NCI Building Systems, Inc. F2Q08 (Qtr End 04/27/08) Earnings Call Transcript

Jun. 3.08 | About: NCI Building (NCS)

NCI Building Systems, Inc. (NYSE:NCS)

F2Q08 Earnings Call

June 3, 2008 10:30 am ET

Executives

Todd Moore – Executive Vice President, General Counsel

Norman C. Chambers – Chairman, President, Chief Executive Officer

Mark Johnson – Chief Financial Officer

Analysts

David Yuschak – SMH Capital

Michal Cox – Piper Jaffray

Arnie Ursaner – CJS Securities

John Diffendal – BB&T Capital Markets

Timna Tanners – UBS

Robert Kelly – Sidoti & Co.

Michael Corelli – Barry Vogel & Associates

[Gentry Kline – Sedis Capital]

Operator

Welcome to the NCI Building Systems’ second 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. Mr. Moore.

Todd Moore

Good morning and welcome to this NCI Building Systems’ conference call to review the company’s results for the second fiscal quarter of 2008. This call is being recorded and a telephonic replay may be accessed through June 10, 2008 by dialing 412-317-0088 and entering the access code 419727.

A replay will also be available at NCI’s website which is NCILP.com. The company’s second quarter results were issued yesterday in a press release and 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. Investors should refer to statements filed by the company with the Securities & Exchange Commission and in yesterday’s news release for a discussion of the factors that could affect NCI’s operations as well as any forward-looking statements made in this 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 to see yesterday’s news release.

Information being provided today is 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 C. Chambers

Thank you Todd. Good morning everyone and welcome to our second quarter 2008 conference call. I’m pleased to have with me this morning Mark Johnson our CFO and Todd Moore our General Counsel. I’ll provide an overview and then Mark will discuss in detail our business units’ performance, then I’ll return with closing comments before we take questions.

Our very strong second quarter results were achieved within a challenging business environment with rising steel prices and weakening overall demand. As we view NCI’s operating performance for the period, we hope to provide further insight into how we have addressed the prevailing headwinds.

Second quarter, as you know our guidance for the first half of fiscal 2008 was for earnings of $0.64 to $0.79 per diluted share. Our actual results now stand at earnings of $1.15 per diluted share with upside having taken place in the second quarter. Our trailing 12 month EBITDA at the end of the second quarter was $187 million.

Backlog at the end of April was $449 million. There were five main reasons our results were better than expected. First, we worked extremely well with our customers, proactively communicating expected steel price increases, giving them the best opportunity to price their work accordingly.

Our steel price volatility is broadly in line with the CRU North American Steel Price Index. The CRU Index was up some 20% during our fiscal second quarter. This was a lesson we learned from having to deal with 2004 steel price increases and we are applying that experience to effectively work with our customers to overcome the increased cost of steel.

One aspect of the initiative to work with our customers is to assist them in getting end users to pre-fund the early purchase of steel for their projects. Second, contrary to our earlier concerns, we did not experience any meaningful slippage in our second quarter shipping schedule of our Buildings Group which significantly benefitted from plant utilization.

Our quoting activity was good in several important end markets such as mining, energy, manufacturing, industrial warehousing, transportation, institutional which includes schools and government buildings. And this represents about 60% of our second quarter revenue and our backlog at the end of the period.

Third, our Components Group experienced a greater demand than we anticipated and their focus on cost and manufacturing efficiencies resulted in significantly improved operating margins.

Fourth, our Coating Group benefitted by both improved internal demand and a shift to more packaged sales during the second quarter. And fifth, as the largest independent company in our sector, we continue to benefit from good relationships with a number of steel mills.

This is critical during periods of price volatility and shortages of certain types and grades of steel. These relationships provide a level of quality and availability that we are able to use to support our customers.

To summarize, we are very pleased with our performance for the second quarter and the first half of fiscal 2008. In the second quarter we posted volume growth across all our business and shipped 3.5% more tons of steel on a year on year basis.

During this same period, McGraw-Hill data shows low rise non-residential new construction starts measured in square feet decreased. The swing factor for us has been the solid demand we have seen from the industrial and institutional and even some small improvement in the agricultural end markets.

And we believe that certain pockets of low rise non-residential segment are stronger for metal buildings and components than they appear in the published data. Of course we still face some difficult business conditions in the second half. Steel price increases will accelerate in the third quarter, the CRU Index forecast of a $0.40 increase during our third fiscal quarter.

We are uncertain whether this will continue into the fourth quarter. My belief is the steel producers will recognize that there is a level at which steel prices will potentially slow demand and or promote switching to other building materials. Steel prices are too high for our customers and the end markets our products serve.

As a result, we are seeing some modest levels of cancellation and some rebids. At the end of the second quarter our Building Group backlog was $449 million, up 9% sequentially and about flat on a year over year basis.

This is a snapshot number that is made up of some 4,500 projects. Some of them reflect the most recent steel price increases and others will only be adjusted as they move into our production. Measured in tonnage I would say the backlog was slightly up sequentially.

We want to be cautious and conservative in our projections. Now however, if we continue to execute well and continue to build our backlog with good value added work, we should be well positioned to meet the challenges that we face and more on that later. Mark Johnson will now review our performance of our three business units. Mark.

Mark Johnson

Thank you Norm. I will begin by discussing the Coatings Group performance. The Coatings Group operating results were up from the same quarter of last year and showed significant sequential improvement over first quarter results. Third-party revenue increased 31% year over year primarily resulting from a shift in product mix from toll coating services to packaged sales which was partially offset by lower third-party tonnage processed.

Packaged products for the first half of our year were 55% of Coatings sales compared to 35% for the same period in 2007. Sequentially, our Coatings Group third-party revenues increased 41% due to the continued increase in packaged sales and higher sales prices resulting from higher steel costs.

Plant capacity utilization reached 77% compared to 72% last year and 67% in the first quarter. Operating income in the quarter increased by almost $1 million year over year and by about $4 million sequentially. The sequential earnings improvement was the result of higher revenues, higher capacity utilization and the fact that the first quarter earnings were unfavorably impacted by a $900,000 inventory charge which we discussed in our last conference call.

The Coatings operating margin was 25% for the quarter which is down from 28% in the same period of the prior year but up sequentially from the first quarter’s depressed 14%. The 3% reduction in operating margin from the prior year was primarily the result of the product mix shift from tolling to packaged sales which are higher dollar but lower margin transactions.

As previously indicated, we expect that our Coatings operating margin will be in the 25% range for full fiscal year 2008 as the result of the change in product mix during our seasonally strong third and fourth quarters.

Components Group has continued its operating performance recovery from the low point experienced in the second quarter 2007. Third-party revenue increased 9% year over year and 13% sequentially. These revenue increases were directly related to volume growth. The components volume measured in tons shipped increased 6% year over year and 11% over our first quarter.

First half components volume is 5% higher than in the same period of last year. In addition to volume growth, our revenues per ton shipped increased by more than 4% reflecting the increasing cost of steel, our most significant raw material.

Component operating margin increased to 12%, up from 7% in the same period last year and 8% in this year’s first quarter. Plant utilization was approximately 65% compared to 61% last year and 58% last quarter. Operating income improvements resulted from higher volumes which led to higher capacity utilization, combined with cost reductions initiated this fiscal year.

The effect of the cost reductions are evident in the fact that despite our significant revenue and volume increases, our component operating expenses have decreased by 3% compared to the same quarter last year.

Included in this quarter’s numbers were net special charges of $600,000 related to the exit of our Components residential overhead door product line which was completed in the quarter. For the fiscal year, we expect operating income margins to be between 10% and 11%, still short of the 13% to 16% we have reported in recent years.

Our Buildings Group revenue increased 14% year over year and sequentially. Similar to our Components business, these revenue increases are directly related to increased volume. Measured in tons, we shipped 10% more product this quarter than the same period last year and shipped 14% more product than last quarter.

On a year to date basis, we have shipped slightly more volume than the first half of 2007. While we see overall declines in small buildings projects, we continue to find reasonably good business conditions for certain end markets and from more complex work. We believe our ability to successfully compete for the higher end complex projects is leading to higher average sales prices and project margins.

In addition, we are beginning to garner the benefits of integrating RCC into our hub and spoke delivery system. Accordingly, our operating margins in the Buildings Group increased from 8% of third-party revenue in the second quarter of 2007 to 10% in the 2008 second quarter.

Plant utilization for the quarter increased to approximately 71% compared to 63% in both last year’s second quarter and this year’s first quarter. As Norm mentioned, our Buildings backlog was $449 million at the end of this quarter. During the quarter we saw cancellations of approximately $30 million which we believe was primarily the result of price increases forcing some projects to be cancelled.

We saw similar levels of cancellations in 2004, the last period of significant steel price inflation. In general, announced price increases tend to cause mixed results with certain customers adhering to shipping schedules to avoid higher costs from delays and others reevaluating their project economics. We expect the Buildings Group operating income margins to be around 10% for 2008.

Operating expenses, our total selling, general and administrative expenses were $73.9 million for the quarter compared to $68.1 million in the prior year. Included in this quarter’s operating expenses were special charges of $2.2 million related to previously announced executive retirement.

When combined with the Components Group exit charges, previously mentioned, the special charges in this quarter amounted to $0.09 per share. Also, we had incremental selling costs of $1.2 million and incremental accrued incentive compensation of $1.2 million.

For the fiscal year, we anticipate our total operating expenses, including the retirement charges will range between $278 and $282 million. Excluding the retirement charges, this will represent a 1.5-3% increase over the prior fiscal year.

Working capital and balance sheet matters, our days sales outstanding, calculated on a trailing three month basis was 31.2 days compared to 33.1 days in the prior quarter and 31.9 days in last year’s second quarter.

We have maintained our high level of credit discipline and have not seen any significant increases in our bad debt write offs of aging of accounts. Inventory increased by $5.6 million or 3.7% from the end of our first quarter. Our annualized inventory turnover for the quarter was 7.9 times compared to 7.2 times last quarter and 5.7 times for the 2007 second quarter.

During the quarter, we generated $15.8 million in operating cash flow which is net of investing $14 million in our working capital, primarily in inventory and accounts receivable as a result of the higher volumes and higher transaction prices driven by increasing steel costs.

Looking forward, we expect to generate healthy operating cash flow in our seasonally strong second half, despite the fact that continued steel price increases could require additional working capital investments, ranging from $5 to $10 million.

Capital spending, during our second quarter we invested $7.5 million in our property and equipment, bringing our year to date investment to $13.3 million. We expect to spend approximately $25 million in the last half of our fiscal year, bringing our total fiscal year spending to about $38 million. Our more significant capital projects include the initial phases of the new insulated panel plant and automation and software development costs.

Norman C. Chambers

Thanks Mark. We believe that the challenging market conditions will likely persist for the remainder of fiscal 2008. On the positive side, historically our third and fourth quarters generate our seasonally strongest demand and longer term we think steel prices will stabilize somewhat and the economy will improve modestly.

As many of you know, the 2008 strategic plan to double our 2007 EBITDA in five years assumes a mild to a deep recession until 2010. Our challenge is to grow our earnings during difficult economic times while improving our competitive position for better economic periods.

As I said earlier, it is a difficult environment to forecast. I know that we left many investors concerned on our first quarter conference call by saying we would review our year end guidance at the end of the second quarter. Many interpreted those remarks as foreshadowing a further reduction in our expected 2008 results.

That was not our intention. Within this uncertain business climate, we need to monitor our operational execution and our quoting activity in an attempt to guide as effectively as we can. Having said that, our third quarter shipping schedule looks pretty solid. To that end, and based on the current data we have narrowed our guidance range to $3.19 to $3.44 in earnings per diluted share for our fiscal year.

Therefore our EPS guidance for the second half of our fiscal year is $2.04 to $2.29 per diluted share. As we have at the end of this quarter, at the end of the third quarter we will review our results and the data to determine the appropriate level of guidance for the remainder of the year.

In closing, I want to thank all my colleagues for their dedication and hard work. We are challenged to both perform well in the current period while also being engaged in designing new systems, products and executing growth initiatives for our future. Now we’ll be very happy to take your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from David Yuschak – SMH Capital.

David Yuschak – SMH Capital

As you know we’ve been more positive on non-residential construction than probably a lot of people, but I’m looking at your tons shipped year over year up 3.5%, backlog growth that had been a pleasant surprise for you as well as intersegment sales and I’m wondering where is the headwind?

Where is this kind of black hole that people have been expecting and kind of squeeze on steel margins that you could get because of business being so bad? I was looking at the numbers in this quarter and what you’re showing here in the way of activity for backlog and intersegment sales, Norm, it’s tough to see the headwinds are as headwindy as you might want to suggest.

Norman C. Chambers

That’s a great question and as you know the aggregate numbers from McGraw-Hill continue to be really low. And when we cut that data, it’s clear that the end markets that we serve, where frankly metal buildings and components are better suited for, are very strong right now.

What’s weak is the commercial and the retail. But even with that, it strikes us that the weakness was more prevalent in that area, which is the commercial and retail in 2007 in the second quarter and third quarter. Because our Components Group deals a lot in that aspect and their demand has really been quite encouraging.

David Yuschak – SMH Capital

Does the intersegment sales strength in the quarter help, did that help you also a lot in getting the EBIT margins where they were in the quarter. Because that intersegment sales was better than what you produced in the third quarter last year which is seasonally your strongest period of time.

Norman C. Chambers

It was good and it really speaks to the level of integration and the value chain that we have. The hub and spoke and the synergies from the RCC acquisition are beginning to take hold in the second phase of this thing now. And you know we are seeing real benefits there and we’re still just beginning to scrape the surface of that.

David Yuschak – SMH Capital

So this intersegment sales are kind of a reflection of that?

Norman C. Chambers

Yes sir.

David Yuschak – SMH Capital

So that looking at your second half, that should even get better if we have a positive environment for spending then?

Norman C. Chambers

As I said in the script, we really are trying to be cautious and conservative because of the uncertainty. And we are very mindful of missing our guidance twice in 2007, just to correct you, we were okay in 2006. But we really want to continue to let our numbers speak. And be the place we stand and kind of how we’re doing.

David Yuschak – SMH Capital

As far as your cash was up $9 million or so, $10 million from the first quarter, no debt repayments yet. What’s your thoughts about cash and your net debt position versus paying down the debt as you look the rest of this year because you should be producing some pretty good cash to increase your net debt position.

Norman C. Chambers

As I said before we’re in accumulate the cash mode and that makes it a little bit difficult because we have to invest in working capital in the short term. But we should accumulate a good level of cash and then we’ll look at when we go into the markets again to review our balance sheet. But we want to let things settle out still a bit further.

Operator

Your next question comes from Michal Cox – Piper Jaffray.

Michal Cox – Piper Jaffray

On the cancellations that you noted in your prepared remarks, I’m just curious as to where you see that trending as you look out to the balance of the year, do you expect that to continue to rise or what levers can you pull to bring that under reign?

Norman C. Chambers

Well the interesting thing with cancellations is that they have a habit of coming back. Sometimes folks cancel because they think that steel prices will come down and they want to wait and can wait. In some cases it just doesn’t happen for a year or more. But we would expect to see kind of the same level of cancellations which is about between 6-6.5% and that is still about half of the cancellations we saw in 2002, during the downturn and pretty much in line with what we saw in 2004 with steel price increases.

So we’re expecting things to continue along that line. You know we have been communicating the steel price increases so the CRU Index of 40% and our third quarter is expected, it’s what people have been able to see and we’ve communicated for the last, probably three months.

Michal Cox – Piper Jaffray

Just going through the numbers you provided in terms of your expectation for operating expenses and to flow through your earnings guidance, it looks like you’re anticipating gross margins to be down in the second half of the year versus, on a rate basis, versus the second half of 07. Is that a function of steel price increases and or is there something else that we should be cognizant of there.

Norman C. Chambers

Well we’re going to see improvement in the Components Group, probably up a little higher than I had first thought, which I was kind of at the 10.4% range, I think we’ll see it maybe closer to 11%. The Coating Group will be where we said they would be which is about 25% and packaged sales will be up. We should drop a little more of the bottom line that way.

And I’m giving ourselves some caution at the Buildings side. I had hoped that we could hold 11% but I think with the steel price increases and their ability to get those through that we’ll probably experienced a bit of erosion there. So we wanted to be cautious on that side.

Michal Cox – Piper Jaffray

On the components of the sales growth in the quarter, I believe you mentioned that tons shipped was about 3.5%, so it’s fair to say that the steel price increases added about 10% from an average selling price perspective or is there something more on a mix side that we should be aware of.

Norman C. Chambers

Well there’s a lot on the mix side but volume was the biggest part of the change.

Operator

Your next question comes from Arnie Ursaner – CJS Securities.

Arnie Ursaner – CJS Securities

What utilization in each of the segments is imbedded in your guidance for the balance of the year?

Norman C. Chambers

It is pretty flattish with the second quarter. And again we’re trying to stay on the cautious side of this Arnie. And even though we know that our third and fourth quarter are strongest, we’re trying to forecast in a way that’s cautious.

Arnie Ursaner – CJS Securities

To the extent you normally get close to 70% of your revenues in the back half of the year, given your views, what percent are you imbedding now, again I’m trying to get a feel for how cautious you are. Maybe another way to say the same thing, do you view the current trends as a pull forward of demand or is demand in your view still pretty strong?

Norman C. Chambers

Demand is still strong Arnie. Our third quarter is looking pretty good on the shipping side. We have been as low as 62% in the last two quarters of the year and as high as 77%. You know if you do the math, we’re probably pretty similar to 2007.

Arnie Ursaner – CJS Securities

You indicated in your, you know one of the key uses of capital would be for an insulated panel plant, you haven’t talked very much about it, I’m assuming you’re building this plant because you’re seeing very strong demand, could you perhaps tell us what your revenues are in insulated panels and with this capacity what your potential revenue opportunity is.

Norman C. Chambers

We currently do about $20 million in panels and we expect to see some increase in that this year to maybe up closer to $30 million. And we think that the plant that we’re building and the opportunity is in the, I shouldn’t say to the short term, within a couple years to have that up to maybe $150 million, between $100 and $150 million of revenue.

Operator

Your next question comes from John Diffendal – BB&T Capital Markets.

John Diffendal – BB&T Capital Markets

You’ve given margins, I know in the prior sort of presentations you had, there as an imbedded sort of sales assumption for the year of like $1.62 billion to $1.67 billion. Norm can you give us any sort of help in updating that number, especially given the steel price changes.

Norman C. Chambers

We’re probably going to be in that $1.7 billion range, maybe $1.7 to $1.8.

John Diffendal – BB&T Capital Markets

I know you mentioned cost cutting helping Components and I know there was an effort to reduce cost, an initiative coming into this year, any way to sort of quantify how much cost cutting is helping you right now?

Norman C. Chambers

It definitely helped the components group. We leaned up pretty good in 2007 and have really been diligent in not adding back a lot in 2008. And we frankly are busier than we anticipated to some extent. And we have made some adjustments on the corporate side, we probably brought our run rate down in corporate by 5% or maybe between 5-6%.

And so we have two sets of kind of plans, contingency plans that if the economy worsens, we have got two plans in place, one is for a mild recession which we still feel we’re in, even though we’re doing better than the aggregate. And we have a plan ready if things turn worse.

John Diffendal – BB&T Capital Markets

I think your earlier expectations, you would pay down maybe $70-$80 million in debt, you mentioned some working capital needs in the second half. How does that change that sort of debt reduction plan?

Norman C. Chambers

That’s still our goal. And in accumulating cash and whether we pay it down or it’s part of a refinance at some point, it’ll be rolled into that probably.

John Diffendal – BB&T Capital Markets

When you step back and look at the quarter relative to sort of budget, where were the real surprises in both directions? Looks like it was pretty much across the board, but where was it really different from your expectation?

Norman C. Chambers

Really the Components you know in recovery is, the men and women in that group have just done a superb job. I got to tell you, across, I mean they’re just managing that, they were so disappointed with their results in 2007 that that team has just been as focused as you can believe.

The Coating Group continues to do things well in terms of efficiencies. The steel market is very tight. You know we’re seeing some delays on shipments. Our guys have had to hustle on the purchasing side. They’ve done a first class job. And the Buildings Group you know continues to go, from strength to strength. I tell you I mean I really am pleased with what everyone has done.

Operator

Your next question is from Timna Tanners – UBS.

Timna Tanners – UBS

I wanted to ask a little bit more if there were inventory gains that might have contributed also to the quarterly results. It seemed like when you talk about the ability to communicate expected steel price rises in advance of maybe having to pay some of those increases. Can you talk about how that works for you and what you might be expecting going forward?

Norman C. Chambers

You know better than anyone that the steel market is very tight. The consolidation in the steel market has led to pricing power that is similar to 2004. Whatever benefits we get from our relationships are really on the margin. And so we weren’t real long on inventory, what happened was our inventory turns really increased. So we were hustling to find material to be sure.

And you know we didn’t get a lot of benefit from inventory that was hanging around at lower prices because in fact inventory bumped up in 2007 towards the end. But I would say that it’s on the margin.

It’s just really being focused on purchasing and trying to get a little better here and a little better there and just trying to work with customers to help them absorb this, in some cases we eat some of the costs. You know we try to work with them to pass it through and sometimes we’re successful and sometimes we’re not successful and we have to help them.

Timna Tanners – UBS

Right but in your five points and how you’re able to best your expectations, the first one was proactively communicating the expected steel pricing, so I’m just wondering if there was any ability to raise prices to customers in advance of paying that into the traditional price increase.

Norman C. Chambers

Most of the benefit we got in the period was from volume. You know that’s where we picked this up. I don’t think we picked up very much at all in the pricing differences. It was just really affectively maybe being able to work with the customers to pass on more of that than we would have expected.

Timna Tanners – UBS

So you’re buying mostly on the spot market, are you able to buy galvanized, are you looking at different input costs there or are you working with the same kind of material?

Norman C. Chambers

Same kind of material but we did pick up a bit on the galvanized side because galvan was a little light, we had, there’s been a lot of movement with Sparrow Point and what not, but again our steel mill partners have really stood by us and done a first class job. I still think the steel prices are too high, but I understand that. I mean I understand where they are but I have to say that the partners that we have in the steel mills did a first class job for us.

Timna Tanners – UBS

And just confirming then, you’re buying mostly on the spot market, you don’t have a lot of contract tons?

Norman C. Chambers

We have no contract tons, we would historically with the foreign steel, we’d go a little longer on that, but as you know, there’s no foreign steel to be bought. So everything we do is we generally buy probably one quarter in advance.

Operator

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

Robert Kelly – Sidoti & Co.

Not sure if you covered this, I might have missed it, the tons shipped versus mix and price in the Components Division?

Mark Johnson

I believe tons in Components were up 6% year over year and 11% over the first quarter.

Robert Kelly – Sidoti & Co.

As far as the 50,000 foot view of Components, are we seeing better discipline in the market, does that explain the improved performance there? Have the inventory excesses been worked off at this point? Just maybe some on the competitive dynamics of the components market in 2Q.

Norman C. Chambers

I would say that the components marketplace is very competitive. There are a lot of small producers and good competitors but they have experienced the steel price increases as well. And unlike 2004, I think some were thinking that it was just a short term event. I think that that experience has led people to believe that steel prices are high and are going to stay high.

So I think that’s contributed to a dynamic that’s more positive. But the big difference in Q2 this year and Q2 last year is that there isn’t the, that we had an excess of inventory in the marketplace in Q2 of 2007 that really damaged the components group.

Robert Kelly – Sidoti & Co.

So the low end of the market is cooperating if you will?

Norman C. Chambers

I wouldn’t use that term but I’ll say that the pressure of steel price increases is felt across the board.

Robert Kelly – Sidoti & Co.

And then on EBS, the backlog you mentioned being flat year over year, as far as volume, is that also a flat number?

Norman C. Chambers

It is flattish, yes but as most of you know but I need to say is that if you looked at our backlog going into the second half of 2007, we actually generated revenue for the second half of the year in the Buildings Group about 13% more than the backlog we had going into that six months.

So we are seeing quoting activity is still very good, we know that the backlog will in some cases will be re-priced. And as it moves into our production schedule, so that number will move a fair amount I think.

Robert Kelly – Sidoti & Co.

So the second half of the year with you saying F08 operating margins for EBS being around 10%, the second half of the year, that’s the weakness versus 2H07, that’s all the steel price increases?

Norman C. Chambers

Yes.

Robert Kelly – Sidoti & Co.

So you don’t expect to get pricing through?

Norman C. Chambers

What I’m saying is that we will be as successful as we can working with the customers to absorb these increases. And the reason for our being cautious is that the velocity of steel price increases will be double in the third quarter that which we saw in the second quarter.

Robert Kelly – Sidoti & Co.

You had talked about the level of cancellation being around 6-6.5% thus far in May, is that still the case?

Norman C. Chambers

Yes.

Robert Kelly – Sidoti & Co.

About the debt repayment, you possibly doing the refinance, is that a near term event, the refinance?

Norman C. Chambers

It depends on the markets. I mean we’re in good shape. Standard & Poor’s improved our rating, we’re in good shape across the board. But we’ll look to get in the market here at some point once it settles down some.

Operator

Your next question comes from Michael Corelli – Barry Vogel & Associates.

Michael Corelli – Barry Vogel & Associates

First of all on the Components side, your revenue was up about $15.4 million, your operating income about $6.6 million which was a 43% incremental margin, was that basically just capacity utilization gains on top of cost cutting that led to such a great incremental margin there?

Norman C. Chambers

Absolutely and as I said and I’ll say it again, that team is just doing a hell of a job.

Michael Corelli – Barry Vogel & Associates

As far as acquisition activity, it sounds like your focus really is to try to get your debt down or redo the balance sheet here. Are acquisitions on the back burner at this point?

Norman C. Chambers

Let’s put it this way that if you look at our strategy to double our 2007 EBITDA, it’s largely driven by internal improvements in systems. But there is a number of acquisitions, they’ll be smaller than we’ve done in the past. But we are constantly looking at opportunities because the market is what the market is and it provides opportunities at times. But we don’t have anything to announce, that’s for sure.

Michael Corelli – Barry Vogel & Associates

A question about the special charges, it sounds like it was $2.2 million in SG&A and that other $600,000 would have been in cost of sales?

Mark Johnson

That’s correct.

Michael Corelli – Barry Vogel & Associates

And then as far as the segment breakout, it would be $600,000 in the Components and would it be $2.2 million in the corporate, is that where that would be?

Mark Johnson

You got it exactly.

Operator

Your next question comes from [Gentry Kline – Sedis Capital].

[Gentry Kline – Sedis Capital]

I believe at the beginning of the call you mentioned that some customers were prefunding purchase. Can you talk about the magnitude of this and if there was a large amount that was kind of pulled forward from Q3 and Q4?

Norman C. Chambers

Well we don’t recognize that as revenue. It goes on the balance sheet. But it is a couple of larger types of projects and when I say larger, in the north of $10 million range. And it made sense in that circumstance. But it’s a fairly small amount to be frank.

[Gentry Kline – Sedis Capital]

And in terms of this recent Q2, it seems a lot of the growth was obviously volume driven and you mentioned mix. With hot rolled basically doubling from the beginning of the year, how do you view that impact going forward in terms of the cost line and your ability to kind of maintain margins?

Norman C. Chambers

Well as I said and reflected, I think we’ll be, we’ll do okay in the Coating Group in line with our expectations. Our Components will be maybe a little better than we thought. And the difficult part will be in the Buildings Group. But as I said, if we can stay in a 10-11% range, I can assure you that the team is working hard to have growth in margins. But at the end of the day, the reality of working with the steel price increases and working with our customers takes precedence.

Operator

Your next question comes from David Yuschak – SMH Capital.

David Yuschak – SMH Capital

Nucor is coming up on one year of ownership of buying [Magnet Tracks] out, we’ve got BlueScope strengthening its beachhead in the space. I’m just kind of wondering what you see here after about a year of Nucor’s expansion in the space as well as what we’re seeing coming out of BlueScope that gives you some sense as to what those guys may be doing in the marketplace relative to maybe some concerns that they’re going to go after market share and potentially take away opportunities for you guys.

Norman C. Chambers

Well it’s interesting because each company is different but they’re both good competitors in very professional well run organizations. And what I’d say is that not much has changed. I mean I think that the level of professionalism of both organizations makes them inclined to understand the dynamics in their business and the steel price increases are part of everyone’s approach.

So my sense is that I don’t think there’s been a lot of change in market share. We’re still kind of up at the top in the Buildings Group. But now we have two others that are very close by us. So they’re both good competitors.

David Yuschak – SMH Capital

As far as availability of steel, with the prices rising as much as they have, certainly there had to be a real scramble for getting that supply.

And you mentioned that kind of the velocity of procuring supplies was pretty intense in the quarter, could you give us some sense as to what things you were having to do because when you get that kind of spike, obviously given the kind of quarter you’ve produced here and shipments up like they are, it would have to at least alleviate some concerns that availability to you guys because of the integrateds having begun to build a beachhead, that availability to you may not be as much of a problem longer term as much as being able to have a reliable source.

I’m just kind of curious what things you did in the quarter because the quarter has certainly showed exceptional results given the dynamics of velocity and availability of steel.

Norman C. Chambers

There’s a school of thought that says being integrated is a disadvantage. I mean we’re independent so we can deal with all of the mills in a very straight up way. We don’t have any conflicts where an integrated might have some conflicts. You know I don’t and I haven’t believed in the theory that we’re disadvantaged.

I would say just the opposite. I mean we’re advantaged, people want to work with us, we’re a good company. We pay our bills. We work with our suppliers, we’ve got great relationships. Yes I’m concerned about the steel prices being up but at the end of the day, we are in good shape with our suppliers.

I mean we have to hustle because their capacity is limited. So working on the supply chain side, our purchasing group did a hell of a job in terms of the logistics and being able to move material and organizing transportation. That’s the kind of stuff in a centralized approach that we have is where we’ve had competitive advantages through the downturn of 2001 to 2003, this is why we tend to do better. And I hope that we can continue.

David Yuschak – SMH Capital

Does the hub and spoke help on that process too as far as being able to move and have availability at any one point in time to get it there sooner so that you can process it faster?

Norman C. Chambers

Absolutely and you know our strategy, you’ve studied us, you’ve been around us for years, we really put a lot in that and believe that we’re seeing the next part of the synergies with the RCC side and that’s going very well indeed.

Operator

Your last question comes from John Diffendal – BB&T Capital Markets.

John Diffendal – BB&T Capital Markets

You guys gave a breakdown on tonnage on the Components side, up 6%, and the overall number, can you give us a similar cut on Systems and Coatings.

Mark Johnson

Measured in tons, we shipped 10% more product this quarter than the same period last year in the Buildings Group. And we shipped 14% more product in the first quarter in the Buildings Group. I’d flip that around for the Coaters, the total third-party volume was actually down slightly. But the overall volume process including Stanley demand was up about 3%.

John Diffendal – BB&T Capital Markets

So Components was up 6% and the Buildings side up 10%, Coatings just down slightly, the overall number was up 3.5%, seems like it ought to be a little higher number overall.

Norman C. Chambers

It’s the weight of the amount of steel.

John Diffendal – BB&T Capital Markets

Okay so the rest of it is mix?

Norman C. Chambers

Yes, it’s mix.

Operator

At this time we have no further questions.

Norman C. Chambers

Again thank you for your interest. We have tried to be as open and straightforward as we can on the conference call and we look forward to speaking to you at the end of the third quarter. Thank you very much.

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