Gibraltar Industries Inc (ROCK) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gibraltar conference call to discuss its first-quarter 2005 results and its outlook for the second quarter. We'll begin today's call with opening comments from Ken Houseknecht, Gibraltar's Vice President of Communications and Investor Relations. After the company has concluded its presentation, we'll open the lines to your questions. At this point, I'll turn the call over to Mr. Houseknecht. Please proceed.

Thank you, Christin [ph]. 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 Gibralter has no control. These factors are outlined in the news release we issued last night and in our filings with the SEC. If you did not receive the news release on our first-quarter results, you can get a copy on our 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?

Thanks, Ken. Good afternoon, everyone. On behalf of Henning Kornbrekke, our President and Chief Operating Officer; Dave Kay, our CFO; and Ken Houseknecht, our Vice President of Communications and Investor Relations, let me thank you all for joining us today. I'm going to open up by talking about our long-term objectives and provide an overview of our short -term focus, which Dave will elaborate on from a financial perspective and Henning will amplify from an operating perspective, and then following that, we'll open the call to any questions which any of you may have.

As we said in our news release, we were able to generate our strongest first-quarter sales and earnings, with sales increasing by 34% and income growing by 15% and EPS growing by 13%. As we stated during our last conference call, we expected to see sequential margin improvement from the fourth quarter of '04 to the first quarter of this year, which we were able to generate -- a trend that we anticipate continuing into the second quarter.

As those of you who have followed our company for any time know, our goal is to make Gibraltar a stronger company, not just a bigger one; for us, driving our margins higher over time and producing even better consistency in our operating performance by diversifying our business mix, customer base and geographic coverage, is a central part of our strategy. Our ability to generate 13 consecutive quarter-over-quarter improvements in sales and earnings -- in spite of extreme volatility in raw-material costs and sharp economic fluctuations during that time -- signals that our strategy is working. And we believe we're in a position to extract further operating improvements from our existing businesses.

As we discussed during our recent conference calls, we're moving on many fronts to strengthen and improve our operations. These initiatives, over time, will continue to give us the ability to drive our margins higher and produce greater consistency in our performance. Along those lines, we're making progress in our efforts to consolidate our supply-chain activities under the direction of our recently hired Vice President of Supply Chain Management and the internal Supply Chain Council that he heads. In their first project, they put together a one-day e-bid, which consolidated our purchase of corrugated materials -- basically boxes and packaging -- and reduced our annual $12 million expenditure by approximately 10%. The total supply-chain spending of approximately $175 million on an annual basis -- an amount that, as Gilbraltar grows, will grow right with the company -- the potential for future savings is significant.

While we may not get a full 10% reduction in every area, we fully expect to lower our costs as we better leverage the size and strength of Gilbraltar through a consolidated supply-chain function.

We are also taking also taking steps to gain efficiencies by moving toward a shared-services approach. We've made 22 acquisitions over the last 10 years, and each of those companies had its own IT, HR, sales and marketing and accounting departments, among others, with a critical mass that we've established in each area of our business. We are now beginning to combine some of those activities, which will streamline our operations and drive out our costs. We are also exploring ways to extract better efficiency in our distribution and logistics area, where we currently spend approximately 9% of sales on those activities. Over the next three to four years, as we drive those costs down towards our target of 5 to 6% of sales, the potential savings are considerable.

And a review of our portfolio of companies continues. We plan to divest those companies and product lines or divisions that are not capable of gaining market-leading position or which cannot reach the margin- and profitability targets that we have set for the Company overall. The recent divestiture of our Melcor[ph] unit on Jan. 27th, for which we received full curing [ph] value, is an example of this initiative.

Simultaneous to our efforts to improve the operating performance of Gilbraltar, we continue to pursue opportunities to strategically grow and strengthen our business -- both our existing operations and through acquisitions, joint ventures and strategic alliances. Earlier this month, we entered into a new credit facility with better terms, greater flexibility and lower overall costs, which Dave will be discussing in a just a few minutes.

While growth remains a clear priority for Gibraltar, we are equally focused on finding ways to improve our performance by driving our margins higher, strengthening our returns, and improving our working-capital management. Our goal continues to be to build a stronger company, not just a bigger one.

As we said in our last conference call, a temporary imbalance between raw- material cost escalations and our ability to capture equivalent selling-price increases, had occurred. We also said that we expected this imbalance to be corrected over the coming quarters, and in fact, as I mentioned earlier, there was sequential margin improvement from the fourth quarter to the first quarter, and as we reported in our earnings release, we anticipate a continuation of that trend into the second quarter of this year.

Since we are a diverse company in nature, from a product and a service offering, and provide generally higher value-added range of products and services, our business model is different than our historic model and our peer group. Also, we're still extracting operating efficiencies from our business, as you can see from our lower SG&A costs as a percentage of net sales, another area that we continue to focus on.

Having said all that , at this point I'll turn the call over to Dave, and Hedding will provide a more detailed review of our first-quarter results and give you a better sense of our outlook for the second quarter.

Thanks, Brian.

The first quarter was certainly another good one for Gilbraltar. Sales of $274 million represents a new high for any first quarter in Gibraltar's history, and we're up approximately 34% from a year ago. Operating income and net income also set new highs for any first quarter. Our diluted earnings-per-share of $0.36 was a 13% increase from the first quarter of 2004. Income from operations in the quarter increased by 17.3%, from $17.8 million in the first quarter of last year, to $20.9 million this year. It also represents a sequential improvement from the fourth quarter of 2004.

Selling, internal and administrative expenses amounted to $29.2 million, or 10.7% of sales during the quarter, compared to $23.6 million, or 11.5% of sales in the same quarter of last year. Income from our equity partnerships was $444,000 in the quarter, down slightly from $540,000 in the first quarter of last year. Interest expense during the quarter was $3.9 million, compared to $3 million in the first quarter of 2004, a result of higher average borrowing levels when compared to last year. Our net return on sales during the quarter amounted to 3.9%, compared to 4.5% a year ago. From a cash-flow perspective, we generated EBITDA of approximately $28.2 million in the quarter, up from $24.7 million a year ago.

On a consolidated rolling-average basis, inventory turned at a planned 4. times -- 4.9 times during the quarter, compared to 5.6 times a year ago. The inventory turns in the processed-metals-products group were essentially flat with a year ago, at approximately 4.7 turns, which is typical for this group. Inventory levels in the processed-metals group are about where they should be to support our focused business in the second quarter. Inventory turned in our building-products segment at a 4.2 times rate, versus 5.2 times a year ago, and a planned rate of 4.5 times.

Inventories in this segment normally are front-loaded during the first quarter in anticipation of the construction season, which usually begins in early March. This year, due to unusually wet weather, the season has gotten off to a slower-than- expected start. Some of the large retail customers have been very slow to restock their shelves in response to the late start to the season. Additionally, we excelerated our planned steel and aluminum purchases during the quarter to ensure a favorable material supply situation. As you may recall, last year we had great difficulty in obtaining sufficient supplies of aluminum and on more than one occasion, suffered stockouts. Inventory turns in the building-products segment will level out by mid-year as planned.

Average day sales outstanding and accounts receivable during the quarter were essentially unchanged from a year ago, at approximately 52 days. Capital spending during the quarter amounted to $6.1 million, compared to $5.2 million a year ago. In total, we expect to spend approximately $23 to $25 million in 2005. In addition. we paid out approximately $1.5 million in dividends during the quarter.

As Brian noted, we completed the restructuring of our revolving-credit facility on April 1st. The new facility is designed to provide us with better covenant terms, significant flexibility and lower overall costs. Among other things, the new facility reduces our all-end borrowing costs by approximately 50 basis points and removes the dollar limitations on mergers and acquisitions. It also removes the limitations imposed on the issurance of any senior unsecured or un- -- or subordinated debt. Now I'll turn the call over to Henning for a more detailed analysis of operations.

Thanks, Dave.

Gibraltar's net sales from continuing operations for the quarter were $274 million, up 34% from a year ago. Gross margins improved 1.1 percentage points from the previous quarter, driven by higher sales and partially offset by higher energy and raw-material costs and a slowing of activity in our industrial markets. Operating margins at 7.6% were up from the previous quarter, driven by the increase in gross margins and slightly offset by higher SG&A costs, a function of timing in the quarters. An analysis of 2005 versus 2004 indicates that gross and operating margins were down 1.9% and 1.1% respectively, a function of the phasing of material cost changes into selling prices and business mix in served industrial markets.

Segment performance indicates that our building-products segment experienced a net-sales increase from continuing operations of [ph] 2.7% to $119 million from the previous quarter. Year-over-year growth was 16.9%. The growth was primarily attributed to the continued high building activity in the Southeast, Southwest and West Coast, partially offset by lower retail activity as home centers balance their inventory levels. Gross margins were 20.8%, up 3.1 percentage points from the previous quarter, driven by higher sales and partially offset by flat selling prices. The operating margin was 8.8%, up 2 percentage points from the previous quarter -- a function of higher growth margins, offset by higher SG&A -- but down from the previous year by 1.4%, due to material costs and sales price phasing. Our processed-metal-products segment sales were $128 million, up 65% from the previous year and 13% from the previous quarter. The increase was a result of higher selling prices, improved market share with current customers, and new accounts.The results of S. C. M. metal products, which we acquired in 2004, are included in these results. Sales in the segment, excluding SCM, were up 44% year-over-year.

Year-over-year, as well as quarter-over-quarter, gross margins were 16% and operating margins 11% -- both up approximately a half a percentage point -- driven by our improved material cost-selling price relationships and leveraging at the higher sales level. Our thermal-processing segment generated a net sales increase of 5.1% to $27 million, versus 2004, and and increease of 1.6 % versus the fourth quarter of 2004. Gross margins were 21.1%, a decrease of 2.6 percentage points versus 2004, but an increase of a half a percentage point versus the fourth quarter of 2004. Operating margins were 12.7%, a decrease of 2.8 percentage points versus 2004, but an increase of 1.7% versus the fourth quarter of 2004. Comparisons to the prior year were unfavorable due to business mix.

At this point, let me provide some commentary under Outlook for the Second Quarter. As we move into the season with strong spirits for our business, the second and thrid quarters will continue to benefit from many growth, efficiency and inventory- improvement initiatives. Our building-products segment , even after the January sales of our Milkwell [ph] subsidiary, continues to generate growth as a result of market-share gains and market growth. In our processed-metal-product segment, growth is coming from the expansion in the powdered-metals market, improved market penetration and participation in new markets. In the thermal-processing segment, our focus is on expanding our business with the many large manufacturers that currently do much of their heat-treating work in-house.

With the position of these growth initiatives, and all of our existing operations, as Brian mentioned, we continue to evaluate acquisition opportunities in every part of our Company. We'll continue to be highly strategic and selective, and only acquire those companies with the creative finacial characteristics that will make make our business stronger for the long haul. With that as a backdrop, we expect our second-quarter earnings-per-share will be in the range of $0.54 to $0.57, which is consistent with our operating plan and compares -- the $0.52 in the second quarter of 2004 -- barring a significant change in business conditions. We had a strong first-quarter sales and earnings, and we are on pace to produce strong second-quarter results.

Longer term, we have a clear target to continually improve our performance in the year ahead and beyond, with a strong focus on building a business platform based on operational excellence. At this point , I'll turn the call back over to Brian.

Okay. Thanks, Henning. Before we open the call up to your questions, let me make a couple of closing comments. First of all, while 2005 is off to a good start in many areas, we are focused on driving our margins back to historic levels, returning our inventories to historic turnover levels, and continuing to improve all of our businesses to meet our established performance objectives. We are focused on all of these areas and we have numerous initiatives under way that should improve our performance over time. Basically, we think we know what we need to do and we're going about it in our normal, consistent manner. That concludes the prepared comments that we have for you today, and we'll open the call to any questions that you may have.

[OPERATOR INSTRUCTIONS] Your first question comes from Robert Lagaipa of CIBC World Markets. Please proceed.

Hi. Good afternoon.

Hi, Robert.

I just had a few questions for you -- obviously a good quarter. The first question I had was just related to what you are seeing in the auto markets. Obviously you have some exposure there ... something along the lines of 25 to 30%. Maybe if you could give us some color in terms of what you're seeing across the businesses there, specifically in process metals and also in the thermal-processing side. You mentioned some mixed shifts going on within the businesses, which have impacted margins, and I just wanted to get additional color there.

Let me take a shot at that first, Robert, and then Henning can follow up with additional and probably more detailed comments.

When we look at the automotive industry this year, while it's still early in the year, the expectations seem to be that it will be a flat to maybe slightly down year. We'll know more as the year unfolds. I think that digging into that bit deeper is more important at this time. It appears that the softness is most predominant with the historic Big Three and that the transplants seem to be gaining market share at their expense. From our perspective, we are experiencing more growth in the transplant area of our business than we are with the Big Three, even though we are continuing to make progress there. So hopefully, if it does turn out to be a somewhat -- a slightly down year, we may be able to offset some of that by doing more business with the transplants. We also have been successful in selling our products overseas, both in the European and Asian markets of late, which also will help mitigate against what might be a slight downturn for the year.

Henning, do you want to add anything to that?

Yeah, Bob, on the issue of mix -- and I had referred to a change in mix -- the real simple answer is that in the heat-treat business, our two most profitable businesses were off during the quarter -- the sales were off, and the sales were off because of slow starts in both the agriculture and vehicular markets, which are the markets that those two businesses serve. The other elements in the heat-treat business, in fact we're doing quite well -- we're moving at the budgeted rate. And we expect those other two businesses, in fact they've already started, to return back to more normalized levels.

Terrific. And two other questions. One, just in terms of the pricing catch-up you mentioned over the course of the majority of 2004, you had some difficulties in terms of matching up the pricing with the cost escalation. Now that we've seen steel costs specifically and possibly aluminum at some point this year as well, start to come off, where are you in terms of catching up on the costs there across the segments, and specifically building products? You mentioned that from the inventory standpoint, you've actually bought ahead some steel and aluminum there. Could you maybe just walk us through the rationale there ...

Just let me give you a general overview and then Henning can pick up on the details. In general, historically, a declining raw-material-cost environment has given us an opportunity to slightly expand margins, driven by the fact that generally, our selling prices come down at a lower rate than raw material costs do. Although this may be somewhat of a different period, in that I don't expect dramatic declines in raw -material costs throughout the year like we have seen in the past, but nonetheless in general, that's how our business has been impacted by participating in a declining raw-material-cost marketplace. Henning, do you want to touch on the some of the specifics?

Yeah, Bob -- as you indicated, and we talked about this, I think, through most of last year -- phasing was always an important element, and I think a number of companies have gone through the same issue, and this is the phasing of pricing and raw-material costs. And we're still going through what we consider to be a challenging period. I think fortunately, we have been able to offset that with improvements on our operating line. If you look through our characteristics, when you go down from gross margin to operating margin, you can see that there's constant improvement. I think Brian has talked about that at great length -- the focus on improving our operating efficiency. It allows us us, if you will, better strengths in dealing with the volatility in materials markets, and it has been a hallmark characteristic of Gibraltar through all the years.

From a margin perspective, specifically in building products, are you expecting -- I'm just trying to get a better sense of the ramp you are expecting in the margin there, with raw-materials costs coming down, and I recognize that you've built up some inventory to ensure availability ... Are you expecting margins to return to last year's levels in building products?

We would expect the margins to get up approximately where they were last year. The mix of the businesses they're coming from is going to be different -- but yes, we do, towards the back end of this year. And I think as Brian said, you'll see the continuing steady improvement go through the the year. And as Brian said, it's not a detriment of the business -- we're doing all of the things in the right areas, and this phasing phenomenon that we've all talked about is something that we are working our way through.

Let me make one comment on the inventory that you mentioned ...

Sure.

This inventory buildup was based on an opportunistic series of buys that we were able to make, which we believe are still very competitive with current and anticipated stock market prices.

That's great. That's very helpful. Last question if I could, Brian. Just from an acquisition/divestiture standpoint, specifically on the acquisitions side, can you maybe just give us some color as what you are seeing out in the marketplace? Have valuations come down at all? Have they remained stable? What are the opportunities out there?

Let me break that down into two groups. The typical acquisitions that Gibraltar has been making over the years are companies that range in sales volume of $75 million down all way down to $5 million in size. We see that market as continuing to have very similar valuation characteristics to those which it has displayed in the past. We have not seen valuation models for that size privately-held company expand, I think, evidenced by some of the recent acquisitions that we made last year.

And we have a number that we're looking at today -- and they, acquisitions of that size -- we anticipate that we will still be making in the historic four-to-seven-times EBITDA range that we've been making acquisitions in. When you look at larger acquisitions -- $200 million or $300 million or larger -- there I think it's clear that the multiple EBITDA has gone up. Dave can probably talk about this.

But the financing markets today are such that the amount of required equity going into those deals is less, the banks are willing to finance more, and as a result they're willing to pay somewhat more. So the historic kinds of acquisitions that we've made, we see the valuation model the same, the bigger ones which we actually haven't made but are looking at, we see a higher multiple for those. But again, we're -- from an acquisition perspective, we plan to stick to our historic pattern of making acquisitions, and we just simply will not overpay for any acquisitions.

Great. That's helpful. Thanks very much. Great quarter.

And next your question comes from Mark Grimski [ph] of Needham & Co. Please proceed.

Good afternoon. .

Hello, Mark.

How are you?

Good, thanks.

On thermal processing, I was wondering if you could give any more color on that segment -- and also any additional opportunities, also concerns in that area ... I guess I assume you are very optimistic on that market this year and I'm just wondering if you think it will live up to your expectations.

I think that we are very optimistic on that market, we think it will live up to expectations, I think in the early part of the year, as I said earlier. Two of the most profitable businesses got off to a slower than expected start. But as we're looking at the incoming business, they're already started to pick up and that will return them back to planned levels. We think it's a good business segment , we think it has great opportunities going forward, and again, in this particular market, it has no material content, so [LAUGHTER] ... It even gives us some stability.

It helps smooth out the volatility.

And not to pick on the gross margins, but just having your contracts -- 90% of the contracts being long-term -- six months to a year out -- and you now you just assume inventory flow through the sales channel, are you confident that your gross margin numbers on a yearly basis is going to surpass last year? You had some strong quarters last year, so ...

We had an exceptionally strong year last year -- as you know, it was the best in our history. Our expectation is still to duplicate the gross margins this year that we had last year. There's going to be a mix in the segments, and looking at our numbers, you can sense that. But I think when it's finished, we expect to be in the same range.

One comment I should make, though, just to clarify a point that you made, Mark, that 90% of our purchases are contractual -- that relates to our processed-metals business, but does not cover our building-products business, where we sell more in the stock market ,so we buy more in the stock market.

And now just quickly on the building products, are you seeing, and specifically on the processed metal, are you seeing the automakers coming back with -- they're obviously having difficult times -- and are they putting pressure on you?

We haven't renegotiated any contracts at this point.

Great. That's it for me right now.

And the next question comes from Yvonne Verrano [ph] of Jefferies. Please proceed.

Thanks. In the building-products area, I just wondering if you could comment on the inventories you think are there still at the big-box retailers. It seems like they were a little high in the first quarter, and the reason behind the little-bit slower sales there. Just wondering how that has changed and whether or not you think we'll see greater strength going into 2Q.

Yvonne, are you talking about the sales at the big boxes are slow and the inventory is high?

Yeah.

I think in participation that we have seen, and in fact without naming the specific customers -- some of the largest customers, at least in terms of our participation with them, got off to a very strong start. I think there is one instance where that has not been the case, but certainly with the largest customers we deal with, that has been the case. Our product lines have continued to do well, and again that's consistent with the gains that we've seen in the building-products market both in new housing starts and in replacement housing sales as well. As you know, most of our products are going to the replacement market , and so year-over-year sales of existing homes usually bodes well for the markets we participate in, and in fact we've seen that and we continue to see that going forward.

Yvonne, I think one of things that happened, again without mentioning names of retailers -- Some of these retailers, it's not that they've had a huge overhang of inventory -- they just have begun to manage those categories far more closely, so they've got more to this just-in-time sort of situation, while at a number of retailers, we had very a good quarter, at other the other numbers are really now just starting to come in for the second quarter.

It's been a mixed --

Mixed bag.

I wanted a little more detail perhaps on the SG& A line. I know on an absolute basis it went up, but as a percentage of sales it went down. I was just trying to get a feel for how some of the programs that you have been putting in into place on the cost-saving side might have impacted that number?

On the SG&A side, I think that when we look back at the first quarter a year ago in terms of dollars compared to first quarter of 2005. The first quarter of 2004, we were just getting into what should I call it -- the regulatory environment -- and we had no idea how much we would incur in legal, professional and accounting fees. So we had just a typical historical level of accruals in the first quarter of a year ago. I could tell you now those costs are much, much higher in 2005. We've had a number of initiatives going on. We are in the process of consolidating payroll from a number of locations all into one central processing area. We're looking at things like cash management, dispursements, accounts payable, certain IT functions. I think those are ongoing projects which are not completed yet, and so and we really haven't dropped much of that yet to the bottom line. We do have a lot of programs in place to control costs at the levels that they're at. I think when you look at -- last year and this year -- certainly they're almost not comparable because of the regulatory impact that started -- we didn't really pick that up until the latter part of the second quarter last year.

Going forward, though, on annualized basis, we would expect the regulatory-related costs that Dave was just mentioning, to be less than what they were on a full annualized basis in '05 compared to '04. I think we're going to view this as a positive, that the Company is now at a point where we've added our own internal audit function -- that gets to be an increased cost as well. As David mentioned, there is a cost associated with the compliance issues, and I think it's a cost that all public companies have had to bear.

So you say we'll probably see less regulatory costs as the year progresses in the SG&A line?

Compared to last year.

Because you started to see the high other regulatory costs in the latter quarters of last year.

Right. Last year the second half of the year was very heavily loaded with those costs. This year, while on an absolute dollar basis, they will in all likelihood be less, they should be spread ... across the quarters.

Terrific. Thanks.

The next question is from Tim Hayes of BB&T [ph] Markets.

Good afternoon.

Good afternoon, Tim.

If terms of top-line sales growth, what might you be expecting for '05 and '06 and what kind of view on steel prices do you have over that period -- specifically the availability of metal. Is it tightening up or do you expect to get supplies quite easily in the second half in '05?

I'll answer the raw-materials cost issue, but as far as forecasting annual sales for '05 and '06, that's something that we just don't generally do. But from an availability standpoint, I believe that the steel industry both domestically and worldwide is in a better position this year to manage its affairs than last year. And as a result of that, while last year was a difficult year from a supply stand- point , I don't envision it being nearly as difficult this year as it was last year. I expect to see an improvement in availability compared to what we had last year, particularly the first part of this year, we're already seeing that. So when I think about it in terms of steel prices, we have seen somewhat of a softening in the current period, and although I don't expect to see any dramatic declines beyond where we are now, and would expect to see probably some degree of firming in the second half of the year.

Tim, I would say that certainly in this year of 2005 and some of this as a result of what we experienced in 2004 -- some of our raw-material purchases this year have been rather front-end loaded for a number of reasons. One is the availability of aluminum. The other is opportunistic pricing, including bringing in some foreign material. So, we'll see lots of that in the second half of the year. The majority of that happened in the first half -- certainly in the first quarter, early in the first quarter, we brought in some very opportunistically priced material and actually quite a bit of aluminum. We won't see so much of that in the second quarter. So that's why when we say inventory will return to much more normal levels, that's why.

Okay. Thank you.

Tim, just let me finish up on your question and say that while we don't make projections on sales forecasts in future periods, I can tell you we continue to be focused on growing our sales, growing our earnings and improving our margins, if that's any help.

Your next question is from Cathy Jones of Smith Barney. Please proceed.

Hi.

Hi, Kathy.

I just want to get a little more clarity on the process-metals segment and primarily, you had a big jump in sales and an increase in operating margins. Can you give me more detail on how much for volume versus price we should be thinking about there?

Yeah, sure, I'd be happy to do that. When you look at where we were in the first quarter of 2004, we were just entering into the period of rapid raw-material cost escalations. So at the end of the first quarter of '04, when asked a similar question, we said it's probably 90% volume, 10% selling price because we hadn't yet passed on any significant amount of selling-price increases. The answer to that question today may not be the opposite of that, but it's probably in the range of 75/25 or 75/30, with price being the larger and volume being the smaller.

Okay. Do you want to hazard a guess what that's going to look like in the second quarter?

I would say, compared to the second quarter of last year, it will probably be 60/40 or 70/30 -- something like that..

And it will moderate towards the end of the year.

And you expect it to even out as the year goes on.

Right and that's why we talked about the phasing issue of material pricing and cost.

That was my only question. Thanks you.

[OPERATOR INSTRUCTIONS] Your next question is from Danny Horowitz [ph] of Investment Counselors. Stand by.

Hi. I just had a question on the process-metals side. I don't know what the timing is each year that you talk to the Big Three or OEMs, but I wonder how you think that conversation will go after you had what looks like an '05 year that seems to be shaping up pretty well and you've obviously had a pretty strong '04 relative to '03.

Those negotiations generally take place in the late third to early fourth quarter of the year, although sometimes it will stretch out later than that. I guess the real answer to that question -- when we have those discussions, it's primarily based on what's been happening with raw-material cost, which is a fairly visible commodity. That really shapes those discussions to a very large extent.

So in a situation where we have a stable commodity environment what -- would they push to squeeze you there, or would they accept a certain level of margin, or how would you expect that to work?

We have always been an outstanding supplier. I think that we get recognition for being an outstanding supplier, and I think we have usually very positive discussions with our customers. I think it's always been the case from the inception of the business. That's in essense how we grew the business. It doesn't necessarily all focus simply on price; that's not the case.

But it is a huge factor, and generally what our focus is in these negotiations is to maintain the spread between our raw-material costs and our selling prices, and that's what we always attempt to do. Historically we've have gone out and locked in our raw-material costs for the same duration that we've established the selling-price terms for, basically locking in our margins. That's the historic pattern that we've tried to follow, and we would expect to continue with that approach going into the '06 model year.

Fair. On the building-product side, is it a similar dynamic that you have an annual discussion with the Home Depots and Lowe's of the world?

No. Basically, once we get an order with them, we pretty much supply them on an ongoing basis. There isn't an annual review, actually.

How have the dynamics there changed? It seemed last year there was much more of a supply-constrined market and they were willing to pay up, and maybe now that might not be the case.

We've not seen that. We continue to have very positive discussions with customer in the building- products side -- we've reached a point where we recognize that we're an important supplier to them and they're an important customer to us. I think it's worked well for both of us.

You are may be talking about a general dynamic that is typically in place, but when you look at the type of products we're selling to the big-box retailers, most of our stuff, with the exception of our mailboxes, is in the back right-hand corner of the store. These are things that sell anywhere from $0.19 a piece to $5 a piece. And when the do-it-yourselfer walks into the store, he wants to make sure that he can get everything he needs to do his project that day. And so from the big-box retailer viewpoint, their first priority is to make sure that that the stuff is on the shelves. If it's not there, they can't get the sale. Secondly, while last year we were successful in getting price increases, the way that the big-box retailers are evaluated -- or one of the ways that they're evaluated by the investment community -- is same-store sales year-over-year comparisons. Inside of one of the big-box retailers, they look at same shelf space, or same department sales on a year-over-year basis as well. So it's up to us to manage and make sure that those shelves are full during the busy buying day so that we maximize same-store sales ... If you factor in a price increase on top of that, that helps drive up the same-store sales comp for them. And particularly if they're able to get a little more margin for themselves as we pass on the price increases to them, they're getting a same-store sales comp improvement, they're getting a margin improvement, and they're keeping their customers happy ... It's a little different dynamic. You were right in the general dynamic, but relative to the specific products that we put into the big box retailers, it's a little different dynamic.

And lastly -- why were the margins in building products down so much?

On a year over year basis?

One things I'd like to point out., on a quarter-over-quarter basis, fourth quarter to first quarter, we were able to sequentially improve the margins.

When we talked in the fourth quarter about our fourth-quarter performance, we made note that the margins came down and that was what Henning referred to as a raw-material cost phasing issue. In the early part of '04 , as the raw-material costs were aggressively ramping up, we were able to keep up with it. We met some increased resistance in the fourth quarter. We are dealing with that subject and as we mentioned, the sequential margins in the first quarter improved over the fourth quarter of last year and we expect to see that trend continue into the second quarter. In other words, we are dealing with the problem that we had in the latter part of '04.

Thank you so much.

You're welcome.

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