken Smith for the operational and financial review of our first quarter results and our outlook, I want to talk about the current operating environment and our aggressive and continuing actions to deal with it.

Following Ken and Henning's presentations, I will provide some wrap up comments before opening the call to any questions that you may have.

The first quarter was the most difficult in our history without a doubt. But also one in which we responded to the current conditions and made progress in many areas. During the first quarter, global economic conditions deteriorated much more severely than expected with the slowdowns intensifying in all of our major end markets.

Housing starts decreased by 50%, the North American automobile fell by 51% and the non-residential building market which grew through the first 10 months of last year contracted by an estimated 10% compared to the first quarter of 2008.

So, you can imagine against that backdrop, customer demand weakened from fourth quarter levels and dropped significantly on a year-over-year basis. We responded to this changing conditions by launching a deeper round of cost cutting and cash preservation actions.

The cost cutting and streamlining actions taken during 2007 contributed to our improved results in 2008, in spite of much housing and auto markets. In our actions during 2008 and in the first quarter of 2009 have further lowered our cost structure and our breakeven point to a level at which we anticipate a significant sequential improvement in earnings in the second quarter in spite of unprecedented lower levels of economic activity especially in the auto, housing and the commercial construction markets.

Furthermore, we made progress strengthening our balance sheet and lowering our working capital in the first quarter. This enabled us to pay down another 8% of our debt or $27 million and we have now lowered our debt by $224 million or 41% in the last 18 months.

Our strategy to position Gibraltar as the low-cost provider and market share leader in niche product areas that either individually or collectively offer the opportunity for margin enhancement and sales growth over time has benefited from our intensified focus on cost reductions, streamlining operations and reducing working capital.

All the steps that we are taking are necessary for Gibraltar to withstand this historic downturn and at the same time the part of solidifying a foundation for record setting performance once economic and end market conditions return to more normal levels. So, we are not just weathering the storm, we are setting the course for improved performance on a long-term basis.

As we said today, the leveraging of any incremental volume improvements against a much lower cost structure will drive profit improvements in a far greater array. Keep in mind that in first 9 months of 2008, we were on track for what could have been a record year and our cost now are substantially lower from what they were then.

So, you can see how a move back in the direction of even the very weak volume levels of 2008 can have a significant impact on our results. Our first quarter was difficult one to be but we have reacted aggressively to the reduced levels of economic activity and are positioned to show a significant improvement in bottom line performance in the second quarter.

Henning and Ken will be discussing some of this, more specific actions taken to deal with the current level of business during their sections in the call. So, with that backdrop, I will turn the call over to Ken Smith now for a review of our first quarter results. Ken?

Thank you, Brian. And I'll begin with slide number three, which looks at key categories of Gibraltar's first quarter as well as full-year 2008 results. The P&L amount shown on the slide are Gibraltar's continuing operations, which means that the divestiture of our SCM Copper Powder Metal business in early October of 2008 has been reclassified as discontinued operations.

As Brian indicated, the first quarter was very difficult. Revenues were down significantly from a year ago and although not shown on the slide, sequential revenues were down 18% compared to Q4 2008. Slowdowns in the automotive, housing and non-residential building markets all worsened in the fist quarter amid very weak economic conditions which led to our significantly lower unit volume which is the largest factor in the unfavorable revenue comparison on slide three.

Regarding our operating earnings, our first quarter operating loss was largely the result of these significantly lower unit volumes and the sale of higher cost inventory. To counter the P&L effects of the declining volume and higher inventory costs, our business leaders have taken a number of additional aggressive cost reduction actions and other cash saving steps and Henning will cover these on a later slide.

Regarding EPS, the Company incurred a loss of $12 million or $0.40 per share, the significant volume drop and higher inventory cost more than offset our cost reductions and lower interest expense. Free cash flow in the first quarter was very solid despite a 30% decline in revenues, the largest source of cash came from improved working capital.

Moving over to slide number four, net income and EPS, Henning will review the performance of each segment in a couple of minutes while I'll discuss the other significant P&L differences. Starting with corporate expense, which decreased 17% principally from lower compensation cost from staffing reductions in home office and lower variable incentive compensation expense.

Debt interest expense decreased 26% from lower average borrowings as we de-levered by nearly 30% during the past 12 months. And regarding income tax expense, there was a benefit here in the first quarter of '09 due to the pre-tax loss and an effective tax rate of 44% compared to a tax rate and expense in the first quarter of '08 of 34%.

The increase in the tax result came from three major factors, the first being non-deductible expenses having a larger effect on a smaller amount of taxable income in 2009. Secondly, a lower US manufacturing deduction we expect in 2009. And thirdly some discreet state tax credits relating to prior periods that we recorded here in the first quarter of '09.

Moving to slide number five, our free cash flow was very solid. Despite the lower profitability this quarter, working capital generated a big source of cash. Inside that working capital total was an inventory reduction of nearly $48 million or 25% in the -- of the 90 days ended March '09.

Now, let's turn to slide six, the balance sheet where the use of free cash flow was applied. In the first quarter of '09, total debt was paid down 80% or $27 million and by 32% in the last 15 months. The debt reduction has significantly lowered out debt to cap and leveraged over those same time periods. And regarding our loan covenants, we were in full compliance with each covenants as of March 31, 2009.

At this point, Henning will review the performance of our two segments and outline the steps we have taken to improve our performance.

Thanks Ken. The further deterioration of conditions in our major end markets during the first quarter and the resulting unifying decline of 33% yielded a gross margin decline of 11.3 percentage points to 2.64%. Our operating margin decreased to a loss of 8.3% driven by the lower gross margin, partially offset with a 30% reduction in SG&A spending.

Each segment's performance, let's turn first to slide seven. Our Building product segment, where there was a sharp first quarter sales decline, which is directly tied to the deepening slowdown in the new build housing markets, and the downturn in the commercial, architectural, industrial and international markets, all of which had been resilient through the first nine months of last year.

The first quarter gross margin in this segment was 12.2%, a decrease of 8.6 percentage points from the first quarter of 2008. The margins were hurt by much lower unit volumes and FIFO effect on margins in some of product lines has been material cost and product pricing continued to decline.

Turning now to slide eight, our Processed Metal segment had another difficult quarter primarily the result of steep unit volume decline resulting some 51% drop in first quarter order production and pricing decreases in certain linked to commodity costs.

The first quarter gross margin was 18.8%, a decrease of 25.6 percentage points from 2008. The decrease in this segment's first quarter operating margin was a result of precipitous unit volume declines and the unfavorable FIFO impact I just discussed.

At this point, I will offer a few comments at current business conditions and please refer to slide nine. Here you can see the significant downturn revisions to our GDP forecast along with the outlook for housing starts and vehicle sales as compared with our expectations just three months ago.

This graphically illustrates the continued deterioration in the economic and market conditions well beyond anything experienced in recent history.

Looking at slide ten, we outlined the actions we have taken to maximize cash. We will continue to control our spending throughout 2009 to ensure our costs are appropriate for existing sales volumes amid the continued deterioration in the global economic conditions.

In the first quarter we initiated a series of additional actions that aggressively lowered our cost structure further reduced working capital, maximize cash and continue to pay down debt. To provide some detail behind this summary announced on slide ten, we have made staffing reductions of 17% in the first quarter.

We have reduced the staffing 25% in the last six months with a total headcount reduction of 32% in the last 12 months; 10% salary reductions have been taken by Brian and myself in addition to the likely zero cash incentive compensation for the year and the significant reduction in equity incentive plan values.

Similar actions have been mirrored throughout the management team. Board of Directors also initiated a 10% cut in their 2009 fees. We have postponed 2009 salary increases. We suspended the Company match for 401(k) plan, furloughs in many of our business units have been and are been continuing to be utilized.

We have scaled the workforce to current customer order rates and travel restrictions, and many other discretionary spending reductions have been instituted. We project annualized cash savings exceeding $8 million in the actions initiated thus far.

Moving to slide eleven, we have been and we will continue to be very focused on strengthening our cash flow from our sales and improving our balance sheet. In 2009, we are expecting less cash flow from profitability compared to 2008 as the economy and credit markets will likely weigh heavily on our end markets through all of 2009. So, we will equally focus on measures we can use to improve our balance sheet and liquidity positions.

On slide eleven, we have outlined the aggressive steps we have taken to help maximize cash and liquidity during this unexpectedly severely economic contraction. Looking ahead, we are anticipating a significant improvement in profitably in the second quarter as compared to the first quarter operating loss of $0.40.

Due to a modest seasonal increase in demand, although sales will certainly be unfavorable when compared to the sales in the second quarter of 2008. The incremental effect of cost reduction measures instituted in the first quarter and the lower cost of goods sold as compared to the first quarter.

In summary, we continue our aggressive efforts to maximize liquidity, pay down debt and reduce costs which included reducing our employment level by 32% in the last 12 months and will take additional actions at market conditions where.

We will continue to streamline and consolidate our business, match capacity to demand, relentlessly attack cost, evaluate our portfolio of businesses and make further adjustments if market conditions fall below our current expectations. At this point, I'll turn the call back over to Brian.

Thanks, Henning. Couple of closing comments. First of all, I want to say that our products are buyable. We are a niche product leader in approximately 80% all of our sales. Our products are competitively priced and our cost structure is coming down. So, when the declines in sales that we have felt are strictly driven by macro market conditions.

The additional cost cutting activities that Henning just described in the numerous supply chain and operational cost savings initiatives that we already have in place, build on these substantial progress we made during 2007 and 2008 when we either closed, consolidated or sold 31 facilities and we reduced our staffing levels by 32% in the last 12 months alone, as part of our strategy to be the low-cost producer of our products.

While some of the aggressive actions were driven by the current volume levels, the structural changes are key components of our strategy to be the low-cost provider of our products. It's important to emphasize that our streamlining and cost reduction activities leave us with an estimated productive capacity of between $1.5 billion and $1.6 billion.

So, we have substantial upside capacity to utilize as business conditions improve. In the near term with signs for a modest seasonal improvement in volume in the second and third quarters compared to the first quarter along with the aggressive actions undertaken in the fourth and first quarters through lower cost to be in line with current volume levels, we anticipate a significant sequential improvements in earnings in the second quarter. With that, we will open the call up to any questions that any of you may have.

(Operator Instructions). And our first question comes from the line of Sal Tharani from Goldman Sachs. Please proceed.

Good morning, guys.

Good morning, Sal

Good morning.

I'm looking at your slide nine, the housing side and vehicle sales progression which you expect. I'm just learning that if things don't improve that much, are you well- positioned to have a -- or you have a plan to cut cost, are you well positioned to weather the storm over the next few quarters?

Yes, we are. We have restructured the business. Taken our breakeven cost below the numbers that we indicate there for both housing starts and automotive. So, the fast answer is, yes. And as it starts to pick up, you can imagine we get the leveraging above our breakeven points.

Okay. And can you give us some color on the covenant, what are the ratios and what do you expect over the next couple of quarters?

Sure. The -- we have four covenants and our current [senior datagram] in on leverage and other is interest coverage, others are third on senior debt to EBITDA, fourth on network and we have passed on all -- complied with all of those at the end of March. And we have continually kept our banking group which has been very supportive and long-standing with the Company and informed of our progress and over expecting. And so, we have a good relationship and are in good shape regarding our debt compliance.

If there is covenant breach, have you started talking to the bank like other companies have in terms of renegotiation or either or so forth?

Sal, we are constantly talking with the bank, keeping them appraised not only on a weekly basis of exactly where we are stand relative to covenant compliance. We have been doing that for some time. We've always had a very open, transparent relationship with the banks and it's been a long-standing banking group. We're very comfortable that if saying if a wavier or amendment is necessary that the banks will work with us to make that happen before any breach would occur.

Okay. And what is the leverage of the Company? I mean if I look at the housing start bottoming in the second quarter and then increasing almost 20%, 30% by the fourth quarter 20%. What is -- how much of your business is tied to the housing market?

We believe about 20% is tied to the new housing market exclusively. A lot of building products businesses are more involved between repair and remodel activity. In those businesses, specifically tied to that that have not had the precipitous decline we talked about. The few that aren't closely tied to it did see those kinds of reductions.

Just an example, Sal, if your roof goes bad, you got to fix it. And even though I think people have tried to defer maintenances much as they possibly can in this current environment at some point your roof is got to be fixed. So, your gutters have to be fixed or your ventilate -- roof ventilation products have to be replaced. Or if you are going to do a full roof job, all of that stuff gets replaced at that point and time.

So, I know just from my own little market studies driving past home depot stores and low stores that during the winter the play room and the parking lines of late as the spring season has come and the weather has gotten a little bit better, I have seen more activity in those parking lines.

So, I think some of the deferred maintenance is probably going to come and that's why we are expecting a little bit of a seasonal improvement. Not significant and I don't mean to say that the end is -- hope the worst is over. But I think we are going to see some sort of -- a little bit of up tick in the season.

Yes. And I almost hate to see this but our activity is in many cases is closely related to damages as a result of mother nature and we know that there's storms going to the southeast and some on the West cost right now. When we think that's terrible but we usually get a spike in business when that happens.

Okay. And lastly just any comments on the -- or color on the exposure to the big three in case of in terms of account receivables are you exposed to -- any where that?

We have really very, very modest receivables with particularly Chrysler and GM. And in each case we are in the midst of applying for the [part] program for the supplier receivable programs where the government essentially reimburses and essentially believe we don't have literally any exposure to on collectivity on that.

Okay. Thank you very much.

Welcome.

And the next question comes from the line of Mark Parr from KeyBanc Capital Markets. Please proceed.

Thank you. Good morning.

Good morning, Mark.

I was -- I just wanted to try to get some more color on the semantics of your commentary around the second quarter. Did I understand your comments that mean you expect the second quarter to be in the black or that you expected a lower loss?

We didn't --

We didn't clarify -- what we said the profitability would be significantly better.

Okay. Alright, is there any color, any additional color you would like to provide?

Visibility is still tough, Mark. And as such what we've said is what we are comfortable saying at this point in time. I'm it's our internal forecast. Literally, we hope for better. But --

-- internal forecast at this point help us feel positive.

Okay. So, can you talk about the magnitude of cost reduction impact 2Q versus 1Q? I mean how much incremental bottom line impact would you expect from and what you can control internally?

We are expecting somewhere in the $5 million to $8 million range of incremental cost improvements. What we'll get a full deferred run rate on the additional actions we've taken before.

Okay. So, that's fairly meaningful?

Yes, it is.

And you put that together with what hopefully turns out to be a modest pick up in revenue activity --?

: And that too Mark, we are hoping for a somewhat more favorable spread between raw material cost and solid prices.

Okay. Is there any color you want to provide on that? You have steel prices have been coming down. Flat rail prices may be trying to bottom and stabilize here in the June quarter, but you are not sure that that's happened yet. Scrap prices look like they are up 60 bucks which may help provide some stability to the market. Is there anything that anymore color that you can give us on your inventory position of steel or steel products and how that might impact?

Macro sense, Mark. The continuation of the decline in hot rolled steel prices. Knowing that we have several months of inventory on hand at all times and has had a negative impact on our profitability.

Right.

As soon as steel prices start to stabilize, that allows us to catch up pretty quickly. And if or when they start to move upwards, it creates the exact opposite scenario for us.

Yes. And at this point though given your normal lags that you normally have, you really wouldn't expect much benefit from the steel price cycle until third quarter as soon as to probably not until fourth quarter?

Not exactly, Mark, because we started the year off with a fairly substantial block of higher priced material that we have been slowly working our way through. And when I say slowly because sales volumes have been so low

Yes.

But as we come through the first quarter, we are expecting that the percentage of inventory that is highly priced is going to be less that it was, so that our cost would be better in the second quarter than they were in the first.

Okay. Now, is that part of your $5 million to $8 million sequential cost improvement?

No.

Okay. So, that would be an addition too? Right.

Yes.

Okay. All right.

There's three components there, little bit of volume, better cost on material and further cost reduction activities that we initiated in the first quarter. That will get a full benefit on to the second quarter.

Okay. All right, terrific. And then forget this S1 follow up question. You discontinued ops, can you provide us may be an update on activity regarding the disposition of those assets and what potential financial impacts that we could expect from it?

It's de minimus, Mark. Small -- none to be anticipated of any meaning in the future quarters.

Okay. Terrific. Thanks for your -- congratulations on the cost and progress and will hopefully the second looks a little better.

Thanks, Mark, and we hope for the same thing. Thanks

And the next question comes from the line of Leo Larkin from Standard & Poor's. Please proceed.

Good morning. Could you give us a guidance for DD&A for 2009? And also are these conditions will be moving any of your competitors from the market?

Well, the DD&A stands for depreciation and amortization?

Yes?

It will probably be in the area of $33 million -- clear on that.

Okay.

Your question of competitors coming out of the market that we aware of number of competitors we have in number of our business units particularly in building products where competitors are dropping out of the market and our folks have been aggressively taking their sales to other companies.

Is that the type of thing you might expect to see more in the third quarter than the second?

We know that there is still three of the large ones that likely to stop participating in the market that got financial issues. So, I think as we go through this period there will be a consolidation of the fewer competitors and those that can withstand that will be the recipient of the business. And so far for us -- in fact we've got some good news out on the West coast exactly because of that activity.

That's exactly why I wanted to point out in the remarks earlier on that our operating capacity to date is still north of $1.5 billion. So, that as these weaknesses in the market start to evaporate and as some of the competitors go away, we've got capacity to absorb additional business.

Okay. Thanks. That's very helpful.

And the next question comes from the line of [Evan Rhino] from Jefferies. Please proceed.

Thanks. You talked about the fact that $8 million in savings, can you help us out in how that might be split between the SG&A and the COGS?

There is most cost of sales. I would say it's really two-thirds -- one-thirds --

Two-thirds cost and one-third SG&A?

Yes.

Okay. And then you actually jumped in the quarter, is that a rate we should be using going forward or is it going to revert back?

Well, we had some discrete items in the first quarter. So, we will be closer to 40% to 41% range for the year.

Okay. You said that a drop close to 37% for the remaining quarters?

No. We hedged that. We had 44% rate I believe in the first quarter. And that had some discrete benefit in there only for the first quarter which increases its op to a 44% rate, it's around the loss for the first quarter. So, by a full year rate for its skews 2, 3, 4 are going to be an approximate 41% to 40% range because they will not have the discrete benefit, it's in the first quarter.

Okay. And then I know you are working through the higher priced inventory. Can you just comment on where you feel inventory levels are now? Are we going to continue to see them being brought down in 2Q?

Yes. And particularly with the volume increase that we expect in Q2 that will help inventories. And they would come down faster, the volumes had help up but that wasn't the case. We did push our inventory reduction plans out but we are still on track to take them though. We are closely monitoring what we are taking in. (inaudible) Yes, we would see continuing inventory and working capital coming down as we go through the year.

And with similar higher priced inventory, we would probably see an increase in gross margins in 2Q?

Absolutely.

Okay. Do we get back up to 4Q levels?

4Q, I would say it will be better than the fourth quarter in gross margins. Yes.

And then just on the interest expense, it came down nicely in the quarter. We continue to pay down debt. Do you have a full year estimate just in terms of expense?

It's largely size $41 million -- it's around $20 million to $25 million range. It's going to be dependent on our macro factor and our sales. Certainly the higher sales will get more cash flow or EBITDA to pay down debt, therefore lower interest expense.

I think we where trending towards $21 million on a full year basis.

Okay. That's great. Thanks very much.

Welcome.

And the next question comes from the line of Tim Hayes from Davenport & Company. Please proceed.

Good morning.

Good morning, Tim.

Couple of questions. Could you repeat the gross margins for Process Metal products?

Hard to believe, aren't you?

Yes. That's why -- if I heard you right. Pardon.

It's 18.8%

18.8%?

Yes, minus.

Minus. And the FIFO impact on Q1, do you have an estimate of that?

Yes, I got. Approximately $10 million.

And I would guess that that would be smaller but still ahead in Q2?

Certainly -- smaller but yes still ahead in Q2

Right, right. And then the guidance for capacity that was given for the $1.5 -- $1.6 billion of capacity, did I have that figure right?

Yes.

Is there a underlying metal price assumption on that, say for hot roll that $500 a ton or --?

It is because when you look at out business, we are not driven by the process metals business. They kind of fully abases process metal like I think are about 15% of our total sales.

Right.

Most of the sales that we have for building products arena and those are not particularly driven by the cost of raw material.

Right. Okay. That's all my questions. Thank you.

Welcome.

And the next question comes from the line of Brett Levy from Jefferies & Co. Please proceed.

Yes, this is Jefferies & Co. As you now look at your bank covenants, does it look like you are gong to breach any of them in the subsequent quarters?

There is an increased probability of that, yes.

Okay. And you are in communications with them. And you were saying the $1.4 million to $1.6 million, that's the borrowing capacity or what is that?

That's the capacity utilization that we have. In other words, facilities structure that we have that we currently support up to about $1.5 billion, $1.6 billion without adding expense.

Okay. I just missed. What is borrowing availability as at the end of the quarter or even the end of the quarter or even today?

End of the quarter was approximately little over $20 million without any violations of the covenants.

Got it. And is that subject to a borrowing base and it generally moved upward or downward since the end of the quarter?

That has moved downwards during the quarter.

Got it.

And lastly, are (inaudible) obviously there's a --

-- obviously they are in the '60s. Those are my questions, thanks very much.

You are welcome.

Thanks.

And the next question comes from the line of Jamie Sullivan from RBC Capital Markets. Please proceed.

Good morning, everybody.

Good morning, Jamie.

What if we could talk about some of the order trends you saw in 1Q, kind of how they progress January, February, March and what things are looking like in April?

I think we saw the order trend increasing as we went through the first quarter. I think we are encouraged with our first month of the second quarter, we are pretty much on target. Coming out of April and as I think we tend to be optimistic of hitting our forecast in both May and June.

Okay. Great. And your comments on some of deferred maintenance and traffic there, are you seeing a pick up in orders in relation to those trends? Or is those --

Those businesses that are involved particularly in repair and remodel had actually done quite well. And I think we are encouraged by that, and I think we will see some pick up as we go through this quarter. Unfortunately, due to the storm activity in many parts of the US, but again we are usually the recipients of more business as people go to repair their damage.

Okay. And I think you commented you have cut the cost structure to below the forecast is for GDP and starts etcetera. I heard that correctly?

Yes.

Okay. So, I guess my question is on the covenants side. If we look at where the cost structure is and the 1Q run rate, do we start up against the covenants if things don't improve according to forecast or the cuts kind of protect it so that if 1Q continues throughout the year, we are still okay?

I think we saw up to the covenants as we go forward -- so we are sitting here doing everything we can to push as much unit volume through the businesses

Okay. And do you feel there is still more you can do about on the cost side?

There are. And I think it's -- I'll also add a little bit more -- I'll use the word color to it. It is a violation of the covenants. We only see it for one to two periods and then clearly we come out the other side very cleanly. So, as they probably looking for covenants violations, I think it's only a temporary injunction that we looking for but find ourselves based -- and there has been some conservative forecasting. We've been a couple of quarter, we are well within it again.

Okay.

At this point, we would say it's a timing issue.

Right. Okay. And then on the raw material side, just wondering what you talked about the $10 million impact in 1Q. Wondering if volumes kind of stay where they are and raw material pricing where it is, what would the benefit in 2Q, I mean we are looking a couple million or closer to that $10 million kind of benefits?

We know -- I think we could use a percent. We know that we expect to see at least I know the metal is 10% pick up in gross margins just as we run through the inventory as it's structured today independent of what happens through incoming pricing on raw material.

Okay. Great. And then lastly on the pricing side, can you talk about some of the clients that you have seen there and how that's trending? How you see that going forward?

I think pricing in the marketplace tends to in those businesses closely tied to material cost had been following the cost of materials and therefore, we have always aligned ourselves with the cost of materials. I think the only incidence it become imbalanced is where there is a continuing drop in cost of materials and you constantly shipping out of your inventory. It's been the case for us and almost everybody else in our space over the last quarter.

Now that's referenced strictly to the process metal business not the building products business.

Okay. And how is pricing done in building products?

I think it's been stable.

Stable.

That's why I make the distinction because it's two different looks.

Okay. Thanks. That's all I have.

Welcome.

And the next question comes from the line of Peter Lisnic from Robert W. Baird. Please proceed.

Good morning, everyone.

Good morning.

Just a clarification. In the last question, the year-over-year change in sales in building products is all volume and pricing is flat just to be clear?

Can you repeat what --?

The down 27.5% sales for Building products -- that would all be volume with pricing at zero. Is that the right way to think about it?

It's mostly unit volumes. There's a little bit pricing in one of our units which is a large unit but the rest of them would be unit volume.

Okay. All right. And that pricing -- little bit of pricing will be positive?

Yes.

Okay. All right. And then just going back to the discussion on the run rate capacity of $1.5 billion to $1.6 billion, the same cost structure. These savings that you are putting through now the $80 million somewhat, the suggestion there then is effectively all that runs through to the bottom line. Is that the right way to think about this or is there --?

Actually, it's the right way to think about it.

All right. And then in terms of -- if you look at the channels that you serve --

Let me just clarify that a little bit. We made substantial headcount reductions and our numbers indicate to us that about 65% to 70% of those headcount reductions have gone or come as a result of warehouses, distribution centers and in a couple of cases plants that we closed, and they are gone. So, a significant part of that is a permanent reduction in our cost structure and yet we still have them $1.5 billion to $1.6 billion with a capacity.

Okay. All right. Thanks for that clarification. You are going to love this next question because I mean I kind of look at what you have done so far -- is being very impressive. And I foresee that there could be some more actions that you can take. I mean it sounded like you are still in the early days a quarter to go in terms of rationalizing the cost structure.

So, just wondering if you look forward you got this $80 million somewhat that you are talking about now in terms of the cost savings but I would imagine you probably have more things on board that you could take on from a structural cost perspective. Is that the right way to think about it and then can you quantify anything along that?

Let me say at this point we've taken our breakeven down probably that is far as one reasonably could without grossly restructuring the Company. And I think that's fair to say. I mean -- we've taken our levels down to very low level. I mean levels that we believe will be lower than we ever have to go to.

Okay. Is there a way to tie the breakeven level to some housing start number? I know it's not the greatest --?

No, it's not because only parts of our business participate there in housing starts. But I would say the closest that we can get to it -- we continued the business -- I'm going to make a guess little while somewhere between 600 pounds and 700 pounds in housing starts per year.

Okay. All right. And then on the covenants side, assuming the second quarter you do end up (inaudible) have the discussions with the banks basically been along the lines of some modest fee increase on the debt instrument or what's the tone of conversation with the financial institutions you are dealing with?

Those have been very positive and supportive. And if we did have to have an amendment, there would be some market pricing on costs.

That's what I'm wondering, is what the incremental cost might be 150 basis points, do you have a major ballpark guess?

At this point I think it's too early to judge --

We are negotiating with the banks at this point and really not -- really not -- do anything they could on those negotiations.

Okay. I understand. Okay. That' s it for me. Thanks for your help.

Welcome.

(Operator Instructions). You have a follow up question comes from the line of Tim Hayes from Davenport & Company. Please proceed

Yes. The FIFO number in Q1 of $10 million, is that pre-tax or after tax?

Pre-tax.

Okay. Thank you.

And you have a follow up question comes from the line of Sal Tharani from Goldman Sachs. Please proceed.

In payment charges you took out those mostly for businesses you bought in the building part of the section?

Yes, it is.

Okay. And can you give us some thoughts on -- you mentioned about you competitors in distress and so forth and you have a view that housing starts will improve. Can you give us some color is there any opportunity to acquire some more assets or you think you are right sized for the time being?

I think we are right sized with time being. We've reconfigured our businesses. We consolidated a number of the businesses particularly in certain segments that we participated. So, we believe we are ideally positioned to take advantage of the market place as it unfolds going forward.

Great. Thank you very much.

Welcome.

And we have no further questions at this time. I will now like to turn the call back over to Mr. Lipke for closing remarks.

Thank you for joining us on the call today. We are optimistic that during our next call, we will be providing you with much better results. Thanks.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.