Core Natural Resources, Inc. (CNR) Q1 2009 Earnings Report, Transcript and Summary

Welcome to the NCI Building Systems’ first quarter 2009 earnings conference call. As a reminder all participants will be in listen only mode. There will be an opportunity for you to ask questions at the end of today’s presentation. (Operator Instructions) The conference is being recorded. At this time I would like to turn the conference over to Todd Moore, Executive Vice President and General Counsel.

Welcome to NCI’s conference call to review the company’s results for the first quarter of fiscal 2009. This call is being recorded. To access the taped replay please dial 1-412-317-0088 and enter the pass code 428378 and then the pound symbol. The webcast archive and taped replay will both be available approximately two hours after this call and will continue through March 17, 2009. The replay will also be available on NCI’s website which is www.NCILP.com. The company’s first quarter results were issued earlier today in a press release that was covered by the financial media. A release has also been issued advising of the accessibility of this conference call on a listen only basis over the Internet. Some statements made in this call may be forward-looking statements as defined in the Private Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Actual performance of the company may differ from that projected in such statements. Investors should refer to statements filed by the company with the Securities and Exchange Commission and in today’s news release for a discussion of 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 website by following the news link you see in today’s news release. Information being provided today is as of this date only and NCI expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. At this time I will turn the call over to NCI’s Chairman, President and Chief Executive Officer, Mr. Norman C. Chambers.

Welcome to our first quarter 2009 conference call. Joining me this evening are Mark Johnson, our Chief Financial Officer; Mark Dobbins, our Chief Operating Officer; and Todd Moore, our General Counsel. I will provide an overview and Mark Johnson will review our financial results followed by Mark Dobbins who will review our operations then I’ll return for some closing comments before we take your questions. During a period when our end markets just shut down NCI managed to hold its own on a number of fronts, absent charges each of our business segments generated an operating profit. We succeeded in producing significant operating cash flow, each of our operating segments generated a reasonable price spread over material costs and we were able to refill our backlog to offset the quotas production and a portion of the cancellations. In fact the value of our quoting activity in January and February was up 17% compared to the same period in 2008. Of course like most every company we are facing significant challenges caused by the economic downturn. The company is addressing three major challenges, first the downturn in the economy and the impact the economy has on nonresidential construction. Second the volatility of steel prices and the third the maturity of our convertible bond in November of 2009 and the crushing impact that concerns about our ability to refinance have had on our stock price. The slowing economy started to have a negative impact on our business during the second half of our fiscal 2008 and caused us significant pain in the first quarter of 2009. Until then we had successfully addressed the slowdown by aggressively capturing share of the nonresidential construction markets where demand was still solid but in 2009 first quarter we faced a significant across the board fall off in tons of steel processed through our manufacturing plants. Even though our variable costs are 84% of our cost of goods sold the amount of tons we processed was insufficient to absorb our fixed costs. Anticipating the effect of a worsening economy on nonresidential activity we have been cutting costs throughout the company. Two phases of costs in SG&A and cost of goods sold have yielded a cost reduction of nearly $68 million. We expect to realize an annualized cost saving of $59 million because we expect to add back some employees to our manufacturing plants during our seasonally stronger fiscal Q3 and Q4. On the revenue side our sales force is focused on winning new business across the 19 end markets that we serve. We continue to cultivate opportunities in the institutional market which has shown solid growth over the past three years. The institutional end markets consist of projects funded by local, county, state and Federal governments as well as houses of worship. This sector represented approximately 24% of our fiscal 2008 sales. Also we see excellent opportunities as a result of the recently passed Stimulus package which Mark Dobbins will talk about more later. As you know our projects tend to be smaller and therefore more quickly implemented than the larger infrastructure projects. The volatility related to the extraordinary steel price increases was a challenge that we successfully overcame in fiscal 2008. However in the first quarter of fiscal 2009 we witnessed a complete reversal of the entire steel price increases of 2008 and I would say that we are now back to pricing that is equal to late 2007. This pricing roller coaster has caused significant dislocation in our business. First we had to write down our inventory because our volume of tons shipped was up dramatically at the same time that steel prices fell precipitously. Second those of our customers who have had projects to build have been on the sidelines waiting to see where steel prices will bottom out. This is a very similar situation to what we experienced in 2005 after the run up of steel prices in 2004. On the positive side some projects that were previously on hold are moving forward. Other projects that were not economically feasible at higher steel prices are now re-pricing. Most importantly over the intermediate and longer term lower steel prices improve our competitive position against block and cement tilt up wall construction and enable us to gain greater share of the nonresidential construction sector and more stable prices are better for us and the steel producers in a recovering slow growth economy. With respect to our capital structure we continue to work diligently with our key relationship banks to deal with the November of 2009 maturity of our convertible notes and have made progress. We are analyzing the execution of several capital structures that would address not only the convertible notes but also the revolver and Term Loan B which matures in June of 2009 and June of 2010 respectively. We are considering a variety of options and are actively engaged in negotiation to pursue appropriate alternatives. We have retained JP Morgan to assist us in this process. NCI has a track record of excellent financial results and cash flow. Even during this unprecedented level of economic contraction we produced and retained substantial levels of cash. We are committed to achieving the best possible capital structure for our company particularly in light of the current economic turmoil. We believe that once this uncertainty is removed NCI will regain the investor confidence that it has built over the years. I’ll now ask Mark Johnson to review our financial results.

As you know our first quarter 2009 operating income came in within our most recent guidance range but significantly below our initial expectations. This was caused by the sharp fall off in volume particularly in our components group and our buildings group where tonnage was down in the aggregate almost 20% more than we had originally projected. As a result our utilization rate dropped to 35% for the quarter which reflected some lag time in taking capacity out of the system. That being said we did see operating costs coming in at or below projected levels which reflect both announced cost cutting programs as well as ongoing efficiencies that Mark Dobbins will discuss momentarily. Also on a positive note the shift in our traditional seasonality that took place over the third and fourth quarters of 2008 combined with declining steel prices and activity levels reduced our working capital requirements and enabled NCI to report positive cash flow from operating activities of approximately $30 million for the quarter. Consolidated revenue for the 2009 first quarter declined 28% over the same period last year on a 40% fall off in volume reflecting our ability to achieve a reasonable price spread over material costs even in these very tough times. Gross profit declined significantly due to a special $29.4 million lower of cost to our market inventory charge and due to lower fixed cost absorption at these depressed volume levels. The inventory charge directly resulted from the combination of both a precipitous sequential decline in steel prices and the significantly slower sales volume in both our components and building segments. Both of these factors exceeded our previous expectations. The charge affected all of our business segments with about half the amount attributable to our components group. The amount of the charge is an estimate based on our projection of the volume and price levels we will achieve in subsequent quarters and a required normal profit. Based on those projections we expect that most of the higher priced inventory will be depleted by the end of the second quarter. If our estimates of volume and price prove to be incorrect there could be a corresponding effect either positive or negative on our gross margins in subsequent periods as the inventory is depleted. Selling, general and administrative expenses for the quarter were down 15% year-over-year to $54 million reflective of a portion of our cost reduction initiatives to date and lower activity levels. Including the inventory charge I just mentioned NCI incurred a total of $550 million in special pre-tax charges. The largest component by far was a non-cash goodwill and intangible asset impairment charge of $518 million. Lower than expected volumes in our first quarter combined with a worsened outlook for 2009 nonresidential construction starts presented an impairment indicator requiring a goodwill impairment test as of the end of our first quarter. As you know part of the impairment test requires the company to reconcile the fair value of its individual reporting units to the company’s publicly quoted market cap including a reasonable control premium. Our low stock price near the end of our first fiscal quarter contributed to the magnitude of the ultimate impairment charge. The charges taken were based upon preliminary estimates which will be subject to revision once final appraisal valuations and other analyses are completed in our second quarter. In addition if further impairment indicators occur requiring an additional impairment tests this could lead to additional goodwill impairment in future quarters if our stock price continues to be lower than it was at the end of our first quarter. The magnitude of the impairment charge was also increased by the estimation of significant value in identifiable intangible assets and the fair value of property plant and equipment which are in excess of the historical cost basis carrying values on our balance sheet. In addition to the goodwill and inventory charges similar to our expectations restructuring and asset impairment charges for the period equaled $3.1 million related to severance costs and plant closings associated with the cost reduction programs that were initiated in the October and November 2008 timeframe. Perspectively we expect to take approximately $1.8 million in additional charges mostly in our second quarter relating to severance costs and other costs for Phase 2 of our cost reductions which will be discussed by Mark Dobbins momentarily. On an adjusted basis which excludes all the special charges incurred in the first quarter the company posted an EBITDA loss of $800,000 calculated to conform to our credit facility definitions as presented in our financial tables, an operating loss of $7.8 million and a net loss of $8 million or $0.42 per diluted share. Turning to the balance sheet post charge inventory levels were at $143 million down $49 million from year end levels and $10 million below last year’s first quarter. Our annualized inventory turnover for the quarter was 4.8 turns compared to 6.7 turns last quarter and 7.3 turns for the 2008 first quarter. Receivables at the end of the 2009 first quarter were almost cut in half to $85 million from $163 million at the end of fiscal 2008 and down about 33% from $128 million at the end of last year’s comparable quarter. Our days sales outstanding calculated on a trailing three month basis was 35.8 days compared to 31.8 days in the prior quarter and 34.6 days in last year’s first quarter. Despite this very tough business environment we are seeing only a moderate increase in our past due account levels with a corresponding increase in our bad debt reserves. Finally post charge there is almost $108 million in goodwill remaining on our balance sheet. During the first quarter we invested $7 million in our property and equipment. As Mark Dobbins will discuss momentarily we have trimmed our capital investments to minimal amounts without sacrificing our key strategic plans. We expect capital spending in our fiscal second quarter of ’09 to be slightly less than it was in this year’s first quarter. With respect to our capital structure we have the following debt obligations in order of maturity, our revolver which has no balance outstanding matures in June of 2009, our $180 million convertible notes have a put call feature in November of 2009 and are now carried as short term debt, our $293 million term loan matures in June of 2010. As they stand today none of these obligations requires any repayment or amortization during our fiscal 2009. As of February 1st, 2009 we were in compliance with all of our debt covenants but if the current trend of depressed sales volume continues or worsens in addition to the inventory impairment charges already taken we could violate our leverage ratio covenants and be forced to seek amendments and/or pay down a portion of our bank debt from our cash balances or operating cash flow. As Norm said earlier we are pursuing all available avenues to refinance our debt and we expect to be in a position in the near term to update the market on our progress. Each of our segments was affected the impact of the worsening economic conditions on our end markets and the sharp decline in steel prices. As you can see form the tables included in our release the coaters group experienced a 41% year-over-year sales decline, the components group sales were down 18% and the buildings group sales were off 32%. Utilization rates range from 32% to 59% significantly below year ago levels. Adjusted for special charges and corporate expense the combined direct operating income contribution of our business segments was $5.4 million in the quarter. Now I would like to turn the call over to Mark Dobbins to review our operations.

As mentioned earlier our operations have been struggling with the more severe demand contraction than previously expected. This additional pull back in volume caused us to move in Phase 2 of the cost reduction plans that we previously announced. The reductions implemented to date involved the closing of five facilities, transition of work from these facilities to other more efficient operations, short term idling of select operations and a workforce reduction in excess of 25% inclusive of manufacturing, SG&A and corporate employees. We have managed capital spending to minimal levels operating in what we refer to as maintenance mode except for projects that involve strategic initiatives. As a result of all these actions we have taken $59 million in annualized costs out of the business and it’s important to note that while the current economic downturn has been the stimulus for many of these actions it is the determination and dedication of employees throughout this corporation that allow us to make these changes without sacrifice to safety, quality or customer service. Additionally the reductions in reductions and changes that were implementing will not impact our ability to respond to an improving market. In fact, we’ll be much better positioned and more efficient as we begin to ramp back up. We continue to move ahead with the integration of the manufacturing operations within our buildings group driving efficiency improvements and reducing costs. By utilizing the advanced technical software and the automation deficiencies within the RCC organization together with our hub and spoke operating expertise we will continue to be the low cost producer in the industry. We are beginning to see significant benefits from our integrated insulated panels systems group in to our components organization. While insulated panels continue to support the buildings group as an element of the engineered building package these products are now getting additional market exposure by being parts of the components groups oftentimes outside of the traditional building markets. In a recent visit to the components group headquarters it was easy to see how this integration is mutually beneficial to both components and our insulated panels systems. Additionally, the development of our state of the art insulated panel manufacturing plant in Jackson Mississippi is continuing on schedule and will be operational before the end of this calendar year. All of our segments experience a fall off in business in the first two months of the quarter but booking trends seemed to flatten out in January. We saw a significant increase including activity across all segments towards the end of the first quarter which we believe signals an increase in seasonal activity, pent up demand and the view that steel prices have bottomed out which should get some customers off the fence with their decision making process. As Norm mentioned earlier the economic stimulus package contains a significant amount of funds targeted for new construction as well as facility repair and restoration of many areas of the Departments of Defense, Department of Interior, Department of Agriculture, Homeland Security and education. Now, these are areas where NCI has historically excelled as these projects fit well within the engineered building systems, retro fit applications from the components group such as their new roof program and increasing demand for energy efficient construction provided by our insulated panel systems. Our buildings group and components group are currently positioning themselves to take advantage of these opportunities by targeting specific builders and contracts who concentrate on this type of work. With that, I’ll turn the call back to Norm.

As we noted in today’s release, visibility is very limited therefore, we are reluctant to provide specific guidance with respect to our Q2 results. While economic conditions remain very though we think we are beginning to see some of the positive signs for our business. First, we expect to realize most of the full quarter’s benefit from the $59 million in annualized cost savings in the second quarter which will improve our operating performance. This significant reduction in our cost structure combined with the lower capital investment should result in positive operating cash flow in the second quarter. Our buildings group backlog stabilized at $302 million at the end of the first quarter and as Mark Dobbins and I have discussed, the uptick in quoting activity across our business signals to us that our customers believe that steel prices are at or close to the bottom. Good news for the near term as well as the long term perspective. As a market leader, NCI has an important competitive advantage in the market place and we believe that our integrated business model will enable us to continue to build share. With that, we’d like to open up to your questions.

(Operator Instructions) Your first question comes from Michael Cox – Piper Jaffray. Michael Cox – Piper Jaffray: My first question is on a comment you made in your prepared remarks about burning through the high cost of inventory by the end of the second quarter here, could you give us some sense for what sort of sales assumption might be imbedded in that? Would it be consistent with the trends that you saw in Q1 or would you expect some sort of improvement in Q2?

We are seeing levels of activity in Q2 that are fairly similar to Q1 and we have about less than a quarters worth of inventory to flow through. Mark do you want to add any color to that?

That’s an accurate assessment and our inventory in general is made up of several different grades and calibers of steel so while it will all turn within the quarter, some grades turn a little bit slower. Michael Cox – Piper Jaffray: In terms of the capacity utilization rates that you called out, you noted that you plan to close five facilities and I assume that’s off the base of 39. Noting those capacity utilization numbers, how deep will the facility closures go as you look out over the balance of the year?

Actually, we’ve actually closed five of the facilities already in the quarter. We’re at the tail ends of the last one. As the period continues we continue to look at areas and opportunities to reduce cost further but at this point we pull back to five facilities and really concentrated on bringing down our cost from pulling out shifts in each location. And like I said earlier, we’ve actually idled out some locations temporarily.

One of the things Michael I think is important is we begin to see positive benefits in operating leverage when our utilization rate historically starts to go above around 60% or 65%. With the reductions that we’ve made and the reductions in shifts that leverage point will be somewhat lower than what has historically been the case. Michael Cox – Piper Jaffray: Last question on the balance sheet you noted that you have had some progress in the refi activity, I was just wondering if you could give any color around those discussions and what that may look like in terms of higher interest rates or whatever you can disclose at this point I guess?

It’s very difficult since we’re right in the middle of it Michael. It’s one of those things that we’ll really be thinking about after we get it done but we are making good progress and are really pleased with the progress that we’re making.

Your next question comes from Timna Tanners – UBS. Timna Tanners – UBS: Just to follow up with a couple of the questions, can you give us an idea what the cost of inventory is relative to current selling prices for steel? Because you said you had another quarter that you think you need to work down higher cost steel in the inventory.

We have written our inventory down near to current replacement cost levels or replacement cost levels at the point in time when that inventory would be sold. There is still some margin above what replacement cost would be but the actual write down is based on what selling prices will be and what the volumes will that will flow through the system will be. Timna Tanners – UBS: Are you seeing competitive pressures from some of the – certainly, some of the mills I would think will have already have reduced their cost and were telling us that they already have written down or worked through their high cost inventory. Are they undercutting prices much? We’re certainly hearing it on the steel side, are you seeing it on the processed side?

From what we’re seeing they’re just taking out more capacity. It appears to us the guys are trying to hold a bit of a pricing discipline out there peeling the capacity off as much as anything. There just doesn’t seem to be a ton of steel moving in the market. Timna Tanners – UBS: But there’s not battles for market share? I mean certainly there’s been a lot of capacity taken out already but there’s less market share and more challenges and pretty much people are holding the line on price you think?

Well, they’re trying to for sure and I can understand that. I’ll say that one of the advantages that we have is that we’re not owned by a steel producer and therefore we are independent so it follows that our business is attractive to a number of suppliers. That’s a good position to be in. Timna Tanners – UBS: But you could also make the argument because you’re sitting on higher cost steel you haven’t reduced your cost and maybe would be slower to lower prices, no?

Well, we have lowered our steel costs so we are now working not from a disadvantage position as we were in the first quarter. I think that’s really important to get. We’ve written our inventory off. Timna Tanners – UBS: So you’re pretty close to current selling prices and that shouldn’t be a distinction?

Absolutely.

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

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

I was curious Norm on your comment about state and local government strength because it seems to us with the short falls in a lot of the budgets that might be something that could be weaning. Certainly, the federal government strength should be a little more stable, can you give us a little bit more color if you’re seeing any weakness from state and local government spending?

That’s a great question and it’s interesting because I really thought we’d start to see that but I think what we’re seeing and I hope I’m right, that we’re seeing a tail of work that was bonded and provided for last year. So, a number of the school projects that we’re working on are really from last year and that’s been a good thing. We definitely have seen an uptick in both activity and opportunity in federal government work particularly in the departments of defense.

So defense is holding up well but that’s not state and local right?

No, that’s not state and local correct.

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

Correct.

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

We think just the seasonality. If you look at the last six years if you look at McGraw-Hill data, the level of seasonal activity in our fiscal year averages about 20% more business activity in the seasonally strong our Q3 and Q4. What that represents over the last six years is we’ve had about a 30% increase in revenue our Q3 and Q4 over our first half of the year. That is corresponded to 1375 increase in net profit. When we kind of work back in to where that leverage point starts it historically starts around the 60% to 65% range. We think that with the cost reductions and efficiencies that we’ve made, we’ve brought that leverage point down.

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

Yes, because it doesn’t take a whole lot of an increase in sales with the current instruction we have to give us that impact.

Above your threshold and benefit that you’ve talked about?

Correct.

Your next question comes from Robert Kelly – Sidoti & Company. Robert Kelly – Sidoti & Company: Is 2Q a profitable quarter if steel prices stabilize?

We’re not giving guidance but we have a level of confidence that we will be in positive cash. Robert Kelly – Sidoti & Company: Will the cost cuts get you to – is that the expectation for 2Q? It doesn’t seem like seasonality is going to kick in maybe as strongly this 2Q as it has in past years?

Well, we have seen as you know in the past our Q1 and Q2 can adjust position we could have a Q1 up and a Q2 down or vice a versa and we’ve had some years where Q1 and Q2 are flattish. We are certainly seeing a level of activity at least in this stage of the game pretty consistent with the levels of activity that we saw in Q1 and we’ll see. In some cases it looks like it could be up a little bit but we want to be very cautious about what we say about Q2. Robert Kelly – Sidoti & Company: You talk about quoting being up significantly here in February, are the quotes turning in to orders, is that how we should read that or is it just prices have dropped, people are getting ready their go projects from the federal stimulus package coming through?

I don’t think there’s anything in what we’re quoting that has anything to do with the stimulus package at all, none, zero. What we have and again, it’s a short data point it’s January and February clearly the value of our quoting compared to the same period last year is up 17%. Now, to be successful we’ve got to turn those quotes in to orders and backlog and that’s what our team is working on and that’s why lowering our steel prices should enable us to be as successful as we’ve been in the past. Robert Kelly – Sidoti & Company: Then just for 1Q, new orders do you have that number?

I don’t know. We know what our cancellations were, our cancellations were 5% or 6%. Robert Kelly – Sidoti & Company: So cancellations dropped relative to 4Q? You guys had talked about 10%.

Yes. It’s interesting, it really is interesting that our cancellations were our highest as a percentage in Q3 dropped in Q4, and dropped again in Q1. Exec They’re about half what they were. Robert Kelly – Sidoti & Company: You had talked about during the 4Q call kind of nothing solid but you had talked about a cash flow goal or cash reserve goal at the end of this year being in excess of the $180 million. Is that still the case?

We’re going to struggle to get to $180. But, at the end of the day the whole intention of the $180 was to really depict and show and indicate that our behavior which was generating and holding as much cash as we could but it was only in service to our refinance. It really is the refinance that we’re working on to get done well, well before that.

Your next question comes from Fred Taylor – MJX Asset Management. Fred Taylor – MJX Asset Management: We sort of beat this to death but I’ll ask it another way, if you do the balance sheet restructuring prior to November is it a deleveraging exercise?

That’s a very good question. I would say that clearly it’s a deleveraging situation. Fred Taylor – MJX Asset Management: Net of cash?

Well, that remains to be seen. That’s certainly within the alternatives that we’re looking at.

Your next question comes from Arnold Ursaner – CJS Securities. Arnold Ursaner – CJS Securities: One of the things I think you said in your prepared remarks was that your tonnage was down 20% more than you expected but, I’m not sure did you give us how much tonnage was down?

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

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

And I think Mark gave some color on the units. Do you want to say it again Mark? Arnold Ursaner – CJS Securities: If it’s in the press release it’s fine.

I’m not sure the units is in the press release.

I don’t think we did. The year-over-year decline in coatings group was 31%, in the components group it was 38% and in the buildings group it’s 46%. Arnold Ursaner – CJS Securities: In thinking about the product you sell a building perhaps with the various movements we’ve seen in the price of steel can you give us a feel for what a selling price on a particular building how it might have changed over let’s say the last six or nine months given all the volatility of steel?

That’s a good question. I will say in one regard even though the volumes were really quite low, the spread that we had over material costs were fairly consistent with the past but it’s clear that we really started to see the effect of the high steel price in the negative impact it had on selling buildings really started to occur in backlog terms in our third quarter and as you recall, our fourth quarter for the first time in our history we had lower revenue in the fourth quarter than we did in the third. So, my sense is that we’re going to see probably our average value for a class of building be lower and that’s part of the whole notion of it being more competitive against other forms of materials and ultimately that’s a good thing in terms of volume. Arnold Ursaner – CJS Securities: A couple of more questions about the potential for a refinancing type of transaction. You’ve retained JP Morgan Securities, remind me again are they the lead bank you have in your syndicate?

No they are not. Our lead bank is Wells Wachovia. Arnold Ursaner – CJS Securities: So to be clear have they been hired strictly as an advisor or what if they come back to you and said, “We think you should do an equity related offering.” Will they be able to in fact suggest a transaction that would be favorable for their economics?

They are assisting us on all aspects of our refinance? Arnold Ursaner – CJS Securities: But are they strictly hired as an advisor or can they also choose to elect themselves to do the transaction they recommend?

No, they can’t elect to do the transaction, no. Arnold Ursaner – CJS Securities: And what is the leverage ratio that would be the closest to tripping your covenants? You mentioned it but what is the actual ratio?

Our covenant requirements there are really three maintenance covenants that we maintain: there’s a total leverage of four times and we’re currently at 2.9 times; there’s a senior leverage of 2.7 times and we’re at 1.8; and there’s an interest coverage minimum of 5 times. So, the leverage ratios both the seniors and the total leverage are the ones that are acting pretty similar to each other. I wouldn’t say that one leads the other one. Arnold Ursaner – CJS Securities: Again, just to clarify your intention is to try and resolve all of the upcoming debt that you have on your balance sheet or are you considering it more separate transactions?

No, our intent is to do a holistic approach. Arnold Ursaner – CJS Securities: To be clear I think you are certainly, as one of your arrows in your quiver would be an equity related offering even down at these prices?

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

Your next question comes from Michael Corelli – Barry Vogel &Associates. Michael Corelli – Barry Vogel &Associates: I’m sure you’ve gone through the numbers and although you haven’t given specific guidance, if business conditions stay the way they are is it you might have a breach of the covenant as early as the second quarter or would that happen later in the year?

It really depends on circumstances. We go in to a pretty fulsome review of this in our Q that will be coming out tomorrow. Michael Corelli – Barry Vogel &Associates: Then I guess the covenant breach would that be related to the term loan.

It would be the senior credit facility which includes the term loan, yes. Michael Corelli – Barry Vogel &Associates: So Wells Fargo Wachovia is that on both the credit facility and the term loan that they’re the lead bank?

It’s one in the same but yes. Michael Corelli – Barry Vogel &Associates: As far as cap ex and deprecation amortization, could you give us some guidance for the year?

Currently we’re guiding towards an ’09 expenditure of just under $20 million. The majority of that spend isolated towards strategic initiatives, you know IPS, IT, so on and so forth. Prior years our cap ex budget was in $34 to $35 million range.

And Mark will give you kind of the D&A here in just a sec.

The D&A will be in a range of $34 to $36 million for the year. Michael Corelli – Barry Vogel &Associates: So as far as the refinancing I guess your biggest cash need is clearly the potential put on the convertible but if you were to breach the covenant I guess that would be the next thing that would require you I guess as far as a deadline to do some kind of a negotiation or a refinancing. Do you have a target date by when you’re going to have this completed?

We certainly are working to a date and it would be consistent with what we’ve said in the past that we’d like to have something to announce by the end of March and we’ll see whether that works out. Whether it’s that or the first part of April kind of remains to be seen but, we’ve got adequate time to get done what we are working on, I’ll say that.

Your next question comes from J. Dennis Delafield – Delafield Asset Management. J. Dennis Delafield – Delafield Asset Management: Just one question and that’s I noticed that the accrued expenses went down very sharply from $129 million to $90 million and I wondered what the majority of that was?

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

Your next question comes from David Yuschak – SMH Capital. David Yuschak – SMH Capital: In your press release you did indicate that you expect to have positive cash flow from operations in the quarter. Could you give us a sense as to where the sources of that optimism is on your cash flow? And, as far as cap ex spend is that going to be back end loaded depending on your cash flow that you produce here in the second quarter?

The answer to the last question is with the exception of the insulated panel plant, other capital expenditure projects can be pushed some and those decisions will be taken based on our cash flow projections just as you suggest. With regard to the first part of the question –

There’s continued mining of the working capital that will occur in the second quarter primarily from the inventory area. David Yuschak – SMH Capital: As far as mining it from inventory, what’s your strategy there to push it down materially to make a difference?

We’re basically adjusting the purchasing to the current volume levels which will bring the inventory level down. David Yuschak – SMH Capital: So mining that will depend on the strength of the production of sales in the quarter then, tonnage delivered I guess where the variable is, how much you can actually produce in a way of cash out of there?

Obviously, with the volumes we’re seeing we’re not adding back inventory to our current position.

Your next question comes from [Jay Greer – Miramar]. [Jay Greer – Miramar]: I just had a few questions, first is on the run rate corporate overhead, I thought I say -$13 million, is that a safe assumption to use for the next few quarters or is there a different rate?

You should see that number come down some over the next couple of quarters probably by as much as 10%. [Jay Greer – Miramar]: On the business that you’re quoting I understand there’s a lot of charges and so on right now but could you talk a little bit about the cash margins that you’re seeing on an EBIT margin basis as opposed to sort of a noise that we’re seeing with inventory write downs and so on? I’m just trying to figure out on a clean basis how have margins come down versus say past performance?

It is clear that margins will come down some and if you think back to other periods in our downturn of 2001 to 2003 it would not be surprising to see gross profit margins come down by maybe 200 or 300 basis points. I think that you’ll have a better view of that at the end of Q2. [Jay Greer – Miramar]: But so far you’re seeing about a 200 to 300 – is that what you expect or sort of where you’re currently seeing business?

That’s kind of what we expect. We didn’t see that in terms of our material margins in Q1, we were better than that. [Jay Greer – Miramar]: Then just last on the working capital could you talk a little bit about flexibility you might have in terms of payables and inventory in terms of ability to stretch payables to some extent or work on different terms of inventory consignment or otherwise with your vendors?

Well, there’s no question about it. As I said with Timna, that we are an attractive partner to a lot of the steel producers. Historically we’ve had very good terms and conditions consistent with that partnership and I don’t want to speculate as to whether that will be the case in the future but you can appreciate that they and us are working together in a partnership. [Jay Greer – Miramar]: So you could see different terms than what you’ve been currently experiencing in terms of days payable and so on?

I don’t want to overstate but I will say this, the steel mills have been through these periods before, they have independently and individually worked in different ways with us and we’ve had a very constructive and positive relationship with all the mills we deal with and I suspect that will continue in the future. [Jay Greer – Miramar]: Just one other issue, just kind of putting together some of the comments you’ve made about the refinancing, I guess in light of the situation with the banks and covenants and the like and the refinancing, should we assume that among other options you’re exploring there may be the possibility to do something which is somewhat a basket of securities to offer in some sort of exchange for the converts? It seems there would be some tension over the use of the cash and as you mentioned sort of equity and new securities and the like so I’m just trying to figure out whether that might be sort of an interim answer given the competing forces here about uses of cash and the uncertainty.

That’s a very good question. We really are looking at all possibilities and haven’t ruled any out but we are progressing down a path that would provide the best outcome we can have for the company and that’s taking in to account a broad range of considerations. [Jay Greer – Miramar]: So the timing on that you’ve mentioned is that sort of an end of March time frame for an announcement? Or, I guess what is it hinging on I guess at this point? Is it sort of waiting on the banks? Because, it seems like you’ve been working with JP Morgan for a little bit of time?

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

Your next question comes from Robert Kelly – Sidoti & Company. Robert Kelly – Sidoti & Company: I think you talked to this already, just maybe one point of clarification, 1Q came in – I think you said this in your prepared remarks, 20% lower than you had expected?

Yes, if you look at all of the volume declines in the buildings group specifically, the components group and the coating group, that combined to be 20% worse than our worst case estimate. Robert Kelly – Sidoti & Company: Right but you had said coming in you were expecting a 40% sequential decline so I’m just trying to reconcile what the incremental negative in the quarter was.

That was a decline over the fourth quarter. Robert Kelly – Sidoti & Company: And it came in down 60%?

No the declines in the buildings and the components group were more significant than we had anticipated.

That’s the real difference, it’s were the declines occurred not the total amount. Robert Kelly – Sidoti & Company: Then one final one, you had talked about hoping that credit markets eased up for you as you went through the renegotiation process, any positive moves on that front as we go in to the first calendar quarter here?

I’ve got to tell you the first fiscal quarter wasn’t very good Bob. I mean the markets were in total disrepair for people that are just below investment grade. Robert Kelly – Sidoti & Company: So you’re still facing similar terms that you were two or three months ago?

I think some of the spreads have come back some.

It remains very volatile.

It’s very, very volatile and that’s why the approach really has to be a holistic approach and frankly that’s what we’re in the middle of working on.

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

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