Gibraltar Industries Inc (ROCK) 2008 Q2 法說會逐字稿

Welcome to the Gibraltar conference call to discuss it's second quarter results and it's outlook for the remainder of 2008. We will begin today's call with the opening comments from Mr. Ken Houseknecht, Gibraltar's Vice President of Communications and Investor Relations. After the Company has concluded its presentation, we'll open the line to your questions.

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

Thank you, Erica. And welcome to Gibraltar's second quarter 2008 conference call. Before we begin, I want to remind you that this call contains 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 risk factors are detailed in the Company's 10-K which can be viewed on Gibraltar's website at www.gilbraltar1.com. If you did not receive the news release on the second quarter results, you can get a copy on our website. A set of the presentation slides that we will cover during this call is also available on our website.

On our call this morning is Brian Lipke, our Chairman and CEO, Henning Kornbrekke, our COO, and Ken Smith, our CFO. Thanks for joining us. At this point I'd like to turn the call over to Brian. Brian?

Thank you, Ken. Good morning, everyone. This morning I'm going to focus my comments on two areas, first I'll give an overview of our second quarter and first half results, followed by Ken Smith and Henning Kornbrekke discussing those comments in far greater detail. And then following Ken and Hennings presentations, I'll provide an update on some of the specific steps that we're taking to continue to refine and grow our business. And then after that we'll open the call to any questions that any of you may have.

During the second quarter, we built on the momentum achieved in the first three months of this year, set off by actions taking during 2007 and the first quarter of 2008. We generated higher sales, strong earnings growth, a consolidated operating margin above 10%, further strengthened our balance sheet and continued to lower our cost structure. And all of this was accomplished in spite of additional weakening in two of our primary markets as housing starts were off 32% and the North American auto build was down 16% compared to the second quarter of 2007. Our many initiatives to reduce costs, consolidate and streamline our operations, reduce working capital and lower our debt allowed us to produce much stronger second quarter results even though we're still in a difficult operating environment. In addition to our on going efforts to lower our cost structure we continue to benefit from the actions we took in 2007 to strengthen our portfolio through the acquisitions of Dramex, Noll and Florence, and the divestitures of Hubbell and our bath cabinet line.

As a direct result of all of these actions we generated second quarter sales of $379 million up 6%, and income from continuing operations of $20.3 million or $0.67 per diluted share, a 56% increase from a year ago. In the first six months of 2008, sales of $705 million grew by 7% and income from continuing operations increased by 36% to $27.4 million or $0.91 per share. These were strong results especially in light of the continued weakness in two of our primary markets and a softening of general economic activity. As I noted three months ago the full impact of our progress is being camouflaged by lower volumes in our businesses that sell to the residential building and automotive markets and that's still the case presently.

So to wrap up my opening comments, I think it's fair to say that our efforts are generating improving results in spite of weak market conditions and as we continue to refine and grow our business and when the markets we serve begin to rebound we'll get additional leverage from increased volumes positioning us for further improving results once that trend begins to emerge. Ken, I'll turn it over to you.

Thank you, Brian. And I will continue the discussion with the consolidated results of Gibraltar, summarized on Slide number 3. We had a very strong quarter, both segments registered increased revenues which resulted from the continued strength of our businesses that sell to the commercial building, industrial, architectural and international markets, plus our 2007 acquisitions. All of which more than offset volume declines related to the residential building and automotive markets. The higher operating income in the quarter and first half of 2008 was fueled by contributions from the 2007 acquisitions, excellent results from our commercial building and industrial businesses and solid improvement from our Processed Metals segment.

In fact, both segments turned in strong margin expansion compared to the revenue increases in Q2 and helped drive our consolidated operating margin to 10.2% above our 10% target for the first time since the third quarter of 2006. The earnings per share results showed double-digit increases compared to the 2007 periods and came from the reasons I just noted, plus lower interest expense and a lower tax rate in the second quarter this year. The free cash flow generated in 2008 was a combination of higher profits and reductions in working capital, and I'll have more detail when I discuss Slide 5.

Now I'll refer to Slide number 4, net income. The first row of-- on our segments performance Henning will talk about that in his remarks so I'll explain the other significant differences. Corporate expenses rose primarily as a net result of higher incentive-based compensation related to the profitability improvement thus far in 2008. The interest expense on the second quarter in 2008 decreased as a result of lower average interest rates as compared to the prior year period. And regarding income taxes, we've incurred more expense this year due to the much higher profitability but our effective tax rates in Q2 2008 and for the first half 2008 were 170 basis points lower than the same periods in 2007. The primary rate difference being the timing of discrete tax adjustments this year and last year that have not repeated. And we expect the effective tax rate for the full year 2008 to approximate 36.5%.

Moving to Slide number 5, cash flow. The main contributors to the 2008 improvement came from higher profitability and lower working capital. And as I mentioned earlier, our days of working capital had been trending downward and for reference I offer the following numbers: As of September 30th, 2007 and December 31, 2007, days of working capital approximated 100. As of March 31, 2008 we had 87 days invested in working capital, and as of June 30th we were down to 68 days. So our businesses are clearly making good strides in this important area.

Moving ahead to Slide 6, the balance sheet. Total debt was reduced by $24 million in the second quarter, by $50 million thus far in 2008, and since September 30th last year, down $115 million. Which-- and I use September of last year because that was just after our most recent acquisition, Florence, which was made in August 2007. And also you can note that our debt to capitalization has scaled down nicely. At this point, Henning will review the performance of our two segments and update our outlook for the balance of 2008.

Thanks, Ken. Our Company-wide gross margins of 21.8% increased by 3.3 percentage points and our operating margin of 10.2% increased by 2.1 percentage points compared to the second quarter of 2007. As Ken noted this was our best quarterly operating margin since the housing collapse began and it was driven by strong results from our commercial building, industrial and international businesses. Improved performance in our strip steel operations and overall contributions from our Lean processes, which are embedded into all of our businesses.

Turning to Slide 7, you can see that our Building Products segment had a second quarter sales increase of 9% to $281 million. With the sales from a newly acquired companies providing the majority of the revenue increase, continued strength in the commercial industrial buildings products plus pricing at market, has helped offset lower unit volume sales for the retail and new build housing markets. Sales in the first six months of the year followed a similar pattern. Gross margins for this segment were 24.8% an increase of 2.7 percentage points compared to the second quarter of 2007. The operating margin was 14.1%, up 2 percentage points from the prior year period. Operational efficiency gains and an improved mix in our commercial industrial businesses more than offset unit volume declines in the retail and new build markets.

Looking ahead at Slide 8, our Processed Metals segment had second quarter sales nearly equivalent to the same period in 2007. Market dynamics and competitive pressures reduced unit volumes in the stripped steel business which is offset by higher revenues in our copper powder business. The higher revenues were driven by pricing to market. The second quarter gross margins were 13.1%, an increase of 4 percentage points. And the operating margin of 8.6% increased 3.3 percentage points quarter-over-quarter. The continued growth of our SCM China business improving strip steel operating characteristics and pricing to market all contributed to the margin improvement.

At this point I'll describe our current expectations for the balance of 2008, which is outlined on Slide 9. As you know, the housing and automotive markets did not improve in the second quarter of 2008 and we do not anticipate any material improvement in either market in the last two quarters of this year. With six months of activity in the books we are staying with our full year estimate of 900,000 housing starts which we lowered from 950,000 three months ago. Our commercial, building, industrial and international businesses are still growing. We're also leaving our 2008 GDP forecast at 1%, unchanged.

In light of the changed automotive market we are lowering our estimate for the 2008 North American auto build to a range of 13 to 14 million units from 14 million units going into the year. A recapturing of businesses that we had lost will mitigate if not eliminate any impact on Gibraltar, even at lower industry volume levels. It's worth noting that the shift away from trucks and SUVs to more fuel efficient cars should actually increase the demand for certain components that use the steel supplied to our Processed Metals segment where we have a product leadership position. As I noted earlier we continue to gain additional strip steel business from former and new customers as a result of the efforts of a revamped Management team and marketing focus. We're also continuing to win business from the new domestics and air suppliers while also finding nonautomotive customers for our products.

Turning to Slide 10, while we do not expect the-- while we do expect the normal season of slowing in the second half of the year. In light of the strong performance in the first six months of 2008 and the momentum for our many operational improvements, we're increasing our guidance for earnings per share from continuing operations to a range of $1.50 to $1.65 from our previous guidance of $1.05 to $1.25 and $1.03 in 2007 barring a significant change in current business conditions. We continue to reshape and reposition the Company at a good pace and the results in the first half of this year and our expectation for the second half, especially in light of the difficult market conditions, are evidence that our progress and momentum we are gaining.

It's important to note that we do not view our many Lean initiatives or the efforts to lower our cost structure as a project or just to respond to the current conditions of the market. This is a process we have embedded at Gibraltar a commitment continued-- continuous improvement that will always be part of how we do business. We have always strengthened our focus on product and market development which will allow us to generate more of our growth organically. We're on track for strong performance in 2008 in spite of tough markets and I want to thank the 3800 men and women of the Gibraltar team for their great work. At this point I'll turn the call back over to Brian.

Thank, Henning. Before we open the call to your questions, I've got just a couple of brief closing comments I'd like to make. As you've heard today and on our recent calls we're taking a number of steps to build a stronger operating platform at Gibraltar. Some of our key initiatives have included, and continue to include, lowering our cost structure through a number of actions including streamlining and consolidating our operations. We have also made solid progress lowering our working capital through improved inventory control and bringing our DSO and DPO into much better alignment. Better working capital management and improved profitability will help improve our return on capital which remains a high priority for us. Our improved cash flow has enabled us to pay down $115 million in debt in the last nine months and we expect to further reduce our debt in the second half of 2008.

We continue to restructure our business portfolio, acquiring companies with better performance characteristics like our three acquisitions and two divestitures accomplished during 2007. We have Lean manufacturing initiatives underway across our Company and we continue to identify ways to improve all of our operations and eliminate nonvalue-added activities. We're continuing to refine and grow our business and we're well positioned to capitalize on increased volume, once the markets that we serve begin to rebound. That concludes our prepared comments for today. So at this point we'll open the call to any questions that any of you may have.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Tom Hayes from Piper Jaffrays. You may proceed.

Yes, good morning, thank you, guys.

Morning, Tom.

Just had a couple of quick questions. Can you briefly talk about the impact that the rising steel price may have had for the quarter as far as whether there's some segments you've had better luck passing the prices through?

We've kind of anticipated that might be a question today. So I'm going to give a general overview of that and Henning or Ken may want to chime in after I'm done. But let me start out by saying the FIFO inventory gains, which I think is what you're referring to, are much more directly applicable to service center businesses.

Okay.

And Gibraltar is not nor has it ever been a service center business period. Our business, today, if you look at our make up is 70% manufactured end products that are sold to the residential and commercial building and industrial markets. 10% of our sales are copper powders and the remaining 20% are high value-added cold-rolled strip manufacturing activities. So applying service center metrics to this business is simply not appropriate.

Okay.

We did take a very hard look at this though. And we, after analyzing it very carefully, estimate that a net of less than $0.05 of our $0.67 earned in the quarter could in anyway be related to any type of FIFO inventory gain.

Okay. Great that was very helpful.

Okay.

Secondly, you've done a great job on paying down the debt. Do you have a target level you're shooting for possibly by the end of the year?

We think of it more in terms of debt to cap ratios and I think I'd like to have it below 40 by the end of the year.

Okay and lastly, could you just give an update on what you're seeing as far as within the acquisition pipeline going forward?

Our focus so far this year, Tom, has been on managing our existing business well and we've taken a pretty conservative approach to looking at acquisitions. Not that we stopped looking, but until we felt more comfortable with the position that the business was in and more comfortable with the longer term outlook for the major markets that we serve, we've kind of put acquisitions on a side burner, not a back burner but a side burner. We're continuing to look right now and there probably is the opportunity for some bolt-on type acquisition activity later on in the year. But I can tell you that the pipeline continues to be very full.

Okay. I appreciate it. Nice quarter.

Thank you.

Your next question comes from the line of Peter Lisnic from Robert W. Baird. You may proceed.

Good morning, everyone.

Morning.

Good morning, Pete.

I was wondering for the first question if you can maybe give us a sense as to what's really driving the margin improvement in the Building Products business? And probably from a more granular perspective how much of it is related to just increased mix from commercial and industrial versus structural improvements across the businesses? And then the follow-up question would be, are you at all concerned about the supposedly impending downturn of commercial and industrial construction markets?

I think-- there was a number of questions there. I think in looking at it to a large extent a lot of the improvements they've made so far has been a direct result of the, I'm going to just put it under the heading of Lean activities that the Company has been involved in. As you know we've closed a number of facilities, we've been very active at consolidation, we've leaned back our work force throughout all of the businesses. And so that fundamentally is driving most of the margin improvement. It's also true that we've had not a different mix but a favorable mix relative to industrial and building-- commercial building products relative to retail. Now we started to see the retail flatten off for the most part. Commercial still is moving at a nice pace, and the industrial business seems to be very resilient. We've got some nice pickup from international operations, and I think together all is providing the balance and the margin improvements going forward. But if I was going to summarize it, the improvements that we're seeing right now are really a direct result of our focused activity and improving operations.

Okay. And if that's the case, if you look at this business in the past and I know the mix has changed, but this has been a business that's right around 15% sort of peak margin. It seems to me that you're suggesting when demand improves on the resi side, that this could be at least that sort of operating margin kind of number, if not markedly higher if a lot of this is being driven by Leans. Is that the right way to think about this activity?

Exactly the right way to think about it, yes.

Okay and I'm going to try to pin you down. Have you talked about or kind of conveyed where margins could peak when and if resi comes back?

Yeah. We have a very, very good feel for what our expectation is as the market comes back.

Okay. Can I, can I ask what that feel is like? Is it something, I mean--?

I think at this point we'd rather not make that commitment but you see the pattern, you understand the trends, you know where we were and therefore you probably can extrapolate what it's likely to look like.

Okay. All right. Fair enough. Thank you for your time.

Thank you.

Your next question comes from the line of Mark Parr from KeyBanc Capital Market. You may proceed.

Hi, good morning.

Morning, Mark.

Boy, rough quarter.

I know.

We were up almost all night trying, counting up all of the money you guys made. That was terrific. They had a--

It certainly feels a lot better, Mark. I can tell you that.

Well, it's always nice to get rewarded for hard work and it looks like your stock's going to respond nicely this morning. So congratulations on that. I had a couple of questions. First I think, Henning, you had mentioned that the, that the shift in production mix to smaller more fuel efficient cars, and Brian you said it, was actually positively impacting your automotive-related business?

As we go forward into the future, yes, that is the case.

Maybe could you give us some color on how we should think about that unfolding?

Yeah. Today, the typical pickup truck or SUV is using a four speed automatic transmission. We know from our conversations with the many auto companies that we deal with or through their part suppliers, that there's a move to improve the fuel economy even though the SUVs and part of that is moving from a four speed automatic transmission to a six speed automatic transmission. And as you may remember, Mark from past conversations the more speeds in an automatic transmission, the more clutch plate steel is used in the transmission. And we're a supplier, in fact I think we're the country's largest supplier of clutch plate steel. So that's one part of it.

The bigger discussions today have focused on the fact that pickup truck sales and SUVs sales are going to going down and people are going to move away from that type of vehicle into smaller cars that have better fuel economy. The good news there is that most of the smaller cars are already operating with six speed automatic transmissions, and if they're not, again based on conversations that we've had with the various customer groups, they're moving in that direction. So-- and again the more speeds in a transmission, the more the clutch plate steel that is consumed. So we see that as a positive trend. We are also thinking that, and this hasn't been talked about too much yet, but as people move away from SUVs in the short-term that may even spur on a higher volume of small car sales. So, we see some positive trends there.

The other thing that we're doing in the Processed Metals Business, specifically the cold-rolled strip steel business, we're looking for applications outside of the automotive industry. We've been involved in those over the years and we're continuing to look for additional activities outside of the automotive industry. Let me give you just a couple of examples. We have been active in the past and we're getting active again in munitions opportunities. We're looking at fasteners as another market for us. Hand tools, chain saws and things of that nature is a market we've been participating in and we're experiencing growth in that right now. And then lastly, we're involved in coinage and we see-- while we've been involved in it for a number of years we see a number of opportunities growing-- for us to grow that part of the business as well.

So, we're, we're looking at a number of I guess macro-type generators for improved performance in that part of the business. We're going in some new directions. And as Henning mentioned during his part of the presentation we've got a new Management team down there that's highly focused, a much more focused program for reaching out to customers and retaking market share. So we're pretty optimistic about that business even though the automotive marketplace in general is somewhat slower.

Yeah, I think it's fair to note that with the general economy and the US dollar down, and we're starting to see more of the base manufacturing move back into the US and less of it gone outside the US. And Brian mentioned some of the product areas and he talked to some of those manufacturers, and now they're looking at and have already started moving some of the manufacturing back to here. Transportation costs have gotten so incredibly high that to move stuff from other parts of the world, that the clutch gone up to 14%, 16% where they used to be 4%. So that will also provide good news for both Gibraltar and I think the US manufacturing industry. And we're starting to see some of that. We're in discussions with a number of folks who-- if fact we're rotating some of the manufacturing, base manufacturing.

Okay. That's really great color. And I appreciate that, it's really-- it's not the same old business anymore and what-- the results are clear. And I think the growth outlook you're sharing will make that even clearer over the next several years. Another question, on the cost reduction consolidation momentum. Brian you've really been involved in trying to get some real structural synergies out of the building products acquisitions and just all of the acquisitions that you've made over the last 10 or 15 years by consolidating facilities that are in close proximity to each other to enhance logistics and warehousing space et cetera. Could you give us some more color on you kind of where you are in that process and how-- what sort of incremental cost reduction we could be expecting to see run through the P&L over the next several years?

We haven't (inaudible). Again gross margins are up 3% and we know just with Lean manufacturing by itself we expect the full year increase in gross margin of 1.5 points. So, as we go forward, the targets that we've established in the past, specifically in gross margin, which really taught you that operating efficiency, I think we've always talked north of 20 and clearly we're north of 20 now. And we're approaching mid-20s. That's reasonable target for our business and I think with the leveraging with some of the volume Brian's talked about, we'll be right there.

Okay, terrific. Well congratulations on the great results.

Thank you.

Thanks, Mark.

Your next question comes from the line of Marty Pollack from Nwq Investment Management. You may proceed.

Yeah. Just a couple of questions. On the working capital, it seems that the-- I think your working capital source was maybe $13 million when I look at it for the first six months. Considering the seasonal slowdown I assume that's more what you're describing as fourth quarter. Do you see a lot more working capital ability to generate more cash via working capital?

Marty, I do think in the second half we're going to get some additional working capital sources to our bank account. Looking beyond the balance of this year, I still think that and we still think, that we have opportunities in both inventories and our payment streams to our suppliers that in both areas that we can continue to improve on where we are at the moment. So, I think shorthand, mid to long-term we still think we've got more to bring out.

Just, with regard to guidance, I'm just curious it seems that third quarter, both the second and third quarter are your big quarters, fourth quarter tends to be far more modest. But in the guidance, any reason why you couldn't sort of put out a third quarter guidance? I mean what would be the significant visibility issue here, we're already in August you might say. Is it just, is there any reason why you were hesitant about doing that?

A couple of things, Marty. First relative to how our year plays out, you're right, the first and second quarters generally turn in stronger performance than the third and fourth quarters. It's a seasonal pattern that has played out over many years for us. And you're also right that second quarter and the third quarter are historically our strongest two quarters with the second quarter being the stronger of those two. Going into this year we made the decision, and I think a lot of companies are going in this direction, to move away from quarterly guidance and adopt annual guidance. But as you can see from the conference calls we're trying to provide much greater visibility in each of our conference calls relative to the overall trends that are developing in business and provide more color on all of the major activities that we're involved in. We think that's another trend that is being adopted by many public companies today.

The reason that we're upgrading or changing our guidance for the full year at this point, is that clearly our results in the first half put us in a position where that is the responsible thing for us to do at this point in time. Going forward, our expectation is to give annual guidance at the beginning of each calendar year and only update that if a significant change, one way or the other, has occurred in our operating performance.

Just last question. Your CapEx at the moment seems to be tracking at a 50% of its D&A, $18 million,your first six months of D&A and $9 million of CapEx. What is the sort of on going trend line that you would expect to be spending, on a normalized basis?

Well, my first, excuse me. My first answer back to you to is our expectations for 2008, we do anticipate some more spending here in the second half that particularly for some cost reduction initiatives and for some new systems that are going to tie system of our recent acquisition more tightly together with our existing businesses. So aggregate this year we think about $24 million in CapEx will be spent. But to answer your question more directly on an on going basis we anticipate we'll have CapEx annually somewhere around 80% of depreciation.

Okay. Thank you.

Welcome.

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

Morning, guys.

Morning, Carl.

Brian, or could somebody give me a sense of just this quarter what the US versus international mix was? And Brian maybe you can talk about additional if you have any international expansion plans in Building Products in particular?

Yes, our international mix is about 15% of our total sales.

Thanks, Henning. That's on all Europe now or almost all Europe, is that correct?

No, it's Europe and China.

And China, right, and China besides that. And Brian, do have-- or have you thought about a broader more aggressive international strategy recently? Or can you just sort of refresh me on the Building Product side as to how big you'd like to see that grow as a percentage of your mix, the international side?

We look at it a little bit differently. We're looking for logical and strategic actions that will improve our existing operations. So, for example when we looked at the, the acquisition in Europe for the first time, that was a direct product extension from our AMICO operations. And there were synergistic opportunities there between those two businesses and that's what led us there. When we acquired AMICO, they had a hit list of acquisition targets and the-- our AMICO operation in England, Germany and Poland were their number one priority on that list. So that's how we're going to, going to look at international opportunities.

Same thing held true with our SCM copper powder expansion into China. We had been selling a substantial amount of our product into the Chinese marketplace and we saw an opportunity there to expand our business by locating a facility in that country and that has proven to be a very good decision. It was a small start-up operation and it is exceeding the expectations that we had for that part of the business.

Great.

So that's the approach that we're going to take when we're looking for growth. It's not all of the sudden we've decided we want to go to England or we've decided we want to go to China or we decided we want to go to South America, it's going be a logical progression and a logical building of-- and strengthening of our existing business.

Thanks. And then I had one additional question on guidance. There's a backwards looking here. The expansion in your guidance was just fairly significant and you had sort of held it constant back last quarter. So what changed in the last sort of seven weeks of the quarter or so in second quarter that-- what was the biggest surprise that you saw come through given that so much of the margin expansion seems to be related to sort of larger, long-term, bigger picture, Lean manufacturing process improvement plans? I would think that you would have seen that coming through. So I'm just, I'm curious as to what changed the last seven weeks that led to such a great performance relative to what I guess where your expectations at the time?

We undertook a number of different steps during 2007 and the first quarter of 2008 to streamline our operations and find better ways of doing things and to push Lean initiatives throughout the business and to bring down our working capital. When you've taken as many steps as we have taken it's sometimes difficult to quantify the exact timing of when you're going to receive the beginning and the full extent of the benefit from all of those actions. And I think while the first quarter showed improvement, we thought that it was probably going to play out a little bit longer over the second and third and into the fourth quarter. But we got a better benefit in the second quarter than we had anticipated.

I think it is fair to say that we were reluctant because of the overall uncertainty in the economy, we're going through a national election, the devaluation of the US dollar and the list is long. And I think with all of the uncertainty out there we were reluctant to make a commitment on something we didn't have all of the information for. We thought it prudent to wait until the end of the second quarter till we closed, which we've done. The second quarter played out as we hoped it would and we've used the same prudence as we forecasted on a full year basis. Even though there's still the same degree of uncertainty going forward, overall economy.

Terrific. Congratulations. Thanks very much, guys.

You're welcome.

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

Hi. This is [Rich On] for Nitin. I've just-- well most of my questions have been answered. Do you have a target liquidity before you start looking at making acquisitions?

I mean we do. I mean we look at it very closely. We-- and Brian has said this for a number of years. We-- we're reluctant to burden the Company, and we found ourselves in a position where we are carrying more debt than we're comfortable with. And so our focus immediately went to taking down our debt, getting into a comfortable area. Typically, and I think Ken will verify this, we like to be less than 35%.

Okay.

Debt-to-cap. And I think we've been as high as, what 55%?

We were north of 50% for awhile.

We are much more comfortable at around 35%, at 35% we become very comfortable and I think not much has changed there.

That's still consistent with the 40% at the end of the year for the target?

Yes.

Yes.

Okay, great.

The-- I think the-- we've proven a couple of things, number one that we can operate in a pretty tough environment with a very high debt-to-cap level. It's not fun, but we've proven that we can successful do that because of the make-up of the businesses that we have. Nonetheless, I think it's prudent for us to try to stay below 40 and that's what our target will be.

Okay. Thank you.

You're welcome.

Your next question comes from the line of Jake Crandlemire from Ramsey Asset Management. You may proceed.

Hey, guys. Good quarter. I kind of want to attack the margin question in a little different way. Specifically on the Building Products. In your presentation you list three things that were favorable acquisitions, pricing and operational efficiency. And just-- I can only-- could you rank those in terms of order of attribution to your performance?

Yes, efficiency is number one, acquisitions is number three, and in fact if you look at it acquisitions had very little play in both operating margins and net income. It was about equal to what we had generated internally. So the bulk of what we've generated in improvement came from increases in operational efficiency and mix changes within the business. A mix change means we've had strong businesses on commercial, industrial products that offset the declines in residential.

Got it. And then one more, just back to your guidance. I mean you guys basically raised guidance by call it $0.10 to $0.15 in the second half of the year after beating in the first half kind of consensus numbers by around $0.42. Is that just you guys being prudent and conservative or is that more of a function of you guys seeing increased costs pressures, or you guys are lacking some of your cost cuts in the second half of the year? Just some color there would be useful.

I think the color is similar to the answer I gave before. We're very cautious relative to the overall economy as we look forward. We're not sure where it's going and I think we have to believe we have to exercise some caution going forward. I think embedded in there is the answer. I think we've got good operating characteristics going forward. And barring a significant change in the economy, we fully expect to hit the guidance that we provided.

The one thing I'd point out though, and I think it needs to be said, is that while some may think we're being conservative in the second half, last year, in what I think is fair to say was a better market environment even though it was very tough, we did $1.03 a share.

Full year.

Full year. For this year, we're projecting $1.50 to $1.65. That's a significant improvement over last year in tougher market conditions. So I don't think anybody should start to think that we're sand bagging here. These-- this is still a tough operating environment that we're in and I wouldn't say that we're being ultraconservative with our guidance on the second half, I think we're being very realistic.

I think we're comfortable with the guidance that we gave. I think you can extrapolate based on what we've done and our past performance and color we provided where we'll likely be by year end.

Great. Thanks, guys.

You're welcome.

Your next question comes from the line Sal Tharani from Gibraltar. You may proceed.

Hi, Sal Tharani from Goldman Sachs. A quick question on your consolidation of the facilities and closure of the facilities. Can you give us some color, are these mostly Building Product facilities?

No, they're not. We talked I think at great length about the closing of our stripped steel facility in Buffalo, New York which was a major change and the resulted improvements, reductions in cost of about $6 million, as I recall. That was a significant change. And we've also consolidated a number of other small distribution centers as well as some plants throughout the Company. So no, it was Company-wide and just as a Lean manufacturing is Company-wide.

Great. Thank you very much.

You're welcome.

Your next question comes from the line of Gregory Macosko from Lord Abbott. You may proceed.

Yes. Thank you. Very nice quarter.

Morning, Greg.

Morning.

Morning.

Could you talk-- you mentioned earlier-- you talked about the, your-- the end marks commercial and industrial. And I think if I heard you correct you said commercial flattening, industrial still growing, could you give us a feeling and I sense you were not--

I think what was exactly said was that residential is flattening.

I did say that commercial was, was flattening, but when I say flattening, I say we still believe and we see still commercial growing at let's say 2% to 3% a year. Now it depends on what pieces of the commercial you look at. The infrastructure part of commercial still seems to be growing at a fairly good pace and we do participant in that. I think some of the other retail buildings on the commercial side, especially the parts that probably is more renovation going on, but we also participate in the renovation. I think on the industrial side we still see fairly good activity. For instance offshore drilling, and there's more and more conversation that we do supply a number of products to the offshore drilling wells. I mean if the bar grading is a big business for us and we are a participant in that. So I think as we go forward, we think the primary markets that we play in, both in the commercial and industrial side, continue to look fairly positive and offer good opportunities on a go forward basis.

Are you-- did-- do you sell to the municipalities and the state, local governments at all?

Indirectly we do. We sell in through a group of distributors that really-- either service centers or distributors that take our products and then would sell into those municipalities.

Any sense of roughly how much-- how exposed you are there?

Offhand, no but it's not, it's not terribly high. Those businesses have been very strong throughout '08 and the projections we're seeing for '09 are in line with that.

And with regard to your comments, Mark talked about the shift from trucks to cars, have you had any specific inquiries or are you hearing from your customers that there is real activity in shifting more into the clutch plate steel in some of these areas?

Absolutely. I mean I think it's widely known, automotive news any of the publication you look at, you can see both GM and certainly Ford shifting very quickly into the more fuel efficient vehicles. I think the new domestics are doing the same also at an accelerated pace.

Thank you very much.

You're welcome.

Your next question comes from the line of Bob Fetch from Lord Abbott. You may proceed.

Good morning. Just to address some of the efficiency issues, some of the things that you've talked about in the past. Number one in the Building Products area, you had mentioned what your logistic cost had been going back a couple of years ago, transportation costs, especially fuel and so forth, have gone up even more so. Can you update us as to where that stands?

Yes, we've continued-- in fact we went through in the process of entering a very favorable contract on the transportation side with another company will help manage that for us. And we're looking at transportation costs coming down almost 3 percentage points. We're still working through that but at this point we feel very good about it. The businesses have made excellent progress in that particular area. We're also hard at work at putting together a better logistics equation for a number of our businesses. We're now working primarily on one part of the country to bring that together. And once we're completed, we should be completed by the end of this year, we'll start cufflinks on to the other businesses done on the same basis. We're putting in the systems, I think Ken talked about the investment in systems, and a lot of it is geared towards allowing that to happen efficiently.

Okay. In that regard, how many Building Products facilities do you now have? Because you had previously talked about them all distributing on their own and likely needing to figure out how to consolidate them.

I'm going to guess right now, but we probably have the order of 50 or 60, depending on how you classify the facilities. Some of them are small distribution centers and in those cases we're likely to look at more effective ways of handling that issue. But I think in total right now if we did a count it's probably in the 50 to 60 area.

Okay. But are they still largely distributing on their own or are you now somehow figuring out a way to combine them before they get to the open customer?

We're finding ways to better handle certain market segments on a more, let's call it, a consolidated basis. For instance we have a retail market that we serve, we have a commercial market we serve. And we're looking at finding ways of certainly using the transportation more effectively so that when we send products out we don't have back halls coming back in, see which we had been doing. And we've come up with good, good conclusions of making sure that all of the back halls are full and that's taken of course down considerably. And we're also looking at how most effectively, particularly as you continue to grow the Company, take products to customers. We believe that's an important competitive advantage going forward. And I think Brian had talked about it indirectly a number of times.

Yes, the-- simply put, we had believed in the past that in order to provide the level of customer service that was required by many of our customers that we needed to have a layer of distribution facilities to, on top of manufacturing facilities, in order to provide that service level. We are now focused on making sure that our production operations are much more efficient. And in the process of that improvement in efficiency, it gives us the ability to eliminate some, if not all over time, of that intermediate distribution step. And that's what our focus is.

I think if you look at it in the broad sense I mean I think you can understand it easily. If you have a lot of distribution you're carrying inventory at each location, inevitably Murphy's Law says you never have the right products in the right location of course. And that's why our focus is making sure we have the right systems in place that we can track our inventory. We can do it from more centralized ports rather than having to go to (inaudible). And that we're working on right now. I mean that's an active project and we're making great progress there.

In the tough retail environment that we're in, can you discuss for us, are you getting in more doors and are you selling more products to existing customers?

Well on the retail side, don't forget, there's been a, I call it, a massive consolidation from those who have been around long enough. So on the retail side we basically--we deal with four customers and we have some co-ops that we deal with. That's the whole deal. So the retail is pretty simple. I think the commercial side is more complex. Commercial side still handles, for the most part, on a regional basis. And that's where we're probably going to pick up most of the gains.

Can you address, if you look out the next year to three, how some of the new product drivers that are going to be the largest contributors as you see them to organic growth?

Yeah. We-- I think looking and looking at businesses and we've been very clear, we tend to focus on product areas where we have significant market share. So we have leading market share in a number of businesses and our intent there is to make sure that we hold market share, focus on growth through new products and that's exactly what we're doing. We'll continue, as Brian said, look at bolt-ons which will bring new product opportunities in some of those businesses. In many cases, making, making full use of the distribution we've set up so when the trucks go out they have a broader product line. That's primarily what we're focusing on. We're focusing, as Brian said, building products, commercial building products and industrial products. We've got a fairly, I'd say a fairly wide screen of opportunities and you look at them. I think we've pretty much defined the markets we're going after and I think in terms of products, we're really staying with technology, core competencies that we're comfortable with and that's where our screen is.

Just a little fact right here, 80% of all of our sales come from products where we have either the number one or the number two market share position. And we want to continue to build on those leadership positions and then find other product areas where we can establish that leadership position again. We think there are a lot of both operational and sales and marketing advantages that come when you have that number one or that number two market share position.

So are you saying of your primary products that you've already penetrated them largely and you need to go out and acquire other ones and--?

We have growth opportunities in.

I think for the most part.

Our existing product areas but we're looking for new ones.

Yes, I think for the most part right now we're building a very streamline efficient distribution organization and we do have high market share in some areas. That allows us to easily move into product adjacencies. So we have leading market shares, Brian said in some areas, but there are a number of product adjacencies that now make an awful lot of sense too. And so now that's where you see the growth, you go into some of the product adjacencies. We've already had some of them on line, some of the businesses start to roll them out. And that's, I think that's where you'll see a lot of our growth coming from.

So are you also implying that of your existing products as the end markets improve, you've got plenty of capacity to grow with those markets without spending much capital?

Yes, absolutely. Absolutely.

Okay. The focus of that question though was, you talked about clutch plates and gratings for offshore rigs and things of that sort. I was really trying to get at, are there other product categories that you feel you have some good visibility on, let's say their sales performance being 10 or 20, or whatever number, higher in two or three years?

Yes, I think without giving away too much, the answer is absolutely yes. And I think you'll just have to let us unfold it rather than give you the answer today.

Okay. In regards though to some of these adjacencies and their wide screen of potential candidates, you folks about-- well it's almost two years ago September where we're talking about having a relatively full pipeline of candidates, but clearly most of them were high-valued and you had a lot of private equity money and so forth competing. Can you, can you characterize the pricing environment even with your hesitation you have right now to kind of preserve capital to a greater extent? Are things becoming more reasonable or are they still living in the past, the sellers?

Of course the pricing environment is more reasonable. We think that we can get-- we can buy the businesses that we're look at right now that we believe that certainly within the parameters that we're very comfortable with.

Okay. Also, you had indicated that the economy pretty much has had an effect on all your businesses. If we were to have a quarter or two of negative GDP would that likely affect your forecast that you made here today?

No, we don't believe so. We've considered that.

Okay. And as far as facilities and employment levels, which you've been consolidating, do you expect further consolidation under current economic conditions?

No, we don't.

Okay. So you've largely done that. Also you've talked about you prefer stable steel prices, we've had everything but that in the last couple of years. What, what has changed, if anything, in terms of how you're dealing with those? And if steel prices were to come off, do you see a more typical margin benefit that might accrue?

Yeah. I think that what we've said and I think it's best way to characterize it, we tend in all of our businesses price to market. Now I think when we say price to market, yes there's some phasing involved, in that some businesses phase in faster than others, but I think we'll continue to that. We'll continue to have a competitive price in the marketplace that'll fairly represent what our costs are. And I think in the environment we're in today I think customers understand and appreciate that.

I think the other thing to take into consideration too is that as we're moving the business more and more into manufactured end products and we're moving the business into more end products that have a higher value-added and engineering component in them. That brings down the percentage of our selling price represented by raw material costs, particularly steel. So that the variability in steel becomes less of a factor in our overall profit generating equation. And that's the direction we want to move the business in.

Having said that though, the general make up of the integrated steel industry I think has changed considerably. And I think we're going to have-- volatility will always be part of it, but I don't think we'll have as violent of volatility levels going forward as we, as we have experienced in the past. I think all of the steel producers are-- have done a very good job now in understanding what levels of volume and pricing they need to be at in order to maintain a, a profitable position for themselves. And I think that in and of itself is going to reduce the volatility going forward. But nonetheless, we're trying to build our business so that regardless of whether that volatility goes away or not, it's going be less impactful on our business.

So in the first half your raw materials have been what percent of your cost?

I think in total Company we're about 56%, Building Products is less than 50%.

Okay. So that's kind of come down 5 or 10 percentage points over then over the last couple years.

Absolutely. And that's why Brian was very addiment when he gave his description of FIFO impact on our business. We're not a service center business. Material costs are not 80% , 85% of our

Okay and one last question. I've come across a number of companies who have talked about a growing trend, which you just fairly lightly touched on, and I'll call it resourcing. I'm reading very little about it in the media up til now. But where companies are beginning to source more products locally and/or what that means in our particular case here in North America for a whole host of reasons, partly is which is the rising transportation costs, logistics have always been at least some issue to a degree. Can you point to how significant that could be and one good example of where you've kind of, say regained or took back some business that otherwise someone might have sourced elsewhere?

We could but we won't because, because that's confidential. We're talking about our customers. But clearly that trend is starting to become more significant as we go forward. I think that it's right of offshore manufacturing specifically in certain parts of the world a lesser factor today than they were even two, three years ago.

You've got, you've got freight issues plus in some of the developing countries where they're building their manufacturing base and in effect building a middle class, we saw it happen in Mexico where for a very short period of time they had a substantial labor advantage. But once the manufacturing base began to expand down there, that labor pricing advantage evaporated relatively quickly. And I think even, anybody who studies the Chinese market for example, is already seeing rapid escalation in wages. And when you add to that the much higher freight costs today, as you pointed out, any advantage there has, has begun to get compressed relatively quickly. And that's driving that-- the beginning of that trend then that you were talking about there.

Going back to our, to your previous question. And one last area of focus that also helps insulate us from raw material volatility is the fact that we're focused on turning our inventories over every 60 days. So if there is a disruption one way or the other, prices going up or down, we've got only 60 days worth of inventory that could be affected by it. So we think rather than trying to be hedgers or speculators, trying to read the market better than somebody else, our best course of action, as it has always been, is to manage our inventories as effectively as we possibly can. Part of that is-- goes back to having a full blown system to drive production planning from order intake through end product inventory levels and everything in between. And that's, that goes back to some of the money that we're spending on systems to help us get a much tighter control over those areas.

Great. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). Your next question comes from the line of [Dennis Aruke] from Regiment Capital. You may proceed.

Yeah, hi. Good morning.

Morning.

Could you just talk about, where there any particular trends in the quarter? Was there-- did the quarter start out stronger and end up weaker or was it pretty stable as far as sales go?

The quarter was flat. Every month came in I'd say as expected or above as expected in general.

Okay. And then on the top line, you mentioned-- it sounded like I think you've taken price in some of your products, could you talk about what volumes were during the quarter and also what pricing was?

Yes, if you look at the total Company I think we said we're up about 6% in revenues. If you kind of strip out price and if you fix that with unit volume I'm going to say you we're probably down about 9% on a unit volume basis.

And pricing was up similar amount?

Excluding acquisitions.

Well, when you say pricing was up, we price to market.

Yeah.

So, we were successful at being able to price our products to market.

Okay.

And what that means is that we're not taking, we're not taking profit because we've had higher increases than we received. I think we're-- we want to be very careful about that. That we price fairy to our customers. As costs are going up we've been able to put that cost into our price and fairly distribute to our customers.

All right. That's--

I wish it was as simple as just saying to our customers, look you've read the paper and you've seen steel costs are going up, so we're just going to pass that along to you.

Right.

It doesn't quite work like at that.

Right, right. Any thoughts on, your bonds are trading at a significant discount and granted your stocks had a nice rally this morning, but any thoughts on either buying back bonds or stock? Are you allowed to do per on your credit agreement?

We can buy back stock.

Right. But right now we're-- most of the excess cash flow we're paying down our--

Paying down debt.

Our variable debt.

So all go into the revolver?

Yes, yes.

Okay. Great. And then in the--it looks like you end the quarter with accounts payable seemed elevated. I think it looks like it's at 46 days and historically you've run-- it's been elevating I guess last year was around 32. And I was wondering is that the new trend extending payables or was this a one-time event and that's going to catch up in the--?

We'd like to think it's a trend. I think we've been active at trying to get better balance in our cash flow. And so that's been an active focus that we've had throughout the Company.

Okay.

That's also the seasonally strongest quarter of the year. So, the service-- the orders and the sales we've gone by in the inventory. And there's a strong portion of that that we bought in particularly the second half of the second quarter that's (inaudible) before.

Okay.

I think another factor there that we have to throw out is that the Management's has had a compensation plan has a substantial component of it related to improvements in working capital. So all of the guys at the business units are very focused on improving our working capital.

All right, great. Thank you.

You're welcome.

This concludes our question-and-answer portion of the call. I'd now like to turn it over to Mr. Brian Lipke for closing comments.

Thanks for participating in our call today. I think it's fair to say that the actions that we've taken have repositioned the Company and as, as marker trends begin to improve, I think we're in a position for continuing improvements in our performance. We look forward to talking to go you again in three months. Thanks.

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