Gibraltar Industries Inc (ROCK) 2003 Q4 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its fourth-quarter results and its outlook for 2004. We will begin today's call with opening comments from Ken Houseknecht, Gibraltar's Director of Investor Relations. After the company has concluded its presentation, we'll open the line to your questions. At this point, I will turn the call over to Mr. Houseknecht. Sir, please proceed.

Thank you, Carol. We want to thank everyone for joining us on today's call. Before we begin, I went 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 did not receive the news release on our fourth-quarter results, you can get a copy on our website at www.gibraltar1.com.

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

Good afternoon everyone. On behalf of Henning Kornbrekke, 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. We would also like to give a special welcome to our newest shareholders from many individuals and institutions that purchased stock during and after our recent secondary offering. On behalf of the 3800 men and women on the Gibraltar team, we want to thank you for your confidence in our company. Please be assured that all of us are focused on continuing to meet our performance goals and increasing the value of your investment.

This afternoon we are going to focus our comments on four main areas; our fourth-quarter and 2003 results, which we released last night, our outlook for the first quarter of 2004 and the rest of the year ahead, a few comments on our recent stock offering, and some general comments before we open the call to any questions that any of you may have. To begin with, we think we had a very good year in 2003, which got stronger as we moved through the year. We generated record sales and earnings, successfully completed our largest stock offering, and took steps that will help us produce strong and sustained growth in the future in spite of the economy, that even though it gained strength as the year progressed, operated well below peak levels.

We reported record sales for the quarter and year with fourth quarter up 19 percent to $185 million, and annual sales increasing by 18 percent to $758 million. Our quarterly and annual net income were also records, with fourth-quarter net income increasing by approximately 24 percent to 5.8 million, and our earnings in 2003 growing by 13 percent to 27 million. Earnings per share were 35 cents in the fourth quarter of 2003, an increase of 21 percent from 29 cents in the fourth quarter of 2002, even though there were approximately 3 percent more weighted average shares outstanding as a result of our offering of 3 million new shares in late December. In 2003, our earnings per share increased by 8 percent to $1.66, compared to $1.54 in 2002, with approximately 5 percent more weighted average shares outstanding.

While the numbers are good, they only tell part of our story. As a result of our efforts last year, we generated profitable growth in every part of our company and took steps which will benefit us in 2004 and beyond. The immediately accretive acquisitions of two building products companies, Construction Metals on April 1st and Air Vent on May 1st, broadened our geographic reach, solidified our product offering, and added approximately $82 million to 2003 sales. We'll get a full year's contribution from both of these companies in 2004 of approximately $100 million in sales.

We also strengthened our Processed Steel Products operations through our recently announced joint venture with Duferco Farrell, which we announced on December 4th and through which we acquired a 50 percent interest in their strip steel division which had 2003 sales of approximately $55 million, and we'll be accounting for this joint venture on the equity basis.

Another important and long-term aspect of this joint venture is that it puts us in partnership with a recognized leader in international steel production and trading, which further enhances our raw material purchasing activities.

Our Heat Treating operations finalized agreements with two major automotive customers, which we believe will result in approximately $75 million of new business over the next seven years. 2004 will benefit from all of these initiatives. In addition, with our stronger balance sheet gained as a result of our 2003 stock offering and a continuing favorable acquisition environment, we are also positioned to grow through acquisitions as well in 2004. So far this year, we've already completed one acquisition, Renown Specialties Company. Renown is a leading Canadian manufacturer and distributor of construction hardware. The strategic acquisition of Renown broadens our product lines, strengthens our relationships with key customers, and allows us to penetrate new accounts.

In December, our common stock offering generated net proceeds of approximately $70 million and reduced our net debt to capitalization ratio to 35 percent compared to approximately 51 percent on June 30, 2003, following the second-quarter acquisitions of CMI and Air Vent. Additionally, in January the underwriters exercised their over-allotment option and added approximately $5 million to the offering, which will be used to further reduce debt. The successful completion of this offering gives us increased resources and the financial flexibility to enhance our strategic growth and profitability. With approximately 4.5 million additional shares in the public float and many new investors, it also significantly improves our stock's liquidity. We appreciate the confidence expressed by so many new and existing shareholders, which we believe is a testament to our performance during our first decade as a public company as we generated record sales and earnings in 8 of the last 10 years.

In spite of a severe and prolonged slowdown in the industrial economy that began earlier in the third quarter of 2002 and continued through the first half of last year, our sales grew at a compound annual growth rate of 16 percent over the last 10 years, and our net income grew at a 14 percent CAGR, clearly establishing Gibraltar as a top performer in its peer group during that period.

Jack Flint and Henning Kornbrekke will be providing more details on our fourth quarter and full-year results in just a couple of minutes. At this point, though, let me give you a quick overview of current business conditions as we see them. Overall, the economy continues to get stronger, having now grown for 28 months in a row. More importantly, from our vantage point, activity in the manufacturing sector is finally improving, and that part of the economy has grown for 8 straight months.

The automotive market, which represents approximately 25 percent of our 2003 net sales, had another solid year, its fifth best sales year. Automotive sales got stronger as the year progressed, and the industry selling rate was 17.5 million units in the second half of the year. Coupled with an improving economy, we have strong momentum heading into 2004. Both General Motors and Ford, two of our largest automotive customers, are currently forecasting 2004 sales of 17 million or more units, which would make this another very good year.

With somewhat higher than desired inventory levels at year-end, production in the first quarter is expected to be flat compared to the first quarter of 2003. Even with a slightly slower start, the automotive outlook for the year ahead continues to be solid. Long-term, one forecast recently estimated that automotive production will climb by 25 percent over the next five years as more of the cars sold in the U.S. are built here. So that obviously bodes well for our automotive business.

With interest rates remaining near forty-year lows, the housing market for both new and existing homes had a banner year in 2003. This year with interest rates expected to stay close to current levels, activity should stay very healthy. In fact, Freddie Mac's chief economist said that the outlook for the housing industry in 2004 remains exceptional. A strong housing market will help fuel the continued growth of our Building Products business. Equally important, many of our major customers like Home Depot, Menard's, Lowe's, and Wal-Mart, which together account for approximately 37 percent of our Building Products business, continue to aggressively grow their business which bodes well for us as a supplier.

Perhaps most importantly, as a result of the strategic growth of our Building Products business over the last seven years, we now have critical mass, the ability to manufacture, market and distribute a broad range of products, both nationally and internationally. This will allow us to generate strong and sustained growth in this part of our company. Our same-store Building Products sales growth of approximately 9 percent for the fourth quarter and year bears this out.

We will further strengthen our competitive advantage by driving out costs, maximizing asset utilization, and here we estimate that we have approximately 200 to $250 million worth of available production capacity in our existing operations, which positions Gibraltar to expand profits as we utilize our available capacity as the economy continues to get stronger.

The Building Products market is still highly fragmented, and we continue to look at numerous acquisition candidates that would strengthen our existing product offering, expand our line, extend our reach into new markets, and drive our sale of manufactured end products even higher. There are numerous growth opportunities in this part of our company.

Finally, our Heat Treating business, which serves a wide array of customers and industries, had another good year in 2003, with double-digit sales growth and margins stabilizing, and is poised for another strong performance in 2004. Moving forward, we are looking to more aggressively leverage our Heat Treating business based on Gibraltar's overall size, reputation, financial strength, and capabilities to grow this business like we did with the agreements we finalized last year with the two major auto manufacturers.

This also remains a highly fragmented business with more than 700 independent companies presenting us with numerous acquisition opportunities, and since more than 90 percent of all Heat Treating work is still done in-house by major parts manufacturers, there is a great potential for future growth as more of this work is outsourced. So all things considered, we had a good year in 2003, our best ever, and we believe Gibraltar's strategic positioning, our focus on continuous improvement, the strength and flexibility of our balance sheet, the critical mass that we now have in both Building Products and Heat Treating, and a steadily improving economy set the stage for even better results in 2004.

That is a quick overview of our business. At this point, I will turn the call over to Jack followed by Henning who will provide a more detailed review of our fourth quarter and 2003 results, and give you a better sense of our outlook for the first quarter and year ahead.

Thanks, Brian. Our sales for the quarter ended December 31, 2003 were a fourth-quarter record at $185.3 million, an increase of $29.6 million or approximately 19 percent from $155.7 million in the fourth quarter of 2002. Sales in 2003 were $758.3 million, an increase of $113.2 million or approximately 18 percent from the $645.1 million in 2002, making last year our best-ever sales year. Gross margin as a percentage of net sales was 19 percent in the fourth quarter of 2003, compared to 19.3 percent in the fourth quarter of 2002. For the year, our gross margin was 19.5 percent in 2003 compared to 19.7 percent in 2002.

Selling, general, and administrative expenses as a percentage of net sales decreased to 11.8 percent in the fourth quarter of 2003, compared to 12.7 percent in the fourth quarter of 2002. SG&A expenses as a percentage of net sales for the year decreased 11.8 percent in 2003 from 12 percent in 2002. These decreases were primarily due to maintaining expenses at prior-year levels while generating higher sales in 2003 compared to the same period in 2002, partially offset by the 2003 acquisitions, which have higher selling, general and administrative costs as a percentage of net sales.

For the quarter, EBITDA increased 23 percent to $19.1 million from $15.5 million. And for the year, EBITDA increased by approximately 15 percent to $81.3 million in 2003 from $70.6 million in 2002. Interest expense increased by $1.3 million in the fourth quarter to $4 million, compared to $2.7 million in the fourth quarter of 2002. For 2003, the interest expense increased by $3.9 million to $14.3 million compared to $10.4 million in 2002. These increases were primarily due to increased borrowings to fund the CMI and Air Vent acquisitions and the joint venture with Duferco in December of 2003. The net proceeds of $75 million from our recent offering should reduce our interest expense by approximately $3 million in 2004, based upon rates in effect at year-end.

Income before taxes was approximately $9.3 million in the fourth quarter of 2003, compared to $7.6 million in the fourth quarter of 2002. For the year, income before taxes grew by 12 percent to $44.6 million in 2003, from $39.8 million in 2002. Our effective tax rate for 2003 decreased slightly to 39.5 percent from 40 percent in 2002. Accordingly, the tax rate for the fourth quarter was 37.6 percent, which added approximately 1 cent to our fourth-quarter EPS. We anticipate a 39.5 percent tax rate for 2004.

As Brian mentioned, net income in the fourth quarter of 2003 was a fourth-quarter record at $5.8 million, an increase of $1.1 million or approximately 24 percent, compared to $4.7 million in the fourth quarter of 2002. For the year, net income was $27 million in 2003, the highest in the company's history, and an increase of 13 percent from $23.9 million in 2002.

Earnings per share in the fourth quarter of 2003 were 35 cents, an increase of approximately 21 percent compared to 29 cents in the fourth quarter of 2002, on 2.8 percent increase in weighted average shares outstanding as a result of our 3 million share offering in December. As you know, we provided a 24 to 30 cents fourth-quarter range during our conference call last quarter. Based upon stronger than expected sales in every part of our company due to an improving economy and a 1 cent per share favorable impact from our tax rate change, our results came in well above the high end of that guidance. For the year, earnings per share were $1.66 in 2003, an 8 percent increase from $1.54 in 2002, on approximately 5 percent more weighted average shares outstanding.

At this point, let me provide some additional detail on our asset management, including accounts receivable, inventory, CAPEX, and our depreciation and amortization at December 31, 2003. Accounts receivable at December 31, 2003 increased to approximately $103 million compared to $86 million at December 2002, primarily due to the second quarter acquisitions of CMI and Air Vent. Average days sales outstanding approximated 56 days for the fourth quarter of 2003, compared to 54 days for the fourth quarter of 2002. Our inventory investment increase to approximately $108 million at December 31, 2003 compared to $106 million at December 31, 2002. However, excluding the CMI and Air Vent acquisitions, our inventory decreased by approximately $10 million or 10 percent.

Our inventory turnover for the fourth quarter of 2003 was 4.9 times versus 4.3 times in the fourth quarter of 2002, and ended the year at 4.8 times compared to 5.2 times in 2002. Again, this ratio is calculated using only those operations which sell inventory. Our CAPEX in 2003 was $22.6 million, up from $16 million in 2002. We currently anticipate our CAPEX will be in the 15 to $17 million range in 2004.

Depreciation and amortization approximated $5.7 million for the fourth quarter compared to $5.2 million for the same period in 2002. For the year, it was $22.4 million for 2003, compared to $20.5 million in 2002. We anticipate our depreciation and amortization will be approximately $24 million in 2004.

Our long-term debt was $222 million at December 31, 2003, compared to $166 million at December 31, 2002, as a result of the 2003 acquisitions of CMI and Air Vent and our $12 million investment in the joint venture with Deferco, offset in large part by the net proceeds of $75 million from our recent stock offering, of which $70 million was received prior to December 31st with a $5 million balance coming in January as a result of the exercises of Greenshoe and also from cash from operations.

Approximately $160 million or 66 percent of total debt is fixed rate financing with a balance at floating rates, which will help minimize the impact of any rate increases. Our net debt to capitalization ratio was 35 percent at December 31, 2003, compared to approximately 51 percent at June 30th of 2003, following the second quarter acquisitions of CMI and Air Vent. At December 31, 2003, $125 million of our $290 million credit facility was in use, leaving approximately $165 million of availability. In December of 2003, the $70 million in proceeds from our stock offering were used to pay down all LIBOR debt that matured in December.

However, there was approximately $25 million from the proceeds that could not be used to pay down debt until January of 2004. If we had been able to pay down debt with this cash in 2003, our long-term debt would have been reduced to approximately $197 million, and availability would have increased to $190 million under our credit facility. Also, this would have resulted in our fixed rate debt being approximately 75 percent of our total debt.

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

Thanks, Jack. Let me start by reviewing the sales and operating income in each of our three business segments. Our Processed Steel Products segment which now represents approximately 35 percent of our sales, down from 42 percent in 2002, had a net sales decrease of approximately 5 percent to $65 million for the quarter ended December 31, 2003. Net sales in 2003 decreased by 2 percent to approximately $269 million. These decreases were primarily due to the decline in the commercial building portion of our business and decreased sales levels to General Motors, Ford, and Chrysler, a function of lower auto production levels, partially offset by gains in other market segments.

Operating margins were 9.9 percent for the quarter ended December 31, 2003, versus 11.9 percent in the fourth quarter of 2002. Operating margins for 2003 were 9.6 percent versus 12 percent in 2002. The decrease in 2003 operating margins were primarily due to higher raw material cost as a percentage of lower net sales, as well as increased workers' comp and fringe benefit costs.

Our Building Products segment, which now represent 53 percent of our sales up from 45 percent in 2002, had a net sales increase of 45 percent to $97 million for the quarter ended December 31, 2003. Net sales for 2003 increased by approximately 37 percent to $400 million. Approximately 75 percent of the increase for both the quarter and year were due to the acquisitions of CMI and Air Vent. The other 25 percent represents organic growth, a function of increased market share, market growth, new products, and new markets. Sales to Home Depot, Menard's, Lowe's, and Wal-Mart increased by approximately 53 percent to $150 million, and represented approximately 37.5 percent of total Building Products sales in 2003. Excluding acquisitions, sales to these big-box retailers increased by approximately 13 percent for the year, and sales through commercial channels of distribution increased approximately 15 percent. This demonstrates our ability to grow our business with both retail and commercial customers where national manufacturing, marketing, and distribution capabilities, what we call our critical mass.

Operating margins increased to 8.5 percent for the quarter ended December 31, 2003, versus 4.9 percent in the fourth quarter of 2002. Operating margins in 2003 increased to 10 percent versus 7.3 percent in 2002. These increases were primarily due to the higher margins of the CMI and Air Vent acquisitions, higher sales, improved labor efficiency, reduced transportation cost as a percentage of net sales, and lower SG&A cost, partially offset by higher raw material cost. Operating income in our Building Products segment was $40.1 million in 2003, compared to $21.3 million in 2002, an increase of approximately 88 percent.

In our Heat Treating segment, which represented approximately 12 percent of our 2003 sales, net sales of $23.4 million for the quarter ended December 31, 2003, increased 15 percent from the fourth quarter of 2002. Heat Treat sales in 2003 increased by 11.5 percent to $89.3 million. These increases were primarily due to the expanded market penetration achieved through the July 1, 2002 acquisition of B&W Heat Treating and our new brazing operation in Ohio. The operating margin decreased to 10.2 percent for the quarter ended December 31, 2003, versus 10.8 percent on the fourth quarter of 2002. In 2003, operating margins decreased to 10.5 percent from 12.4 percent in 2002. The decrease was primarily due to higher energy costs and higher workers' compensation and fringe benefit costs, partially offset by higher operating margins at our new brazing operation in Ohio.

At this point, let me provide some perspective on our outlook for the first quarter and the rest of the year ahead. As the economy continues to get stronger, we expect our positive sales and earnings momentum will continue in the first quarter 2004 and throughout the rest of the year. As Brian noted, business in the automotive and housing markets, two key areas for Gibraltar, is still very strong. The year ahead looks like another good one. We'll also get a full year of sales and earnings from our CMI and Air Vent acquisitions. The first-quarter acquisition of Renown, which had 2003 sales of approximately $10 million Canadian, continues the strategic growth of an important business for us. This is the first full year of our Ohio facility, which brazes torque converters for Ford, and our agreement with GM also begins to ramp up in 2004.

Our joint venture with Duferco Farrell should provide growth in our Processed Steel Products segment. As a result of the many growth initiatives we have in place, we expect to generate sales and earnings gains this year even if the economy stays flat. An improving economy will accelerate our progress. We are also continuing to aggressively attack expenses and push for continuous improvement with active cost reduction programs in every segment of the business. In light of these considerations and barring a significant change in business conditions, we expect our first-quarter earnings per share will be in the range of 32 to 35 cents compared to 30 cents in first quarter of 2003, on approximately 20 percent more shares outstanding. This would result in a 27 percent to 39 percent increase in our first-quarter net income, and it would be our ninth consecutive quarter-over-quarter improvement.

Also keep in mind that the Automotive and Building Products enter the busiest season in the second and third quarters, so we're moving into the historically strongest periods for our business. With our constant focus on profit margins, asset management, and return on investment, and our enhanced financial strength and flexibility from the recent stock offering, we are an excellent position to take full advantage of growth opportunities as the economy continues to improve.

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

Thanks, Henning. Before we open the call to your questions, let me make just a few final comments. With 10 years as a public company behind us, we believe that we've established a proven business strategy, a significantly improved strategic position, a solid record of execution through many challenging economic environments, all leading to a solid record of sales and earnings growth and shareholder value creation. The steps we've taken to expand and diversify our customer base, extend our reach into many of North America's fastest-growing geographic and steel consuming markets, and our move into higher value-added, higher margin products, processes, and services have served us well and should serve us better in the future.

Since our IPO in 1993, we've grown our company through internal expansion, joint venture, and 19 accretive acquisitions. Seven years ago, we didn't manufacture any building industry-related products. Today we believe we are number one in ventilation products and mailboxes, number two in structural connectors, and a leader in many other building-related products, like metal roofing. We've built critical mass and we've become a national supplier to the major big-box retailers. Eight years ago, we didn't participate in the commercial heat treating industry. Today we believe we are North America's second largest firm with annual sales approaching $100 million. Our technical capabilities, size, and proven expertise recently resulted in agreements with Ford and General Motors, which we believe will produce more than $75 million in new business over the next 7 years, and we are well positioned to generate additional opportunities as we leverage our overall financial strength. Simply put, larger customers want to do business with larger suppliers with proven track records and a solid financial base.

As a result of these growth initiatives and additional opportunities to strategically grow and strengthen the business and the timing of our 2003 acquisitions, we expect to generate increased sales and earnings in 2004, even if the economy stays flat.

Over our 10 years and now 41 quarters as a public company, we have met or exceeded earnings expectations 37 times. In the four quarters when changing economic conditions necessitated an adjustment, we reported earnings within the revised range. We take great pride in being able to manage our business to achieve our stated goals and objectives, and this continues to be our focus.

Lastly, let me make just a few comments on the unexpected and unprecedented actions by the steel mills to impose surcharges on the steel their customers purchase from them. This situation for us we view as a temporary speed bump. A dramatic growth of our Building Products operations which use a variety of other materials, including aluminum and plastic and the higher value-added component of manufactured end products, and our Heat Treating business which is strictly tolling with no exposure to raw material cost changes, and the fact that our steel processing segment is now only 35 percent of our total sales, will all help to insulate us from the surcharges.

We have deliberately built our company so that we can produce consistent and steadily improving results in a wide variety of economic and steel pricing climates. Over the long haul, we fully expect to maintain and enhance our margins and to preserve and expand our customer base. In this regard, we are much better positioned than many of our competitors. Steel surcharges notwithstanding, as we look ahead to the coming year, we see an increasing number of positives, with an improving economy, interest rates hovering near historic lows, the housing and automotive market showing sustained strength, and aggressive growth plans from many of our largest customers. As the economy gets stronger, it will accelerate our progress.

Every part of our company is still running below its (indiscernible), so there is considerable upside in our sales and earnings potential. Our recent stock offering solidified our balance sheet and gives us access to additional capital to fund the continued growth of existing operations and maintain our focus on making accretive acquisitions. So while we are proud of our performance during our first decade as a public company and our ability to generate record sales and earnings in 8 of the last 10 years, we truly believe our best days are still in front of us, and we look at 2004 with increasing optimism.

That concludes our prepared comments. At this point, we'd be glad to answer any questions that any of you may have.

(OPERATOR INSTRUCTIONS) Yvonne Varano of Jefferies.

Just Brian on your comments talking about building products and that there's going to be a speed bump, should we infer from that that we could potentially see some margin compression in that business with what's going on with the surcharges being put in place?

When I referred to a speed bump, I was really talking about the surcharges overall and the impact on our business. Right at this point in time, we are focused on maintaining our margins, and we see that we are in a pretty good position to be able to do that.

Is there any color you can give on your customer's reaction to the surcharges that have been put in place and whether they are pushing back, or if you're going to be able to achieve some of that?

Let me answer that in a general sense first, Yvonne, and then I will get a little bit more specific towards the end of my comments here. First of all, as we said in the conference call, we think that our ability to handle these surcharges is enhanced by our strategic positioning. Our Building Products segment is a high value-added end-product manufacturing business where the raw material cost is a smaller percentage of selling price, and on top of that, steel is not the only raw material that we use there.

Other metals like plastics and aluminum make up our raw material base there, and that helps to dilute the impact of steel on our overall cost buildup in that part of the business. When we look at our Heat Treating business, we have no raw material cost component in our selling price, since we are heat treating other people's parts and materials. So we are completely immune to any steel price fluctuations there. And in our process steel business, as I mentioned, now represents only 35 percent of our total sales, and that is down from 42 percent in 2002 and down from nearly 50 percent in 2000, and which has been driven primarily by the growth of Heat Treating and Building Products. So, as a result of our realigned strategic position, we feel quite optimistic that our operating margin trend, which has been on the ascension since we started to diversify the business back in the 1990s, has worked well then, and we are optimistic that it will work well in the future.

We've tried to build the business so that it will be able to generate consistency in our margin generating capability. And we think that the diversification of our business has allowed us to work through a whole series of very volatile steel pricing environments brought on by a whole host of things like steel shortages a few years ago, currency fluctuations, the 201 trade issues, bankruptcies in the supply base. And yet, since we've started to diversify the business, our margins have been on an upward trajectory. And that I attribute primarily to our strategic positioning and good execution.

So as we look out into the future, there's certainly going to continue to be temporary changes in steel pricing from time to time, and we believe that our strategy to diversify and move into higher value-added activities is going to allow us to continue to drive our margins upward over the long-term. To get more specific, Yvonne, at this point I am going to say that I think it is prudent for us not to comment on specific discussions that we are having with either our suppliers or with our customers, because that is confidential information that I wouldn't want to provide to our competitors.

But I can say this, rest assured we are taking steps that we deem to be prudent from both the short-term and the long-term perspective in relation to both our customers and our suppliers. And I will also say that the earnings guidance that Henning provided earlier takes that issue into consideration.

Thank you. I just wanted to follow up a little bit because you seem to feel that these surcharges are temporary. I was just wondering what you are seeing in the marketplace that might give us an idea of how temporary these are.

The temporary speed bump comment really didn't relate to a specific timeframe. What I was referring to it as is an adjustment period more than anything else. I don't know how long they will be in place, and I don't know to what extent they may come up before go down. I just refer to it as an adjustment period, and I think the industry, both from the supply side and the customer side, will adjust to it.

Great. Thanks so much.

Mark Parr of McDonald Investments.

Congratulations on a great quarter. I had a couple questions I wanted to get into. On the growth that you achieved, the core growth in the fourth quarter in the construction products area, can you share -- give us some sort of approximation of how much related to increased shelf space within existing big-box guys as opposed to actual store expansion by the big-box guys, as opposed to underlying core growth or underlying -- like same-store sales growth? What I'm trying to do is try to draw a distinction between your strategy to extend the product lines more broadly across the entire U.S.

This is Henning. Our comp stores, our big boxes, were up approximately 10 percent.

In the fourth quarter?

In the fourth quarter. We continued to have good growth, and I'm not going to go inside of the specific customers, but we've had good growth with all of the big boxes, and with our largest customer we've continued to have in most areas of the country double-digit comps.

Is that shelf space related?

It's total sales year-over-year as our customer would measure it.

Okay.

In some cases, it is more shelf space, but in all cases it is more SKUs through the cash register.

Okay. You mean more as far as a more diverse number of SKUs?

More dollars in sales.

It's just dollars of sales, okay.

And the other thing I think that we do spend a lot of time in, we pride ourselves in doing a good job of merchandising the products through our customers' locations.

Okay, all right. If I could ask a follow-up, looking at -- you haven't had a whole lot of time to really analyze these surcharges or really even figure out what's going to happen, how quickly it's going to happen. I understand it is a very volatile situation right now. I was just curious based on what you know thus far, where do you think there's potential bigger impact as far as a bottom-line impact could be concerned? Would it be in the steel business, steel processing, or in the construction products area? I'm just trying to guess which one has the biggest risk of maybe a little short-term margin impact.

It's early, as you said, Mark, to make any predictions like that.

I'm not asking you to predict. I'm just saying, what is your best guess at this point, because I realize it is a very unpredictable situation?

Well, it can go from one extreme to another, and what we tried to do in the guidance that we provided was to take a host of factors into consideration in coming up with that range. To try to elaborate on all the various factors that we took into consideration wouldn't be time-wise during this call. But suffice it to say that we looked at it from as many different perspectives as we possibly could.

And our pension, Mark, is to provide active -- not active -- accurate guidance. As I mentioned, 37 out of 41 quarters we got the numbers right, and we put every effort that we could into making sure we got the numbers right for this quarter as well.

I guess then that would beg the last question here along this line. Given the fact that these surcharges are just now beginning to be implemented, would it be fair to say that the bigger impact on your business may be the second quarter as opposed to the first quarter?

It depends on how they play out, Mark. It is early.

Too early to tell?

Early to project on that, yes. But I still think the industry is going to sort it out and everything is going to come down in a good position, and we are just going to go through an adjustment period.

Okay.

It is just a different way of -- I think the surcharges are just a different way to implement or attempt to implement price increases, and whenever that happens there's an adjustment period, and then things sort themselves out again. And I think that's what's going to happen this go-around as well.

It's pretty clear that you're not going to be in any different situation than any of your competitors would be.

Well, I don't know. I would hope that we are in a slightly different position than many of our competitors because we've got a different business makeup than many of our competitors. We've got a big portion of our business that has no raw material costs (indiscernible).

I didn't mean that, Brian. I was just talking about like on a product-by-product basis. You know, like the guy you're competing with in mailboxes or the guy you're competing with in brackets or braces or siding or soffits or ventilation systems. It is all the -- they've all got the same raw material issues that you're trying to deal with.

Well, we buy a whole heck of a lot more than a lot of these smaller manufacturers that exist out there.

So here's where economies of scale can actually be put to some advantage.

We do have honest leverage in all of these areas that we've discussed.

All right. Just one last thing if I could; did you disclose the size of Renown? I don't think that in my head, I'm sorry.

It's $10 million Canadian.

So it's a small acquisition. And are you going to be fully consolidating the Duferco joint venture?

We're going to account for it through the equity method.

So you're going to take equity, all right. Are you willing to provide any guidance whatsoever here on that, as far as what it might contribute in '04?

Not at this point, no.

Okay, you can say no. That's fine. Just congratulations, keep up the great work. And Brian, I've got to say your Walt imitation is pretty darn good.

Thanks, Mark.

Robert Lagabassa (ph) of CIBC World Markets.

Just had a few quick questions for you. One, I was hoping you might provide a little bit more color as to your penetration with the transplant producers, what the current penetration rates are and kind of what your goals are.

Jack, do you want to help out with the details on that? I can tell you in general that we have a full court press on to continue to penetrate the transplants deeper and deeper. And as they gain market share, we want to participate as they gain market share. It is clear that once the transplant manufacturers have established a beachhead in this country and build their sales volume to a certain level, that they then move towards producing those vehicles in this country. It's just a more economically viable method of doing that. And over the next few years, we expect to see car production in this country grow because of more production of vehicles that are sold here in this country.

So we are definitely focused on that. Jack, do you want to give some details?

Yes. It's kind of hard to give exact details on this because again, a lot of the products go to a number of customers, and we don't know whether it winds up with the transplants or not. But the one thing we can say is sales to Honda are up year-over-year, 2003 to 2002, and we are actively aggressively looking at some of the other transplants as well.

Just on the acquisition environment, both in Building Products and Heat Treating, can you maybe provide a little bit more color about the environment now versus say a year ago?

The environment a year ago was positive for us, in that there were a lot of acquisition opportunities out there. And secondly, the valuation expectations of these companies was very realistic. The smaller, privately-held manufacturers are recognizing quickly that in order -- in the new order of today or in the new paradigm that you've got to be big or getting big quick or the value of your franchise goes down. And as a result of that, they've got realistic expectations and are also recognizing that if they don't do something now or pretty soon, the value of their franchise is probably going to go down over time.

When I look at today, I see the exact same situation. The only difference is that now Gibraltar is recognized as a company with critical mass. We recently went to the International Builders Exposition out in Las Vegas, and for the first time, we displayed all of our building products under one Gibraltar banner, and it was a large booth in the center of this show. And it got a much better visibility for all of our Building Products companies. Even though we still utilized the name recognition that many of these companies had, they're now all linked together under the Gibraltar Building Products umbrella and name tag, and I think that sent a message to a lot of the smaller guys out there that watch out, this Gibraltar group is growing in size and becoming their very formidable, and you better think about your future carefully.

Thank you very much.

Marty Pollack (ph) of NWQ Investments.

On the SG&A which seems to have come off nicely and certainly helped the quarter, can you give us a sense for what that trend would be going forward? I see it was about 11.8 percent, down almost 100 basis points from last year. But what do you expect for that going forward?

We expect SG&A to continue to come down. We've got active programs in place that are addressing that issue. We know we're in a competitive environment. We are going to continue to drive all of our costs in all segments of the business down.

Marty, let me just add one other thing. One factor in driving the SG&A down as a percent of sales is that we're driving more sales through our existing operations, and we expect to continue to do that, which will also on top of our cost containment and reduction efforts will help drive down our SG&A percentage. We've talked about this for a long time. Over the last few years, we've spent, invested a lot of money in building this critical mass and haven't harvested any of the benefits over that period of time. We are just now, starting with the second half of last year, beginning to realize some of the synergies of that critical mass, and there's a lot of them left to extract.

So I'm optimistic as we go forward that we're going to be able to continue to not only drive our sales upward, but drive the SG&A as a percentage of sales in that part of our business down.

Secondly, on the Heat Treating side where you say it seems that this is clearly focused on acquisitions and opportunities, when I look at the long term in terms of your mix or where you will be percentage of sales, let's say in three or four years, and were pretty good margins in the past. I think they were 12.4 percent in '02. Can you just give us an idea of where our margin is likely to be over next several years as you shift further into heat product? Are those companies, the ones that you contemplate buying, actually going to have lower margins where you can quickly bring them up, or do they tend to be -- will they be companies standalone that actually will be fairly well run?

We would expect the margins with the Heat Treat business to continue to improve going forward. Again, a number of programs in place that are going to allow that to happen. And we are continuing to focus on those segments of the Heat Treat business that do provide the best margins for us. I think one of the examples is this new brazing operation that we are just getting in place. So I think you will see more examples of that same type of activity, and as we do get more involved in those areas, our margins will get higher.

Overall, do you think 10 percent kind of normalized margins is something that could be possible then?

Are you talking the whole company now, or just Heat Treating?

Actually, whole company.

Our target is north of 10 percent for the whole company.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer session of today's call. Mr. Lipke, I will turn the presentation back to you for your closing remarks.

Okay, thank you. Thanks to all of you for joining us on our call today and for the questions that you asked. We appreciate them. We look forward to talking with you again in about three months and updating you on our continued progress. Thank you.

Thank you for your participating in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.