Gibraltar Industries Inc (ROCK) 2006 Q4 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its fourth quarter 2006 results and its outlook for the first quarter of 2007. We will begin today's call with open-end comments from Ken Houseknecht, Gibraltar's Vice President of Communications and Investor Relations. After the Company has concluded its presentation, we will open the line to your questions.

At this point, I will turn the call over to Mr. Houseknecht. Please proceed.

Thank you, 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 news release we issued last night and in our filings in the SEC. If you did not receive the news release on our fourth 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. Brian?

Thanks, Ken. Good morning, everyone. With me today is Henning Kornbrekke, our President and Chief Operating Officer; Dave Kay, our CFO; and Ken Houseknecht, our VP of Communications and Investor Relations. On behalf of all of us, thanks for joining us today.

This morning I'm going to focus my comments on three main areas. First, I will quickly review our 2006 results. Next, I will talk about some of the actions we took last year to continue the strategic transformation of Gibraltar including our most recent acquisition of the expanded metal company, and finally, I will discuss the current operating environment specifically in the residential building and automotive markets.

Following that, Dave Kay will discuss our financial results in greater detail and Henning will then go over our corporate and segment performance and provide a more detailed outlook for the first quarter and year ahead. Together, Dave, Henning and I will try to simplify our fourth quarter earnings release and show the many positive strides the Company made during 2006, which provide an improved foundation to move into 2007. After our prepared remarks are completed, we will open the call to any questions which any of you may have.

To start with, in spite of the slowdown in two of our key markets which began to impact our results in the late third quarter and then more pronounced in the fourth quarter, we still generated record sales and earnings in 2006. For the year, sales from continuing operations increased by approximately 26% to $1.3 billion. Earnings per share from continuing operations were $1.66 in 2006, up 32% from a year earlier.

Our performance in 2006 when two of our major markets suffered serious pullbacks is evidence of the progress we're making in building a larger, stronger, increasingly more diverse Company and one that sells more products to more customers in more markets, which has strengthened our resiliency and made us better able to produce consistent and improving results.

To that end, we took a number of important steps in 2006. First, we successfully integrated the largest acquisition in our history, AMICO, which we completed in October of 2005. AMICO is a leader in the manufacturing of metal bar grading, expanded metal, metal lab, as well as a number of other products. The majority of AMICO sales go to the commercial, industrial and architectural markets, areas where we've had little participation prior to this acquisition; these markets, which remain solid throughout 2006 and which have a good outlook for 2007 and beyond.

In 2006, we made three acquisitions, including our first in Europe. We acquired two storage and postal products companies, Home Impressions and Steel City in June and July that solidified our leadership position in that product category. Then in November, we acquired the expanded metal company or as we refer to it, EMC, a leading supplier in key European markets which, along with AMICO, gave us a global leadership position in this rapidly growing market.

We've identified numerous synergies between our European and North American expanded metal operations and we're taking steps to grow our market share on both sides of the Atlantic. The EMC acquisition also gave us an excellent vantage point to evaluate additional opportunities in Europe and we are pursuing a number as we speak today.

We also sold two noncore businesses in 2006 -- a Thermal Processing segment and our steel strapping business, and we used the proceeds from those sales to pay down debt. This process of evaluating our portfolio of companies is ongoing and we will continue to focus our resources and capital on those areas that provide the best strategic fit and which produce the highest returns for our shareholders.

And then finally, throughout 2006, we continued to consolidate our existing businesses and extract deficiencies as we took steps to more fully integrate our operations and better leverage our size through our many supply chain initiatives. As we look ahead to 2007, we have a number of activities underway to further improve our operating performance and continue to grow the Company.

As we previously stated, we anticipate that this year will get off to a slower than usual start, primarily as a result of the lingering weakness of the residential building market and there specifically related to new home construction with conditions improving as the year progresses. We also expect that the automotive market will be flat to slightly down in 2007, basically following the same pattern we see in building products, with a slower start in the beginning of the year with a stronger finish.

We see continued strength in the commercial and industrial markets, both in North America and in European markets. These are areas that we've targeted for growth, and we've identified many additional growth opportunities with our existing operations and through reacquisitions both in North America and internationally.

It's important to note that during the first 13 years as a public company, we generated record sales and earnings 11 times in spite of a wide range of economic conditions, unprecedented volatility in raw material and energy prices, and global consolidations by our suppliers, customers, and competitors. In light of our many internal growth initiatives, numerous acquisition opportunities, continued progress and improving our operating efficiency and the steps we're taking to drive out costs, we fully expect that 2007 will be another solid year for Gibraltar.

That's my overview. At this point, I'll turn the call over to Dave and Henning to further clarify our results for fourth quarter in 2006. Dave?

Thanks, Brian. As Brian noted, the year 2006 was a great one for Gibraltar, in spite of some recent headlines in several of our major markets. As a result of the slowdown in the residential building and automotive markets, sales from continuing operations of $292 million in the fourth quarter decreased by approximately 3% from a year ago.

In spite of a soft fourth quarter, sales from continuing operations in 2006 were $1.3 billion, up by approximately 26% when compared to 2005; a result of the strong results we generated in the first nine months of the year. A significant portion of the sales growth in 2006 was due to our AMICO acquisition, which gave us a foothold in the industrial and commercial building markets which are experiencing strong growth and where we had a solid performance again in the fourth quarter.

Income from operations of $20.5 million in the quarter increased by 6% from $19.3 million in the fourth quarter of last year. For 2006, income from operations was $120.3 million, up 48% from $81.1 million in 2005. We did record an impairment charge of $8 million net of tax or $0.27 a share in the fourth quarter of 2006 to write off the value of Gibraltar's 50% ownership interest in the Duferco Farrell joint venture.

As we said in our news release of a couple of weeks ago, the consolidation of the steel making industry and the higher than expected cost of the joint venture of raw materials diminished the viability of this operation. The joint venture became increasingly unprofitable over the last year and we recorded a pre-tax loss of $1.9 million in 2006 to reflect our 50% ownership in its operating losses. Going forward, we will not incur future operating losses from the joint venture.

Earnings per share from continuing operations before the impairment charge discussed earlier were $0.27 in the fourth quarter of 2006 compared to $0.17 a share in the fourth quarter of last year. Partially offsetting the impairment charge was a $0.08 per share benefit arising from a companywide alignment of our vacation policy. Income from continuing operations in the fourth quarter of 2005 was negatively affected by a number of nonrecurring onetime charges which totaled $0.19 a share.

Reported net income in the fourth quarter of 2006 including the impairment charge and the results of discontinued operations was $1.6 million or $0.05 a share. As we said during our last conference call, the fourth quarter of 2005 was unusually strong as a result of robust residential building markets, storm related activity, and the contribution from acquisitions, all of which have made for a difficult year-over-year comparison.

For the full year 2006, income from continuing operations was $49.9 million, an increase of approximately 33% when compared to 2005's results. Earnings per share from continuing operations in 2006 were $1.66 a share, an increase of 32% compared to $1.26 per share in 2005. Net income included the results of discontinued operations, was $1.91 in 2006 compared to $1.46 last year.

Selling, general and administrative expenses amounted to $31.1 million or 10% of sales during -- 10.7% of sales during the quarter compared to $33.1 million or 11% of sales in the same quarter of last year. Total interest expense amounted to $7 million in the fourth quarter compared to $11.8 million in the fourth quarter of last year.

As you may recall, last year's interest expense included a $6.8 million charge for prepayment and make whole penalties related to early redemption of senior secured debt. Additionally, approximately $2.5 million of that interest expense originally reported in the fourth quarter of 2005 has now been reclassified to discontinued operations. As a result, comparable interest expense quarter over quarter has increased by approximately $800,000, primarily a result of higher average interest rates.

From a cash-flow perspective, we generated EBITDA of $27 million in the fourth quarter of both years. We generated EBITDA of $147 million for the year of 2006 compared to $102 million in 2005. On a consolidated basis, we turned our inventories 3.7 times during the quarter compared to 5.1 times in the fourth quarter of last year.

Inventory levels as of December 31, although down by $9 million from September 30, are still higher than our targeted levels, largely as a result of slowing demand. We expect inventories will continue to trend downward in the first half of the year and then stabilize as we move into the strongest part of our selling season. We expect to return to our inventory turn goal of 5 times toward the end of the second quarter.

Average day sales outstanding were 54 days in the quarter compared to 53 days in the fourth quarter of last year. Our capital spending amounted to $22.2 million in 2006, which is slightly less than our depreciation. We expect to spend a total of $22 million to $24 million in 2007, which is at or slightly less than our projected depreciation expense.

During the year, we also paid out approximately $6 million in dividends. Our long-term debt to total capital ratio stood at 42% at December 31 compared to 48% a year earlier. This improvement results primarily from the debt repayments we were able to make as a result of the sale of the Thermal Processing segment. At December 31, we continue to be 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 $292 million in the fourth quarter, down 3% from a year ago. Our gross margin of 17.7% rose .2 percentage points from the fourth quarter of 2005 and our operating margin of 7% was .6 percentage points higher than a year ago quarter, a result of both improvements in our process mills business and the effect of accounting adjustments in 2005 and 2006.

Comparing operating margins after the effect of these discrete items were removed, we show a decrease in operating margin of 2.2% from the fourth quarter of 2005. This decline in margins was a result of product mix within our building products business as the new build housing slowdown caused a reduction in sales of some of our higher valuated products. Increased margins in our processed metals segment partially offset this reduction due to a shift in product mix.

Looking at the results for two segments, building products, which represents 66% of our total sales, had a sales decrease of 6% to $192 million. The decline was a result of lower sales for the retail and new build housing market offset by continued strength in our sales to the commercial and industrial building product markets.

When considering these results, it is important to note that the fourth quarter of 2005 was abnormally strong in the aftermath of significant storm related activity, which was not present in 2006, making the comparison that much more difficult. Gross margins were flat compared to the year ago quarter. The operating margin was 11.3% compared to 12.4% in the fourth quarter of 2005. The decline is a function of the lower sales and a less favorable product mix.

Our processed metals product segment had fourth quarter sales of $99 million, up 4% from a year ago, a result of higher material costs at our copper powder business. Our gross margins was 8.7%, up 1.2 percentage points from the year ago quarter, and the operating margin was 4.8%, up from 2.9% in the fourth quarter of 2005, driven by improvements at our strip steel, service center and SCM China businesses.

At this point, let me provide some perspective on our outlook for the first quarter and the balance of the year. In 2006, the year started off strong and then weakened in the third and fourth quarters. We expect that 2007 will reverse that pattern; with slower than usual start, but we anticipate it will pick up strength as the year progresses. Our building products businesses that are most closely aligned with the new build housing market, like our structural connectors, will continue to experience below normal activity levels in the early part of 2007. Since some of these businesses have high valuated products, it will adversely affect our margins.

Offsetting the slowdown in the new build housing market is continued strength in the repair, remodel, commercial, industrial and architectural markets. Last week, the Federal Reserve said that some [tentative] signs of stabilization have appeared in the housing market and many of our retail customers have worked through the year end inventory reductions. We are cautiously optimistic that the residential housing market is positioned for improvement as the year unfolds.

In our processed metals product segment, which accounts for 34% of our total sales, our powdered metals business remained strong with continued growth in our Chinese operation and strong North American demand for our products. Our strip steel business is well positioned to participate in the changing automotive market. The expected stabilization in the steel supply market will enhance Gibraltar's opportunities in existing and new product lines.

Because our first and second quarter results in 2006 were the best we ever generated for those periods in Gibraltar's history, the difficult year-over-year comparisons will continue the first half of 2007. In light of all these considerations, we expect our first quarter earnings per share in continuing operations to be in the range of $0.23 to $0.27, barring a significant change in business conditions.

We expect that the markets we serve will begin to improve late in the first quarter and continuing into the second quarter, which is typically a strong period for Gibraltar. As we look ahead for 2007, we have a number of initiatives underway to further improve our operating performance and continue to grow the Company in spite of a challenging operating environment. We see continued strength in the commercial and industrial building markets, areas we have targeted for growth, and we have identified many other growth opportunities with our existing operations and through acquisitions, both in North America and abroad.

We've also taken a number of steps to drive down expenses and bring them into better alignment with our current sales levels. We are focused on generating progressive improvements in all our businesses, carefully managing our assets, maximizing our cash flow to help fund growth and pay down debt while continuing to transfer Gibraltar into a company that produces higher and more consistent margins and better returns on capital.

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

Thanks, Henning. Before we open the calls to any questions that you may have, let me make just a few closing comments. Even with two of our major markets slowing considerably in the second half of the year, we still generated our best ever sales and earnings in 2006. And that means we have now generated record sales and earnings 11 times in our 13 years as a publicly traded company, and that's a record that we're proud of and one that we're focused on continuing to improve.

As we look ahead to 2007, we believe that we are well positioned to build on our record of consistent and steadily improving results. There is still a lot of efficiencies and synergies that we can and are beginning to extract from our businesses. There are a lot of acquisition opportunities out there for us and what appears to be an improving market for the type of companies that we have historically purchased and they're also within our valuation parameters, and we're going to continue to move the business forward as we have through past slowdowns.

That concludes our prepared comments and at this point, we would be happy to open the call to any questions that any of you may have.

(OPERATOR INSTRUCTIONS). Robert LaGaipa, CIBC World Markets.

I just had a few questions. One is just a clarification on the fourth quarter, then I have a few for the 2007 outlook. One with regard to the fourth quarter. The $0.08 with regard to the vacation alignment companywide, was that included in the $0.27? And where can we find that? What's the absolute amount?

Well, it is included in the $0.27. The absolute amount is about $2.5 million in total.

That's the net amount. Right? What's the --

That's the net amount.

And what's the gross amount and which line items can we find those?

I believe the gross amount is about $3.7 million or $3.8 million, somewhere in that range. Primarily would show up in -- I mean, some of it's in cost of goods sold and some of it's in SG&A. The predominant portion of it would be in cost of goods sold.

What was the realignment exactly? What did you do?

Well, we had a lot of different vacation policies throughout the Company which I guess is probably not unusual when you have acquired a lot of companies over the years. And we thought we needed to really just align the policy so that everybody was using the same vacation policy and it was really an issue of when do you accrue or when do you earn vacation and what year you earn it. The new policy essentially says that you earn your vacation in the year in which you take it. So we've put everybody on the same policy now.

And a few other questions. One, with regard to the building products segment, obviously it's been widely recognized that you have this housing slowdown, et cetera, and you mentioned that the inventories have been coming down in the channel. I guess my question is now that we sit here in the first quarter, you have some degree of optimism that things are going to improve as we progress throughout the year. My question is, so far, have you seen customers come back and increase their order levels? And how do those compare versus last year at this time?

We have seen some improvements in order levels through some of our businesses. We see some of the retail chains particularly starting to re-look at their requirements and we've seen increased orders, I know, in two of our businesses in that particular area. We've continued to work very vigorously with some of the contractors themselves. We have been specified by a number of major contractors with our products and we're starting to do load-ins as we go into the year.

Again, the other data that we have, the general data in the building price suggests that it has bottomed out and it is starting to move up. We've done studies in individual areas across the country, and of course the slowdown is most noted in what's considered the hot areas. Phoenix, the West Coast, Florida, certainly the West Coast and the Phoenix area seems to have started to pick up. We are starting to see signs even in Florida.

Can you maybe put it into prospective whether it be versus last year or versus sellthrough in the channel? I'm just trying to get a sense of how large is this improvement? Is it just an improvement off of just weakness around the holidays or is this a true improvement? How does it relate to sellthrough?

We see -- it's not, of course, we are in a seasonally slow period right now when we typically would see that particular business segment picking up as we run into March. And we're starting to see signs that that is happening.

I'll move on to the next questions. Processed steel; my question there is obviously it's -- the inventories in the channel have been fairly high. If you look at the service center data, for example, it's still near historic highs. There's been some reports as to potential price increases, working down the inventories, et cetera. I guess the only question is at what point do the inventories get worked down? Where do you stand with regard to your customers in that regard, both from an inventory prospective and from a sellthrough prospective? What is the last few weeks or the last month or two look like? And are you seeing any improvement? And what are you seeing in terms of margins? Are you expecting a continued improvement in margin as we get throughout the year or is that going to be offset by the weaker demand that's out there?

So far we see improved demand. We've had negotiations with all of our customers and again, a lot of the customers, particularly domestic, are addressing the need for new products. So we recognize there is inventory of finished goods sitting out but also a strong push, particularly in domestic side to come out with new products, and we are participating in those areas. We would anticipate the demand for products to continue to move forward. We've got a new management team in place in one of our major businesses. I think as we look forward into 2007, I think we remain rather excited about our opportunities, [plus] existing products and we've got a concerted push on some new product opportunities, as well.

Last question. This one's for you, Brian. If we look over the course of the last several new years, obviously there's been some changes within the Company. You've had a number of acquisitions, most of which have been on the building products side. There's been some divestitures. Obviously there's still strapping and also the Thermal Processing business in the second quarter, and I guess my question is, all of these acquisitions, of course, have been in building products, and a lot of this has been residential related. And are you fearful that you bought a lot of these businesses during the peak and if things don't improve from here on out over the next couple of years, what actions do you plan on taking to address that?

Number one, I'm not fearful of that and let me tell you why. First of all, when we bought these companies, we didn't overpay, and that's a critical part of what we've done here. Secondly, as we purchased these companies, there are numerous operating synergies that exist between each one of these companies that will help improve the operating performance of those companies even if it was already good. And there have been a number of clear steps that we have taken that have had a very positive impact on the performance of the companies as we have streamlined the administrative overhead and consolidated the manufacturing operations, and there's more of that yet to come.

So number one, we didn't overpay. Number two, there are still -- while we have captured operating synergies, there are still more to capture and we see that many of the products that we are producing in these businesses today have an increasing level of demand, regardless of what's happening relative to the housing starts at any point in time. I'm talking here specifically about our steel connector products as one example and many of our ventilation products that are not driven by new housing starts but are driven more by replacement of roofs and maintenance of existing facilities.

So no, I'm not concerned about that at all. I think we've made some very good decisions and I think also, though, the fact that now that we have AMICO and the expanded metal Company, we've diversified our business within the building space to include the industrial and architectural and commercial markets as well, which offer us a good balance point between residential and commercial.

And just, this is the second part, I mean if, in fact conditions do worsen, are there any other or additional actions you might be taking to address that? Or is it basically business as usual?

Overall, we have sent out a mandate starting in December that we are going to take every step that we can to limit our spending right now, both operationally and from a capital standpoint. So, just -- we're pre-active, I guess, or preemptive here in trying to make sure that we generate the best performance that we can for the shareholders again this year. But I should also say, too, overall, we've got a number of internal opportunities to improve the efficiencies of the business and cut costs out of the business. We've got a number of internal opportunities here through the development of new products to get additional sales, even in a slow market. We've got a number of acquisition opportunities that continue to exist in front of us today.

As we look out over 2007, we think the first quarter is going to be better than the fourth quarter. We think the second quarter, which historically is a very strong period, will build on that, and then when we look at the third and the fourth quarters, we're cautiously optimistic that we're going to see improvements in the major markets that we're serving. So while I guess we always have to be aware of the downside in any situation, I think over the years we've done a pretty good job in protecting against the down side. We also see opportunities out there in the second half of the year.

Mark Grzymski, Needham & Co.

Brian, just touching on your last answer there regarding the building products area. You've mentioned in the past leveraging your relationships with the big box retailers by getting kind of more products into more stores. Just curious on how that's going since that's going to be an important component of growth going forward.

You're absolutely right, Mark, and I'll let Henning answer the rest of that question.

Good morning, Mark. Yes, we work very closely with all of our customers in all of the channels and certainly the large customers are important to us. We've developed a number of opportunities directly with some of those customers that will provide opportunities for us both in 2007 and beyond. I think we feel very positive about the growth opportunities with specifically those customers. And again, where some of those customers have started to branch out and to move into some other channels of distribution, we are participating with them in there as well.

So, to kind of sum that up, you're definitely getting more exposure to those guys?

Absolutely.

And now, just curious on a year-over-year basis, you may not have the numbers, but how much were you down with the big box guys due to this slowdown in the residential market?

If we're making a comparison on a year-over-year basis, we would say that we're not down on a full year basis, that we're up with those customers. If we saw slowdowns with them, it was in the back end of the year and was primarily focused on the fourth quarter. But they were so strong in the first and second quarter that when you looked on a full year basis, we ended up being up, in fact, with all of them.

Can you comment on the pricing environment at present time now that we're a couple --

We exist in a very competitive environment. Pricing is very important. Material cost is very important, as Brian had said earlier. We've got a number of initiatives in supply chain management where we really focus intently on optimizing our ability to buy materials and that allows us to remain very competitive with the customers. We don't think that that's going to change. We've put in systems in place to help us best manage, if you will, on an ongoing basis.

The key, as I see it, I always like to simplify things as much as possible, is maintaining the spread between our raw material costs and our selling prices, and we think we've got a number of very good mechanisms in place to allow us to move -- to keep things, to keep those spreads stable. A lot of the customers today, recognizing the volatility of raw material costs over the last couple of years are -- we have been having discussions with them relative to index type pricing, and it seems to be gaining more acceptance out there as everybody wants to stabilize their cost picture.

So we've got a number of mechanisms in place. That's the key part to managing this business. I think if you've seen any of our presentations, our investor presentations over the years, you've been able to see that we've had a very consistent pattern of operating margins, a very consistent and upward, I should add, pattern of gross margins, very consistent pattern of EBITDA margins through a wide variety of steel pricing environments, and always in the face of very fierce competition relative to our selling prices with our customers. But I think one of our big strengths is the ability to maintain that spread between raw material costs and selling prices.

And then just lastly, within the metal processing business, what percentage of that business was tied to the transplant in Q4? Because you talk about that being a growing component of the metal processing business.

It's about one-third transplant, two-thirds the historic big three.

So the really, that doesn't change in the second half of the year at all?

As the mix as between -- if the percentage of the total industry shifts from one part of the customer base to another, we think we're well positioned to move with that.

Sal Tharani, Goldman Sachs.

A couple of quick questions mostly on processed metals side. Can you give us -- what was your inventory tunnel on processed metal by itself?

For the full year?

No, for the fourth quarter, and also for full year, yes.

For the fourth quarter, 3.4 [for the turns]. And your other question was it, did you ask receivables?

No, just for the --

Oh, for the full year it was 4.1.

And your target is 45.0 --

Well, it depends on the business itself, but I think on balance, we're looking at about 4.8 turns. We actually have three separate businesses inside of processed metals.

Also, can you remind us what percentage of your processed metal is on contract?

On contract?

I guess in processed metals, relative to the overall strip steel business, the vast majority of it is on contract, but they're all of different lengths of time. Some are quarterly, some are semi-annual, some are still on an annual basis, so -- but the key there is that whatever arrangement we have, we try to link our purchasing arrangements so that they're in sync with our selling arrangements, so that we can do the best job we can at locking in our spread for that piece of business. But also, as I mentioned, there's much more discussion relative to index pricing where raw material costs swings will be reflected in the selling price either up or down allowing us to maintain our spreads even better.

Some of the contracts are lower as of January 1st with the new pricing?

That's true in some cases.

What I'm coming at is that if most of your contracts are linked to purchasing, I don't understand why so much volatility in the processed metals side if you are working off a sort of a spread.

I think first you have to understand about one-third of the business in processed metals is a copper business, not a steel business. The copper volatility has been truly significant. It's been so significant it's had impact on the total segment.

And that's mostly powder?

That's powdered copper.

How is your orderbook right now compared to fourth quarter? Is it improving? Have you seen some --

Orderbook is strong and improving. I think we're encouraged with the signs that we see.

You mentioned that you continue to draw down your inventory, and I think you heard similar comments from other service centers also or other metal process people who have businesses like yours, metal processing business. But my question is that we are seeing some production increase being taking place by the mill. Have you guys gotten more offers from the mills in recent past?

Supply is not an issue at this point in time. So, we're able to get all the steel that we need. There have been times in the last couple of years where steel was in very tight supply. The steel mills are now inching pricing upwards. I think they sense stronger demand coming as the year unfolds and are trying to get ahead of that.

Have you increased your buying? I know you buy a few weeks in advance. Have you increased your buying from the mills at this point and anticipating better business?

We try to stay away from hedging and guessing and we try to order to what we anticipate our orderbook will be with all of our customers. We found over the years that while you hedge or try to get out in front of the market, every once in awhile you'll hit it right, but more times than not you won't; and so our focus has been on managing our inventories, turning them over as fast as we can and buying to meet customer requirements.

Unlike a service center, we don't buy inventory from the mills to stock. We buy either based on firm orders or anticipated orders. We don't have huge, enormous backlogs that will be six month backlogs and we just do not stock inventory. We really buy inventory in whole coils and process it essentially to meet incoming orders.

And since we produce many repetitive products across the business lines, that allows us to be much more targeted in the inventory that we buy as opposed to a service center that just has to buy in general with the best knowledge that they have of what their entire customer base might be needing.

And lastly, the inventory levels at the big box were high when you had the last conference call. Have you seen some improvement or talked to them that they have been drawing down inventory also?

Yes, they've -- every indication is, and we've read all the press releases, show that their inventories have come down to their expectations I think without exception.

I think clearly what happened in the fourth quarter to a large extent was that many of the big box customers got very aggressive in pulling their inventory levels down, which had a direct impact on the volume that we did during the fourth quarter. I guess that's the bad news. The good news is when they pull it down that dramatically, it means that they're going to have to replace it sooner than if they had followed a normal pattern.

Mark Parr, KeyBanc Capital Markets.

Thanks for all the color and the commentary. I've got a couple of questions. One thing, Henning, I was curious if you could give a little more color on the mix issue in the construction products area. Just maybe help us to understand how mixes can impact profitability.

We have, as you know, we have a number of products [inbuilt] in the building markets that we serve; a number of businesses are making those products. Some of those businesses have higher value added opportunities than others.

Could you give us some examples of that?

We'd rather not because now we're getting into sensitive areas with customers and customers are not something that --

I didn't think you would, but at least I thought I'd give it a try.

Got to ask, Mark.

And I certainly -- I understand the tough comps from last year because that was quite an interesting --

Quite a robust quarter.

Yes. Another thing I was curious, you had -- Brian, I think you had mentioned this opportunity about moving to an indexed pricing format with your customers. Could you explain a little bit or give us some more color about why you are interested in it and give us some examples of how this could decrease volatility or enhance the profitability of the metal processing segment?

I'll try to answer part of it and then probably Brian will provide some input as well, but I think for the most part, it's just not in processed metals, by the way. We're also having those same discussions with some of the businesses that serve the building market. I think when you go to an index, there's some assurances both on the supplier and on the buyer's part that there is a price that both agree to. In other words, you can agree upfront on a, if you will, a threshold, a margin threshold, and if there are variations in material costs and there's been significant variations over the last couple of years, usually either the buyer or the seller gets caught on the wrong end of that at some point in time and it distorts both sides. So I think both parties sit down and say that's not what we're trying to do. We want to give an accurate picture of how our business is operating and I think with the index it tries to flatten that off. If material cost is going up, then they accept a higher price. If it goes down, then we sell it at a lower price.

Do you think that the goal here is to reduce volatility or is there an opportunity for this to actually improve margins for Gibraltar?

I think we're really trying to reduce the volatility. I think that we view ourselves as a good supplier, a competitive supplier. We realize we're going to have to earn the margins that we post, so our intent at this point of this juncture is to really reduce the volatility.

Our focus forever has been to earn the profit that we generate, not by getting lucky on how we buy, but by the value that we add to that steel that we buy. Certainly we want to be competitive on every ton of steel that we buy and we think that with the number of tons that we are buying and the mills that we're working with, we put ourselves in a good position to be competitive on the buy side.

The key to our business, though, is making sure that we are competitive on the production and manufacturing side of the business. That's how we're going to protect ourselves from worldwide competition. We've got to be the low-cost provider of the products that we manufacture and sell to our customers, and that's our key focus -- making sure that our costs are lower than what our competitors are is the key to driving this forward. So if we can take the volatility out of the raw materials side through indexing and then make sure we're the best from a cost standpoint for manufacturing, we're right where we want to be.

Another question on the metal processing side, if I could. The impairment charge that you took in the quarter against the Duferco Farrell joint venture, I'm curious what are the differences there for this operation compared to your wholly-owned operations from a supply side or any incremental color you could get as to the basis behind the impairment charge I'd really appreciate.

The basic difference was the market that that facility was geared to go after. Geared to go after more of a commercial commodity market versus our very specific specification-driven markets in the other part of our business.

That was a stand-alone cold mill, wasn't it?

Yes.

So the product mix was never as rich or didn't have the value add opportunities of your existing operations?

Much more price sensitive. You hit the nail on the head, Mark.

And then I have one last question, if I could. I'm sorry to take up so much time here, but it seems given the fact you're seeing a pickup and your guidance is actually a bit lower than your fourth quarter number, I was just curious what would have to happen for your current guidance to prove conservative? To the extent you could give us any sense of what your underlying assumptions are, things that we can look for that might give us clues as to an upside surprise. It certainly wouldn't seem as if you're looking at any downside surprise here for the first quarter, but what clues -- what should we be looking at to think that maybe there's an upside surprise here in store for Gibraltar in the first quarter?

I think if you look back at how we've tried to forecast over the years --

I know. I know.

I think our approach has been that we'd rather under-forecast and outperform because we know the penalties for underperforming are swift and severe. We think that our ability to create shareholder value is a long-term proposition and one that's based on showing our shareholders that we know how to manage this business through good times and bad, and that we understand the dynamic drivers within the business and have them under control. So in general, I think we've been an accurate to conservative -- Ken, how many times have we met or exceeded?

In all the quarters that we've been a public company, Mark, I think we've only had to go out and preannounce on the downside four times.

Out of 52 quarters?

Well, we've been a public company now for 13 full years. And many of those quarters were because there were some macro situations like the fourth quarter of 2001 and the aftermath of September 11. So there have only been a couple of quarters in our history where it's been a unique Gibraltar situation and I think Brian is right. We really try to be as accurate as we can be when we give the guidance and I think our track record now would speak to our ability to gauge with a pretty high degree of certainty how we're going to perform.

Consistency, Mark, whether -- it's probably not as exciting as some stories, but we think consistency is a big part of our story and --

Brian, I think consistency works just fine. I have no problem with that at all.

Well, it is our story and we're sticking to it, Mark.

Is there anything that you can give us as far as the underlying assumptions in your first quarter guidance?

In the first quarter, I'll be as accurate as I can. We took our primarily November/December run rate and we ran it through the first quarter. We think November and December from everything we see is -- will be a very conservative posture on our side. But as Brian said, we'd rather error on the conservative side.

I really appreciate all that extra color. Thanks very much and congratulations. Good luck on '07.

(OPERATOR INSTRUCTIONS). Bob Richard, FTN Midwest.

My questions on Duferco Farrell were answered. Thank you very much.

(OPERATOR INSTRUCTIONS) You have no further questions at this time. I would like to turn the call back over to Brian Lipke for closing remarks. Please proceed.

Thank you all for joining us on the call this morning. Just want to reiterate that 2006 was a good year for us, not only from an EPS standpoint, but also we took a lot of steps to continue to strengthen the foundation of this Company going forward. While we are faced with slower or softer markets in our two major markets today, we think that we have a host of internal opportunities, acquisition opportunities on the outside, new product opportunities that are all going to help offset these slow conditions and allow us to have another good year in 2007. So to all the shareholders, thanks for your continued support and we look forward to talking with you again next quarter.

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