Gibraltar Industries Inc (ROCK) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter Gibraltar -- I'm sorry, Gibraltar Industries, Incorporated earnings conference call. My name is Sean, and I will be your coordinator for today. At this time, all participate apes in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. For assistance at any time during the call, please press star zero and a coordinator will be happy to assist you. I would now like to turn the presentation over to your host for today's call Mr. Peter Ciotta, Director of Corporate Communications. Please proceed.

Thank you, Sean, and good afternoon, everyone. We want to thank everyone for joining us on today's call. Before we begin, I want to remind you that this call may contain forward-looking statements about future financial results. Our actual results may differ materially as a result of factors over which Gibraltar has no control. These factors are outlined in the news release we issued last night and in our filings with the SEC. If you did not receive the news release on our second quarter results, you can get a copy on our 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.

Thanks, Peter. Good afternoon, everyone; and on behalf of Henning Kornbrekke, our President and Chief Operating Officer, Dave Kay, our CFO, and Peter, our Director of Corporate Communications, who today is filling in for Ken Houseknecht, our Corporate Director of Investor Relations, we want to thank you for joining us on the call. I'm going to give you a general overall overview of the Company and then talk a little bit about our longer range initiatives. Dave Kay is going to follow up and discuss our financial results for the quarter, and then Henning will take a look at the Company from an operating perspective; and then after that, we'll open the call up to any questions that any of you may have for us.

To start with, the second quarter saw increased volatility in raw material pricing over that which existed in the first quarter. And while Gibraltar is not immune to the effects of this volatility, we believe our ability to generate solid results in this environment is a testament to the progress that we've made in diversifying and strategically repositioning Gibraltar. In addition to serving more customers and more markets with a broader array of products and services than at any point in the Company's history, we've also repositioned our business into areas of higher value-added end product manufacturing and service areas which have no raw material cost component in their selling price.

These factors help mitigate against raw material cost volatility and improve our ability to perform more consistently in a variety of material pricing, economic and interest rate environments. And our strategy going forward calls for us to continue to focus on building Gibraltar into a company more capable of generating consistently improving performance over the long haul. In addition to building a company that can produce consistent and steadily improving results over the long haul, on our fourth quarter conference call, you may recall that we said we were going to focus on a few key areas in the short run, as well. So let me give you an update on the progress in those areas.

First, during our fourth quarter conference call, we said that we expected to generate sequential margin improvement in the first and second quarters, and we've accomplished that. Our gross operating and net income margins were all up in the second quarter compared to the first and the fourth. Importantly, our operating margin climbed back above our 10% goal, and our net income margin topped our 5% target. Second, we said we are going to reduce our inventory position, which we accomplished by driving down our inventory by $31 million or 13.5% during the second quarter. Third, we said that we needed to improve our cash flow, which would enable us to fund more of our growth internally.

And as a result of our inventory reduction and strong earnings, we paid down $45 million in debt during the second quarter, which lowered our net debt to total capitalization at June 30, 2005 to 36%, down from 40% at the December 31, 2004, and from 38% a year ago at June 30, 2004. And this positions us well to continue to execute our growth strategy. We also continued an intensive and ongoing effort to drive costs out of our business and make a host of operational improvements that will further strengthen Gibraltar for the long term. At this point, I'm going to turn the call over to Dave, and then Henning, who will provide a little bit more of a detailed review of our second quarter results and give you a little better sense of our outlook for the third quarter and the balance of the year. Dave?

Thanks, Brian. Sales from continuing operations of $288 million in the second quarter were the highest for any quarter in Gibraltar's history, and increased by approximately 16% from a year ago. In the first six months of 2005, sales were $562 million, up by approximately 24% compared to the first half of 2004. Net income from continuing operations in the second quarter was $15.9 million, compared to $15.3 million in the second quarter of 2004. During the first half of 2005, net income from continuing operations was $26.5 million, an increase of approximately 8%, when compared to the first six months of 2004. Earnings per share from continuing operations in the second quarter of 2005 amounted to $0.53 a share, up from $0.51 in the second quarter of last year.

During first half of 2005, earnings per share from continuing operations were $0.89 a share, compared to $0.83 in the first half of 2004. As a result of lower professional service fees associated with Sarbanes-Oxley compliance and the ongoing cost control efforts, selling, general and administrative expenses amounted to $27.2 million, or 9.4% of sales during the quarter compared to $29.7 million or 11.9% of sales in the second quarter of last year. Our equity partnerships generated a slight loss during the quarter, compared to a $1.2 million profit in the second quarter of last year. The decrease resulted primarily from operations at the Duferco Ferrill joint venture, which was negatively impacted by the steel pricing situation and competitive market factors. As a result of higher overall interest rates and slightly higher average borrowings, interest expense during the quarter was $3.8 million, compared to $3 million in the second quarter of 2004.

Our return on sales was 5.5% for the quarter, up sharply from 3.9% in the first quarter of this year, and moving us towards our year-end goal of a 5% net return on sales. From a cash flow perspective, we generated EBITDA of $36 million in the quarter, up from approximately $34 million a year ago. We paid down $45 million in debt during the quarter, reducing our net debt to total capitalization ratio to 36%, our lowest level since the first quarter of 2004. During the quarter, we were able to complete a restructuring of our revolving credit facility which will allow us greater flexibility at a lower overall cost. We were, as Brian also mentioned, able to reduce our inventories by $31 million during the second quarter, and we would anticipate further reductions in the current quarter. On a consolidated basis, we turned our inventories of 4.4 times during the quarter compared to 4 times in the first quarter of year, moving us back towards our annual goal of turning our inventories at a rate of 5 times or greater.

Average days sales outstanding were at 53 in the quarter, compared to 52 a year ago. Capital spending during the quarter was $4.3 million, compared to $4.6 million last year. Year-to-date, capital spending amounted to $10.4 million. In total, we expect to spend somewhere in the range of 23 to 25 million during the year 2005. We also paid out approximately $1.5 million in dividends during the quarter. For the balance of the year, our efforts from the finance perspective will continue to be focused on working capital management and maximizing cash flows. Now, I will turn the call over to Henning for a more detailed analysis of operations.

Thanks, Dave. As Dave has mentioned, our net sales from continuing operations were $288 million in the second quarter, up 15.8% from a year ago. Our gross margin improved 1.3 percentage points from the first quarter, the result of higher sales, offset by higher energy costs and margin compression in our processed metals group. Our operating margin of 10.2%, was 2.6 percentage points higher than the previous quarter, driven by a higher gross margin and the reduction in SG&A costs. Comparing 2005 to 2004, our second quarter gross margin decreased 3.2 percentage points to 19.6%. Our operating margin was down .7 percentage points to 10.2%, a function of the lower gross margins, offset by reduced SG&A spending as described by Dave earlier.

Looking at the results in the three segments, building products had a net sales increase from continuing operations of 11.2%, to $143 million. The growth was the result of market share increases in a number of businesses. Gross margins were 25.2%, down 1.9 percentage points from a year ago, driven by short-term decline in material margins. The operating margin was 15.6%, up from 15.4% in the second quarter of 2004, driven by lower SG&A spending. Our processed metals product segment sales were $118 million, up 25.3% from a year ago, a result of higher industry market prices. The results of SCM Metal products, which we carded in June of 2004,are included in this segment. Sales in this segment, excluding SCM, were up 15.8% in the quarter.

Our gross margins were 12%, down 4.4 percentage points from the previous year, and the operating margins were 7.1%, down from 11.7% in the second quarter of 2004, a result of competitive selling prices, and higher costs, raw material flowing through cost of goods sold and a declining price environment. Our thermal processing segment had sales of $28 million, an increase of 4.2% compared to the second quarter of 2004. Gross margins were 23.3%, compared to 25.3% in the second quarter of 2004. Operating margins were 15.2% in the second quarter of 2005, compared to 16.2% in the second quarter of 2004. The decrease in operating margins was due to the lower gross margins, driven by increased energy and maintenance costs, partially offset by lower SG&A costs.

At this point, let me provide some commentary on our outlook for the third quarter and the balance of the year. The third quarter will clearly provide additional challenges, particularly gross margin compression, a result of the phasing of inventory consumption costs and selling price alignment. The impact will be most prevalent in our processed metals segment. Offsetting will be the continued strong building products market and improving automotive market, improved market penetration in all segments, and improved operating efficiencies. Considering the peak impact of the inventory phase through issue, which will hit during the quarter, we expect our third-quarter earnings per share will be in the range of $0.40 to $0.45, compared to $0.55 in the third quarter of 2004, and $0.33 in 2003, barring a significant change in business conditions.

Looking ahead to the balance of the year, we expect margin pressure in the processed metals products segment will subside in the fourth quarter as we work our way through our remaining [INAUDIBLE] inventory and steel prices continue to stabilize. Longer term, we remain focused on growth and continuous improvement. Building a business platform that provides strategic advantages in the marketplace and operating efficiencies will continue to be corner stone traits, with the objectives of providing consistent operating results and improved shareholder value. At this point, I will turn the call back over to Brian.

Thanks, Henning. Before we open the call with any questions that any of you may have, let me make just a few closing remarks. Since going public, we've focused on strategically reshaping and repositioning Gibraltar to make it a larger, stronger, and more diverse company, capable of generating a consistent pattern of improving results. This past quarter highlighted our progress towards that end. While we certainly understand the importance of hitting our quarterly performance goals and objectives, and quite frankly, we've done a pretty good job of doing that, we also know that we have to continue our efforts to build Gibraltar into a company capable of generating improving performance in a variety of economic, raw material and interest rate environments; and to those points, we continue to make progress in the first six months of 2005, and we look at the second half of the year with an expectation of more progress, which we belive will position Gibraltar for further growth and improvements in our operating performance and shareholder value characteristics over the long haul. That covers our prepared comments for today; at this point, we'll open the call to any questions that any of you may have.

Ladies and gentlemen, if you wish to ask a question, please press star one on your touch-tone phone. If your question has been answered or you wish to withdraw your question, please press star two. Questions will be taken in the order received. Please press star one to begin. And we'll pause for a moment before we take our first question. And your first question comes from the line of Mark Grzymski with Needham & Company.

Good afternoon.

Hello, Mark.

Just on the profit metal area, the gross margin problems going on there, is -- how -- or, actually, let me step back for a minute here. You mentioned the industry -- higher industry prices. Is that what you said, or -- I thought you said declining price environment.

Well, we may have said both, but they were comments relative to different areas.

Oh, okay. Understood.

Raw material costs in the second quarter and continued into the early third quarter were declining rather precipitously.

Mm-hmm.

Which caused some misalignment between raw material costs and selling prices. And then on the selling price side of that, we said that we expected, because it appears that imports of raw steel coming into this country are down because the majority of the inventory correction that was taking place in the service center arena, and in other steel consuming arenas, has pretty much run its course, and the fact that a number of the integrated mills have taken some of their capacity off line, we think all of that leads to a tightening of supplies in this country, which should drive steel prices up as we look out over the balance of the year.

Right. Okay. Okay. Great. And in the processed metals area, are you seeing -- you know, what kind of pricing are you getting from the -- you know, from your large retail clients? Are there any -- are they accepting higher prices, or what kind of -- what's the environment like?

The environment in that segment of the business has tracked what's happened with raw material pricing issues.

Mm-hmm. So kind of looking forward now, is there any -- you know, are you seeing any softening in demand from those areas? Are you --

No, just the opposite. We are -- we are seeing an improvement in demand from the automotive sector. We are seeing improvement in demand in the -- continued strong demand of the building products area; and from our heat treating business, which serves the general manufacturing base of this country, manufacturing activity overall seems to be going up, which should help us from a buying perspective in that part of our business as we look out over the balance of the year. So in general, things are, from a buying perspective, are looking good.

Yes, I think we would term that it's a competitive business situation that we see improving going forward. I think that's what we tried to portray in our conference call.

Right. Are you seeing any of the -- in the process now, are you seeing the demand for -- the strong sales in automotive, obviously through the incentive programs? Is that kind of translating through?

Oh, yes, that's going to have an increase in manufacturing, which will eventually translate to businesses like ours. And again, we remain optimistic as we go forward, particularly as we look at the global marketplace, which I think we all realize is where we are today.

I think the auto companies, too, are developing strategies now that -- in awareness of the fact that they have been discounting to make sales that are going to help them get over that hurdle and start to put a different -- a lower price line of vehicles in the marketplace, to help get away from some of this incentive-based selling that they have been doing for sometime now. So I think long term they are coming up with solutions that are going to allow them to maintain a good rate of sales.

Okay, well, thanks. Thanks for the clarification. I will get back in.

You're welcome.

And your next question comes from the line of Robert LaGaipa with CIBC World Markets.

Hi, good afternoon.

Hey, Bob.

A few questions for you. One, I just wanted to follow up on the processed steel side. You mentioned the raw materials costs. You've also mentioned in the past your ability to mask them; and you know, obviously, with this precipitous decline that we've seen for steel pricing, it has had an effect. But how much of that -- because you also mentioned in your commentary that there's been some competitive pressure, too. I mean, how much of it was the decline in -- purely the price decline versus, you know, just your competitors being fairly aggressive?

Well, there's different ways that we can look at this, but I think the most accurate way is that it's a function -- and we talked about the phasing. It's a function of the price over inventory and how quickly we can pass it through in a marketplace where prices are coming down obviously. Obviously, that's a temporary situation. Eventually, we've focused on years for turning our inventory as fast as we can. We are not inventory speculators. We try to -- we are pretty much a job shop. So we buy inventory relative to the customers that we have; and we try to buy as little as we can, but yet meet the service and delivery requirements that the customers have. Last year, 2004 saw some aberrations there; when the steel market got very, very tight, people were scrambling to get inventory.

We were fortunate because of long-term supply arrangements that we had and a good history with our vendor base to get the steel that we needed; but I think like many, towards the end of the year, and going into the first quarter, we got caught with more steel than typically we would normally have carried. And we've since been working our way through that. And as you saw from our second quarter report, we think we've worked our way through a -- through a substantial piece of that inventory overhang, and we've got some more work to do this quarter. But by the end of the third quarter, we expect to see that situation resolve itself.

Yes. Well, the good news is we are getting through it quickly with minimal impact, and I think relative to the other folks, where we fare with our peers, I think would you agree with that.

Now, what gives you confidence that this is going to resolve itself over time? I mean, how do you see in a situation where, you know, the pricing has stopped falling? I mean, what are you seeing currently in the marketplace?

I think in the marketplace, in a broad sense, we see that mass steel has now become a global market and not a regional market and that is -- of course, is helping to stabilize the situation. And we see -- I mean, we look at the spot markets I'd tell you that we see it already starting to level off.

At what price is it leveling off? I mean, if I were to go out and buy a hot roll sheet right now -- I mean, I know the purchasing managers report, you know, talks about July pricing at 460 -- but if I were to go out and buy it right now, I mean, what price is it at?

It depends on if you're buying in the spot market, Bob, or if you're buying on a little bit longer term basis. The stock market number is -- you know, it's still a little bit of variability in it, but we are probably in the 420 to 440 range. And -- on the pure spot market basis. That's a guy who goes out, wants to buy steel right today and have it delivered within the next few weeks.

Somebody who's got a little bit longer term commitment, though, I think you are probably closer to the 475, 500 range at this point in time. And clearly, the -- the free fall that the market was in during the second quarter and into the early third quarter, I think has abated. The bottom has been found, and with the [INAUDIBLE] that I mentioned earlier in the call, import slowing down, the massive inventory reduction that was taking place throughout the first half of the year, mostly being completed, and some of the integrated producers in this country taking capacity offline, all of those factors, I think, are going to lead to not only a stabilization, but some upward mobility in the third and the fourth quarters.

So I guess the other question is, I mean, are you looking for further margin erosion in processed steel in the third quarter or it leveling off?

We see the margins coming down in the third quarter, as we have indicated.

Okay.

And then abating and coming back up.

Last few quick questions, if I might just squeeze these in. On the building products side, I know you mentioned during your first quarter commentary, you know, some of the poor weather impacting the ordering activity, you know, certainly a major retail customer kind of changing their inventory management, which, you know, you could argue that it's just a temporary change just in terms of that adjustment period and becoming more normalized over time. I mean, what are you seeing in terms of the ordering activity in the building product side? I mean, are you expecting the quarter to get higher, to be a little bit better than the second quarter? Worse? And, you know, also on the margin side, what are you expecting there.

We see the third quarter continuing at a pretty good pace. I think the second quarter picked up nicely, the weather patterns across the U.S., of course have gotten much better, including here in the northeast, and we have seen that change in our sales. And so it's been a very good quarter for building. You see the third quarter being more of the same. We continue to take market share in key areas of the country where there's high growth patterns like the southwest and the southeast, and we've done very well there, and we will continue to do well there.

Okay, last question. Brian, on the acquisition front -- and, you know, I guess related in the divestiture front, you know, has there been any change in terms of the market as you see it? I mean, has there been increased activity? Has there been, you know, opportunities that have presented themselves to you more recently? And also, maybe if you could just discuss the size of it as well, that would also be very helpful.

Well -- yes. I would say, yes, that there is increased activity. I can tell you, as I've said repeatedly on conference calls over the years, we are always in various stages of reviewing acquisition opportunities. And I can tell you right now, we have as many on our plate that are -- that we're reviewing right now as we have ever had, so that the pipeline for acquisition opportunities continues to be very good. I can also tell you from a valuation standpoint, while you have heard a lot lately about deals getting done at relatively high multiples, when you look at the size of those transactions relative to the size of the typical transaction that Gibraltar gets involved with, you will see that those are much bigger, and today the bigger transactions carry the higher multiples.

We are still looking at being able to successfully accomplish acquisitions in our historic EBITDA multiple range. So I see a full -- a full pipeline of acquisitions. I see valuations still working favorably in our model; and as I've -- we've said in the past, our objective is to do at least one acquisition every year, and since we started these acquisitions we have actually averaged almost two acquisitions a year. And that's our focus.

And the focus continues to remain primarily the building products on the [INAUDIBLE] processing sides?

We are looking at both sides. We've got a pretty broad spectrum on our plate right now in terms of size, which is one of the questions you asked. We're looking at the full spectrum on size.

Terrific.

Why -- it 's becoming more important to us, obviously.

We had activity in the acquisition or joint venture front in all three segments of business. Clearly, we see each of our businesses being solid, functioning businesses for us with long term opportunities, including acquisition opportunities. But what we have done in the last couple of years with Henning and Dave coming on board, we have refined the parameters with -- within which we will make acquisitions. We've got a much more intense focus on gross margin, operating margin and net income margins, along with return on invested capital.

And we're -- we're applying that tighter set of metrics as we look at acquisition opportunities, because we've got an aggressive set of goals for this company when it comes to gross margin, operating margin, net income margin, and return on invested capital that we have established for ourselves and the type of acquisitions that we make are going to help us achieve those objectives. So yes, we're looking at all three areas, but the focus is more refined than it was, and we see the biggest range of opportunities, though -- the longest list of opportunities, I guess would be fair to say -- in the building products first, heat treating thermal processing second and then our processed metals group third.

Terrific. Thanks very much. Very helpful.

And your next question comes from the line of Peter Lisnic with Robert W Baird. You may proceed.

Gentlemen?

Hello, Peter.

Question on SG&A. You guys did a nice job managing the cost structure. I was wondering if you could give us some specifics maybe on exactly what you are doing there to pare down the cost structure. In the past, you've talked about supply chain initiatives -- and that's pretty early days. You've talked about distribution costs of building products. Can you just maybe talk about some of those initiatives and how that's helped the SG&A line?

Sure. We are looking at specific rationalizations in some of our businesses. I think in one case, we put together three separate businesses into one and we sort of centralized the headquarters -- which is still on the way, by the way -- and that's allowed us to take our SG&A -- as you know, SG&A typically is fairly low and we typically run about 10.5 to 11%. A long-term target is something on the 10%, and we keep moving in that particular direction. The other thing, of course, that helps is, you know, our business is growing very quickly, and we are very, very frugal about adding expenses as our top line is going up and, of course, that gives us a significant advantage as well.

Okay, and can you maybe add some color commentary on building products specifically and what you are doing there in terms of, you know, the target of distribution cost savings where you are at there?

In many cases, as you know, the distribution channels are consolidating very quickly, and we are moving with that consolidation effort as we consolidate our businesses and consolidate our distribution, particularly with some of the -- as you know, the larger customers at retail, you know, have gotten very large and very few. We see the same thing happening on the commercial side of the business. Again, our alignments work well with those consolidations, so we are able to take a lot of our shipments and run them through single plants, and we are continually moving in that direction.

Okay.

And Peter, I think I know what you're after specifically. Henning was referring to day-to-day operational steps that we are taking to reduce the cost of getting our products out to our customers. From a bigger picture perspective, I've mentioned in the past that we are looking at a major distribution and logistics program. And last quarter, when I mentioned that til today, we are still exploring the best way for us to put that together, because that's a very critical long-term step for us, and we need to make sure that we get that right. So we are going to take the time to explore it properly; but along the way, as Henning points out, we're going to continue to make day-to-day operating improvements that are going to help drive down the SG&A cost.

Okay. And one of the things that I looked at was the gross margin of the milling products business was, I guess, down 190 basis points, but a lot of that was materials driven. So if I kind of strip that out as a temporary item, I see a business that has -- or appears to have -- better structural profitability on a year-over-year basis. And so what I'm wondering is, A, is that true, and B, how sustainable is that, and C, you know, what do you think you can get in terms of peak kind of profitability, or what you're targeting for profitability in that business?

I think the answer to your question, yes, it is sustainable and, yes, we're going to continue to drive it forward. And all of the businesses have targets that are, in fact, higher than we are currently operating at, and we still think we can get another couple points there.

Henning, you might want to describe for Peter some of the product line steps that we've taken, where in the past we've been making a couple of -- the same product line in a couple of different locations and what you have done there.

Yes, I mean, in some of the cases -- let's say, in our ventilation business -- we were making product lines in actually four different locations, and for the most part we consolidated it into one or two locations, which obviously gives us some real advantage in manufacturing, of course, and improves our gross margin.

Okay. All right. And then one knit question, and that's the tax rate. It came down from the first quarter. Guess on full-year tax rate?

Well, what you saw in the second quarter was really a -- I hate to say a one-time. But it really was a discrete item. It took place in the second quarter, and it really had to do with the -- you know, the change -- the radical change, I guess, in the state of Ohio's tax structure. So it really was just adjusting our deferred tax assets and liabilities to reflect that. I -- for the balance of the year, I would expect we would be back in the third and the fourth quarter to a more normal rate, which would be in the 39% rate. This was a one-time.

Okay. All right. Fair enough. Thank you, guys.

Thank you.

And your next question comes from the line of Kathy Jones with Smith Barney. You may proceed.

Hello.

Hello, Kathy.

I think since most of my questions are answered, just could you walk us through, again the pricing on the -- in the fair various segments and whether it's net up or down?

I -- I kind of --

Pricing to customers or -- is that what you are referring to?

Right. Right. So when in the processed metals and the building products and the thermal processing and heat treating, could you walk us through what the pricing was in the second quarter and what you're seeing going forward? I just want to get straight what you're seeing on the pricing outlook.

It's a very sensitive area, and it gets into a whole host of competitive issues, Kathy, and I'm a little bit reticent to want to discuss too much along those lines; but I think it's fair to say that we have felt some -- well, it's clear we have felt some margin compression, which was driven both by raw material costs and selling price issues; which varied somewhat between -- from segment to segment, but it was something that was felt pretty consistently across the board.

Yes, I would say that we priced very competitively in the marketplace, I think -- and you would expect that we would -- and the area where the competitive pressures were most severe obviously was in processed metals, and I think we have tried to describe that.

So what would you say the net is down sort of -- on a net basis, pricing is down, though?

I think -- I think the best way to describe it -- and I think we've tried to do that, because obviously, I think what you are trying to get at is what is the impact on gross margins, and obviously, gross margins have come down, which probably accurately means that we're playing more for materials than we are able to pass on to customers.

And would you say that's true across all segments or is it mostly just processed metals?

Mostly processed metals.

Okay. Thank you.

And your next question comes from the line of Mark Parr with KeyBanc Capital Markets. You may proceed.

Good afternoon.

Hey, Mark. Could I just ask you to hold off on your question for one swift second so I can just follow up on Kathy's question?

Oh, sure, absolutely.

I think one way to answer it Kathy, is that in the areas where we have the most significant value to the raw steel that we buy, we felt the least pricing pressure. And that as you go backwards down the line, where we had the least amount of value, we felt the most pressure. Okay, Mark. Thanks.

Oh, no not at all. I had a couple of things to follow up. And I did -- I was caught up on a conference call so I wasn't able to catch some of the early parts, so I'll apologize in advance if I'm asking questions over again. First of all, on the -- and this predominantly relates to thermal processing and steel processing. I was wondering if you are -- have seen anything or if you are seeing anything in terms of unusual production acceleration, you know, related to all the inventory reductions that have occurred at the Big Three over the past couple months?

Yes, we're definitely seeing improvement in the order flow rate.

I mean, is it normal, relative to just coming off the summer shutdowns? Or is there something in that strength that you characterize as greater than you would have expected, say, a couple of months ago?

Take the summer shutdown out of it and compare it to the period before the summer shutdown, and it's stronger now than it was then. I wouldn't say it's dramatically improved, but it's definitely moving in the right direction.

Okay. That's helpful. Secondly, on -- in the -- a question related to building products. Are you seeing any shift in mix toward new construction activity that you could talk about or give us some color on?

Say that again, Mark?

I'm just trying to get a sense of your after-market repair and upgrade business versus new construction-related business, and trying to get a sense if there's any pickup in nonresidential, private construction activity that you are benefiting from.

Yes, well first of all, our building prices continues to move along quite nicely, both the replacement and the new. We sell on both ends of it. In fact, more of our sales goes to inflation, which is a comfortable place to to be. But, yes, we have seen continued strong activity, both in residential and on the commercial side of it. In fact, we are becoming more aggressive on the commercial side, because we think there are bigger commercial pickups available long term.

By commercial, you're meaning the new construction?

No, by commercial, we're moving away from residential into --

Into commercial construction.

Into commercial construction.

All right. Does Gibraltar Industries have any significant perceived benefit from the new highway bill?

Not yet.

All right. I mean, assuming that comes through and gets signed and all that, I mean, is that something that you would look to -- to be of benefit to you guys going forward if it goes through?

One of the things that we are looking at Mark, as you know, over the years, we have tried to find ways to utilize our core competencies, and now that we've established competencies in the building products arena, we are looking for ways to expand those specific competencies, and one way to do that is to move more to the commercial construction area, which would include roads and highways. So while, as we're structured today, it won't necessarily have a direct impact on the business -- there will be an ancillary one -- but we are looking at ways to participate in a broader section of the building market overall, and we're looking for ways to expand into the commercial area, which would include that. So long term, it could possibly have a positive benefit as we continue to broaden our -- our perspective in that area.

Okay. I appreciate that color. I've got two other questions. First -- and you may have done this already, Brian, could you give us a progress report update on the Copper Powder business and how that's doing from a contribution standpoint?

The Copper Powder has done very well and we are very pleased with that business. It's contributing exactly as we thought it would. It's moving along very nicely. We are looking, in fact, to expand in that business,s and we hope to have an announcement soon in that area, which is going to help move that business,s again, forward it in some new markets, which we are very excited about, -- some growth markets. So more to come. But moving ahead very positively, making the contribution that we expected right on target.

Have there been any issues in that business as far as raw material supply? You know, given the shortage of overall copper supplies worldwide?

No. And we say that because the way that business is structured, the pricing is -- the cost of copper is factored into the pricing and actually agreed upon by our customer base. So we don't have the same issues there that perhaps we might in other areas relative to material costs.

Mark, I might say that the business primarily runs off of scrap, number one bundles; and to the extent those are not available -- which, you know periodically has happened in this market -- we have to turn to the cathode market perhaps a little more frequently than what we would normally do, but for the most part, the cost of copper is just passed through. And our margin really is made on the conversion.

Okay. Terrific. Thank you for that. I've got one last question. And this is for Brian. You had made a comment about the Ohio tax law, the new Ohio tax law, and I was curious as to your opinion as to whether you would say thats more or less business friendly.

Actually, Dave made the comment so I will let him follow up.

Sorry about that. Sorry, Dave.

That's okay, Mark.

You guys all sound so good, I can't tell you apart.

At least initially, as we would look at it, and we did have one fairly substantial operation in Ohio.

Right.

We -- we would view that initially as probably business friendly. You know, one thing that it did address was the -- you know, the personal property tax situation. Only time will tell, I thin; you know, theoretically these things look good on paper, and you know, it did give us a little blip in the second quarter, but I guess we will find out. Initial rate is -- you know, it's probably positive on the business side.

Okay. I appreciate that, and I apologize to the rest of the people on the call who are not from Ohio. But congratulations on the quarter.

Thank you.

Thank you, Mark.

As a reminder, ladies and gentlemen, to ask a question, please press star one. You have no other questions at this time.

Okay, thank you all for joining us this afternoon, and for your continuing interest in Gibraltar. And we look forward to talking with you again in about three months and updating you on our continued progress. Thanks.