Gibraltar Industries Inc (ROCK) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the Gibraltar conference call to discuss its fourth quarter and full year 2004 results and its outlook for the first quarter of 2005. 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 lines for your questions. At this point I will turn the call over to Mr. Houseknecht. Please proceed, sir.

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 fourth quarter and 2004 results, you can get a copy on our website at www.Gibraltar1 -- and that is the number 1 -- .com. At this point I would like to turn the call over to Gibraltar's Chairman and Chief Executive Officer, Brian Lipke.

Good morning everyone. On behalf of Henning Kornbrekke, who is calling in from a remote location where business has taken him today, Dave Kay, our CFO, and Ken Houseknecht, our Vice President of Communications and Investor Relations, we want to thank you for joining us on our call today. This morning I'm going to give you a general overview of the Company. After that Dave will talk about our financial performance, and then Henning will provide an operational review. Following that we will open the call to any questions that any of you may have.

As we said in our news release our 2004 results, measured by any number of financial and operational benchmarks, were the best in Gibraltar's history. We surpassed our long-standing sales and earnings goals, drove our gross margins above our 20 percent target, generated our highest ever operating margin, and perhaps most importantly, produced a return on net sales of 5 percent, which is substantially above our long-standing objective of 4.5 percent.

During 2004 we continued Gibraltar's transformation putting in place the structure and systems that are necessary as we move toward our next set of goals, annual sales of $2 billion and net income of $100 million by the year end 2009 or sooner.

Our strategic plan calls for a continued focus on improving our performance characteristics using a three pronged approach. First, from an internal perspective we are leveraging the critical mass that we have in each segment of our business by extracting cost reductions in the administrative area, and by moving toward a shared services approach with a number of corporate functions, which will further streamline our operations. We're also focusing on the supply chain management areas where we are focusing on reducing the cost of nonproduction purchased materials and logistics. We're also focusing on ways to leverage our critical mass in each of our segments in the area of sales.

Secondly, we are continuing to focus on acquisitions that will not only expand and strengthen our business, but also improve our operating characteristics. We continue to find a favorable acquisition environment, both from a candidate and valuation standpoint. And finally, we are reviewing our portfolio of existing companies with an eye toward divesting those divisions of the Company that are not capable of gaining a product leadership position, or which cannot meet or exceed our stated performance thresholds. The sale of our Milcor division is an example of this. The product leader in this market saw how our operation could dovetail with his, and we were able to strike a deal that made sense to both of us.

In the last year we also broadened and strengthen our management team, making a number of moves, most notably promoting Henning to President and Chief Operating Officer, and naming David Kay as our CFO. Henning has led our effects to put in place the processes and procedures that successful multibillion dollar corporations use to manage and strategically grow their businesses. Dave is helping us create a capital structure that will allow for larger, potentially more complex acquisitions, while still giving us the flexibility to run our day-to-day operations. We believe that all of these efforts puts us in an excellent position to produce steady and sustainable improvements in our margins and profitability over the long term.

Our record-setting performance this past year was the result of our long-standing and ongoing efforts to build a Company that can produce consistent and steadily improving results in a wide variety of economic and raw material pricing environments. In the 11 years since our IPO we have grown our sales at a compound annual growth rate of 18 percent. Our net income grew even faster, advancing at a 19 percent CAGR. During this time we have strategically repositioned Gibraltar, dramatically changing its size, scope, product offering, customer mix and geographic coverage, all of which positions the Company for continued improving performance in the future.

Even though we generated our best ever results in 2004, breaking through our long-standing goals of 1 billion in sales and 45 million in net income, we have a number of initiatives underway that should over time continue to drive our results even higher.

At this point I will turn the call over to Dave and Henning, who will provide a more detailed review of our fourth quarter results, and give you a better sense of our outlook for the first quarter.

The fourth quarter, even though it is traditionally our weakest, was another good one for Gibraltar. As was the case in each of the first 3 quarters of the year, sales, operating income and net income were best ever results for the period. Our diluted earnings per share of 33 cents was a 41 percent increase from the fourth quarter of 2003.

All of our operating segments once again experienced significant sales increases from a year ago. Overall sales improvement in the fourth quarter amounted to a 44 percent increase from last year. During the quarter sales in each of our reportable segments benefited from increased levels of business activity, new products, and customer development activities.

Operating income in the quarter increased by 38 percent from 13 million in the fourth quarter of last year to 18 million this year. Selling, general and administrative expenses amounted to $28.7 million or 10.8 percent of sales during the fourth quarter of this year compared to 21.9 million or 11.8 percent of sales in the same quarter of last year. The increase in SG&A costs in terms of dollars alone results primarily from the costs associated with running a larger and more complex business, and significant increases in the estimated costs associated with compliance efforts under the Sarbanes-Oxley Act.

Sarbanes-Oxley compliance costs in the quarter amounted to nearly $2 million, with full year costs approaching $5 million. Income from our equity partnerships increased to $1.4 million in the quarter compared to 300,000 in the fourth quarter of last year. The primary reason for this increase comes from outstanding results at our Gibraltar, Duferco Farrell strip steel joint venture, an investment we made in December of 2003.

Interest expense during the quarter decreased as a result of slightly overall average effective interest rates when compared to the effective interest rates in last year's fourth quarter. Net return on sales during the quarter amounted to 3.7 percent compared to 3.1 percent a year ago.

Cash flow perspective. EBITDA amounted to $26 million in the quarter and $122.5 million year-to-date. We had net borrowings under our various credit arrangements of approximately $9.4 million during the quarter and $67 million for the entire year. For the year significant amounts of cash were reinvested in the business in the form of working capital, primarily in the form of higher levels of inventory and accounts receivable required to support the significant increases in business activity.

Inventory increases were split fairly evenly between Processed Metal Products, Building Products, not only increases in quantities but significant price increases as well, particularly for steel. However, during the fourth quarter inventories in the Process Metals Group grew significantly as we made opportunistically priced purchases to fulfill first and second quarter business needs. These purchases are estimated at around $20 million in the quarter. We expect to see inventory levels in Processed Metals return to more normal levels during the early part of the second quarter.

During year we made 4 acquisitions at a total cost of $65 million. Most of the cash used for the acquisitions came from borrowed funds under our revolving credit agreement. Inventory turned at 4.5 times during the quarter compared to 5.5 times a year ago. As mentioned earlier, we made significant opportunistic inventory purchases in the Processed Metals Group close to the end of the quarter. For the year, inventory turns were comparable.

Average day sales outstanding in accounts receivable during the quarter were 54 days, down from 56 days in the fourth quarter of 2003. Capital spending amounted to $8.2 million during the quarter and 25.2 million year-to-date. Capital spending during the first quarter of 2005 is currently estimated to be in the range of 3 to $4 million. And we expect to spend approximately 23 to $25 million in the entire year of 2005. In addition, we paid out $1 million in dividends during the fourth quarter and $3.7 million in dividends for the entire year.

We expect to complete the restructuring our revolving credit facility later this week or early next week. The new facility is designed to provide us with better covenant terms, significant flexibility at a lower overall cost. Now I'll turn the call over to Henning for a more detailed analysis of operations.

Gibraltar's net sales for the quarter were $266 million, up 44 percent from a year ago. Gross margins were 17.5 percent, down 1.4 percentage points from the last year, a function of higher material costs, primarily steel. Operating margins at 6.7 percent were down slightly from the previous year, driven by the decrease in gross margins, offset by lower SG&A as a percentage of sales.

Segment performance indicates that our Building Products Group experienced a net sales increase of 31.5 percent to $127 million. The growth is primarily attributed to increased market share, market growth, and new products. Gross margins were 18.5 percent, down 2.7 percentage points, driven by higher material costs and flat selling prices. Operating margins, 7.1 percent, down 1.4 percentage points, a function again of lower gross margins, partially offset by lower SG&A as a percentage of sales.

Our Processed Metals Products Group's sales were $113 million, up 73 percent from the previous year. This increase was a result of higher unit volume, coupled with higher market pricing. The results of SCM Metal Products, which we acquired in June of 2004 are now included in this segment. Sales in the segment, excluding SCM, were up 50 percent. Gross margins were 15.7 percent, up 1.1 percentage points versus 2003. And operating margins improved by 1.2 percentage points to 10.7 percent. The improvements are a result of higher sales volume, mix and improved operating efficiencies.

Our Thermal Processing Group, which no longer includes SCM, generated a net sales increase of 13 percent to $26 million. Gross margins were 20.6 percent, up .5 percentage points versus 2003. Margin improvement was driven by higher sales volumes and improved operating efficiencies.

At this point let me provide some commentary on our outlook for the first quarter. Business and economic conditions indicates stability in the markets we serve, which would support our organic growth targets and provide results in accordance with our 2005 plan. Our Building Products segment, now our largest at 51 percent of sales, has sold its Milcor division, a result of strategic realignment. Market characteristics suggest continued growth in this segment; however, as evidenced in the fourth quarter material cost increases in certain market segments, coupled with a longer than expected phase in of price increases, and the divestiture of Milcor will moderate income in the quarter, offset by improved margins in other segments. Our focus to be a strong participant in the highly fragmented building market remains unaltered.

Our Processed Metals Product segment with improving volumes, favorable mix and generally stable material pricing is expected to provide consistent targeted performance. Finally, our Thermal Processing segment generated strong organic growth in 2004 as the industrial economy improved. We also began work on a couple of large national contracts, one with GM and the other with Ford, that will support growth in this segment during the year. And finally, this remains a fragmented industry, filled with numerous acquisition opportunities, so the outlook here is also a good one.

With that as a backdrop, we expect our first quarter's earnings per share will be in the range of 33 to 36 cents, which is consistent with our operating plan and compares to 32 cents in the first quarter of 2004, barring a significant change in business conditions. While we had an excellent year in 2004, we have clear targets to improve our performance in the year ahead, with a strong focus on operational efficiencies.

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

Before we open the call to your questions, let me reiterate just a few highlights from this past year. First of all we generated far and away our best ever annual sales and earnings. We produced our highest ever gross operating and net income margins. We made 3 acquisitions, Renown, Covert and SCM, which added 70 million in annualized sales. And we sold our Milcor division, a process that began in 2004 and was completed this year in January, as part of our ongoing evaluation of our portfolio of companies. And we will increasingly focus on those areas that generate the highest margins and profitability.

We completed a 3 for 3 stock split, increasing shares outstanding to nearly 30 million, which significantly improved our liquidity and average daily trading volume. Shareholders experienced a 67 percent increase in annual dividend payments due to the annual increase in our dividend, and the 3 for 2 stock split. Our stock reached its highest ever price on October 6, and finished the year up 41 percent on top of a gain of more than 30 percent in 2003.

And finally, to better reflect our current business mix, and our performance characteristics, and to broaden our range of growth opportunities we changed the name of the Company to Gibraltar Industries.

All in all it was a very good year. And I want to personally thank all 3,600 members of the Gibraltar team for their hard work in 2004. While we continue to have a positive long-term view of Gibraltar's future, as we look for ways to grow our sales and earnings and improve our operating performance characteristics, coming off a record performance in 2004 sets a high bar to compare against in 2005. We take great pride and satisfaction in our accomplishments over the past 11 years, especially our record-setting performances in 2003 and 2004. And we believe that we are well positioned to continue Gibraltar's transformation into a larger, stronger and more valuable Company for our shareholders.

Before we open the call up to any questions that you might have, let me anticipate the first question and give you an answer to that. The first question I think will probably revolve around the Building Products segment margins. Just as we had timing issues in early 2004 in our Processed Metals Products segment, which were driven by a timing delay in our ability to pass through higher raw material prices to our customers, we are currently experiencing a similar situation with our Building Products Group.

In Processed Metals we ran into the delay in the early part of the year, followed by sequential margin improvement as the year progressed. While in our Building Products area we were quite successful in general in passing these costs increases along through the end of the third quarter when resistance in some product areas was increased, which has caused the current margin disruption.

There are a whole host of issues included in the creation of this situation, not the least of which is the high demand that we are experiencing in the Southeastern coastal areas, most notably Florida, resulting from storm damage. And this is occurring in an environment in which raw material costs are continuing to escalate, and gaining price increases has been difficult in the face of the devastation in that area.

Nonetheless, overall the margin situation is expected to sequentially improve to normal levels as we move into the second quarter and the balance of the year. With that we will now open the call to any questions that any of you may have.

(OPERATOR INSTRUCTIONS). Robert LaGaipa with CIBC World Markets.

I have several questions. I guess, one, just to follow-up on your answer to the first question, which obviously was the question I think most of us had, what is actually occurring in the marketplace? I was just a little unclear as to your Florida comments. Is there just too much inventory in the channel that is being worked through? You mentioned the timing issue. Historically it has been a situation where you have being able to pass along the costs which you mention fairly quickly. But we have seen this margin compression. Can you maybe just provide a little bit more color as to how much inventory is actually in the channel? You also mentioned comments relative to opportunistic buying of inventory in the fourth quarter, it looks like. Is that in Building Products? Is that in Processed Steel? What is actually occurring there?

You were right. You asked several questions there. Let me try to response to each one of those. First of all, relative to the Florida situation, what is occurring there is simply is that there is very high demand that -- related to all of the repairs and rebuilding that is taking place down in that area. And for those of you who follow that situation, there has been a request, I guess if you will, for companies who are supplying products into that rebuilding not to gouge pricewise; in other words, not to raise prices. And that has certainly impacted our margin situation.

Overall, I think the success that we achieved in the early part of the year in passing on raw material costs increases in the Building Products area was driven by a timing issue. In the early part of the year we were moving into the busy part of the construction year. And the big concern back then was not price related, it was availability related. In the first part of the year there was a very, very tight supply of steel. And customers were more concerned with having steel, having these products available to them during that period of time than the price that they paid -- that they had to pay for those products. In the latter half of the year as things slowed down, we have experienced a little bit more resistance. But as I said, we remain optimistic that we'll see sequential improvement as the year unfolds.

And where exactly are you seeing this resistance? Is it in the big-box stores like Home Depot or the Lowe's? Is it the contractors? Where are you being met with resistance?

I think it is fair to say that the retail segment is a segment that would be in generally more resistant.

Although it's not across the board. It's limited to the distribution type products. The higher value-added products like our hangers and construction hardware products are experiencing -- are not experiencing this issue.

Now what gives you confidence that you will be able to pass along the higher pricing to reflect your costs on a go forward basis, given what is actually already in the channel, which you mentioned?

Well, pretty much the same thing -- the same situation that occurred last year. As we move into the busy part of the construction season, again, the customers are going to need the products, number 1. Number 2, when we look at the demand level out there we see housing starts and remodeling continuing to stay at very high levels of activity, which we think bodes well for us to regain more normalized margin activity. Secondly, this is the pattern that has unfolded for us. So I have the confidence that we will be able to pass these costs increases along once we work through this delay.

2 last questions, if I could. Number 1, to circle back on the inventory issue. Now I was just a little unclear. Now the inventory there was bought on an opportunistic basis, was that in Building Products or was that in Processed Steel? In which segment was that bought in?

Let me first describe what we meant by opportunistic. What we were able to do is somewhat mitigate against the price increases that were coming along. So it doesn't mean that the raw materials were purchased at lower costs than we had previously been buying in the third and fourth quarters. It is just -- we were able to avoid further increases, and we took advantage of that. And that was spread across both our Processed Metals area and our Building Products area, with the bigger bulk of it going into Processed Metals.

Okay. Even in this environment it looks as if the steel pricing obviously has come off since September. It has come off at least by some estimates as much as 125, $140 a ton. Are you concerned that you have bought this inventory, this additional $20 million worth of inventory, in the face of these declines?

I would have to differ with you. I don't believe that prices have come off that much at all. We haven't experienced that. So we're not concerned with our ability -- with the timing of this purchase.

One of the issues in the Processed Metals segment of course is managing the spread between raw material costs and selling prices. And essentially this was a move to manage that spread. So we don't view that there's any risk at not recovering this purchase, because one of the reasons we did it was to sort of lock in our spread between material costs and selling prices in the first quarter.

So the tonnage that you bought from an inventory perspective -- I know you have done a very good job with this in the past -- that has already been committed at a certain price on a go forward basis?

Yes. In our Processed Metals area generally our selling price arrangements are for annual or at least 6-month periods of time. And for 2005 we have already established the pricing parameters with all of our customers, and that is locked in place. So we knew what our selling price was, and anything that we could do to stabilize our raw material costs picture, we thought was to our advantage. We sit here now with our Processed Metals business having locked in at fixed prices approximately 90 percent of all of its requirements for the year.

Terrific. And the last question, and I will pass the baton. And I appreciate you spending the time here. On the acquisition side, you mentioned that the acquisition environment was favorable. I was just curious as to what your visibility is on a go forward basis there? Can you maybe just expand upon this comment, just in terms of the environment, the pricing environment, the opportunities? Are there more opportunities in Building Products or are there more opportunities in the Thermal Processing, the Heat Treating business? Where are you seeing the opportunities?

First of all, when you look at the prices that we paid for acquisitions in the past year we were able to stay nicely within our historic range of 4 to 7 times EBITDA. Our target is to make at least 1 acquisition every year. Clearly we have averaged far more than that. And as we look out into 2005, we have a number of candidates. And again, I will say in each segment of our business, although most notably we see the largest number of acquisition opportunities in the Building Products area of the Company.

We're constantly reviewing acquisition candidates. And we're in various stages, as we always are, of discussion and review of acquisition candidates. And we still believe that our historic average of 4 to 7 times EBITDA is a range that we can successfully make acquisitions in.

Are you using a normalized range for that, not off of this previous environment, which obviously has been very robust for a number of companies?

Yes. We don't take the spike in earnings. We take an average of historic EBITDA generation. And over the years we have been highly selective. And if somebody feels that their business is more highly valued than our model allows for, we walk. It is just that simple. The acquisition environment is still that rich with candidates that we don't have to make every deal that comes along. We can and have been very selective, and we will continue to do that.

Marty Pollock with and NWQ Investment Management.

A quick one, starting with inventories. I'm just trying to get a sense of if I look year to year, clearly with acquisitions you know you have in effect probably bought some inventories. But when I look at the year-to-year growth in inventories it is almost 90 percent versus sales growth of about 30. How much of that inventory growth can you sort of just break down into inventories that were purchased vis-a-vis acquisitions? Because in effect overall it does look like inventories are at a far higher level than where sales have gone to. Can you just kind of breakdown a little bit more detail there?

The biggest single reason for the escalation in the dollar value of the inventory relates to the pricing of inventory. Just as a rule of thumb, raw material costs have gone up somewhere around 100 percent for the year. So that in and of itself is the biggest single factor.

I would say approximately, and this is just a round number, about $10 million of the total increase year-over-year came from acquisitions, that was primarily in SCM. As Brian said, steel pricing has almost if not completely doubled during the year. We did pick up some -- as we mentioned, some volume in the fourth quarter, particularly in the Processed Steel Group. So yes, inventory is up probably a little more than we would have anticipated maybe 6 months ago. But certainly we believe it is manageable and its costs is recoverable.

And we also believe that we're going to work it back down to where we are turning the inventory on a 5 times turnover basis on a quarterly and annual basis as well.

And overall, just if we could turn to the acquisitions. You made 4 acquisitions. Could you just describe where you are on the performance, at least of your earlier ones in the year? Have you met your targets internally?

I would say certainly for the acquisitions -- we made 4 acquisitions. We sometimes use the phrase 3, because 2 of them are very similar, and they were made at the same time. All of the acquisitions that we made are performing at the levels at which we anticipated. I do have to tell you though one of the acquisitions that we made during year was bundled together with the Milcor sale. So the Portals Plus acquisition that was made during there was actually bundled together with Milcor and sold. So we no longer own it. But during the time we did own it certainly lived up to or exceeded our expectations.

Okay. And again following up on Building Products, can you maybe just deal with more precise on the impact of the -- of the growth there in terms of -- essentially you have had significant growth in revenue in Building Products, but then the margin compression is there. But how much of it let's say was seasonable, so that if we were to go ex out the seasonal factor, what would be a normalized first quarter type of number? As you pointed out, the fourth quarter tends to be your weakest?

Yes, the fourth quarter is the weakest, and there was margin compression, but it is normal margin compression in the fourth quarter. If you look at the full year results for -- in fact all the segments, including Building Products you would find that the margin was up substantially over the previous year. And we would expect the same type of characteristic on a full year basis going forward.

I see. And just overall, if you could, if you had to put a dollar headwind, not the number, on these rising costs if you are not being able to pass through? Just in aggregate can you in a sense quantify that number? In effect maybe start with what is the total headwind cost that you -- if you could put -- define. And I guess maybe just target really the fourth quarter since this is where you have seen it most acute.

Are you asking us of course to say what our EPS would have been had we not been able to --?

Could you in effect provide some color on how much of that in nominal dollars really affected the quarter? I know there were a couple of estimates that were very high on the Street on the fourth quarter. I think most of them in effect for Building Products were significantly higher. And that was clearly -- what were the disappointment is because not just year-to-year but in the higher expectations.

Yes, there was one -- right now or in the fourth quarter, I believe we had 4 analysts covering us. One analyst was an outlier at I believe 39 cents, which had the impact when it is 1 of 4 of dragging the consensus estimate up higher. Our guidance going into the quarter was toward 29 to 31 cents. So clearly outside of that guidance some chose to -- or analyze the situation and came to a much higher number than that, which is how it is done I guess, although it creates an environment for what I would say is an unfair comparison.

I guess, not to belabor this, but I'm just now looking at the third quarter, the September number, and obviously when you're looking at the seasonal slow down it is apparent. And even year-to-year margins in Building Products were lower, both when you look at 8.2 million versus 96 in sales. Because of the seasonal decline when I look -- when you look at the third quarter where you had almost 15 percent margins in Building Products, again can you maybe -- if headwind and seasonal, if you were to get back to some normal level, what would be that new normal level for you in '05? Whether it would be the first or second quarter or any other quarter, what would be in a sense be the normalized type of margins?

That is kind of difficult to say because you know the component of the Building Products Group has changed somewhat over time. I think that in the fourth quarter there is obviously a seasonal decline no matter what the composition of that group is. And if you were to look at this particular fourth quarter as an anomaly, which is I guess sort of the way we're looking at it, we would expect to see -- I don't know, maybe as much as a 20 percent decline in the fourth quarter margins, 15 to 20 percent. I think if you look at last year the change was approximately 15 percent, which would be seasonal. I think the rest of that you can attribute to this material pricing issue.

Okay. So overall you are not -- you really don't want to describe the specific normal amount of total, let's say, headwinds that you experienced -- I should say experienced in the fourth quarter?

I think that we actually need to get a little further into the year to determine that. But obviously it carries ever somewhat from the fourth quarter to the first quarter -- into the first quarter -- and should improve as time goes on back to a more normal level. But we do believe it is really a timing issue of when we can get these price increases through into the marketplace.

Mark Parr with Key McDonald.

Just, Brian, for the record, given the fourth quarter headwinds of lower auto production, and also your decision to not to acquiesce to people's request for lower-cost steel to rebuild from the hurricane devastation, you still come in at the high end of the range that you set for yourself. And I just want to congratulate you on an outstanding quarter.

Thanks, Mark. We feel that was a pretty decent quarter as well. But we recognize the issue inherent in that. And we are comfortable that we are going to be able to return that to more normal margin generating levels as the the year sequentially unfolds.

I look back, you know at the the 10 or 12 years that I have followed your Company, and I have watched it grow consistently. There have been some ups and downs in earnings, just which is characteristic for the industry. But I guess at this point what I would like to hear you talk about and maybe -- I missed the first 5 minutes of the call. So if this is repetition, I apologize. But just to go over the kinds of things that perhaps could create another record year for Gibraltar in '05. And I don't know if there is any color you would like to give around that, but that might be really helpful given the fact the stock is down over 15 percent right now from the open?

Yes, I could go back and talk about some of those things, and I think it is appropriate to do that. First of all, we see strong markets for automotive. We don't have to -- for our automotive business to be good, the automotive industry in general doesn't have to operate at maximum volume levels. We're gaining participation in the industry, and we're continuing to refine our operations. And we're going into 2005 in a different position from our Processed Metals segment than we would into 2004 with.

In 2004 we had to play catch-up all year long when it came to passing through raw material costs. Not only did we had a delay in passing those costs on, in some cases while we did get increases from 100 percent of our customers in that segment, we didn't get 100 percent of the costs recovered that we had to absorb from higher raw material prices throughout the year. Going into 2005 though, we're starting out in a totally different position. We have righted that position. We're now with all customers operating at historic margin levels, which we didn't have through 2004.

When I look at n Building Products I see that we made great strides in increasing our sales, increasing our throughput from each of the operations. We're now focused on continuing to ramp up the available capacity that we have within those businesses, and at the same time extract a whole host of operating synergies that are available to us.

Number 1 lies in the area of logistics. And we're putting a full court press on there to reduce the cost of getting our products out to our customers. Right now in Building Products our logistics costs, basically transportation costs, are averaging about 9 percent. Henning's background at Stanley leads him to believe that we should be operating into the 5 or 6 percent of selling price range for logistics costs. Certainly we don't expect to recover all of that this year, but we certainly expect to have an improvement in the area.

So we're going to see increasing sales. The market is still very strong for our Building Products, so we expect to see increasing sales and improvements in our cost structure within that business. And Thermal Processing continues to be strong. It is a basic supplier to the manufacturing base of this country. And manufacturing and capital goods continues to be strong. Also going into 2005 we're going to se the ramp up of the General Motors and the Ford deals that we entered into last year, which should help build the sales volume and the profitability within that business.

Also if you recall last year, we hired a new Vice President of Supply Chain Logistics. And we are looking at a whole host of ways to reduce the cost of the purchased -- nonproduction purchase materials that we're buying in the Company. Just the other day we did our first EBIT, we combined all of our corrugated purchases throughout the Company, which totaled somewhere in excess of 10 million -- $12 million. And through the EBIT process, while maintaining relationships with most of the incumbent suppliers, we were able to reduce the cost by over 10 percent or $1.2 million on the same volume going into 2005. That is not a cost avoidance. That is an actual cost reduction. And we've got about $70 million worth of other products that we were grouping together throughout the Company taking advantage of this critical mass that we have accumulated over the last couple years, and looking to go out and do similar types of things there.

Okay. So if I just -- if you just want to kind of summarize this, you've got your Metal Processing business has got a locked in cost for 90 percent of year's anticipated demand at normal margin. You're looking at continued growth opportunities in construction products across a broad spectrum.

Right.

You've got successful cost reduction initiatives in place, both on material procurement and logistics. And capital goods market and new programs, Ford and GM, are really going to help the Heat Treat business continue to show good growth in '05?

Right.

It doesn't sound like a very bad year to me.

Nor to me.

Congratulations. Keep up the great work. And I look forward to talking with you soon.

Tim Hays with BBT Capital Markets.

I have 2 questions. The first is the sales in Q4 for the Processed Steel. I saw that that jumped up. Was anything unusual that is not sustainable in that sales number?

I think one of the things you see in Q4 that is new -- a new addition this year is that SCM has been reclassified out of the Thermal Processing, so their sales now would pop into the fourth quarter. So that is a little bit of an unusual item. But I think in general we believe that pretty much the Processed Metals business, the traditional business that we have known for years is very sustainable. There doesn't seem to be anything out there. Certainly demand remains strong. We would expect a good performance in that segment for the entire year.

The second question is when you talk about the cost reductions from freight costs going from 9 percent of sales down to a target 5 to 6 percent, do you have a specific time line on when you want to achieve that goal?

I would like to do it as soon as possible. But it is going to unfold over the next couple of years. Number 1, we want to move carefully here because maintaining service, high service levels to our customers is a critical element in all of this. So we're going to move cautiously as we attempt to extract these cost reductions. But it should unfold over the next couple of years.

Were you able to get any cost reductions in '04 or --?

Actually, the truth is very minor, if any.

Gregg Costco with Lord Abbott.

Could you talk about -- you mentioned with regard to the Building Products area that the pricing has taken longer to implement than you had expected or hoped. Have you announced prices as of the 1st of June -- or January or March, or some period of time to recapture that at this point? How does the pricing work, and how do you expect to recapture that?

Yes, we have gone out and talked with customers about price increases to take place at various times during the first quarter. It is generally on a customer by customer, product by product basis that this happens. Let me just clarify one thing though. It didn't take longer. I mean we were very successful in the first 3 quarters of year of matching raw material cost increases with selling price increases. It is basically in the latter third and early fourth quarter where we started to experience this problem in the Building Products area. But we are highly optimistic that we're going to work our way through this and see sequential margin improvement as we move into the second, third and fourth quarters of 2005.

So you're saying that you have talked to the customers. You're working in a price range or whenever that you feel that you'll be able to get back to traditional gross margins within this business?

Yes.

And then the other question was with regard to the Processed Steel. You mentioned that you had -- did you say that you had locked in price for 90 percent of your customers for the entire year? Maybe you could expand on that?

Yes. Going back to our historic pattern in the Processed Metals segment of our business, generally the customers that we work with are the larger automotive companies, the larger manufacturing companies. And they have always been in favor of locking in selling prices for a model year, and that pattern continues into 2005.

The last couple of years because of supply disruptions with the steel mills going out of business, or close to going out of business, the consolidation and merger of steel companies, the resulting tight supply of steel that was in place during 2003 and 2004, our ability to lock in the annualized firm prices with our vendors was somewhat -- had somewhat deteriorated. Going into 2005 though the situation has stabilized considerably, albeit, at higher prices. But availability, while still tight, has improved. And we were able this year to negotiate annual contracts with our various suppliers for our Processed Metal products.

Our philosophy has been to try to match our purchasing arrangements to those of our selling price arrangements. So where we're selling at a longer-term pricing commitment we want to match that with a longer-term purchasing arrangement. In other areas of the business, like Building Products, the selling price arrangements are generally spot market, and will change periodically. And that is why we have a different purchasing arrangement there where we buy a larger percentage of our purchases, but those sales are in the spot market.

So we were successful in the early part of the year where demand was very, very high for steel. And in fact it was in very, very, very tight supply. And in fact many companies were being cut back on the amount of steel that they could buy from their vendors. Because of our long-standing relationships with our suppliers and because of the way some of the consolidation stood place, we became a much bigger customer of some of those consolidated suppliers. We were able to get what we needed. But our customers were concerned with whether or not they were going to be able to get all the products that they needed, particularly going into the heavy construction part of year which begins in the mid, late first quarter into the second quarter.

So our ability to pass on those raw material cost increases to that part of the business was very good in the first part of year. As we move into the slower part of year, the late third quarter and fourth quarter, the customers began pushing back a little bit more. But we're very confident that we are going to be able to right this situation and return to the kind of margins that we generated in the business -- Building Products business throughout the year as we move into the second and third and fourth quarter of the year.

In process though, are we saying that if raw materials prices fall that price decline will be passed on to the customers? Would you maybe (technical difficulty).

No. We have firm prices that were negotiated considering those factors -- those potential factors. And we have had very good success over the years with our customers and maintaining those fixed selling price arrangements.

Again, if price of steel rises or falls, you are either going to benefit or be hurt by that supply in the second half of the year, let's say?

No, no. We've locked it in.

You've locked in the price and you've locked in the cost?

Right.

Finally, with regard to the inventory level, have you looked at it on a ton basis that the increase year-over-year -- at the end of year on an increase in tons?

We do look at it on a ton basis, which really is only germane I would say to the Processed Metal, particularly the strip steel business. And there is an increase in tons. We did intentionally increase the amount of inventory that we had on hand at the end of year. I would say in the Building Products segment it is really not looked at the terms of how many tons that you have on hand, it is really more -- because you don't sell it by the ton, you sell it by the piece and the widget and so on and so forth. But there is an increase in ton on hand at the end of year in the Processed Steel, or strip steel component of the business.

Even adjusting for the 20 million pre-buy?

Well, that's part of the increase. It comes in tons.

So above and beyond, there was an increase there, but that is based on volumes in steel. On a ton's basis, if you look at the turns, that turns are down even after adjusting for that?

But the turns are down based on the fact that we sort of pre-buy, okay? And we had an increase in inventory right at the end of year. So the turns are down in the fourth quarter. But for the year we're pretty flat. Now a little over 5 turns for the year which is very comparable with historic levels. But if you look at the fourth quarter all by itself, because of the spike in inventory, both in terms of tons and dollars, the turns are down. But that should return to a more normal level.

And, sir, we have no further questions at this time.

Okay. Final comment. I just want to thank everyone for participating in our call today. We are very happy with the results that the Company was able to generate in 2004. And we look forward to a positive year in 2005, and also to talking with you at the end of the next quarter. Thank you.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Good day.