Cornerstone Building Brands, Inc.
Q4 2008 Earnings Call Transcript

Published: 11 Dec 2008

[Operator:]

Good morning ladies and gentlemen and welcome to the NCI Building Systems Fourth Quarter 2008 Earnings Conference Call. (Operator Instructions). At this time, I would like to turn the conference over to Todd Moore, Executive Vice President and General Counsel.

[Todd Moore:]

Good morning and welcome to this NCI Building Systems conference call to review the company’s results for the fourth fiscal quarter of 2008. This call is being recorded and a telephonic replay may be accessed through December 18, 2008 by dialing 1-412-317-0088 and entering the access code 419727 #. A replay will also be available on NCI’s web site which is www.ncilp.com. The company’s fourth quarter results were issued yesterday in a press release that was covered by the financial media. A release has also been issued advising of the accessibility of this conference call on a listen only basis over the internet. Some statements made in this conference call may be forward-looking statements as defined in the Private Litigation Reform Act of 1995. Forward-Looking statements are statements that include projections, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission and in yesterday’s news release for a discussion of factors that could affect NCI’s operations as well as any forward-looking statements made in the call. To the extent any non-GAAP financial measures are discussed on today’s call you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on the company’s web site by following the News link to see yesterday’s news release. Information being provided today is as of this date only and NCI expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. At this time I will turn the call over to NCI’s Chairman, President, and Chief Executive Officer Mr. Norman C. Chambers.

[Norman Chambers:]

Good morning everyone and welcome to our fourth quarter 2008 conference call. I am pleased to have with me this morning Mark Johnson our Chief Financial Officer; Mark Dobbins our Chief Operating Officer; and Todd Moore our General Counsel. I will provide an overview and Mark Dobbins will review our operations followed by Mark Johnson who will review our financial results. Then I will return for closing comments before we take your questions. Fourth quarter earnings came in above our guidance range, reflecting the better than expected performance of our Coatings and Components group and a 120 basis point reduction in SG&A as a percentage of sales. Overall we were very pleased with our fourth quarter results which came on the heels of our record third quarter earnings. As you will recall, this year’s third quarter earnings benefited from some pull forward of work which shifted our traditional seasonality. Q4 results reflected our anticipated reduction in demand as a result of extraordinarily high steel prices. In fact, Q4 2008 tons shipped volume was down 14.2% compared to the same period in 2007. Current customer reaction to high steel prices is precisely what we experienced in a similar steel price environment in late 2004 and early 2005. As steel prices began to fall customers held off making purchasing decisions anticipating further reduction in steel prices. Steel prices fell by approximately 15% in 2005 from the high point of October 2004 until customers started to commit to new projects. We believe we are experiencing the same situation now. Steel prices for January delivery are expected to be down considerably from the high point recorded in August of 2008 and our lower backlog levels of $330 million at the end of the fourth quarter reflects the effect of these quarter push outs. However, longer-term lower steel prices benefit our business by making our products more cost effective than the traditional building materials with which we compete. Therefore we believe that the current pricing trends will help drive a pick up in demand during our seasonally stronger fiscal third and fourth quarters 2009. In addition to steel price fluctuations the US economic contraction has led to a substantial slow down in business activity. The AIA numbers for billing index for October, which foreshadows to some extent new construction activity for the next six to nine months, is at levels similar to 2003 which was the last year of the 2001 to 2003 downturn in non-residential. However, the AIA inquiry index is still reflecting growth and it is albeit at very low levels. New construction activity measured in square feet is reflected by McGraw-Hill. [Indiscernible] was down 17.6% during our fiscal 2008 and McGraw-Hill is forecasting a further decline of 12% in calendar 2009. We find that coating activity overall is mixed. In November we surveyed a cross section of our customers through out the United States

[Mark Dobbins:]

During the fourth quarter and throughout the year we succeeded in implementing efficiencies across all three of our business segments which contributed to our solid results and increased our resilience to difficult economic and business conditions. Our safety performance continues to improve, indicated by a 31% reduction in total injuries which correlates with [audio gap]. In the Coater segment we continue to implement process improvements to improve quality and become more efficient. Our two metal prep facilities, where we process heavier gauge hot roll material, improved their daily through put by 22% and 26% respectively with improved quality. Our other coating locations and processes enable better utilization of raw materials resulting in reduced costs. Also, we have successfully trawl coated aluminum sub straights which will allow us to serve additional markets outside our typical customer base. The engineered building segment has begun implementation of lien manufacturing processes which enable efficiencies within a specific location and also allow for consistency across our many locations. Additionally, we have positioned this segment for further integration and higher utilization by commanding the manufacturing responsibilities of both NCI and RCC engineered buildings under one individual. The Components segment wrapped up a very successful year focused on customer service and ongoing cost reductions. Several initiatives were yielding solid results including component sales to family builders and the MBCI online web based customer service center. Another initiative that is having significant success is the new roof program. This program focuses on the roof retrofit of existing structures and is marketed via presentations to members of the American Institute of Architects. Each of our four operating segments successfully navigated through the dramatic steel price increases that occurred in 2008 and have been quickly adapting to changing economic and pricing conditions. As Norm noted earlier, 2009 is expected to present additional challenges for the non-residential construction markets and we have taken action to respond by using this as an opportunity to resize and realign our manufacturing operations. We have resized our operations by reducing the number of shifts at all locations, shifting volume to more efficient and cost effective locations, and closing four of our least efficient facilities. Two of these facilities will be retooled and reopened late in 2009 and early 2010 as insulated paneling manufacturing operations, which is one of our strategic initiatives and a major part of our green initiative. All capital spending has been temporarily suspended except for emergency requirements, safety, and items directly impacting our strategic objectives such as the ramp up of insulated panel production capability. These are significant changes and they are not based solely on our perception of the near term weakness in non-residential construction activity, but also reflect the ongoing integration of RCC into a hub and spoke delivery system and the continuing extension of the RCC technical software across both building divisions. This allows for standardized manufacturing, the efficiency gains from process and equipment improvements, all of which significantly enhance capacity at all locations. Now I would like to turn the call over to Mark Johnson, our Chief Financial Officer, for financial review.

[Mark Johnson:]

As Norm mentioned earlier, Q4 results came in above expectations after an unusually strong third quarter. We saw a shift in our traditional seasonality as the volume shift in the third quarter exceeded the fourth quarter volume by 7%. The last time we experienced this was in the 2004 fourth quarter when there was a similar spike in steel prices. Consolidated revenue for the 2008 fourth quarter increased almost 10% over the same period last year and grew almost 7% sequentially. The year-over-year increase is due to increasing transaction prices based on increasing steel costs partially offset by the 14% reduction in tons shipped compared to the fourth quarter of 2007. Selling, general and administrative expenses for the quarter were $73 million compared to last years $72 million. Importantly, SG&A as a percentage of sales was down 120 basis points to 14.4% from 15.6% of sales in last years fourth quarter. Our operating margin for the quarter remained reasonably steady at 10%, compared to 10.3% in the prior year, due to strong results from our Coaters and Components segments. Fourth quarter net income of $24.6 million, or $1.26 per diluted share, included two special charges which are worth noting

[Norman Chambers:]

Historically seasonal factors have resulted in above a 25% or so fall off in volume in the first quarter of our fiscal year compared to the fourth quarter. In the first quarter of fiscal 2009, when you layer in the impact of continued economic slow down and the order of push backs as our customers anticipate lower steel prices, we are looking at a sequential volume decline closer to 40%. Under that scenario we would report a slight loss for the period excluding the special [inaudible] charges that Mark had mentioned. However, because of the shift in seasonality that occurred in fiscal 2008 and the declining steel prices we are confident that we will have both positive cash flow and EBITDA for the first quarter. Also, the actions that we have taken to streamline our operations, which could create further efficiencies, will not really benefit our results until the second and third quarters of our fiscal year. In addition to the substantial dollar amount of annualized savings we have positioned the company to weather these difficult economic times while maintaining the ability to scale up our operations to capture the additional business activity when our markets begin to rebound. The recession combined with steel price trends and production curtailments have reduced the short-term visibility, but as a market leader NCI has important competitive advantages that we believe will allow us to continue to significantly out perform the industry. Our three segment operating structure works very well and has enabled us to build our market share, and we continue to effectively execute our EBITDA growth strategy by implementing technology and engineering improvements as well as developing new products. At this point I will be happy to take your questions.

[Operator:]

(Operator Instructions) Your first question comes from David Yuschak - SMH Capital.

[David Yuschak:]

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

[Mark Johnson:]

In reality it is not back end loaded because the seasonal shift that occurred in 2008 caused the fourth quarter to be less volume than the third quarter which is very unusual. So our typical pattern would be that the back end of our year is where the working capital tends to free up and we would invest in the first half of the year. But that won’t be the case in 2009, because we are coming off of a softer quarter and therefore we are not rolling a bunch of payables into the first quarter that need to be paid. So we would see the cash flow relatively evenly distributed throughout the quarters in 2009 and only slightly leveraged towards the back end.

[David Yuschak:]

So would your assumption be that to get a recovery in say late third quarter into the fourth quarter you may end up still, because the traditional season ways still free up cash then as well?

[Mark Johnson:]

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

[David Yuschak:]

And a lot of that will come out of your inventory reduction more than, you know in a softer time you are certainly going to get some receivable release, but is a lot of it too going to come from inventories?

[Mark Johnson:]

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

[David Yuschak:]

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

[Norman Chambers:]

We certainly believe we are going to be well north of $180 million. Again, when you look in our investor packet the sources and uses you see that our working capital is normally a source except for 2004 in a steel price environment. So, that $90 million that we invested will be rolling out and that rolls out pretty quickly.

[David Yuschak:]

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

[Norman Chambers:]

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

[David Yuschak:]

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

[Mark Johnson:]

Approximately 25% of the cost reductions will be in SG&A and the rest will be in the cost of goods sold. At the risk of creating some confusion on this topic, I want to point out that the actual cost reduction steps that we have taken as of right now, the actual cost reductions are closer to $41 million, but the reason we are using a $34 million annual number is because of the seasonal pattern in our cycle and that is relatively normal that our costs would increase towards the end of our business year.

[David Yuschak:]

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

[Mark Johnson:]

$34 million is our prediction for 2009.

[David Yuschak:]

One other thing, on the insulated panels you kind of spoke to – I am backing away from your expansion there. Is there anything right now that you are seeing in the way of this green initiative that whatever business is going on at this point in time at this low level of activity that you are seeing some increased sales in that area or potentially seeing that increase sooner than later so to speak?

[Mark Johnson:]

We are seeing 20% growth right now as we speak.

[David Yuschak:]

The inquiries on that also are showing the same kind of positive expectations?

[Mark Johnson:]

Absolutely.

[Norman Chambers:]

Rapid growth.

[David Yuschak:]

How soon do you think you can get where you would need to be internally on the ability to produce that with as much optimism you had for the total scope of work you can do?

[Norman Chambers:]

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

[David Yuschak:]

Well that is why I just kind of wondered how that might play out between the neo EM piece and what you are doing internally.

[Norman Chambers:]

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

[David Yuschak:]

So in 2009 you are thinking that this could be a very meaningful percentage of your total revenue mix.

[Norman Chambers:]

It’s going to really help the components piece and as you see we have done the reclass so that you can get a feel on the segments and that’s now in components. Mark do you want to add any color to that?

[Mark Dobbins:]

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

[David Yuschak:]

I have just one more question so I can get some clarification on one other made earlier. You expect to have your financing, you said, done by the end of the January.

[Mark Johnson:]

It is the calendar year first quarter.

[David Yuschak:]

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

[Mark Johnson:]

The fundamental approach is that we will manage our business to have sufficient funds to deal with our balance sheet. That is our first line of defense. The second though is that we expect to get the refinancing done during the calendar first quarter and to the extent that we have cash that we are able to apply to that refinancing, which we of course do have, then that will help us refinance less. But, we also know that the interest rates will be higher, so we need to manage our cash in a very conservative way to accommodate both possibilities.

[Operator:]

Your next question comes from Michael Cox - Piper Jaffray.

[Michael Cox:]

My first question is on the inventory levels. It sounds like on a unit basis down about 12%. I guess that means that average selling prices for your inventory are up about 50% year-on-year. Does that mean than more inventory write-downs are to come now that steel prices have fallen?

[Mark Johnson:]

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

[Michael Cox:]

That is helpful and then on the payable side, considering that inventory was up sharply year-on-year, it was surprising to see payables down as much as they were year-on-year. Could you maybe give a little bit more color around that divergence and working capital?

[Mark Johnson:]

Sure. It tends to be the same answer again and that is the shift in the seasonality that I partially driven by the rising steel prices; it pulled a lot of business into the third quarter where customers were trying to beat sales price increase. What happens is that a lot of our purchases of inventory in our normal year were forced into the earlier parts of the fourth quarter and the later parts of the third quarter. All of those inventory purchases were then paid for by the end of our fiscal year. Our payables are just naturally lower because our purchases towards the end of the year are lower.

[Michael Cox:]

Okay, but you are carrying the inventory because of the environments that we are in right now?

[Mark Johnson:]

That’s correct.

[Michael Cox:]

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

[Mark Johnson:]

The marketplace is extremely volatile and any numbers that I would quote for you would be wrong, for sure, so I really don’t want to speculate.

[Mark Dobbins:]

It is likely that they will be more than what we paid before.

[Michael Cox:]

Sure, that’s fair. Then in terms of debt covenants could you remind us what key debt covenants you do have on the existing lines of credit right now?

[Mark Johnson:]

Sure. There are really three financial covenants that we live by and it’s the leverage ratio. That has a maximum of 4-1; we have a senior leverage ratio which is a maximum of 2.75-1; and an interest coverage ratio which is a minimum of 5. Let me just take off where we are on those for you. With the leverage ratio we are at about 2.47; on the senior leverage ratio at about 1.56; and the interest coverage we are at 8.7.

[Michael Cox:]

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

[Mark Johnson:]

With respect to the senior leverage ratio, in our stress-tested models we do not exceed a 3x leverage.

[Mark Dobbins:]

Again, Michael that is at 1 ½ times worse than Dodges forecast for new construction starts.

[Michael Cox:]

That is on a net basis?

[Mark Johnson:]

No that is on an absolute.

[Michael Cox:]

My last question is on cancellation rates. Norm I believe you have commented on these in the past and I just wondered if we could get an update on what those were for the quarter and what the outlook looks like in terms of cancellation rates?

[Norman Chambers:]

Yes, we certainly burned off more of our backlog in the buildings group in our fourth quarter than we had expected, which in some respects is good. Cancellations in the quarter were approaching 10%, about $30 million. Just to answer a question that you haven’t asked. But, our incoming orders are about equal with our outgoing levels of shipment.

[Operator:]

Your next question comes from Arnold Ursaner - CJS Securities.

[Arnold Ursaner:]

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

[Norman Chambers:]

Let me just answer the question I think that you asked and if I haven’t you can ask me again. We were shipping at about the same level as we were booking. So what we would have expected in an environment where people weren’t waiting to see what steel price is going to do, that we would be adding to our backlog.

[Arnold Ursaner:]

Okay so you are running through a little bit of backlog, but still getting in a reasonable amount of new orders to keep your booking up for this quarter.

[Norman Chambers:]

Yes we are, I mean currently that is what is happening. Our incomings are about equal to our outgoings and that is kind of what we are expecting in the first quarter as well. I will say that when you look at our backlog at halfway through the year our backlog in April was $463.4 million and our actual revenue in our Buildings group was 29%, about that. We do get some growth normally. We get more in the second half than we do in the first half, but we do normally get some growth.

[Arnold Ursaner:]

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

[Mark Johnson:]

No, we didn’t indicate that.

[Arnold Ursaner:]

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

[Mark Johnson:]

We will typically want to maintain our inventory in a 45 to 60 days of inventory level. So that will fluctuate as volumes fluctuate.

[Arnold Ursaner:]

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

[Mark Johnson:]

I think it will be substantial. I don’t want to put a number on it. Inventory timing is very tricky, but it will be very substantial.

[Arnold Ursaner:]

Do you have orders out to buy steel offshore? Are you still placing orders to have more inventories coming in or are you basically running down what you have?

[Norman Chambers:]

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

[Arnold Ursaner:]

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

[Norman Chambers:]

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

[Mark Dobbins:]

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

[Arnold Ursaner:]

My final question is regarding the insulated panels you mentioned. Obviously you are expanding to a retooling two plants, which won’t come until late ’09. You also indicated 20% growth right now. What is the current level of activity that we are seeing 20% growth on?

[Norman Chambers:]

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

[Arnold Ursaner:]

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

[Mark Dobbins:]

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

[Arnold Ursaner:]

Would you remind us again what the primary uses of these insulated panels are?

[Mark Dobbins:]

It is for roofing systems and sidewall systems because of the advantage of having an internal wall and an external wall in the level of heat retention. It provides a level of insulation that is 4x better than what is currently being used in the marketplace.

[Norman Chambers:]

It is basically a pre-assembled, pre-insulated panel package that you can put on a structure. Additionally, there is a relatively large market of freezer and cold storage for this same product.

[Arnold Ursaner:]

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

[Mark Dobbins:]

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

[Operator:]

Your next question comes from Fred Taylor- MJX Asset Management.

[Fred Taylor- MJX Asset Management:]

On the refi, would you anticipate a similar revolver/term loan type of structure? Although money is spongable it sound like most of your cash flow over the next 12 months, take out the converts, with maybe no cash left, but nothing on the revolvers. Am I thinking about all of those things correctly?

[Mark Johnson:]

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

[Fred Taylor- MJX Asset Management:]

So it might be a revolver term loan structure, it could be revolver term loan bonds, could be a number of things is that?

[Mark Johnson:]

That’s correct.

[Operator:]

Your next question comes from Robert Kelly - Sidoti & Co.

[Robert Kelly:]

I had a question on the backlog. You guys talked about your assumption for sounds like a worse case scenario being 1 ½ times the McGraw-Hill forecast. It looks like we are beyond that at this point. I mean is there a worse, worse case scenario where you are still in line with the covenants?

[Norman Chambers:]

That is for the year and as we said, we will see that the enhanced seasonality that we normally have a reduction of volume between 20% to 25% between our fourth quarter and first quarter. This first quarter will probably be an additional 25% worse than the first quarter of 2007. What’s interesting is during the period of 2004 and 2005 backlog in tons was down about 37% and then came back up 52% as people started to move on steel prices. That year only had growth in non-residential of 1.98%, so it wasn’t a booming year by any stretch of the imagination. We will have some swing back seasonality, but it could be a challenging year, that is for sure.

[Robert Kelly:]

Yes, I wouldn’t expect a boom year in ’09.

[Norman Chambers:]

No, no we are not.

[Robert Kelly:]

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

[Norman Chambers:]

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

[Robert Kelly:]

Then just one point of clarification, you had some reclassification for sales over the past eight quarters here. What was that in relation to?

[Mark Johnson:]

We had just realigned some of our products with the segment that they belonged to. It is primarily our insulated panel systems which moved from our Buildings group into our Components group. Then vice versa we have moved our dot com business from our Components group into our buildings piece, which is our small buildings piece.

[Robert Kelly:]

Are you trying to tell us that the IP mix is better or worse? What is the indication there?

[Norman Chambers:]

No, it is just that we wanted the IPS to be in the distribution channels that we have in Components.

[Robert Kelly:]

No, I understood, but it seemed like the operating profitability moved around a little bit; that the mix for IP is raising components. Is that how we are to read that?

[Norman Chambers:]

Yes it is, exactly right.

[Operator:]

Your next question comes from James Eustice at Churchill Pacific.

[James Eustice:]

I want to clarify; with the put are there any restrictions on you using cash within your credit agreement for the put?

[Norman Chambers:]

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

[Operator:]

Your next question comes from David Yuschak - SMH Capital.

[David Yuschak:]

I would like to have a little more detail on the inventories. At the end of July you showed $226. Was that the absolute peak in dollars or was it higher maybe into August. Could you give us some sense as to how far the peak went?

[Mark Johnson:]

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

[David Yuschak:]

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

[Mark Dobbins:]

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

[David Yuschak:]

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

[Mark Dobbins:]

There will certainly be some impact of that, but what you do find is that when you are in a seasonally slow period the operating leverage that you have ends up really being tested with volumes that are 25% lower than the normal seasonal 25% that we normally experience, so it throws in to some question the operating leverage. We continue to work to have the best possible results we can have in this quarter coming and in every quarter.

[David Yuschak:]

But some of the gross margin is because of the higher costs. The lower revenue doesn’t help, but the run off of higher costs is still showing up in the first quarter as well.

[Mark Dobbins:]

Absolutely.

[David Yuschak:]

As far as your expectations on inventory going forward, it has been very difficult managing inventories when you have got volatility of prices. It has been kind of interesting, like you were commenting about owners wanting to hold off on purchasing stuff, we are finding as we talk to issuers, customers and all that, that it is because of that volatility it is tough to manage what it is you want to do, whether it is to build inventories or build a facility. How do you expect, when inventories, steel was relatively stable, you guys have kind of managed around a 30-day inventory. Boost that up to 45 days on some occasions and I am just thinking, as you look forward here how do you manage that steel inventory as far as days when you have such volatile markets right now?

[Mark Dobbins:]

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

[Norman Chambers:]

I would just add that, clearly, going forward with the position that the steel mill industry is in today, looking forward into ’09 the availability of steel will be much easier to put your hands on at a quicker rate; that we can run a lower inventory level there. As opposed to in 2008 when we had some spot shortages and it was tough to put your hands on some of the lighter gauge materials.

[David Yuschak:]

You said earlier though that you thought maybe 45 to 60 days and that seems like that would be a tight steel environment versus brining it closer to 30 days.

[Mark Dobbins:]

Yes, I was just speaking to typical averages.

[David Yuschak:]

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

[Norman Chambers:]

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

[David Yuschak:]

Some of the things that you have done internally suggest that that is a realistic goal?

[Mark Dobbins:]

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

[David Yuschak:]

I have one last question about the financing that you expect to get wrapped up by the end of March. You said there are various different strategies that might take place. Is which way you go going to depend on what kind of economic conditions you have and the kind of potential you see for the rest of the year? I am just kind of curious as to if you have several alternatives and scenarios out there, what things do you think you need to do to go to maybe one less optimistic scenario versus a more pessimistic scenario or one that is kind of in the middle?

[Norman Chambers:]

That is a very, very good question. We want to ensure that our capital structure fits the cyclical nature of the business and our strategy. Fortunately our strategy does not require that we make acquisitions, to it is not like we have to increase our debt. We obviously want to decrease our debt. I think there are a number of ways of approaching that, but we will take steps to make sure that we have the greatest level of stability in our balance sheet that we can achieve.

[David Yuschak:]

Along that same line then, what would be kind of longer-term debt to capital ratio you think is ideal for the business given the volatility?

[Norman Chambers:]

Well I think we are running at 2.5 and 2.5 until we saw was a great place to be. Mark do you want to comment on that?

[Mark Johnson:]

Yes. Well I think our debt to equity capitalization is about 45% today, in that range and I think we would like to see that be below 40%.

[David Yuschak:]

I mean on a sustained basis is 40% optimal or is it more like 30% optimal?

[Mark Johnson:]

Well I would say that it is in that range. I don’t know that [interposing].

[David Yuschak:]

Of course 30% to 40% might be kind of, depending on economic conditions it can be 30% to 40%.

[Mark Johnson:]

That’s correct and it will vacillate in there. It is kind of a pilot shoot or not an absolute.

[David Yuschak:]

That is more your comfort level versus being above 40% say, for instance, given the kind of volatility we are seeing.

[Mark Johnson:]

Yes.

[Operator:]

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

[Norman Chambers:]

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

[Operator:]

Thank you all so very much for participating in the NCI Building Systems Fourth Quarter 2008 Earnings Conference Call. This concludes today’s event. Thank you for participating.