Gibraltar Industries Inc (ROCK) 2004 Q1 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its first quarter results and its outlooks for the second quarter.

We'll begin today's call with opening comments from Ken Houseknecht, Gibraltar's Vice President of Communications and Investor Relations. After the company has concluded its presentation, we'll open the line to your questions.

At this point I'll turn the call over to Mr. Houseknecht. Please proceed.

Thank you, Chris.

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 last night and in our filings with the SEC. If you did not receive the news release on our first-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 Chief Executive Officer, Brian Lipke. Brian.

Thanks, Ken. Good morning everyone.

With me today is Henning Kornbrekke, our President, Dave Kay, our newly hired CFO, and as you just heard, Ken Houseknecht, our Vice President of Communications and Investor Relations, and on behalf of all of us, we thank you for joining the call today.

Today I'm going to provide you with a general overview of the company before I turn the call over to Dave Kay, who will provide some commentary on our financial performance, followed by Henning, who will then give you an operational review. After that we'll open the call to any questions that any of you may have.

During the first quarter of this year Gibraltar, and for that matter our entire peer group, was presented with not necessarily unique circumstances, as we've dealt with steel price fluctuations, periods of tight supply, and all of the related customer issues connected to those, but what made this go-around different was the rapid escalation of steel pricing and the use of surcharges versus price increases, which was pretty much unprecedented. It's with these very issues in mind that some years ago Gibraltar began to broaden its product and service offering to allow us to perform with greater consistency in a wide range of economic climates and varying market conditions, and we believe that while steel pricing did play a role in our first-quarter performance, that many actions that we've taken during our first ten years as a public company also contributed to our first-quarter results in a very meaningful way.

First off, as you know from our news release, we had record sales and earnings in the first quarter, with sales up 31% and net income nearly doubling to $9.3 million. We've now generated quarter-over-quarter improvements in both sales and earnings for nine consecutive quarters, and we believe that we're well positioned to build on this record of consistent and steadily improving performance in the second quarter.

All of our investments, all of our acquisitions, and all of our actions during the last 30 years, and especially in our first decade as a public company, have given us the critical mass to accelerate the growth in every part of our company. And we believe that we can and are going to grow all of our existing businesses and some of them dramatically.

We're also evaluating many new and related markets, some of which could significantly transform the trajectory of our growth. We also have acquisition opportunities in each area of our business which will help provide additional growth opportunities over and above the substantial internal growth available to us.

We have strengthened and broadened our management team, putting in place a group of leaders who's experience and expertise is going to play a pivotal role in moving Gibraltar forward.

All of this has brought Gibraltar to what we call an inflection point, where we see opportunities to continue to transform Gibraltar into a larger, stronger, and more valuable company.

Just as we've taken many steps to make Gibraltar financially and operationally stronger than at any point in the company's history, we also strengthened our board of directors and our executive management team during the last year. In just a couple of minutes, as I mentioned earlier, you'll hear from two of the key additions to our senior management team, Dave Kay, our CFO, who heads up our Finance area, and Henning Kornbrekke, our President, who oversees Gibraltar's operations.

Henning and Dave both have experience as senior managers at multi-billion-dollar companies with international operations. Henning, who joined Gibraltar almost two and a half years ago now, has sales, marketing and manufacturing expertise, along with familiarity with the disciplines used by successful larger companies to drive operational improvements through an organization. Dave brings a strong financial and international business background and significant acquisition expertise and experience in metals and manufacturing, all of which will take Gibraltar to the next level.

Before I turn the call over to Dave and Henning I want to highlight some of the main contributors to our first-quarter results.

We continue to generate exceptionally strong growth in our building product segment, which now represents more than half of our sales. As we said earlier this month, our national sales and marketing efforts, new product additions, and ongoing operational improvements took hold even faster than we had expected, producing results that were much better than what we had anticipated at the beginning of the quarter.

Those of you who have listened to our conference calls in the past or who we've met with during our road show this past December will recall our discussions on the ramping up of available capacity within our existing operations. This process is taking place much quicker than expected, and we're clearly ahead of schedule in this area.

Our heat-treating segment, which is strictly a tolling business, produced double-digit sales gains and even stronger growth in operating income as volumes rebounded and some of our new business initiatives, like our new metal joining and assembly facility near Cincinnati, began to kick in. Again, somewhat ahead of schedule.

And finally, in the remaining portion of our company, our processed steel product segment, we did generate modest sales growth, but we actually suffered a slight margin contraction as raw material costs rose faster than our ability to fully pass them through in some cases. In total, we estimate that approximately 90% of our sales gain in the first quarter was the result of higher volumes, with only 10% coming from higher selling prices.

In summary, our record setting performance in the first quarter was the result of our longstanding efforts to build a company that can produce consistent and steadily improving results in a wide variety of economic and steel pricing climates. By design, we didn't see a great benefit as steel prices rose dramatically over the last few months and we envision a manageable impact when they begin to go back down.

While we started the year with solid momentum, we continue to have a number of initiatives underway, and others in the planning stages, that should help to further improve our performance as the year unfolds.

At this point, I'm going to turn the call over to Dave and he's going to provide you with a more detailed review of our first-quarter results and then give you a better sense of our outlook for the second quarter. Dave?

Thanks, Brian.

As Brian mentioned, the first quarter of 2004 was the best quarter in the history of the company, not only in terms of sales but net income as well. On a consolidated basis, sales were up approximately 31% from the first quarter of 2003, and nearly 15% from the immediately preceding quarter, which ended December 31st of 2003.

By reporting segment, sales in the processed steel group increased by 8.4% from the first quarter of 2003, with heat treating increasing by 15.8% and building products by slightly more than 60%. Exclusive of the CMI and Air Vent acquisitions, which were completed in the second quarter of 2003, sales from existing operations in the building products group increased by $9.9 million, or approximately 14.5% from the first quarter a year ago. This continues the positive sales trend in this segment where sales, exclusive of acquisitions, grew at a 9.2% rate in the fourth quarter of last year.

Gross profit in the first quarter amounted to $42.8, million or 20% of sales, compared to gross profit of $29.1 million, or 18% of sales, in the first quarter of 2003. Total operating income increased from $10.6 million a year ago to 18.2 million in the first quarter of this year, an increase of 71%.

Looking at the reporting segments, operating income in the processed steel group decreased slightly to $8 million in the first quarter. These results were driven primarily as a consequence of the timing of raw material cost increases compared to the extent and timing of our ability to pass the increases through to customers. Operating income in the heat treating group increased by 33% to $3.9 million from a year ago, on new business and increased volume, while building products increased by $8.3 million to 10.8 million, an increase of more than 325%. Exclusive of the 2003 CMI and Air Vent acquisitions, operating profit in the building products group increased by $4.5 million, or approximately 176% from the first quarter of 2003.

Selling, general, and administrative expenses amounted to $24.6 million for the quarter, or 11.6% of sales. This compares to 18.4 million, or 11.4% of sales in the first quarter of 2003.

As a result of increased borrowing levels when compared to the first quarter of last year, interest expense in the quarter increased to $3.3 million from 2.5 million a year ago. Our return on sales for the quarter was 4.4% compared to 3% in the first quarter a year ago. From a cash flow perspective, EBITDA for the quarter amounted to $24.7 million, up from 16 million a year ago.

During the quarter we repaid approximately $7 million of long-term debt and used approximately $7.1 million for acquisitions. 5.9 million of which was used to acquire the stock of Renown Specialties Company Limited, a Canadian-based designer, manufacturer, and distributor of construction hardware products, and approximately $1.2 million to acquire the assets of Covert Operations Incorporated, a small manufacturer of epoxies and crack injection systems for concrete and masonry.

Exclusive of cash, working capital, primarily as a result of higher accounts receivable and inventory levels, increased by approximately $26 million during the quarter.

Inventory turnover was at 5.5 times for the quarter, while days sales outstanding were at approximately 50 days. Comparative numbers in the first quarter of 2003 were 4.1 inventory turns and a DSO of 50.

Capital spending for the quarter amounted to $5.5 million. Capital spending for the balance of the year is now forecasted to be approximately $11 to $12 million, bringing the total for the year 2004 to between 17 and 18 million.

Looking out into the second quarter and beyond, we will be putting a great deal of emphasis on generating maximum positive cash flows and working capital management. We're also looking at optimizing our existing overall capital structure, particularly the debt component, in light of our long-term growth and acquisition plans. We're looking to put into place a capital structure which will allow us the capability to deal with larger and potentially more complex acquisitions, while still providing us the flexibility to run our day-to-day operations.

Now I'll turn the call over to Henning for an analysis of operations.

Thanks, Dave.

In the first quarter, as previously discussed by Brian, most of our internal programs gained momentum at a much faster pace than expected. Which, coupled with the very fertile market environment, produced a quarter with exceptional growth in sales and profitability.

Let me start by giving you a brief overview of the performance of and major developments in each of the three business segments.

Building product sales were up 60% including acquisitions, and operating income was up 326.5%, a function of improved volume and increased efficiency. Primary drivers for the increased sales volume include continued market growth and market share improvement as we continue to offer our customers consolidated solutions for their supply, as well as innovative new products, like our easy to install whole house fan. Air Vent and CMI have been successfully integrated, with significant synergies realized.

Processed steel sales grew by 8.4% and operating income fell slightly by 3.1%. Increased sales in this segment were primarily a function of higher volumes of our coated and painted products and an improved product mix. Margins were down slightly due to timing issues related to material costs, primarily steel.

Our heat treating segment produced its best-ever quarter, with sales up 15.8% and operating income up 33.2%. The growth in sales and margins are attributable to an improved manufacturing environment and our aggressive programs to increase our market penetration.

At this point let me provide some perspective on our outlook for the second quarter and the rest of the year.

As we move into the seasonally strongest periods for our business, the second and third quarters, we will continue to benefit from all of our many growth initiatives and operational improvements. Also, as the economy continues to get stronger, we expect our positive sales and earnings momentum will continue in the second quarter of 2004. Business in the automotive and housing markets, two key areas for Gibraltar, is still very strong and the year ahead looks like another good one.

We'll also get a full year of sales and earnings from our 2003 acquisitions of CMI and Air Vent, and our first-quarter acquisitions of Renown and Covert strengthen our position as the second largest manufacturer of structural connectors in North America.

As Brian mentioned our Ohio facility, which [indiscernible] torque converters for Ford and our agreement to treat aluminum engine blocks for GM, also continues to ramp up in 2004. And our joint venture with Duferco Farrell is providing growth in our processed steel business.

We're also evaluating numerous acquisition opportunities in every part of our company and our recent stock offering gave us increased resources and the financial flexibility to enhance our strategic growth and profitability.

Finally, we are focused on improving operating margins through controlling overall spending and implementing Gibraltar's cost reduction programs.

In light of these considerations and barring a significant change in business conditions, we expect our second-quarter earnings per share will be in the range of 56 to 61 cents, compared to 51 cents in the second quarter of 2003, even though there are approximately 21% more shares outstanding in 2004. This would result in a 33% to 45% increase in our second-quarter net income and it would be our 10th consecutive quarter over quarter improvement.

As a result of all of our initiatives we are in 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.

We'll open the call up to your questions in just a couple of minutes, but first let me make just a few final comments.

Our first quarter was the best in Gibraltar's history and we expect even better results in the second quarter, even though our growth on a comparative basis is expected to occur at a moderate -- a more moderate pace than the first quarter.

Under Henning's leadership our operational focus has never been better and we expect Dave Kay to make an already strong financial area even stronger.

We have built critical mass in every area of our company, with the size, the reputation, the capabilities and the financial strength necessary to accelerate our growth. Even though our balance sheet is strong and acquisition opportunities are plentiful, we will continue to be highly selective and strategic in this area.

Our efforts to broaden and diversify our product offering and our geographic coverage and create critical mass in each area of our business are now just beginning to pay off, as evidenced by our record results in the first quarter, which is typically -- or historically, not the strongest quarter of our year. We're well positioned to continue and perhaps accelerate the growth of Gibraltar into a yet stronger, larger, and more valuable company for our employees, our customers, and our shareholders. And that's the clear focus of all 3600 men and women of the Gibraltar team.

That concludes our prepared comments, and at this point we'd be happy to try to answer any questions that any of you may have.

Thank you, sir.

Ladies and gentlemen, if you wish to ask a question please press star 1 on your touch-tone telephone. If you'd like to withdraw your question or your question has already been asked, please press star 2. Please press star 1 to [inaudible]. Please stand by while we compile a list of names.

And your first question comes from Robert LaGaipa with CIBC World Markets. Please proceed.

Hi, good morning.

Good morning.

I actually had several questions for you.

One, I was interested in what you're seeing in your end markets, kind of progression throughout the quarter and what you're seeing currently. Maybe we could start there, and then I'll ask the additional questions.

In general, business continues to be strong, and, in fact in -- particularly in the heat treating segment of our business, which serves a broad cross-section of manufacturing in general, we see the strongest growth potential there, but building -- our building products area continues to be very strong, both in supporting the continued high starting -- or continuing high build of new homes, as well as through the retail distribution line.

From an automotive standpoint, the automotive sales are -- our sales to the automotive companies are maintaining a good level, albeit with the lower growth rate than the other areas of our business.

But how about, you know, when we look at the quarter, I mean, January versus February versus March, I mean, we're now, you know, towards the end of April, I mean, what have you seen from that perspective in terms of the progression? I mean, is it stronger now across your businesses at the end of April than it was in March?

We've continued to see our businesses grow, we've continued to see all the markets we participate in getting stronger, which is traditional for our businesses. And again, I think it's worth noting that in the building products area, most of our products go to the replacement market and so we continue to see that market staying strong throughout the year.

And to your point, Henning, what kind of penetration growth are you seeing at the big box stores, maybe this quarter versus last quarter?

We see our sales at the, if you look at all the big boxes in total, through the three months ending March 31st, up 84%.

And what was that last quarter, in the fourth quarter?

Fourth quarter of last year, total growth, with all of those stores -- I'm just looking at the number here. 129%? 12.9%. Couldn't see the decimal point. I mean, on average, we've been growing double digits with the big boxes on a regular basis. We continue to stay very aggressive in that particular market. We see good opportunities in front of us to expand some additional product lines in that area. We continue to be very encouraged with our growth in this market channel.

It was up 12.9% three months rolling through the fourth quarter, through December, and now it's up 84% through March?

I think what the reality is, that many of the businesses that we dealt with did -- did intentionally take their inventories down in the fourth quarter and so they're very anxious in the current market to make sure they had adequate stock going into the first quarter.

Okay. We can follow-up after on that.

In processed steel, the decline in margin you had mentioned that there's, you know, some timing differences between the raw material cost increases and your ability to pass those along. Maybe if you could just expand on that and let us know where we are now on that, if that's going to change moving forward, et cetera.

We saw price increases coming in very quickly and it took a little bit of time to adjust our pricing with our customers.

Okay. So, I mean, given that the prices continue to kind of ramp up, at least through the current month, are those timing differences going to continue to occur in the second quarter or dissipate?

Well, it'll all depend on the stability in the markets that we're buying from. I think that we would expect that it would moderate through the back end of the year.

Okay.

And then lastly, just in terms of your comments relative to, you know, the potential for larger, more complex acquisitions and a potential change in the capital structure, can you maybe expand on that and provide a little bit more color in terms of what you're considering in terms of your capital structure?

Well, we don't have any definite plans right now. I think if you look back at the history of the company, you know, there have been a number of acquisitions, a lot of acquisitions over the past several years, most of those were paid for with, you know, borrowed money out of a revolver. Certainly the stock offering in the fourth quarter really provided the company with a lot more flexibility, it allowed them to sort of ratchet down that leverage ratio, if you will.

I think what we're looking at going forward, and, as I say, we don't have any definite or concrete plans. We're exploring things. But I think we need to look at the revolving credit agreement as something more, perhaps, in the long term, more of a working capital current needs sort of thing and put something in place that's perhaps a bit more permanent that allows us a little better access to capital markets to take care of larger acquisitions.

Yes, just as a follow-up on that, the main issue here is that we've been able to execute well on our strategy of making acquisitions each year. Generally, the acquisitions have been of companies that are in the size range of anything from $5 million to $75 or $80 million in sales. And as we've got bigger and bigger, we want to make sure that we have the financial capability to look at acquisitions that are also bigger. Not that we're necessarily going to make them, but we want to be in a position to take advantage of opportunities as they may present themselves.

And just on that front, on the acquisition front, obviously you're targeting the building products and the heat treating, are there any particular areas within building products that you're targeting there, either from a product perspective or geographic perspective?

Just one quick thing, Bob. Last year we expanded our business in every single area. We entered into a joint venture in our processed steel products area of, we think, meaningful proportions with the joint venture with Duferco, we made acquisitions in -- we expanded our heat treating business and we certainly expanded our building products business. So I think it's fair at this point in time to say that we're continuing to expand in every area of our business.

Clearly building products, in the recent history, has provided us with the most growth opportunity, and as we look forward, I think that will probably continue to be the case. Henning, do you want to -- ?

Yes, we continue to look for companies that provide market leadership in these specific areas that we're interested in.

I think we've identified, at this particular point, a number of key areas that we're very interested in, and as you know, we have at this point attained market leadership in the markets we do participate in. As we said, we've, number one in ventilation products, number two in construction hardware, a significant position in the service and distribution business of building products throughout the United States, and we're going to continue to move in those areas.

Terrific. Thanks, guys.

You're welcome.

And your next question comes from Jim Glickenhaus of Glickenhaus & Company. Please proceed.

Hey guys, it was a terrific report, really impressive. I just had a general question.

You guys are across a wide spectrum of the economy, and a lot of companies seem to be reporting cautiously that they see a bit of an uptake in demand, and it would seem that from looking at your results, that -- are you seeing the same thing?

Yes, we definitely are.

The best indicator we have is our heat treating business, because we serve the automotive industry, the appliance industry, the construction industry, the off-road equipment industry, you name it, and we have customers in virtually all segments of the manufacturing sector of this country. So it's good barometer for manufacturing activity, and we're definitely seeing an uptick there.

That's good news for all of us.

Thanks again, and it was a great report.

Thank you, Jim.

Your next question comes from Timothy Hayes of BB&T Capital Markets. Please proceed.

Thank you. Good morning.

Good morning, Tim.

Question on the cash flow statement.

I waw a big negative decline in accounts receivable, is that an indication that customers are just paying slow or giving this rapid rise in steel prices or is there something else going on there?

No, I think the days sales outstanding is about the same as it was a year ago, about 50 days. The big ramp-up really happens, because March, if you look at -- referring back at a previous question, how have you seen the business progress sequentially, January was a good month, February was a little better, March was really a great month, and it's just that, you know, it's just a buildup of receivables. Nobody's slow paying, nobody's -- you know, no defaults, no unusual activity, it's just that March was just such a great month sales-wise that receivables really shot up.

Okay, thank you.

I think the other side of that question, too, is if you look at where receivables were last year in total dollar sets, that was prior to making two acquisitions in the first quarter -- first half of the year.

And once again, ladies and gentlemen, to ask a question please press star 1.

At this time, sir, there are no further audio questions.

Terrific.

Thank you all for joining us for the call today, and we look forward to talking to you following the conclusion of our second quarter.

Thank you.

Ladies and gentlemen, thank you for your participation. That ends today's conference.

You may now disconnect.