Gibraltar Industries Inc (ROCK) 2005 Q3 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its third quarter 2005 results and its outlook for the fourth quarter. We will begin today's call with opening comments from Ken Houseknecht, Gibraltar's Vice President of Communications and Investor Relations.

After the Company has concluded its presentation, we will open the line to questions. At this point, I will turn the call over to Mr. Ken Houseknecht. Please proceed, sir.

Thank you, Andrea. 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, you can get a copy on our website 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.

On behalf of Henning Kornbrekke, our President and COO, David Kay, our CFO and Ken Houseknecht, our Vice President of Communications and Investor Relations, we want to thank you for joining us on the call today. I am going to give you a general overview of the quarter and talk a little bit about our four recent acquisitions. Dave Kay will discuss our financial results, and Henning will look at the Company from an operating perspective. Then we will open the call up to any questions you may have.

On our second quarter conference call, we said we would experience margin pressure in the third quarter, especially in our Processed Metal Products segment as we brought our inventory costs and selling prices into better alignment. As the third quarter came to an end, our margins began to stabilize as we worked through the higher-cost inventory that was on hand going into the quarter. We anticipate a continuing pattern of improving margins in the fourth quarter and beyond.

We also said that we would continue to reduce our inventories, which we've now driven down for seven months in a row and which were reduced by $35 million in the third quarter and by $67 million over the last six months. We expect to make additional reductions during the fourth quarter, although our inventories are nearing our targeted levels.

As a result of our inventory reduction efforts and solid earnings, we paid down approximately $20 million in debt during the third quarter, even after spending approximately $28 million on acquisitions. As we've noted on each of our recent conference calls, Gibraltar is intensely focused on improving cash flow, which will allow us to fund more of our growth internally. Our ability to reduce our debt by approximately $65 million during the last six months is clear evidence that we're accomplishing this goal.

As we work to continue to strengthen the Company's performance, generating higher and more consistent margins, cutting costs, improving our operating efficiency and cash flow, and producing higher returns on invested capital, we also continue to focus on growing Gibraltar through internal growth initiatives and acquisitions.

In the last six weeks, we announced the completion of four acquisitions that will make Gibraltar an even stronger company They will further expand our product offerings and channels of distribution, diversify our customer base, extend our geographic reach and move our business into higher margin areas.

Before I turn the call over to Henning and Dave, let me make a few comments about each of our recent acquisitions. AMICO, which had sales of 204 -- I'm sorry, which had 2004 sales of approximately $285 million, was our largest acquisition to date at a purchase price of approximately $240 million. It's consistent with Gibraltar's strategy of operating in niche markets where we can be a market leader.

AMICO is the clear leader in each of its three product categories: Metal bar grading, expanded metal and metal lath, which compromised more than 75% of its sales. It also has strong positions in a number of other categories, as well. Because AMICO is the leader in a number fragmented and expanding markets, it's well-positioned for continued growth and we expect the business to grow organically at roughly two times GDP.

You can learn more about AMICO products at the Gibraltar website. AMICO's gross and operating margins are in line with or above Gibraltar's long-standing targets and there are good opportunities for synergistic margin improvements, both through purchasing and operations.

An example of purchasing synergies, which would be most evident, exists in our purchasing area. The acquisition of AMICO moves our annual steel purchases towards 1 million tons, which would represent approximately 2% of total U.S. flat-rolled steel production, making Gibraltar a more important customer to our suppliers. There is also very little customer overlap between AMICO and Gibraltar's existing billing products operations. This not only expands our opportunities, it also spreads our risks.

Approximately 2/3 of AMICO's sales go to the commercial, industrial Building Products markets. Areas where we had very little participation before this acquisition. With AMICO adding approximately 8,000 new customers to Gibraltar's base, there are numerous opportunities for cross-selling. Importantly, we were able to acquire AMICO near the lower end of our historic acquisition valuation range, which is 4 to 7 times trailing EBITDA before operating synergies.

At mid-September, we acquired the Gutter Helmet product line, which last year had sales of approximately $16 million. Gutter Helmet broadens our range of rain-carrying products and accessories and gives us a leadership position in this market. This was a product category where we see significant growth opportunities.

Later in September, we purchased a facility that manufacturers copper powder in Suzhou, China for sale to Chinese customers. This is an extension and strategic complement to the U.S.-based SCM operations which we acquired last year. Now that we have this on the ground presence in the center of the rapidly-growing Chinese industrial market, we are better positioned to serve current and potential customers in all three of our business segments.

And earlier this month, we announced the acquisition of American Willcon plastics, a manufacturer of plastic-injected projects, for two Gibraltar companies and a number of other customers. American Willcon strengthens our capabilities in this manufacturing area, gives us the ability to consolidate these activities, makes process improvements, improves our operating efficiencies and output and lowers our costs.

These four acquisitions together with our existing operations give us annualized sales approaching $1.5 billion, moving us much closer to our goal of $2 billion in annual sales by 2009 or sooner. More importantly, these acquisitions enhance our ability to produce steady and sustainable improvements in our margins, cash flow and profitability.

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

Thanks, Brian.

Sales from continuing operations were $282 million in the third quarter and increased by approximately 5% from a year ago. In the first nine months of 2005, sales amounted to $844 million, an increase of approximately 17% when compared to the first nine months of 2004.

Net income from continuing operations in the third quarter amounted to $12.7 million, compared to $15.8 million in the third quarter of 2004. During the first nine months of 2005, net income from continuing operations was $39.3 million, compared to $40.3 million in the first nine months of 2004. Earnings per share from continuing operations in the third quarter of 2005 amounted to $0.43 a share compared to $0.53 in the third quarter of last year. This is in the mid point of the range of $0.40 to $0.45 we provided during our last conference call.

During the first nine months of 2005, earnings from continuing operations were $1.33 per share, compared to $1.37 in the first nine months of 2004. Selling, general and administrative expenses amounted to $28.9 million, or 10.3% of sales during the quarter, compared to $31.6 million or 11.8% of sales in the third quarter of last year.

Our equity partnerships generated a loss of $820,000 during the quarter, compared to a $1.8 million profit in the third quarter of last year. This decrease results primarily from the operations at the Duferco Farrell joint venture, which continued to be negatively impacted by the steel pricing situation and a very competitive marketplace.

Interest expense during the quarter declined to $3.4 million from $3.5 million in the third quarter of 2004. This resulted primarily from lower overall borrowing levels, partially offset by higher interest rates. Our net return on sales was 4.5% during the quarter, compared to 5.9% in the third quarter of 2004.

From a cash flow perspective, we generated EBITDA of $30.5 million during the third quarter and nearly $95 million year-to-date. As Brian mentioned, we further reduced our inventories by $35 million during the quarter.

On a consolidated basis, we turned our inventories at 5.2 times, the same as in the third quarter of 2004. Average days sales outstanding and receivables were 52 days in the quarter, down slightly from 53 days a year ago.

During the quarter, we spent approximately $27.5 million on acquisitions, the largest of which was Gutter Helmet. Capital spending came in at $4.4 million for the quarter and year-to-date capital spending amounted to $14.8 million. In total, we expect to spend somewhere in the range of 20 to $23 million on capital spending during 2005. Approximately $1.5 million in dividends were also paid out during the quarter.

We were able to reduce our debt under our revolving credit agreement by $19.7 million, bringing our total debt repayments for the year to approximately $57 million. At September 30, our long-term debt to total capital ratio stood at approximately 32%.

As previously mentioned, we closed on the AMICO acquisition on October 3. With a purchase price of $240 million, that's the largest single acquisition in Gibraltar's history.

As we discussed on the conference call we held last month, to announce the AMICO transaction, this acquisition, because of its size, complexity and financing requirements required us to prepay approximately $115 million of senior secured private placement notes. The maypole and early redemption penalties on these repayments amounted to approximately $6.8 million gross, $4.1 million net of tax, or around $0.14 a share. These charges will be reflected in our fourth quarter results.

We also repaid approximately $26 million of seller financing debt from a previous acquisition. There were no prepayment or maypole penalties in connection with this prepayment. Funds to close on the AMICO transaction and make the debt repayments were provided from a $300 million temporary credit facility provided by a consortium of banks, and for borrowings under our revolving credit facility.

As part of the new borrowing arrangements, we upsized the limits on our revolving credit facility during the month of September from $250 million to $300 million. We are now preparing to replace these temporary financing measures with a more permanent long-term structure. We anticipate deciding on an appropriate structure within the next several weeks and are currently targeting having a new structure in place before the end of the year.

Our goal is to put a structure in place that is more appropriate to our larger size but one that will still provide us with the flexibility we need to take the business forward, pursuing not only internal, but external growth opportunities.

Now I'll turn the call over to Henning for a more detailed analysis of operations. Henning?

Thanks, Dave.

As Dave mentioned, our net sales from continuing operations were $282 million in the third quarter, up 5.5% from a year ago. On gross margins of 19.1% was down by approximately 3.1 percentage points from the third quarter of 2004, a result of the phasing of higher material costs, primarily steel inventory in our processed metals group. Our operating margin of 8.9% decreased by only 1.5 percentage points from the third quarter of 2004, driven by the lower gross margins, partially offset by lower SG&A costs.

Looking at the results in our three segments, Building Products had a net sales increase from continuing operations of 13.8% to $149 million. The growth was a result of continued strong market demand coupled with the leverage created by our leading market share position. Gross margins were 25.7%, in line with our expectations but down 1.9 percentage points from the year ago quarter, driven by higher material costs, particularly steel, aluminum and plastic.

The operating margin was 15.6%, down only a half a percentage point from 16.1% in the third quarter of 2004, a function of the lower gross margin, offset by increased SG&A efficiencies. Our processed metal product segment sales were $106 million, down 4.2% from a year ago, primarily a result of lower industry market prices, but demand on a unit volume basis remained strong and in line with our expectations.

Our gross margin was 9.1%, down from 16.4% in the previous year, and the operating margin was 4.5%, down from 11.3% in the third quarter of 2004, a result of falling selling prices, coupled with higher cost steel inventory. Current inventory costs are becoming synchronized to normalized margin levels. Margin compression was most notable in the service center business component with moderation in our other processed metals businesses.

Our Thermal Processing segment had sales of $27 million, an increase of 5.4%, compared to the third quarter of 2004. Gross margins at 21.2% were flat with the third quarter of 2004 despite rising energy costs. Operating margins were 12.8% in the third quarter of 2005, up 2.6 percentage points from 10.2% in the third quarter of 2004. The increase in operating margin was due to mix and improved SG&A efficiencies.

At this point, let me provide some commentary on our outlook for the balance of the year. The fourth quarter is historically the slowest period for Gibraltar, a result of holidays and planned shutdowns in the automotive industry and seasonal slowing in the building industry. We expect our sales and income this year will follow previous fourth quarter trends.

As we've discussed, steel course volatility, competitive pricing pressures in our Processed Metal business coupled with rising energy costs and its impact on our Thermal Processing applications pose fourth quarter challenges. However, the continuing strength of our business portfolio, particularly our Building Products businesses and ongoing productivity improvements all of our businesses provide the ingredients for continued growth and profitability.

In light of all of these considerations, we expect our fourth quarter earnings per share from continuing operations before any nonrecurring charges will be in the range of $0.30 to $0.35, compared to $0.32 in the fourth quarter of 2004, barring a significant change in business conditions.

Looking ahead to next year and beyond, Gibraltar will continue to benefit from its unique market position and leadership. The Company will continue to focus on continuous improvement and organic growth. In addition, as Brian mentioned earlier, we added four acquisitions in 2005, broadening our market participation and strengthening our total operations, which bolsters our ability to provide consistent performance, as we have over the last 12 years, in spite of economic and material pricing volatility.

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

Thank you, Henning. Before we open the call to any questions that you have, let me make just a few closing comments.

We have profitablly grown this business, both organically and through 26 acquisitions, by an average of 19% per year over the past decade. We diversified, strengthened our operations, which has enabled us to deliver more consistent and improving margins since our initial public offering in 1993.

In spite of record volatility in the price of steel, near-record energy costs and weather-related disruptions to parts of our business, Gibraltar delivered another solid performance in the third quarter, another example of how our strategy is moving us away from our past as a commodity steel processor and toward being a value-added, diversified manufacturer.

With our four most recent acquisitions and the steps we're taking to improve the performance of all of our existing operations, we continue to position the Company for even stronger results in 2006 and beyond. We will enter 2006 as a much larger, much stronger company, better positioned to generate a consistent pattern of sales, earnings and cash flow.

That covers our prepared comments for today. At this point, we'd be glad to open the call to any questions that any of you may have.

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

Thank you, good afternoon. Just had a few questions -- one a clarification. The $0.30 to $0.35 range for the fourth quarter, Dave, you had mentioned a $0.14 charge, I guess, related to the private placement earlier redemptions. Is that included or excluded from the $0.30 to $0.35?

It's excluded.

It's excluded. I guess my next question, then, with the AMICO acquisitions, you obviously -- a positive from a strategic perspective long-term I was just curious as to what level of accretion are you assuming in the fourth quarter? I mean it would have appeared, based on your prior conference call that there should have been significant accretion. Is it just related to the seasonality, the fact that it's construction-related? Or what kind of accretion are you expecting in the fourth quarter from the acquisition?

There is a couple of issues there, Bob. And there's no exact answer to that question. Obviously AMICO is an accretive acquisition to Gibraltar, but certainly in the first quarter, because of what I would characterize as probably fairly significant purchase accounting adjustments that need to take place in that quarter, plus the additional amount of interest that we had to take on, in order to make the acquisition, it's very difficult for us right now to determine what AMICO will really add in the fourth quarter. We don't normally talk about one individual business -- we prefer to talk about total segments.

Sure.

But, you know, we need to record the AMICO purchase price at its fair market value and as I'm sure you're aware, we need to write up a lot of the assets. One of those assets we need to write up to fair market value is going to be inventory. And the impact of that is really to take whatever profit may have been in that inventory and really impute it to the seller. So, that's going to be a significant number in the quarter and will certainly depress whatever AMICO can add for the quarter. We don't expect to see full accretion of AMICO until , into the year 2006.

Okay. So these issues, I mean predominantly are one-time in nature that are all impacting the fourth quarter and then as we move -- or progress through 2006, especially once construction activity picks up post the first quarter, which is typically weak, as well, you're expecting some accretion?

Oh, yes, absolutely. You know, and it's just hard to say how much the amortization of this purchase accounting adjustments will be in the fourth quarter, but we do know that, you know, it will not be a small number. So --

Can you ballpark it for us?

I really don't know. We have to have the assets appraised and that's, one, that's a process that will be taking place here during the quarter, but the accounting standard requires you to write the inventory up to its fair market value, means whatever the purchaser, an arms length purchase would be, so whatever profit we would get on the existing inventory, really, we can't recognize. So, that will depress those results.

Okay.

And that, by the way, in the $0.30 to $0.35 --

Yes.

We've sort of already taken that into account. We don't have an exact number, but, you know, the $0.30 on to $0.35 will be what AMICO adds after we have to pay for these purchase accounting adjustments. We don't view those as one-time nonrecurring adjustments. They happen with every acquisition.

Oh, of course. The second question I had was related to your comments in the steel segment, the processed metal segment. Obviously you've seen some significant margin compression both year-over-year and sequentially. You had mentioned that the market conditions or at least things are starting to normalize or have started to normalize as you've finished out the third quarter. And your expectation is that things will improve.

What I'm trying to get my arms and here -- okay, you're at 4.5%, you're at 7.1% the previous quarter, kind of an 11% range in the quarters before that. I mean what type of level are you expecting it to normalize at? I mean is that 4.5% in the fourth quarter -- you're anticipating it doubled? Does it go up by a little bit? Go up by a lot? What type of expectation do you have in the business? Based on the expectation, if you could provide us color in that regard, that would be helpful.

We would expect the margins to go back to our expected normal levels as we go forward into the fourth quarter.

And that would be closer to the 11% that you saw through most of 2004 --

I don't think we could see 11%. Traditionally the fourth quarter is a slow quarter, particularly December. So, December's results will normally moderate the quarter as they have in past quarters, but I would expect that the fourth quarter margins would be somewhat analogous to previous fourth quarter margins.

Okay, terrific. And last question, if I could sneak the last one in. Related to the hurricane activity, significant hurricane activity, not only through the Gulf Coast, but through most of South Florida. Have you seen any pickup in terms of your order rates or anything with regard to --

We see -- yeah, Bob, we've seen a little bit of pickup, but really not much. We don't expect to see real pickup until the first and second quarter and even beyond in 2006.

Okay, terrific, that's helpful. Thank you very much.

Your next question comes from Robert Wiggins from Neusage Investments, please proceed.

Actually he answered my question.

Your next question comes from Peter Lisnic from Robert W. Baird. Please proceed, sir.

Good afternoon, gentlemen.

Good afternoon.

A question, Henning, you talked quite a bit through your prepared commentary about improvements or containment of SG&A costs. I'm wondering if you could give us some details as to exactly what was done there. I know you added resources to focus on the cost structure. Can you take us through some of the things you're accomplishing on that front and how -- what kind of leverage you're going to get and where we are in terms of innings of the game, in terms of getting costs out?

I think and we talked about in the past, historically we tend to run the business on a lean basis. We continue to run the business on a lean basis. And even though we are growing in terms of net sales, we're not, at the same time, adding to our expenses, certainly SG&A expenses.

And at the same time, we've been active in our cost reduction programs and actively, in fact, as we're speaking, putting one of the business units together, where, in fact, we're consolidating what had been three businesses into a single business in a single location. Again, it's those types of processes which continue to pair across that of running our operation.

Okay, one of the things you've identified in the past has been distribution or logistics cost for the Building Products business. I think, if I remember correctly, you were shooting for a 300 or 400 basis point improvement in that piece of the cost structure?

In general, particularly in the Building Products structure, we've seen our costs come dow I think Brian has talked in the past of costs of around 10%. I think if we look at it today, we're closer to the 5.5%. That's just through much tighter management on how we distribute products through customers. So, the groups have made really excellent progress in that direction.

Okay. Fair enough. Dave, if I could, I'm just going to ask the question directly, in the 30 to 35, what number do you have assumed for AMICO? And you can refuse to answer -- but I figured I'd ask it.

Our policy really is to not talk about one individual company and what it would add or deduct. The only way we would ever do that is if we saw one and have to split it up. But we prefer to talk, instead, about segments or groups of companies and I don't really want to comment on exactly how much AMICO would add. And I might add, that at least in the fourth quarter, that number, if you had it, probably wouldn't do you a lot of good because it's not indicative of what we have going forward.

And you're -- just so I understand this portion correctly, you're required to file an 8-K to show us pro forma financials with AMICO in there?

Yes.

And do you know the exact due date?

I would -- I would anticipate that that will take place within the next several weeks. We're trying to finalize some of that information right now.

Okay. Thanks, I will get back in queue. Thank you.

Thanks.

Your next question comes from David Smith from Citigroup. Please proceed.

Good afternoon, guys.

Good afternoon.

Can you -- what was your organic growth ex acquisitions and currency in the quarter? I know you gave us a top line growth total. Is there a separate number we can look at, ex acquisitions and currency?

We really have no currency built into it. Most of our sales are from the year of 97%, as I recall, are sales that primarily -- U.S. and a little bit in Canada, I think that's true. Our organic growth -- I don't know if we've -- I don't think we've had that --

I don't think we've done enough analysis on the quarter yet to actually have an organic growth figure, but if you mean by currencies you mean selling price increases -- or do you mean foreign currencies?

Both the currency effect and really the acquisition impact -- I guess -- the acquisition impact may be light. I don't see much since last year.

Very little acquisition impact. Most of it took place late in the quarter and the big acquisitions took place after the end of the quarter. I don't think right now we have enough analytical information to tell you what organic growth was in the quarter.

If you look at the numbers -- almost all the growth was organic in the quarter --

And how much was pricing, that number?

It was a negative --

None of it was pricing. The pricing was on the negative side. And you see evidence of that particularly in the processed metals part of it.

And Processed Metals portion, can we just delve more into that, specifically on the -- is it the customer base pushing you back? Or basically -- why would I see pricing fall back there?

As you know, steel prices had gone up rather quickly and then started to drop and as steel pricing dropped, I think customers had expectations that pricing would come down on a commensurate basis. And I think that , in essence, was driving the pricing -- I think the market in general seemed to be driving the situation.

I think at this point we believe -- at least we've experienced stabilization in pricing and that's what our expectation is on a go-forward basis. We do see a better level of stabilization in steel costs on a go-forward basis. And that's consistent with the other folks in the steel business.

Relating to an earlier question, then if we look at fourth quarter margins, I think in 2002 it was almost 12%. Last year it -- or in 2003 it was 10% and then 10.7% last year. So, if we're looking at this year, if you're saying trend line for the fourth quarter, that 10 to 11% almost seems like the number, but in the face of pricing and other issues in -- in that segment, would that be -- I get the sense that might be a little bit of a high jump coming off of 4.5.

No, we would expect, as we said, our margins to -- to be as where -- we didn't talk about margin, but we expect margins to be at a normalized level in the fourth quarter.

Near normalized --

Moving back toward a normalized level in the fourth quarter.

Okay. And on the past three or four quarters, in the fourth quarter, it looks like it's more like 10 to 11%. Would that be fair?

I think if you're doing a direct comparison to the previous year, I would say it's probably not fair because the previous year saw the reverse trend. I think if you did a longer study of our history, it would give you a more accurate picture.

I'm looking at the past three or four years on my model.

I think if you looked over the last two and three years, you'd get a pretty accurate picture of what -- what our margins look like and what the improvement going forward is going to look like.

Okay. And then, Dave, just -- on the inventory adjustment, is that the biggest impact you see from AMICO? And does it carry into the first quarter, as well?

I think that will be the biggest impact and there probably will be some carryover into the first quarter. It won't be nearly as significant as the fourth quarter. There will also be some intangible assets that will have some amortization and that will go forward over a longer period of time but obviously the -- the biggest impact will all be in the fourth quarter.

Great, thanks a lot, guys.

Your next question comes from Aldo Mazzaferro from Goldman Sachs. Please proceed, sir.

Yes, thanks. I just had a couple of quick questions. Could you clarify for me what the acquisition cost is all in? Is the $240 million is the price you quote, but then the debt assumption or the repayment of debt, 115 plus 26, is that the all-in price, about $381 million, then?

It's $240 million. All we did was to extinguish some already-existing debt that we had taken on over the years and will be replacing it with something a little more permanent. But the purchase price for AMICO, in its entirety, including any debt that we had to assume, which, by the way, is nothing, is $240 million.

So then what is -- what is the cash transaction that you're doing in the 115?

We had private placement debt that added up to $115 million. It was already outstanding, long before we acquired AMICO. We had to repay that debt --

Oh, I see, this was your debt.

Yeah, yeah, this was our debt.

Pre-existing.

Pre-existing. It was really senior secured debt that was with an insurance company. But the problem with the debt is it didn't allow us to actually take on the AMICO transaction.

So, we had to repay it. So, we borrowed money under a temporary facility to do that. But, the net amount of money that we actually borrowed is more in the $240 million range.

I got you. Okay. Appreciate that. Another question -- separate topic -- within the Building Product sector, could you break out a little bit for us what percentage of sales go to the big box retailers and what percentage of sales you might say is more of a spot basis?

Spot basis... sales to the retailers in total in the area of about -- again, on an annual basis -- about 15% of our total sales. And that would include sales to three, four major customers.

And are those prices relatively fixed in nature that you saw those products for?

Nothing's fixed in nature! But I think when we're dealing with retail, I think when we have -- let's say agreements with the larger retailers, yes, for the most part, we fixed those prices, usually on once a year basis, unless there is significant difference in our situation, like quickly escalating material pricing in which case we would sit down and have a separate discussion. That's true with all of our customers.

Great. I guess the follow-on to that is you're seeing prices rise rapidly in the fourth quarter. Is the impact of that on your margins going to be negative or positive in the fourth quarter?

Regarding the fourth quarter, keep in mind, whatever steel we use in the fourth quarter, generally, we will have bought in the third quarter. So that would be lower-priced material and that's the reason that our third quarter numbers help margin compression.

We use materials bought in the second quarter at higher prices and then the overall steel pricing market came down and we and most other steel processors were faced with the same situation, where we had inventories that had -- that were all based on higher pricing levels from previous periods that if we had to work through during the third quarter.

Right. So, that should reverse in the fourth. I'm just wondering, I guess in light of your guidance, I guess my question is why aren't you getting more margin improvement then?

Prices for customers and as Brian had said, the materials that we've taken on hand have already been purchased and so the fourth quarter would be fairly stable in the basis. I think in the first quarter, I think we would see perhaps an improvement margins, as you go forward.

And that would be because you raised prices faster than the cost of steel rises?

No --

In the first quarter?

No.

Well, if the prices rise in the fourth quarter, wouldn't the impact of that cost hit your first quarter then?

Unless we raise prices.

Right, but -- I thought you just said you'd see a wider margin?

Well, don't -- don't get confused about spot prices in steel eye don't normally buy steel on the spot market and you've said, I think in your lead-in, that we're seeing rapidly escalating prices. I don't think we're seeing rapidly escalating prices.

There is some upward pressure on steel pricing. I think we're seeing prices increase some but I would not characterize that as rapidly escalating prices. I think we're seeing steel prices go back to what we would consider to be a fairly normal level.

So, how much you say your purchased steel price rises in the fourth quarter versus the third? As it comes in the door, not as it's costed, I mean --

The first -- that starts to get into some -- what I could consider competitive information. And I really don't like to share what we're paying for steel in a specific sense of concern for giving competitors information that they might not possess on their own.

Right.

But we can say -- I think we need to clarify this, for the fourth quarter, what we're going to be doing is, off of the same selling prices that had been in place, applying lower raw material costs to those sales, thus the margin expansion trend in the fourth quarter. In the first quarter, we adjust prices anyhow. We will adjust those prices relative to the steel prices that will be in effect for the first quarter.

Okay. Thank you.

Does that -- does that clarify it for you a little?

Yeah, I followed that. I just --

I want to make sure because it's important that -- that you do understand that dynamic because it will play a role in -- in how you analyze things and the estimates that you put out there.

Yes, I know. And that's -- I guess that's why my estimate in the fourth quarter was so high. I expected prices to b reflecting a little bit better improvement in the steel market and the trailing effect of your third quarter purchases to help your margins.

Well --

Well, there's a lag on our ability to raise our prices to our customers. It isn't instantaneous with steel, raw material cost increases. That is something we had noted throughout all of last year in our conference calls. So, in there, I think there may lie the misconception that drove you to your number for the fourth quarter.

Uh-huh. Okay, thank you.

Your next question comes from Mark Parr from KeyBanc Capital Markets. Please proceed.

Thank you. Good afternoon.

Good afternoon, Mark.

I've got a couple of things here. I don't want to beat AMICO to death, but I was wondering if you could give us some sense of what's your approximate anticipated cost of capital for the debt you're bringing on, on the acquisition?

Really can't give you an answer on that because I don't know what the form and content of that debt will be. So, you know, I can tell you that what we borrowed temporarily, the $300 million, is really, you know, a LIBOR-based -- that's the same pricing as our revolver. But I don't have a permanent structure in place so I don't want to hazard a guess.

So, that's still under discussion.

Still under discussion.

All right. Another question related to this acquisition -- do you have a sense of what -- out of the gate synergies might be on an annualized basis? In terms of purchasing or combining healthcare or reduction of administrative overhead, et cetera?

Mark, going back over time, our -- our focus, when we make acquisitions, is first on buying companies that have displayed a consistent pattern of operating performance, and once we've acquired them, we begin to work with management of that company to thoroughly understand the business, and at that point, we begin to look for operating synergies that -- that we can bring forth from the business.

Okay well you've made -- you've made well over 20 acquisitions, you've got a lot of experience here. Is there any sort of rule of thumb that has emerged -- the only reason I'm asking, this is such a big deal for you guys, you know, it's just -- really, it's a major boost to your business. And I'm just -- I'm just trying to do some of my own back of the envelope calculations on what the -- what it might mean for you.

I hear what you're asking, Mark and it's a logical question. Although it's not the way we've approached it.

The one-time synergies that we might get out of the business are never a big factor in our determination to make an acquisition or not. Our big decision on making an acquisition is what we see long-term potential from that business and how having that business as part of the Gibraltar organization we can help drive the growth and improve performance of that company. And that's our focus with AMICO, as well.

Will there be some operating synergies? Yes. We would expect, as we've seen in the past to lower healthcare costs by bringing them in underneath our healthcare purchasing umbrella. Clearly their size is -- gives you a better negotiating position.

From a raw material standpoint, as I mentioned earlier, we'll now be buying tons that are approaching 1 million a year and that's a big percentage of the total flat-rolled marketplace. To project on a per-ton basis what kind of savings we anticipate out of that is going to be a marketplace factor to a large extent, but one thing I do know is we will be considered a much better customer to whoever we're doing business with and that will provide stability into all of our purchasing arrangements going forward, which should help us to reduce the volatility and steel pricing on a long-term basis.

That's really one of the fundamentals of our whole growth program, is to put the Company in a position where we can generate more -- a more consistent pattern of sales and earnings and consistently drive the operating margin performance of the business upwards, as we have done over the last 12 years.

Okay. I had -- I had two other questions, just on -- on the segment operations, if I could. And I appreciate your comments on the acquisition, Brian. First of all, related to Building Products revenues, those were up about 14% year-over-year. 131 to 149. That's about $18 million. I was wondering if you could break that down in terms of unit growth versus pricing?

It was all unit growth.

Okay. Congratulations on that. And then lastly, I wondered if you could provide a little more color on the margin expansion and Thermal Processing, is there something here on the raw materials side that's driving this? Or is this operationally driven --

We've -- we've consistently been looking at better ways to run that business and we've been consolidating wherever we can, many of our SG&A activities, let's say and I think we're seeing the benefit of those programs we've been working on.

In addition, you're seeing the ramp up of some of the major capital expenditures that we made last year to internally grow that business as those facilities come online and are ramping up the level of capacity utilization.

Okay. Good. I was very impressed with the pickup of margin, given that revenues were only up 5% year over year

And when you consider that utility costs have gone up significantly, as well.

And it was an offset and you -- as you saw, it was all on the operating margin line. Which was a function of the efficiencies we're beginning to see.

Good luck getting all of these -- these acquisitions under your belt here in the fourth quarter. It's probably not -- no one's going to eat much turkey on Thanksgiving.

Mark, I think that's an excellent point that you make. If you take a look at each one of the four acquisitions, three of the four are relatively small ones and each of those is tucking right in underneath one of our existing operations today. It is just going to be tucked into the middle of that.

So, is from an integration digestion standpoint or a management standpoint, it's really not a significant change at all. AMICO, of course, is a bigger acquisition but again, it's a company that we're very intimate with, all of the key fundamentals of that business. The channels of distribution, the production procedures, the purchasing procedures.

While it does bring 8,000 new customers who we don't know, we think that's a -- a good thing. So, while we did make four acquisitions in a relatively short period of time, first of all, we never intended for them all to happen that quickly or in that close proximity to one another --

Brian, I thought you were getting so good at this, you could do it all the time! [laughter]

But I wish I could say that's true! But the key is that -- that these all fit in to the business very nicely. These aren't, going off in in a new direction that we've never been in before, taking us into a new technological area that we've never been in before. It's all right down the middle for us. All right in the sweet spot of what we've been doing for years and years and years, so, we're very comfortable with the ability to bring all four of these companies into play all at once.

Terrific. Thanks again for all of your comments and congratulations.

Thanks, Mark.

Your next question comes from Yvonne Verano of Jefferies and Company. Please proceed.

Yes, thanks. On AMICO, I was wondering if you knew what the earnings distribution has been in the past on a quarterly basis?

I think that they're -- the pattern of their earnings follows ours -- it's not radically different us because a lot of the businesses, sort of what we'd call construction, it's going to look slightly different type of construction, but, their best quarters are usually probably their second and third quarters. I would say they're not radically different from us --

I think if it anything, the first quarter is perhaps better than our traditional first quarter.

Right.

Okay. And then in the Building Products on the margin side in 4Q, given the inventory with AMICO, are you expecting margins to fall off a little more than a normal seasonal pattern?

No.

No. Excluding AMICO, which is a one-time adjustment, we would expect to see some improvements in our operating margins in Building Products.

Relative to prior quarters?

Yes.

Not necessarily compared to 3Q?

Fourth quarter -- quarter-over-quarter.

Right. Okay, thanks very much.

You're welcome.

Your next question comes from Leo Larkin, Standard and Poors. Please proceed.

Good afternoon.

Hi.

Do you have any guidance for Capex for '06 and DD&A?

I would say our corporate policy even after the acquisitions and AMICO has followed this traditionally, we're probably looking at capital spending being, either slightly less than or about the same as depreciation so 28 -- maybe 28 to $30 million on both sides of that.

Okay. Thank you.

You're welcome.

Your next question comes from Marty Pollack from NWQ Investment Management. Please proceed.

Yes, just a couple of questions. One, on Building Products, you indicate AMICO acquisition also provides you with significant incremental capacity. I mean this entire Building Product segment is good margin. Can you talk about what targets you expect for that business, assuming you execute on all cylinders here? Are we talking about a 20% margin type business, you think, first question?

As you know, we only talk about margins by segment and I think we've said consistently that AMICO would be accretive and --

I'm thinking a longer term effect, the prospect of building -- of eventually selling into the capacity which you say you have exited at the moment, but obviously as you grow, how your utilization rates, et cetera, all of that?

Yeah, I think what -- I've consistently said and we still expect to see, we would expect the -- the growth in Building Products to be probably in the area of 2 to 2.5GDP on average and we would continue to see improvements in our operating margins, which -- which we have displayed so far.

With regard to the fourth quarter, since you're on an inventory reduction mode, I'm just wondering as far as utilization, capacity utilization, fourth quarter, while seasonally obviously lower, do you think you were executing fairly well with lower utilization. How do you measure yourself with regard to that performance?

Usually utilization and again, I'm assuming you're talking about --

On the fact that certainly, in effect across the segments, but maybe if inventory reduction taking place in the process side, maybe you could --

Typically, as you know, if you're talking specific Building Products, that's our slowest quarter and for the most part, most of the businesses we have in the Building Products, we actually flex their workforces so our labor utilization is usually relatively good, of course, the capacity utilization, usually goes down a little bit but not significantly, because most of the businesses will start to provide some finished goods inventory build that -- that usually is required as you get into the middle of the first quarter.

And lastly, coming back in effect to Aldo's question, maybe more directly, as far as accounting, do you -- do you have a LIFO credit or charge that you --

We do not use LIFO inventory. We're strictly FIFO. And to some extent in the process metals group it's actually identified coil by coil by coil.

So in effect clearly inventory -- the inventory situation should be improved for the fourth quarter, though?

Yes, of course.

All right, thank you.

Marty -- Marty, this is Brian.

Yes?

One -- let me just go back to your previous question and try to clarify that a little bit. I think that Henning may have answered it from one perspective. I will try to come at it from another. When we think in terms of inventory reduction, while we're trying to watch our level of finished goods, the primary area that we focus on for inventory reduction is raw material.

And to that end, it's a pretty simple procedure. We want to be sure we're buying less than we're utilizing in each period where we're trying to reduce inventory. But we don't want to do it in a way that limits our ability to service our customers. So, we watch our finished goods levels and try to maintain those while reducing our raw material level.

Okay, that's helpful. Thank you.

Your next question comes from Mark Grzymski from Needham and Company. Please proceed.

Good afternoon.

Good afternoon.

Just looking long-term here on the Thermal Processing area, are you looking at acquisitions there? How is that market going? And I know you talked in the past about trying to get business from the auto manufacturers who are doing it internally. How is that going?

I think Thermal Processing continues to have excellent growth prospects. We talked in the past, and had agreements with General Motors and Ford and both of those investments have gone very well. Most of them are starting to ramp up. We're, in it fact, as we speak, we're entertaining some additional prospects in the same area and -- with some very positive outcomes.

And sticking with the auto parts there, with the issues going on there, is that having any negative impact on you guys?

If anything it's having a positive impact because they're coming apparently quickly to the realization that it's more effective for them to outsource things like Heat Treating and so now they've -- a number of times you see them come back at us and, in effect, we're entertaining a new project right now that's in the same direction, which we view as very positive. It's a good business for us and we think it's a great decision for them.

A lot of our business in both the Thermal Processing and the processed metals is really what -- direct with the manufacturers themselves. We don't have a lot of Tier One, Tier Two business. In other words, we didn't have much of an exposure at all in the Delphi filing. Delphi is not a big customer of ours. It tends to be -- you know, it tends to be the big guys, General Motors, Ford, Daimler Chrysler directly. And the transplants, right.

Thanks, guys, for that. And clarification here. Did you say that Capex for this year is $24 million?

I think it's going to be 20 to 23. Ballpark.

We will come in at -- actually considerably less than depreciation. That's the pattern and probably a repeatable pattern.

The reason next year's number goes up is we got a much bigger company next year.

I just wanted to make sure I had the right one there --

It's come down slightly from the end of last quarter.

Right. Right. Looking at the construction market here, the residential construction, any feedback you can give on, you know, how that market is going? Obviously there's some mixed signals out here in the --

Well, I think you read a lot in there, but the bottom line is it's still very positive, still a lot of growth, the storms are going to, in fact, accelerate some of that growth in specific regions of the country and we're starting to see some of that right now and will see more going forward in the next couple of years.

One thing I saw on the news that was pretty interesting, one of the news reporters was standing in a windy area down in Miami and was saying because of the storms in previous years and the resulting change in building codes, he said damage to the newer homes that were built to higher construction standards was minimal. And we are a direct supplier of those products that are used to build these homes to higher construction standards.

So, as these building codes continue to change and more and more of the new housing is built to higher standards, to withstand the impacts of mother nature, whether it's earthquakes or hurricanes or tornadoes, we expect to see our business grow right with it. The Housing market still continues to be strong. Even if it was to slow up, the demand for more of our products, even in what could be a somewhat slower market at some point in the future, could offset that trend.

So, we're -- we're optimistic and kind of excited, actually, that all of these new construction standards are proving to be the right thing to have done in terms of houses being able to impacts of mother nature, which will drive further utilization, if not increased utilization of our structural connector products as time unfolds.

As well as some of our other products. The other, I think trend we're seeing unfolding is a movement away from more -- into more metal products in different parts of the construction. Specifically, for instance, metal roofing.

The metal roofing market is growing at three to four times the rate of growth for asphalt roofing products. And, of course, we participate in that and Brian outlined our participation in the connector market and we're in other parts of the Building Products market with outstanding metal products.

Thank you very much for that. And to kind of rehash, the split now in Building Products between residential and commercial with the acquisition of AMICO, could you just kind of restate that again?

Looking at AMICO -- AMICO is probably more in it the industrial segment than what we call the commercial segment of building product, but right now, as we go forward, we'd probably say we're probably 65% residential and maybe 10% commercial and the remaining in the industrial building market.

Okay.

Industrial includes factories, oil rigs, for instance --

Right.

The damage for oil rigs do use our products and will use more of them.

And finally, guys, any -- touching on AMICO again, contributions to the fourth quarter on a revenue basis? Is there any way to get a sense of that?

You're probably going to get a good sense when we release the -- we'll be out with an 8K here in the not so distant future --

We're not intentionally trying to dance up -- maybe we are! Around this -- around the subject, but I think when we actually do the formal release, you will look at it and I think you will agree with us that it fits very nicely with Gibraltar on a go-forward basis.

Okay, guys, thanks, I appreciate it.

You're welcome. Bye.

Your next question comes from Gregory Macosko from Lord Abbett. Please proceed.

Yes, thank you. Could you go back to the fourth quarter? There was a lot of discussion about energy and raw material steel costs, can you give me a sense of -- on a general basis -- do you expect raw material steel costs to be -- steel to be a -- sort of an incremental positive or negative in the fourth quarter --

Expected to be a neutral in the fourth quarter.

And energy?

Energy we know is going to go up, anywhere from 10 to 20% would be the impact on our businesses and I think for the most part, with what we're doing in our business, I think we believe we're offsetting most of that.

Okay. And then also you made a comment regarding pricing. You said -- I believe you said with regard to the first quarter it's a normal point of price adjustment. Does that mean that a fair number of your contracts come up at that point and you'd expect annual price increases implemented in the first quarter?

Let me just clarify. I think the comment was made relative to Processed Metals only.

Okay.

Not Building Products.

All right.

Building Products is different. It's only on Processed Metals and on the processed metals business, most of our customers are large customers and we're usually into -- into a full-year agreement with those customers, in many cases, they're initiated at the front part of the year.

They're actually negotiated in the fourth quarter of any year and take place -- or go into place for the first quarter of the following year.

And is that the point that I would assume at which you true up issues with regard to cost of steel, et cetera, and then move forward with surcharges if necessary?

Yes. Not necessarily surcharges, but price -- new pricing arrangements.

All right, but surcharges would be a part of that?

Could be and has been in the past, but we -- we tend to not think in that same arena. And again, I think the surcharges only existed because there was such significant volatility over a short period of time. And I think as we've seen over the last year, as more stability has crept into the market, there's been more consistency on pricing and how those are applied.

Plus, I think what you might have noted, too, is many of the steel producers will announce a surcharge change, but alter their base price at the same time.

Right.

In what they're trying to get to is a net price for the steel that they're selling, and basically with our customers, that how we've always worked. A net price to the customers based on our net raw material cost that we're using to supply those customers.

Okay. And then finally, I believe you said that processed metals was down 4.2%, but you said units were up. Do you have a volume growth of processed metals.

On a net unit basis, it's about 3% growth

So, net units were up 3%.

Tons were up.

Tons!

Okay. Very good. Thank you.

Your next question is a follow-up question from Robert Lagaipa from CIBC World Markets. Please proceed.

Hi, good afternoon. Two quick follow-ups. One, I wanted to follow-up on Greg's question with regard to volume. I understand it's up 3% year-over-year. I wondered what the volume in processed metal might have been third quarter versus second quarter? And what your expectation is moving into the fourth quarter, up or down?

Going into the followed quarter, it's always down.

Okay. But no more on a percentage basis than in past years. And versus the second quarter --

Second and third quarter actually, usually and historically, and was true this year, are usually tracked very closely with one another.

The big difference between the second and third quarter typically resolves around summer shutdowns occurring in July at the automotive plants.

And the last question, for you, Brian, from a strategic perspective, obviously you've had a number of acquisitions recently. Certainly the largest with AMICO. Is there more in the pipeline? Are you essentially complete? When you look across your businesses and Building Products, you know, there's parts of that business, where the margins are exceptional and structural connectors, let's say, and ventilation, et cetera. Are you looking to look more aggressively in terms of divestitures in the business? Where do we stand here?

It's an evolving process. Our focus is on driving corporate-wide, our gross margins north of 20%, and our operating margins north of 10%. Embedded in that is looking for acquisition opportunities that would help us move both of those margins higher and also at the same time, as you saw last year, we are constantly reviewing all of our portfolio of companies to make sure we understand which ones have the capability of getting to our minimum acceptable level of operating and gross margins and if we don't think that we're capable of getting them there, we'll make the appropriate decision.

So, it's an ongoing, unfolding process. We've shown that we are willing to sell off companies as we sold off the -- the Milcor and Portal Plus operations last year and in an effort to help drive up our margins and we have that same process ongoing right now.

We're constantly looking at acquisitions, but they have to meet a much stricter set of criteria now than what we first started in the acquisition arena. We've gotten more disciplined in that area and we've raised the bar and the same goes for our existing operations. We've raised the bar on performance and the companies either make it or we're going to have to come up with an acceptable disposition.

The other part to think about -- as we've grown larger, we've recognized that we have some -- some market synergies that in many cases, some of the products that we're going -- were going to customers would pull the other products. So, when you look at the total -- I'm talking Building Products, the total portfolio of products that we have in that particular segment, some of the products that we're selling to certain customers pulled the other in some cases, high margin price, so, the basket of products we have seems to work very well for us today.

Even though there might be a difference in margin, there are true market synergies related to all the businesses that we have. And we continue to focus at developing that synergy on a go-forward basis.

The focus that we have as we sit here today, knowing that our run rate now is approaching $1.5 billion, we think that it gives us a little bit of an opportunity to have more of a minimized focus over the closer-term foreseeable future. I mean we're going to take a hard look at existing operations. We're not going to turn our bank on acquisition opportunities, but clearly, we've gotten the message that return on invested capital is a paradigm we have to improve to have an improving stock price. So, now that we've got this higher run rate, we think we've got the opportunity within that to take a stronger, harder look at some of of our existing operations and take the necessary steps there.

Great, thank you, that was very helpful.

You have a follow-up question from David Smith from Citigroup. Please proceed, sir.

Hi, guys. We haven't heard a comment yet really on the -- on the customer responses to the end markets outlook. Typically the auto industry, as far as I understand, gives a good sense of where the industry is going. And if you could talk about where the auto industry seems to be going for 2006? I know you've got about 75% of the exposure to the big three and the remainder of the transplants, but maybe what they're saying?

Automotive industry to be relatively flat growth at GDP, and we service all of the automotive industry, not just the big three, but the transplant, as well. We expect growth next year, as approximately GDP. When we're looking at Building Products, again, that tends to be more regional. If I were to characterize the entire Building Products industry, it looks like it's anywhere from 1.5 to 2 times GDP.

Some parts of the country are growing very quickly. The southwest continues to grow quickly. The southeast is anticipated to have exceptional growth, not just storm-related, but in rebuild activity, but there's still a lot of new activity. So, I think -- I think the markets that we see that we're serving, look to be solid as we go into 2006.

I think the other side of it, too, Dave, is that we would hope to see less volatility in steel pricing in '06 than we experienced in '04 and '05. Less volatility, of course, means more consistent performance and we would hope that with less volatility in steel pricing that even if the automotive market stays flat and even if the Housing market just stays flat, that less volatility would, in order to better performance from a margin standpoint, for us.

Yes.

We don't expect to see as much volatility in steel pricing. I think -- we don't expect to see a big swing of imports of raw steel coming into the country, either. That should lend better stability over the -- over the coming year.

How about a new market for you guys will be commercial and industrial construction. Are you hearing anything on the ground in it those markets?

Absolutely, those markets are now starting to pick up and they're predicting to be rather strong as we go forward.

Okay.

After being in a lull for a number of years --

They lagged the Housing market.

I fully agree with you. That seems like a good offset there. There's no question. Last point, any thoughts on where you see free cash flow for this year and next year?

Increasing.

Well, yeah, certainly -- I think the trend this year will continue. I think we've generated $95 million worth of EBITDA. I think our trend for the rest of the year will be not unlike it was last year, maybe just a little better. With AMICO, certainly next year we'd look for an improvement.

Okay. Thank you, guys.

Thank you.

As a reminder, [ OPERATOR INSTRUCTIONS ] Ladies and gentlemen, this does conclude your question and answer portion for today's call. I will turn it back to Mr. Houseknecht for closing remarks.

This is Mr. Lipke. Thanks for joining us on the called this afternoon. And for your continuing interest in Gibraltar. We look forward to talking with you again in about three months and updating you on our continued progress. Thank you.

Thanks.

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