Gibraltar Industries Inc (ROCK) 2007 Q3 法說會逐字稿

Welcome to the Gibraltar Conference Call to discuss its Third Quarter 2007 results and its outlook for the fourth 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 presentation, we'll open the lines to your questions. At this point, I'll turn the call over to Mr. Houseknecht.

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 third quarter results, you can get a copy on our website at www.gibraltar1.com.

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

Thanks, Ken. Good morning, everyone, and thanks for joining us on the call today. On behalf of Henning Kornbrekke, our President and Chief Operating Officer; Dave Kay, our CFO; and Ken Houseknecht, our VP of Communications and Investor Relations, we want to thank you for joining us.

I'm going to begin today's call with a quick review of our third quarter results and then I'll talk about our [off-]Florence acquisition, the disposition of Hubble assets and some of the other steps that we're taking to improve Gibraltar's performance characteristics. After that, Dave will discuss our financial results in greater detail. And then Henning will take over and review our corporate and segment performance and our outlook for the fourth quarter. After our prepared remarks, we'll then open the call to any questions that any of you may have.

As we stated in our news release, we generated third quarter sales and earnings that were within the expectations we provided three months ago. Even though conditions in our two largest markets, residential housing and automotive, remained challenging during the quarter. Our sales from continuing operations were $343 million, an increase of approximately 8%, and our income from continuing operations before one-time charges was $12.8 million, or $0.43 per share. More importantly, we continue to strategically transform Gibraltar through acquisitions and divestitures and a streamlining of our existing businesses. All of these actions will position us for significantly improved results when the markets we serve begin to return to more normal volumes.

In early September, we acquired Florence Corporation, a leader in the storage and postal products market, with 2006 sales of approximately $80 million. Florence sells to a number of markets that have been growing faster than GDP. With continued growth in storage and centralized delivery systems expected, the long-term trends for their product line are favorable.

It's also worth noting that the Florence Corporation is not directly tied to the new build housing cycle, evidenced by their growth this year in a sharply down market. With replacement sales, conversions of single point locations into multiple units, and the use of centralized products in many markets, including single family, multi-family, commercial, and institutional, this is clearly a product line that is not dependent on any one market. The Florence acquisition is consistent with our strategy of building leadership positions in niche markets and it strengthens our ability to deliver stronger and more consistent results.

Just as we're adding businesses that don't improve our portfolio, we're divesting those that don't meet our market and product strategy or have the potential to meet our minimum performance targets. That review led to our decision earlier this month to sell the assets and cease the operations of our Hubble steel subsidiary.

When we acquired Hubble in 1995, it broadened our product offering and diversified our cost and our customer base, giving us our initial exposure to the building products market and introduced us to Southeastern Metals, the first building products company that we acquired back in 1997. But as our focus has shifted to higher value-added products and services, Hubble no longer provided a good strategic fit. The Hubble sale is also part of a broader effort to improve the performance of our process metal segment where earlier actions included last year's sale of our scrapping operations, the elimination of our Duferco Farrell joint venture, and this year's consolidation of two Buffalo area steel processing facilities into a single location.

Our processed metal segment now has two businesses - our coal rolled strip steel operations, which -- with facilities in Buffalo and Cleveland, and our powdered metal business, with a U.S. location in Raleigh, North Carolina and a plant in Suzhou, China. Both of these are good businesses and both have market leadership positions. With our restructuring efforts behind us, we expect this segment will generate improving results as we move into the future, a trend that we began to see in the third quarter.

In the third quarter, we also made more progress with the consolidation of our facilities with eight locations closed or consolidated thus far in 2007 and we're looking to close or consolidate additional locations. Most of these consolidations did not result in major restructuring charges and the expenses related to those closures were included in normal operations and we see the same in the future.

Throughout our Company, we are aggressively taking steps to control and cut costs and these efforts are ongoing. We've continued to reshape and reposition Gibraltar by making 10 acquisitions over the last 24 months with combined annual sales of approximately $600 million, 5 divestitures during the last 3 years with total annual sales of approximately $250 million, and accelerating our continuous improvement initiatives at all of our existing businesses, all of which is designed to improve the operating performance characteristics of the Company.

By expanding our product offering, diversifying our customer base and business mix, and extending our reach into new geographic markets, we've increased Gibraltar's strength and resiliency, enhancing our ability to succeed in a variety of operating environments, including the most severe slowdown in the residential housing market in a generation.

Many of the steps we're taking today will not only help us maximize our performance in the short term, but will also position us for new thresholds of performance as our markets improve and return to more normal levels of activity.

At this point, I'll turn the call over to Dave and Henning, who will provide a more detailed review of our third quarter results, our operational performance, and our outlook for the quarter and year ahead.

Dave?

Thanks, Brian. Sales of $343 million from continuing operations in the third quarter of 2007 increased by approximately 8% from a year ago. For the first nine months of 2007, sales from continuing operations were $1 billion, up by approximately 6% when compared to the first nine months of 2006. Exclusive of acquisitions, sales were down 8% for the quarter and 7% year-to-date when compared to last year, driven primarily by the soft residential building market. Acquisitions added approximately 15% to net sales for the quarter.

Income from continuing operations before one-time charges was $12.8 million, or $0.43 a share in the third quarter of 2007, compared to income of $18.2 million, or $0.61 a share in the third quarter of last year. In the first nine months of the year, income from continuing operations before one-time charges was $35.8 million, or $1.19 a share, compared to $50 million, or $1.67 a share in the first nine months of 2006. The decline in income from continuing operations was in line with our expectations and was driven primarily by lower unit volume and mix changes, partially offset by aggressive efforts to control costs and streamline our operations.

Reported third quarter income from continuing operations of $11.4 million, or $0.38 a share, was negatively impacted by two nonrecurring items, including a restructuring charge of $400,000 pretax or $0.01 a share net of taxes, related to the consolidation of the Company's strip steel facilities, and $1.8 million, or $0.04 a share in acquisition-related purchase accounting adjustments resulting from expensing the write up of inventories acquired in the Noll, NorWesCo, and Florence acquisitions from their historic cost basis to fair market value. The expensing of these inventory adjustments will be completed in October and impact fourth quarter results by an additional $0.01 a share.

The cost of the previously announced planned sale and liquidation of Hubble steel assets amounted to a pretax charge of $13.9 million. We also incurred a $2.9 million charge in pretax costs associated with the sale of our Solar Michigan operation. These charges have been recorded in the third quarter and are reflected in the results from discontinued operations. The results from Hubble and Solar Michigan's business operations have been reflected in the results for discontinued operations for all periods presented.

Selling, general, and administrative expenses amounted to $38.4 million during the quarter, or 11.2% of sales, compared to $32.6 million, or 10.2% of sales in the same quarter of last year. SG&A expenses were impacted by costs from acquired businesses, as well as general cost increases. On a year-over-year basis, excluding acquisitions, SG&A expenses decreased by 7%.

Total interest expense amounted to $8.4 million in the quarter, compared to $6.1 million in the third quarter of last year. The increase comes largely from higher average borrowing levels, resulting primarily because of acquisition activity, as well as higher overall interest rates.

The effective tax rate in the third quarter was slightly lower as a result of several discrete items, most notably a change in German tax law and a return to a provision true up for state taxes.

Our net return on sales from continuing operations before one-time charges was 3.7% in the quarter, compared to 5.7% in the third quarter of last year. Exclusive of discontinued operations, we generated EBITDA of $25.6 million in the quarter, compared to $35.1 million a year ago, with the decline largely as a result of lower operating income. On a trailing 12-month basis, we've generated EBITDA of $124.6 million.

During the quarter, exclusive of amounts borrowed to complete the Florence acquisition, we were able to repay approximately $21 million against our revolving credit facility and we intend to repay additional amounts during the fourth quarter. Throughout the year, we have taken a number of aggressive steps to control working capital and drive down our inventories. Excluding inventory acquired through acquisition and the impact of discontinued operations, inventories were down approximately $29 million, or 13%, year-to-date, and have decreased by $14 million in the third quarter alone.

Turns improved from 3.7 at year-end to 4.6 in the third quarter, well on our way to our target of 5 turns.

Average days sales outstanding and accounts receivable were flat at approximately 53 days in the third quarter of both 2006 and 2007.

Through the first nine months of the year, capital spending amounted to approximately $13 million, compared to $17 million last year. Total capital spending in 2007 will be at approximately 60% of depreciation. We have also paid approximately $4.5 million in dividends during the first nine months of the year and we anticipate maintaining our current dividend rate.

During the period ended September 30th, our total debt, including current maturities, increased to $553.6 million, largely as a result of the Florence acquisition, which we completed on August 31st. During the quarter, we amended and restated our senior secured credit agreement, which covers both the bank revolving credit facility and the term notes. We upsized the bank facility by $75 million, extended the maturity by two years, and made a number of other minor changes to covenants and pricing grids under the revolver. The borrowings to complete the Florence acquisition were made utilizing the revolver. As of September 30th, we were in full compliance with all of the provisions of the amended facility.

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

Thanks, Dave. Net sales from continuing operations, as Dave noted earlier, were $343 million in the third quarter, up 8% from a year ago. Our gross margin was 18.6%, down 2.8 percentage points compared to the third quarter of 2006, a result of lower volumes, unfavorable material cost variance, and unfavorable product mix in our building products businesses. Our operating margin of 7.4% was down 3.8 percentage points compared to the third quarter of 2006.

Looking at the results in our two segments, building products generated a sales increase of 10.5% to $247 million, a result of our 4 acquisitions over the last 12 months, which offset sales declines in the residential building products. Gross margins were 21.9%, compared to 25.8% in the third quarter of 2006. The decline was a result of lower unit volume and unfavorable mix. Both were driven by the decline in the housing market. Even with the lower volumes and mix changes, the operating margin remained strong at 11.5%.

Our processed metal product segment had third quarter sales of $95 million, roughly unchanged from a year ago. Gross margins were 9.7%, compared to 11.1% in the third quarter of 2006. The operating margin was 5.8%, up sharply from 3.3% in this year's second quarter, but down from 7.6% in the year-ago quarter. The decrease is a function of the established pricing index in our copper business and the tighter margin spread in our steel business. With the restructuring of this business segment completed, we expect margins will continue to improve.

At this point, let me provide some commentary on our outlook for the fourth quarter and the year ahead. In our building products segment, we expect to generate continued top-line growth. The commercial, industrial, and architectural markets, which represent approximately one third of our building products activity, are slowing somewhat but still growing. We'll also benefit from our acquisition of four high value-added, growth-oriented commercial, industrial building products companies over the last 12 months, which will add annual sales of approximately $225 million.

Our participation in the new build housing market, which is down approximately 30% compared to the first nine months of 2006, has only decreased by 10%, which indicates that we're continuing to increase our market share with new products, focus marketing programs, and outstanding customer service.

In our processed metal products segment, the consolidation of the strip steel facility, the disposition of our Hubble assets, and consistent volumes in our powdered metal business put us in a good position to continue to improve performance of that business. In addition to the acquisition and divestiture activity that Brian talked about, we are infusing elements of lean manufacturing into all of our businesses, which will include further consolidations and streamlining of our operations. Reducing our total cost to produce and distribute our products will continue to be our focus and will improve our core operating characteristics. Additional major expenditures for streamlining are not expected.

Looking ahead, in light of the normal fourth quarter seasonal slowdown in the building realm of markets and considering the continued approximately 30% downturn in the building market, we expect our fourth quarter earnings per share from continuing operations before any one-time items will be in the range of $0.12 to $0.16, which compares to $0.20 in the fourth quarter of 2006, barring a significant change in business conditions.

We have made significant progress in reshaping and improving our business' core operating characteristics in 2007. We are positioned to generate higher levels of return in 2008 if current market conditions prevail and are postured to exceed as the housing market rebounds.

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

Okay, thanks, Hennning. Before we open the call to any of your questions, let me make just a few closing comments. First, we're continuing to refocus our business to achieve improved operating performance objectives by moving into higher value-added, higher margin areas of activity. We're continuing to strengthen our leadership positions in niche segments of large and growing markets. We continue to cut costs and extract efficiencies from our operations and we've got a great team of people all focused on the same goals working together with a large part of their compensation directly aligned with creating shareholder value. This is a formula that's proven successful for Gibraltar over the last 35 years and which has allowed us to produce record results in 11 of our 13 years as a public company and to quickly bounce back after market disruptions like we're currently experiencing in the housing market.

We're confident that we're taking the right steps to position Gibraltar as a stronger, leaner, better-positioned company poised to again generate record results once the markets we serve rebound. Now, while we're always striving for record performance for our shareholders, we need to keep in mind that we should have our second best year ever this year with the guidance that we've just given for the fourth quarter in spite of a very difficult operating environment. I think this bodes very well for our future.

Let me just give you a couple of other statistics that will show what we've worked our way through this year that we won't have to contend with as we look out into 2007. Going into 2007, I'm sorry, going into 2008. Going into 2007, we started the year with excess inventory, which has been reduced. We've taken about $36 million out of our inventory from our core businesses before acquisition. More importantly, that inventory has been replaced, not only with the proper amounts, but with the right value to allow us to have the proper spread between raw material costs and selling prices.

We've taken a number of actions this year, which were streamlining and restructuring of our operations, the consolidations of our processed metals facilities, the decision on Hubble, consolidations in our building products business that don't impact our ability to generate sales, strictly streamline and reduce costs, and we think we've taken steps from an acquisition standpoint that are all part of repositioning Gibraltar. All of that was accomplished this year. Most of this, we've not felt the full impact of yet.

Relative to the fourth quarter, just a little perspective on that, what we're seeing right now is year-end tightening of inventory by both the retail and wholesale channels. This is an occurrence that we also saw in the fourth quarter of last year and this year that's -- it's on top of an already low demand in the housing market.

When you look at the performance in the third quarter relative to the fourth quarter of last year, and this year, you'll see that the decline is almost identical. So, all in all, I think we've taken a number of steps this year to position Gibraltar well when we look out into the future.

At this point in time, I'm happy to open the call to any questions that any of you may have.

Thank you. (OPERATOR INSTRUCTIONS) Michael Cox, Piper Jaffray

My first question is on the billing products segment and the margin characteristics of that business. I was wondering at this point of the housing cycle if you could comment on when you expect the margins to stabilize and what specifically you're seeing from a pricing pressure standpoint on your products?

I think we expect the margins to continue to move back towards the, what we consider to be, traditional levels. I would -- as I made in my comments, the 11.5% is an outstanding margin, given the market that we're in, and we've done a lot of comparisons to companies out there. We're sort of in the top tier and we expect that to continue to move forward with all of the actions that we've outlined that we have taken.

The margins, this is Brian, the margin impact is strictly one of volume.

Volume and mix, yes.

Volume and mix, not pricing.

Okay, that's helpful. And you touched on the lean manufacturing. I was wondering if you could give a little more detail around the percentage of completion of rolling that out to the different facilities at this point. And then also, if there are any planned facility closures through the balance of this calendar year.

We have rolled out into seven different businesses right now. They're actively working on it. They're all in different stages of implementation. And we do intend to look closely at our businesses. We're not at liberty to disclose what those businesses are obviously, but we would expect to continue and to finish some of those other consolidations at year-end and into the first quarter.

Just a little more color on that. If you had a map in front of you that showed all of our facilities, you'd see that there are several areas where we have a concentration of facilities and those concentration of facilities arose primarily because of the acquisition activity that we had where we buying companies that had either manufacturing or distribution facilities in similar locations. So all we're looking at doing is thinning out some of the areas where we have a concentration of facilities. None of that will have an impact on our ability to serve the customers or an impact on our sales operation. It will strictly take costs out of the business.

A lot of those facilities are leased facilities, too, that -- leased warehouses, where we'll just wait for the lease to expire, move away from it with no costs. There may be some minor costs relative to severance costs for employees, but we're not anticipating any substantial write-offs.

Okay, that's very helpful. And my last question is on the international piece of your business. I was wondering if you could disclose the percentage of total sales that international was or outside of the U.S. in the quarter and how that is trending relative to the domestic business?

It is approximately, what is it, about 7% of our total business?

It's relatively small at this point, but we see these facilities as giving us a good vantage point to view other opportunities in those markets.

Yes, it's --

9%.

How much?

9.

9%.

9%. We just did the calculation quickly.

Mark Grzymski, RBC Capital

Brian, just curious here, in the press release, you're saying that you're expanding your market share in a difficult environment, obviously on the billing product side. Could you just kind of expand on that a little bit more as to where exactly -- I know you're trying to penetrate the big box retailers more with more of your product. Is that what you're referring to or is there something else going on as well?

We've -- this is Henning. We've continued to focus not only on retail but wholesale and commercial. We see a lot more expansion obviously where the channels are broader on the wholesale and commercial side of the business. And that's where we've made bigger gains.

Okay.

We're also looking at expanding our participation at retail, and that is taking the products that we currently are manufacturing in through those same channels.

Okay, but it's -- obviously it's just a little bit more challenging now given the environment for that push to be sort of emphasized?

Well, no, I think the push is -- is emphasizing we are making those gains. At this point, we're just waiting for, in this case, the customers to come back up to full speed. I know in a number of instances we've gone through and we've done entire new resets and they've gone very well. And I think as those customers start to move back into the sales territory, they have been in the past, we'll also see the immediate pickup.

I think, Mark, the real issue here is that the gains that we're making are offset by the overall market decline. But the good news is when the markets that we're serving do come back, do start to regain some of the volume that they've given up, that we'll see a direct impact, a direct positive impact of that.

Okay. And now just stepping back and looking at the overall market, obviously the residential market is extremely weak. Some believe we're at the bottom, I certainly don't think so, on the new housing starts. Curious on your opinion there. And also on the commercial side, I know there are patches of strength. Heavy commercial building is doing okay and maybe the lighter stuff like retail isn't. Just your thoughts.

Well, Henning can add to this because he's very, very close to all of this, but, in general, Mark, I'd probably tend to agree with you that the bottom hasn't been found yet. We're -- we took a number of steps this year in anticipation of that, and tried to outline some of those steps at the end of my opening comments, to make sure that we were positioned right to make our way through this and maintain a good level of profitability. But I tend to agree with you on the residential construction side that we may have a little ways to go yet before the overhang is eaten into and put to bed once and for all. And actually the -- it's a paradox here, but the slower the new build rate is the faster the overhang will get eaten up.

Yes.

Commercially, the areas that we're in are, as Henning said earlier, still growing for us, maybe at a little bit slower rate than they were before, and we're still pretty comfortable with that business.

Okay. And then, just finally, with that in mind, are there any other businesses, product lines that you're looking at in the building products area to divest given the rationalization that's going on internally?

We look very close at the portfolio of companies who have. I think we're very, at this point, confident that we've got a good group of companies, their operating margins I think have been optimized. And just as some color on the last question, I suspect, and I think the wisdom out there is that we're close to the trough in the building cycle. We're about $1.1 million. I think that's the consensus that will be arrived at by year-end. If it goes down, it's not much more and we're probably well into the peak-to-trough cycle that we're in. And, again, I'm just repeating some of the wisdom that's out there in the general marketplace. I think we view on the commercial side, it's true maybe retail commercial is down, but infrastructure building, public buildings are continuing to grow at a pretty good rate. We do participate in those and we'll continue to participate at a higher level going forward.

Great. Thanks for the color, guys.

Peter Lisnic, Robert Baird

It's actually John Haushalter on for Pete. If you guys just -- if you look at kind of processed metals, and it's a little tough right now because of the discontinued operations with Hubble, but just if you kind of look at auto environments as being flat going forward, I mean, is it safe to say that the worst of kind of the margin performance is past us at this point and it was really kind of Q2 was the bottom?

Yes.

Yes, we think so.

We think so.

Okay. And then just --

Keep in mind a couple of things there, John. We -- we're working our way through the consolidation of the two Cauldwell strip steel operations this year and we haven't really begun to feel the full force or the benefit of that. Secondly, keep in mind, during the year, we are working our way through excessive inventories and inventories that were mismatched to the selling prices. In other words, that the spreads were down because of that. We think we've gotten both of those problems behind us now.

Okay. And then, just turning over to something I think you guys commented on in your prepared remarks, but it sounded like SG&A was down about 7%, if you exclude acquisitions. Does that -- how should we be thinking about that in kind of a tough selling environment that you guys can ramp that down kind of proportionate with the overall market?

Yes, absolutely. We've been focused on minimizing our expense levels throughout the year. I think we said from the beginning that we view our objectives to be an operational excellent company and we've continued on that track.

Okay. And then just one thing, just as more of a recordkeeping aspect, it looked like when you guys sold that Solar Michigan operation it was profitable. How come it ended up costing you so much to sell it?

Well, I think that probably the biggest reason is some of the assets there, particularly the building, was -- the fair market value of the building, we had it appraised and the fair market value of the building was just below what the -- or far below what the book value was. And there were some assets in there that we just didn't feel that could be sold any other way but auction. So it's really fair market value versus book value sort of thing.

Yes. It was primarily the building and real estate that we had, bringing it back down to fair market value.

On the other hand, when we dispose of all of those assets --

It will be reconciled.

Yes. If we sell it for more than those numbers, it will be reconciled. Although it comes back through in the discontinued operations. Although the cash flows in.

Nitin Dahiya, Lehman Brothers

Just one housekeeping item. What was the pro forma sales and EBITDA once you factor in all the acquisitions and divestitures?

We haven't actually disclosed that publicly.

I was hoping you would on the call.

We don't have it at our fingertips right now, but --

Okay. Maybe I can just follow up on this. On -- next question, on guidance, you think you'll do $0.16, but D&A appears to be moving around a fair bit? Would it be fair to say, I'm estimating that EBITDA is down probably 0 to 10%, just because D&A is going go be up for year-over-year. Is that fair?

I would say if you just look at what operating margins are, you wouldn't be too far off.

Yes.

I mean, it's got to in that range.

Yes. No, that's true. Now, on working capital, obviously, I mean, Henning, there's been a significant amount of improvement year-over-year and also sequentially. Would you say you're where you wanted to be, like last quarter, you mentioned a certain decline you expected through the end of the year, or really what should we be looking for in the fourth quarter?

Well, our objective, from an inventory standpoint, is to get to a five-time turnover. We don't stick to a dollar amount.

Sure.

All of our operations are challenged to turn their inventories five times per year. So whatever happens with their sales will also drive what we do with our inventory. But I think it's fair to say that we're going to see a continued push to drive inventories down as we move into next year.

Our expectation in the fourth quarter is that we will generate cash, or free up cash, from liquidating working capital.

Okay.

Whether it be inventory or receivables or extending payables.

So $10 to $20 million is probably a fair estimate, right?

Yes.

Yes.

Fair enough. And, any -- and I know there was a question earlier, but around business sales, let me kind of ask it this way, when you look at your debt, Brian, and you've said historically where you want to be in terms of your debt-to-cap and that appears to be now at the high end of that target.

That's right.

So would it be fair to say that those big acquisitions are less likely right now unless either EBITDA improves significantly or you make a sale?

Absolutely. Our number one focus right now is paying down debt.

Okay. So, and on the sales side, because obviously EBITDA is going to take it's time to improve just because of market conditions, so the only way you will make a big acquisition, if I were to just extend that argument, would be if you were to sell maybe your process metals business?

In order to make a big acquisition, we have to come up with capital some how, some way, yes.

Okay. But, now, the process metals business you said is improving, but when you look at their operating margins, I suppose they're still below where what would be acceptable to you, if you like, just based on your past comments. So is there some change of thinking around that business?

Right now our focus is on improving the performance of that business as much as we possibly can and trying to push margins back towards more historic levels or even double-digit levels.

Okay.

And that is our focus right now.

Fair enough. Thank you very much.

Carl Reichardt, Wachovia

Can you comment a little more, Henning or Brian, on the tightening of inventory at the wholesale channel in particular? When did you start to see this and what particular product types from a building products perspective are you seeing that most active in?

Oh, they start -- became very aggressive. We're taking the (inaudible) coming out of the first quarter of '07. They all started to become aware of the downturn in the building market and they started to pull back rather severely on their inventories, which is a reasonable posture for them to take. They're now really ordering as their business progresses, rather than taking inventory. And we would expect that will start to loosen up as we go into the early to mid part of 2008.

One of the things that we saw last year, Carl, was that, as these companies moved into the fourth quarter and we -- this is happening again this year, to improve their own balance sheets as much as they could before year-end, they pretty much shut the door on accepting incoming material. Other than exactly what they needed, as Henning just said, to continue to operate their business. And we see that exact same pattern developing in the fourth quarter.

Okay. But as we look at the acquisitions and the comp last year from a sales perspective, are you expecting that to get worse in the next two months, Brian, than it was last year, given credit tightening and broader concerns about the economy? I'm still struggling a little bit with, especially my thought of what top line ought to be for you in the building products business and -- I mean I'm just trying to figure out if the earnings guidance is really more a function of the top line or the margin in the fourth quarter in building products?

I think, Carl, what's happening this year that's a little different than last year, everybody took inventories down, but they didn't envision that the housing starts were going to get to the levels that they're currently at. So there was room to continue to take those inventories down. And with the sense that we may not yet be at the bottom, I think there is more aggressive inventory tightening going on this fourth quarter than last.

Okay.

When we went into 2007, the consensus was that the market was down, it was thought to rebound at midyear and be back at a level of $1.6 million by the third and fourth quarter of '07. It's pretty clear at this point that's not happened. That it was at $1.3 going into the year and that it's now deteriorated to [$1 Y]. I think the wisdom is, we're -- as I said early, at the trough as you go into 2008, the likelihood of it starting to rebound. And we talked to contractors and builders across the country. They're starting to sense some of that increase in activity, which we view, it's premature I know, but the right noises are being made at the grassroots level of the marketplace. I think that's a good sign. I think we're, at this point, I think we're pretty excited for our company about 2008.

Okay, I appreciate that, guys. Thanks so much.

Carl, just one last thing, too. In the first quarter of '07, as people -- as customers got a better fix on the difficulties that they saw ahead, they continued to reduce inventory substantially going into the first quarter. And I can remember that it was only when we got into late March did the normal spring order pattern started to come through. I don't know that we're going to see that pattern this year. I think everybody by the end of the fourth quarter is going to have pretty well adjusted down to a lower level so that what they're bringing in will more closely reflect their actual activity, which is (technical difficulty).

Mark Parr, Banc Capital Market

I think this has been a really good call. I appreciate all of the color that you've been giving, Brian and Henning. One of the things, I don't know if you are going to feel comfortable answering these questions, but one thing I was curious about is what your -- what's Hubble's book value or could you give us some color on what you think it might be worth as you go out to explore the divestiture?

Well, I mean, we're a little uncomfortable telling you the book value.

Yes, we really can't go into that because we are intimately involved in discussions with two potential buyers and it would be inappropriate for us to obviously disclose those conversations.

Unless you want to give us a number that's 30 or 40% higher than what --

Thanks, Mark.

Just trying to help you out. Any sense of timing as far as when monies might change hands?

We're hoping to finish in this quarter, fourth quarter.

Okay. So that could help your cash flow moving into '08?

Yes.

Absolutely.

Okay, terrific. Another question I had related to the inventory situation. And I know a lot of people have asked this. I certainly wouldn't disagree with the inventory cycle particularly related to some of the larger big box guys, as they tend to over-adjust in both directions. And I'm just wondering, first on construction, if you think that there's -- if -- let's put it this way, if we get a modest rebound in housing activity in '08, do you -- does it feel as if the big box guys have over-adjusted on the down side and that could create some inventory rebuild occurring at some point next year?

Yes. We know, we do surveys with some of our customers, we know that they're very lean on their inventories. And so the event, as you discussed, is a likely outcome.

Okay. Another thing that, I'd just like to carry that thought one step further, because there is I think credible evidence at this point that the flat rolled market, flat rolled carbon steel market, has probably over-adjusted on the down side already. And I'm just curious as to what your inventory position in the strip business looks like third quarter relative to second quarter or how you feel or if you could just talk about the turns in that segment of the business. Any color you could give there would be really helpful.

I would say that our inventory turns have improved slightly in that business. In other words, we have a little less inventory on hand to serve the business that we have. I think the turns there are just slightly over four.

Yes. We're running 4.7 turns. In strip steel specifically, we're 4.4. We were 3.5 last year, same quarter. So we do have less inventory, I think, more importantly, and Brian really highlighted this well, the inventory is priced we believe at the right way right now. So we think we have the right inventory and we think we have it at the right price.

All right. So you've got the potential to normalize margins as a result of better inventory costs.

Absolutely. And the fact that we've taken one plant off line is going to also, obviously, help us maximize our margins as we go forward in '08.

All right. Is there a potential -- I mean, if you see, again, this is theoretically, I mean if you see the market environment maintain its current momentum, is there a possibility that the strip business could back in the double-digit EBIT margins in '08 for at least one quarter?

I've never given up hope of that, Mark.

Well, we've postured it. We've done the calculations. Our expectations are running in that direction for sure.

Okay, terrific. Well, anyway, good luck making all this happen next year. Henning, I really am encouraged by your upbeat feel about what could unfold for Gibraltar and we look forward to further conversations. Thanks again.

(OPERATOR INSTRUCTIONS) Sal Tharani, Goldman Sachs

A quick question on your process metal business, the auto portion of your business. How do you guys see next year? There's been a lot of talk that as costs are going up for steel-making raw material mills would try to push the prices up in the contract business. You guys do a lot of that. I just wanted to get your thoughts on that.

Well, number one, from an overall volume standpoint, I think we're looking at a flat year.

Of unit volume.

What's that?

Unit volume.

From a unit volume standpoint. Relative to steel pricing from the steel mills to us, we're hearing what the steel mills have to say about the direction they see pricing going in and we're taking that into consideration as we manage our sales process this year. We are, to an extent, a contract buyer and we're making sure that we've got the proper linkage when we do go a little bit longer in our pricing commitments to make sure we're backing that up with the proper commitments on the raw materials side.

We think we've never been postured better in the strip steel business. As we look into '08, we feel very positive. Again, as Brian had said earlier.

And you -- generally, your contract with the auto industry, are they indexed to any pricing or are they just [slack]?

Some are and some aren't. I think, as I recall, two of them are and one is not and discussions are ongoing.

And there are no questions at this time. I would now like to turn the call over to Mr. Lipke for any closing remarks.

Thanks for joining us on the call today. We think we're well positioned as we look into the future. We've got a number of steps that we've taken during 2007 that we expect to benefit from as we look out into 2008 and beyond and we thank you for being with us today.

This concludes your presentation. You may now disconnect and have a great day.