Gibraltar Industries Inc (ROCK) 2008 Q3 法說會逐字稿

Welcome to the Gibraltar conference call to discuss its second quarter (sic) results and its outlook for the remainder of 2008. We'll begin today's call with opening comments from Ken Houseknecht, from Gibraltar's Investor Relations Department.

After 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. You may proceed sir.

Thank you, Erika. And welcome to Gibraltar's third 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 factors are detailed on the Company's 10-K, which can be viewed on Gibraltar's website at gibraltar1.com.

If you did not receive the news release on our third 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 site. On our call this morning are Brian Lipke, our Chairman and CEO; Henning Kornbrekke, our President and COO; and Ken Smith, our CFO. Thank you for joining us. At this point, I'd like to turn the call over to Brian. Brian?

Thanks, Ken. Good morning, everyone and thanks for being on our call this morning. I'm going to address two areas in my comments this morning. First, I'll provide an overview of our third quarter and nine months results, which Ken Smith and Henning will then discuss in greater detail.

Following their presentations, I'll update the progress we're making in our ongoing efforts to streamline our operations, manage our portfolio of businesses, with our recent SCM sale and strengthen our balance sheet. After that we'll open the call to any questions you may have.

In the third quarter, we built on the strong results we reported in the first six months of the year. We generated higher sales and solid earnings and margin growth in both of our segments, even though two of our primary markets continued to weaken with housing starts down 33%, and the North American auto build off 16% compared to the third quarter of 2007.

During the third quarter, we continued to lower our cost structure, consolidate and streamline our operations and pay down debt. We also benefited from our 2007 acquisitions of Dramex, Noll and Florence Corporation, which added incremental sales of $14 million in the third quarter and $73 million in the first nine months of 2008.

Our businesses that sell to the commercial building, industrial, architectural and international markets also performed well during the third quarter. All of this enabled us to generate a third quarter sales increase of 10% and income from continuing operations increased 69%. In the first nine months of 2008, sales from continuing operations were up 8% and income from continuing operations increased by 48%.

Even though the business climate has become somewhat more uncertain in recent weeks, the many steps that we've been taking to reduce costs through our lean initiatives and facility consolidations, our progress in lowering debt, our product leadership positions and the diversity of our markets and our programs to gain new business from current customers, while continuing to add new ones have strengthened our ability to successfully weather this slow down.

We continue to reshape and reposition Gibraltar and our results in the third quarter and the first nine months of the year, especially in light of the extremely difficult market conditions, are evidence of our progress and more so of our potential once our markets begin to rebound. At this point, I'll turn the call over to Ken Smith for a more detailed look at our financial results. Ken?

Thanks, Brian. And I'll begin with slide number three, which focuses on key categories of Gibraltar's third quarter and nine-month results. We had another good quarter as both segments generated revenue gains with Building Products producing double-digit increase. The revenue gains came from our 2007 acquisitions and continued strength in the commercial building and industrial markets, which more than offset the slowdown in residential new construction and automotive markets.

The strong growth in operating income in the third quarter and nine months was again the result of contributions from the acquisitions, the excellent results from our commercial, industrial businesses and a significant improvement in our Processed Metals segment, which came from improved pricing and operating efficiency. And part of these improvements also included facility consolidations and reductions.

Earnings per share from continuing operations were up sharply as a result of the factors just noted, together with reduced interest expense from lower rates and average borrowings. Our free cash flow in the first nine months of '08 compares unfavorably to 2007, which benefited then from $16 million generated from discontinued operations last year.

Now, turning to slide number four, net income and EPS. Henning will review the performance of our segments in a couple of minutes, so I will discuss the other significant P&L differences. Our corporate expenses in the third quarter increased due to $1.1 million of non-cash charge for software no longer in use.

And also in the nine-month period for 2008, expense also rose due to higher variable incentive compensation based on the improved earnings this year. The decreases in our net interest expense for the periods presented resulted from lower average borrowings and lower average interest rates as compared to the prior-year periods.

Regarding income tax expense, the amounts have increased for the comparative periods, due to higher pre-tax earnings while the comparative third quarter rates were nearly equivalent. The year-to-date 2008 tax rate was lower than the comparable 2007 period by 110 basis points, primarily due to favorable discreet tax adjustments in the first quarter this year. We do expect the effective tax rate for the full year 2008 to approximate 36%.

Now to slide number five, cash flow. In the first nine months of 2008, free cash flow was good at 1.3 times net income and 5% of revenues. Again, 2008 does compared unfavorably to 2007 when we had $16 million generated in the first nine months of '07 by discontinued operations, as well as the reduction of the then elevated levels of inventory. Thus far this year, our businesses have continued to do a good job paring down the cash invested in working capital, having reduced working capital by 25 days since this beginning of the year.

Moving ahead to slide number six, the balance sheet. Total debt was reduced by $10 million this quarter and, as the slide shows, by $60 million in the first nine months of this year and by $125 million during the last 12 months, significantly reducing our debt-to-capitalization, which we expect to fall even further in the fourth quarter.

Last month on October 9, we announced the signing of a definitive agreement to sell our SCM Powder Metal Business, at that time we expected the close on the sale in the fourth quarter after regulatory reviews were completed. We did in fact close that transaction yesterday and Henning will talk more about it. My point is that the proceeds from that sale will be also used to pay down debt.

At this point, Henning will review the performance of our two segments, update our outlook for the balance of '08 and provide more detail on the SCM sale.

Thanks, Ken. Our Company-wide gross margins of 20.9% increased by 2.3 percentage points and our operating margin of 9.4% increased by 2 percentage points compared to the third quarter of 2007. As you can see on slide seven, our Building Product segment had third quarter sales of $277 million, an increase of 12% with sales from our newly acquired companies providing approximately half of the increase, and continued strength in the commercial building and industrial products areas accounting for the balance.

Strong sales in these areas, together with pricing at market offset significantly lower unit volume sales for the retail and new build housing markets. Sales in the first nine months of the year followed a similar pattern. The third quarter gross margin in this segment was 22.4%, an increase of one-half of a percentage point. The operating margin was 12.1%, up 0.6 percentage points from the prior-year period.

Operational efficiency gains and an improved mix in our commercial and industrial business more than offset unit volume declines in the retail and new build markets. In the third quarter, we also incurred one-time charges of $2.7 million, relating to our facility consolidation efforts.

Looking at slide eight, our Processed Metal segment had third quarter sales of approximately $100 million, up 4%. The increase was primarily a result of marketing programs, which re-captured lost business and added new accounts and pricing to market, offset by unit volume declines resulting from the sharp slowdown in Auto production.

The third quarter gross margin was 16.7%, an increase of 7.1 percentage points, and the operating margin of 12.2% increased 6.4 percentage points compared to the third quarter of 2007. Improving strip steel operating characteristics, pricing-to-market and cost savings from the 2007 facility consolidation, all contributed to the margin improvement.

At this point, I'll describe our current expectation for the balance of 2008, which are outlined on slide nine. We expect difficult conditions will remain in the new build housing market with the fourth quarter of 2008 down approximately 30% or more compared to a year ago. But the decline is slowing with single-family starts, flat in the current month versus the previous month.

2009 should show modest improvement. All of our business' selling into this market have adjusted their cost structures, which together with our efforts to gain more business from current as well as new customers, position us to continue producing solid results.

While our commercial building and international businesses experienced growth in the first nine months of 2008, their markets weakened in September and faced more difficult outlook in the fourth quarter. However, many of our end markets like energy and industrial still exhibit positive growth characteristics and the housing repair model market has began to improve. All of these conditions reflected the third quarter GDP number released last week.

In the fourth quarter, the North American auto build is likely to be down 20% or more compared to a year ago. The slowdown looks like it will continue, but we expect to offset much of the slowdown through recaptured business, better penetration with current customers and continuing to find non-automotive customers for our products. With that as a backdrop, our performance in the third quarter and first nine months of 2008 demonstrates that we've made significant progress in improving our operating efficiency, as well as providing a solid base for higher earnings as the markets rebound.

Slide 10 provides additional detail on our recent divestiture. On October 9, we issued a press release announcing the signing of a definite agreement to sell our Powder Metals business. SCM Metal Products closed on this transaction on November 5, 2008. While SCM has been a good business, it does not fit the strategic direction that our Company is moving in. The sale of SCM helps us to continue to focus on our long-term strategic objectives.

Moving ahead to slide 11, we provide a roadmap on our guidance for earnings per share, starting with updated guidance as if we had not sold SCM. Our updated guidance for 12 months 2008 would have been in the range of $1.61 to $1.68 per share for continuing operations, which compares favorably to our guidance provided on August 8. Our raised guidance for the full year stems from our strong results through the first nine months, plus our expected earnings in Q4.

In Q4, we expect a normal seasonal slow down in our sales volume, but also a higher degree of uncertainty brought upon by the highly volatile credit markets and the [indirect/direct] effects from slowing consumer spending. With the sale of SCM in the fourth quarter that will take approximately $0.14 from our full-year guidance and [yield] our expected range from continuing operations of $1.47 to $1.54 per share without SCM.

Now turning to slide 12, we also are providing a schedule showing several time periods for 2007 and 2008 and what we expect continuing operations to be. Bear in mind that the operating results of SCM will be reclassified to discontinued operations as of October 3, 2008, the date the definitive agreement was signed.

In summary, we continue to focus on optimizing our businesses through operational excellence, tight expense control, decreased working capital and aggressive marketing. And even in difficult markets, we continue to look for growth through new products, markets and businesses. The progress we've made in each of these areas provides a base for even higher earnings as markets return to normal levels.

At this point in time, there is little clarity into 2009; however, as stated earlier, we have positioned the Company to deliver strong results to all our stakeholders in 2009, just as that we have in 2008. At this point, I'll turn the call back over to Brian.

Thanks, Henning. I'm going to make just a few comments before we open the call to any questions that you may have. During third quarter, we continued to make progress streamlining our operations, managing our portfolio of businesses and strengthening our balance sheet. We've closed or consolidated 22 facilities since the beginning of 2007, which helped lower our cost structure.

The continued transformation of our portfolio of businesses, including the sale of SCM is a key part of our overall strategy and it includes both acquisitions and the occasional sale of a division or a product line that's not consistent with the direction that we're moving the Company in. As we've continued to reshape the portfolio, Gibraltar has become a stronger Company, more capable of delivering sustained earnings and cash flow growth.

As Ken Smith noted, we paid down another $10 million in debt in the third quarter and we've lowered our debt by $125 million over the last 12 months. And we're going to have a big impact on the fourth quarter from both cash flow generated from operations and the sale of SCM to bring that debt down even further.

We're going to use the proceeds from these sales to continue to pay down debt as we look out into the future. Although, as we get more comfortable with the outlook for 2009, we anticipate the opportunity to once again begin looking more aggressively at acquisitions, which we think may be attractively priced.

While it certainly remains a very difficult operating environment, we've made good progress so far in 2008 and we've a number of initiatives underway that will continue to build Gibraltar into a stronger, more resilient Company able to produce consistent results even in tough market conditions. With that, I'll open the call to any questions that any of you may have.

(Operator Instructions) Michael Cox from Piper Jaffray.

Hi good morning. Congratulations on another strong quarter, gentlemen.

Thank you.

Thank you, Michael.

My first question is on the pricing environment. I was wondering if you could talk a little bit about the general stickiness of the price increases that you've implemented through the course of the year, now that we've started to see commodity prices come down.

The real question at hand is more about maintaining the spreads, and that's something that Gibraltar has always focused on. If you look back over the history of the gross margins that the Company has been able to generate, you'd see a very consistent pattern on a year-over-year, quarter-over-quarter basis, driven primarily by the change in seasonal volume with the first and fourth quarters historically being our two weakest quarters and the second and third being our two strongest quarters.

And that's -- if you look back over a number of years and that pattern exists -- in spite of the dramatic volatility that has been in place particularly from a steel standpoint. If you go back to 2003, steel was at different points of time in the quarter, but in the high $200 per ton rate. In '74 it peaked at $700 a ton, '75 it came down -- I'm sorry, in '05, it came down, '06 it came up a little bit, '07 it dipped, and then in '08 it climbed to all-time high levels.

But throughout that entire period of time, in spite of the ups and downs in the commodity raw material pricing environment, we've been able to maintain a fairly consistent year-over-year quarterly pattern of earnings.

The other factor that has changed Gibraltar, is we moved the Company more and more into the end product manufacturing arena. And now with the sale of SCM, over 80% of our sales will be of manufactured-end products. It's built in more consistency and a better ability to deal with the volatility in the raw material pricing ranges, because as we move more and more into end product manufacturing, raw material becomes a smaller and smaller percentage of our overall selling price and thus has less of an impact on volatility.

So, as we look out into the future and continue on our path of streamlining our operations and getting more efficient, I should add without limiting our ability to service the customers, we feel comfortable with our ability to continue to manage that part of the spread equation as we go forward.

Yes. I would just add, we've not been aggressive with our customers in moving prices up. In most cases, we've gotten prices at the back end of the period. We've almost never recovered the full increase of cost. Most of the gains that we've got is through efficiencies that we worked on internally. We try to treat our customers very fairly and right now we know that material volatility is a big issue, but we're going to continue to deal with our customers in this situation as we always have, as conservatively as possible and therefore, I think we're, I guess, less concerned than many other businesses would be as we go forward.

I think, I'll add one last thing too. When we look at our inventories at this point in time, the volume of inventory that we have is at a very conservative level. So that then minimizes any period of potential disruption that we have to work our way through. So our penchant over the years has not been to speculate on inventory, it's been to manage our inventory levels and our inventory investment all the way through the system from raw materials to work in process to finished goods.

In the course of the last year -- actually the course of last two years -- we've substantially improved our ability to control that component -- those components of our working capital and balance sheet. And we're entering this period, where it appears for a while, commodity raw material pricing will be coming down, in as good a position as one could possibly enter it.

That's a great overview. Thank you. And on the facility closure consolidation side, it looks like you consolidated four in the quarter. Do you have further plans for consolidation in the fourth quarter as we look out to 2009?

Yes, we're working -- looking right now; in fact we're working at closing a rather large facility. That's in process right now. We should finish that by the end of this year.

Okay. Thank you. And then my last question, with the proceeds of the SCM transaction being used to pay down debt, could you provide a year-end debt expectation or debt level expectation?

I think we'll be somewhere around $360 million to $370 million.

Great. Thank you very much.

Welcome.

Peter Lisnic from Robert W. Baird.

Good morning, gentlemen.

Good morning.

Good morning, Peter.

I was wondering if we could talk a little bit, just about the margin improvement process models. If I look at the third quarter on the operating margin basis, we're looking at something that -- around 12% with the restructuring charges loaded in there which is -- a margin that is as strong as anything you've put up in half a decade at least.

So I'm just -- I'm kind of wondering, how do you drill that, and if you could break apart and maybe quantify what piece of that was driven by cost savings, what piece of it was driven by pricing and just give us a little bit more color on that -- on that increase.

Probably half of it was in cost savings related to the closing of the plant. We expect to see even more pick ups as we drive [higher] volumes, because we in fact have taken our breakeven down by quite a bit. And the other piece is pricing of course.

I think from a comparative basis though, we have to go back and look at where we were a year ago, and a year ago we were over inventoried with high-priced inventory, which took that operating margin -- the operating margin for that period down lower, so the spread seems pretty large from one year to the next.

The other thing too is that, if you recall we've made some pretty significant management changes in that business and a year ago the sales effort had not been nearly as focused and aggressive than as it has been during the course of the last year. And we've been able to find a more appropriate spread between raw material costs and selling prices, which was a direct effort of a much more focused and realigned sales effort.

Okay. Great on that one. And then, if I could just switch gears a little bit to the comments that you alluded to for '09. I heard there is a clause in there about modest improvement in '09. And then you also talked about repairment model basically seeing some improvement I think in the fourth quarter or maybe projected improvement next year. I would love to get some color on that because it doesn't seem to coincide with some of the other at least residential building product suppliers seem to be seeing right now about that end market?

I think when you look at -- and in saying (inaudible) separate the two -- repair and the remodel. Repair market has picked up significantly and if you talk to particularly roofing companies of which there are a number of them, some public and some not public, you would find that their sales are rather strong and they are doing rather well, which is an indication that people are starting to -- and we see this by resale homes and they are starting to invest more in their current homes, we have also seen some remodeling activity pick up in renovations inside of the home.

I think we've seen some increased activity even at some of the retailers that we do supply. And all of that that we suggest it says that people now, which are more characteristic of the market we're in, are starting now to reinvest in their homes, again, for a number of reasons. Either buying a new home or they decided they are going to stay in their home and they decided they're going to begin to invest. Not at the same rate they had in the past, but we start to see -- we're starting to see that starting to pick up and it's reflected in our sales.

One of the other things that you are starting to read more and more about both relative to auto and housing, with the declines now with housing starting in '06 all the way through '07 and now all the way through '08, there is only so much time that maintenance can be put off both for a car or for a home. And it's getting to that point where the deferred maintenance can no longer be deferred and people are starting to have to do some of these repairs, particularly in the area of roofs and ventilation, which goes along with roofing repairs that Henning was referring to.

So, I think also the statement that was made relative to next year was, the rate of decline from '06 to '07 was very severe. The rate of decline in housing from '07 to '08 was severe, but not as severe as it was from '06 to '07. And certainly, while there are some reasons to be a little bit more hopeful of the outlook in '09, although it's a little bit too early to tell because of some of the various governmental programs that are -- have been announced and are just barely getting started at this point in time. But, certainly the rate of decline from '08 to '09 should be reduced, if not end up with more of a flat -- flat overall build outlook.

Okay. That is very helpful. And then last question, just -- basically the same question I asked about Processed Metals for Building Products. Can you maybe give us a sense as to what sort of pricing improvement drove the relative improvement in margins in that business if you ex out the restructuring costs?

In Building Products?

Yes, in Building Products.

We don't --

I think in pricing in Building Products we'd say that we were flat, some did well and some not at all and we're not going to separate the two for some obvious reasons. But I think what the improvements we saw in Building Products were generated internally through operational efficiencies.

Okay. That is helpful. Thank you very much.

Welcome.

Mark Parr from KeyBanc Capital.

Gentlemen, good morning.

Good morning, Mark.

Great job on the quarter, once again.

Thank you.

You got some good momentum going. Now if we just knew what the economy would be, we could come up with an '09 outlook, correct?

We would be all set.

Yes. We would be all set, Mark. You hit the nail on the head.

Yes, figure that one out; at least the OIS spread is down below 150 basis points. So we're not in in Armageddon land anymore but we're still in bad shape on the credit situation, moving in the right direction.

We thought you could help us with the '09 forecast, (multiple speakers) if you could give us guidance?

Oh, sure. Well, just -- I'll send a contract over, you sign it, and we'll be ready to go.

Okay, let's go.

Did you have much of a FIFO impact in the third quarter? I don't know if you quantified that, you indicated in the second quarter it might have been a nickel. I mean, was there anything similar in the third quarter?

We had approx -- probably under $0.05, Mark, this is what we've calculated for what the impact would have been for FIFO inventory cost.

Pretty similar to the second quarter.

Okay. All right. And again, recognizing that we don't really know what the overall economy is going to bring for '09. But looking at the things that you have within your control on the facility consolidation side, you made great progress in '08.

I mean, could you give us a sense of kind of where you are? You may have already talked about this, but -- if I'm repeating a question I apologize. But I mean how much more consolidation activity is still left in the pipeline based on what you're looking at right now?

I think, realistically, we don't have a lot more consolidations to go through. We've done a good job on distribution; we've done a good job in consolidating our plants. We're really focusing on operating -- operating efficiencies at this particular point. We've positioned ourselves to run at lower volumes, unit volumes than we have in 2008. So we've tended to be very conservative, and I think with all of the restructuring we've done, we still feel comfortable that '09 will be a -- we think '09 will be a good year for us.

The thing with all these restructurings that we've been going through, we did a bunch in '07, and we didn't feel the full impact of those actions in '07. It swung into '08 clearly. And we expect that the same -- we do not expect, we know the same is going to happen as we move into '09. Many of the actions that we've taken in the latter portion of this year, we will probably receive little benefit in '08, but more if not all of it in '09. So that gives us a little momentum going into the year.

I'd say, to use a baseball analogy, that we're probably in the seventh or eighth inning of our restructuring. However, once we again begin to start making acquisitions, that sets up a whole new level of opportunity for us to consolidate acquired businesses into our existing operations, cut costs and improve the performance of the acquired businesses. So in a certain regard, Mark, it's going to be an ongoing activity permanently embedded in our business as we continue to make acquisitions.

Okay. So I just want to make sure I had that right. So the -- the 22 closures, all the consolidation activity in '08 is really something that we'll see the benefits of, the earnings impact in '09?

Yes. And don't forget, we've already taken the cost associated with the restructuring and the closing of the plants in the prior years and so '09 should be free of those costs. Don't forget, almost every quarter we keep looking at ourselves, we've had below the line charges which we characterize as a one-time charge. I think we've done that for, I don't know, five or six quarters in a row. All that was related to the restructuring and the facility consolidations.

I think in '09 you're going to find it to be a lot cleaner, I think we'll see the full benefit of that, and I think with just a little bit of volume pickup we're excited.

When we were coming out of '06 and looking into '07, we came to the harsh realization that we weren't going to be able to control the markets. And in that situation then we needed to look at what we could control and what we felt we could control were our costs. And at that point we liked to get very aggressive in looking at our existing operations.

And as a result of those actions, I think, we are in a much improved position compared to where we were throughout 2006. And very well positioned to deal with whatever comes along in '09. And as I said earlier in my more prepared comments, what excites me is that for two quarters in this year, the second and third quarter, we generated EBITDA higher than any period of time in the Company's history, and that's with very depressed major markets.

So when volume comes back up with this new lower cost structure that we have in place today, with the 22 facilities that have been closed, there have been other permanent reductions in overhead. So when we get some additional volume to leverage against a much lower cost structure, the opportunity for significantly improved earnings exists.

Okay. I really appreciate that color. I think it just helps to highlight, '07 you had a kind of all of the costs and none other benefits. '08 you had ongoing costs and benefits that you have been realizing. As the costs of consolidation ease off in '09, you'll still get another big upside in terms of benefits.

So I think I am thinking about this right. And so I can see how you would feel that you're well prepared to `whether the storm` in terms of any recessionary, extended recessionary pressures that may unfold over the next six to nine months?

You summed it up well. Although, the only thing I'd add is, when I look at housing and auto, I think for the last two years our business has been dealing with recessionary levels of activity.

Yes, Brian I hope you are right. It's hard to think that, when GM sales are down 45% in October that there isn't something other than derived demand at work. I mean, I can't imagine that the demand for cars fell off 45%. So there's clearly some pent up demand being created in the marketplace right now with this credit issue that we've got in the economy.

I read a report from one of the firms who just stands back and analyses all variety of economic factors and they're talking more and more about pent up demand being built, which at some point in time will come to fruition.

It's a -- it's not the consumer deciding he doesn't want a car, it's a consumer being told he can't get credit to buy one or go get one. And that's -- that's definitely a difference. Okay Brian, look I won't tie this thing up, but I just want to again take the opportunity to congratulate you, you guys are doing a hell of a job in a difficult environment and I'm on your side, I can't wait to see what the earnings look like when the demand picks up.

Thanks, Mark.

Thanks, Mark.

Leo Larkin from Standard & Poor's.

Yes, good morning. Two questions. First, any estimates for CapEx and DD&A for '09?

We're going to spend about 67% of depreciation in '09, that's what our plans are, which I think is about $24 million.

Okay. The other thing I'm wondering about -- with a lot of stress occurring in the auto industry are you -- how are you looking at your accounts receivable, are you concerned if --?

We have very little risk with any of the automotive suppliers in accounts receivables. In fact, we have had a lot of discussion on that subject now that you bring it up.

We've been watching it very closely.

Okay. So there is nothing --?

Nothing major there at all.

All right. Thanks very much.

You're welcome.

[Jimmy Kim] from RBC Capital Markets.

Good morning.

Morning.

Just a quick question for you. In your Processed Metal Segment, you talked about marketing programs and pricing offsetting the weakness in North American auto. Could you break down the volume and the pricing -- or the contributions from volume and pricing?

I think year-over-year, our volumes are off about 3% to 5%.

Okay.

Our unit volume tons are down about 3% to 5%. I think at pricing -- I'm getting an input from our financial people.

'07 was the down year, '08 they've actually made up some ground. We'll have to get back to you on that one.

Okay. So it's not 3% to 5%, the volume declines for '08 are not 3% to 5%?

I'm looking at total '08. And if we look at our tons sold this year versus last year it's 3% to 5%. We had a bigger decline in the third quarter, but your question is relative to '08. We would think that when we finish this year we could be on a unit volume decline tons over tons probably 7% or 8%. We've made up all of that, plus a little bit on pricing.

Okay. Thank you so much.

Tim Hayes from Davenport & Company.

Hi, good morning, it's Tim Hayes from Davenport. How are you?

Good.

Just a further question, a lot of my questions have already been answered, but just to further the -- on Processed Metal Products, if -- given in Q3 volumes were down from a year ago, that makes the gross margin that you achieved even more impressive, given that volumes were lower. I guess my concern is, is there any part of that gross margin that you think is not sustainable?

Yes. I think we said earlier that we'd probably -- we've come in gross margin that's probably about 2 percentage points higher than is sustainable on a long-term basis. But we've also talked a lot about restructuring the business. And then basically we've gotten the gross margin up to a very attractive level, given normalized unit volume through the plants.

Right now, we're running lower unit volume through the plant, so we're not gaining the full efficiency that we would normally get with the reconstruction efforts that the business would have, but again as we look to next year -- and we are going after and have been obtaining more business, more tons through the plant -- we expect to maintain let's say, a very respectable gross and operating margin as we go forward.

Okay. Thank you. That's all my questions.

Thank you.

Dennis O'Rourke from Regiment Capital.

Yes. Hi, good morning.

Good morning.

Looking at your inventory levels, it looks like you ended September with inventories about $15 million above last year's end of the third quarter. Do you think your inventory volumes as reflected in the end of -- you are above or below as you enter the end of the third quarter last year?

Inventory levels are below. And again, we tend to measure DSI's, and if you look at our DSI's, we're about -- I think last year -- they're looking -- but I think we're 82 DSI's in this year aren't we -- I was going to say 72, they're saying 71, I was going to say 72 DSI's. Our days sales of inventory are significantly down. We've got a strong focus on eventually getting our DSI's into the 60s, which is a respectable level, and I think that we've got planning in place that eventually will drive us to that level.

Keep in mind one thing that while our inventory -- current inventory level in dollars is slightly higher than what it was a year ago, in that year commodity raw material prices have skyrocketed. Even though they started recently, very recently to turn down, to maintain almost the same level against that kind of an increase we think is a pretty decent job on our part. As these commodities start to come back down, of course against a lower volume, our inventory investment will also come down.

And that's why recognize why we're using DSI's. We've got split inventories, we do have some steel in one of our businesses, but many of our businesses, [a lot even towards] in finished goods, its units, its SKUs of units. And as Brian said, as pricing goes up in many cases, selling price goes up, so a better measurement is days sales of inventory.

All right, great. And then on your fourth quarter, if you back out the numbers, it looks like you are guiding to $0.05 of EPS, but if you include the asset sale for the full year as if it hadn't happened. So if you backed that out, it looks like that's about $0.04 a quarter. Is it fair to say then -- if you excluded the asset sales earnings per share in the fourth quarter would be about $0.01, which is about flat year-over-year?

On the fourth quarter? I think last year fourth quarter we lost $0.08 and I think if we do the arithmetic right, we're looking at --

$0.06 to $0.13.

$0.06 to $0.13 in this fourth quarter.

Okay.

Which means it sounds like it's a significant improvement over the fourth quarter of last year.

I read it, when I backed out the numbers, the $0.05 included the asset sale for the full quarter. Okay, so it sounds like earnings and the sales and everything will be up year-over-year, is that right?

Yes, that's absolutely correct.

Okay. And then finally, your bonds are trading in the -- are offered in the high 60s. Any thoughts or are you able to bring your credit agreements to buy back your bonds with the yield that they have at a big discount or you're still paying down the revolver?

Under our credit agreement there is a protocol sequence we have to follow on any debt reduction and bonds would not be part of that, the first couple step downs. So we -- plus there's a make whole on some of those. But we are prevented; most of our initial debt reduction has to go against the revolver of the term notes.

And probably it's not the time to go back to your banker for an amendment, right?

I would not prefer to do that.

Okay. Thank you.

We are in good stead with them right now, and we like keeping them posted with all the good news, so we certainly do not want to get into a position of going back for any amendments.

Right. Thank you.

You are welcome.

Yvonne Varano from Jefferies & Co.

Thanks. When you look at your outlook for 4Q, can you just let us know what kind of expectations you are factoring in there in terms of steel pricing?

For which time period?

Fourth quarter.

For 4Q.

We're using the pricing that (multiple speakers).

It's what our inventories are at right now.

So, there is no speculation, or very little speculation in the fourth quarter. Fourth quarter is a slower period, we're basically going to work off inventories right through the fourth quarter and it is what it is and that's what we've used in our numbers. Any buys that we're doing right are really first quarter buys in '09.

Okay. And, can you help us understand a little better how management in the Processed Metal product segment has changed the way the contracts are structured so that you can maintain that operating margin?

Yvonne, I can appreciate where you're coming from with that question. But, on the other hand, I hope you can appreciate that that kind of delves too close to very competitive information and I'm going to decline to get too specific on that.

Okay. Thank you.

Welcome.

[Jay Greer] from Miramar.

Hi, just wanted to get a little bit of clarity on sort of '09 and your outlook, which of the different end markets you were involved in that you were expecting to see some turnaround. Obviously we're looking at the data out there on non-res construction and steel and overall industrial production, just trying to figure out which of those markets I guess you're most confident in -- or betting on to sort to speak?

I don't think we're betting on any of them. We think that we're going into the year and we were planning to be very conserved going into the year. We have programmed very little real growth into next year. We know what customers we've signed; we know what agreements we have. Certainly, we've used those, because those -- we think the industrial markets that we're in will continue to be anywheres from relatively flat to up slightly, we think commercial building will start to trend down a little bit, but not a lot, there is still some watch projects in place that we're participating with.

I think at the back end of '09, we're still somewhat hopeful, but not planning on this, that residential housing will start to pick up. We see certain parts of the country where they've already started to pick up, we've got -- including Buffalo by the way -- 25 cities that were -- where there are been pickups in building. And we're participating well and we've got some businesses in those areas that are doing spectacularly well.

And, I think in automotive there is probably a lot more uncertainty on the future of the automotive market, but we are still confident that the automotive market will right itself. And I think as one of analysts said earlier, there is an awful lot of pent up demand, both in housing and in automotive, and I think at some point that will follow through, and I think we're positioned right to participate to the full extent that the pickup exists.

I see. And could you clarify, is there any market share gains that you've seen in terms of servicing whether it's auto or non-res, have you seen any (multiple speakers)?

In the areas where we have strong market share and which is -- which is usual, we've continued to dominate and in those areas we could put more pressure on our competitors. In some of the markets we've seen our competitors fall by the wayside as they say. And that's allowed us the opportunity to pick up the business that they've left behind. We'll continue to focus strongly, continue to focus on pushing our market share advantage wherever we can.

I see. And so just to clarify, you mentioned commercial construction, you're sort of seeing it flattish to trending down slightly but now --

It depends what element you looked at. Certainly infrastructure is still relatively strong, but those are long-term projects, we've got a new administration coming in place. So there is reason to believe somewhat optimistically that infrastructure build will continue, that that would not be unusual, be consistent with all the forecasts out there.

We see some of the commercial buildings, I mean healthcare has got a number of issues. They are still building although they are looking at it, healthcare facilities. So there are segments inside in some of the end markets they're in, energy is still relatively strong. We supply a lot of products into the oil wells and the drilling and there was a lot of discussion in the election about should we drill offshore. I think the consensus was they all said yes at the end of the day.

We make a lot of components that go into that part of the end market. So, I think with security, we do play in the security market, I think that's going to continue to have some emphasis. Again, those are just an example of some of the end markets that we play in. And we think they'll continue to be rather good for us, not robust, but good and allow us to continue the trend that we've developed.

The diversity of the products that we make and the markets that we serve is one of the strengths of the business and Henning was doing a very good job in pointing out just how broad a range of different end markets from a construction standpoint that we serve. And it's not all doom and gloom. It's not all rosy either, but there are a lot of plans underway by our Federal government to help stimulate certain areas. And it's hard to say how they are all going to play out. But there is some room for some optimism.

Yes, and I hate to beat the dead horse, I just -- there is plenty of press out there suggesting that commercial construction is sort of on the verge of a sort of material decline. And obviously given the financing environment, but it sounds like that hasn't -- that's not something you're seeing.

No, and we do a lot of studies across the country. If you go across the country there is not an awful lot of commercial construction underway. I mean, it's not like it was 10 years ago where there were new commercial buildings going up everywhere. I mean, those have been paired back fairly significantly.

I think what's left is people like ourselves and others participating in a market that has been rather steady. It hasn't been growing 20% or 30% a year, it's been jumping along at anywhere from 3% to 6% and that's likely to continue, maybe it won't be 6%, maybe closer to 3%.

But again infrastructure is a part of that and that we think is going to grow a little bit stronger, there is evidence of that. There are projects we participate in today and we have backlogs in those projects which suggest that we're going to continue to participate in the future. [I'm saying], we've taken a conservative approach and based on the conservative look we have I think we are certainly comfortable going forward.

That's very helpful. I appreciate your time. Thanks guys.

You are welcome.

(Operator Instructions). Peter Lisnic from Robert W. Baird.

Hi, back again. Henning, can you just, on the 200 basis points improvement in Processed Metal Products gross margin, the number for the third quarter I think, you said was 16.7%, and year to date I am coming up with like 12.8%. So is that 200 basis points relative to 12.8% or the 16.7% or --?

The 16%. And again, if you kind of look at the gross margins for Processed Metals, by the time we get finished at the end of the year we will have achieved what we believe is a sustainable gross margin for Processed Metals. It was lower in the first quarter because of pricing, it was higher in the second and third quarter because of pricing. It will be lower in the fourth quarter because of pricing, but the average is going to be pretty close to the sustainable margin that we expect for processed metals.

Yes, I'm guessing that sustainable margin is somewhere around 14% compared to --

It's about 12% to 13%, and you probably can figure out the rest, because the SG&A for that business is very low and they have done a good job of maintaining at a low basis, and therefore we are going to end up with what we think is a very nice margin for that business, one that's sustainable on a go forward basis.

All right. That is very helpful. Thank you.

You are welcome.

This concludes the question-and-answer portion of the call. I would now like to turn it over to Brian Lipke for closing remarks.

Thank you. Thanks for participating on the call today. We look forward to talking with you again in three months and reporting on our fourth quarter results and talking more about 2009 at that point in time. Thank you.

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