Gibraltar Industries Inc (ROCK) 2007 Q1 法說會逐字稿

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

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

Thank you, Carol. We want to thank everyone for joining us on today's call. Before we begin, I want to remind you that this call may contain forward-looking statements about future financial results. Our actual results may differ materially as a result of factors over which Gibraltar has no control. These factors are outlined in the news release we issued last night and in our filings with the SEC. If you did not receive the news release on our first quarter results, you can get a copy on our Web site at www.gibraltar1.com.

At this point, I would like to turn the call over to Gibraltar's Chairman and CEO, Brian Lipke. Brian?

Thank you, Ken. Good morning. 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. And I want to thank you all for being with us on our call today.

As usual, I am going to begin today's call by providing an overview of our first quarter results and I'll give you an update on our two acquisitions that we made this year, along with some of the other major strategic initiatives that we have ongoing within our Company. Following that, Dave Kay will look at our performance from a financial perspective. Henning will then talk about our operations, our segment performance, and our outlook for the second quarter. I will finish off our prepared comments with a few closing comments and then we will open the call to any questions that any of you may have.

As we reported last week, the continuing slowdown in the residential building market, which adversely affected our sales and our product mix, impacted our earnings as well. Our sales from continuing operations in the first quarter of 2007 were 318 million and income from continuing operations before restructuring charges was 6.6 million, with EPS from continuing operations before restructuring charges at $0.22.

The softer than expected conditions in the new housing market, inventory control programs at a number of our retail sector customers, along with the very adverse weather conditions that affected the overall construction market, all impacted our first quarter results. In spite of the temporary soft market conditions, we continue to move the Company forward. We recently completed two acquisitions, the first Dramex and the second NorWesCo, Noll, and M&N Plastics. Both of these acquisitions, while immediately accretive to our earnings, we'll launch fully integrated into Gibraltar, contribute to our plan to drive improvements in our operating and net margins along with returns on invested capital.

Dramex, which we acquired last month and which had annual sales of approximately $25 million strengthens our leadership position in the expanded metal market. We first entered this business in late 2005 with our AMICO acquisition and increased our presence in that market with the Expanded Metal Company acquisition, which became part of Gibraltar last November, which further broadened and diversified our product line and gave us our first facilities in Europe. The Dramex acquisition is consistent with our strategy of focusing on niche product markets, where we have a leadership position. It also continues to grow our business in the commercial, industrial and architectural building markets, which continue to be solid markets. We are actively working to maximize the many marketing and operating synergies, which exist between our three expanded metal companies. The integration of Dramex into our existing AMICO operation will provide cost cutting opportunities and operational efficiencies, which will help drive improvements in our operating and net margins along with our return on invested capital.

The addition of NorWesCo, Noll, and M&N Plastics to the Gibraltar family of companies earlier this month strengthens our presence in the Northern California, Pacific Northwest, and Rocky Mountain markets. These are high growth areas that we have targeted for expansion. As is the case with Dramex, the integration of NorWesCo with Gibraltar's existing operations will have a significant impact on our operating and net margins along with our returns on invested capital. These are well run companies with annual sales of approximately $60 million and solid records of growth and good cash flow characteristics. They have excellent manufacturing facilities, capable of increased throughput with minimum capital expenditures required. They are also well positioned to grow organically through the introduction of new products and the addition of new customers, some of whom we helped to bring to them from our existing customer list.

While we have made more than 30 acquisitions over the last 12 years, those of you who have followed our Company for any time know that we are highly strategic and very selective and will only acquire those companies with the accretive financial and market characteristics that will make our business stronger over the long haul. While sales growth is clearly part of Gibraltar, we recognize that topline gains are secondary to EPS growth, higher return on invested capital, margin improvements and better cash flow. We use these measurements as guidepost in our decision-making when we look at internal and external business opportunities. In the past, clearly, we were focused on sales and net income growth, which as a small start-up publicly traded Company was a necessity. Now, we have evolved and we have reprioritized our financial focus, and we know the surest way to create shareholder value is through improved operating performance and that's our number one focus.

To that end, we are aggressively taking steps to control and cut costs, improve inventory turnover, streamline our operations and extract efficiencies from all parts of our business. For example, we are consolidating a number of operations, including two Buffalo steel-processing facilities into one location, which should significantly enhance the performance of that business. We are also taking steps to better leverage our size through our many supply chain initiatives. We are currently spending more than 800 million every year on steel and other metals, transportation, utilities, and other materials and services, and with dozens of initiatives underway to better coordinate our activities and optimize our savings.

We have also created a new position of Corporate VP of Operations with Kevin Cullen initiating lean manufacturing and process improvement activities throughout the Company. All of these actions will continue to enhance our core operating characteristics and will become even more evident when business rebounds and returns to more normal levels.

So, in short, we are focused and we are highly confident about our future. At this point, I will turn the call over to Dave and Henning, who will provide a more detailed review of our first quarter results and give you a better sense of our outlook for the second quarter. Dave?

Thanks, Brian. Sales from continuing operations of $318 million were down approximately 2% from the first quarter of 2006. Sales declines in our historic building products companies was partially offset by the four acquisitions we made over the last 12 months, Home Impressions, Steel City, The Expanded Metal Company and Dramex, which together will add annual sales of approximately $120 million and contribute to our continued growth and overall strength in the building market.

Income from continuing operations before restructuring costs was $6.6 million in the quarter, a decrease of approximately 43.6% when compared to $11.7 million in the first quarter of 2006. Earnings per share from continuing operations before restructuring costs were $0.22 in the first quarter of 2007, within the range we provided on April 17. On a GAAP basis, earnings per share from continuing operations amounted to $0.21 in the first quarter of 2007. Restructuring costs, which primarily relate to the consolidation of Buffalo-based facilities and the processed metals product segment amounted to $700,000 on a pretax basis, or $0.01 a share on an after-tax basis.

Selling, general and administrative expenses amounted to $35.2 million or 11.1% of sales during the quarter compared to $37.8 million or 11.7% of sales in the first quarter of last year. Interest expense during the quarter was 7.2 million compared to 6.8 million in the first quarter of 2006, largely as a result of increased overall interest rates.

Our net return on sales during the quarter amounted to 1.9% compared to the 3.6% a year ago. From a cash flow perspective, we generated EBITDA of approximately $24.5 million in the quarter compared to $32.9 million a year ago, a function of reduced operating income. Cash flow provided by continuing operations was $16.7 million during the quarter compared to a use of $9.1 million in the previous year's quarter. This nearly $26 million improvement is the direct result of our continued focus on working capital management.

On a consolidated basis, inventory turned at 4.2 times during the quarter compared to 5.2 times a year ago. As you may recall from our last conference call, we discussed a number of initiatives we were undertaking to return our inventories to a more normal level. During the quarter, we did reduce our inventory by $10.6 million and we expect to make further progress throughout the balance of the year, with the goal of returning our inventory turns to our stated objective of 5 turns by the end of the third quarter. Average day sales outstanding in accounts receivable during the quarter were 50.5 days compared to 49.6 days last year.

Capital spending amounted to $5.4 million during the quarter compared to $5.3 million a year ago. In spite of the temporary market conditions we are experiencing, we will continue to invest in the future of our business. We currently expect to spend approximately $23 million to $26 million on capital projects in 2007, which is adequate to maintain our current capabilities plus grow the business. In addition, we paid out approximately $1.5 million in cash dividends during the quarter. We currently do not anticipate any change in our dividend policy.

During the period ended March 31, our total debt including current maturities increased to $421 million, an increase of approximately 20 million from year-end, which was largely a result of the Dramex acquisition. By March 31st, our long-term debt to total capital ratio stood at approximately 43% and 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. Henning?

Thanks, Dave. Gibraltar's net sales from continuing operations for the quarter were $318 million, down approximately 2% compared to a year ago, a result of reduced activity in the building market which is carried over from the second half of 2006. Gross margins declined 3.3 percentage points from the first quarter of 2006 driven by lower volume and product mix. Operating margins of 5.2% were down by 2.7 percentage points from the first quarter of 2006, the result of lower gross margins offset by reduced SG&A spending.

Segment performance indicates that our building products segment generated net sales of $207 million, a reduction of 3.5% compared to the first quarter of 2006. As previously noted, our residential building product sales fell as a result of the sharp downturn in the housing market, coupled with severe weather conditions throughout most of the country, offset in part by the contribution of recent acquisitions and continued strength in the commercial, industrial and architectural building markets. Excluding acquisitions, sales were down 13% versus a decline of more than 20% for the overall housing market.

Gross margins of 20.6% were reduced 3.8 percentage points by the lower sales volume and changed product mix. The operating margin was 9%, down 5.6 percentage points from the first quarter of 2006, a function of lower gross margins and slightly higher SG&A, which provides continued support to our lean manufacturing initiatives, new products and marketing programs, all intended to optimize the operating characteristics of Gibraltar over the long-term.

Sales in our processed metals product segment were $110 million, up 2.3% from the previous year driven by higher material prices offset by reduced volumes in a service center business, which supplies steel to building products companies. Gross margin impacted by a negative steel material cost through market profile in our service center business, restructuring costs associated with plant consolidations, and higher copper costs, all of which resulted in a 1.9 percentage point reduction in gross margins to 8.2%. Offsets in SG&A spending provide an operating margin of 4%, down 1.4 percentage points. Strip steel margins continue to improve and for the quarter were equal to the previous year's first quarter margins.

At this point, let me provide some commentary on our outlook for the second quarter. As we said in our news release, our business did improve in the second half of March, a pattern which is continuing into the second quarter. While we expect our business will strengthen considerably as we move into the seasonally strongest periods for our business, the second and third quarters, we have not yet seen a return to normal business level. However, we believe improvements are on the horizon. Repair, remodel activity will stay at below normal, but improving levels as the inventory of new homes are sold, ushering in a more normalized resale market, a catalyst for the repair, remodel market, where approximately 70% of our sales activity is generated.

Our sales to the commercial and industrial building markets is showing continued strength and these are areas, as Brian noted earlier, that we have targeted for growth. In spite of the downturn in the automotive market, our processed metals product segment is benefiting from our aggressive marketing programs and operational improvements. Our ongoing efforts to broaden our customer base, enter new geographic markets and develop new product application will further enhance our sales performance and returns. We expect a strong sequential pickup in activity, as we move into our peak selling season, the second and third quarters, with general marketing conditions improving as the year progresses.

With that as a backdrop, we expect our second quarter earnings per share before any unusual items will be in the range of $0.43 to $0.48 compared to $0.22 in the first quarter of 2007, barring a significant change in business conditions. This represents a sequential improvement of 95% to 118% across the range of our guidance, which is a larger percentage improvement than the seasonal swing experienced during 2006, a sign that we are improving our operations, gaining market share and seeing some improvement in market conditions.

Longer-term, the many steps we are taking to streamline and consolidate our operations, improve our transportation logistics, automate more of our processes and control or cut cost will continue to enhance the core operating characteristics of the Company and better position Gibraltar for improved performance.

Our business is fundamentally solid. Our first quarter results are a function of lower volumes and product mix, both driven by a market slowdown. Many of our product lines in geographic markets are not down as sharply as the new build market, which demonstrates that we participate broadly in the building market, which does provide better continuity of performance. As business rebounds later this year and into next year, all of the steps we have taken and continue to take will allow us to generate improved operating characteristics and stronger earnings.

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

Thanks, Henning. We will open the call for your questions in just a minute, I want to make a few closing comments. In spite of the difficult operating environment that we are experiencing presently, we are stronger and more focused than at any point in our history. We have got good people running our businesses and we continue to strengthen our team. And most recently, we have added several new players; Andy Blanchard, now heading our processed metals segment; Kevin Cullen as our Corporate VP of Operations; and Gary Henry, taking the helm of Noll, NorWesCo and M&N Plastics, all strengthen our management team. We are focused on generating progressive improvements in all of our businesses, carefully managing our assets and maximizing our cash flow to pay down debt, while continuing to transform Gibraltar into a Company that produces consistently higher margins and better returns on capital along with improved EPS. Clearly, we are fighting a headwind at this point in time because of the market conditions, but over the long-term, we believe this is a recipe for shareholder value creation. We are highly focused on this and highly confident that over the long run, we will achieve it.

That concludes our prepared comments. At this point, we will be glad to open the call to any questions that any of you may have.

Thank you sir. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Robert LaGaipa with CIBC World Markets. Please proceed.

Hi, good morning.

Good morning.

Couple of questions. With regards to the processed metal segment and the restructuring and the consolidation in Buffalo, do you have any idea what the margins would have been in the quarter, were that consolidation completed, and when does that consolidation going to be completed? I thought it was in the second quarter, and are there any additional restructuring charges that are going to come in the second quarter?

It will be completed in the second quarter. There are a few additional restructuring charges, but nothing truly significant and the expectation, with the restructuring our operating margins, will improve by 3 percentage points.

By year-end.

3 percentage points by year-end, just all things equal?

3 percentage point off the current base, whether it's a quarter or a full year.

Okay. So, from the 4%, you are expecting it to get 7%?

Yes. Well, just don't forget, the 7% represents three businesses, not just one. We are talking about one business right now.

Okay.

Processed metals is SCM, it's our strip steel business and our service center business.

Right, okay.

And of course, the largest is the strip steel business and we see a nice improvement in the operating margins of that business on an ongoing basis.

And speaking of that, the market itself right now, obviously, it seems like the latest data coming out of the service centers is the inventory has come down fairly significantly over the last quarter or so and the pricing actions by many of the steel mills that are being put in place, it seems like there's been some mixed success in that regard. What are you seeing out there in the steel market, I mean are there additional price increases to come, how is the inventory situation out there, how is the demand?

We see the steel prices continuing to move upward but stabilizing over the long-term. The demand seems to be fairly steady. At this particular point, we don't see any significant issues on the demand side.

Okay. And then switching gears to building products, and this might be a question for Brian, obviously there's been a number of acquisitions over the last few years. The residential market had, to your point earlier, had a fairly sharp downturn here, what's your comfort level with the profile of the business? I know you've added some acquisitions that have increased the non-residential exposure, but where do you see profile of that business being over the next few years? Is it going to continue to shift to non-res, so it's more equal in terms of the exposure or especially in light of the fact that the thermal processing business is no longer a part of the portfolio, are you looking outside building products and processed metals to potentially add an additional segment or additional end-market exposure?

Relative to the building products segment of our business today, clearly we would like to balance the portfolio out so that it's more evenly split between residential and commercial. We think that would help stabilize the business over the long-term. From an overall corporate perspective, clearly, we're moving the business in a direction of a more pure building products play. We think over the long-term that studying the history of building products companies that they generate higher PE multiple than the service center or processed metals business and we're moving the business in that direction. We think we've created a very good platform to continue to drive the business in that direction and see lots of internal growth opportunities as well clearly as external growth opportunities that are going to help us continue this transition.

Last question if I could -- it begs the question with regard to the commitment to the processed metals products business, obviously there's been significant amount of consolidation in the steel industry overall. More recently, even in the service center side of things especially with [steel tech] for example, I mean what's the commitment to that business and where do you see that business long-term? Is it a part of the Gibraltar portfolio or is it something different?

That's a question that will be answered as we move into the future. Right now, our focus is on taking that business and improving its operating performance back to historic business levels, and we think with this consolidation and a number of other steps that we're taking that we've got a very good opportunity to do just that. As we go down the road, we'll see what develops. Right now, every steel mill on the planet is looking for another steel mill to buy. Recently, there has been some activity pointed at steel mills looking to buy up steel processing companies. I don't know how far that all is going to go, but clearly we'll pay attention to it.

Terrific, thanks very much.

You're welcome.

Your next question comes from the line of Mark Grzymski with RBC Capital Markets. Please proceed.

Good morning everyone.

Hi, Mark.

Dave, just curious, the tax rate was a little bit lower. Could you give an explanation for that?

Yes, we just had a couple of one-time items that don't go into the overall effective rate. I wouldn't expect to see that in the second quarter.

Okay, so we can assume just back to normal?

Yes, back to normal, probably 37% or 37.5% range.

Okay, great.

It's just a couple of discreet items.

Okay. Looking at the gross margin area, I'm curious, obviously volume has with the weakness in the residential market has been hurting, but I'm curious how the raw material pricing is affecting gross margins, and if it is more significantly than you would have anticipated, are you expecting some price increases in certain areas?

Mark, here's the real issue there. It's more of a timing situation as we've discussed in the past. Inventory was in tight supply, we bought to maintain inventories to make sure that we're going to be able to satisfy all of our customers like just about everybody else who was a steel buyer. We built our inventories too much, prices got higher and then came tumbling down, and so we were having to work our way through higher priced raw materials. We're pretty much through that at this point in time and that's going to have a positive impact on margins as we move forward. The key in this business has been to maintain the proper relationship between raw material costs and selling prices and we've taken a number of steps internally to make sure that we are even more intently focused on aligning our buying pattern with our selling pattern and making sure that we maintain those necessary spreads.

So, it sort of leads me to --- well, you're implying that then gross margins aside from the volume pickup and the seasonality, that you should get also an additional bump there as well in Q2?

Yes, we would expect that.

Okay.

We were penalized in Q1.

Yes, [that's what I'm] understanding, okay. I know you never really answer when I ask, answer this question and I always ask it, but I'm curious, has the split changed the non-res to residential in the quarter? You talked about mix being a little bit different, so I'm curious what the percentage was, residential to non-residential business?

I don't know if there's so much a split between res and commercial or industrial. It's more of the product alignment within the residential marketplace.

I mean we can get you a solution, but I believe in the quarter probably our sales on the commercial industrial side were as a total a little bit higher percentage in residential, which you would expect.

Yes, of course.

Now, the greatest impact tends to be the mix within the residential. That's where the big impacts came in the quarter.

Right, so the connectors were obviously down significantly?

Yes, right, and they are more closely tied to new housing starts.

And there a few other products that carry high margins where sales were also off because of residential.

Right. Now, with the fact that -- obviously, backlog is important to you guys, I'm just curious where -- you're confident in a slight rebound as opposed to maybe just a slight pickup in the seasonality, now where are you getting that confidence beyond?

I think the order patterns in most of the business has started to improve. When we got into the back half of March, we see that continuing as we're looking here in April and the feedbacks we're getting from the folks in the divisions are supporting our optimism. So, I think that what's driving our optimism as we go forward.

As we said though, Mark, I don't think it's any one thing. I think it's a combination of several things that are leading to stronger sales right now and as we look out into the future. One of the big impacts that we felt in the first quarter was a number of our major retail and wholesale customers were simply slashing their inventories, they weren't buying. And so, on top of a slower housing market, they were also further taking their inventories down; that has stopped. They're now bringing in material at more normal levels, now that they've adjusted their inventories. So, that's a positive impact on top of weather and on top of what we see as slight improvements in the overall market.

Okay, thanks. And just my last question, I know that you're rationalizing in the metal processing by shutting down one plant at Buffalo. I'm curious, with all the manufacturing space that you have on the building products in the 40 plus plants that you have, is there any plan there to consolidate in them?

Yes, we are. Brian talked earlier, we're working on that process continuously. I think as we get through the first quarter and the second, we're looking at closing another I think four or five plants and is continuing actively, so looking at other opportunities. So, that's an ongoing process for us. We are moving to improve our operating characteristics, and plant closing consolidations is a very important part of that activity.

Let me just qualify what Henning said relative to closing some additional plants in the building products space. We're taking a couple of actions there. One, we're carefully looking at our distribution process. When you look at the number of facilities that we have, a number of them in building products are simply distribution centers that may have one or two little pieces of equipment that manufacture certain heavily used products within that region. We're looking at streamlining the distribution process as we've said a number of times and in fact have already taken a number of actions there. So, these aren't steps that would require major restructuring charges or anything like that. These are generally, relatively small leased facilities that have 10 or 12, maybe sometimes even less employees there. So, we're looking at that kind of an action within building products.

We have taken some steps to consolidate our plastic injection molding. We were doing that in a number of locations. We've now consolidated that back into one location and there were no restructuring charges involved and that one was a leased facility. So, we're managing through that process. But, yes, Mark, clearly there are a number of activities we're involved in, in the building products area. That won't limit our upside growth potential, but will streamline our current operating activities. That's all part of having created this critical mass that we've talked about so much in the past. We're now at the point where we can effectively do these things without having any negative impact on sales, but yet streamline our costs through these consolidations. So, we think we've arrived at a good point where these things can start to be put into play in a meaningful way and that's why we added a senior level guy, Kevin Cullen, to our staff, to help us coordinate and more aggressively pursue these consolidation opportunities.

Great. That makes sense and thanks for taking my question.

Your are welcome, Grzymski.

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

Good morning gentlemen.

Good morning.

Good morning.

Good morning.

Just wondering if you could give us insight into the margin profile of the acquisitions you made because what I'm trying to do is figure out in the building products business, the margin decline there or the operating income decline relative to what happened in sales is pretty significant. So, I'm wondering if you could give us some insight into kind of base business versus the recent acquisitions in terms of what they've kind of done on the margin front for building products?

Recent acquisitions ---

The two most recent acquisitions had no bearing on the first quarter. So, I think you're talking about acquisitions made during 2006?

Right. But I'm also interested in what those acquisitions might do going forward to the margin?

I think the margins that we have, operating margins are being impacted by the slowdown in sales volume in gross margin. If you look at the margin we got last year, you can see the more typical range we expect our margins to be. In the new business, we're running at margins that are very similar to those types of margins. We would not be terribly interested in a business with lower margins unless we thought we could improve it to that level.

Okay. So similar to what margins, the first quarter margin that you put up or last year or --?

Active by lower volumes, which we've talked about. I think if you looked at '06, that's a more typical margin for our building products.

Okay, all right, fair enough on that one. When you talked about the 300 basis point improvement that you think you could get in the kind of the processed metals facility consolidation, how much execution risk is there? In other words, is this simply -- I mean is it just essentially closing a facility and maybe, there are some people in it that get cut there as well, or is there more work that needs to be done to get that 300 basis points?

The facility has already been closed, everything has been moved over. We're in the process of just cleaning up and disposing of the empty facility.

So, if that's the case, then it's safe to say that you're very confident that that 300 basis points will come to fruition?

Absolutely.

Okay. All right, that's all I have. Thank you very much.

You're welcome.

Your next question comes from the line of Leo Larkin with Standard & Poor's. Please proceed.

Good morning. Could you give us the D&A for 2007?

We are -- our forecast for depreciation and amortization?

Yes.

I don't know that I have that number in front of me here.

We'll get back to you.

We'll get back to you.

Generally, we are spending --

Generally, we spend slightly below our depreciation rate and I think our depreciation rate is about $28 million.

I think it's around $28 million.

Okay, thanks. One other question, any sense for CapEx for 2008 or is it too early?

It's probably too early but I think it's reasonable to think that we would spend at the same levels. Our business is getting larger, so the expectation will be probably 28 to 31 would be a reasonable number for 2008.

Okay thanks, that's helpful.

Depreciation is about 28 and amortization will be about 6. So, the total is about 34 million.

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

Good morning guys.

Good morning.

Good morning, Sal.

A couple of my questions, a lot of my questions have been asked. On the acquisition front, generally you talk about non-res construction, bolt-on acquisitions in that business. But if you look at the market, the residential construction market is sort of what you think probably have bottomed or close to bottom. Do you find any businesses in residential side which you think might be a good buy at this point considering your optimism that this market will turn around in the future?

Yes. We're always looking at a number of acquisitions. We're probably right now looking at five or six that we're somewhat active on, evaluating. We still find there are good opportunities both in residential and non-residential building market.

I think the real heart of your question, Sal, our valuation expectation is lower because of the slower market and I'd say maybe they've been tempered a little bit but not substantially because most people believe this is a short-term issue. We're constantly bombarded with acquisition opportunities. They come flying in from all directions on a very regular basis and we have a very disciplined process for reviewing acquisitions. And we simply don't deviate from it and in fact we've raised the hurdle for acquisition evaluation, going forward. We're intent on improving the operating performance of the Company and that we're certainly not going to be buying companies that have lower than our threshold operating performance characteristics, number one.

Number two though, we're intently focused on improving our internal operations and frankly, that's a larger focus, higher priority focus than making acquisitions right now. We're not going to turn our back on making acquisitions clearly but our number one focus and priority is to improve the internal performance of the company today and that's where we're focused.

Okay. Going back to your earlier comment on your building product business, I'm sorry in the processed metals business, you mentioned that time will tell if you will stay with that business or not, but can you give us a color, what kind of synergies do you have between the two businesses, do they depend on each other or they are totally different businesses?

Totally different businesses. The only place where they really touch is raw material purchasing. Aside from that, they're completely stand-alone businesses.

Do you transfer this raw material at market price to the building product or how does it work?

The processed metals business for all intents and purposes does not sell steel to our building products business.

Processed metals business, primarily the strip steel business, really has a different purchasing requirement than the building products companies. There tends to be more high-quality automotive type purchasing where we don't really need that over -- on all of the building products. So, while we coordinate purchasing from a corporate level, the sourcing whether it be domestic or offshore depends on the particular type of business. In the processed metals business, we have to buy almost everything domestically. It is just the higher quality requirement.

Relative to that too, we have John Wagner as our Corporate Vice President of Supply Chain Management and he coordinates the buys, but the purchase orders are all issued out at the operating division level. So, they are standalone units.

That's fairly easily separable, if at some point you --

Yes, if that turns out to be direction we want to go and it's not a difficult transition.

Okay. And one more thing, on building products, generally what I understand and we have talked in the past is that you sell these products sort of by piece, by -- not in terms of tonnage.

Right.

And when steel prices are going up, do you -- would you -- do you think that you might have some margin squeeze on your gross margin line because of the current price increases?

Yes, I think the real answer depends on the channels we sell into. Most of the channels do provide an opportunity to move the selling prices up as material prices move up.

Okay, and lastly, can you give us some color on the inventory in terms of volume, was it up or down quarter over quarter?

In tonnage?

In tonnage, yes.

It's down.

Down.

Okay. Great, thank you very much guys.

You are welcome.

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

Thanks a lot. Good morning.

Good morning, Mark.

I had a couple of questions. First, on the -- could you give me a breakdown of maintenance versus growth CapEx for the projects you have got in place this year?

We tend to focus more on capital expenditures that support the growth and the lean manufacturing initiatives. I think on maintenance, I think we are approximately 30% on maintenance. 70% is really more focused on areas that allow us to improve our business or grow our business. We tend to focus on product development, we tend to focus more on the manufacturing -- lean manufacturing initiatives that we've got ongoing.

Okay, and what's the --

That's somewhat of a change from the past too and as the nature of the business has changed, it's allowed us to move our CapEx in that direction.

I mean, internally, you certainly would have a threshold as far as what's a good growth CapEx project. Could you talk a little bit about what the anticipated return on this is over the next several years?

On our CapEx?

Yes.

We tend to look for a return that's north of 20%. We tend to look for a payback that's usually -- usually under six years.

Okay.

Most of the projects we have ongoing, which we are very happy with, usually are paid back in two or three years. They usually tend to be very good projects with immediate paybacks.

Terrific. Wanted to shift gears on to the strip steel business, and Brian, I was wondering if you could talk a little bit about the basis behind the restructuring, why was it necessary? I mean, what's the change in the market dynamic that is behind this, and I'd just like to get a little more color as to why you chose now to do this?

It's more of an internal look than an external look. We believe, through productivity and efficiency enhancements that we build into the business, we put these three facilities that we had been operating in a position where we had excess capacity. By combining them, taking them from three to two facilities, we are going to utilize these facilities much more efficiently going forward than we have in the past several years. So, it's not market share loss, it's not a decline in volume, it's simply that we have got these plants in position where we can do more with less, and as a result, we will be able to generate improvements in our operating margins.

Okay. All right, that's helpful. And just lastly, just to try to broaden the discussion on your growth objectives on the M&A side, Brian, you have got -- one of the things I really give you guys a lot of credit for is your willingness to -- your willingness to both buy and sell operations. And I am wondering if there is something that you could talk to us about regarding your threshold on the low side, when would you really consider divesting operations, and could you talk a little bit, wonder if any operations in your portfolio right now might be closer to that threshold.

We have created some very clear operational performance metrics that we measure all of our operating divisions against. And currently, we have one specific one that is below those operating metrics and we are working very hard to get them up, although the other side of that equation is we have to look at what we could sell them for and we have to make sure that once sold, we understand the impact that the sale and the loss of that operating income would have on our performance characteristics, when you measure that against the cash that we bring in and debt that we pay down. And then, ultimately what we would do with that additional capital and where we could invest it to make sure that the net of all of that would be positive to EPS for the Company.

Right.

Positive to operating margins and positive to return on invested capital. So, it's -- we have clearly articulated operating performance metrics against which every operation is managed, and then, we are either going to fix the business and get it up to those levels or will sell it or will close it down, and we have the discipline to do that. We look at this as a long-term proposition and we are prepared to make those decisions.

Okay. And I was just curious, given your debts, moving in the 40% plus range, I thought that you might be looking a little more closely at perhaps a divestiture, in the context of the fact that you are still seeing plenty of acquisition opportunities in the market, in areas you feel very comfortable with and very excited about.

I hear what you are saying and we are, but right now, we are really trying to drive operational improvements. That's our number one priority.

Okay.

And we are not going to turn our back on acquisitions though, I don't want to mislead anybody on that, but improvements in our internal operations are a very key focus right now.

Okay, terrific. Look, congratulations on the hard work and we will look for the earnings to show some nice upside here over the next couple of quarters.

Thank you, Mark.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of [Nithin Dahiya] with Lehman Brothers. Please proceed.

Hello.

Good morning.

Good morning. Couple of questions, just on the maintenance side, your guidance for second quarter, that would -- I mean I am looking at it and I think it's like a 20% decline in EBITDA for the second quarter year-over-year. Is that a fair way of looking at it?

Yes, when you comp this year's second quarter to last year's second quarter, it is a decline in that.

And most of that decline, you will say like, over half the decline is coming on the residential building material side?

Yes.

Yes.

Fair enough. From a working capital point of view, you talked about getting inventory turns up from 4.2 to 5. That would -- and I suppose with other working capital improvements, for the year, if you look at it like a 20 million to 30 million kind of a source, is that too much?

No.

No, I wouldn't say so.

Fair enough.

We should --

We should do that.

Okay. And cash taxes for the year, just staying on maintenance question, I mean last year you ended up paying significantly more than your book taxes. How should we look at it this year?

It's probably going to be a little less this year.

So, less than the book?

Yes.

Yes.

Okay. On the acquisition front, I mean I know you just said that internal operations are obviously a key focus, but when you look at acquisition, should we see you making small tuck-in kind of acquisitions or would you be comfortable making a bigger acquisition if something came around, say, maybe like $200 million, $300 million kind of acquisition if it were available?

We do consider all acquisitions, we are not limiting the scope of the acquisition. Bolt-ons tend to be very convenient, it's an easy way, as Brian said, to improve the operational characteristics. But, we are also interested in looking at some larger enterprises that could be a very strong part of Gibraltar going forward.

Fair enough. Though from a leverage point of view, is there a target leverage or a maximum leverage that you would say, I am comfortable with X kind of leverage?

It depends on the operating characteristics of the candidate. We have done --

I think you are referring to the overall corporate level?

Corporate level leverage.

That's right, that's right.

We have been as high as 50, we don't like being there. We are much more comfortable when we are at the 40% range or high 30s, and that's what we are focused on.

Debt to cap, okay.

Yes, debt to cap, I am sorry. I was -- you are right, sorry.

That's fine. And in the various channels, I mean you talked about ability to take pricing and I suppose the whole sales channel is generally reasonably supportive of pricing, but are you seeing some pressure in particular channels just on pricing? I mean are pressure more in some channels than others?

Are you referring to pressure to move our pricing down?

That's right.

We have not seen pressure to move our pricing down.

Okay. Great, thank you very much.

You are welcome.

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

All right. Well, thank you for joining us this morning and for your continuing interest in Gibraltar. I hope you've picked up our sense of focus and optimism for the future because that's truly how we feel. We look forward to talking with you again in three months and updating you on our continued progress. Thank you.

Thank you for joining in today's conference. You may now disconnect. Good day.