Gibraltar Industries Inc (ROCK) 2004 Q2 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its second-quarter results and its outlook for the third quarter. We will 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 will open the line to your questions. At this point, I'll turn the call over the Mr. Houseknecht. Please proceed, sir.

Thank you, Mike. 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 second-quarter results, you can get a copy on our Web site 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?

Good morning, everyone. On behalf of Henning Kornbrekke, our President, Dave Kay, our CFO, and Ken Houseknecht, our Vice President of Communications and Investor Relations, I want to thank you for joining us today.

This morning, I'm going to give you a general overview of the Company. After that, Dave Kay will provide some commentary on our financial performance and Henning will then give you an operational overview. Following that, we will open the call up to any questions that any of you may have.

As you read in our news release, our second quarter was far and away the best in Gibraltar's history as our sales, our net income and earnings per share all rose well above our prior best results.

For the first time, we drove our quarterly operating margin above our long-standing goal of 10 percent to 10.7 percent. This margin expansion highlights our strategies and our overall positioning. It's also a direct result of the critical mass that we've established, which is helping to drive improved capacity utilization and internal operating synergies, along with our long-standing focus to drive the business to higher value-added, higher margin-generating activities. These same factors have also contributed to our net income margin growing to 6 percent, surpassing our target of 5 percent, and is an all-time record for Gibraltar.

Of equal importance, though, we believe these factors strengthen our ability to generate consistent performance in a wide variety of markets.

The second quarter, by any measure, was an outstanding one and it's important to note that our performance was a direct result of the many steps that we've taken over the last ten years to strategically reposition Gibraltar. Our many initiatives to broaden and diversify our customer base, extend our reach into many of North America's fastest-growing geographic and metal-consuming markets, and our push into higher value-added, higher-margin areas like building products and heat treating has given us the ability to generate stronger and more consistent results.

All of our segments generated double-digit sales increases in the second quarter and even stronger improvements in operating income.

We had continued strong performances in many of our targeted high-growth areas, like ventilation products, structural connectors, and metal joining and assembly services, just to highlight a few. Very importantly, we estimate that the majority of our second-quarter sales improvement came from higher unit volumes gained through market-share growth. The balance came from higher selling prices, which were largely the result of the unprecedented increase in steel prices. Let me state that again but in a little different way. Our performance in the second quarter was not just the result of steel prices going higher. It was a product of the steps that we've taken and are continuing to take to make our business stronger.

As a result of our national manufacturing and distribution footprint, particularly in the building products area, where we've been able to generate internal or organic growth rates of approximately 15 percent during the second quarter compared to 14.5 percent in the first quarter through the increased utilization of available capacity. This drives sales, profits and return on invested capital higher.

Our record-setting results in the second quarter and the first half of 2004 come on the heels of our performance in 2003, when we also generated record sales and record earnings. During the first ten years as a public company, we generated record sales and record earnings eight times, in spite of a severe and prolonged slowdown in the industrial economy.

We are clearly gaining momentum. In the first half of 2004, we've begun to utilize more of our existing capacity and we are also capturing more of the sales, marketing and operating synergies that we have throughout our company. Even though this was our best quarterly performance by a long shot, we have numerous internal and external initiatives underway that, over time, should continue to drive our results even higher.

Before I turn the call over to Dave and Henning, let me touch on just a few highlights from the quarter and our recent acquisition of SCM. This was our first quarter with annualized sales at or above the $1 billion level. In the first half of 2004, we've earned almost as much as we did in all of 2003, and we had record earnings last year. Our 10.7 percent operating margin was more than a full percent higher than our prior quarterly best, which was achieved in the third quarter of 2000 right before the recession hit. Our net income margin of 6 percent was also a quarterly best, as the operating efficiencies that we've extracted throughout the Company allowed a greater share of our sales dollars to drop to the bottom line.

In short, we believe that our long-standing strategic focus is proving itself. We have the right people in key positions in our company, and we are beginning to produce results that will continue to create increased shareholder value.

Let me just spend a couple of minutes on our SCM acquisition that we made on June 1. SCM manufactures non-ferrous metal powders that are used in brazing pastes, roofing shingles, oil-less bearings and friction products, among a whole host of other applications. SCM serves more than 100 customers in a number of industries, including automotive, aerospace, electronics and consumer products. It's an internationally recognized quality and technology leader, and we see many synergistic opportunities to combine the expertise and experience in our heat-treating and processed-steel products operations with SCM to build and strengthen our combined business.

Importantly, too, since nearly one-third of SCM's sales (which last year were $45 million) go to customers in Europe, Asia, Central and South America, we now have established presence in a number of international markets, which is an area that we are more actively targeting for future growth. The SCM acquisition is consistent with our strategy of finding fragmented, high-growth niche markets where Gibraltar can become a market leader, as we have in mailboxes, ventilation products, heat treating and cold-rolled strip steel. SCM was our 21st acquisition in the last nine years and our third thus far in 2004. There are many additional acquisition opportunities available to us in every part of our company.

At this point, I'll turn the call over to Dave and Henning, who will provide a more detailed review of our second-quarter results and give you a better sense of our outlook for the third quarter. Dave?

Thanks, Brian. As Brian has already reported, the second quarter was an outstanding one for us, not only in terms of sales but operating profit, net income and earnings per share as well. The 78 cents per share earnings number represents not only a new quarterly record for Gibraltar but a 53 percent increase from the second quarter of last year.

All of our operating segments saw double-digit sales increases from a year ago. What makes this so significant is that a large portion of the increase resulted from higher levels of business activity and increased unit shipping volumes.

Exclusive of acquisition activity, sales in the quarter were up $48.9 million from the second quarter of 2003. Operating income in the quarter increased by nearly 60 percent from $17.3 million in the second quarter of last year to 27.6 million this year.

Selling, General & Administrative expenses amounted to $30.7 million, or 11.9 percent of sales this year, compared to 23.2 million, or 11.4 percent of sales in the same quarter last year. This increase, not only in terms of dollars but percentages as well, resulted primarily from the costs associated with running a larger and more complex business, combined with increased levels of incentive compensation associated with improved unit operating performance and significant increases in the estimated costs associated with compliance efforts under the Sarbanes-Oxley Act.

Interest expense during the quarter decreased slightly from a year ago as a result of lower average borrowing levels, compared to the amounts outstanding in last year's second quarter.

Our net return on sales during the quarter amounted to 6 percent, compared to 4.1 percent a year ago.

From a cash-flow perspective, EBITDA amounted to $34.8 million in the quarter and $59.5 million year-to-date. During the second quarter, we used approximately 41.5 million of cash to make the SCM acquisition and 10.2 million for increases in working capital.

We had net borrowings under our credit agreements of approximately $39 million, most of which was used to fund the SCM acquisition.

Capital spending amounted to $4.8 million during the quarter and 10.3 million year-to-date. Capital spending during the second half of the year is currently estimated to be in a range of 7 to $8 million, bringing the total for the entire year to approximately 17 to 18 million.

During the quarter, we were able to term out a portion of our revolving credit facility at attractive, long-term rates. We entered into a $75 million, seven-year term private placement arrangement at an all-in coupon rate of 5.75 percent. We drew down $25 million on the date of closing, and will draw down the balance of 50 million at specified dates and amounts which are designed to coincide with the expiration of several interest rate swaps we currently have outstanding. The amount drawn down was used to reduce outstandings under the revolver. Future drawdowns will be used for general corporate purposes, including growth opportunities and potential acquisitions.

We continue to explore optimizing the debt component of our capital structure in light of our long-term growth and acquisition plans. We anticipate completing a restructuring of our existing revolving credit facility during the third quarter with the goal of providing us maximum flexibility at a lower cost.

Now, I will turn the call over to Henning for an analysis of operations.

Thanks, Dave. Gibraltar's net sales for the quarter were $257 million, up 27 percent from a year ago. Gross margins improved to 22.6 percent, up 2.7 percentage points from last year, with operating margins growing to 10.7 percent, up 2.2 percentage points from last year. Inventory turns were 5.64 versus 4.86 last year, and receivables were approximately constant at 52.4 DSOs.

Segment performance indicates that our processed steel group sales were $89.3 million, up 28.4 percent from the previous year. The increase was a result of market share gains and the higher material pricing. Gross margins improved by approximately 1 percentage point, and operating margins improved by 2.6 percentage points to 11.7 percent, a function of increased manufacturing efficiencies and lower SG&A costs.

Our Building Products group experienced a net sales increase of 22.1 percent to $136.7 million. The growth is primarily attributed to market share gains with a number of our operations plus, to a lesser extent, the full-quarter participation of Air Vent. Gross margins were 26.6 percent, up 3.7 percentage points from the previous year, driven by higher unit volume efficiencies and manufacturing consolidations. Operating margins escalated to 14.8 percent, up 2.8 percentage points from the previous year, a function of higher gross margins offset by higher SG&A costs associated with the branch structure of CMI.

Our Heat Treat group, including one month with our newest acquisition, SCM, generated a net sales increase of 43.6 percent. The return of a stronger manufacturing environment, aggressive marketing and new programs at Ford and General Motors were responsible for the growth. Gross margins grew by 4.1 percentage points to 24 percent, a function of higher volumes and reduced operating expenses. Operating margins were 15.3 percent, up 4.7 percentage points due to higher gross margins and tight SG&A controls.

At this point, let me provide some commentary on our outlook for the third quarter and balance of the year. The automotive business, while experiencing a slowdown in June, remains on pace for another strong year with sales estimated to be in the 16 to 17 million unit range in 2004. It's important to note that we continue to diversify our customer mix in this area by expanding our presence with transplant automakers and their suppliers.

The housing market, new and existing, remains strong, which fuels continued spending on household goods. This, coupled with our new product introductions, geographic expansion, better penetration of existing customers and new customer activities, is spurring double-digit sales and earnings increases in our building products business.

With the industrial economy continuing to gain strength, volumes in our heat-treating business are rebounding nicely, driving large improvements in our operating margins.

As we've discussed on this and other quarterly conference calls, we have numerous programs underway to grow the sales and improve the operating efficiency in this and every part of our company. These initiatives are helping to offset the volatility in the steel supply markets, which has not abated. We are continuing to manage this issue carefully.

With that as a backdrop, looking ahead, we expect the third-quarter earnings per share will be in the range of 61 to 65 cents, compared to 49 cents in the third quarter of 2003, even though there are approximately 22 percent more shares outstanding in 2004. This would result in a 51 to 60 percent increase in net income.

It is also important to note that our growth historically slows somewhat in the third quarter as a result of model year changeovers in the auto industry and seasonal slowing in the building industry. Nonetheless, we expect strong performance in the third quarter.

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

Thanks, Henning. Before we open the call to any questions that you may have, let me make just a few final comments to wrap this up.

Our mental suppliers have continue to push for and receive increased overall selling prices, and additional increases were announced in early to mid-July. While material availability has improved slightly, it remains very tight. Fortunately, our supply arrangements are allowing us to satisfy our existing customer requirements and grow our business while generating a strong performance.

Against this backdrop, our ability to source material to meet the needs of our customers and our ability to significantly expand our margins through internal operating efficiency improvements continues to strengthen Gibraltar. Our long-standing efforts to build a company that can produce consistent and improving results in a wide variety of economic and metal-pricing climates is clearly paying off. For ten consecutive quarters, we have generated quarter-over-quarter improvements in both sales and earnings and as Henning said, we expect to build on that trend in the third quarter.

More importantly, the critical mass that we now have in every area of our company and the momentum that we are building in our efforts to improve our operating efficiency have clearly brought us to an inflection point which has transformed the trajectory of our growth.

While we are proud of our second-quarter performance, we still see many opportunities to build Gibraltar into an even larger, stronger and more valuable company for our shareholders, customers and our employees.

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

(OPERATOR INSTRUCTIONS). Yvonne Varano with Jefferies.

You are talking about metal prices going up, and it seems that way for July and August. I was just wondering what was put into the forecast of 61 to 65 cents for Q3 for metal pricing in September?

We have learned to be reactive in this current raw-material pricing environment and as you've seen from past quarters, we've been fairly accurate in determining what raw-material prices would be. We did factor in somewhat higher raw material costs during the current -- during this quarter, than we have in the past.

Okay. Would that mean that September would be on par with August and July levels, or is that expecting September to increase or decrease?

Expecting raw material pricing?

Yes.

To increase or decrease in September?

Yes -- (Multiple Speakers) -- you assumed it remains flat at where we are here in August?

We took what we think is a conservative approach to that, but one thing I've learned in the last year is prognosticating on steel prices is not a wise action for us to take publicly. I can tell you that we've conservatively built in what we think is going to happen into our model.

Okay. On the building products, I thought that the seasonal slowing was more towards Q4. Can you just talk a little bit about what we would be seeing in that area in Q3?

Yes. I will touch on it quickly and Henning may have something to add. Basically what we are talking about is it begins during the month of September, primarily.

I think, for the most part, the slowing is more of a regional event.

And weather can impact that too.

Timothy Hayes with BB&T Capital Markets.

Good morning. One question on the volumes sequentially in the processed steel -- how did that compare in Q2 versus Q1?

The volume? You're talking unit volume or sales?

Unit volumes, please.

It's higher. Unit volumes in the second quarter were slightly higher than the first quarter.

Tim, just to follow up, that's a historic pattern for us, too.

Joel Sarge (ph) with KeyBanc/McDonald.

That's Joel (indiscernible). Congratulations on a good quarter, guys. I just was wondering, if scrap surcharges rise another 50 to $75 for August, what potential impact could that have for your automotive customers?

On their business?

In terms of your business with them.

Our business with the automotive customers is tied into a contract. Our contracts tend to be long-term, and so the increase in the steel pricing isn't going to affect the unit volume with any of those customers.

Can you give me any type of color specifics on the seasonal slowing in the building industry beyond -- or how specifically you think it's going to affect you?

We only factor in a slight decrease going into the third quarter. It's hard to predict. We know some of our customers have already started to tightly manage their inventories and again, we saw that happening in fact at the end of the quarter that just ended and we are aware of that happening in the quarter that we are currently in. Again, it's hard to predict but as Brian said, we're very conservative in the forecast that we've put in, going forward. We know, last year, for instance, that in the Midwest the weather turned very bad very quickly and we saw our business turn down much sooner than expected. But we had a lot of offsets built into the system and I think Brian spent some time talking about those offsets.

The other thing is, right now, I'm sure you know this but I'll say it anyhow -- housing starts continue strong; the sale of existing homes is operating at or near all-time record levels. All of that bodes well for our business since a substantial portion of that goes through retail outlets and supports both -- when people buy at new house or buy an existing home, they generally want to do things to the house that make it theirs and that drives retail sales. On the new-build market, although it's a smaller percentage of our total sales, as long as that stays strong, that bodes well for our business.

Joe Kinnison with Kennedy Capital.

My question is on the SG&A line. I understand you've described what's going on there, the cost of having a larger and more complex business, but I guess, in thinking about that, in a lot of other cases, I've seen that as organizations growth, they are able to leverage their corporate overhead and things like that and actually increase their SG&A. Well, I guess decrease SG&A as a percentage of sales. So, I wondered if you might talk about that a little bit, as to why you wouldn't be getting some leverage as you grow your top line on corporate overhead and things like that.

We have been getting the leverage on our top line. If you look at the numbers, they would support that.

I think the other thing that I think -- the way we've run our business, we've always been very conservative. We've always run with very lean costs throughout the business, and that continues to be our philosophy. We're starting to see some leverage on SG&A as we start to consolidate or as we start to move to shared services. Again, these programs are early in their inception but that's the direction we're moving in. We've seen some good consolidations on the manufacturing side, where we actually have put a number of business together and are marketing through a more consolidated approach. So, we are starting to see those gains and I think our results speak to those.

Joe, the key thing too is that we've really just put ourselves in a position where we can start to extract the operating synergies, including SG&A-type synergies when we established the national manufacturing and distribution footprint for the Company in the second half of 2003. So now we're just going through a lot of the steps to fully capture all of those available synergies. We would expect to see those unfold over the next year, year and a half and start to have a meaningful impact on the SG&A line.

For now, the first focus has been to make sure we are selling as many of our products to as many of our customers as we possibly can and driving the capacity utilization upwards. Then we're going to put into place more of the synergy-capturing opportunities as we move down the line. So, it's a little bit more complex.

I think it's important to note also that we grew up from being a very small company and we weren't a large company that merged with another large company. We've always run the businesses on a very lean philosophy, so we've only added when we needed to add as we've gone forward.

That helps a good deal. Maybe one more aspect of it -- you also said, in your Building Products business, that SG&A is little higher there because of the branch structure in CMI. Will SG&A as a percentage of sales be higher in general in the Building Products business and -- (multiple speakers)?

Well, it's an interesting offset. Although their SG&A is higher because of their branch structure, they are very aggressive on the sales side, and they continue to see very strong, double-digit sales growth through their businesses. The reason they've gotten that sales growth and the reason that we are so close to our customers is because of the branch structure. So although the SG&A is higher associated with that business, there's a very good offset to that. We don't see that growing into our other, more manufacturing-oriented businesses.

The other side of that, too, is that, over the last six or seven years, we've been acquiring smaller, regional companies that had a limited product line and a limited geographic range in which they were marketing their products. As a result, as we've expanded the number of customers that we are doing business with, we today are working with a highly inefficient distribution system. As we start to transition these companies that have been historically regionally based to more of a national base, we are going to find -- and it's a key focus right now -- is to find a much more efficient distribution setup to allow us to get more of our customer -- more of our products to more of our customers but in a much more efficient manner. Today we have trucks going all over the country, back and forth, crossing over each other's lanes. As we get more efficient in that area, you're going to see a reduction in our SG&A.

Just for a second, think about this -- today, other than in mailboxes where we do distribute mailboxes to all of Home Depot's stores, the vast majority of our other products are currently only going into 350 of the 1600 Home Depot locations. Our objective, of course, is to drive that number up. That will give us better capacity utilization and it will also allow us to put together a much more efficient manufacturing and distribution setup.

So over the longer-term, you'll start to see more operating improvements as a result of this national coverage that we now -- national manufacturing and distribution footprint that we have today. Even though it's highly inefficient, our objective is to make it more efficient as we go down the line.

The only thing I would add is that the branch structure also allows us to dramatically reduce our total transportation costs of getting goods to customers because now we are shipping shorter distances in smaller trucks. There is an offset, but you won't see it on SG&A; it's up in cost of material.

Thanks very much. Great quarter.

(OPERATOR INSTRUCTIONS). There are no other questions in queue at this time, sir.

Okay, thank you. Thank you all for joining us this morning and for your continuing interest in Gibraltar. We look forward to talking with you again in three months and updating you on our continued progress.

Ladies and gentlemen, thank you for your participation on today's conference call. You may now disconnect.