Gibraltar Industries Inc (ROCK) 2007 Q2 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its second quarter 2007 results and its outlook for the third quarter. We'll 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 presentations we'll open the line to your questions. At this point I'll turn over the call to Mr. Houseknecht. Please proceed.

Thank you, Dan. We want to thank everyone for joining us on our call this morning. 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 second 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. Brian?

Thanks, Ken. Good morning, everyone. With me today are Henning Kornbrekke, our President and Chief Operating Officer, Dave Kay our CFO and you just heard from Ken Houseknecht, our VP of Communications. Thanks for joining us this morning.

I'm going to begin today's call with a brief overview of our second quarter results, and then I want to spend a few minutes talking about the strategy that we're following to create shareholder value. Following that Dave will discuss our financial results in greater detail, and then Henning will review our corporate segment performance and our outlook for the third quarter. And then we'll open the call up to any questions that you have.

As we said in our news release, our second quarter sales and earnings, as expected, showed a strong sequential improvement from the first quarter. And even though our business did strengthen considerably as we moved into our seasonally strongest periods, the second and third quarters, it's still well below a year ago and more normalized levels. The residential building market continues to work its way through a severe slowdown and the automotive market is sluggish. These are two of Gibraltar's very important markets.

Fortunately, the steps that we've taken to diversify and broaden our business portfolio, most notably our move into the commercial building and industrial markets and our international expansion, both of which continue to perform well, and solid contributions from recent acquisitions helped our second quarter performance even in this very difficult operating environment.

Our goal, of course, is to build a Company capable of performing well in tough times and one that excels in good times. In spite of the current operating environment, 2007 should be the second best year in the Company's history.

In the second quarter, even with the sharp slowdown in two of our largest markets, our sales from continuing operations were $370 million, a strong advance from $323 million in the first quarter. Our income from continuing operations before one-time charges was $13.6 million or $0.45 per share, more than twice what we earned in the first quarter. And our operating margin improved from 5.2% in the first quarter to 7.4% in the second quarter. While our sales, margins and earnings all improved dramatically compared to the first quarter, these results are well below what we believe the business is capable of generating.

So to sum up the second quarter, we made steady progress in a very difficult operating environment. And we think the Company is well positioned to achieve new performance records once our markets return to more normal levels of activities.

I want to just take a quick second here to thank the 3,600 men and women on the Gibraltar team for their great work under challenging circumstances. At this point let me spend a few minutes talking about what we're doing to improve our operations, further diversify and strengthen our business and generate profitable growth, all of which we believe are important parts of the formula to continue building shareholder value.

While Gibraltar has been and will remain a growth-oriented Company, our primary focus right now is to improve our operating performance. We measure that performance using a number of key benchmarks, most notably earnings growth, margin improvements, better returns on capital and improved cash flow. Part of performing well against those benchmarks is being operationally excellent. In recent calls we've highlighted a number of the steps that we're taking to consolidate and streamline our operations as part of our plan to lower costs and become the low-cost producer of products on the planet.

In our Processed Metals product segment earlier this year we combined two Buffalo-area steel processing facilities into one location, a project that is now largely completed, which we believe will improve the performance of that business by 200 to 300 basis points at the operating margin line. In our Building Products segment, thus far in 2007 we've consolidated three recently acquired Dramex facilities into nearby AMICO locations. This was part of our acquisition strategy right from the beginning. We also closed a facility that made ventilation products and moved it into another location.

We currently operate 47 manufacturing locations and 27 distribution facilities, which is six fewer than we had at the beginning of this year, most of which came from the 31 acquisitions we've made over the last 12 years. We've identified a number of additional opportunities where we can further streamline and consolidate our operations, including two more we'll complete before the end of this year, and the cost of those are not anticipated to be significant.

We're also intensifying the focus on our many continuous improvement activities, like LEAN manufacturing and operational excellence, which will help to improve the performance characteristics of our business. Our newly hired Corporate VP of Operations, Kevin Cullen, is leading this charge throughout our Company and it involves all of our people in manufacturing, sales and administration.

We participate in large, growing and highly fragmented markets and acquisition opportunities, both in North America and elsewhere, are plentiful. And while we continue to be highly strategic and selective, and perhaps even more so now than ever, we're targeting those acquisitions that will allow us to continue improving the operating characteristics of the business.

Even as we move aggressively to strengthen our existing operations, we'll continue to make acquisitions that add to our product leadership positions. Having dominant market share in niche markets provides operational and sales and marketing advantages. Currently 80% of our sales come from products where we have the number one or the number two market share, and we're looking to add to those positions.

Finally, we continue to review our business units to make sure that they are taking steps to meet or exceed our performance targets. For those that either don't fit our product or market strategy or have the potential to meet our minimum performance targets, we have proven that we will divest them if they can't be restructured to meet our targeted criteria.

So that's a quick look at our major areas of activity. At this point I'll turn the call over to Dave and Henning who will provide a more detailed review of our second quarter results, our operational performance and our outlook for the third quarter and balance of the year. Dave, do you want to take over?

Thanks, Brian. As Brian mentioned, sales from continuing operations of $370 million in the second quarter, increased by approximately 5% from a year ago. The increase was largely the result of acquisitions. Sales from our existing businesses declined by approximately 7%, a result of lower activity levels in the residential housing and automotive markets.

While the sales in many of our residential build product companies remained under pressure, especially in areas like our Structural Connector business that sell into the new-build market, those declines were offset by continued growth in our Commercial and Industrial Building product sales and the contributions from the five acquisitions we've made over the last 12 months.

For the first six months of 2007 sales from continuing operations were $687 million, up by approximately 2% when compared to the first half of 2006. Here again sales from existing businesses declined on a year-over-year basis, offset by the contributions of acquired businesses. Income from continuing operations before one-time charges was $13.6 million or $0.45 a share in the second quarter of 2007, which is the midpoint of the EPS range we provided three months ago. It compares to income of $19.8 million or $0.66 a share in the second quarter of 2006.

Operating income from existing businesses was down 32% on a year-over-year basis, driven by lower margins in our Processed Metals businesses and those Building Products businesses most closely aligned with residential housing activity, with acquisitions partially offsetting the decline.

In the second quarter we incurred a special charge of $1.5 million consisting primarily of legal, accounting and other external due diligence costs for an M&A transaction that was not successfully consummated. And a $1.2 million restructuring charge relating to the consolidation of our Strip Steel facilities for a total pretax charge of $2.7 million or $0.05 a share after tax.

Net income, after giving affect to these charges, was $11.9 million or $0.40 a share. In the first half of the year income from continuing operations before one-time charges was $20.2 million or $0.67 a share compared to $31.5 million or $1.05 a share in the first six months of 2006. After special charges, reported net income from continuing operations in 2007 was 18.1 million or $0.60 a share.

Selling, general and administrative expenses amounted to $38.3 million during the quarter, or 10.4% of sales, compared to $39 million, or 11.1% of sales, in the same quarter of last year. SG&A expenses for our existing businesses decreased by $4.8 million or approximately 12% when compared to the second quarter of last year.

We continue to focus on reducing SG&A expenses through cost-control initiatives as well as rationalization and consolidation of overlapping administrative operations and back-office functions. However, we continue to invest in the future of the business by making investments in information technology, new product development, marketing and other initiatives critical to our future success.

Total interest expense amounted to $8.2 million in the quarter compared to $7.1 million in the second quarter of 2006. The increase comes largely from higher average borrowing levels, primarily because of acquisition activity, as well as higher overall interest rates. Our net return on sales was 3.2% for the quarter compared to 5.6% in the second quarter of last year.

From a cash flow perspective, we generated EBITDA of $36.2 million in the quarter compared to $43.6 million a year ago, with the decline largely a result of lower operating income. Over the last 12 months we have generated EBITDA of $137.5 million. During the quarter, exclusive of any acquisition activity, we were able to repay approximately $30 million against our revolving-credit facility and we intend to repay additional amounts during the third quarter. We are clearly focused on generating free cash flow and better management of working capital.

As we noted on our last call, we've taken a number of steps to drive down our inventories which, excluding the acquisitions, fell another $16 million during the quarter and our now down $26 million in the first six months of the year. As we move towards our target of five turns or better, our goal is to further reduce our inventory by approximately $15 million to $20 million by the end of the year. On a consolidated basis we turned our inventories at 4.2 times during the quarter compared to 5 times in the second quarter of 2006. Average days sales outstanding and accounts receivable were 48.5 days during the quarter compared to 50.4 days a year ago.

Through the first six months of the year capital spending amounted to $9.3 million, compared to $11.5 million last year. Because of current market conditions we now expect to spend a total of $18 million to $20 million for the year 2007, a reduction from our earlier estimate of $23 million to $26 million, an amount that is still adequate to maintain our current capabilities and grow the business. We've also paid out approximately $3 million in dividends during the first half of the year and we anticipate maintaining our current dividend rate.

During the period ended June 30 our total debt including current maturities increased to $452.2 million, largely as a result of the Noll NorWesCo acquisition which we concluded in April. At June 30 our long-term debt-to-capital ratio was 44% 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.

Thanks, Dave. Net sales from continuing operations, as Dave noted earlier, was $370 million in the second quarter, up 5% from a year ago. Our gross margin of 17.8% increased 1.3 percentage points from the first quarter but was down 4.2 percentage points compared to the second quarter of 2006, a result of lower volumes, unfavorable material cost variance, restructuring costs in our Processed Metals business and unfavorable product mix in Building Products businesses.

Our operating margin of 7.4% was 2.2 percentage points higher than the first quarter but down 3.5 percentage points compared to the second quarter of 2006, with our efforts to drive SG&A expenses helping to narrow the spread between the gross and operating margin lines.

Looking at the results in our two segments, Building Products generated a sales increase of 8.9% to $260 million, a result of recent acquisitions, with offset sales declines in our Residential Building Products. Gross margins were 22%, up 1.4 percentage points from the first quarter but off from a very robust 26.7% in the second quarter of 2006. The decline was driven by product mix changes, a function of the market downturn. The operating margin was a strong 12%, up 3 percentage points from the first quarter and very much line with top-tier industry performance.

Our Processed Metal Products segment had second quarter sales of $110 million, down 3.3% from a year ago, a result of lower volumes in our Coated Products business. Gross margins were adversely impacted in the quarter by restructuring costs associated with the consolidation of Strip Steel facilities, a significant negative material cost variance of approximately $1.8 million in our Coated Products business and higher copper costs, all of which resulted in a gross margin of 7.6%. Excluding the restructuring costs, the operating margin was approximately 4.4% compared to 7% in the year-ago quarter. With the restructuring of our Strip Steel operations nearing completion and inventory costs at market pricing, we expect to generate margin improvements in the second half of the year.

At this point let me provide some commentary on our outlook for the third quarter and the balance of the year. In our Building Products segment, which now represents more than 70% of our total sales, we expect to generate continued top line growth. The commercial, industrial and architectural markets, where approximately one third of our Building Products activity is currently focused and which is an area we have targeted for growth, are projected to remain strong for the remainder of 2007 and for the foreseeable future. We'll also benefit from our acquisition of four Building Products companies over the last 12 months, which added annual sales in excess of $150 million.

The new housing market will continue to struggle and the inventory of unsold homes remains high. In the short run repair and remodel activity, where we do approximately 70% of our business in the residential building market, has also been hurt by the slowdown in the housing market. But signs are pointing to an upturn here later this year and into 2008.

Longer term, the fundamentals in the Residential Building business are excellent. Demographic trends, the large and aging housing stock and a robust repair/remodel market provide a solid foundation for long-term growth. We believe Gibraltar is well positioned to grow in this large expanding and fragmented market.

In our Processed Metal Products segment, which now accounts for less than 30% of our total sales, the consolidation of our Strip Steel facility sets the stage for a significantly improved performance from that business. Our Powdered Metals business remains strong with solid volumes. And with inventory levels and costs of our Coated Products business in better alignment, results there will also improve.

In 2007 the slowdown in the residential building and automotive markets has been our single greatest challenge. We have responded by increasing the efficiency of our businesses through many initiatives, including LEAN manufacturing, and we have continued to increase our market share.

Our focus on operational excellence has positioned Gibraltar to accelerate its growth in sales and profit as we return to normal market dynamics in 2008. Typically our third quarter has been our second strongest period and we expect our results this year will follow that normal seasonal pattern. In light of all these considerations, we expect that third quarter earnings per share from continuing operations, before any unusual items, will be in the range of $0.40 to $0.45, which compares to $0.61 in the third quarter of 2006, barring a significant change in business conditions.

Our business is fundamentally solid in spite of the sharp market downturn, which has resulted in lower sales and returns. As the market returns to more normalized levels, our many initiatives to generate greater operating leverage will help us produce higher margins, better returns and stronger earnings. While top-line growth continues to be extremely important to Gibraltar, we are making significant investments in our people, systems, equipment and programs to help reduce the cost of doing business, all of which have a positive impact on our results.

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

Thanks, Henning. Before we open the call to any of your questions, let me make just a couple of closing comments. Our focus on improving the operating characteristics of the business, along with our customer, geographic and market diversification is allowing us to generate solid results, even with strong headwinds in two of our major markets. While 2007 will not be a record year for Gibraltar, it should be our second best in spite of a very difficult operating environment.

Last year, we generated our best ever results even with the slowdown in the second half of the year. When our end markets eventually stabilize and start to grow again, and they will, all of the actions we're taking have ideally positioned us to move our performance to even higher levels. Our focus is clear and unwavering, grow our sales and earnings, generate consistent and sustainable margin improvements, increase our cash flow and drive our returns higher over time. We believe that hitting those targets will create increased value for our shareholders and that remains the clear objective of this management team.

That concludes the prepared comments for today so we'll open the call to any questions that any of you may have.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Peter Lisnic from Robert Baird. Please proceed, sir.

Good morning, it's actually John Haushalter on for Pete. I guess first off, could you guys kind of go through the M&A transaction that you guys ran through the $1.5 million for that didn't happen? I mean how big of revenue were you looking at? At exactly was the reason it fell through? Was it pricing or just you couldn't come to an agreement? Or was there a hidden liability or something?

We've got to be very general, John, in response to that question, there are confidentiality agreements that remain in place today. Clearly we're looking at businesses that will help improve our overall operating performance and have higher gross and operating margins and better returns on invested capital. We're looking at businesses of all different sizes. This particular one that we looked at was of significant size and could have been our biggest acquisition ever.

But as you know we have a very comprehensive and diligent process of reviewing any acquisition opportunities, and unless we can get completely comfortable with them, particularly ones of larger size, even though we've made an investment of time and money, if it's not going to be right we're not going to do it. So we had taken a look at this, along with lots of other companies, and just decided that, at the end of the day, there were some factors involved that we could not get our arms and our head around. And we decided it was best for our shareholders to walk away from the deal.

Okay. And I guess switching gears to the existing performance of the Building Products segment, I mean there are two more closing for facilities planned for this year, looking forward to 2008 the housing market should be stable at least but are there plans for further consolidations there? It still seems like the facility count is a little bit high for the revenues you're running through for the next year or year and a half.

Yes we continually look at all of our operations and I think we've talked in the past about continually improving our business. We're focused on continuous improvement, we will continually look to improve our operations, we will look to continually consolidate wherever it makes sense. That's an ongoing process and you can expect to see from us more of the same activity as we go forward.

Hey John, just to add on to what Henning has said, not only are we going to be looking at all of our existing operations, but when it comes to looking at acquisitions as we did with Dramex, we're looking at acquisitions where we can consolidate some of their facilities into existing operations. Helping us to improve the overall operating performance of the Company and the performance of that acquired Company, so that's part of our acquisition strategy now. Keep in mind, too, that over the years we've grown through acquisition, and generally when we've bought companies we've had to buy everything that they had.

And that's, if you look at the map of our facilities today, there are a number of areas where we have a concentration of facilities. Those are the things that we're sorting through to make sure that we're operating as efficiently as we possibly can. So I think it's fair to say, not only with the activity that we've already had this year and will have in the balance of this year, that we're going to continue to look for opportunities to further streamline and consolidate our operations to drive for higher operational performance.

Yes out strategy, just a final comment on that and Brian said it earlier, is to be a low-cost producer on a global basis. We're absolutely adamant that that's where we have to be and we're driving towards that target continuously.

Okay. And if you had to kind of quantify, how far along that continuum are you at right now? I mean is most of the opportunity still in front of you?

Oh yes, absolutely. I mean we're working on some very exciting programs as we go forward.

Plus every time we make an acquisition we add to that continuum as well. I mean we will be a constant work in progress and I think that's a good thing.

Okay I'll get back in queue. Thank you, guys.

Thanks.

Thanks, John.

Your next question comes from the line of Robert LaGaipa from CIBC World Markets. Please proceed, sir.

Thank you, good morning.

Good morning, Bob.

A few questions, I guess one a clarification, in terms of these charges, the $1.2 million and the $1.5 million, the $1.2 million, does that belong in the Processed Metals I would imagine, but also in the gross and the costs of goods sold in terms of the consolidated? Is that correct?

Yes.

And then the 1.5 million, where does that belong? Is that in SG&A?

Yes SG&A

Just in SG&A.

Okay. And in the unallocated part of the segments, correct?

Yes.

Yes.

Okay. My follow-up question is, Henning, your comments relative to the rest of this year with regard to renovation, remodeling, signs of that picking up late this year, what are your points there? What are you looking at?

I think, and we've talked about this previously, many of the large home builders, we've made a lot of consolidation with home builders, have built ahead. What that means is they've added to their inventory of spec homes. They're aggressively selling those off. Once those get sold off then the remodel/repair activity will pick up because now the used homes will start to pick up in their sales. And we're starting to see that activity starting to move forward.

Okay. And then on the Processed Metals side of things, with the consolidation completed you mentioned the volume impact and material costs etcetera, the 200 or 300 basis point improvement that you're looking at as a result of these consolidations, do you still think that that's possible in the third and fourth quarter? Or is this something that stretches out further into 2008?

No we absolutely see it impacting us in the third and fourth quarter. Our run rate right now coming out of the last month of the second quarter was at the rate we anticipated for that business that we've restructured.

I think what Henning's saying is we don't expect to be there on an annualized basis but we expect to be there on a quarterly basis and then looking forward.

Starting in 3Q? Is that what's built into your forecast of $0.40 or $0.45?

Yes.

Partially.

Okay. And a last question if I could, this one's for Brian, obviously a lot of companies in the industrial space have benefited recently but there's strength in the international markets. And a lot of what's been acquired thus far has been dedicated to the U.S. for the most part, a lot of that being residential. Is there an intention to expand more aggressively on an international basis to take advantage of some of the more positive secular trends there?

A couple of parts to my answer to your question, first we already have established a footprint in the European marketplace, we have facilities now in England, Germany and Poland along with China but that's unrelated to Building Products. So we've established a footprint there already. Our overall objective is to build a Company that's going to perform well in all kinds of markets and clearly a diversification strategy is what we've been part of for a long time.

This geographic move into Europe is certainly part of that and I can tell you those operations today have not been impacted at all, they're performing at all the expected levels that were in place at the time we acquired those companies. So in fact that diversification move has helped. Unfortunately it's still a relatively small part of the overall business so the impact that it's having, while positive, is a smaller percentage of the total sales. But clearly it's an opportunity for us.

Okay. All right great, thank you very much.

You're welcome.

You're welcome.

Your next question comes from the line of Nitin Dahiya from Lehman Brothers. Please proceed.

Good morning.

Good morning.

Good morning.

Dave, I'm not sure if I heard this right but did you say that organic operating income declined 32%?

Yes the businesses that we had owned in both quarters, both second quarters, actually declined 32%. And it's primarily led in the Processed Metals and somewhat in the Building Products companies that are most closely aligned with the new housing market.

Fair enough. So with that, and I'm just by calculating, the new acquisitions didn't contribute that much of operating income in the second quarter year over year if you like?

Yes that's where we made up the difference. You know we had some Building Products companies that actually performed better year over year, but in general I think probably the biggest decline that we saw really took place in Processed Metals.

Okay fair enough. On cost savings you've talked about the plants you are shutting down. Could you quantify what (inaudible) you are at right now in terms of your cost savings from all these planned consolidations? And where do you expect to be by the end of the year?

Are you referring to our sales potential as a result of these?

No I'm sorry, I just meant from cost savings, like when you're consolidating plants you mentioned like a 200 to 300 basis point benefit from the --

It's a little difficult to say, particularly in the market that we're in, because we're saving costs but revenues you know revenues are also down in some of these businesses, so you don't get the absorption of all the cost. It's difficult to say but we do have some cost-saving targets out there, we have a number of them that come through the, we call it the supply chain management side of things, the purchasing side we're targeting some reductions there, which I think we're on track for. But it's really difficult to quantify in the current marketplace, when we consolidate two distribution centers, how much we've improved our cost base there because the volume is down also.

I think that's a fair point. And Henning, on the decline in the gross margin, how much of that is mix versus raw material pressure? I think you mentioned a $2 million number there.

Yes we've gone through that analysis fairly thoroughly, it's all mix. And when we say mix, the businesses that are most profitable tend to be off the most and they're directly related to the housing starts, once those housing starts come back up. And we've continued to invest in those businesses because we think there's a very strong future for them so we've continued to invest. And as we see housing starts come up, and in fact we've just had some very good news in one of those businesses, it looks like we're signing a new account which is going to even benefit that business later this year and into early next year.

Are you talking the Structural Connectors?

One of our very good businesses.

But I do think that we saw some raw material pressure certainly in the steel side of Processed Metals --

In the Coated.

In the Coated Products in particular, and that was I think Henning said about $1.8 million in the quarter.

Fair enough. And on working capital, just based on your comments about where inventory is already down and where you think it's going to be down further. For the year -- you know I'm just kind of (inaudible), so $40 million to $50 million kind of a source from working capital for the year, especially because sales are down as well, is that a realistic number?

That's probably realistic.

Fair enough. Thank you very much.

You're welcome.

Your next question comes from the line of Carl Reichardt from Wachovia Securities. Please proceed.

Good morning, guys, how are you?

Good morning, Carl.

A question, Henning, on the performance with the big boxes during this quarter, can you talk a little bit about sales growth or decline rate with them in particular?

Yes I think that our sales had followed the trends that we've noticed from the big box customers that we do supply. We have also noticed that our sales are not off as much as their sales, so we continue to be aggressive with the lines that we have within the big boxes. But at the end of the day we are down, just not as much as their overall scores.

Okay terrific.

And just looking at some of the data, I think one of them were looking at a decline of 1.5%.

Okay great. And then, Dave, on the CapEx change in terms of the forward budget, what particular projects, if you can comment on that, are coming out of what you had originally planned for the year CapEx wise?

I don't think there's any one significant project coming out.

Yes I have some information. We are going to delay the expansion of a distribution facility into 2008, and that was a significant project.

So it's more expansion related CapEx, new facility related CapEx?

And it's a business that's been growing very quickly. We recognize we need a larger distribution center, we've committed money to it but we in essence have pushed off that project into first quarter of '08 as an example.

Okay. And the last question, just a follow on about acquisitions internationally, I want to expand that just a bit, I mean obviously the acquisitions you've made at this point have been leveraging off your knowledge understanding buying power and Steel and Metal Products. Is there a thought process, as you've got a fairly broad footprint in Building Products in particular, of thinking about acquisitions in this space that might not necessarily be as related to steel?

It's interesting. We've had a lot of discussion internally with that. We do do a lot of business with steel but we actually have two large injection molding facilities in our operations, we do an awful lot of business with aluminum as well. And so we've continued to recognize that we're likely to move into different materials as we continue to pursue the business going forward.

Okay terrific, thanks so much --

Carl, one last thing on that. Part of our focus has been to move up the value-added chain and we know for a fact that manufacturing end products versus being a raw material supplier allows us to do that. One of the other nice things about that is that raw material cost as a percentage of selling price in manufactured end products comes way down. So we're taking the variability related to raw material volatility and reducing that in our overall profit generating equation. That's a clear part of the strategy that we have going forward. I hope that made sense.

No it did, I appreciate that. Thanks, Brian. Thanks a lot, guys.

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

Good morning.

Good morning.

Brian, I'm wondering if you can comment on the Metal Processing business. You know you talk about volumes hurting you guys right now and you also talk about some of the raw material costs also affecting it. With the margins kind of sequentially down now for three or four quarters, what is it going to take to kind of jump start this business? Is it going to be better penetration into the transplants? Is it going to be more stable raw material costs? Or what's going to have to change here?

Number one, in our overall strategy as we review the portfolio of companies that we have, if a Company isn't making our minimum acceptable margins, our plan is to first do whatever we can to fix it and get it up to those minimum performance levels. And that's our focus right now at the Processed Metals group and we've had a substantial amount of discussion already today on the steps that we're taking to move the Processed Metals business back up to acceptable margin levels.

There are a number of factors, as you very accurately pointed out. Raw material costs are a factor there, although I'm optimistic that the volatility that we saw over the last two or three years has to a large extent abated. Clearly right now steel prices are coming down, but if we were three or four years in history, the swing from the high to the low would be far more dramatic than what we're experiencing here today. So that is a positive as we look out into the future relative to our Processed Metals business.

Also we think that there is consolidation taking place out there, either that companies are leaving the market or going out of business, which means that there's going to be more business left for a smaller number of players. And we believe that'll have an impact on our business as well.

So there are a couple of factors there, but clearly, having said all of those things and those are all things that we're continuing to look at -- and I should add too that, while the performance of this business from a margin perspective has been under pressure for the last few quarters, it's a good business for us, it's a mature business and it still generates good cash flow for us. So it's not all bad.

But having said all of those things, every business is going to be under constant review and, if we arrive at a point where we do not think that a business is going to be able to meet our minimum performance standards, we will take the second part of our action plan and that is sell it off. And we've proven over the last couple of years that we are willing to sell off businesses that either don't fit with our long-term strategy or we don't think have the ability to meet our long-term performance objectives.

And I would just add we have restructured the business, we very firmly believe we've repostured it and it will perform as we expect it to perform going forward. So we've taken the steps to get it there.

Do you think though that the fundamental changes of that business are just too great at this point, kind of now that you can look back at where it was?

No we don't. We've taken the necessary steps -- it will be dramatic for us because the plant that we closed, I think, was one of the original plants that we had and so it was internally a dramatic event for us, traumatic, but we went forward. It was the right thing to do, we've repostured the business, we think it'll perform very admirably as we go forward.

Just a clarification, the 200 to 300 basis point improvement, did you give a time line as to when you expect that? Or is it more just a target?

We expect to be at that run rate going into the fourth quarter.

Okay great.

And one of the things that you need to remember about Processed Metals is that there are really a number of businesses embedded within that. And what we're talking about in the Buffalo restructuring is really only the Strip Steel business. And probably the business that has performed far below the expectations is really the Coated Products business, which I hate to call it a service center, but it's --.

It's a service center.

It's a service center.

You're still a building products Company, don't worry.

That's right.

First and foremost. But you know one other element, Dave mentioned that there are a couple of businesses wrapped in our Processed Metals business overall besides the Strip Steel business. Our Copper Powder business is continuing to perform very well.

Unfortunately though, copper prices have gone through the roof, which you might think on the surface would be a good thing for us. It is not, though, from the perspective that copper prices in this business are a pass through. So our processing charge remains the same, the copper price goes up and that selling price goes up, but our margins as a percentage come down. That's a factor in the Processed Metals business as well.

Okay. Thank you for the color there. Last question on the acquisitions, are you seeing any change, I assume you are and everyone else is saying so as well, but obviously you're seeing changes in the prices that these acquisitions want to come to market?

In some cases.

We say yes and no. You are going to pay a premium for a very good business and we are looking at some what we think are very attractive businesses and we'll probably end up paying a higher multiple we believe.

And a very good business is one that's defined by either the operating or the EBITDA margin level. The higher the EBITDA or operating margin level, generally the higher multiple you'll have to pay for the business. But they're worth it is the point.

Yes agreed. All right, guys, thank you for taking my questions.

You're welcome. Thanks, Mark.

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

Yes thanks very much.

Hi, Mark.

Hi, Mark.

Hi, good morning. There's have been a lot of good questions that have asked and you have provided some really good color and good answers. One of the things that I'm curious about still, and I wanted to try to ask question a little differently, if you assume that '07 unfolds in kind of a normal way from a seasonal perspective, maybe this is a question for Henning. All the cost reduction and restructuring momentum, if you look at it across the entire corporation, is there a number that you have in mind in terms of dollars that could accrue to the second half earnings relative to the first half?

Related to all the restructuring activity?

Yes, cost reductions and just -- you know you've got purchasing initiatives, you've got restructuring initiatives, I'm sure you've got memos out there telling people to hold the line on T&E, you're cutting back some of your expansion. You know there's a whole raft of things.

In fact we are going through an analysis right now, and I'm not going to give you a number because it'll be a guess.

The problem with all of that is, Mark, so much of this expense reduction is tied to the level of business activity that we'll be handling. And I look forward to more normal markets where all of these changes are going to provide the full impact to the P&L that we're hoping for. Right now what we're doing is we're swimming as fast as we can to do as good as we can in a difficult environment. But most importantly we're positioning ourselves for going back to achieving record performance levels once our markets return to a more normal level of activity.

Okay. Let me try to just, if we're not going to talk about numbers then maybe I could get just a little more color from you on this perspective. You know Brian, your focus for so many years has been on growth and on making good acquisitions, and you've done a remarkable job at having a successful track record in those endeavors.

And I'm just curious, now that you're having to go back in the face of these macro headwinds and try to push a little harder on the cost side, how much low-hanging fruit do you feel like you're finding? I mean I realize it may be hard to put it in a relative context, but what do you think the -- let's just say in the past I think you guys had an objective of, what, a 10% EBIT margin?

We do. And probably the --

10% operating.

Yes operating margin.

Probably the best way to look at it, and you can see it, if you go back and you look at our past results, look at Building Products a number of years ago. If you look at it five years ago, our margins in Building Products were probably about 7.5%. If you look at the run rate now in Building Products, even if you look at last year, we're north of 14%, all of those improvements or all of that gain came out of improvements that we've been building into the business on a continuous basis. We've taken -- one business I'm thinking of, we took from a 7% operating margin, right now they're running at 14%, it was all organic, all internal improvements we've made and we've continued to have that same focus on all our businesses.

So even though we've been focused on growth, we've never ignored the importance of improving the businesses that we do have. And we're not going to stop. And then Brian said earlier it's an ongoing process for us.

Yes I think that's really fair and I think maybe that's an even more positive comment to make. You know this is not something that's new to Gibraltar. You've had an ongoing focus in this area.

And again, look at our history and the best way you can measure it, if you look at the Building Products, those improvements weren't all made just by buying better businesses. In looking inside, we have actually improved the businesses that we have purchased and in some cases significantly.

That's why I was mentioning earlier, Mark, the idea that when we acquired the Dramex operations we immediately moved to consolidate some of those facilities into some of our existing facilities. And the impact of that is improvement in margin for both operations. And that's the kind of thing that we've been focused on for years but we think we're getting better at of late.

I mean look at all the information out there. How many building products companies in the down market we're in right now are still doing 12%? Probably not many.

No that's for sure.

And so when you look at doing still a 12% EBIT in a market that's down 30 to 40%, I think that's truly a significant performance.

I'm certainly not arguing with you or even attempting to complain about your execution skills and momentum. So I mean again we're just trying to get some color. I had one other thing I just wanted to make a comment, you guys are very brave to be calling for some initial recovery in the housing market, based on the way the general market is acting this morning. And I just hope you guys are right.

I don't think that's what we intended to say. I think what Henning was saying is that, as the inventory of new homes that exist are sold off, because there are so many new homes out there today, the sale of existing homes is down.

Depressed, yes.

Depressed. And what he's saying is, as those new homes sell off, the existing homes will come back in view for people who are looking to move from one home to another.

Okay I see.

That means is that the remodel and repair market will come back, and that's what Henning was talking about. We're not making a projection now that housing starts are going to shoot back up in the second half of the year.

Okay. I didn't understand that nuance so I appreciate you clarifying that. Thanks, Brian. Thanks, Henning. Thanks.

Thanks for the question, Mark.

And congratulations on the progress, I look forward to talking with you all again next quarter.

Great thank you.

Thanks.

Your next question comes from the line of Michael Cox from Piper Jaffray. Please proceed.

Good morning, guys, and nice work on managing through a tough environment.

Thank you.

My first question is I wonder if you could give a sense of order of magnitude in the delta between the performance of your Nonresidential Building Products segment and your Residential Building Products segment on an organic basis.

For margins you mean?

No from a sales perspective.

I'd say on the commercial and industrial products that we have, we are up probably 2% or 3%. And the difference is the decline, which is probably in the order of 7% to 9% on residential building market participation.

Okay that's helpful. And in aggregate what was the acquisition sales contribution to the Building Products segment in the quarter?

In the quarter. They're looking right now, they're bringing numbers up.

Okay I can move on to my last question here. As you look at the LEAN initiatives and the LEAN journey that you're under way on, I was wondering if it's spread evenly across both business segments or skewed towards one? Or said differently, is there particularly more low-hanging fruit in one segment versus the other?

Typically there's more activity on the Building Products side because simply we have more businesses there and we've got a very significant program under way as we speak. But we're also paying a lot of attention to the Processed Metals side. We've got active programs in our Strip Steel businesses and the other two businesses as well, so we're clearly not ignoring those. But I guess the gist of your question, the biggest bang for our buck is going to be on the other side where we have more businesses and larger businesses.

Okay that's helpful. One housekeeping item, what do you have remaining on your line of credit utility?

It's a $300 million line, we've got as of this morning about 117 actually outstanding. And then of course there are some letters of credit and things like that. But we have a significant amount of availability under the line.

Okay.

Your next question comes from the line of Yilma Abebe. Please proceed.

Thank you, good morning, a couple quick ones for me. On the M&A front, can you give us color in terms of what areas of your businesses you're looking to add to?

Well I think it's fair to say that, when you look at the activity we've had over the last couple of years, it's been primarily in our Building Products area. And that's a clear direction that we're taking the business in, we see higher and more consistent margins there and we also -- it ties into a whole number of other strategies driving the percentage of our selling price that is reflected through raw material cost down, which takes variability out of the business. So that's the direction we're heading in.

Do you think on the Building Products side you're more leaning more towards residential versus commercial? Or you're looking at --

We're actually looking for a better balance. We recognize there are some excellent opportunities in the commercial and industrial side of the business. We're exploring those as we speak. We think that they will help provide some better balance to our participation in the total markets that we participate in.

Thanks. Another question, in terms of divestitures, and I think you have said that if there are some businesses that don't fit your matrix you may look to divest them, are there any businesses you're looking at closely to divest in the near term?

Well I think we got through a fairly robust process. There are some businesses that don't perform up to our expectations. I think we closely evaluate every business, but obviously we have some businesses that perform very well that we don't look at as closely. But certainly there are some that are under the microscope I would say and we look at them very closely.

Okay thanks. My last question, I think you alluded to paying more debt this quarter, any sense of how much debt you may be paying?

Hard to say because some of it depends on working capital and accounts payable and so on and so forth. I'd hate to put a number on it in the quarter, but we certainly would expect to pay down more debt during the quarter.

Great. That's very helpful, thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Sal Tharani from Goldman Sachs. Please proceed.

Good morning.

Good morning, Sal.

Henning, I think you were trying to look for some numbers on the earlier question on the acquisition contribution on sales and operating margin, operating profit.

In the quarter?

Yes.

$43 million.

That was on the sales?

Sales, yes.

And would you be able to give us the operating profit contribution also?

Approximately $4.5 million.

Okay great, thank you. What portion of your business on the Processed Metal is Coateds, is it very significant portion?

Could you repeat one time?

The Coated Steel --

Oh the Coated Steel, how significant is that?

Yes in the --

In total it's approximately 19%.

Okay. The reason I ask is I was a little surprised that, quarter over quarter, the price of steel are flat to generally increased and you do carry three months of inventory. I was just surprised that you didn't see any inventory profit. Was it a volume issue?

No we just, I guess to be honest, we just bought an awful lot of steel at a very high price and we have to work through it. And we're just about through it fortunately.

All right. And on your comments regarding becoming one of the lowest cost manufacturers around the world, have you ever looked into moving some of the manufacturing facilities out of the U.S. which you are building --

Yes absolutely. And in a number of instances we do manufacturer products outside of the U.S. Although our focus on most products, because they're difficult to ship, is to in fact obtain that status by manufacturing in the U.S. And we believe we can, by the way, in the product lines that we are participating in.

And lastly, did the 200 to 300 basis point improvement you mentioned in the consolidation of your Strip Steel facility, is that 200 to 300 basis point improvement for that particular location? Or is it --

It's for the total Strip Steel division.

Which is what percentage of your Processed Steel is that business?

It's probably 70%, 60%.

Of Processed Metals.

Of Processed Metals.

Oh so that 200 to 300 basis points will be the improvement in the 70% of your Processed Metal business.

Yes.

Okay great. Thank you very much. Appreciate that.

At this time I would like to take a question from Yvonne Varano from Jefferies. Please proceed.

Thanks.

Good morning, Yvonne.

Good morning, Yvonne.

Good morning. You said you've worked through most of the higher priced inventory on the steel side?

Yes.

So we should start to see some margin improvement in 3Q there?

Absolutely.

And then on the copper, how much inventory do you carry there? And where are we in terms of --?

We carry about six to seven turns typically in copper inventory. We stay pretty close. I mean we manage that very closely. We primarily buy scrap and we process it going forward.

And what have you factored into your forecast in terms of copper prices over the next quarter?

It's moving so much I'm sure where we are. It's up to $3.90 a pound, the last time I looked it was coming down. I'd have to go back and look at the division to see what they've factored in. They were conservative though, I would add that.

Yes we buy copper a couple of different ways, some of it on the spot market, some of it on a little longer-term basis. The net result is we're constantly trying to average our cost of copper down. But keep in mind it's a pass through.

Right. That's a direct pass through, there's no lag.

It's almost like a total process. We buy the copper, we process it, there's our cost and some margin onto it and that's gets transferred to the customer.

Yes there can be a slight lag, but I mean it's probably for a month less.

Okay. I was just trying to figure out the margin impact, because you talked it before and I know it's a straight pass through, it has the ability to compress your margin.

Yes it does, exactly.

It has.

So do you think that there's going to be the ability to expand your margins in 3Q? Or are we still looking at a compressed scenario for the copper part of the business?

At present I would say no, it's going to be compressed.

All right terrific, thanks.

Okay. I guess that takes care of all the questions for today. Thank you all for joining us on the call and for your continuing interest in the business. We're doing everything we can to make the best out of a difficult set of operating environment circumstances and we look forward to a time when our markets are back to more normal levels, and the full anticipation that we will then be in a very solid position to generate record performance again. Thanks and we look forward to updating you next quarter on our continued performance.

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