Gibraltar Industries Inc (ROCK) 2006 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gibraltar call to discuss it 2006 first quarter results, and it's outlook for the second quarter. We will begin today's call with opening comments from Peter Ciotta, Gibraltar's Director of Communications. After the Company has concluded its presentation, we'll open the line to your questions. At this point I'll turn the call over to Mr. Ciotta.

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 first 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. On behalf of Henning Kornbrekke, our President and COO; Dave Kay, our CFO; Peter Ciotta,, who you just heard from, who is filling in for Ken Houseknecht, our V.P. of Communications and Investor Relations, we want to thank you for joining us on the the call today. I'm going to begin today's call by providing an overview of our first quarter results, and then I'll give you an update on some of the major strategic initiatives underway at our company, and following that Dave will look at our performance from a financial perspective, and Henning will then talk about our operations, the performance of our segments, and our outlook for the second quarter. After that, we'll open up the call up to any questions which you may have.

As you saw in our news release, we had a very strong first quarter. We generated our best ever first quarter sales, net income, and earnings per hour, with sales increasing by 32%, net income growing by 36%, and earnings per share up by 33%. We're proud of these results and I want to thank just a minute to thank the 4400 men and women on the Gibraltar team for another outstanding effort, and for getting 2006 off to such a strong start.

Our first quarter results are especially noteworthy when you consider that we had to overcome rising energy and transportation costs, as well as competitive pricing pressures in our processed metals segment, and rising steel costs in our building products and our processed metal products segments. Our ability to generate record results in spite of strong headwinds again demonstrates that Gibraltar's product, market, customer, and geographic diversification allows us to produce consistent and steadily improving results in a variety of economic and operating environments. Our first quarter results again show that our ongoing efforts to transition into a diversified manufacturer capable of generating higher and more consistent margins over an extended period are clearly moving us in the right direction.

Importantly, our first quarter results build on Gibraltar's long and lengthening record of performance and achievement. During our first 12 years as a public company, we've grown our sales and earnings at a compound annual growth rate of approximately 18%, and even more importantly, our consistent and steadily improving performance has benefited our shareholders. $1,000 invested at our IPO in 1993 is worth nearly $4,000 today, which is a compound annual growth rate approaching 13%. And all of us here at Gibraltar are focused on continuing to build the long-term value of our company.

Today, because of Gibraltar's size and our strength, which creates many additional internal and external growth opportunities while also positioning us to improve our operating performance, we believe we are well positioned to generate an even stronger performance in the years ahead. In 2006, we'll continue to benefit from the contributions of AMICO and the three other acquisitions we completed late last year, as well as organic growth in our existing building products operations, our powdered metal business, and our thermal processing segment.

In 2005, we had 10 businesses that generated organic sales growth above 1.5 times GDP, and building on that momentum in the year ahead remains a clear focus. AMICO significantly expanded our presence in the commercial, industrial, and architectural building products markets. Sectors currently generating strong growth, and which present us with numerous organic and other growth opportunities. AMICO also significantly broadened and diversified our customer base.

In addition to our internal growth initiatives, we continued to evaluate acquisition opportunities. We'll continue to be highly strategic and selective and only acquire those companies with the accretive financial and market characteristics that will make our business stronger for the long haul. We'll continue to make smaller bolt on acquisitions to solidify our existing operations, and we'll also look larger transactions like AMICO that will continue Gibraltar's strategic repositioning, and we're looking at the possibility of larger combinations that would create even more shareholder value. And we'll also continue to manage our portfolio of companies with an eye towards reviewing all operations to assure they meet our minimum performance targets, and for those that do not, we'll either fix them, or we'll dispose of them as we did with our Milcor division in 2005. The first quarter of the year got off to a good start, and we look to build on that momentum during this year. At this point, I'll turn the call over to Dave and Henning, who will provide a more detailed review of our first quarter results and then give you a better sense of our outlook for the second quarter. Dave?

Thanks, Brian. As Brian mentioned, the first quarter was another outstanding one for Gibraltar. Sales from continuing operations of $360 million represents a new high for any quarter in Gibraltar's history, and we're up by approximately 32% from the first quarter of 2005. The inclusion of AMICO's results for the full quarter was primarily responsible for the increase. Along with growth at the other building products operations, and the thermal processing segment, which offset softer results in the processed metal products segment, primarily our strip steel operations. Operating income, net income, and earnings per share also set new highs for any first quarter.

Income from operations of 30.9 million in the quarter increased by 48% from $20.9 million in the first quarter of last year. Net income from continuing operations was 14.4 million in the quarter, an increase of approximately 36% compared to $10.6 million in the first quarter of 2005. Earnings per share from continuing operations of $0.48 increased by 33% from the first quarter of last year, and we're above the upper end of the range we provided in our call on February the 8th. Sell selling, general, and administrative expenses amounted to $40.6 million, or 11.3% of sales during the quarter, compared to 29.2 million, or 10.7% of sales in the first quarter of last year. The increase in SG&A expenses results primarily from the inclusion of AMICOs results in the quarter, including amortization of intangibles, combined with higher equity compensation costs.

Interest expense during the quarter was $8 million, compared to 3.9 million in the first quarter of 2005. Largely as a result of higher average borrowing levels, primarily from the AMICO acquisition, as well as higher overall interest rates. Our net return on sales during the quarter amounted to 4% compared to 3.9% a year ago. From a cash flow perspective, we generated EBITDA of approximately $40.5 million during the quarter, up from $27.8 million a year ago. On a consolidated basis, inventory turned at an annualized rate of 5 times compared to 4.9 times a year ago.

During the quarter, we experienced the normal inventory build in advance of the construction season, which typically begins in early March, depending on the weather. Average day sales outstanding and accounts receivable during the quarter were 51 days, compared to 52 days a year ago. Capital spending amounted to $6.4 million during the quarter, compared to 6.1 million a year ago. In total, we expect to spend approximately 28 million to $31 million in capital in the year 2006, slightly below our depreciation levels. In addition, we paid out approximately 1.5 million in dividends during the quarter.

In spite of building our inventories and receivables as we move into the strongest selling season, we were still able to reduce our debt by $8.3 million during the quarter, bringing our long-term debt down to approximately $446 million. At March 31, our long-term debt to total capital ratio stood at approximately 47%, with secured debt representing approximately 26%. Now I'm turn the call over to Henning for a more detailed analysis of operations.

Thanks, Dave. Gibraltar's net sales from continuing operations for the quarter were $360 million, up 32% from a year ago. Gross margins improved 1.5 percentage points from the first quarter in 2005, driven by higher sales and partially offset by higher energy and transportation costs. Operate margins of 8.5% were up 0.9 percentage points for the first quarter of 2005, driven by the increase in gross margins and slightly offset by higher SG&A costs. Segment performance indicates that our building products segment generated a net sales increase of 80.2% to $215 million, compared to the first quarter of 2005. The growth was the result of the AMICO acquisition and organic growth at existing building products operations.

Sales in this segment excluding AMICO were up 5.5% year over year. Gross margins were 23.8%, up 2.7 percentage points from the first quarter of 2005, driven by operational improvement and leverage at the higher sales levels. The operating margin was 14.6%, up 5.8 percentage points from the first quarter of 2005, a function of the higher gross margins and business mix. Our processed metal product segment sales were $116 million, down 9.2% from the previous year, primarily result of lower tons sold, coupled with lower product prices, driven by competitive pressures in the strip steel market, offset by strong demand on higher material and product pricing in our powdered copper business. The gross margin was 10.5%, down 4.5 percentage points from a year ago, and the operating margin was 5.8%, down by 5.2 percentage points, both the result of competitive pressures described previously in our strip steel business, partially offset by higher margins in our powdered copper business in the United States and our operation in China.

Our thermal processing segment generated a net sales increase of 10.9% to $30 million, versus the first quarter of 2005. Gross margins were 23.8%, an increase of 2.7 percentage points, versus the first quarter of 2005. Operating margins were 15.7%, an increase of 3 percentage points versus the first quarter of 2005. Comparisons to the prior year were favorable, due to leveraging at the higher sales levels, improved operating characteristics at key locations. And strategic investments that have yielded new business with higher margin profiles.

At this point, let me provide some commentary on our outlook for the second quarter. As we move into the season, the seasonally strongest period for our business, the second and third quarters, will continue to benefit for many growth and efficiency improvement initiatives. Our building product segment which now represents approximately 60% of our sales, continues to generate strong growth as a result of market share gains and market growth. As Brian mentioned, our AMICO acquisition significantly expanded our exposure to the commercial, industrial, and architectural building markets, which continue to experience strong growth.

As noted earlier, our processed metal products segment particularly our strip steel business continues to face competitive product pricing pressure, and the prolonged market adjustment to changes in the steel industry, helping to offset this is continued strength in our powdered metals business, and our thermal processing segment continues to benefit from the new business we've gained and the ongoing strength in the industrial economy. Even though rising energy, transportation, and raw material costs will continue to put pressure on our margins, business remains on target across the Company, and we expect business segment performance similar to first quarter results. With that as a backdrop, we expect our second quarter earnings per share will be in the range of $0.57 to $0.62, compared to $0.53 in the second quarter of 2005, barring a significant change in business conditions. We had strong first quarter sales in earnings, and we expect to produce solid second quarter results. In the year ahead we'll continue to focus on improving operating efficiencies, optimizing market share, and maximizing cash flow to help fund our growth and reduce debt. At this point, I'll turn the call back over to Brian.

Thanks Henning. Before we open the call to any questions that you may have, let me make just a couple of closing comments. We generated our best ever first quarter sales, net income, and earnings per share, and we think we're well positioned to deliver record setting results again in the second quarter, which sets us up well for another strong year. Over the longer term, our goal remains to build a company that produces steady and sustainable improvements in sales, margins, and profitability, which we believe will create value for our shareholders, and we continue to be making progress towards that end. That concludes the prepared comments that we have for today. At this point, we'll be glad to answer any questions that any of you may have.

Thank you, sir. [OPERATOR INSTRUCTIONS] Sir our first question is from the line of Robert LaGaipa with CIBC World Markets.

Just a few questions. One, I just wanted to circle back to the anticipated guidance for the second quarter. Can you just give us a sense -- you've provided a broader outlook. What has to happen for you to get to the upper end of the range of $0.62 versus, what from a negative perspective would happen to push you into that lower range?

As we see it right now, normal performance in the markets that we're serving today, and we expect that volumes should be consistent, we're -- and there are no dramatic swings in raw material pricing that occurred during this period of time, that we're -- those are the main factors in determining that range.

And then I'm assuming it's the mid-point of the range?

We know what you're asking us, and I think what we're trying to do is to give you an accurate representation of what's likely to happen, and we're trying to consider any of the variations that we're somewhat aware of in the markets that we participate in, and, also, of course, with material pricing and energy costs. I think if someone could tell us exactly what will happen with both energy and material costs, we probably could narrow the range.

A couple other questions then. Just with regards to the building products segment, could you just remind us how much is going to the big box stores? We've heard from a number of other companies that companies like Home Depot, for example, had reduced their inventories fairly dramatically through at least the first couple of months of the first quarter. What type of impact that might have had on your results, and do you expect to rebound in the second quarter, beyond just the seasonal trends, as it relates to that? And maybe if you could just couple that with also the warmer weather. I mean, obviously the winter time frame during the quarter was a little bit warmer than most winters, and if that had any effect on the results.

Just one thing before Henning takes over and answers that question. Let me just go back to your last question, Bob, about the guidance that we gave.

Sure.

We don't play games with our guidance. We understand our business very well. We want to provide the most accurate representation of what we believe is going to happen that we possibly can, and I think if you look back at our past performance relative to the guidance that we've given, we've done a darn good job of being accurate in our projections.

Sure.

I guess that's all I want to say about that.

Fair enough.

Big box sales represents about 21% of our total sales, and in that number are all of our sales to all of the big box customers, not just one of them. And it's true certainly during the first quarter, certain of those customers did go through a period where they're readjusting their inventory, and we went through that same period with them, I think, it all, as it usually does, averages out when you get to the end of the quarter, which it happened in our case.

And how about any impact from the weather?

Yes, we had impact with the weather, certainly on the West Coast, we saw our sales on the West Coast down, usually. And I think the other thing I would add, now that you're asking about building products. Our building products business was unusually strong for the first quarter, and I think some of that was due some to the positive weather characteristics. We had warmer than usual weather, although wetter in some areas, and I think the warmer weather opened the season up earlier than we'd normally expect it, and our results consider that. If you look at our building products results, they were really outstanding for the first quarter, part of that had to do with some of the market moving into, what had traditionally second quarter into the first quarter.

I guess what I'm trying to get at is just in light of the AMICO acquisition, the fourth quarter and the first quarters are typically your weakest quarters, but obviously the acquisition has had a significant positive impact on your margin during, what's again, seasonally your weakest. I guess what I'm trying to get a better sense for is now that you've had a quarter or so, more than a quarter or so of the AMICO acquisition, has it changed your outlook or your expectation for the margin in this particular business? I mean, I would think that it probably changed it to the positive, but trying to always put that all into perspective.

One thing about AMICO before Henning goes to your direct question, Bob, like everything we do, we're trying to build a company into one that generates a consistent performance over an extended period of time. AMICO unlike many of our other businesses, doesn't necessarily experience the same timing of seasonality that some of our other businesses do, particularly relative to our automotive business, which always has a very weak fourth quarter. AMICO runs a little bit counter to that, because of the nature of that business. And we saw that as another positive aspect of AMICO. Henning, you can add to the margin question.

It's true. AMICO, I would say in general, is delivering as expected, and in fact is delivering above expectation, and that was true in the first quarter. I would also add that usually AMICO has a stronger first quarter than most of our other building products businesses. As Brian had said the the cycles they go through are a little bit different than a traditional building product cycles. Again, they are more involved with both the industrial architectural markets, and they tend to have a different cycle than some of the traditional retail and wholesale markets.

One of the reasons that they have a different first quarter, too, is that a certain volume of their sales go to service centers, who would be stocking up in the first quarter in anticipation of a stronger demand for those products, as the typical construction season opens up. So that's one of the things that gives them a little different pattern than some of our other businesses.

And how much is nonresidential exposure for the overall company currently?

Nonresidential -- well, let's see if retail is -- let's call it 20%, then the remaining 80% is the other.

But that would also be residential. I mean, it's not just necessarily retail.

Well, yes, it depends how you define residential, because we sell into the wholesale markets, and the wholesale markets go both residential and commercial.

It's a little bit difficult for us to--.

70/30, 30 residential, 70 -- you know when we sell into a wholesaler, we're not sure where they're going to bring the product.

Or even into a retailer.

So we tend to focus more on the channels that we take the products to, and where they eventually end up, we don't necessarily know. We sell into, for instance on the retail channels and we know now an increasingly larger number of their customers are not retail customers, but are rather commercial customers, and that by the way has been their focus, at least one of those customers.

One last question before I go back in queue, if you don't mind. The other question that I had is the results in the processed metals business. If we look at the steel pricing trends, the inventory that occurred through most of the industry through most of the second half of 2005, the inventory overhang, for the most part has been completed, as I understand it the pricing seems to have improved somewhat. Can you maybe just speak to just the competitive pressures that you're seeing. If I recall correctly, I mean you're one of only three producers and certainly a leading position in the strip steel market. What type of competitive pressure are you seeing and do you expect that to abate on a go-forward basis? You mentioned a number of things that -- in your outlook, but maybe if you could just provide a little bit more color just so we all understand what exactly is going on in this particular market, and why haven't you seen a more significant margin rebound push the inventory overhang?

Great question. Let me answer that, and if Dave and Henning want to add anything it to following my answer, they're welcome to chime in. Let me answer it generally first, and then specifically second.

Sure.

First of all within think the most important consideration for everybody to look at here is our overall corporate performance. While clearly processed metals did not perform to historic levels during the first quarter, we nonetheless still had record setting performance. That is a clear depiction of the success we're achieving in transforming the Company into a diversified manufacturing business capable of generating more consistent performance over the long haul. And as we continue to execute that strategy, and processed metals becomes a smaller and smaller percentage of our overall sales, we'll see the consistency of our performance continue to improve and that's the direction that we're taking the business in.

Do I think that this is going to correct itself? Yes. I know that previously we have mentioned, relative to the processed metals segment, that there was a phasing issue that you talked about relative to inventory issues, and we had talked about the fact that we expected that to be behind us by now. And in fact, as you pointed out, that is, but a new variable crept into the equation and I think that variable, competitive pricing, was driven by somewhat of a misread of the raw material cost environment that we're moving into at the beginning of 2006. That then resulted in certain certain actions being taken to reduce pricing, selling prices in advance of capturing what some expected to be declining raw material costs, and in the market that we're in, the market always seeks the lowest possible price.

Now that published prices for hot roll have had been issued, that show increasing -- an increasing trend as opposed to the spot market prices, which are sometimes less easier to discern, I think that the segment will be in a better position to correct the imbalance between selling prices and raw material costs going forward.

Can you just define -- it's just a little unclear. The mystery that you're talking about, was it an inventory misread on your part? Was it a misread on your competitors' part? Can you maybe just expand on that?

It wasn't a misread on anyone's part. Let's look in general. I think we would all agree that the steel industry has changed. I think we've looked to those changes. At this particular point, the various markets that are part of the steel industry is also going through a various series of changes. We happen to operate in a niche called strip steel which is part of a market that's also going through changes. Steel industry at this point is starting to stabilize. I think as it stabilizes then you'll see this market segment start to stabilize. So the long term answer is absolutely we see the market stabilizing. We se the margins going back to where they were, and I think we more or less indicated it in the information that we've provided.

Okay.

When you think about raw material costs, going into 2006, there were views going in both directions. One, that it was going to stabilize and continue to go higher, and one that it was going to weaken and go south, and the big question mark in all of that was what was going to happen with imports, and at that time, the spread between import pricing on the international market, and domestic pricing, and what impact that would have on the whole situation. So I think there was room in there for a number of interpretations of how that scenario would play itself out. We took one, others took another, and the net result is what we currently see. It will correct itself, though.

We believe it's still a very good, solid business, and I think as we go forward, it will be very clearly indicated to our shareholders.

Fair enough. I can follow up. Thank you very much.

And sir, our next question is from the line of Mark Grzymski with Needham & Company.

Congratulations on the quarter. Just wish the stock price would react to the Company performance not just the segment performance. Getting to the processed metals segment here, the -- what percentage of revenues in the quarter came from the domestic automakers?

About 50 to 60%.

I'm sorry?

About 50 to 60%.

And just wondering if you could maybe shed some light on the impact at -- the troubles in that industry is having on you guys right now and what you are doing to offset them? And then secondly, how the -- how the move to get more transplant business is shaping up as we speak?

I think as we go forward, we understand there are some issues with with some of the companies that participate, but we've always looked at the market in general. We tend to supply products in the automobile market, and for the most part, that's fairly stable. You're right, there has been a shift to more of the transplants, and we've participated in that shift. We're well aligned with the trans plants, we continue to supply products there. I think in the past, and Brian has mentioned this in previous presentations, we supply steel to just about every automatic transmission that goes into production, independent of who's making it, and that's where we participate, by the way.

With one note here. We've become aware that on these calls, not only are interested investors or potential investors listening in, but also customers, competitors, as well as suppliers, are all on the phone, so if we're a little reluctant to divulge information, it's only because we think it gets a little to close to the competitive nature of the business. And we'd just like to be a little bit guarded in some of the responses.

This second question might be a little more challenging, but, you know, with regards to operating changes and those specifically in regards to lean manufacturing and the implication of those initiatives, is there any way to -- I mean, are you seeing the changes, the positive changes, and is there any way to quantity.how that might draw out in the rest of the year

Yes, we're seeing very positive indication of those changes, and I think if you tracked our margins not just on a quarter by quarter basis, but over a number of years, it would be very apparent to you, probably the most apparent place is in our building products margins over the years. We came in at the end of the quarter 14.5%, which is a fantastic showing for a first quarter for a building products company. And if you go back and you look of our history, you would find that we were well, well below that in the past. And a lot of that is not only acquisition, a lot of it has been a lot of the work we have done in putting together various plans, a lot of the efficiencies that we've gained and some of the internal consolidations that we don't necessarily talk about.

Right. Okay. And Henning, you talked bout thermal processing and the margins, and the improvement in that business. Could you just maybe go over again why -- maybe I missed it, but why the margins improved so much from the fourth quarter, and on slightly better revenue? I mean what other changes--?

I think the thing that I characterized in and there's been one action that's really worked that, we've made a number of -- as you know, we continue to invest in our business, and Dave talked about some of those investments. We've made some very good investments in the thermal processing business, and they've paid off handsomely, they brought us into some new businesses, and I've indicated earlier that they provided some very positive, let's call it profit profiles different than existing profiles. We've continued to invest in all of our businesses, and in many instances, those investments are now starting to pay off with the Company

Okay. and then just a quick housekeeping question. Dave, what was the options expense in the quarter?

Well, options themselves were fairly small. We don't have a a lot of options outstanding, and now that we're under 123R. The expense for the quarter was really, pretax was only about 45 or $46,000. Plus the comp expense from Equity Securities came from restricted stock, rather than options.

Okay. So it was minimal at best.

Minimal.

Okay. Thanks, guy, and congratulations.

Thanks, Mark.

And sir, our next question is from the line of David Smith with Citigroup.

Good afternoon, guys. Just getting back to the strategic investments in the heat treating business, can you just circle into some of the markets that you're getting the better margin and the sales --?

As Brian indicated, you're getting into an area that we're not really going to go down, because now we're starting to talk about customers, and you can understand why we won't go there.

I'm just getting more at the markets, actually.

Well, as you know we participate fairly broadly, both industrial automotive and aerospace markets in the thermal processing, and the spread is continuing in the same areas, and some of it's automotive, and some of it's industrial in general, and there's a little bit that's in the aerospace.

Okay. When you look at the AMICO business, I think that you said organic growth ex AMICO was up 5% in the buildings products business, but if I look at AMICO on its own, are you seeing a higher growth rate in AMICO, given the contribution from the nonresidential piece?

Yes, AMICO did have an above average growth rate in the first quarter.

Okay. And in terms of the nonresidential piece going forward, are you seeing solid order trends to indicate that might unfold in a similar manner?

We do, very much so. I think one of the things that we like, another one of the things that we like about moving into the commercial space, is that the commercial space, historically, does not follow the same pattern that the residential space does. If you'll recall, the residential market came back well in advance of when the commercial market came back and right now the commercial market is continuing to roll along very strong, and we would anticipate that that market would have a longer run than the residential market, because of a later starting point.

Yes, it looks like it's starting to pick up right now, at least we're hearing that from a lot of of the companies we talk to.

And the industrial markets tend to be very strong. In fact I just read a report this morning that talked bout the willingness of more companies to continue to invest in new plants and modernize plants. And that usually takes some of our products along with it as well.

You mentioned how in the first quarter, as far as the buildings products goes, it sounds like the margins actually were somewhat, at least unheard of in the past, to see these high levels in the first quarter. What does that mean then for the rest of the year?

As I indicated, we would expect similar performance in the second quarter. We don't forecast the full year, as you know, but certainly we anticipate a strong second quarter.

Okay. And then would you expect the second quarter would seasonally be at a peek.

Usually the second quarter is a strong quarter for us. Second and third quarter tend to be our strongest quarters.

Okay. That sounds great. Thank you.

And our next question is from the line of Gregory Macosko with Lord Abbett.

If we could just step back a minute and look at the three businesses, clearly building products and the thermal processing where we saw favorable trends and sales, could you look at it from your standpoint on an internal basis, is it fair to say that those two businesses really did -- both did much better than you had expected, versus the processed metal, which was basically significantly below your expectations and internal projections?

I think in total we were about on target where we thought we would be. The mix is a little bit different. That's true. But as Brian talked about earlier, that's one of the reasons we started moving the Company in the direction that we did move it in, so that we would have the ability to deliver consistently. I think that answers the question.

Okay. And within the building products, last year, chosen for I guess the core business, the core Gibraltar business, was at -- looks to be an 8.8% operating margin. Would you say that that margin improved against itself, excluding the AMICO business?

Yes.

Okay. And, also, within the building products area, could you give us a little more:on some of the products in the retail segment, particularly say maybe some of the programs at Home Depot. How have those gone, and are you gaining penetration, et cetera? Could you talk a little bit there?

That's a good question. We've done a really excellent job in gaining market share, particularly on the retail level. We've seen some of our products, like metal roofing, trims and flashings, those are products used in the construction process, growing. Most of the businesses involved there have seen double-digit growth rates on a year over year basis. So we have seen very strong growth patterns and again we have done a good job in supporting our customers. We tend to take responsibility of helping to drive products right through the customers, and I think both ourselves and our customers have enjoyed unusually strong growth.

Have you added more stores? in other words, if the number of--?

We have. We've added, that's an interesting question. We have added more stores, we picked up some different regions with some of those customers. We're also adding new products into the mix, and we've got a fairly broad portfolio of products. And we're looking always for opportunities to take more of our products through the same customers.

How about the connector business? Have you gained more penetration if that area?

Very strong growth. We've continued to -- I think the whole market is expanding. I think that's a true statement. I think we've continued to expand with the market, and we've continued to take those products into some new channels.

That's a slightly different play, too. It's not only just a market driven play, but the demands, the building code specification demands for the use of those products is increasing, and it started out in the coastal areas of the country, and is now moving in deeper and deeper into the country. So simply by building code requirements, the use of those products is expanding.

And did we see any sort of inventory fill or anything like that in the building products area, just given what you've said about new stores and stuff, or is this an ongoing growth rate?

In fact many of our customers made a concerted effort in the first quarter and the back end of the fourth quarter to reduce their inventory, so we're pretty much running on line right now, and I think most of our customers prefer it that way. There's not a big inventory build sitting out there.

Okay. Very good. And then in the transport area, clearly a solid kind of operating number, and that -- that kind of margin, is that -- I mean, obviously given volume levels and everything, is that kind of a level we should look for going forward?

Absolutely.

Those kinds of margins there.

Yes, sir.

And sir our next question is from the line of Sal Tharani with Goldman Sachs.

Good afternoon.

Hello, Sal.

Brian, you mentioned in your comments about that you are evaluating other acquisitions, some small ones, and you mentioned the possibility of a larger combination. Where do you guys stand in terms of would you be an acquirer, or would you be an acquiree in such a combination?

As you know, we've been very growth oriented, and we continue to see ourselves as a growth oriented company. We tend to look at those opportunities that add shareholder value. I think you would assess that we've done a good job of accomplishing that over the years.

Yes. And when we talk about the tail end of your question there, Sal, Henning and I and Dave spent a lot of time trying to look around the corner and see what's coming next, and how to best position the Company for long-term shareholder value creation. And that's where we get into considering some of the possibilities that exist out there of some larger type combinations. But clearly we think we've got a pretty good handle on where we're going with this business. We think we've got a decent track record. I believe we've got a management team in place that's capable of running a much longer organization, and based on those considerations we like the position we're in.

Okay. On the processed metals section, is that -- are there is a lot of synergies between that and your building product? I mean that if you at some point decide to get out of the business and sell it, would you consider that?

There are virtually to linkages between the two businesses, other than the fact that they both use steel.

So you mentioned -- several times you've mentioned that you want to be more and more towards the manufacturing end part, on the building product side. Is that a possibility you will entertain to just spin it off or sell it?

Yes we tend to focus on value-added acquisitions, and I think Brian indicated very clearly that we've grown in that particular area. So value added is an opportunity we will continue to focus on.

Also, looking at your -- you know your contract businesses you know your pricing arrangement. Do you think it's just a matter of lag impact from the rising steel prices, and you will be able to recover these margins probably in a quarter or two?

Yes. We think it will return to more normal levels. I'm not sure if it's only the lag impact, but we believe that we will get back there.

And lastly on the import front, and you also mentioned the pricing gap between your imports and the U.S. what are you seeing out there?

That gap has narrowed significantly.

Are there any opportunities then for you guys to buy import steel before somebody else wants to buy or does it slowly disappear?

We've never been a big buyer of imported steel. We do keep a pulse of what's going on in that marketplace, and some of our West Coast and southeastern operations do purchase certain amounts of foreign material, but the vast majority of what we buy has historically been North American based, which includes Canada and Mexico, but we -- it's never been huge factor in our overall business.

Thank you very much.

You're welcome.

And our next question is from the line of Leo Larkin with Standard & Poor's Equity Research.

I'm wondering in the first quarter your working capital was a good deal better than I thought you might be able to do, given the higher sales, and I'm wondering, even in view of the higher sales, is it conceivable that working capital could be a source in 2006?

Well, Leo, we have -- as you know, we have had a big push on this, a big emphasis really starting in the fourth quarter to really get our working capital under control. It's been a real focus. So we have been very restrained about building inventories. I think if you look at the first quarter a year ago, we had a much more significant build in inventory. This is a real focus with us. We manage this, we talk about this with our group presidents on a monthly basis. We want to ring as much as we can out of working capital. Our focus is on generating cash. We would like to deleverage the Company. Some of that may in fact come from working capital.

Okay. Thanks very much.

And sir we have a question from the line of Mark Parr with KeyBank Capital Markets.

You guys had a great quarterer and your stock is only down 14%.

And we only a announced that we're going to have record-setting results in the second, so forbid we should ever announce a down quarter, we would probably go up.

Wow, that is kind of a surprise.

Mark, just for what it's worth, Ken Houseknecht is not here today, although he called in sick way before the market opened. I started feeling sick after it opened.

Well, it's probably all his fault anyway.

He's not here, so it's got to be.

Well, certainly all I can say is that the weakness in the stock is clearly, at least from my perspective not deserved. I guess Brian the one thing that comes to mind, given the market reaction today, and I think there may be some macro issues at work here as well, not just the earnings, but would you be be willing to share with us what the biggest disappointment was for you in the first quarter performance?

Clearly it resides in our processed metals area, and it was simply the marketplace pricing.

So this -- it's kind of like the supply head fake that lot of people got caught into, you are not the only one, I don't think

I believe that's the case.

Okay. And then given what I'm hearing, and just what I'm seeing, it's pretty clear to me that there are others that feel the same way that you do, that this is a temporary phenomenon, and that the margin momentum has probably reached a trough. We'll have to see how that goes.

I would agree with that, Mark. I would think that we have definitely hit the bottom of the trough, and white it may not come off of the bottom as fast as we would like, it will definitely come off of the bottom. The only thing I'd have to say is I don't have the luxury of talking to others the way that you do, so I can't comment on that.

I was just kind of sharing that as an observation. I had another question. And first of all, I just congratulate you on the 5.5% organic growth in the building products area. I was wondering if you could break that down between new stores versus same store sales growth, that 5.5%?

When we look at building products, recognize, as we said only 20% of the sales are going through big box, so -- and again, when we look at comp sales versus new store sales, most of the big boxes, they're getting pretty saturated, so we're not opening up as many new stores. Most of the growth we have are on comps. We tend to have run double digit comps on retail, and again as I said, we monitor that very closely, we work with our customers, we put together programs and the right products that help increase the growth of those same store sales.

I think, Mark, if you remember back over time, and I know you do, but we said that we'd had available capacity in these building product businesses, and we are gradually, as we said we would, utilizing that available capacity.

I've always thought it was a great strategy because you're buying a regional business that's running a one-shift operation, and you turn a regional business into a national business, and the capital investment associated with going to two or three shifts is just really not there.

Exactly what the strategy was.

One other question I had, and, I got another thing I'm kind of surprised about is the length of the call today. It usually doesn't go much more than 20 minutes, and we've had a very active call, but can you talk a little bit about your exposure in the processed metal area, what percent of your buy is exposed to the spot market, as opposed to being locked up in supply agreements?

That's another one of those areas, Mark, where it gets us into divulging, some competitive strategies, and a little bit more information than I would really rather talk about. But I can tell you what our overall strategy continues to be. Whatever period of time we're committing to on a selling price arrangement, whether it's quarterly arrangement, a six-month arrangement, which is pretty much where the majority of things are today, or an annual arrangement, or a spot price arrangement we try to buy our raw materials on that same time of arrangement, so that the time frame that we're locked into, relative to our selling prices, is backed up by raw material pricing arrangements for that same duration of time, so that our exposure is limited and moderated.

And is it fair to say that doing that has become easier lately than, say, it was two or three months ago?

Yes.

Okay. I appreciate it. And congratulations on the great results.

Mark, thanks.

And sir, we have a question from the line of Peter Lisnic with Robert W. Baird.

Actually it's John Halfel her on behalf of Pete Lisnic. I just had a couple follow-up questions for you. First off on the acquisition front. Just on a large acquisition, what exact kind of debt to cap ratio do you consider going up to in an acquisition?

Well, it depends on the acquisition. We have often said that we -- for the right acquisition for the grand slam of acquisitions, we certainly are willing to take on more leverage than we historically have. We right now are levered at about, I think, somewhere around 2.8, 2.9 times EBITDA. We're -- we are never going to be a leveraged buyout firm. We're not going to lever up to five or six times EBITDA. You know, we have some sanity in place, but for the acquisition, we can still make those acquisitions, we can still borrow money, we can still keep the Company leveraged to 3.5 times or less of EBITDA, so that's kind of what we look at.

Okay.

That's pretty much what we said -- or almost exactly what we said when we were out on the road show for the bond offering.

Okay. And then something I remember you guys talking about when you first declared AMICO and just given the -- kind of talk about consolidation in the steel industry. You guys kind of talked about making the 1 million ton threshold for purchases helping there. Would it have been worse without that? Or really you've had -- started to have synergies from AMICO with that?

We have some synergies obviously on the steel, but not many, and we're close to that threshold that we've talked about. At its face value, AMICO is a good business. We always thought it was a good business. It has continued to be a good solid business. And I think we look very closely at the growth opportunities associated with that and some of our other businesses.

I think the real commentary on that million ton threshold lie more in the fact that the consolidations that have taken place in the raw steel production space put us in a better position with the more tons we are buying. There are fewer larger players out there, and we would like to be as significant a factor as we can possibly be, and the more that we're buying, the more significant our presence will be. If you are looking at steel producers today that range in size from 12 million annual tons of flat rolled steel to 50 or 100 million tons, and if you're buying 100,000 tons a year, you are not going to get their attention. You are buying a million tons a year, you have got a better shot at getting there attention. That's really what that comment was all about. It's more about, too, making sure that you have supply in many instances than it is what you're going to pay for it, and it clearly the bigger guys are the ones that goring to get taken care of first when things get tight.

And then kind of turning to transportation, just with your comment on freight and with gasoline and diesel prices being where they are right now, is that something -- how exactly do you kind of deal with big box customers regarding freight and other people, and can you kind of revise as freight rates continue to increase?

Well, it's a good question. I think in some instances, big box customers have decided to do the freight themselves, so we don't deal with it. I think in other instances where -- where there's a warranted increase to cover that, we have discussions and a user agreement reached on that basis, as there is with any other business.

Okay. But generally probably on a timing lag?

Yes.

All right. Thank you.

You're welcome.

And our next question is from the line of Yvonne Varano with Jefferies.

Thanks. On the revenue decline in the processed metal products area, can you break out how much of that was price driven versus volume driven?

Yes, in general, Yvonne, while Henning and DaVe are working on some actual numbers. By the way, hello.

Hi.

First of all, the majority of it's been pricing, a limited amount has been volume. As the competitive nature of pricing has crept up, we have been somewhat more selective in what business we'll take. We like to make money when we ship steel, and as a result, we've been somewhat more selective in what business we'll take. We like to make money when we ship steel and as a result we've been somewhat more selective. Do you guys have a rough guess on the--?

Well, we know that the volume is down 16%, and that's just tons sold.

Okay. Because I was wondering if the volume decline was more than the market it might have represented some market share loss because of some of the comments you made.

I think in our case, the decline in volume was voluntary our our part, because in some instances the pricing situation was unacceptable, and therefore we, based on strategy, went after the part of the market that was most important to us.

Yes. And on AMICO you talked about the organic growth of that business, it being higher, but I was looking to try and narrow down what higher meant. Is that high single digits, is that low double digits?

It actually had double digits.

Okay. And then last quick thing. I know we've talked about an acquisition or a larger combo. Should we continue to assume that it's going to be the areas that we've seen in the acquisition activity in the past?

Well, it's by far the largest market out there. I mean, we've sized it of at least $480 billion, and we know it's a highly fragmented market, so clearly there are good opportunities in the building products market, but we also look at opportunities in the processed metals segment as well. There are actually good opportunities in segments of the processed metals industry.

Okay. That's it.

Thank you.

Thank you.

Sir, we have another question from the line of Gregory Macosko.

Yes, just wanted to follow-up on the building products there, you mentioned that most of the retail growth was basically comp store growth. Just so I understand that, does that mean that basically you set mailboxes in most retail outlets, and you're adding products such as connectors and the like to the stores where you are selling those mailboxes?

When we talk comp sales we're talking about same store sales and we measure same store, same product sales year over year.

It's a term, same store comp, same store comparison in a given space that we have, how many dollars worth of sales are we putting through that same amount of given space.

Right, but.

It's really a brig box measurement, not one of our own

And so when we're talking about comp sales, we're talking about comp sales by department. Your example, for instance, where we are bringing connectors into a customer, they go into a different department. We would measure that separately.

So when you talk about comps, you talk about department as opposed to?

That's how you measure.

But you are adding new stores, correct?

Yes, we are. Well, we're not.

Adding new products in new stores if.

That's what I meant, you are adding new stores within your building products. That was just not clear to me. And then did you say that Amico is better than -- is double digit sales on a comparable basis?

Yes, AMICO did have very strong sales activity in the first quarter. Unusually strong activity in the first quarter.

Okay. And finally with regard to the placing pressure in processed metal, are we talking basically about the three of you that are there, or have you seen pressure from others that are maybe secondary players that came into the market, and created pressure there that maybe was not the case in the past?

There have always been some fringe player, between the three biggest, we probably have somewhere around 80 to 8% of the market. There are some smaller players. Some of those smaller players certainly are participants, but--.

But not any more this quarter than any other quarter?

Yes, and recognize it's hard to see, because some of the other players are much broader than just stripped steel. In our particular case we're only stripped steel. So when you look at what others are doing, you are looking at fairly broad market participation, and far more than stripped steel. In fact, stripped steel is a small part of their total play, in our particular case, it's 100% stripped steel, so I think you have to factor that in also.

And the 5.5% sort of Gibraltar growth in the building products area, without Amico, is that accelerating this quarter versus last quarter?

We see it running at the same rate at this point, the forecast that we have tends to support the operating plans that we have.

Okay. Thank you very much.

And our nest question is from the line of Steven McDoyle with Lord Abbott.

Yes, just one quick question. A follow-up on this Home Depot opportunity, I haven't heard the direct answer to are you selling connectors into Home Depot today?

No, we're not.

And does that opportunity exist?

Every opportunity exists, and we would hope that one exists also.

Well, there's certainly a fairly healthy level of discussion on your competitor's call the other day with regards to this issue, which would lead you to believe that there may be a meaningful share opportunity shift.

Yes, it was a surprising discussion, and we recognize that it happened. Interesting discussion.

Surprising to the extent that they would offer it up, or -- asked a different -- asked a different way, would you be selling -- is the opportunity a high probability event that this year that you would be selling connectors into a big box retailer that you don't today?

We obviously can't answer that question. I think that you would find that--.

That's a customer decision, not ours.

I mean we have a very good business, it manufactures excellent products. We're very proud of that business. They've deep an excellent job, and I'm sure there are a lot of opportunities for that business going forward.

Great. Thank you very much.

You're welcome.

Sir, we have a question from the line of Robert LaGaipa

Good afternoon again, just a few quick follow-ups. One, just to get back to the acquisition question. If I remember correctly, a quarter or two ago you had mentioned acquisition opportunities, but not necessary in the near to intermediate term as you digest the AMICO acquisition which is obviously the largest in your history. I guess my question is just with regard to where you stand today, what's your pipeline look like, and if your pipeline is fairly strong, I mean what's the size of the potential acquisitions that are in your current pipeline and your comfort level with doing a fairly large acquisition today, versus something that you might do sometime in the future, but certainly not in the next quarter or two?

Well, relative to the pipeline itself, the range of size in them is from 10 million to many hundreds of millions, so there's a broad range of candidates that exist out there. It's a highly fragmented market, and our approach to it is to look for acquisitions that have a good track record of performance, and can strengthen our product leadership in the niche markets that we're playing in. Those are key things for us, or one that would immediately bring us, like Amico did, a market leadership position in a brand-new market. So those are the kind of things that we're looking for. That's the size of the acquisitions that we're looking for.

The digestion process of the AMICO acquisition is moving very well. The management team down there has been nothing other than a very, very pleasant surprise. Everything that we thought we were getting, we've gotten. We have, as you know, following the Company, we recently put a new President in place there, Roland Short, haD done an extremely good job of running that business over the years, is going to continue on with the Company as a senior statesman, so to speak, through a transition period, and that whole situation is going very well. Joe Smith who is taking over brings a wealth of experience to the company, and we think he will fit in extremely well with the existing management team and the overall culture of that acquisition. So because it's going smoothly, we think we're back in a position where we can start to consider our next move, or moves, and we're in the process of doing that as we speak.

So would you say that, as we look over 2006, that you're comfortable, or you believe that it's likely that you could do an acquisition of AMICO's size or better within this calendar year?

I think Gibraltar is going to continue to be a very active company as the year unfolds. I think we'll continue to add shareholder value in some very significant ways. We're probably going to leave it at that.

And two just quick housekeeping items. Dave, can you just tell us given the SG&A expense in the quarter, the 11% plus, as a percent of sales, I mean, is this a level that we should expect going forward? And what could change that level, either positive or negative on a go-forward basis?

I think actually our focus to bring that down. We Would like SG&A expense to be 10% of sales, or perhaps even a little bit less. We have a number of programs, and efforts underway to do that. I think really what you so is really adding the raw, sort of AMICO numbers. We haven't really done a lot there. We still have things that we need to do. Our target is 10% or less.

Fundamentally, we're putting in line some system and so right now we're investing additional monies systems, and a lot of that is getting pulled into that number. I think once everything is up and running and we have it the way we want you'll start to see that number come down.

So would it be fair to say that the increase is fairly front loaded into the first quarter, and you're expecting more of a benefit or a decline in SG&A as the year progresses?

It's a nice thought process, and what systems -- I like to think they're front loaded, but there's a tail on them, so I think we'll see some increased expenses as we go through the year, and I think as things get in place, you will see them start to tail off. That we're actively working on those issues.

I think the key thing with systems, too, to keep in mind is that what it does, it positions the Company to generate more sales through the existing overhead structure, more efficiently. In other words, we can do more once these systems are in place than we're currently doing with the same dollars that we're currently expending on overhead. That's the desired outcome.

All right. No question. And last question if I could, again, just to get back to thermal processing and the margin improvement there. I know a key input for the thermal processing business is natural gas, and given the peak in natural gas in the fourth quarter, the precipitous decline that we saw in the first quarter, can you maybe quantify what benefit, or if there was any benefit as it relates to the natural gas decline in that segment?

I think there were some, but I think think the folks that work in that business did a really excellent job of managing energy in many cases, and they talk in decatherms, they found ways to, if you will, buy ahead on gas so they were able to lock in an advantageous price that we -- that system was well controlled. They've done a really good job in that area.

I guess just the strategic investments, you mentioned a number of industries, a number of different things you are doing there. What specifically from a strategic investment standpoint was the particular new products, was it new applications?

We've got some excellent expertise in specific processes, and we've really applied those processes to some manufacturers who have looked at what we do and they said, yes, you're right, you should be doing it for us, and we've invested in those areas, and it's paid off very nicely for us.

We take the expertise in the process and we convince the manufacturer to outsource his heat treating to us, and that's been part of our strategy in that business, and we've been very successful there.

And then when we convince them to outsource it to us, we do it on a contractual basis, which locks in for us a set level of operating performance over the life of that contract.

Given the sequential increase in the quarter as a result of some of these -- the additional outsourcing, some of these contractual agreements, can you maybe just give us a sense of is there any particular ramp in the agreements as the year progresses, should we expect additional contracts to be signed as the year progresses? And maybe if you could just give us some sense of what to expect moving forward?

We are as we speak making some new investments in some other business opportunities, and all of those have had long-term horizons on them. None have been less than five years.

And they should be at comparable margins I would think.

Yes.

Okay. Thanks again

Our next question is from the line of David Smith

I'll try and make this shorter. Just quickly, can you give us a sense of the processed metals is down, bust the powdered metal business, you haven't talked a lot about that. Can you give us a sense maybe -- I know you're not going to likely give us an actual profitability number, but just how much more profitable it is than say the base -- the process metals business, and what you're seeing for the business for the rest of the year?

First of all, before we get into a specific answer, generally speaking, it's still a relatively small part of our overall sales volume.

That's what I thought.

And that's why we don't spend a great steel of time talking about it. What it is for us importantly though is a potential new platform for us to continue to develop the business. With the move into China with this, it opens up opportunities for us in what I think anybody could easily understand is a burgeoning marketplace and a burgeoning series of opportunities for us. So the reason we don't spend a great deal of time talking about it is it's a relatively small part of the business, and as a percentage of our total sales, it's only--.

Of our total sales

--of total sales, 2 or 3%?

0.5%.

0.5%, sorry. So that's why we don't spend a great deal of time on it.

But it's been a very profitable business. It had some really excellent results. It helped offset some of the other businesses that we have there. it's -- as Brian said, it's a good business going forward.

Very good margin characteristics.

Just given what you're saying, does that kind of mean multiples of what the base process petals metals business is?

It's certainly above the total range that we've described for our company.

That's great. Thanks, guys.

Thank you.

And sir, our next question is from the line of Peter Lisnic.

I just wanted to follow up on Steve McBoyle's question from earlier, and forgive me if I miss this. But in regards to the structural connector issue or opportunity, however you want to classify it, can you maybe comment on your manufacturing capacity and distribution footprint and whether or not you think you have adequate capacity and footprint to maybe, if you did get that business, to maybe be able to serve that business on a national basis?

We are a national basis, we do supply products across the United States. We do have manufacturing capacity. We are in the right places.

Footprint-wise, we're in the north central, we're on the West Coast, we're in the Southeast. We're everywhere.

We've got the country covered.

If it were to come your way, you could ramp relatively quickly without a lot of capital investment I guess is what the right answer is?

That's correct.

One more quick question. Just more generally, could you maybe talk about with AMICO growing the way it is, what capacity looks like there, any incremental capital investment that you see might be needed there?

In terms of capital equipment, I think we're pretty well set. The biggest concern we have is availability of raw materials. We manage that one very closely. But we certainly have the platform and we've got the facilities to continue to grow that business.

Fair enough. That's all I had. Thank you.

You're welcome.

And sir, we have is a question from the line of Kevin Stanley with Jefferies.

Hi, guys.

Hello, Kevin.

Just a classification point if I could. In the processed metals, when the question was asked about volumes and pricing, breaking out that 9.2% decline, can you go over that one more time?

Well, we had a 16% decline in volume, but that 16% decline, was driven by -- to a great extent by pricing. Some of it is voluntary on our part. We chose not to participate at the type of margins that were available in that space. So, it's primarily driven by price, but obviously volume had an impact on it.

And just--.

You said 16%, 1, 6?

Yes. Let me clarify for a moment. When we talk processed metals, we actually have three businesses inside of that category. The answer we gave you has a relationship to only one of those businesses, because one of -- the other business, the other significant business there actually had growth during the period. That was the copper powder business we just talked about a moment ago. We are now focusing on a piece inside of the processed metals which is stripped steel.

And that's the 16, the stripped steel. Can you give an aggregate of the three businesses.

No, the 16% is just a decline in the strip steel business only, volume only.

And can you give those numbers to the three businesses in that segment that get you the 9.2?

As you know, we don't forecast on separate businesses.

Not the separate businesses, be the aggregate number for the segment. How do I arrive volume and price to get to that negative 9.2%?

The total businesses all together were down 9%, and obviously from implication is that the decline has been with the strip steel business.

Okay.

Only. And the other businesses were obviously up.

Okay. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] And sir, we have no further questions at this time.

All right. Well, when I say this time thanks for your interest, it really was an interesting call, and I do thank you all for participating today. We think we're on track for a solid year in 2006, and we think our performance during the first two quarters, our first quarter and what we've indicated we expect for the second quarter positions us well for another record year. Thanks for your participation.

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