Gibraltar Industries Inc (ROCK) 2006 Q2 法說會逐字稿

Welcome to the Gibraltar conference call to discuss second quarter 2006 results and outlook for the third quarter. We will begin today's call with the opening comments from Peter Ciotta, Gibraltar's Corporate 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. Peter Ciotta. Please proceed.

Thank you, Shameeka and hello, everyone. Before I begin I want to remind you that this call may contain forward-looking statements about future financial results. Our actual results may differ materially as a result of factors over which Gibraltar has no control. These factors are outlined in the news release we issued last night and in our filings with the SEC. If you did not receive the news release on our second-quarter results, you can get a copy on our website at www.Gibraltar1.com. At this point, I would like to turn the call over to Gibraltar's Chairman and Chief Executive Officer, Brian Lipke.

Thanks, Peter. Good afternoon, everyone and thanks for joining us today. On behalf of Henning Kornbrekke, our President and Chief Operating Officer who's dialing in for this call today from our CMI facility in Ontario, California, Dave Kay, our CFO, and Peter who you just heard from who's filling in for Ken Houseknecht, our VP of Investor Relations, we thank you for joining the call.

As my part today I'm going to give you an overview of our second-quarter results, and then talk a little bit about some of our recent initiatives and their impact on our performance, Dave will then discuss our financial results in greater detail and following that, Henning will review our corporate and segment performance and our outlook for the third quarter. After our prepared remarks are completed, we will then open the call to your questions.

As we stated in our news release we had another good quarter with second-quarter sales up 39% and operating margin of 10.9%, net income increasing by 51% and earnings per share growing by 50%. All of these results were the best for any quarter in Gibraltar's history. I want to thank and congratulate the men and women on the Gibraltar team for their contributions to this performance.

Our second-quarter results further demonstrate that we're making measurable progress in our ongoing efforts to transition Gibraltar into a diversified manufacturer capable of generating improving and consistent results in a variety of operating environments over an extended period of time. To that end, in the last 18 months, we have continued to strategically transform Gibraltar by making six acquisitions, selling three businesses, and focusing on continuous improvement with all of our existing operations. Our six most recent acquisitions added annual sales of approximately $400 million while the three divestitures had annual sales of approximately $180 million. More importantly, those, these actions solidified our leadership position and targeted growth areas and strengthened our operating characteristics.

We took a number of steps during the second quarter, most significantly we sold the assets of our Thermal Processing segment on June 30th for approximately $135 million. Dave's going to provide more financial detail on this transaction during his portion of the presentation. Even though our Thermal Processing segment performed well for us during the 10 years that we owned it, this business no longer strategically fit in our growth or our capital allocation plans, and we concluded that it would be a better match with another organization. This was an increasingly smaller part of our business, accounting for approximately 8% of our 2006 budgeted sales.

As we said in many of our recent conference calls, we continue to review our portfolio of companies and businesses and we will divest those that are outside of our strategic and our operating parameters. We are going to continue to focus our resources and capital on the niche products and markets where we can establish a dominant position and have long-term growth potential. So consistent with that approach, we also sold the assets of our steel strapping operations on June 16th.

While this, too, had been a solid business for Gibraltar for a long number of years, it didn't provide a long-term fit that was consistent with our growth objectives so we sold it. We used the proceeds from both of these sales to pay down debt. This decreased our long-term debt debt-to-capital ratio to 40% at June 30th from 47% at March 31st. We also recently announced a couple of purchases, acquiring Home Impressions on June 8th and Steel City on June 30th. Both of these transactions solidified our leadership position in the storage and postal products category.

Together they added annual sales of about $30 million while broadening our product mix and defined niche markets, strengthening our marketing capabilities, enhancing relationships with existing customers and adding some new customers to our customer base. Our results in the first six months of 2006 have been strong and we enter the second half of the year with solid momentum. We're actively pursuing continued growth and operational improvements in all of our existing businesses while we're also evaluating a wide range of acquisition opportunities.

The company is well-positioned to continue to pursue our growth strategies. We are more focused and stronger than at any point in Gibraltar's history. The markets we serve are continuing to grow and remain strong. We have good people running our businesses, we continue to improve our structure and our systems, and we have made numerous improvements to our operations and we are working on many others. At this point I'll turn the call over to Dave and Henning who will provide a more detailed review of our second-quarter results, our operational performance, and our outlook for the third quarter and balance of the year.

Dave?

Thanks, Brian. As Brian has noted, the second quarter was Gibraltar's most successful. As measured by a number of benchmarks. Sales from continuing operations of $352 million in the second quarter were the highest for any quarter in Gibraltar's history. And increased by approximately 39% from a year ago. For the first six months of 2006, sales from continuing operations were $675 million, up by approximately 38% when compared to the first half of 2005.

The sales increase during the quarter and six months was driven by improvements from our existing businesses along with the inclusion of AMICO's results. Income from operations of $38.3 million in the quarter increased by 56% from $24.5 million in the second quarter of last year. For the first six months of 2006, income from operations was $63.7 million, up 57% from $40.6 million in the first half of 2005.

Net income in the second quarter of 2006 was also a record at $23.3 million, or $0.78 a share compared to $15.5 million or $0.52 a share in the second quarter of last year. Net income from continuing operations in the quarter was $19.8 million or $0.66 a share compared to $13.5 million or $0.45 a share in the second quarter of 2005. During the first half of the year, net income from continuing operations was $31.5 million, an increase of approximately 45% when compared to the first six months of 2005.

Net income from discontinued operations amounted to $3.6 million, or $0.12 a share in the second quarter of 2006 compared to $2 million or $0.07 a share in the second quarter of 2005. Included in the discontinued operations for the second quarter and year-to-date results for 2006 is a $0.06 a share gain from the disposal of the net assets of the discontinued operations.

Selling, general and administrative expenses amounted to $39 million or 11% of sales during the quarter compared to $24.6 million or 9.7% of sales in the same quarter last year. The primary reason for the increase in SG&A expenses, both in terms of dollars and percentages, comes primarily from the addition of AMICO. Together with general cost increases, increased expenses for professional fees related to registering our senior subordinated notes and stock compensation costs.

Total interest expense, including amounts allocated to discontinued operations amounted to $8.4 million in the quarter compared to $3.8 million in the second quarter of last year. 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 in the quarter was 6.6% compared to 6.1% in the second quarter of 2005. From a cash flow perspective, we generated EBITDA of $43.6 million in the quarter, up from $27.3 million a year ago.

On a consolidated basis we turned our inventories at about five times during the quarter compared to 3.8 times in the second quarter of last year. And in spite of an overall increase in receivables resulting from increased sales, average days sales outstanding were 49.8 days in the quarter compared to 54.8 a year ago. For the first six months of the year capital spending amounted to $11.5 million compared to $8.1 million last year. We now expect to spend a total of 24 to $26 million in 2006 versus our original estimate of $28 to $31 million prior to the disposal of Thermal Processing.

We've also paid out approximately $3 million in dividends during the first half of the year. As noted in our news release, the sale of the Thermal Processing segment, together with the sale of the steel strapping assets resulted in a net gain of $1.9 million, or $0.06 a share. As Brian mentioned earlier, we used nearly all of the cash proceeds from the sale to pay down debt by approximately $110 million, bringing our long-term debt-to-total-capital ratio down to 40% at June 30th compared with 47% at March 31st. At June 30th, we were in full compliance with all of our debt covenants.

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

Thanks, Dave. Net sales from continuing operations, as Dave noted earlier, were $352 million in the second quarter, up 39% from a year ago. Our gross margins of 21.9% improved 2.5 percentage points from the second quarter of 2005 as a result of improved operating efficiencies in our building products group. Our operating margin of 10.9% was 1.2 percentage points higher than the year-ago quarter driven by higher gross margins, partially offset by higher SG&A expenses, a result of the elimination of the Thermal Processing Group in the quarter and its lower SG&A ratio.

Looking at the results of our two segments, Building Products generated a sales increase of 67.6% to $239 million. The growth was a result of recent acquisitions and organic growth at many of our existing building products operations. On a year-to-date basis, organic growth in this segment excluding the effect of acquisitions was approximately 4.7% compared to last year. In addition, AMICO generated strong organic growth, a result of continued strength in the markets they serve.

Gross margins were 26.7%, up 1.5 percentage points from the year-ago quarter. The operating margin was 16.9%, up from 15.6% in the second quarter of 2005. Margin improvements, the sixth consecutive second-quarter gain, is a direct result of our ongoing efforts to be a world-class supplier by increasing operating efficiencies while reducing costs. Our processed metal product segment had second-quarter sales of $113 million, up 3% from a year ago, a result of strong demand and higher prices in our powdered copper business, offset by lower unit volume driven by competitive pressures in our strip steel business.

Our gross margins were 11.8%, up 1.6 percentage points from the first quarter. And the operating margin was 7%, up from 5.4% in the first quarter. Margins in this segment continued to move back towards their historic levels, a pattern we expect will continue in the third quarter.

At this point, let me provide some commentary on our outlook for the third quarter and the balance of the year. In our building Products segment, which now represents 68% of our total sales, we expect to generate continued growth as a result of market-share gains and strength in most of the markets we serve. As we've discussed on prior calls, our more recently acquired businesses give us broader participation in the commercial, industrial, and architectural markets, all of which continue to experience strong growth.

In our processed metal products segment, which accounts for 32% of total sales, our powdered metals business remains strong, with solid volumes. Margins in our strip steel business are expected to return to the normal patterns, in line with current market trends. Energy cost volatility will have a reduced impact on our margins going forward with the sale of the Thermal Processing segment. Our continued focus on operating efficiency gains coupled with process innovations helped improve operating margins during the quarter. We expect the same pattern will prevail in the second half of the year.

In light of all these considerations, we expect the third quarter earnings per share from continuing operations will be in the range of $0.59 to $0.63, which compares to $0.37 in the third quarter of 2005, barring a significant change in business conditions. We reported record results in the first six months of 2006 and we anticipate a similar environment in the third quarter. We remain committed to progressive improvements in our business units, carefully managing our assets, maximizing capital utilization, and cash flow to help fund growth and pay down debt while transforming Gibraltar into a company that produces better returns on capital.

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

Thanks. Before we open the call to your questions, let me make just a couple of closing comments. We generated solid performance improvements in the second quarter and the first half of 2006. The guidance that Henning just provided makes it clear that we expect to build on that momentum in the third quarter.

Long term, our objective is to continue transforming Gibraltar into a company that can generate consistent and improving results. And we think we're making steady progress towards that end. That concludes all of our prepared comments for today and at this point we'd be happy to open the call to any questions that any of you may have.

Thank you. [OPERATOR INSTRUCTIONS] One moment while we construct the list. Your first question comes from the line of Robert LaGaipa of CIBC World Markets. Please proceed.

Hi, good afternoon.

Hey, Robert?

Just a few questions for you. Obviously a very strong performance especially in light of the divestitures. One of the questions that I had was just the organic growth rates that Henning mentioned just in terms of the 4.7% for the first half. You know, where was it in the first quarter versus the second quarter?

Pretty much the same.

Okay. So not much change there.

Not much change.

Can you maybe talk about, what you're seeing in that channel? Obviously you have some big box retail exposure. I remember historically, or in the last quarter or so you mentioned the -- the inventory adjustment happening in the chain and some other companies have mentioned that that's been largely completed.

Are you seeing that completion, are you seeing a -- the order growth rate return? Which would continue, you know, on a go-forward basis, or if you maybe can just talk about the business conditions there? And, also, along with that, the penetration that you're getting, are you seeing significant penetration in light of the AMICO acquisition and, getting those products on the shelves as well?

Let me direct that call -- or that question, Robert, to Henning. Henning, you want to start out?

Yeah, good question. I think what we're seeing on an ongoing basis is that we -- we are experiencing strong growth and when we talk about organic growth we typically talk about sales off of the base business platform as it exists today and we see sales increases off of our base business platform which include acquisitions, so we're looking at the growth of the acquisitions factored in as well, which obviously are going to move over into the quarters in front of us, uh, that growth we're experiencing at about an 8% level. We see that growth continuing, we see the markets that we're participating in, particularly some of the newer markets, the architectural and some of the industrial markets, to continue to move forward very strongly.

And Henning, how much of an impact? Because you mentioned, AMICO just in terms of the SG&A costs still impacting -- impacting the segment or the overall-of company as well. How much of an impact was that in the quarter? And should we see any relief going forward as it continues to be integrated?

Yeah. We -- we continue to talk about and I think that we've said it publicly that we always had a target of getting to a SG&A expense in the area of 10%. I think AMICO does more marketing than some of our other businesses have and that will tend to move that up a little bit but in general as we continue to go forward, we continue to focus on minimizing all the costs associated with running the business and we've continued to make I think good gains in those areas and we continue to move it in that same direction.

Two other quick questions. One on the process metals business, in terms of the outlook. Are you expecting, the sales to increase on a go-forward basis as a result of pricing? Is it related to volume? Can you just maybe talk about, those dynamics, the pricing versus volume, the last couple quarters and what you expect moving forward?

Yeah. We see pricing continuing. As we said earlier, to the more normalized levels in -- again, we're very encouraged with the trends in the marketplace. And -- and our teams over there are working very diligently at increasing our market -- market share, so certainly we would expect that they would continue to make the gains that they've outlined.

Is that -- is that volume, or is it price, or both?

I think we're primarily focusing on volume.

Okay.

And I think we see some good opportunities with volume. We see some of the markets that we're participating, starting to level off. There's been a -- some uncertainty in some of those markets, some shifts between players in the markets, but in essence we see that continuing and moving forward as we forecasted earlier.

The last question is just for Brian. Maybe if you could talk to -- in light of the divestitures, thermal processing and the steel strapping. It's obviously a lesson to the capital requirements of the business and obviously the cash on hand has actually increased sequentially. Can you maybe just talk about, the pipeline acquisitions what your thoughts are there just in terms of timing? Is this something that given the pipeline that you're expecting to increase that pace in the near to Intermediate Term or maybe you could just talk about kind of what you're seeing and what the direction of the company is.

Yes. Good question and as you know it's a key part of our strategy going forward. Right now from a -- from an overview perspective with the current debt to total capitalization level that we're at, clearly we have again created room within our balance sheet to go out and continue to make acquisitions. And yet still stay in a very comfortable range from a debt to cap perspective. From a pipeline perspective, the pipeline continues to be very robust. We have discussions taking place in at least six different areas right now and we're reviewing a number of different candidates. So the flow of acquisitions continues to be good.

We've got a very tight set of specifications that we apply to any acquisition candidates and valuation criteria is a key aspect of those parameters and we're still optimistic that we're going to be able to continue to make acquisitions in the four to seven times EBITDA multiple range and have them be not only immediately accretive to our EPS but also help drive some of the other operating characteristics in the right direction that we're focused on. Most notably return on invested capital.

We've been talking about that a lot the last few quarters. I think as the year plays out, we'll see that our ROI will be improving because of the divestitures and we hope to make sure that any acquisitions we make going forward will also help us out in that category as well.

What --

We're in good shape there.

When you talk about different areas, though, do you -- is -- are we thinking more on -- or the bolt-on variety given the divestitures? I mean is something on the horizon or potentially on the horizon of a new platform, or how should we think about these areas that you have described?

Yes. Right now, we have had a very good track record of making the so-called smaller or bolt-on acquisitions and as you saw from recent activity, the Steel City and Home Impressions acquisitions, we're still making those bolt-on type acquisitions and will continue to, to strengthen our market and product leadership position. But we're also focused on bigger opportunities as well.

And -- because of the -- the balance sheet strength that we have today, we can make a larger acquisition and still have a balance sheet that looks better than what it looked like at the close of making the AMICO acquisition. We're -- we're -- our main focus, though, overall is to continue to strengthen the areas that we're currently in. Although that does not mean that if the right synergistic opportunity comes along that we won't add another leg to our -- to our stool.

Terrific. Thank you very much. Good quarter.

Your next question comes from the line of Peter Lisnic of Robert W. Baird. Please proceed.

Good afternoon, gentlemen.

Hello, Peter.

Henning, if I could ask a question about the -- about AMICO. It -- that 8% number you quoted, was that growth for AMICO?

It was organic growth and organic growth I would define as taking your base sales a year ago in the same quarter and looking at your sales in the current quarter we just closed.

Okay. And in the first quarter they grew double digits if I remember correctly, right?

Yeah.

11%.

As we said before it's been a good acquisition for Gibraltar. It fits very nicely. We're hard at work at integrating it we're taking some of the products through some of our own distribution channels at our other companies are participating in and I think it really spells, uh, a very positive message both for the business that we purchased and for Gibraltar going forward we are very excited about it.

Okay. And along those same lines, can you maybe give us a sense as to what profitability in that business has done since you've acquired it? I know you've --

I think it's fair to say it's exceeded our -- our expectation. They've done a fantastic job. They've really come together. They've focused themselves. We brought some new processes into them and they've -- they've absorbed those processes very actively and I think it's helped continue moving the business forward. Again, we're very excited about it and it's been a very strong win-win both at Gibraltar and the business itself.

And is this a business that you look at and say we've got, a significant amount of incremental improvement, in terms of profitability going forward, or is it --

Yeah. And that's why I indicate when we looked at the margins, particularly in this segment, and I went back on a review for the last six quarters, there is continuous improvement in operating and gross margins, every one of those quarters continuously. And as Brian said earlier, we're focused on continually improving the businesses we have. Every time we look at a business, every time we look -- whether it's an acquisition in existing businesses we just identify more and more opportunities.

Yeah. And what I'm trying to figure out is how much is AMICO driving those numbers up and how much is the base or the legacy business?

I would say that AMICO is in line with our other businesses. That the results are not being skewed heavily by AMICO, but certainly AMICO is a good participant.

Okay. Fair enough. And then if -- if I could, in terms of the -- the base business. We got a -- a small sense as to what you're doing in terms of some of the efficiency improvements that you alluded to on the call with the press release with Ryder a couple days ago. Can you maybe run through some of the opportunities that -- that you have in the legacy operations to improve [overlapping speakers].

If you say base business, are you referring to the --

Refer to non-AMICO, I guess.

Okay. Because we look at AMICO as a base business. It's so far integrated.

Yeah. I guess I should say legacy, I'm sorry about that.

It is -- AMICO is part of a base business and it is part of Gibraltar for sure. I think on the base business that we have -- and Brian talked about these earlier also. We continued to focus on putting the processes in place, we continue to focus on innovations both on how we absolutely operate the business and also processes within the business themselves.

We seek continuous improvement in the original businesses going all the way back to the very first business Gibraltar started with to the most recent businesses we've acquired. We're hard at work at integrating various facilities where it makes sense. We've got teams of people working at it as we speak. Again, as I said earlier, we're very excited about the opportunities for this business on a go-forward basis.

Okay. And then Dave, if I could just have a -- ask a quick question on interest expense, kind of what the -- what the run rate might look like for the second half? A few balance sheet --

I think on a static basis, assuming that we don't make another acquisition, obviously the -- the high yields are out there at -- they're at a fixed rate at 8%.

Yep.

We're down to about $125 million on the -- on the B loans. Those are relatively fixed now because they're hedged.

Okay.

So it's really -- what kind of demands should we put on the revolver for working capital, those tend to be somewhat temporary and that's almost a LIBOR-based rate.

That helps very much, actually. Thank you.

You're welcome.

Your next question comes from the line of Mark Grzymski of Needham & Company. Please proceed.

Good afternoon, guys.

Hey, Mark.

Hey, Mark.

I think it's the first time in a while when your stock's up during a conference call. Congratulations.

Good results being announced.

Yes. Henning, you said 4.7% organic growth in the Building Products business. Wondering if you could kind of give us a little insight into the pricing and the volume contributions there.

Well, obviously, the -- the volume -- and we've had -- because of the organic growth we had good volume contributions but we've also continued to focus on efficiencies. We have closed facilities that -- that's allowed us to pick up efficiencies, we've got the organization focused and continuing on improving the business and that's really where most of the gains are coming from. I mean they're real solid gains. They're not -- not momentary gains. And I think that's why we -- we feel so positive about the business.

So -- so of the 4.7%, the majority of that was -- was -- was from -- from increased volume and efficiencies.

I mean there was some leveraging at the higher volumes but I wouldn't attribute most of the gains to the leveraging. I think most of it were good solid gains that we've made in the businesses as we continued to move forward. The folks out running the businesses have really paid attention to their business and they felt certainly have provided the results that we are reviewing today.

Okay. And then kind of sticking with Building Products. I know you've mentioned in the past the breakdown between residential and commercial and now with AMICO it's obviously changed a little bit. But in the past quarter, what was that -- do you have that breakdown?

I -- I don't have it with me. I can -- I can speculate when we look at residential probably today about 60 to 70% of our business is in residential. And that includes both through the retail channels and the wholesale channels. So we talk residential, we're going through two channels. We sell in the wholesale side, we sell on the retail. We have a lot of conversation on the retail because it usually -- quotes some of the big box suppliers, so -- but we've also -- and look at the other side.

I would say 30% to 40% of our business is now moving in the commercial, industrial architectural markets and kind of lumping those together for a moment. And we see nice growth in those particular markets. We see opportunities to transform some of the products that we have on residential and to bring them into the commercial side in a much stronger way. By simply taking some of the products and beefing up some of the applications so that they're appropriate for the commercial side and we see a good transition as we continue to be more active in some of those other commercial markets.

Okay. And kind of -- leading -- lead into my next question. As far as pricing into the retail into the wholesale chains, could you talk about that -- the pricing environment there and your ability to pass on to the retailer?

Yeah. I guess I would best say that we live in a very competitive world. We recognize that. We talk to our folks on a regular basis. Our job is to be competitive on a worldwide basis. We focus more on our cost than almost anyone else and we try to drive our costs down so that we're in many cases a low-cost supplier on a worldwide basis.

So when people ask us about challenges from offshore, we hear the challenge and we say, yes, but we're competitive on a worldwide basis, we don't care where it comes from. And I think for the most part we've determined that that in fact is accurate. We price competitively in the marketplace. We priced where we have to price to retain the business. And I think anyone else in business will tell you the same thing.

Okay. So, overall strategy it seems like as you expand your product offering, you're more inclined to work on your efficiencies than to price yourself out of the market so to speak?

Well, we'll work on our efficiencies because when you're the most efficient supplier in the marketplace it's much easier to take up market share because you have good service, you have good cost structure and it allows you an opportunity to be aggressive where you need to be.

Right, right.

Henning, just let me add that that's part of our acquisition strategy as well. We're looking for companies that can improve our product leadership, which adds to all of those things that Henning was just talking about.

Okay. And then just a last quick question. A percentage of revenue was going to your big box retailers, is there any -- any breakdown there?

I don't think we've ever broken -- broken that down. When you kind of look at the retail. But for the most part, as the world knows, if you get into the home improvement industry there's really only three retailers there so probably the arithmetic is easy.

I think we've in general talked about that before but I mean it certainly -- it's less than -- it's less than 20% of our total revenue.

Right.

As a company.

Okay.

We had all three --

Probably closer to 15%.

Right.

When you add all three.

And any -- you know, if you could kind of characterize the residential market right now for us, softness, geographically --

Well, I mean -- yeah, you're right. If there is some softness in certain sectors of the company but I also add that many of our products are not used on new homes, that they're used on remodels and rebuilds. And so we -- we do have a reasonable amount of resiliency even if we go into a housing market -- a new housing market that's declining. I think we've got only one of our businesses are more dependent on new housing starts and, and their business has been down a little bit.

When I say down a little bit, they didn't have, the double-digit gains, they've had in the past. They are more in the single-digit. But for the most part, the businesses that we have are fairly resilient. We see them remaining resilient even with the downturn in building -- new building that they're forecasting.

The other side of that, too, is that particularly in our construction hanger business, market trends are calling for increased usage of those products in each unit that is built. Building codes, insurance demands, things of that nature are driving increased usage of those products in each new home that's built. So there's somewhat of a counterbalance there. Even if the number of builds slows down somewhat, increased usage -- usage of those products in whatever number of homes gets built can help offset that.

So we get the retail side of it where, a lot of that is just remodeling and rebuilding and doing decks and doing additions onto houses and things like that, which many times run countercyclical to the housing starts numbers. So there's a number of factors that we have in place that will help mitigate against any -- any slowdown in the housing market. Also with AMICO now being part of the company and a bigger portion of our business going to the -- the commercial and industrial and architectural markets, the -- the trends in those two segments of the construction marketplace are -- are pretty different. Right now the industrial and commercial end is still showing very strong trends.

Well, thanks for taking my questions, guys.

You're welcome.

Your next question comes from the line of Sal Tharani of Goldman Sachs. Please proceed.

Good afternoon, guys.

Good afternoon, Sal.

Brian, can you tell us what does this do to the sale of trading to your five-year strategy of reaching a 2 billion sale, is that still in your ballpark?

Yes, it is. That has not changed.

We like to say around here that the -- the strategy and the goals don't change, the tactics may, but the strategy and the goals always stay the same.

And your goals on the margin's 2010 is still in sort of ballpark, that's what you --

Absolutely. And that was a big factor in -- in considering these divestitures, was to position the company to not only meet those goals that we set but surpass them.

And Henning, can you give us some color on the margin pressure you are still seeing in the business. Is that because of people are chasing volume or is it the sourcing cost which is causing that?

Well, I think there's been a lot of uncertainty with pricing in the marketplace. I think that's been true on a global basis. I think with -- with what's happening, again, on a global basis, particularly with steel producers, we're starting to see that flatten off and level out and we're starting to see, those kinds of effects in our business and as I said earlier, we see the margins in those businesses returning back to more what we would call normal levels.

Okay. And Dave, on the working capital, how does it look for the second half of the year? You -- you use a lot of working capital in the first half.

Well, I think that's -- that's pretty traditional in our business. We begin to build working capital about halfway through the first quarter. We -- the second quarter is our big -- big working capital consumption it's usually starts down in the third quarter and is at a low point in the fourth quarter.

So we -- we should certainly see some cash coming from working capital in the second half of the year. Receivables and inventory will go down, particularly in the fourth quarter. So this is usually the high-water mark of our working capital requirement.

It's driven by, when the big selling periods are for us and we build inventory in the late part of the winter so that we're ready in spring to -- to hit the ground running as construction really takes off and hits a higher level.

And lastly, what do you see in terms of inventory as far as metals compared to last year at this point?

Well, our inventories are running well. We are managing -- as I can say we are managing our inventories much better than we did last year and I think Dave gave the numbers on there. And we see -- we've got a pretty strong focus as Dave said earlier on managing how we utilize the assets and running the business and we're going to stay focused on managing those assets, including inventory.

Sal, just let me add a couple of points on that. When you look at steel supply from a worldwide perspective and the major consolidations that either have taken place or may soon be in the process of taking place, we -- we think that that's going to bring greater stability to the overall raw material considerations from a worldwide basis. Not only from an availability perspective, but also from a pricing perspective. And I would hope to see far greater stability, far less volatility in steel prices as we go forward.

So when you couple that to the fact that we're moving the business in the direction of driving raw material as a cost component of our business down by going after high -- more higher value-added areas of activity, the combination of those two things, I think, over the long run will put us in a much better position to generate consistent and improving earnings.

Thank you very much and great quarter.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question comes from David Smith of Citigroup. Please proceed.

Hi. This is James, actually. Can you just tell me what the -- I would imagine you would get a higher margin on your residential than your residential. Can you characterize that as -- is it 5% higher, 10% higher typically?

We don't obviously for competitive reasons we don't provide that information. I think we -- as I said earlier, we're competitive with all of the customers that we deal with.

And then last quarter you said that the volumes in the processed metal product segment were down about 16%, how much were they down in Q2?

I think about 3 to 4.

Yeah, 3% I believe.

Okay. A little better. Okay.

Yep.

And then, on the ROIC, are you -- going to take a stance on the timing to hit that 10% marker over the long term?

Well, I think we're --

I think -- I think if you look at the performance that we've had so far, there would be every indication that we're very -- that we're at that target now, that we're running to that target. That's fair to say.

Are you -- how do you do it on an LTM basis? What was your ROIC in the past couple quarters then?

Well, we were -- we had that discussion a little earlier. It makes it a little difficult to calculate it on the quarters particularly when you just sold a business. But we tend to look at it over a longer period of time. So we'll look at it over either a trailing 12 or forecasting going forward, we believe that we're approaching that level if we're not already there.

We have looked at it sort of on a forecast basis as we said the -- the Thermal Processing was a rather capital intensive sort of business, good operating characteristics but poor Return on Invested Capital. So we -- we think we're there now. People calculate it differently but, we certainly believe we're on track to get there.

Okay. Maybe I can call you later to have a conversation about that.

Sure.

Because I'm still a couple points below that.

Okay.

And that's -- that's it for my questions. Thanks.

All right.

There are no further questions in the queue at this time. I would like to turn the call back over to management for closing remarks.

Thank you all for joining us for the call this afternoon. We -- we thank you for your continued interest in Gibraltar and we look forward to reporting another strong quarter when we get together at the end of the third quarter. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.