Gibraltar Industries Inc (ROCK) 2006 Q3 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its third quarter's 2006 results and its outlook for the fourth quarter. We'll begin today's call with opening comments from Mr. Ken Houseknecht, Gibraltar's Vice President of Communications and Investor Relations. After the company has concluded its presentation, we'll open the line for your questions.

At this point, I'll turn the call over to Mr. Houseknecht. Please proceed sir.

Thank you, Shiquana, and welcome to our quarterly conference 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 new release we issued last night and in our filings with the SEC. If you did not receive the news release on our third quarter results, you can get a copy on our website at www.gibraltar1.com.

At this point, I'd like to turn the call over to Gibraltar's Chairman and Chief Executive Officer, Brian Lipke.

Thanks, Ken. Good morning everyone, and thanks for being with us on the call today. With me today is Henning Kornbrekke, our President and COO; Dave Kay, our CFO; and Ken Houseknecht, who you just heard from, our VP of Communications and Investor Relations.

This morning, I'm going to focus my comments on four areas, our third quarter results, our performance in the first nine months of 2006; the operating environment we see in the fourth quarter and as we look out ahead into next year, and then of course, I'm going to spend a few minutes on the continuing development of our strategic transformation into a stronger, more focused business. And all of that, of course, is aimed at creating improved shareholder value.

Following that then, Dave Kay will discuss our financial results in greater detail. Henning will then take over and review our corporate segment performance and provide a more detailed review of our outlook for the fourth quarter and the year ahead. And after our prepared remarks are completed, we'll then open the call to any question that any of you may have.

As we said in our news release, the third quarter was another good one for Gibraltar with sales up 36% and operating margin up 10.7%, net income increasing by 69% and earnings per share growing by 65%. And all of these results were the best for any third quarter in Gibraltar's history. This performance is even more impressive when you consider that some of our end markets, most notably the new housing sector and the automotive marketplace, began to soften during the quarter. And with this softening, we partially offset it by the continuing strength in the commercial and industrial building markets that we're now serving.

Our results in the first nine months of 2006 have also been very strong with sales advancing by 37% and operating margin up 9.9%, net income growing by 53% and earnings per share up by 52%. These results are also the best nine months' results in Gibraltar's history. So clearly, our focus on improving the operating characteristics of the business along with our customer market and geographic diversification is allowing us to perform well, even with changing economic conditions, fluctuating raw material prices and downturns in some sectors of our economy are confronting us.

Looking ahead to the fourth quarter and the coming year, we fully expect to generate record results in 2006. And even with softening in some of our markets, we have plans in place that should enable us to continue and build on the momentum in the coming year. Keep in mind that in the 13 years since our initial public offering back in 1993, we've generated record sales and earnings 11 times, and now Gibraltar of course in 2006, is a much different, larger, stronger and more focused company than it was back in those early days.

The continued strengths of the commercial and industrial building markets, now an important growing part of our business which offers us a whole host of different growth opportunities, provides an offset for the slowdown in the new build, residential housing market. And even though the traditional automotive companies remain important customers for Gibraltar, our business with the transplants and their suppliers is growing steadily and today, accounts for approximately one-third of our auto business. So we're better positioned to withstand the impact of the softening in some of the other parts of our business.

In every part of our company, we're taking steps to make Gibraltar stronger, better focused and more resilient by diversifying our customer base, focusing our mix of businesses and expanding our geographic reach. And this is a process that's ongoing for Gibraltar. As we look ahead to 2007, we see a broad range of opportunities to improve our operating performance and grow the company in spite of a softening operating environment, which we think will persist in the first half of the year with conditions gradually improving as the year progresses.

I use the term softening based on a whole bunch of different factors that we've reviewed including the September economic forecasts from the Manufacturers Alliance, which calls for a 16.2 million light automotive build for 2007, down slightly from a 16.6 million estimate that they had for 2006. And housing starts are estimated in this report to be at $1.72 million in 2007 versus $1.9 million in 2006, again, down slightly. Both of these markets are projected to be down, but not dramatically. Neither of these markets will have record years, but then again, they're not going to have terrible years either.

As always, we continue to [adequately] evaluate our wide range of acquisition opportunities and expect 2007 will see us make additional transactions, which will further focus our operations and provide growth and resiliency. I'd also note too that acquisition [prodding] historically, tends to be more favorable to the buyer as the economy moderates.

That's the end of my opening prepared comments. At this point, I'll turn the call over to Dave Kay. Dave?

Thanks, Brian. As Brian noted, the third quarter was another very strong one for Gibraltar. Sales from continuing operations of $336 million in the third quarter were the highest for any third quarter in Gibraltar's history and increased by approximately 36% from a year ago. For the first nine months of 2006, sales from continuing operations were $1.012 billion, up approximately 37% when compared to the first nine months of 2005. The sales increase during the quarter and in the first nine months of 2006 was largely due to the strong growth in the industrial and commercial building product markets that we serve.

Income from operations of $36.1 million in the quarter increased by 70% from $21.2 million in the third quarter of last year. For the first nine months of 2006, income from operations was $99.8 million, up 62% from $61.8 million in the first nine months of 2005. Third quarter income from continuing operations of $18.3 million increased by 69% compared to $10.8 million in the third quarter of last year.

Earnings per share from continuing operations of $0.61 in the third quarter of 2006 increased by 65% when compared to $0.37 a share in the third quarter of last year. During the first nine months of the year, income from continuing operations was $49.8 million, an increase of approximately 53% compared to the first nine months of 2005. Earnings per share from continuing operations of $1.66 in the first nine months increased by 52% compared to $1.09 a share in the first nine months of last year.

Selling, general and administrative expenses amounted to $33.7 million in the quarter or 10% of sales compared to $26.4 million or 10.6% of sales in the same quarter last year. Total interest expense amounted to $6.4 million in the quarter compared to $2.7 million in the third quarter of last year, largely as a result of higher average borrowing levels, primarily from acquisitions as well as higher overall interest rates. Our return on sales from continuing operations in the quarter was 5.4% compared to 4.4% in the third quarter of last year. From a cash flow perspective, we generated EBITDA of $42 million in the quarter, up from $30 million a year ago.

On a consolidated basis, we turned our inventories at 4.1 times during the quarter compared to 5.2 times in the third quarter of last year. Inventory levels are somewhat elevated as a result of slowing demand combined with strategic opportunistic purchases designed to mitigate the impact of pricing volatility. We expect inventories to trend downward during the fourth quarter, continuing into the first quarter of next year. We expect to return to our inventory turn goal of five times toward the end of the first quarter.

Average day sales outstanding were 51.4 days in the third quarter compared to 52.4 a year ago. Through the first nine months of the year, capital spending amounted to $17.1 million compared to $11.8 million last year. We now expect to spend a total of $20 million to $22 million in total for the year 2006. We've also paid out approximately $4.5 million in dividends during the first nine months. We were able to slightly lower our debt during the quarter, brining our long-term debt to total capital ratio down to 40% at September 30th compared to 48% at December 31st of 2005. At September 30th, we continued to be in full compliance with all of our debt covenants.

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

Thanks, Dave. Net sales from continuing operations, as Dave noted earlier, were $336 million in the third quarter, up 36% from a year ago. Our gross margin of 20.7% improved 1.5 percentage points from the third quarter of 2005, a result of decreased material volatility in our Processed Metals segment, higher sales volumes and improved efficiencies. Our operating margin of 10.7% was 2.1 percentage points higher than the year-ago quarter, a function of higher gross margins, lower SG&A expenses and mix.

Looking at the results of our two segments, Building Products, which represents 67% of our total sales, generated a sales increase of 52% to $226 million. The growth was the result of continued market share growth coupled with strong activity on our commercial and industrial building products businesses. Gross margins were 25.8%, essentially unchanged from the year-ago quarter. The operating margin was 15.3% compared to 15.6% in the third quarter of 2005. The slight decline was driven by mix.

Our Process Metals Products segment had third quarter sales of $110 million, up 12% from a year ago, a result of strong demand and higher prices in the powdered copper business and better pricing than a year ago in our strip steel business. Our gross margin was 10.5%, up 1.5 percentage points from the year-ago quarter, and the operating margin was 6.9%, up from 4.4% in the third quarter of 2005. Reduced material volatility was a key factor in the margin improvements experienced by our strip steel and service center businesses coupled with improved efficiencies and higher volumes, particularly at our powdered copper business in China.

At this point, let me provide some commentary on our outlook for the fourth quarter and as we look ahead to 2007. 30% of our businesses in our Building Product segment are experiencing pressure from the slowdown in the new build housing market. Offsetting that is continued strength in the repair, remodel, commercial, industrial and architectural markets, which account for approximately 70% of our Building Products segment sales. To put this slowdown in context, the size and strength of the US housing market with total assets of $33 trillion give it great resiliency to absorb and adapt to change in demographics and dynamics.

As Brian mentioned earlier, we anticipate conditions improving in the second half of next year. This is supported by the study just completed by the Harvard Committee on Housing, which forecasts a soft landing for the housing market with an 18-month duration, which started approximately six months ago. The long-term opportunities related to the building market, in general, remain robust with positive drivers embedded deep within the industry. It's also worth noting that the automotive industry is still strong, as Brian indicated, with forecasted 2006 sales of 16.6 million units and continued strength in 2007, perhaps with continued changes in market share.

As we've discussed on recent calls, our current business structure now gives us broader participation in the commercial/industrial and architectural markets, all of which continue to experience growth. Overall, our businesses continue to grow organically, and we are actively exploring other opportunities to expand and focus our product and market participation.

In our Processed Metals Product segment, which accounts for 33% of our total sales, our powdered metals business remains strong with good growth opportunities. Margins in our strip steel business are expected to continue to improve as the market and customers it serves stabilizes. As Brian mentioned, we continue to grow our businesses with a renewed focus on new opportunities including international vehicle manufacturers. We're also evaluating a full range of options to improve the bottom line performance of this business.

Our fourth quarter will attract the normal seasonal slowing, but unlike 2005 when the slowdown was offset by strong economic factors including high regional demand related to storm damage, this year, we will fee the impact of the reduction in domestic automotive production levels and the slowdown in new build housing markets. In light of all these considerations, we expect our fourth quarter earnings per share from continuing operations will be in the range of $0.30 to $0.35, which compares to be $0.17 as reported exclusive of one-time charges, which amounted to $0.23 in the fourth quarter of 2005 barring a significant change in business conditions where continuing to streamline, consolidate and extract efficiencies from our operations together with the restructuring of our business portfolio is driving steady and sustainable improvements in our margin.

Even with challenging conditions in some of our markets we serve, we're on track to generate our best-ever sales, net income and earnings per share in 2006. We continue to move Gibraltar in a more resilient business platform, one that has the ability to succeed, in spite of adverse conditions in some markets.

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

Thanks, Henning. Before we open the call to any questions that any of you might have, I just want to make a couple of quick closing comments.

While we generated our best ever third quarter and nine-month results, at this point, that's old news. Looking ahead, our strategic focus remains unchanged. We're going to continue to grow our sales and earnings, generate consistent and sustainable margin improvements, increase our cash flow to fund more of our growth internally and drive our returns higher over time. Using these targets to guide our strategic decisions, we believe will allow us to maximize shareholder value, and that's the clear focus of this management team. As I noted earlier, we continue to evaluate a wide range of acquisition opportunities that will further focus our business and help to offset the temporary softness in some of our businesses.

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

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Robert LaGaipa with CIBC World Markets. Please proceed.

Thank you, good morning. Hi.

Good morning, Bob.

Just had a few questions, I guess one, with Building Products, the 52% increase year-over-year, can you break that down to exclude the acquisition impact? And, give us a sense of what the core growth rate was in the quarter? How's it's compared over the last quarters, and what you're expecting moving forward?

When you say, acquisition impact, which acquisition are you referring to?

Well, it would be AMICO, right? Because it wasn't acquired until October of last year.

We've, as you know, made a number of acquisitions including AMICO, and acquisition both at the same time and after AMICO.

Right.

I think in answering your question best, we can say that we see our business that we currently run today, have grown approximately 3% organically. Does that answer your question?

I can follow up after with regard to that. Secondly, on Processed Metal, if we think back to the last few quarters, obviously off the exceptional weakness that you saw, in the fourth quarter of 2005, you saw some margin progression. The sales increased over the last few quarters. This is the first quarter the margin actually fell off, albeit slightly sequentially. And given the inventory levels in the channel and some of the competitive pressures that you've seen previously, what type of pressure are you expecting, not only in the fourth quarter, but in the first half of 2007 in light of those inventory levels kind of reaching their highs in the service center channel and the processing channel? And, is there an opportunity some time in 2007 to get back to kind of the more typical 10% to 12% type operating margin numbers?

Yes. We see the margins continuing to improve. I think the inventory that we have is -- we think was bought at a good price. And I think will help our movement towards margin restoration. Again it -- I think internally, we're disappointed it's not improved as quickly as we would like it to, but nonetheless, it is improving. We are moving in the direction that we've indicated. We've got program internally that are helping move that along at a faster pace.

We also believe that's -- that some of the competitive pressure that brought that margin squeeze into play has abated. The -- as the results from the actions of other companies came apparent to them, I think we've seen a new focus there that has allowed part of this margin compression to be mitigated against and start it moving back in the right direction. And, we think we'll see more of that in the future.

So just to follow up on that, we were originally expecting -- I think you had mentioned a margin increase in the third quarter relative to the second quarter, but it fell off slightly. Now, moving into the fourth quarter, obviously again, with the inventory so high, maybe the competitive pressure itself might have abated somewhat. But now, you're also dealing with slower end-market demand.

Well see, the biggest issue we had in that quarter and we'll see it in the fourth quarter is obviously, the slowdown with two of our largest customers. That clearly has an impact, and I think we've indicated in our report that it has had impact. And, that certainly has slowed down the full restoration of margins that we experienced, let's say, two years ago.

So, are you expecting a larger decline relative to the third quarter and the fourth quarter from Processed Metal or Building Products?

I think if you looked at the building market, and you can slice it a lot of different ways, the total building market, the housing market and if you look at the latest data, it's down 32%. Now, we've indicated that we're only subject to -- in our total business about 30% of our business is directly related. So, if you go through the full analysis in terms of the total impact on our businesses, it's an area of approximately 9%. We have good offsetting product lines in markets that are still rather strong. And, we've had a -- numerous discussions with our folks who continue to indicate that the other markets they're participating are strong. And, those are the largest participations that we have are those other markets, which is the good news.

I would think that the slowdown that we're going to see with automotive in general, and Brian indicated earlier, that the total automotive market is still growing at approximately GDP. The issue is, there's some changes in market share taking place. And, our strategy is to make sure we align ourselves with those changes in market share.

So when we think about the $0.30 to $0.35 that you're expecting in the fourth quarter, does that imply a margin decline both in Processed Metal and also Building Products?

We don't see a margin decline in Building Products. We talk about a normal fourth quarter season this year. We did not encounter a normal fourth quarter last year. So if you look the a year-over-year comparisons, they might seem in favor, but they're not. We're on target to see the normal fourth quarter slowing with some mitigation from the slowdown in new housing starts. I think that's true, and the numbers reflect that.

Hey Bob, this may help out a little bit.

Okay.

If you're looking at the sequential change from the third quarter to the fourth quarter, we did a quick study on that. From '99 through our projections for the fourth quarter of this year, the average sequential change from third to fourth quarter was 34%, which is driven primarily by seasonal impacts in both automotive and construction. And automotive, we all know what happens in the fourth quarter. In housing and construction, as the fall and winter weather moves into certain parts of the country, it has a natural slowing of business during that period of time.

So, just trying to put this $0.30 to $0.35 range in a perspective of relativity compared to the third quarter numbers, and if you look at those numbers compared to where we were last year at a $0.40 number before one-time charges in the fourth quarter, we'd be at $0.35, about 13% below that and about 25% if we were at the lower end of the range. And, that clearly is driven by the slowdown in both automotive and the residential, commercial parts of the markets. So it's -- I think what we're seeing is a slight exacerbation of the normal fourth quarter seasonal impact.

Right. A quick two questions and then, I'll turn it over. I guess what I'm asking, Brian, is when we think about Processed Metal, if we think about for example, the MSCI inventory numbers, on an absolute basis, they're probably the highest they've ever been in history. And what I'm trying to get a better sense for, especially in light of that and the expected slowdown, particularly in auto in the fourth quarter lasting into the early part of next year, are you expecting the margins to decline to the levels of the fourth quarter last year, which were roughly 3.4%?

No.

Okay.

Bob, let me show you one thing relative to that. I think the inventory levels being where they are, if you watch what the steel world, the raw steel material -- the raw steel producing world is doing is, they're being much more disciplined relative to pricing. They are taking capacity offline. They're scheduling in outages for rebuilding and relining and doing various repair and maintenance work to their facilities to adjust to a temporary, lower level of demand so that they don't bring prices crashing down. I think they've all learned some tough lessons over the years. And now with one 100-million ton a year producer out there and with several others looking at becoming 100-million ton producers, I think there's a great deal more discipline in the raw material side of the marketplace today.

Okay.

Everybody's learned the lessons there that these wild fluctuations in raw material selling prices aren't good for the producers, and they're not good for the customers either. And, I think there's a great deal more discipline today to prevent that from happening.

Okay, terrific. And last question, Brian, this one's for you. When we think about Processed Metals from a long-term perspective, obviously given the changes in your business and how large Building Products has become, what's your view relative to the Processed Metal segment long term? Do you view it as a quarter of your operations? Is it something that continues to be evaluated? Could you maybe put that into perspective for us?

Sure. We have established and talked about in the past very specific performance characteristics that we want to move this company into, both from a gross margin standpoint, an operating margin standpoint and a return on sales and a return on investment standpoint. We're evaluating every single part of our business, relative to those very specific targets.

And when I mentioned earlier in my prepared remarks about the strategic transformation that we're taking the company through, I think clearly, the divestiture of the cold-rolled -- I'm sorry, the thermal processing business, was a clear indication of the serious -- the seriousness with which we're taking those targets that we've established, those operating metric targets that we've established for the business. So, we will continue to evaluate every part of the business as we go forward to make sure that we are in a position to achieve those operating targets that we set for the company. We think those targets, those returns are the things that are going to drive increased shareholder value. And, that's our main focus.

Terrific, thank you very much.

You're welcome.

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

Good morning.

Good morning.

Good morning.

Can you give us some idea of the decline in your earnings, how much you see in terms of volume and how much would be the pricing pressure? Can you just approximately break it down?

It's virtually all volume.

Okay. You mentioned in your comment that you have done some strategic buying. So, you think you have bought, in your opinion, steel which is lower than the current market price? Is that what you have done?

We believe so, particularly in -- a lot of the strategic purchases were made in the, I'll call it the Building Products segment. And, some of that was sourced offshore. And, it certainly is below domestic pricing levels.

How -- what is the lag between when you order from offshore? And, what is -- and when you receive it versus when you order domestically and you receive it?

Well, it's -- the lag from offshore is about three months.

And how about domestic?

Domestic is a little more certain, I'd say, because the shipping distances are so much shorter. We have a little more ability to turn that on and off rapidly.

It depends on availability and [once again] steel is not steel if we're buying coated steel or galvanized steel. It adds some other factors into it.

I think what we'll see too is with this slowing of demand is a little bit more, how shall I be able to better put it, a little better availability and little bit more reliability on delivery dates. Quite frankly, in the past year, that has been somewhat problematical.

But, if we look at the import numbers, which are still very high and the way we are hearing from you and your peers that you all are trying to trim down inventory, I guess we should see much better or much lower import numbers, probably two months from now, because you probably have stopped ordering maybe even last month or this month. Is that correct to assume?

I think there's an assumption that the import numbers will go down somewhat. And I think, at least some of the statistics that we've read in the last several weeks show that, imports are slowing.

Maybe with the stabilization of steel prices on a global basis, you're going to see fewer and fewer imports, because it just doesn't make sense to bring it into this country. Even if you look at the pricing in steel coming out of China with transportation costs, there's no advantage or little advantage.

So, let me come at this from a little different perspective for you. One of the ways that we're going to drive for these improved operating metrics that we've established for the business is to move the business in a direction where raw material costs play less of a factor in our profit generating equation. We want to move the business where raw material costs represent a smaller and smaller percentage of our overall selling price, which means that these vagaries that you're talking about right now will have less of an impact on the business. And, that's a -- that's been a decided direction that we're taking the business in, so it'll have less of a play in the future.

We're not -- we have never tried to be prognosticators for what's going to happen in the worldwide steel market. We're focused on buying to meet the demands of our customers as closely as we possibly can and maintain the appropriate spread between our raw material costs and our selling prices. We're not hedge buyers. We don't try to speculate to any great degree. That's never been part of our focus. Our focus has always been on turning our inventories as fast as we possibly can. If you're a speculator, there are times where you might time it right. But, we think that we're best advised to run this business from a perspective of serving our customers well and controlling our inventories as well as we possibly can.

And, that relates back to our real underpinning of everything that we do, which is to make sure that we're generating as consistent a level of performance while improving that performance as we possibly can. We think that that serves our shareholders best.

Another thing you have to remember about our business is, is in Building Products -- we are not a service center. We don't stock inventory. In the Building Products space, we buy inventory to convert it into finished end product, which we sell. And in the strip steel business, it can't -- it's not a service center. We're supplying end customers. We're not stocking inventory.

We're buying very specific types of inventory to produce very specific components for the automotive industry that are ordered in advance of us buying our raw material. We're not like the supermarket that goes out and buys a vast array of products and puts them on the shelves and hope somebody comes to our doorstep. Everything that we're -- we're basically a job shop, which is a totally different approach than a service center. Not that we're right or they're wrong, it's just the difference between our business and a service center business.

So, when I tried this comment about less volatility from the raw material side, I feel that you will probably move along with your strategy of acquisition in the Building Products sector more and more. And, you made a comment that you are certain that there will be some more acquisitions in 2007. Assume that you are in very late stage of discussions with some of your potential targets?

Well, we're always at various stages with a number of different acquisition candidates. And, I would hesitate to describe what stage we were in with any one of those candidates, but as you know from our history, we've completed a minimum of one acquisition every single year since 1997. And, I think our average is actually almost two a year now. And, we don't see any change in that.

Okay. And, the last thing is, can you just give us some perspective on your powder metallurgy business, how big it is and how volatile it is? And, which sector does it cater to?

Sure. It's in Processed Metals. It's not terribly volatile. We have agreements with customers to pass pricing on material directly onto them. It's got nice growth opportunities. It's tentative growth at two times GDP. We do have a facility in China. A lot of the parts using powdered metallurgy, particularly copper, are located in China. We're on the forefront of developing some new products and new applications for that particular business. We think it has great opportunities going forward.

The copper powder business, the copper business in general, tends to -- with some exceptions, tends to pass copper pricing along, based on commodity prices. And, the real differential is in the conversion costs. So, while the price of copper has increased dramatically, it has not put a lot of volatility into our business.

When you say, two times GDP, Chinese GDP is 10%. You've talked about 20% over there?

GDP -- I was talking about GDP in the US since we report US results.

Okay. And, how big is it? How big of a part is --?

We don't disclose that information. It is part of the Processed Metals Group, but we don't break down the size of those businesses inside of the segments.

Okay, great. Thank you very much, then.

You're welcome.

Your next question comes from the line of David Smith with Citigroup. Please proceed.

Good morning, guys.

Good morning, David.

Good morning.

Hi.

Can you give us a sense just on the retail side, whether sales were up in the quarter or down?

Our sales or our customers' sales?

Your sales to the retail channel, so the big box retail side of it, just the magnitude --.

I think generally, our sales to our customers were up in the quarter, in the third quarter.

Can you give us any magnitude on that?

I think they're in the order of 4% or 5%, and I'm talking organic growth only.

Yes, great. Okay. On the residential and auto side, new home and then new auto build on Big Three side, are you guys seeing any pricing pressure there?

I -- it's constant.

So really -- but, is -- with the markets kind of heading south lately, has it gotten any worse?

No, it's not gotten any worse. And, I think the primary issues is that some of the customers that we deal with in the automotive side have got other issues that they're trying to deal with. And so -- as you all know. And so, their focuses are in dealing with their internal issues.

Okay. You've talked in the past about your LTM ROIC measure. Can you give us a sense of where that was this quarter?

We haven't calculated that yet, but certainly I would say it was in line with the last quarter. We're not quite at where we would like to be yet. But, we're --.

That's generally the calculation we do on an annual basis.

Yes, on an annual basis, but --.

Yes.

We're not quite at -- we're not where we want to be yet. We've said that we want to have a return on invested capital in our business of 10%.

Or better.

Or better. We certainly are not there yet.

But we can tell you -- let me do it real fast, and this is rough, but our total capital turns were about 1.8. And we know our operating margin for the total return on sales for the business is 10.8, so you do the arithmetic. One times the other gives what our return on investment would be for the business in total. And, you can see it's considerably than where we were last year, because last year same period, our margin was 8.6%, operating margin, so that we're two points, a good two points better. Capital turns are only down slightly. We do a great job on receivables. Inventory was slightly up. Dave said previously that the capital expenditures were down from the previous year. So, I think when you mix the whole thing, our total capital turn's going to be probably 1.8. We haven't done the official calculation, but it would suggest a return on investment in the area of 21% using that calculation.

Got it, okay. That looks good. I'll work with that. On the corporate expense, the number was down quite a bit compared to what we were looking for and on a sequential basis. Is there anything that's driving that down? And, should that be the rate that we're looking for going forward?

I think in the first part of the year, certainly the first half of the year, there were some -- we had some increased spending for legal, some consulting, some acquisition sort of related things. I think that the first half of the year, particularly the second quarter, was probably abnormally high, probably higher than what we would expect going forward. We are -- our goal is to bring selling, general, administrative expenses to 10% or less of sales. And, I think that's probably what you should, over a long term, expect to see.

Okay. So that's --?

There will be blips in the quarters as things happen. But, I would think long term we would be looking for 10% of sales.

Okay, that's good. On -- so, you've kind of given us a couple of hints into the sales mix today by market. Can you just -- given with all the acquisitions and moving parts, is automotive today less than 20%?

That's probably true.

Well, it's got to be around there. Processed Metals is a third of the business. There's a 30 -- let's say a 30%, and part of that is obviously the strip steel business. So yes, 20% is -- which is primarily and automotive business, by the way.

Yes.

Probably 20% is a good number.

Okay.

It's actually looks like it's about a little bit under 14%.

So, 14?

That's what it looks like, total business, automotive.

Okay. And, I'm --.

We're kind of pulling that together, so let's just say we're below, we're around your 20% number.

Yes, yes.

Okay.

We can research that and get more specific.

The last thing, we've been seeing some data point coming out on the non-res. And admittedly, the non-res side has been very good. We've heard some really good comments of [cornerstone] on non-res. But, the macro data on a rolling three-month basis actually that came out from F. W. Dodge, I believe it was yesterday, suggests about a 15% decline on rolling three months. Now it doesn't necessarily look like a demand issue, but it looks like more of a cost issue than anything else that may be pushing out some business. What are you guys seeing there? I know you're seeing -- everybody's talking about great numbers on non-res, but is the pushback, or is there any pushback you're seeing? Is it price-related?

I think our demand on the non-residential side, which is commercial/industrial, that's what we tend to call it, commercial/industrial/architectural, has been fairly robust. I don't think that we have seen like a 15% reduction in demand there. There's always pricing pressure. That's a given, but it seems that the markets that we serve right now, are going along at a pretty good clip. And, we haven't seen anything like 15%.

Okay. What about -- in terms of pricing, your pricing in that market, would you say it's up on a year-over-year basis, or is it flat?

We're fairly flat. I think we're seeing organic growth in the area of 8% or 9% in those markets combined, and that's pretty consistent with what we've learned from various indexes that we use to measure this and again, from the folks who study those dynamics.

Okay. Last thing, can you maybe just quickly talk about areas that you think you're gaining some market share in, or if you see that you're losing market share anywhere?

Well, we know that -- we know we haven't lost market share anywhere. We've got very high market share in the niches that we participate in, and we hand on to that market share very tenaciously. We do know that we're gaining market share in some of the commercial and industrial products. We've got increased focuses there. We're also looking at bringing out a number of new products to help push that market share percentage up a little bit. So, I think we're doing a good job in both maintaining and growing our business as we go forward. And, I would say it seems to be true in all segments.

Okay, sounds great. Thank you.

You're welcome.

Your next question comes from the line of Mark Grzymski with Needham & Co. Please proceed, sir.

Good morning, everyone.

Good morning, Mark.

Good morning.

Wondering if we could touch on the Building Products segment here? From what I understand or what we know about one-quarter of that -- two-thirds is residential, and about one-quarter is new housing. Correct? Roughly?

I think we said that -- of our business specifically?

Right.

Of our business, of our total Building Products segment, about 30% is related to new housing starts. 70% is related to commercial/industrial/architectural opportunities.

And retail.

And retail.

And retail.

Okay.

Which is the remodel end of it, of course.

Okay. So then, you're really in Q4, you're factoring in the slowing new builds and then, just general seasonality? Correct?

Yes, exactly.

Okay. So, if volumes come down substantially or modestly, as far as gross margins go, are you looking at gross margins to kind of tick under 20% here? Or --?

Typically fourth quarter, our gross margin would be under 20%. That's just the normal seasonal slowing. If you go back and look at our history, you'll find that our margins do.

Right.

And, we -- again, we see a somewhat normalized fourth quarter. And, that's why I think we took the time to explain that last fourth -- last year fourth quarter wasn't a normal fourth quarter. This year, we think it's going to be more normal. We do have some slowing in some of the markets we participate in. We're working hard at offsetting those with some of the stronger market activities. We still are viewing the fourth quarter as a good solid quarter for Gibraltar.

Yes. I think, as Brian mentioned, typical -- a typical fourth quarter for us, if you look at sequential margins in -- or performance from the third to the fourth quarter, a typical result would be a decrease of about 35%. Last year was really probably the only year out of the last seven or eight years that didn't display that sort of characteristic.

It was still down.

It was down, but certainly not -- last year was sort of an abnormal fourth quarter.

Well, some big things that contributed to the abnormality, one, a number of our products, we were virtually sold out of. We couldn't produce enough to meet the demand, and the demand was driven by regionally related storm activity that had occurred just prior to the fourth quarter.

We were virtually sold out at. We couldn't produce enough to meet the demand and the demand was driven by regionally-related storm activity that had occurred just prior to the fourth quarter. And that had a very important impact in last year's fourth quarter. This year, by comparison, there haven't been the storms to drive that extra push. So it somewhat distorts what's normal, or the comparisons.

Logically, my next question would be how much of that business was storm related in Q4 last year?

It's always hard to say exactly what was storm-related and what was normal business. But all we know is that the business was stronger than the year before fourth quarter. And we think that '04 and '06 are more the normal and '05 was the aboration.

Dave, you talked about inventories in detail earlier. What portion of that is raw material as opposed to finished goods, and obviously that being --?

I would say that most of the inventory that we are talking about is in the raw material. If you look at the growth in total, our material cost, again as a percent of sales, are about 56%. In some of the -- particularly in the process metals piece, most of what they are dealing with is raw material.

So of that 266 million in inventory were -- I'm assuming that -- or, 263, for the majority. What -- can you give a percentage as far as --?

Probably 60% likely raw material. I -- again, that's -- I don't have the data in front of me, but I expect that that is the order of magnitude.

We don't maintain a lot of finished goods, particularly in the processed metals. It's almost -- that's almost manufacturer delivered.

So you're pretty confident that this number should work its way down. We're not expecting a drastic pull back, but should it work its way into the first quarter?

Yes, those numbers will definitely come down, we've already seen the --. We track inventory actually weekly and we're already seeing the last two week's inventory coming down.

Okay, but more gradual than anything sudden right?

Again, we don't encourage a dramatic fall off because we don't see our business falling off to that extent. We still -- and I think Brian mentioned earlier, we see the first quarter starting slowly, we're factoring that into our business plans. And we see as we go through 2007 the business will pick up. We will probably see a stronger pick up as we get into the later half of the second quarter and we think that will continue through year end.

That's a similar profile I think that other businesses are looking at as well.

And then lastly, I am just wondering if you can comment. You mentioned that it's a buyers market as far as acquisitions go. First, are you still active purely in the commercial area and are you still looking at residential products? And secondly, are you concerned that buying these companies as things may be peaking in the commercial markets is a concern for you guys?

We take a very conservative approach to making acquisitions and we're well aware that in many cases acquisition pricing or valuation has been at peak levels. But if you look at what we've been paying for companies we're still paying in the historic range that we've established right from the beginning which is 4 to 7x trailing EBITDA.

And the good news for us is that there are a lot of acquisition opportunities out there so we don't have to fall in love with any one acquisition. If the pricing or valuation model gets too high or the demands for price get too high we'll politely dismiss ourselves from the process and go look at the next opportunity.

We know once we buy it we own it. And the last thing that we want to do is overpay and be stuck with it for the long term so we're just simply not going to do that.

Okay. And as far as a debt level that you're comfortable with. If you assume things do slow down and there is some impact too your business, what level of debt would be comfortable in a worse case scenario?

Well we've gone through tough times at higher levels than we currently have. We don't expect -- we don't think that we're stretched at all at this point in time. At a 40 to -- 40% cap level, we're very comfortable and would be comfortable 5 to 7 points higher.

We've been higher. I would say that we are reasonably conservative. It's certainly not our intention to over lever the business and put it at risk.

And we always take into account that there might be some leaner times, but we would not want debt levels to exacerbate leaner times, so.

Okay, thanks for taking my question.

Your next question comes from the line of Yvonne Varano with Jeffries & Company. Please proceed Ma'am.

I just wanted to ask about the operating margins in the Building side of the business. You said that it was mix driven in the quarter, and can you just give a little more color on that?

Yes, there were some businesses that were primarily focused on new housing start products and those businesses were down and some of those have really very strong margins. And then some other businesses that were mainly [well-related] on the commercial side, with margins not quite as strong, businesses are up. So that obviously provides a mix change and therefore has an impact on total margins.

And where does retail fit in there in terms of margins, relative to the new housing start products?

I don't think you can do it by market. I think it's a look at by-products. Certain products that we have are well positioned and they command stronger margins in another area. Some cases we have some very unique products, and not only us other businesses as well. And they do get better margins. In other cases we're selling products on -- not quite as unique and therefore those margins are more consistent with industry margins.

Some products in that space, in what's call the retail and/or new housing market, some of our products in that space that have very high margins really don't have a huge presence in retail, so --.

Are there builder classifications that you could talk about, in terms of products?

Let me read between the lines of your question here, are you asking whether retail margins are better than wholesale margins and I would have to tell you that they run pretty consistent.

I guess I was just trying to better understand the sequential drop off in 3Q from 2Q and whether any of that had to do with better raw material costs or pricing pressure as well, or was it all mix related?

There was some mix. In the Building Products sector, when we look at those businesses it wasn't driven by material cost at this point. There has been more stability on that side. It's really been the mix of the businesses and their contributions for the whole.

Okay. And then you said that you had been buying some offshore material. Can you give us an idea of how much lower that that might be for domestic prices, right now, on a percentage-basis?

Which domestic price are we going to use for today? It's still --.

It's sort of a general --. Are you buying 5% better, 10% better?

Yes, when we are buying new we are buying at about 12% below the then-current price and I would tell you that the then-current price hasn't changed a whole lot between then and now, so they're still buying at an advantage.

I would tell you that as we forecast going forward we see domestic pricing coming down and therefore there is less of an advantage, certainly in the first quarter that seems to be true.

Great, thanks very much.

Your next question comes from the increase of Mark Parr, with KeyBanc Capital Markets. Please proceed sir.

Good morning guys. Good quarter and congratulations on all the progress you keep making. I may have asked this before, but I want to get back to it, in years past you had always made such a strong comment on not speculating in the raw material markets. And it seems like that's changed. Now maybe I'm misinterpreting what you are saying but it seems like you've become more aggressive as far as your willingness to go out and risk the margin proposition or attempt to enhance it via a strategic buying of raw materials. Could you talk a little bit about what's changed? Does it have anything to do with the shift in the mix of the business, or what's going on here?

Let me answer directly, we haven't changed our position at all. I think what you maybe referring to is that the fourth quarter of '05 as well as now the fourth quarter of '06 you're seeing our inventory levels build. As Dave mentioned, that we did take advantages of some opportunities to bring in somewhat more inventory because we were able to get an advantageous price on it, for that period of time. But what's really happened, particularly this year, is the fact that the demand level from the integrated producers has slowed and the demand level from our customers has slowed.

The integrated mills caught up with their deliveries because of the lighter demand and our customer started taking a little bit less and wa la, we've got more inventory than we normally like to carry. So it's not that we've gotten -- have put on a cowboy hat and spurs and are going out there and getting crazy with how we buy raw material at all, it's simply that a combination of factors that have emerged.

I can tell you Mark, to be very frank here, we're taking very serious steps inside of our business to improve upon what we think has been a good process over the years. But to make it even better so that we don't have this year-end blip in inventory, any more. It's not the way we want to run the business and doing it two years in a row isn't something that I'm very happy about. So we're taking steps internally to tighten our process down to prevent this from happening again.

These opportunistic buys, are they for the metal processing side or are they for the construction product side?

Mostly for building products. Almost all of our process metals or strip steel, is sourced domestically, almost all of them.

All right, so the implication is that you were able to find some advantageous foreign quotes for raw material inputs on the building product side?

Keep in mind a lot of our building products businesses are located in the coastal areas, Florida and California. Which gives us better access to the international markets for those facilities and that's why you would see a higher percentage of -- or higher impact from foreign purchases of any --.

Mark, in general, we are a very different business than we were let's say four or five years ago. Four or five years ago, and if you go back even farther than that we were primarily a process metals business. Today a large part of the business is in building products and therefore the more complex, our buying patterns are going to be different and on top of that the whole world of steel has changed, it's dramatically different today.

I think that probably answers the question. And I appreciate that. If I could do one follow-up. Regarding your acquisition orientation, you've kind of gone from three legs to two legs. From a segment reporting standpoint, over the next 18 months would you think that we would have a higher likelihood of seeing restoration of a third leg or are you going to continue to focus your primary efforts in the existing two segments.

I think Brian mentioned earlier, our primary intent is to focus our businesses on value weighted opportunities. We're looking at opportunities that are going to enhance shareholder value.

We've got a very rigid set of operating parameters that we want to drive the business towards. And we also have become very focused on niche market opportunities. And we are looking for ways to build our dominance in those niche market areas.

So, while I won't rule out a third leg to the stool, what I will say is that, particularly when you look at the building products area, what we've done there is we've added another leg to that stool. In the past we weren't very active in the industrial or commercial potential area. Now we're very active in that space. That is good for us because that runs a different pattern of ups and downs than does residential. So, between the two of them that gives us some more balance to that part of our business.

When we look at the process metals area of the business we're really redefining that in a way and what we are focusing on there is being a supplier to the industrial markets. And there are other product lines that offer potential for us in that area as well.

Our whole intent here is to focus on achieving a very detailed set of operating metrics for the business and we think a more focused business approach is probably the best way for us to get there.

Okay, thanks again.

your next question comes from the line of Timothy Hayes with Davenport & Company. Please proceed sir.

Good morning. I have two questions. First, I was a little surprised to see you give guidance's as far out as the first half of '07. Typically I know you give guidance for the upcoming quarter. My question on the first half '07 guidance is, are you actually seeing softness in your order books both for autos and new home construction, for that period? Or are you just anticipating that your order book will be slow given some of the macro economic forecasts that you see?

It would be nice if we had orders in hand that go out that far, but we don't. This is our estimation of what we're looking at for the first half of the year. I'm not sure that the term guidance -- how you interpret that? All we're doing is giving an overview of what we see from a market place perspective. We haven't converted that into any kind of EPS guidance whatsoever.

That's helpful. And the second question is, you mentioned that your auto business that's going to transplants, was about a third?

Yes.

How much of that increase from say two years ago and five years ago?

Okay, five years, it was less than half of what it is today. There's been a sequential improvement since then.

Right, and a couple of years ago, what was the percentage?

I don't have that number off the top of my head. We can get it for you though, if you'd like it?

Okay. I would be curious to know that. Thank you.

[OPERATOR INSTRUCTIONS]

Your next question comes from the line -- is a follow-up from Sal Tharani with Goldman Sachs. Please proceed sir.

A couple of quick questions. Brian, you mentioned transplants as part of your market share. Is it safe to assume that you are growing that business at least at the rate where the transplants are increasing their market share in the auto industry versus the Big-Three?

That's clearly our objective. When we look at the automotive industry, I think it's fair to say that there is a transition taking place there and we have to make sure that we are properly in line with that transition and that's what our focus is.

I think Henning, you made a comment on price decline and how global prices or -- import prices versus US prices, you had seen the trend. And you mentioned you expect pricing to soften in the first quarter, is that what you said, in the US?

Yes, we expect to see, from what we've read we expect the import prices to go up. And we therefore would expect less imports going into the first quarter.

But you also expect US pricing to soften in the first quarter more than that one?

Yes, everything -- we're pretty established, consistent with what the rest of the world has. We think hot rolled coils are going to be, I don't know, 580 to $610 a ton, going into the first quarter.

Okay. And lastly, what's the outlook on working capital for the next couple of quarters?

Well, certainly in the fourth quarter we would like to reduce the amount of working capital, generate some cash flow, same thing in the first quarter as we work off some inventories. We have a tendency, just because of the nature of the business, the Building Products business, to start to build working capital towards the end of the first quarter. So we would expect the fourth quarter certainly and at least the first half of the first quarter to actually generate cash from working capital.

Thank you very much.

At this time there are no further questions. I would now like to turn the call back over to Mr. Brian Lipke for closing remarks.

Thank you for your continuing interest in Gibraltar and we look forward to talking to you in the first quarter of next year. Thanks.

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