Gibraltar Industries Inc (ROCK) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Gibraltar conference call to discuss its second quarter results and its outlook for the rest of 2003. We will begin today's call with the opening comments from Kent Houseknecht, Gibraltar's Director of Investor Relations. After the Company has concluded its presentation, we will open the line to your questions.

At this point, I will turn the call over to Mr. Houseknecht. Please proceed, sir.

Thank you, Alicia. We want to thank everyone for joining us on today's call. Before we begin, I want to remind you that this call may contain forward-looking statements about future financial results. Our actual results may differ materially as a result of factors over which Gibraltar has no control. These factors are outlined in the news release we issued this morning and in our filings with the SEC. If you do not receive the news release on our second quarter results, you can get a copy on our website at www.gibraltar1.com.

At this point, I would like to turn the call over to Gibraltar's Chairman and CEO, Brian Lipke.

Good afternoon everyone. On behalf of Walter Erazmus, our President, Jack Flint our CFO, and Ken Houseknecht, our Director of Investor Relations, we want to thank you for joining us on our call today.

This afternoon we are going to focus on comments on four main areas. First, our second quarter results, which we released earlier today, our acquisition of Construction Metals and Air Vent, our outlook for the third quarter and the balance of year, and then some general comments before we open the call up to any questions which you may have.

As we reported in our release, our sales and earnings for the quarter ended June 30th, 2003, were the highest for any quarter in Gibraltar's history. Our sales in the second quarter were approximately $203 million, up almost 19 percent from the second quarter of 2002. This was our first quarter with sales above $200 million. We think that is pretty noteworthy for a number of reasons. First, it means we are moving closer to our goal of 1 billion in annual sales. Also, sales of $200 million in one quarter is more than our sales for all of 1993, which was our first year as a public company, and equal to our sales in 1994. As result of our efforts to grow and strengthen the business, Gibraltar today is four times the size it was nine years ago.

While topline growth has been an important goal of our Company, our primary focus always has been on increasing profitability. To that end, our ability to generate our best ever quarterly earnings in an economy that is nowhere near full strength, was especially gratifying. In the second quarter our net income was a record 8.3 million, and earnings per share were 51 cents. For the first half of 2003 sales were approximately 365 million, up more than 15 percent compared to the first half of 2002.

Net income in the first half of 2003 was 13.2 million, up more than 9 percent from the first half of 2002. And earnings per share in the first six months of 2003 were 82 cents, compared to 81 cents in the first six months of 2002, with approximately 9 percent more weighted average shares outstanding for the six months ending June 30th, 2003 as result of our secondary stock offering of 3,150,000 shares in March of 2002.

Our ability to generate our best ever sales and earnings in an economy that is still slow and struggling, is a direct result of the strategic positioning of our Company and the outstanding work on the part of the 3700 men and women of the Gibraltar team; the immediately accretive impact of our two second quarter acquisitions, Construction Metals or CMI, which we acquired April 1, and Air Vent, acquired a month later helps to offset the slowdown in automotive production. These two companies will add approximately 100 million to our annual sales.

As we discussed on our last call, CMI gives us manufacturing and distribution on the West Coast, including a presence in five new states, while also expanding our product line. Air Vent makes us the largest manufacturer of roofing, attic and foundation ventilation products in North America, and also gives us a presence in Iowa. These acquisitions also eliminate two of our strongest competitors which strengthened our market position.

As we standardize our product offerings, take advantage of the improved distribution opportunities gained through our critical mass to improve the efficiency and effectiveness of getting our products to our customers, and become a more important national supplier to the big box retailers, we will extract even more benefits from these two acquisitions and our Building Products segment overall.

Our second quarter performance once again demonstrated that our steps to broaden our customer base and our business mix, extend our reach into many of North America's fastest-growing geographic and steel consuming markets, and our push into manufactured end products, which now accounts for 53 percent of our sales in the first six months of this year, allows us to generate profitable growth even in a weak economy.

That is a quick overview of our second quarter results. Jack is going to provide a more detailed review in just a couple of minutes. But before I turn the call over to Jack and Walter, I want to give you a quick overview of our current business conditions. In the second quarter, the economy continued its sluggish performance with with many areas like automotive production and the industrial/capital goods sector continuing to struggle. The automotive market, which represented 29 percent of our 2002 sales, is still a bit of a mixed bag.

While automotive industry sales in 2003 are only down slightly from last year, and even though the industry analysts and the automakers are forecasting full year sales around 16.5 million units, which would make this one of the five best years in automotive history, automotive production is down sharply. And we have clearly felt that in those parts of our company that serve the automotive industry. Thankfully, though because of the steps we have taken to diversify our customer base and our business mix, we have been able to offset much of that pressure through the strength in other parts of our Company. Our automotive exposure today is less than half what it was ten years ago, even though we nearly doubled our dollar volume of business during that time. The benefits of our strategic diversification are especially evident during these difficult economic times.

With interest rates at 45 year lows, the housing market for both new and existing homes has been a pillar of strength in an otherwise wobbly economy providing a stable environment for our Building Products business. While long-term rates have climbed somewhat during the last few weeks, they still remain near historic lows, which should sustain the housing market for the foreseeable future. Many of our largest Building Products customers, Home Depot, Lowes, Wal-Mart and Menard's are continuing to aggressively grow their business, which bode well for us as a large and growing supplier to these companies.

Apart from industry dynamics, our Building Products business, which now has annualized sales in excess of 400 million, and includes a portfolio of more than 5000 products, presents us with many strategic growth opportunities and synergies as we capitalize on the critical mass that we now have in this part of our Company.

Our Heat Treating business, which serves a wide cross-section of major industrial markets, continues to feel the effects of a manufacturing and capital goods sector that has struggled for most of the last three years. As Walt mentioned, on our last conference call last quarter our Heat Treating segment was successful in gaining new business from Ford Motor Company to become a supplier for the copper brazing and torque converters and turbines. Another one of our Heat Treating companies recently secured an agreement with General Motors to provide heat treating services on aluminum engine blocks, another rapidly growing area of activity like powder metals where Gibraltar is a recognized leader.

Our Heat Treating segment had sales of approximately 80 million in 2002. And these agreements will allow us to meet our goal of generating 10 percent or greater growth in annual sales from our existing operations for the next four to five years or more for this segment of our business. These agreements and others also highlight our ability to grow our business despite difficult economic conditions by leveraging our technological and customer service leadership. Once the capital goods market rebounds, and there are some signs that a turnaround might be beginning, that will positively impact this part of our Company. But many parts of our Company continue to operate well below peak levels. Our ability to generate best ever sales and earnings in the second quarter is especially noteworthy.

That is a quick overview of our business. At this point, I will turn the call ever to Jack, who will provide a more detailed review of our second quarter results, and Walt who will discuss our operating results by segment, as well as performance of the acquisitions we have recently made, and our expectations for the third quarter and the rest of year.

Sales in the second quarter of 2003 were a quarterly record at $203.4 million, an increase of 18.6 percent from $171.5 million in the second quarter of 2002. Sales for the first six months of 2003 were $364.9 million, up 15.4 percent from $316.2 million in the first half of 2002. These increases were primarily due to including net sales of B&W Heat Treating, acquired July 1 of 2002; Construction Metals, acquired April 1 of 2003; and Air Vent, acquired May 1 of 2003, which contributed approximately $28.5 million in additional sales for the second quarter, and $31.2 million for the six months ended June 30th, 2003.

Gross margin as a percentage of net sales improved to 20 percent in the second quarter of 2003, back to our goal of a minimum of 20 percent, from 18 percent in the first quarter of this year largely due to higher sales and increased margins from our two acquisitions earlier this year, offset by increased workers comp costs due to increased claims. The gross margin was 20.6 percent in the second quarter of 2002, and the year-over-year decrease was primarily due to higher raw material costs and to percentages of net sales in 2003.

Selling, general and administrative expenses as a percentage of net sales were 11.4 percent in the second quarter of 2003 compared to 11.6 percent in the second quarter of 2002. SG&A expenses as a percentage of net sales for the six months ended June 30th, 2003, were 11.4 compared to 11.9 in the first six months of 2002. These decreases were primarily due to our continued focus on cost control and productivity improvements.

EBITDA was $23.1 million in the second quarter of 2003 compared to $20.6 million in the second quarter of 2002. In the first six months of 2003 EBITDA was $39.1 million compared to $35.2 million in the first six months of 2002. Interest expense in the second quarter of 2003 was $3.7 million compared to $2.1 million in the previous year's second quarter.

For the six months ended June 30th, 2003, interest expense was $6.2 million compared to $4.9 million in the first six months of 2002. These increases were primarily due to increased borrowings to fund the CMI and Air Vent acquisitions. As a result of all of the above, income before taxes was $13.8 million in the second quarter of 2003 compared to $13.4 million in the second quarter of 2002.

For the six months ended June 30th, 2003, income before taxes was $21.9 million compared to $20.2 million in the same period in 2002. The income taxes were $5.5 million in the second quarter based on a 40 percent effective rate. As Brian mentioned, net income in the second quarter of 2003 was a quarterly record at $8.3 million, an increase 3.6 percent from $8 million in the second quarter of 2002.

During the first half of 2003, net income was $13.2 million, an increase of 9.3 percent from $12 million in the first half of 2002. Earnings per share in the second quarter of 2003 were 51 cents, an increase of approximately 4 percent from 49 cents for the second quarter of 2002 on approximately the same number of weighted average shares outstanding.

During the first six months of 2003 earnings per share were 82 cents compared to 81 cents in the first half of 2002. And there were approximately 9 percent more weighted average shares outstanding in the 2003 period as a result of the successful completion of our secondary stock offering on 3,150,000 shares in March of last year.

At this point, let me provide some additional detail on our asset management, including accounts receivable, inventory, CapEx, and depreciation and amortization at June 30th, 2003. Accounts Receivable at June 30th, 2003 were $125.4 million compared to $103.3 million at June 30th, 2002, primarily due to the second quarter acquisitions of CMI and Air Vent in 2003 and B&W Heat Treating in July of 2002.

Average days outstanding approximated 52 days compared to 51 days for last year's second quarter. Our inventory investment increased to $119.6 million on June 30th, 2003 compared to $106.2 million at December 31st, 2002, largely as a result of the 2003 acquisitions. However, excluding the CMI and Air Vent acquisitions, our inventory decreased by approximately $6 million, or approximately 5.5 percent, compared to the first quarter. Our inventory turnover for the quarter was 4.9 times compared to 4.1 times in the first quarter of 2003. This is calculated using only those operations which sell inventory. Our turnover results, which we believe are one of the best in the business, demonstrate our focus on maximizing our utilization of assets.

CapEx for the quarter was $5.5 million, and $10.2 million for the first six months of the year. And we anticipate CapEx will be approximately 20 to $21 million in 2003. Depreciation and amortization approximated $5.7 million for the second quarter compared to $5 million for the same period in 2002, and should approximate $23 million for 2003, equal to or slightly above, our CapEx for the year.

At this point, I will turn the call over to Walt.

First, I would like to comment on sales and operating income in each of our three business segments. Our Processed Steel Products segment, which represents approximately 34 percent of total sales, had net sales of 69.5 million for the quarter ended June 30th, 2003, down slightly by approximately 1.1 million or 1.6 percent from 70.6 million in the second quarter of 2002. The decrease was primarily a result of the decreased automotive production levels by the big three automakers and reduced sales in the service center processing part of our business.

Net sales for the six months of 2003 increased by 7.1 million or 5.3 percent to 140.7 million from 133.6 million for the comparable period in 2002. This increase was primarily due to stronger automotive production levels during the first quarter. Sales to big three were down approximately 8 percent in the first six months of 2000 of 2003. However, including Honda, our direct sales to auto were up approximately 4 percent in the first half of 2003 compared to 2002. And direct sales to automotive manufacturers represented approximately 38 million, or 27 percent of total Processed Steel Products sales.

Income from operations as a percentage of sales for the quarter ended June 30th, was 9.3 percent compared to 12.5 percent during the same period in 2002. The six months ended June 30th, income from operations was 10.5 percent compared to 12.2 percent in the first six months of 2002. The decreases were due primarily to higher raw material costs as a percent of net sales and an increase in our reserves for bad debts.

Our Building Products segment, which represents approximately 55 percent of our total sales, had net sales of 112 million for the quarter ended June 30th, 2003, an increase of approximately 31 million or 38 percent from 81 million for the second quarter of 2002. This was the first time any of our segments broke 100 million in sales per quarter. And it is especially noteworthy since this segment did not even exist until 1997.

Net sales for the first six months of 2003 increased by 36 million or approximately 25 percent to 180 million from 144 million for the comparable period in 2002. The increases for both the quarter and the six months were primarily due to the CMI and Air Vent acquisitions completed during this year's second quarter, approximately 26 million or 70 percent of year-to-date increase, and increased sales with existing customers. Sales to Home Depot, Lowe's, Menard's and Wal-Mart grew during the quarter -- grew by 19 million or approximately 40 percent, and represented 66 million or approximately 37 percent of Building Products sales for the six months ended June 30th, 2003. CMI and Air Vent accounted for close to 14 million of the $19 million sales increase. Sales to these big box retailers represented approximately 18 percent of total sales.

Income from operations increased to 12 percent of net sales for the quarter ended June 30th, 2003 from 10.3 percent for the prior year's second quarter. Income from operations for the six months increased to 8.9 percent of net sales from 7.5 for the comparable period in 2002. This increase again was primarily due to the CMI and Air Vent acquisitions.

Our Heat Treat segment, which represents approximately 11 percent of our total sales, had net sales of 21.9 million for the quarter ended June 30th, 2003, an increase of 2.1 million or 10.6 percent from 19.8 million in the second quarter of 2002. This increase is primarily the result of our acquisition of B&W Heat Treat, which accounted for approximately 2.8 million in increased sales, which were offset by by decreased sales due to weakness in the capital goods markets. Net sales for the six months of 2003 increased by 5.6 million or 14.8 percent to 43.9 million from 38.3 for the comparable period in 2002, primarily as a result of the B&W acquisition which accounted for a majority of the increase.

Income from operations decreased to 10.6 percent of net sales for the quarter ended June 30th, 2003 compared to 13.7 percent for the same period in 2002. For the six months ended June 30th, 2003, income from operations was 12 percent compared to 13.9 in the same period in 2002. The decreases for the six months were primarily due to higher costs as a percentage of net sales at B&W Heat Treat, higher utility costs, approximately 3 to 4 percent, and of course due to the start up of our Fairfield, Ohio facility, which will begin contributing to operations in the third quarter.

At this point, let me provide some credit information -- some information on our debt and credit facility. As of June 30th, our total debt outstanding was approximately 323 million, an increase of 156 million from December 31, 2002 as a result of our two second quarter acquisitions. Approximately 50 percent of our total debt is fixed rate financing, with the balance at floating rates. Our long-term debt to cap at June 30th, 2003 was 50 percent compared to 36 percent at year-end. As I mentioned during our last call, this is lower than the debt to cap rate we experienced during 1998, 1999 and 2000 when we exceeded 55 percent as a result of acquisitions.

At June 30th, 2003, 210 million of our 290 million credit facility was in use, leaving 80 million available. As we have done in the past, we'll continue to use cash generated by operations to pay down debt. Our annualized EBITDA, including our acquisitions, is now approaching 90 million. One of our goals is to get our total debt to less than 3 times EBITDA.

At this point, let me provide some perspective on our outlook for the third quarter and balance of 2003. We expect to continue our positive year-over-year sales and earnings comparisons in the third quarter, even though our July volumes were impacted by an extended automotive shutdown. In the September 30th period, we'll get a full quarter's contribution from the Air Vent acquisition compared to the second quarter, which will help mitigate the impact of lower automotive production, reduced sales volumes and continuing margin pressures.

As I mentioned in the second quarter conference call, the strategic acquisitions of CMI and Air Vent are expected to add 15 to 20 cents to our earnings per share for this year. And we believe it will be closer to higher end of that range. We do not disclose operating results by individual companies.

In light of these considerations, and barring a significant change in business conditions, we expect our third quarter earnings per share to be in the range of 45 to 49 cents compared to 44 cents in the third quarter of 2002 on approximately the same number of weighted average shares outstanding.

Despite the challenging economy, we believe we're still well positioned to generate positive sales and earnings comparisons for the third quarter, and we're well positioned to produce record sales and earnings for 2003. We also believe that our strategic acquisitions of CMI and Air Vent this past quarter, and our internal growth initiatives in our heat treat business, will position us well for the balance of 2003 and future years.

At this point, I will turn the call back over to Brian.

Before we open the call to any questions that you may have, let me make just a few final comments. We have had a solid start to this year with highlights, including the recent immediately accretive acquisitions of CMI any Air Vent, which increased our annual sales by approximately $100 million; the continued growth of our manufactured and products business, which now accounts for approximately 53 percent of our total sales, giving us the ability to generate higher and more consistent margins; best ever quarterly sales and earnings in the second quarter, even though the economy is still far from full strength.

In light of our ability to generate consistent sales and earnings growth, we have recently increased our annual dividend by 13 percent to 18 cents per share from 16 cents per share. There are a wide range of opportunities through internal growth and strategic acquisitions to continue to grow and improve the operating performance of every part of our Company. We we now have generated quarter over quarter gains in both sales and net income for five straight quarters. And we believe that we're well positioned to build on that performance during the third quarter. Our acquisitions of CMI and Air Vent will have a major impact on our sales and profitability levels in the future. They will help us achieve our long-standing goals of 20 percent average annual growth in sales and earnings, double-digit operating margins, and drive the return on shareholders equity back above 15 percent.

While we take satisfaction in having generated record sales and earnings in the second quarter in spite of the difficult economy, we have clear targets to further improve our performance. We continue to focus on both the acquisition and financial areas of the business, as well as bringing a more intensive focus to our day-to-day operations in an effort to achieve our stated goals and objectives. We believe that companies that generate consistent sales and earnings growth, along with improving returns on invested capital, equity, and assets, will be the ones that create shareholder value. And that is what we're focused on.

We believe that we're well positioned to generate record sales and earnings in 2003, even as the economy continues to struggle. When the economy finally does rebound and resumes healthy growth, it will accelerate the momentum that Gibraltar has been able to establish in spite of the slowdown in the industrial economy that has now lasted for more than three years. All three of our business segments are operating below peak levels and the ability to meet increased demand from our customers without significant outlays of additional capital.

That concludes the prepared comments that we have for today. At this point, we would be glad to try to answer any questions that you may have.

Mark Parr with McDonald Investments.

One point of clarification. First of all, I want to congratulate you for getting more numbers into a speech than I think I've ever heard. So we're sitting here feverishly trying to write it all down.

It is on the Web site, if you would like to listen to it again and get the numbers again.

Well, I'm sure I will need to do that too. But I was wondering could you just go over the increase in the growth for the big box, and what the total number, and how much of it was from the recent acquisitions?

Sure. Sales to Home Depot, Lowe's, Menard's and Wal-Mart grew by 19 million, or approximately 40 percent, and represented 66 million or 30 percent of Building Products sales for the six months. CMI and Air Vent accounted for close to 14 million of the 19 million sales increase.

Terrific. Just a couple of other questions. I was wondering if you could just provide an outlook as far as natural gas as it might relate to Heat Treat, whether you're hedged or what you expect to see there between now and the end of year?

And also what impact, if any, the extreme volatility in flat rolled steel prices might have on margins in the Processed Steel segment in the second half? Congratulations on making a quarter in a really tough environment.

I will start on the utilities, Mark. Just in general, our utilities for the first half ran about $10.2 million, and that included our acquisitions. So over the course of a year, we're talking $20 million, and maybe somewhere in the area of less than 3 percent of our sales dollars. It goes about -- in terms of a breakdown between gas and electric, we're probably talking 47, 48 percent in gas, 52 percent in electric. All of our operations use electric. We do have obviously a major part of the natural gas being used in our heat treat area.

We do have pretty much, as we talked about I think last year we had tied in a lot of our gas contracts and strip contracts for this past -- for 2003. And we're in the process right now of tying in some prices for 2004. And we're going to expect to get an increase in those prices in 2004. But for this first half of year those prices probably increased less than in the area of 3 percent. And part of that was due to increases from acquisitions and also increased volume. So I think we're pretty happy with our performance in tying in and keeping our gas prices pretty stable over the course of this year. And we've got the work to do for 2004 and 5.

Could you talk a little bit about your outlook for flat rolled steel prices in the second half and how they could impact you?

I will pickup that one, Mark. This is Brian. You are absolutely right when you use the word volatility, because we see the last 18 months to two years in the steel supply arena as probably the most volatile period ever. And that, as you know Mark, has been driven by a number factors including the section 201 situation; the decline of the dollar against the euro and other currencies; the consolidation that has taken place within the domestic steel industry; and perceiving some of the consolidations, some of the disruption because of some steel mills that were temporarily, or in other cases, permanently idled. And then also to make it even more difficult stronger foreign markets, which were reducing the flow of imports to the United States. So there has been a lot going on in the steel space, and that has caused a significant amount of volatility.

My sense though is that these issues are starting to sort themselves out. And the swings that we've seen over the last couple of years should begin to be replaced with some more stability. And we think that is a good thing. Our philosophy on this very important area of our business, steel buying, has always been to have a very broad base of suppliers, both domestic and international. And we have continued to want to increase our supply base. And we continue to believe that more suppliers is better than fewer suppliers. As our purchases have grown, our ability to be a more important customer to a larger number of suppliers has also improved. And in this business, Mark, as you well know, tons talk. So we have a louder voice as a result of our growth than we we did years ago.

We also have had a history of entering into pricing arrangements that had various durations. Some of them are up to a year or more, some are semiannual, some are quarterly. And some are just plain spot market buys. So in other words, we're in the market at all points in time, so we're constantly aware of the changes that are taking place. We have also varied the amounts of steel that we purchase under any one of these arrangements from any supplier. And we try to swing with those to meet the prevailing conditions in order to keep our steel costs competitive and consistent.

Our company strategy, Mark, and I'll get to the specifics of your question in just a second, but our long-term strategy as you know has been to take the Company into the higher value added, higher margin generating processing areas, along with end process manufacturing manufacturing, which carries consistent and more higher margins and aren't as susceptible to raw material costs swings. And then we have also moved into Heat Treating, which has no raw material cost component, which also helps reduce the impact of any changes in raw material pricing. We think all of that helps us mitigate against this volatility that has occurred recently, and that our margins have held fairly consistently.

When we look specifically at the second half overall, we expect to be paying about the same price for steel, flat rolled steel, in the second half that we have paid in the second quarter of this year. And different parts of the business may feel a little bit of impact one way or the other, but in general, we expect the margins should be fairly consistent in the second half with what they were in the second quarter.

It is a long-winded answer to, I guess, a short question, but I really believe that the strategy that we have employed over the years has put us in a very good position to deal with this volatility.

I appreciate that, Brian. One thing, just as one quick follow-up, it looks like going through the math and adjusting for the core business at the big boxes, you had growth of better than 10 percent, which seems like it is a big improvement over where you have been in the last several quarters. I was just wondering -- I think is right. And could you talk a little bit about ...?

I thought it less than that. I thought it was around -- why don't you give me a minute?

All right. It is seems like an acceleration of growth.

You're talking about excluding the ...?

Excluding acquisitions.

(multiple speakers) acquisitions.

Yes. It seems like an acceleration of growth. And I was just thinking, that is awesome. And I was just wondering if you want to talk will more about that and what the source of it was? And I will pass it on. Thanks, again.

Give us a second, Mark, we will come back to that one. But we will take another question in the meantime.

Marty Pollack (ph) with NWQ Investment Management.

A couple of questions, if I may. One, on the acquisitions, I don't remember seeing a lot of detail in there, but when just looking at the balance sheet impact, goodwill rises significantly. I'm just wondering whether in a sense that have you written down assets so that since D&A is perhaps lower than what you might have expected, what benefited in a sense in that accretion -- is the margin impact of the goodwill?

The goodwill for the quarter, you can see increased by $122 million, which is obviously the result of the acquisitions. The fixed assets based on the appraisals which we get done in order to satisfy the accountants and also to get an independent view, results in what we end up recording for fixed asset values. The last time we talked we were in the process of getting those evaluations done.

I am just wondering...?

There is about $2 million in tangibles, such as the noncompetes that we've got in there based on independent individual recording, or giving us the detail in terms of how to record that. And that is in other assets.

Maybe I can rephrase that? Are you suggesting 15 to 20 cents, I believe, in savings or accretion to earnings via... ?

Accretion to earnings.

If you had to it to define the accretion by just its component of savings -- I'll call it savings or maybe...

That is strictly from -- that has no cost savings at this point in time in them at all. That is strictly from including their results for the second quarter in our operations. These were very strategic acquisitions that were profitable. And obviously we paid a lot of money for them, and we expected to get an improvement to our bottom-line strictly from including them in our results. And that is exactly what happened.

That is before any operating synergies are realized.

We expect to get operating synergies to a great extent next -- a greater extent next year than we are this year. This year is mainly integrating the operations into our existing companies.

And next year what, in a sense, are you integrating facilities or are you essentially added them on as to your infrastructure, so these remain stand-alone? Or what is it that you're going to be able to achieve next year via (multiple speakers).

Generally they remain stand-alone. The big ingredient for improving our performance comes when we look at the utilization of these facilities to help us manufacture and distribute all of the products that we make around the country more effectively. A big focus for our Building Products group now is to use this critical mass, this wide range of products, this broad geographic coverage that we have more effectively.

With the acquisition CMI we now have a much broader base of both manufacturing and distribution facilities in the western portion of the country that we did not have prior to that acquisition. Air Vent brings us what we think is a leadership position from a product standpoint in several key product areas. What we are now focused on doing is capitalizing on both of those situations, the greater geographic coverage and the products dominance that has come to us with the CMI and Air Vent acquisitions. And that is how we're going to drive for operating synergies. It is less of a consolidation and more of an expansion of our marketing and distribution efforts.

Just on that point, you clearly suggested that both acquisitions eliminate to some extent key competitors. Do you expect that any antitrust issues could still come up on these acquisitions by other competitors who...?

We have filed an HSR filing with the government prior to the acquisition of Air Vent, and because the total market approximates in the ventilation products that we're a part of what is in excess of $300 million, we were still under the 50 percent number.

Thank you.

Timothy Hayes with BB&T Capital Markets.

Good afternoon. One quick question on the bad debt allowance. Do you have a figure for that?

That was in the $200,000 area, for steel processing.

Okay. Are we correct for that -- we're a little surprised that the margins fell out of bed compared to the recent quarters. I know we've had steel price volatility, but your margins have been able to sort of hold in a tighter range. Anymore color on why the margins were to drop as they did?

Well, we talked about the customers so there's product mix that is there. There is a decrease in margins because of the cost of material. In addition, we had anticipated greater sales volumes, which in the past previous quarter helped to make up some of the margins that we were -- margin pressures that we were having.

The next question we have...

Mark, Mark Parr (ph). I would like to just congratulate you on your arithmetic. Your 10 percent was right in the ballpark in terms of the increase on the Home Depot, Lowes, Menard's and Wal-Mart sales, excluding acquisitions. So I just want ed to congratulate you on that.

Mark, the reason for that is the fact that as we have developed this critical mass, we have been able to better utilize all of the facilities that we have, and we are finding ways to sell Home Depot more product. The fact that we can now manufacture and distribute on a national basis, and the fact that our sales in our Building Products area are about $400 million, and that our overall business is the size and strength that it is has registered with many of the larger customers that we're doing business with. Not only in the Building Products area, frankly, but in the flat-rolled area as well and in the Heat Treating area.

And we're starting to see a greater interest in doing business with Gibraltar because we are of a sound financial condition. And these companies are looking for ways to shrink the number of companies that they're working with, but they want to work with those that are stronger and bring a greater capability to serve them nationally and bring a larger product line to them. So this critical mass that I referred to twice during our prepared comments is a very significant aspect of our strategic positioning today, and I believe is going to help carry us out into the future to achieve our $1 billion objective and beyond.

Eric Fell (ph) with (inaudible) capital.

I just want to go back to the question on margins and how they relate to steel prices. You had suggested that the prices that you paid for steel wouldn't be that much different, but if steel price overall are going up, wouldn't you get more for the product that you sell? Wouldn't your margins go up given the recent rebound that we have seen in steel prices or no? Am I missing something?

It doesn't quite work that way. Just because steel prices go or down, it doesn't mean that our selling prices go up or down in tandem with those. Generally there's a delay either side of that equation. And in some cases, like this period of time that we have been going through over the last 18 months, customers have, in a very weak economy, have taken a very adamant stance against any type of price increases.

So not only has it been volatile on the steel purchasing, or steel cost side of the equation, customers have been digging their feet in quite effectively and withstanding any attempts at getting price increases. That is a short-term scenario. It always is. And as the economy begins to gain some strength, the ability for customers to do that will go away. And with greater stability on the raw material side, we think we will see a trend back towards the margin levels that we had seen in the past, particularly in the flat-rolled area of our business.

I have no more questions in the queue at this time. Would you like me to go ahead and reread the instructions?

No, I think that about covers it. I just want to thank everyone for joining us on the call this afternoon, and for your continuing interest in Gibraltar. And we look forward to talking with you again in three months and updating you again on our continued progress. Thank you.

Ladies and gentlemen, thank you for joining today's conference. This concludes the program. You may now disconnect. Good day.