Gibraltar Industries Inc (ROCK) 2004 Q3 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its 3rdquarter results and outlook for the 4th 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 will turn the call over to Mr. Ken Houseknecht.

[Audio interruption] issued last night and in our filings with the SEC. If you did not receive the news release on our 3rd quarter results, you can get a copy on our website at www.gibraltar1.com. At this point, I would like to turn the call over to Gibraltar's Chairman and Chief Executive Officer, Brian Lipke. Brian?

Thanks, Ken. Good afternoon, everyone. On behalf of Henning Kornbrekke, our President, Dave Kay, our Chief Financial Officer and Ken Houseknecht our Vice President of Communications and Investor Relations, we want to thank you for joining us on this call today. This afternoon I'm going to give you a general overview of the company. After that Dave Kay is going to talk about our financial performance and then Henning will give you an operational overview. Following that, we will open the call to any questions which you may have. As you read in our news release, our September 30th results built on the momentum that we established in the 1st six months of the year. For the 3rd quarter in a row our sales, net income and earnings per share all rose above our prior best results with each setting quarterly records. Of equal importance our operating margin in the 3rd quarter was 10.4%. The 2nd straight quarter we climbed above our long standing goal of 10%. Those of you who have followed Gibraltar for any length of time know that a centerpiece to our strategy is driving our margins higher over time and producing greater margin stability and consistency. We've accomplished this by moving more of our business into higher value added, higher margin products, processes and services like building products and thermal processing which today account for approximately two thirds of our sales. Another key to our margin expansion is that critical mass that we have developed in each of the three business segments which is enabling us to more fully utilize our existing capacity and to drive additional operating synergies throughout our company. In our building products segment, for example, our recent acquisitions especially those made in the last two years, have given us the the ability to manufacture and distribute our products throughout North America. As we've begun to leverage this coast-to-coast footprint, we've generated double digit organic growth in this part of our company each of the last five quarters and we've identified many additional initiatives that will allow us to continue that growth.

With Home Depot, for example we are now selling our mailboxes in all 1,800 of their stores. While our other 5,000 building products are sold in roughly one fourth of their locations, we have enormous opportunities for growth with our current product lines. The opportunities at Lowe's and Menards and other major customers in this part of our company are similar. In the logistics and distribution area, we've identified opportunities for significant savings as we begin to centralize and consolidate our operations. At present, we are spending about 9% of our building products sales dollar on distribution and we believe that over time in the next 2-5 years we can drive that down into the 5-6% range. With current annual sales of $500 million in this part of our company, those savings are considerable. In our thermal processing segment we have identified similar opportunities to drive sales higher, improve operating efficiencies and produce higher and more consistent margins. On the sales side we are leveraging Gibraltar's size, our reputation, our capabilities and our financial strength, in total, our critical mass, to accelerate our growth. During last year we finalized large multiyear agreements with both General Motors and Ford and we are actively pursuing other opportunities with other large manufacturing companies in a number of different industries. We have also continued to grow and improve the performance of our historic business, processed metal products. Most notably through the joint venture we formed with Juferco late last year which expanded our capacity, broadened our product offering and solidified our leadership position in the cold rolled strip steel marketplace. In summary, I want to reiterate that our record-setting results in the 3rd quarter and the 1st nine months of 2004 were not primarily the result of unprecedented increases in the price of steel. The majority of our sales gains have come from higher unit volumes as we have won additional business with existing customers, gained new accounts and continued to introduce new products and services. And while we've generated strong sales gains in 2004 we have been able to generate even stronger improvements in our operating income.

This demonstrates that we have the right strategic focus and our people know how to execute which will allow to us continue to grow Gibraltar share in our target markets, generate steady and sustainable improvements in our results and further solidify our leadership position. At this point, I will turn the call over to Dave and Henning who will provide a more detailed review of our 3rd quarter results and give you a little better sense of our outlook for the 4th quarter. Dave?

Thanks, Brian. As Brian has already reported, the 3rd quarter was an outstanding one for Gibraltar. By any measure, this was the best quarter in the company's history. Once again, sales, operating income and net income reached new records. In addition, our diluted earnings per share of 82 cents also marks an all-time high for any quarterly period and a 67% increase from the 3rd quarter of 2003. All of our operating segments once again experienced significant sales increases from a year ago. Our reportable segments benefited from increased levels of business activity, new product and customer development activities, and overall increases in average selling prices. Driven primarily from the pass-through of higher raw material prices and operating costs. Exclusive of acquisition activity, sales in the quarter were up $51.5 million from the 3rd quarter of 2003. An increase of 25% from a year ago. Operating income in the quarter increased by nearly 70%, from $17.1 million in the 3rd quarter of last year to $28.9 million this year. Selling, general and administrative expenses amounted to $33.1 million or 11.9% of sales during the quarter compared to $25.8 million or 12.4% of sales in the same quarter of last year.

This increase in terms of dollars results primarily from the costs associated with running a larger and more complex business, increased levels of incentive compensation associated with improved operating performance and significant increases in the estimated costs associated with compliance efforts under the Sarbanes Oxley act. Income from our equity partnerships increased to $1.8 million in the quarter compared to $200,000 in the 3rd quarter of last year. Primarily as a result of our 4th quarter 2003 investment in the Gibraltar Deferco Farrell joint venture. Interest expense during the quarter decreased slightly as a result of slightly overall lower average borrowing levels when compared to average amounts outstanding in last year's 3rd quarter. Our net return on sales during the quarter amounted to 5.8% compared to 3.8% a year ago. From a cash flow perspective EBITDA amounted to $37 million in the quarter, and $96.5 million year-to-date. We had net borrowings under our credit agreements of approximately $26 million during the quarter. Also during the quarter we used approximately $16.4 million on acquisition-related activity and $34 million for increases in working capital. The increases in working capital are primarily for higher levels of inventory and accounts receivable. Resulting from increased levels of business activity and higher overall prices for purchased commodity raw materials such as steel, aluminum, copper and plastics. Inventory turned at 5 point times during the quarter compared to 5.8 times a year-ago. Average day sales outstanding and accounts receivable at September 30th were 52.5 days compared with 51.5 days in the 3rd quarter of 2003.

Capital spending amounted to $6.8 million during the quarter and $17 million year-to-date. Capital spending during the 4th quarter is currently estimated to be in the range of 3-$4 million. Bringing the total for the entire year to approximately 20-$21 million. In addition we paid out $1 million in dividends during the quarter and $2.7 million for the year. As a result of the 3-for-2 stock split which becomes effective November 1st, our annual dividend requirement at the current per share rate will increase by approximately $2 million. We continue to explore optimizing the debt component of our capital structure in light of our long-term growth and acquisition plan. We anticipate the restructuring of our existing revolving credit facility will be finalized in the 4th quarter with the goal of providing us with better covenant terms, maximum flexibility and at a lower overall cost. Now, I'll turn the call over to Henning for an analysis of operations.

Thanks, Dave. Gibraltar's net sales for the quarter were $279 million, up 34% from a year ago. Gross margins improved to 22.2%, up 1.6 percentage points from last year with operating margins growing to 10.4%, up 2.2 percentage points from last year. Segment performance indicates that our building products group experienced a net sales increase of 15.4% to $142 million. The growth is primarily attributed to increased market share, market growth and new products. Gross margins were 27.2%, up 2.1 percentage points from the previous year. Driven by improved operating efficiencies gained through higher unit volumes and aggressive cost-reduction programs offset by higher material costs. Improved gross margins and continued tight expense control provided an operating margin of 15.6%, up from 12.9% in 2003. Our processed metal products group sales with $97 million, up 55% from the previous year. The increase was a result of higher unit volume coupled with higher market pricing. Gross margins were 16.8% versus 13.5% in 2003 and operating margins improved by 4.9 percentage points to 12%. The improvements are a result of higher sales volume mix and improved operating efficiencies. Our thermal processing group including SCM, generated a net sales increase of 77% to $39 million. Organic sales growth was 15%. Gross margins were 18.2% versus 17.6% in 2003. Operating margins were 8.7% versus 7.8% last year.

Margin improvement was driven by the higher sales volume offset by a purchase accounting adjustment of $456,000 pretax. And one-time costs of consolidating several heat treating facilities, without which the operating margin would have been approximately 11%. At this point let me provide some commentary on our outlook for the 4th quarter. The automotive business even with a lower projected build rate in the 4th quarter should have another solid year. Our business with our long-standing customers is solid and we continue to diversify our customer mix in this area. With more of a business coming from the transplant automakers and their suppliers. The housing market even with interest rates rising somewhat remain strong, which fuels continued building and remodeling activity both in the residential and commercial markets. A strong housing market coupled with our new product introductions, geographic expansion, better penetration with existing customers and new customer activities have enabled us to generate double digit sales and earnings increases on a building products businesses in each of the last five quarters. With the industrial economy continuing to stay strong, volumes in our thermal processing business in general are now at solid levels which have driven improvements in our margins. Across our company, improving our operating efficiency remains a clear priority. Our goal is to drive our operating margins consistently beyond 10%. As Brian mentioned we have a number of initiatives underway to help us achieve this goal. The 4th quarter is historically the slowest period for Gibraltar, a result of holidays and plant shutdowns in the automotive industry and seasonal slowing in the building industry. We therefore expect sales and income to follow previous 4th quarter trends. With that as a backdrop as we look ahead we expect our 4th quarter earnings per share will be in the range of 43-47 cents compared to 35 cents in the 4th quarter of 2003. Barring a significant change in business conditions, which positions us to deliver the best 4th quarter in the company's history, Gibraltar Industries is on track to generate sales, net income, earnings per share and margins in 2004 that will exceed any prior year. At this point, I will turn the call back over to Brian.

Thanks, Henning. Before we open the call to any of your questions let me make just a few final closing comments. First of all, while we are not Gibraltar Steel anymore and we are now Gibraltar Industries we still have a perspective on steel pricing that I would like to share with you, particularly in the wake of the ISPAT ISG agreement and then what any impact might be on Gibraltar as a result of these changes. First of all, it is hard to evaluate what the creation of the world's largest steel producer will have on worldwide or even North American pricing in the short-term or the long-term but I think it is fair to say that this agreement should have a further stabilizing effect on steel pricing particularly in North America. Prior to the announcement of the ISG agreement, ISPAT ISG agreement we believe steel prices were beginning to stabilize and sometime in the 1st half of 2005 they begin to moderate. We did not, however, expect prices to fall sharply and we did not expect that steel prices were going to fall back to anywhere near the level that they were at before the rapid runup in pricing began this year. In short, we saw steel prices stabilizing, then moderating in the 1st half of 2005 and finally normalizing at levels well above historic levels. In the wake of the ISPAT ISG announcement I still believe those thoughts to be valid although with a lesser opportunity to see anything other than moderate downward pricing as we move into 2005. From Gibraltar's perspective if and when raw material prices do begin to moderate, we believe there may be opportunities for us to see some margin improvement in our business since historically commodity raw material prices have fallen faster than our selling prices.

No matter what happens to steel prices, I want to make it clear, though, that Gibraltar's record-setting performance in 2004 is not simply the result of prices climbing to historically high levels. In the 11 years since our IPO we've carefully built a company that could produce consistent and improving results in a wide variety of economic and metal pricing climates. For 11 consecutive quarters even though metals prices and economic conditions have varied widely 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 4th quarter. More importantly, the critical mass that we now have in every area of our company and our steady progress in improving our operating efficiency has clearly brought us to an inflection point which is allowing us to accelerate our sales and earnings growth while at the same time improving our margins and returns. As I referenced earlier two days ago the shareholders approved changing the name of our company to Gibraltar Industries Incorporated, a name which better reflects our current business mix and our current performance characteristics. And then this coming Monday, our 3-for-2 stock split will go into effect which we believe over time should help to increase the liquidity of our stock. And since we're retaining our per share annual dividend rate, our dividend is actually increasing big 50% which gives us another way to reward the loyal shareholders of this company, many of whom have owned Gibraltar stock since day one. While we look back at the results that we have generated over the past 11 years as a public company and especially our record setting results in the 3rd quarter and 1st nine months of 2004, we believe that our new name signals our continuing focus on transforming Gibraltar into an even larger, stronger, and more consistent performer for our customer and our shareholders. And that's the clear focus of our senior management team and the almost 4,000 people of the Gibraltar team. That concludes our prepared comments. At this point, we'd be glad to answer any questions that you may have. Thanks.

Ladies and gentlemen, if you wish to ask a question, please press star, followed by one on your touch tone telephone. If your question has been answered or you wish to withdraw your question, please press star, followed by two. Your first question comes from Yvonne Varano of Jeffries.

Thanks. I was wondering if you could break out how much of the sales increase was actually due to pricing and what might have been due to volumes or other factors?

Yes. In general, we estimate that two-thirds of our sales price or our selling volume increase this year came from unit volume increases and one-third has come from selling price increases.

Okay. And then looking at the expectations that you have for 4th quarter, I understand this is seasonality in the business but it seems that the decrease is a little greater than what we have seen in the past. Can you give us a little more color on what you might be seeing in the markets that might account for that?

First of all, Yvonne, if you look at the last six years and take the average change in EPS from the 3rd quarter to the 4th quarter, you would see that our average decline was 40% and that includes the estimate for the Q4 of this year at 47 cents. So the decline for the 4th quarter of this year is 43% and that is very consistent with our historic pattern. And having said that, the 4th quarter of 2004 is going to be the best in the company's history and significantly better than last year's. So I -- I don't think that it is correct to say that it is a material difference from what was experienced in the past. It is typical seasonal slowing. The other thing that has to be considered whenever anyone is comparing one year's quarter to a previous year's quarters are any of the dynamics that were in place in that comparative period of time. Some quarters may be stronger than others for a whole host of different reasons, making the comparison to the next year more difficult or less difficult. When you take the average over a 6 year period of time I think it smooths all of those things out and puts us in a position of saying that we are not seeing anything abnormal.

Okay. I guess I was calculating it based on the low end of your range, which would be certainly a decline greater than 40%. Can you just tell me what the cost has been for Sarbanes Oxley?

We estimate the cost for the entire year to be somewhere between $3-$4 million and that would be money that we spent outside the company that doesn't count around internal time, resources and people. That would be external spending.

Okay. And can you give me a little more color about what impact -- I know you talked about the purchase accounting impacting the margins and the thermal processing. Could you just explain that a little further, what that actually was?

Well, the accounting rules and this is a very arcane rule it is a pertains to purchase accounting essentially says that when you acquire a company that has inventory to the extent that there would be profit in that inventory on the day that you buy it you have to technically impute that profit to the seller, meaning that when we sold the goods we realized zero profit on it and that number was 400 -- around $450,000. That -- I hate to use the term one-time but that will not happen again. It is an anomaly that is unique to this transaction in this quarter. And it is on the SCM transaction.

Okay.

It is required under GAAP.

Now that you explained it further I remember this rule. Thanks so much.

You're welcome, Yvonne.

Your next question comes from Joel Hirsch of Keybank Capital Markets.

Hi, guys. Congratulations on a great quarter.

Thanks, Joel.

I was just wondering. Historically contract pricing has been greater than spot pricing. And recently it seems to be the other way around. Where do you guys see the relationship going in 2005?

Contract pricing is greater than spot pricing?.

Historically speaking. Recently it seems to be spots greater than contract.

Yeah, that -- that-- I guess has been true historically. As -- in the last year, though, I think contract pricing while you would think that this wouldn't be the case since the word contract is in there but contract pricing has risen as well because of surcharges and a whole host of other extras that have been brought into the equation. Probably not to the -- well, definitely not to the level that spot pricing went up to but it did -- contract pricing did -- the gap between spot and contract pricing did narrow.

Okay, and has the restart of the Ottawa, Ohio, steel processor having any effect on your business?

No, our sales -- our sales are up in the processed metals part of our business this year.

Okay, great. Thanks very much.

You're welcome.

Once again, ladies and gentlemen, that is star, one to ask a question. Your next question comes from Phyllis Thomas of NWQ.

Yeah, this is Marty Pollock with Phyllis. Just a quick question. When you went through these segments, you know, I didn't really get the breakdown of organic growth acquisitions. It seems that you didn't mention specifically that for the processed metal side as well as the thermal. Can you just sort of break that down? And as well, also if you could talk about where you are benefiting from certain surcharges, you know, surcharges in the areas that, you know, you were able to get some pass-through prices?

While I'm letting Henning and Dave sort out the first part of the question I will answer the second part. And when you say benefiting from surcharges, I think our business model is different from that of service centers in that our efforts have been to pass on any increases we get but because of the type of selling price arrangements that we have with the majority of our customers, there is a delay in the timing of our receipt of any raw material cost increases and when we might pass them on to our customers. So the net effect for us during the year because of this would be a compression in margins. As opposed to an expansion of margins which differs significantly from what happened in the service center area where I believe many companies were able to not only immediately pass on any announced raw material cost increases even before they had to pay them, but they were able to pass on more than 100% of those increases because of the demand characteristics of the marketplace. You might ask then how could our margins have expanded this year in light of what I just said and our operating margins expanded this year because of better throughput and our ability to capture a host of different operating synergies that we now have inside of our business today because of this critical mass that we have been able to put together over the last couple of years. Dave and Henning, do you want to try?

In answer to your question of I think what you asked is organic growth versus growth let's say primarily through acquisition. The only segment that was really impacted by growth through acquisitions was the thermal processing group where total growth was 77% and the organic part of that, you know, the year-over-year growth was actually 15%. The growth in the other two segments was really for the most part substantially organic growth year-over-year growth of the same business.

I see.

It is true that there was -- acquisitions and building products are extremely small and fundamentally 98% of the growth, 15.4% in building products was in fact organic.

Okay. Thank you.

You're welcome.

Your next question comes from Jeff Burtell of Pullar.

Hi, just a follow on that. So the organic growth in the processing side was 15% or 15% of the 77% growth?

15% of the traditional heat treat business was organic growth and then we purchased the business called SCM which added in additional sales revenues which accounted for total growth of 77%.

Okay. All right. That's helpful. I'm trying to understand just how these margins work and how it works with inventory and is your processing business a tolling business?

Yes, it is.

So should we expect margins to go down in a higher priced --

Let me -- I'm sorry. We're going to have to revise it.

Gonna decide what processing you are talking about.

The heat treat -- the traditional heat business is a tolled business. It's a service oriented business. However, we are now reporting the SCM business which is not a heat treat business but a powdered copper business in the same segment and they do have inventory and they are a more traditional metal processing business.

And that would he -- have characteristics similar to a manufacturing company than a tolling company. Although we have included them in our heat treating business segment because the technology involved there and the other business characteristics align itself well with the heat treating area.

Okay. And so if I went back and looked at a long-term margin profile of that business as, you know, prices increase and costs increase in the tolling business generally the margins go down on a percentage basis.

That's right.

Is that the way it's worked for you guys?

Yep.

Okay. And you kind of referenced your price increases and I think people are kind of getting mixed up here between price increases and surcharges and I'm kind of in that camp a little bit and I was wondering if you could sort of talk about price increases say, you know, you experienced over the last year in your different businesses and how that may be helping profitability.

Let me try to clarify your question. First of all, when you talk about price increases, you mean our selling price increases or raw material cost increases we've had to absorb?

No, your actual price increases to our customers and maybe differentiate them between sort of surcharges.

I'm reluctant to want to get into that because it would be divulging sensitive and competitive information that knowing that this is a totally public conference call that I really wouldn't want to arm our competitors with.

Okay. All right. And then on the inventory side, there has been a lot of -- a lot more differences than you would expect between steel processors and service centers on how they actually report their inventories and then how they have actually reported the gains or neutralized the gains that they have had on selling higher or lower cost inventories in a higher priced environment.

We are a FIFO accounting or inventory based accounting program, have been all along.

So is there a number I can put on or a way to understand if I look back at your EPS profile and your margin profile sort of what might be normalized and what might be attributable to inventory?

Well, we -- we -- unlike service centers, service -- to differentiate a processor like we are from a service center, a service center back when this rapid price escalation started to take place when the mills would announce surcharges or price increases, the service center passes those on immediately whether or not they have actually incurred that cost. So the margins at service centers grew rapidly. Astronomically. A processor like us, we don't -- we're not able to pass that on like a service center would because -- for any number of reasons. So there is some time lag between when we can incur a cost and when we can pass it on to our customers so we are really not a service center that can just automatically pass any announced cost increase on. That is one of the reasons the service center margins have done so well this year.

Okay. So I guess for all intents and purposes then your actual, you know, margin levels aren't as overstated if overstated at all like some of the other --

No, just the opposite. Just for a second if you would assume that and this is an assumption. If you would assume that we were able to pass on 100% of the raw material cost increase through the same dollar amount increase in our selling price, you would actually see margin compression.

Mm-hmm.

Which is different than what the service centers were able to do. In our case there has been a delay in our -- in the timing of that which would further impede margin growth. So any margin expansion that you have seen this year is predominantly related to operating efficiencies and greater volumes that we put through our business.

Okay. Well, that's very helpful. Thanks for the commentary.

You're welcome. Thank is for the question.

Your next question comes from Joel Hirsch of Keybank Capital Markets.

Hi. Just wanted to go with a quick follow-up question sort of along the same lines. I was wondering if you could kind of quantify the amount of growth you're going to get out of your construction products business generated from store penetration?

When you look at our building products business, we estimate today that we have somewhere around $200 million worth of available manufacturing capacity within that business. Now that we have got a national manufacturing and distribution footprint we think we are in a much better position to penetrate some of our national accounts on a national basis and take all of our building products or more and more of them to more and more of the locations of many of these big box stores that we are doing business with and as we do that over the next couple of years we would expect to ramp up the utilization of that available capacity which is going to help drive our topline, and help drive our bottomline and of equal importance going to help drive a higher return on investment within our business.

Great. Thank you very much.

You're welcome, Joel.

Once again, ladies and gentlemen, to ask a question please press star, one. Folks, you have no further questions at this time.

Okay. Thank you all for your interest in Gibraltar. We will be back talking to you again in three months. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.