Cornerstone Building Brands, Inc.
Q1 2008 Earnings Call Transcript

Published: 4 Mar 2008

[Operator:]

Good morning and welcome to this NCI Building System’s conference call to review the company’s results for the first quarter of fiscal 2008. This call is being recorded and a telephonic replay may be access through March 11th by dialing 719-457-0820 and entering access code 9414328. A replay will also be available at NCI’s website which is NCILP.com. The first quarter results were issued yesterday in our press release and has been 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 conference call may be forward looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission and in yesterday’s news release for a discussion of the factors that could affect NCI’s operations and the forward looking statements made in this call. To the extent any non GAAP financial measures discussed in today’s call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the company’s website by following the news link to see yesterday’s news release. The information being provided today is of this day 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 the NCI’s Chairman, President and Chief Executive Officer, Mr. Norm Chambers. Please go ahead sir.

[Norm Chambers:]

Thank you Scott, good morning everyone and welcome to our first quarter 2008 conference call. I’m pleased to have with me this morning Frances Hawes, our Chief Financial Officer and Mark Johnson our Chief Accounting Officer. By way of introduction I’d like to say a few words about last quarter’s numbers and then give you some insights into how we see current business environment and the competitive landscape. I’d also like to take you through how we intend to manage through these challenging market conditions, provide an update on our business groups and discuss our guidance for the rest of the year. As you know 2001 was a particularly, a tough year across our industry and for the first part, at least 2008 is similarly challenging. That said I believe we are managing through this period well. Net income per diluted share for the quarter was $0.39 after charges of $0.06 a share. These charges consisted of $0.03 a share for inventory adjustment, $0.02 a share for executive retirement and $0.01 a share relating to the exiting of the residential line of our overhead door business. The inventory charge resulted from adjusting the carrying values of certain painted [hot] roll steel products in our coatings segment to manufacturing standard value. Sales for the quarter were $361 million which is a slight increase over the same period last year. During the quarter we paid down $22 million in our term debt and had $26 million of cash at the end of the quarter. It’s important to keep in mind that as we discussed last quarter we typically use cash at our operations during seasonally slower first and second quarters to support our operating activities, principally rebuilding our inventory position, as was the case this first quarter. We used $20 million in operating activities compared to using $23 million for the first quarter of 2007. For a better comparison, our working capital to revenues ratio excluding cash for the quarter was 8% compared to 10% for the prior year. This improvement relative, reflective of our discipline to manage our DSOs and inventory turns. As we move through the year, our cash flow from operations typically builds substantially. We are focused on our cash flow needs and our leverage which is currently at 2.85 times. Especially in light of the current liquidity concerns in the credit markets. As a result, our goal is to manage leverage and accumulate cash to make sure we maintain fiscal flexibility. For 2008 we think similar to last year, it is prudent to be conservative as the economy remains unpredictable. While continuing to invest in our businesses, we intend to carefully manage capital expenditure, with capital expenditure for the quarter was $5.8 million. Looking forward, our current cap ex plan calls for expenditures of around $41 million for the year, down from the mid $40’s range that we talked about on our last call. A lot of people have asked me about the competitive environment in which we are operating and in particular how the consolidation of the downstream competitors with steel producers may affect our overall market. Let me give you our perspective, from the perspective of our three business segments, there has been no meaningful change in the competitive dynamics in our coatings business and our components group. Our buildings segment has consolidated from six major players to three, while 49% of the market remains highly fragmented with more than 200 regional competitors. The entry of steel producers Nucor and Blue Scope into the buildings segment has altered the competitive dynamic somewhat as a result of consolidation. Both are highly professional, well run organizations that we feel will improve the focus on quality of the metal building companies they have recently acquired. We welcome them as competitors. Both Blue Scope and Nucor have participated in the buildings segment for a number of years. Of the some 20 steel producers who supply us directly with steel, Nucor and Blue Scope supply us with less than 10% of our steel requirements. The 1 million tons of steel we do expect to process for fiscal 2008 remains attractive to our current steel producing partners and new entrants that are planning to produce an additional 11 million tons of steel by 2011. We believe that even with the current absence of imported steel from foreign based steel producers, supply is adequate and will improve over the next few years. Now how does our 2008 strategy fit into this current economic backdrop? The 2008 strategy we are executing provides the opportunity to double the $176.7 million in EBITDA that we generated in fiscal 2007 within 5 years. It should be noted that our 2004 strategy that we previously executed called for us to double our 2003 EBITDA within 5 years. We accomplished that objective within 3 years in 2006. Our 2008 strategy is based on internal and external initiatives as was our 2004 strategy. Internally our 2008 strategy calls for engineering and order entry systems, driving improvements in margin enhancement and our ability and components group, in addition to capacity improvement in our coatings group. Further, we will expand energy conservation products, offering across all three of our business units. Externally, we will acquire small companies that we can tuck into our existing business segments that will benefit from our purchasing power, technical systems and our integrated value creating supply chain and coatings component and buildings. We have proven our ability to provide an expanded and bright future for the men and women in the companies we have acquired in the past, we will do so in the future. A large part of our current and future achievements are the result of working closely with our suppliers to develop new products, energy efficient painting systems, environmental sensitive buildings through our green initiative and building components such as our insulated panel [assistance] to increase the utilization of metal as the non residential building material of choice. We have innovative, experienced employees, a strong balance sheet and the unapologetic desire to continue to be the leader of our industry. In the short term we will face challenges. Our buildings backlog is strong at $410.5 million, up some 12.4% over the same period last year and down sequentially 8.2%. Our coating activity is good in all areas except small buildings used in retail and certain commercial applications. Our end markets in manufacturing, transportation, mining, energy and the institutional side remain good. Despite the higher coating activity we are seeing some indecision on the part of customers to commit to new projects resulting in lower bookings in the quarter compared to the prior year. Based on current coating activity we expect our backlog to grow in the second quarter in line with previous seasonal trends. Further, there are no increases in our days receivable, no increases in bad debt, no significant cancellations which we saw during the deep recession in non residential construction during 2001 to 2003. We have seen some slippage in our shipping schedule for Q2 in part due to bad weather in the Northern part of the country. We will have to aggressively pull work into April to make up for the slippage we are experiencing. Historically, rising steel prices motivate builders to commit prior to steel price escalations. This may help us to mitigate the slippage. The second quarter will be challenging for our buildings who [are] particular as they work with customers to pass price increases on to end users. We expect our weighted average cost of steel to increase by 22% by June. Our builder network of some 5,000 strong continues to work closely and cooperatively with us as they have in the past. In 2004 it took us two quarters to work with our builders and their customers to absorb the higher steel prices. We are better positioned from that experience to work with our customers in the current environment. Our coatings and components group are capable of more quickly respond to rising steel prices because they do not have a backlog. We expect they will perform well in the current business environment. Now I’ll speak about each of the three business units results for Q1. The coatings group. Coating group third party revenue increased 18% over the same period in the prior year. This increase was a result of a shift in product mix from [whole] coating services to packaged sales, partially offset by lower third party tonnage processed compared to the same period in the prior year. The operating margin for the coatings group was unfavorably impacted by an inventory charge of $900,000 as a result of adjusting the carrying values of certain painted hot roll steel products to a manufactured standard value. Excluding this charge, operating margin on the third party revenue was 19% compared to 28% in the prior year period. A significant operating margin reduction was the resut of the product mix shift from tolling to packaged sales coupled with temporarily higher hot roll material cost for internal sales. While we do expect that the coating margins will be lower than 2007 as a result of the change in product mix, we expect that the coatings group will achieve operating margins in the range of 25% for fiscal 2008. Components, although lagging in comparison to the first quarter of 2007, our components group has continued its operating performance recovery from the low point experienced in the second quarter of 2007 and is exceeding our internal budget targets for revenue and operating income. Third party revenue is down from the same period of 2007 by 1% due to continued weakness in commercial overhead door business and lower sales prices compared to the exceptionally high sales prices in the first quarter of 2007. These declines are partially offset by approximately 4.9% higher tonnage volumes shipped. Operating margins continue to be depressed at 8% on third party revenue compared to 9% in the prior year period. The operating margins are lower primarily as a result of lower sales prices compared to the peak levels in the first quarter of 2007. Offset by significant reductions in operating expenses, as cost cutting measures taken in the latter half of 2007 begin to take hold. In addition, the components group took a $226,000 inventory impairment charge in the period related to the decision to exit the residential overhead door product line which I will discuss in a few moments. Planned utilization was approximately 58% during the quarter compared to 55% in the prior year. For the fiscal year, we expect sales to be slightly lower than 2007 due to continued softness in small retail buildings, with modest improvement in operating income margins between 10-11% for fiscal 2008. Buildings, despite the inclusion of Garco in the current year period, the buildings group revenue increased only fractionally over the prior year period. We continue to see declines in demand for small building projects and the average complexity of our buildings backlog continues to increase. Our ability to successfully compete for higher end complex projects is leading to higher average sales prices and project margins. However, this is offset by lower total volumes shipped and the inclusion of incremental Garco operating expenses. Accordingly, our operating margins in the buildings group declined from 10% of third party revenue in the first quarter 2007 to 9% in 2008. Planned utilization was approximately 64% during the period compared to 67% in the prior year same period. Progress continues in the transfer of engineering systems from Robertson-Ceco to the NCI Building’s companies and moving Robertson-Ceco into the NCI [unintelligible] spoke delivery system. In addition, we have begun to see better than expected traction from deploying our web based pricing software for small metal buildings in the NCI builder network and we’ll further deploy these tools to the Robertson-Ceco builder network in the second quarter of 2008. For fiscal year we expect sales to be up only slightly over 2007 with operating income margins similar to last year. Exiting the residential overhead door product line, due to the consistently poor financial performance and the lack of strategic fit, we are exiting this business line which is included in our components segment. For fiscal 2007, this line generated revenues of $12 million and produced an operating loss of $514,000. During the first quarter of 2008 we incurred an inventory impairment charge of $226,000 as a result of the decision to exit this line of business and further expect and additional charge of approximately $900,000 to be taken in our second quarter. The second quarter charge will be comprised mainly of employee severance and accrual of idle lease space. Although we cannot predict with any certainty the timing or the amount, we may be able to mitigate these charges by possible gains on the sale of the related land, building and equipment. Conclusion, it is clear that the second quarter will continue to see a challenging environment, despite our strong building backlog at the end of the first quarter and in line first quarter performance, we are reducing our guidance for earnings per diluted share for the first half of our fiscal 2008. Our modification is based on significant steel price increases recently announced by certain major suppliers and we expect that the weighted average cost of steel will increase 13-15% in our second quarter which will have to work through our existing backlog. Our assumption for the original guidance was that our 2008 weighted average cost of steel would be flat for 2007. Additionally, our modification is based on the identification of charges incurred in the first quarter of 2006 per diluted, $0.06 per diluted share and an additional charges totaling $0.05 per diluted share anticipated in the second quarter consisting of an estimated $0.03 related to exiting the residential door product line and $0.02 related to our previously disclosed executive retirement in the second quarter. Our revised first half guidance is in the range of $0.64 to $0.79 per diluted share which includes the $0.11 of charges and excludes any potential dilution related to the NCI notes [because that amounted to any] will be dependent on the future price of the company’s stock. So, full year guidance. As a result of the revision to our first half guidance due to rising steel prices and charges of $0.11, we are adjusting our full year 2008 guidance to $3.09 to $3.44 per diluted share, which only gives effect to the revision of our first half guidance, which excludes any potential dilution related to the NCI notes. We believe this adjusted guidance continues to be an achievable range assuming our healthy quoting activity translates into orders for our April 2008 backlog. Our challenge is to balance volume and pricing during the rising steel price environment, given the unpredictability of the economy. We expect to update our full year guidance at the time we report our second quarter results. These are factors that we’ll continue to discuss and look at throughout the year, particularly with the benefit of our backlog numbers and market conditions later in the year. As I said earlier, these are clearly challenging times but there are some signs that conditions may improve. We think steel prices will abate somewhat in the second half of the calendar year if the US continues to soften, steel prices will eventually be affected by demand. We are encouraged by good market conditions we are still witnessing in the buildings group and increased package sales in the coating group should enable us to generate improve operating income in our coatings group by year end. Also, our components group continues to see market conditions that support our expectation of an improved performance in 2008 over 2007. With that I’d be happy to take your questions.

[Operator:]

Thank you sir, to signal for a question on today’s conference, please press star one on your touchtone telephone. Once again, it’s star one to signal for a question. Please be sure that your mute function is turned off to allow your signal to reach our equipment. Again hit the star one, we’ll go first to Arnie Ursaner with CJS Securities.

[Arnie Ursaner:]

Hi, good morning Norman. A couple of real quick bookkeeping questions, your share count was down quite a bit in the quarter, can you walk us through what drove that down?

[Mark Johnson:]

Yes there’s really primarily two changes. We have the convertible instrument is not producing any dilution as well as certain of our incentive stock options are below the conversion price, so they are not dilutive during the period. So that coupled with the stock buybacks in the prior year resulted in lower shares outstanding.

[Arnie Ursaner:]

Okay and on the business you sold, the overhead door business, I’m assuming you’re just shutting it, there are no proceeds on the sale or?

[Norm Chambers:]

Yeah what will happen Arnie as I tried to say in the script is we’ve taken a charge, first charge of it in the first quarter taken, the second charge in the second quarter and we are in the process of both trying to sell the equipment and the land and would expect to complete that sometime during the course of the year and any result that’s positive from that will be identified.

[Arnie Ursaner:]

The building segment, a couple of questions there, how much was volume down in the first quarter given that prices are rising and revenues are flat by definition, volume has to be down.

[Norm Chambers:]

Volume was down about 7%.

[Arnie Ursaner:]

Okay and in your guidance for the full year in the building products segment, I think what you said in your prepared remarks is you expect sales to be up slightly and operating margins similar to last year. If you have volume declining, higher raw material costs, I’m assuming you’re not getting all of that back. If you have less volume and less utilization I’m unclear how you could possibly have operating margins similar to last year in that segment.

[Norm Chambers:]

Yeah I mean the challenge is, just as it was in 2004 is getting the steel prices through, through our backlog, okay and to some extent we are saying, no, to a full extent we are saying that that is, that is the challenge we face in the second quarter in particular and it’s a thing we’re going to be cautious about. In 2004 it took us two full quarters to get the steel prices through and once we got them through the buildings group recovered nicely. And we believe we’re in better shape this year both from the steel price increases we have already put through, plus our ability to quote with better visibility of what steel is going to be at the time the building will be shipped. So having said all that though, we’re still going to take a cautionary view and we’ll see how well we do at the end of the second quarter in terms of house successful we were at getting our steel prices through. All things being equal, by the end of the year we expect that we will be very close to, if not holding on to the margin improvements that we had in the buildings group in 2007.

[Arnie Ursaner:]

As a follow up regarding the current quarter if I may, there were a few things you said I believe in your prepared remarks that are leaving me confused so I want to perhaps go back on them if I can. One of the specific statements I think you made is you have to pull work into April, so I want to keep that in mind, you also mentioned the 22% increase in the cost of steel by June but you also said only a 13-15% weighted average for use, so obviously you’re getting some inventory benefit and the third message you had is you’re quote working with customers. So, I guess a couple things, one is when you say you’re working with customers, are any of them actually willing to give you some price relief on steel and what exactly do you mean by pulling work into April?

[Norm Chambers:]

Yeah, okay, let me deal with the April one first. So what happens is that we look at our shipping schedule and as you know we’ve had one of the coldest winters up North that we’ve had in many, many years. So we find work that was going to be shipped up North is now saying God I don’t want to take the building in February, March, I want to take it in May and June, okay. So at the same time we’ve had relatively good environmental or weather in the, you know South of the Mason-Dixon line. So we go look at our shipping schedule and see what work we can pull from the third quarter back in the second quarter, okay and that’s something that you’ve heard me speak about many calls. We’re constantly I know juggling our shipping schedule. So that’s a part of it. The second part of it is historically and this occurred in 2004 and it occurred in some respects in 2006, if price of steel is going to go up in a future period and we notify the builders of that, they may and do say I want to take my building early and they ask us to put a building into the shipping schedule ahead of when they had planned to take it so they can take it at the old steel prices and the steel prices that we have in our inventory, okay. Those two things are occurring and will continue to occur. But that variability is something we have to manage and I’m saying it’s better to be cautious about that rather than to set our expectations too high.

[Arnie Ursaner:]

Great, thank you Norm.

[Operator:]

We’ll go next to Michal Cox with Piper Jaffray.

[Analyst for Michael Cox:]

Yeah, good morning, this is Tom Hayes for Michael. Just a couple quick questions, you guys seems to have done good job on the expense line, managing the SG&A, I was just wondering if you could give some color as to some of the initiatives that you’re working on in that line.

[Norm Chambers:]

Just before Mark does, you know I want to say that the biggest opportunity we have in SG&A is not in headcount reduction, it is in fact in our supply chain management and focusing on bringing things down like our transportation costs which run about $110 million. We’ve got a team that’s focused on that now and I think that we will start to see some nice results towards the end of the year. But Mark will give you the actual SG&A movements.

[Mark Johnson:]

Despite what Norm said, some of the savings that we are witnessing and seeing right now do result in headcount reductions, particularly in our components business. So we’re seeing lower wages and wage related costs. We’re also seeing some lower advertising costs as we change our programs there. Those are really the primary drivers for the reductions in our SG&A cost.

[Analyst for Michael Cox:]

Okay and then I guess secondly you had mentioned that you’re starting to see some weakness in the quoting activity, is that something that’s just started to pickup in the last month or so or something you’ve seen throughout the year?

[Norm Chambers:]

No, I’m saying the quoting activity is good, I’m saying we’re seeing a little indecision on the part of bookings, people committing as quickly as we would hope. While our backlog was up 12.4% which is a good thing, with the quoting activity we had seen, I would have expected it to be you know higher and when we look at it, we see that there’s maybe been some slippage in the bookings by maybe as much as 8%. So there’s clearly some things going on in the market that is leading people to have some indecision about their ability, willingness to commit. Now, on the same hand though, our backlog is actually up 12.4% and we’re looking at what we believe to be a pretty clear indications that our backlog will be strong at the end of our second quarter. But we’ll have to see that to make sure it materializes.

[Analyst for Michael Cox:]

Okay, thank you.

[Operator:]

And we’ll go next to John Diffendal with BB&T Capital Markets.

[John Diffendal:]

Yes, good morning. Going back to the steel price increases that you’re talking about impacting the second quarter, you seem to be implying that most of this is really on the engineered systems side. Talk about the components side, has that been pressed through without problems, I think earlier indications is that it, you raised prices and that other people had joined you in that price move. Is that correct?

[Norm Chambers:]

Yeah, I mean what I can say is and I didn’t answer this in the past question that Arnie had asked. We’re saying two things, we’re saying in our quarter, our second quarter, which is February through April, our weighted average cost of steel will go up 13-15%. We’re saying that we already know through June that that 13-15% will increase to 22% through June, okay. So what we have done and others in our industry has been to increase and to put forward steel price increases, right and you all know that steel is 73% of our cost of goods sold and about 54% of our sales. So we’re putting forward and we’ve put through two to three steel price increases and we are in the process of working those through with our customers in our buildings group. What does that mean? It means that we go out, we put forward the increase, have conversations, verify by showing the steel price increases that we’re getting from the mills, document it and work with our builders to pass that on to their customers. Their customers are aware that steel prices are going up. So we do that. On the components side, they have a much quicker turn, they sell and ship the same week. So they’re able to change their pricing very much more rapidly and don’t have a backlog to work through. So both they and the coatings group move more quickly and get the prices through. So we would expect to see as we saw in 2004 and 2006 that they will be able to deal with this more timely and it will take our buildings group a bit of time to get this through.

[John Diffendal:]

But generally you’ve found that your, the world you operate in on the components side, the other competitors, you know, you’re not seeing a situation where others are hanging back to try to hold volume, those prices are going through there so where it’s really happening is on the systems side. And I seem to remember that after the 04 situation you put in escalators, are these escalators, or are you kind of back to working with these customers and putting escalators back in or simply just, I mean is that something that’s not there today?

[Norm Chambers:]

No the escalators are in all of our contracts and all of our quotes, that is absolutely the case. And the application of those in terms as I’ve said for many years is based on us working with our customers. You know we have situations where we are more readily, you know there’s a more receptive customer to in fact realize that the costs have gone up. There’s a situation that you know prior to the delivery of the building steel prices, go up so that we can notify them of our higher charge. So there’s a number of mechanisms that manifests itself but the bottom line is we will work with our builders and their customers you know to get this through in a positive way. And that’s what’s going on. And as I say, sometimes that takes some lag, sometimes it is the case that we don’t get it all through. But I will say that we are clearly on top of this to an order, to an order of magnitude better than we were in 2004. Both in terms of visibility and what steel prices are going to be as well as just a much tighter type of control over it.

[John Diffendal:]

I mean given that the second, I mean the second quarter adjustment really relate, at least from the release, entirely related to the steel price increase and to the additional charges, I guess part of what the market’s worried about is that we’ll see some further drain off of that same problem into the second half of the year when you’re, the seasonally strong period, can you address that situation? I know you’re not really looking to try to change your second half guidance here but as you say there’s a lag, but is it your expectation that the second quarter will basically make that adjustment or that adjustment you’re expecting through June, that 22% price increase gets pushed through.

[Norm Chambers:]

We will see both in our backlog and our ability in our numbers in Q2, I’m sorry in, yeah Q2, we will see what affect the 13-15% steel price increases are. You will see evidence of our ability to get that through in the quarter. We will then have our backlog for the second half of the year and we will have the benefit of knowing what steel prices are going to be in calendar Q3 and calendar Q4. We will have the effect of our steel price increase, [unintelligible] through at that time, I mean I just think that where 2004 where steel prices increased by a much bigger magnitude at a velocity that was far exceeds what we’re seeing in 2008, that where it took us two quarters [in abilities] group to get that done, I suspect that we’ll be better off by a quarter. We still may see some [unintelligible] in the third quarter but we’ll know that much better when we get to the end of the second quarter.

[John Diffendal:]

And one last question, you mentioned the backlog being up 12-13%, obviously prices are higher, so on a tonnage basis, is that number down 5%, something like that?

[Norm Chambers:]

No, because I mean I think that that backlog is up you know in real sense. You know we really didn’t see any steel price increases in the first quarter. So that backlog is good. In fact one of the things we’re seeing John is that the quoting activity on manufacturing and mining and elsewhere, geeze it’s still very strong. There’s great opportunities there you know for expansion.

[John Diffendal:]

Great, thank you.

[Operator:]

We’ll go to Jason Feldman with UBS.

[Jason Feldman:]

Good morning. Just a follow up on that last question actually, if the backlog is up 12% and you said that for the second quarter your weighted average cost of steel was up 13-15%, I’m not quite clear, does that mean that there’s, it seems that either if the volume in the backlog would actually be down on a sequential basis or that the pricing would be deteriorating significantly relative to the cost of steel. What am I missing here?

[Norm Chambers:]

Okay, the backlog consists of work that was quoted at an earlier period and that part of the backlog is what we’re working our steel price increases through. Part of our backlog will be quoted at new steel prices and it’ll be a blend of both.

[Jason Feldman:]

Okay so the backlog, the $410 million in backlog, the actual value of that is higher assuming that you’re able to get the steel price increases that you’re trying to put through.

[Norm Chambers:]

On the portion of the work that is most currently bid it will be, on the portion of the work that’s in the backlog from a prior period, I mean that won’t probably be. And that’s the part that we’re working through the steel price increases.

[Jason Feldman:]

Okay, got it.

[Mark Johnson:]

It’s important to note too that one of our important levers here is to take delivery of steel prior to the steel price increases. So we attempt to take as much steel as we can before that happens to prevent the effect of higher prices.

[Norm Chambers:]

That’s a very good point and you heard me say in the script that we actually pre bought some steel.

[Jason Feldman:]

Right and you typically, if I remember from what you’ve said in prior calls, typically buy about a quarter in advance? Is that roughly right?

[Norm Chambers:]

That’s correct and in some cases like we did in Q2 of last year, for defensive reasons, we bought $40-$50 million more of steel. This time we bought about $30 million more.

[Jason Feldman:]

Okay but then if you think about that buying say 3 months in advance, you’re saying through June you expect steel prices to be up about 22% on a weighted average basis, so the steel that you’re purchasing through June is basically what you expect to be delivering through let’s say September, give or take, roughly. Right? So I guess I’m still just completely, because you haven’t changed the second half guidance but it seems that relative to your prior expectations of roughly flat steel prices there’s an enormous difference essentially in your raw material costs and you’re also talking about you know potentially it’ll be better than the last time but you’re still going to need a quarter of so of lag between when you’re able to pass that steel price on. So I guess I’m just a little bit uncertain how to think about the second half guidance at this point.

[Norm Chambers:]

Well that’s why we didn’t give second half guidance. But let me just say, what you’re going to see is probably the biggest challenge on steel prices being passed through in Q2. Alright and we think that that will be the most challenging time, that’s the reason why we were cautionary about what we were going to do, okay in the second quarter. As we go into the third quarter, that price increase is less, right and we think that we’ll be able to manage that through as well because we’re kind of ahead of the curve on that. So what we have done in the past, we did it in 2006, we did it in 2004, is we were able in the buildings group to catch up, to get our margins on top of the steel price increases and did it very successfully. We expect to do the same thing in 2008.

[Jason Feldman:]

Right but in terms of the catch up, the game doesn’t necessarily end at the end of the second, I mean part of it depends on what your view is in terms of steel prices for the second half of the year, you know for example in the press release I think you mentioned that you have reason for optimism on steel pricing towards the latter half of this year, you know I mean what are you expecting after June at this point or do you have any expectations?

[Norm Chambers:]

What I think personally is that we’ll see some abatement. You know one of the things that’s clear is that we and everyone else in the industry ran our inventories down. A big part of the demand that the steel mills who we’re selling into was replenishing, right and I think that our starts across the board will be high enough. So my view is that that surge in demand that we saw in the first quarter won’t be there in the second half of the year if the economy slows, we’ll still get the seasonal pick up that we get in Q3 and Q4 but it’ll probably be lighter. So my sense is that steel prices will abate.

[Jason Feldman:]

Okay, great thank you very much.

[Operator:]

We’ll go to Mukul Kochhar with CBIC World Markets.

[Mukul Kochhar:]

Hi Norm, how are you doing, good morning. Just a quick question on the steel price increases, first do you find that the industry is totally committed behind increasing these, I mean the industry’s structure is slightly different from what it was in the past, do you think the steel mills [that are] behind pushing the price increases through?

[Norm Chambers:]

Yeah, what I think Mukul is that we buy steel from a lot of folks, we’ve got great partnerships with some, some of our steel producers are lower costs guys and they are advantaged. Our purchasing power gives us the ability to try to get, constantly get the best deals we can. We don’t have the advantages we’ve had in the past years with imports but we’re finding that our best steel partners are working with us because they want us to be competitive and to continue to buy steel from them. And you know we continue to work that and to look at ways that we can bring our steel prices down, look at ways that we can reduce our transportation costs, so there’s a whole host of things that go into it.

[Mukul Kochhar:]

And internally I mean do you think Nucor for example is as committed to pushing this price increase through in its building system segment?

[Norm Chambers:]

You know I don’t know what they’re doing on their buildings segment, they’ve got about a 12% share and you know we have seen in the past that certain of our competitors have held their prices and taken all the hit for a while then they put their prices up. You know the competitive dynamics are really very different and we’ve always had a very fragmented marketplace with regional folks that compete very effectively. So you know, I mean the dynamics really haven’t changed that much.

[Mukul Kochhar:]

On the backlog Norm, backlog as a percentage of [unintelligible] two quarters, it’s as high as it was in the 2001 timeframe when we had a big slowdown. But in that cycle I think cancellations were a big factor and this cycle I think what you’re saying is cancellations still are not there, but I think the end result has been the same, do you think the difference in this cycle is [unintelligible] just through a product mix, you have bigger buildings in your pipeline now?

[Norm Chambers:]

Yeah we clearly have bigger buildings, there’s no question about that and that’s in part where Robertson-Ceco who have always been very good at that, we’ve improved that on our side as well. You know Garco you know is doing very well in terms of its mining work and are as close to winning a big contract there which will be very good for us. You know we’re definitely seeing the advantages of Robertson-Ceco and our improvements on the NCI side and I think that’s a good thing.

[Mukul Kochhar:]

Alright, fair enough. And finally the receivable days it’s as higher relative to where you end up typically in your first quarter, is there anything to watch out for there or is it just sort of a one off thing?

[Frances Hawes:]

No, the receivables are actually in line in where we are every, the beginning of every fiscal year. When you look at it compared to the end of 07, it’s normalized that the receivable increases because of the curve where we are in our seasonal trends.

[Mukul Kochhar:]

Alright, fair enough. I mean I can probably touch basis with you later on this, I mean I have in 2007 29 days, it’s slightly higher, 2006 has 28 days and now you have 32 days.

[Frances Hawes:]

Well the quick answer is there are no problems in the receivables.

[Mukul Kochhar:]

Alright, thanks a lot, appreciate your help.

[Operator:]

We’ll go next to Mike [McDay] with [Lunus] Sales.

[Mike [McDay]:]

Hi, how are you guys doing. Just generally what percentage of your cogs is steel?

[Norm Chambers:]

Cogs, 73, 72-73%. And 54% of sales.

[Mike [McDay]:]

Okay and then during the recessionary period earlier this decade your EBITDA dropped off substantially during 01, 03, what gives you the confidence to feel that this go around is going to be any different?

[Norm Chambers:]

A couple of things, number one is that our buildings group is larger and therefore we have more diversification in our end markets and that’s by order of magnitude of 100% with the buildings group. Second thing is that I think that our whole procurement and our control of pricing is better than it was then and in 2001, the non residential dropped 10.5% followed in 2002 by something like 13.5%. And we’re not seeing that evidence in our quoting activity or our backlog. So while this is certainly a challenging time, at this stage it doesn’t have the same level of magnitude that it had in 2001 and 2003.

[Mike [McDay]:]

Okay, thank you.

[Operator:]

As a reminder to our participants it is star one to signal for questions. We’ll go to David Yuschak with SMH Capital.

[David Yuschak:]

Good morning gentlemen. As far as the steel price issue that’s out there, earlier in the cycle you’re able to pass that stuff on relatively quickly, I guess this is kind of a two part question, I’m just wondering because again a few years ago that was very early in this whole commodity boom that we’ve seen over the course of the last three to four years, just wondering one how quickly you’re able to pass or at least negotiate some of these price increases compared to where it was three years ago when you were very early. Because I get the sense as we see things developing on many fronts that there are owners beginning to become a little more concerned that the cost of projects today is getting to the point where that incremental return on capital isn’t there enough or the uncertainty about what it might cost is high enough and when you throw on top of that some of the concerns in the credits markets where you’re financing that stuff. I’m just wondering if it’s getting tougher in the negotiation process because of some of these issues as you look at the second quarter and into the second half of the year?

[Norm Chambers:]

That’s a good question and I think the answer is both a historical and a current one. So historically, in 2004 which was I mean steel prices increased by 80% in the course of a couple of quarters, three quarters. What we saw was in our buildings group, we frankly were flat footed. We had a great deal of trouble as you’ll recall in second quarter of 2004 and really had some difficulty. That continued into the third quarter and by the fourth quarter our buildings group had a huge fourth quarter because they were able to get their steel prices through and recover a lot of what they had given up in Q2 and Q3. I don’t think we’ll see that kind of downward or that kind of upward move. You know I think that we’ll have some challenges in the second quarter but the team is focused on getting that done. One of the real changes Dave is that the part that’s driving our success and our growth in backlog are capital expenditure types of projects with big customers in mining and energy, transportation, manufacturing. Almost nothing we’re doing is on spec. Nothing we’re doing is subject to finance. That product mix change from Robertson-Ceco and our move in NCI to that direction is a big difference. Components and coating you know frankly have always managed this well because their quicker turn. And we expect that they’ll do well. So at the end of the day, the market conditions are what we see. Coating activity is still good, booking are slowed a little bit. Backlog is up and you know we still see with just the bookings activity we have today, that you know we think that by the end of the second quarter we’ll see a backlog that’s pretty good.

[David Yuschak:]

You’re saying then that in the buildings group you would not expect to kind of fall off in the EBIT margins that you experienced on that first ramp up early in this commodities cycle. That’s basically what you’re saying but you more get the kind of, it should be more evenly distributed compared to like a big pop that you had in the fourth quarter that year?

[Norm Chambers:]

Absolutely, that’s exactly what I’m trying to say.

[David Yuschak:]

Okay, so it mitigates it, I mean it had the problem in the second quarter begins to show good recoveries but not again it goes back to that shock effect versus this one, you’re not as shocked about the price increases, I guess the biggest concern I have is does the customer ultimately say enough is enough on some of these project costs, which gets me to a question is, when you take a look at your revenue growth basically right now year over year across all your segments you’re about flattish. And it’s been a very challenging environment for you here in the last 12 months because of small buildings and other things that have happened relative to what you’re seeing generally in non residential construction which had been very strong until recently. So the question I got to ask you is if for whatever reason your comments about some of the these bookings don’t get converted to backlog, what kind of plan B would you have in place for the second half of the year that could help mitigate maybe a construction economy that could look particularly on a non residential side on a broader basis, a lot weaker than what we think could be [active] but still a potential, what kind of effort would you need because again last year at this time you put a $20 million implementation of cost reductions into place, I’m just wondering from a comfort point of view from an investor’s point of view, that if we should hit a brick wall out there that that bookings isn’t converted to backlog, what kind of strategy would this company deal with in the case it’s some pretty hostile environments versus the challenging one you’ve got today.

[Norm Chambers:]

Well there’s you know there’s really three areas. I mean the first is that we will slow up on our capital expenditure, we’ll preserve cash and I’ve said that last quarter and this quarter as well. We can still push out a lot of the $40 million we’re expecting to spend, we only spent I guess $5.6 million or something, $5.8 million in the first quarter. You know, we can push a fair amount of that out if we have to, okay. And we will. The second thing is that we can and may decide to consolidate a couple of plants, we could do that. The third thing is that we can and will watch our costs in a very real way, we’ve got kind of the [avid] initiative which frankly we haven’t had in the past which is our supply chain side. And we see some real good opportunities there to rationalize some costs, you know transportation is the big one, okay. So we are focused on being prepared for whatever eventuality we see. And as I said, that goes into watching closely, I mean on a weekly basis what is going on in quoting activity and bookings, the solidness of our backlog, are we seeing cancellations, are we seeing some bad debt issues, we’re on top of that. And my view is that we will work through this environment more successfully than we have in the past and as you will recall, while our margins were hurt in 2001 and 2003, we are still profitable, generated great cash, paid down debt, where many of our competitors got in trouble. That level of discipline and focus is absolutely the same as it was then.

[David Yuschak:]

Okay and one other question as far as your capacity utilization as you mentioned is relatively low here right now. Given this lift with particularly throwing Ceco in there, your capacity utilization [unintelligible] never got to the level as it really cranked out EBIT margins that were cause back on without Ceco back in the turn of the decade you produced 11% corporate EBIT margins, have only got about 9 here, never got that capacity utilization levels to where they needed to be to really boost the EBIT margins much higher. Does that suggest that maybe you do still have some redundant capacity that you need to close because of maybe at those peaks you still had too much around or would that effect materially [unintelligible] opportunity that you say is out there.

[Norm Chambers:]

Well in 2007 we’ve shut down two plants, one in Canada and one in Georgia. We built a new components plant, a highly efficient plant. We are always looking at our plant mix. You know that our goal is to get our buildings group to a level of profitability by 2010 of 15%. That is largely driven by systems. So we will be affecting our efficiencies through our investment in systems and automation and that’s a part of our capital expenditure we still expect to have. We have commissioned and are going ahead to building a new insulated panels plant which is a product line that has got great growth potentials. We will be doing that in the most efficient way possible. So my sense is that we will continue to look at our plants and just as we have in the past, just as our course of business is to trying to always take advantage of investments that we’re making with automation to look at what the mix of plants should be. And that won’t change.

[David Yuschak:]

Okay, thanks, that’s all I got for now, thanks.

[Operator:]

At this time we have no other questions, I would like to turn the call back to Mr. Chambers for any additional or closing comments.

[Norm Chambers:]

Well again thank you very much for your questions and your comments. I know that the market conditions and the stock market and what not are very difficult. This is a very difficult time but as I’ve said, our focus is on producing the very best results we can, we have done this in the past and we will do it in the future and thank you very much.

[Operator:]

That does conclude today’s call again thank you for your participation, have a good day.