Gibraltar Industries Inc (ROCK) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gibraltar Conference Call to discuss its Second Quarter 2009 results. We will begin today's call with opening comments from Ken Houseknecht from Gibraltar's Investor Relations department. After the Company has concluded its presentation, we will open the line to your questions. At this point, I would now like to turn the call over to Mr. Houseknecht. Please proceed.

Thank you, Lacey. And welcome to Gibraltar's Second Quarter 2009 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 in the Company's 10K, which can be viewed on Gibraltar's website at www.Gibraltar1.com. If you did not receive the news release on our second quarter results, you can get a copy on our website. A set of the presentation slides that we will be referring to 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 would like to turn the call over to Brian.

Thanks Ken. Good morning, everyone, and thanks for being on our call this morning.

Before I turn the call over to Henning and Ken Smith for an in-depth review of our results and some comments on what we expect for the rest of the year, I want to spend a few minutes reviewing some of the key steps that we've taken over the last few years that paved the way for the substantial improvement in our profitability during the second quarter. Then following Ken and Henning's presentations, I'll provide some closing comments before we open the call to any questions that any of you may have. Let's start by taking a look at slide three.

In spite of a deep and prolonged downturn in the largest end markets that Gibraltar serves with housing starts and the North American auto build both down 48% compared to the second quarter of 2008, we were able to report significant sequential improvements compared to Q1 of 2009. Our profitability increased with improved operating earnings and profit before tax and a substantial sequential improvement in EPS.

Our revenues also increased despite a lower sales volume to the automotive market which was largely due to the temporary shutdowns at GM and Chrysler as they worked their way through their various issues and that was offset by a strong sequential in our building product sales and that's pretty encouraging.

This improvement in our second quarter operating results to a great extent is the cumulative result of the many steps that we've taken to aggressively restructure our business, cut costs, continue to reduce working capital, conserve cash, pay down debt, together with a much smaller FIFO impact and our focus on positioning Gibraltar as the low cost producer of the products that we manufacture.

Let me highlight some of the specifics here. We continued to streamline our operations in the second quarter, closing another three locations. Since the beginning of 2007, we've closed 32 facilities or 36% of our locations. As a result -- I'm sorry. As we noted on our call three months ago, it's important to emphasize that our streamlining activities leave us with $1.5 billion to $1.6 billion of productive capacity. So, even with our fewer facilities, we have substantial upside as business conditions improve.

In the last 18 months, we've also reduced the number of active employees by 33%. While we do expect some increase in employment when business begins to rebound, we estimate the majority of these reductions, approximately 70%, are permanent as they're linked directly to facility closures. We've also continued to focus on working capital which was lowered by another $47 million in the first six months of 2009 and which we've driven down by more than $100 million or 40% over the last 12 months.

We've achieved this reduction in working capital by incenting management at all levels of the Company to manage the business more efficiently and we're actively pursuing additional improvements. The cash generated from operating activities has been largely used to reduce debt which came down again in the second quarter. Our debt at June end was the Company's lowest since September of 2005.

Our second quarter results which we generated with only a modest increase in sales demonstrate how we have structurally changed the business, permanently lowered our cost structure and reduced our breakeven point. Our many cost reduction and cash preservation actions have set the stage for improving performance in the current operating environment and they position us for significantly better results as we begin to see continued improvements in volume.

As we reported last week, we also successfully completed an amendment to our senior credit agreement which provides the liquidity to successfully run our business through this global downturn and gives us the flexibility to fund organic and potential future acquisitions.

Even though the business conditions appear to have stabilized in the second quarter at levels well below a year ago, our restructuring activities allowed us to generate a significant increase in our second quarter profitability. These activities have lowered our operational breakeven point below our current volumes and we expect to see further improvements in our results now that it appears incremental improvements in demand are beginning to materialize and as the full impact of our cost cutting actions is felt along with a reduced FIFO impact going forward.

With that overview as a backdrop, I'll turn the call over to Ken Smith to give you a more detailed look at our financial performance.

Thank you, Brian. I'll turn next to slide number four which looks at the sequential improvement in more detail. Starting with revenues, while we had an unsurprising sequential decrease in one segment, our processed metal segment which serves the automotive OEMs, that segment's decrease was more than offset by our building product segment revenue increase of 15% as repair and remodel markets were positive, particularly in selected regions of the U.S.

Regarding profitability, the huge improvement was fueled by the full impact of our additional restructuring and cost reduction actions in the first quarter, a smaller detrimental effect from FIFO inventories, and the leverage from the sequential rise in net revenues. And regarding EPS, we also benefited from lower interest expense.

All of these factors were partially diminished by a high tax rate in the second quarter and I'll explain when I discuss a later slide. The principal takeaways from this slide are Gibraltar's ability to be profitable at low levels of customer demand and the leverage we have as demand comes back.

So, moving away from the sequential quarterly comparison, let's turn to slide number five which compares the year over year periods. We all know about the well publicized weakness in macro factors and thus it's not surprising that our revenues were down sharply in the 2009 periods as unit volumes have been unfavorable in the principal end markets we serve.

Likewise, looking at operating earnings, the 2009 periods were down sharply as a result of the significantly lower unit volumes, coupled with the sale of higher cost inventory. To offset lower volumes, we've aggressively reduced cost through actions which Brian noted in his opening remarks and Henning will provide additional detail in his comments on the segments.

Regarding free cash flow on slide five, it was once again very solid with the largest source of cash coming from lower working capital and aided by curtailed spending and CapEx and the suspension of the quarterly dividend. So, despite unfavorable comparisons to 2008, the summary here is that we've taken a number of actions to scale our operations, curtail spending, and turn assets faster to generate positive cash flow at current low levels of demand.

Moving ahead to slide number six, net income and EPS, Henning will review the performance of both our segments in a couple of minutes, so I'll discuss the other significant P&L differences. Our corporate expenses decreased significantly in both periods. The largest reductions have been in variable compensation plus a much reduced level of staffing in the home office as well as spending reductions in discretionary programs. Net interest expense also has decreased considerably, largely due to lower average borrowings as we have delevered by 30% or $132 million during the 12 months ended June 2009.

Regarding income tax expense, we have an unusually high tax expense in the second quarter. We have updated our expectations for the annual tax rate for 2009 resulting in a lower tax rate of 37% compared to the previous expectation of a 44% tax rate which we used in our first quarter results. In order for the year to date June 2009 P&L to have a 37% tax rate, which it does, the true up from the 44% rate to the 37% rate gets recorded in the current quarter. Hence the high tax expense only for Q2 2009.

Moving to slide seven, our free cash flow at 15% of net sales in Q2, certainly strong again with working capital the major source of cash and in the second quarter we reduced our inventories by another $24 million. We've now reduced inventories by nearly 40% in the first six months of 2009.

Turning to slide eight, you can see that we've reduced our borrowings by another $23 million or 7% in the second quarter and cumulative through the first half of 2009, we've paid down $51 million or 14% of the debt that we had outstanding at the end of 2008. Gibraltar's total debt of $306 million at the end June 2009 is the Company's lowest level of debt since September of 2005. As we move into the second half of the year, we will continue to focus on cash management and further delevering the balance sheet. Before we leave this slide, I have some summary remarks to make about the loan amendment we announced last week.

As our July 27 news release noted, we amended our senior credit agreement. The amendment provides an asset based revolving credit facility of $200 million in commitments plus a term loan of $59 million. At June 30, 2009, the Company had outstanding borrowings on the revolver of $40 million. The revolver and the term notes both mature in the second half of 2012. Gibraltar also has $204 million of senior subordinated notes outstanding. These notes which mature in 2015 were not affected by the amendment.

The amendment on the revolver and the term note eliminated certain previous financial covenants and instead contains one covenant. For 2009 the covenant is specified EBITDA amounts on the last day of each quarter through December 2009 and in 2010, that covenant is replaced with a fixed charge ratio of 1.25, measured at each quarter end.

Interest rates on the term note and revolver will continue to be based on LIBOR with a LIBOR floor of 1.5%. The term note will have an additional margin of 3.75% while the revolver will have an additional margin of 3.25% plus a 0.5% commitment fee. We expect the impact of the higher interest rates on pretax earnings to approximate $1 million per quarter or $0.02 per share based on the amounts outstanding as of June 30, 2009.

And now Henning will review the results of our two segments and discuss the current operating environment.

Thanks, Ken. As Brian and Ken noted, we generated a strong sequential improvement in earnings on a modest 6% increase in sales. In the second quarter our gross margins rose to 17.3% and our operating margin advanced to 4.7%, both significant improvements from the first quarter. Comparisons to the prior year remain unfavorable due to market and economic factors. Sequential comparisons, however, indicate the progress we have delivered and they set the stage for future trends. I therefore will confine my comments to a sequential analysis.

Looking at the building products segment on slide nine you can see that sales improved by 15% from the first quarter driven by market share and new product gains coupled with a seasonal pick up. Gross margin increased to 20.7% in the second quarter, up sharply from the 12.2% in the first quarter and the operating margin advanced to 9.2% from a loss of 1.9% in the first quarter.

Sequential margin improvements resulted from aggressive cost reductions initiatives, a much smaller FIFO impact due to our balance inventory position, unit volume increases driven by market share gains, and new products like our patented Gold Coat Connect is now stocked at major retailers and our patented Edge Vent system, an exclusive product that lowers costs to homeowners, to name a few.

Moving to slide number ten, the processed metal segment, the second quarter gross margin improved by 11.3% from the first quarter. And the operating margin improved by 45% even thought second quarter sales in this segment fell by 32% from the first quarter. The temporary plant shutdowns at Chrysler, General Motors, and other OEMs largely contributed to the exceptionally weak demand. The effects on profitability were largest from the sharp decline in orders but more than offset by aggressive cost reductions, restructuring actions and a smaller effect from FIFO impacted inventory. A reconfiguration of this business sets the stage for industry leading returns as market shares regain -- as markets regain their historical norms.

At this point I'll offer a few comments on current business conditions outlined on slide number 11. Our market stabilized in the second quarter. We believe they found their bottom, but at sales levels well below where they were a year ago. We expect continued improvement in the second half of this year, volumes in all of our end markets will remain below where they were in 2008.

We are, however, beginning to see some positive signs in many of our markets. Housing starts and permits improved in each month of the second quarter and growing signs that the housing market is starting to bounce back after the worst downturn in decades. The repair and remodel market which accounts for approximately 70% of our residential building product sales is steady.

The North American auto build, with the GM and Chrysler bankruptcies resolved, inventories coming down, and the federal government offering incentives to buy new vehicles should also be stronger in the second half of the year. Higher volumes will definitely help our processed metals product segment.

We'll also benefit from a number of new products that we have introduced and market share gains we have made in our processed metals, building products, and industrial businesses. Even though if we make great progress, we'll continue to relentlessly attack costs and steadily move to further reduce SG&A expenses, we're also continuing to strategically realign our businesses to ensure that we fully capture all of the available operational end market synergies and we're continuing to focus on working capital turns which should allow us to further lower our debt in the second half of 2009.

Our continuing actions to streamline our operations, cut costs, conserve cash, and pay down debt allowed us to generate significantly improved results in the second quarter with only a slight increase in sales. As the economy and our end markets continue to stabilize and eventually begin to strengthen, we have positioned Gibraltar for marked improvement in profitability.

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

Thanks, Henning. The structural changes that we've been making to our business over the last two to three years and the aggressive cost cutting and cash preservation actions we initiated in response to the deepening slowdown earlier this year have positioned Gibraltar for profitability even at these depressed levels of activity in our major markets. The structural changes and our intensified and permanent focus on working capital have substantially lowered our breakeven point below the current level of demand while maintaining our productive capacity in the $1.5 billion to $1.6 billion range.

Simply put, we're a far more efficient Company as a result of these actions which bodes well for increased profitability as the economy recovers. Our second quarter results are evidence of this. With only a slight increase in sales, our profitability improved significantly.

Looking forward to the third quarter we anticipate another modest sequential increase in sales. Longer-term, as the automotive and building markets continue to improve, Gibraltar is poised to attain more significant bottom line performance.

With that, we'll open the call to any questions that any of you may have.

(Operator Instructions) Our first question will come from the line of Jamie Sullivan with RBC Capital Markets. Please proceed.

Good morning, everyone. Nice job on the quarter.

Thanks, Jamie.

Just a question on some of the demand improvement that you saw. If you could just add a little bit more detail to some of the seasonal tick up? You mentioned some geographic improvements in specific areas. I was just wondering if you could talk a little bit more about where you saw the improvement?

Yes. Clearly we saw improvements in various parts of the country. Certainly the Northwest has started to show improvement in the building area, even California has started to show pickups. The Midwest has continued to be relatively strong. Northeast has sort of gained. Even most of the Southeast with the exception of Florida, started to see pickups in residential market activity.

I think some of the new products we introduced also helped augment some of the volume increases that we saw. I think there's a growing confidence out there. I know we've had marked increases in our process metals business as the automotive folks are now poised to start to significantly increase their production volumes as well.

Can you talk a little bit about some of the new products that are helped and what's in the pipeline for some of those new products?

Yes. Even some of the simpler products. We introduced ten new mailboxes this year, believe it or not, and the cluster boxes, one of our divisions makes -- we've developed three new products in that particular case, including a -- I guess they call it a cluster arrangement that allows us to put in a finished product into a development that allows for much less expensive mail delivery.

So, our folks now are working closely with the Postal Service to provide a better solution. As you know, they're having real problems with profitability and we provide a real solution to help them minimize their cost. The Gold Coat connectors -- we're excited about that -- provides a good solution and works well with wood that's now treated with a preservative but initially attacked the metal so you had to go to different solutions. We've got a, at this point, a patented solution that allows the connectors to withstand the corrosion that otherwise they would see.

I think the focus we've had, even though the business is down, we've continued to focus on the new product and new market areas. So, that's starting to pay off and we're starting to see some pickups and with the market coming up at the same time. That helps the entire incoming business configuration.

Great. Are you seeing some restocking in the retailers?

The retailers are starting to restock right now. Some of the wholesalers are starting to tick up. I think as they gain more confidence with their business, they will not just order on a order by order basis or a demand basis. They will start to reconfigure their inventories.

Jamie, in previous quarters, everybody was in a destocking mode. In other words, whatever they were selling, they were buying less than they were selling. Now it appears that at least at a minimum they're buying and replacing to the level that they're selling which is a positive change from where it had been.

As the world goes, it's kind of interesting, now there's more of a concern with availability. A lot of the industries have come down. The steel industry's taken a lot of capacity offline and as we've seen volumes start to pick up, there's a growing concern about getting the raw materials that you need. So, that is going to generate a whole series of other actions.

Alright. Thanks a lot. I'll get back in queue.

Thank you.

Our next question will come from the line of Sal Tharani with Goldman Sachs. Please proceed.

Good morning, guys.

Good morning, Sal.

I wanted to just ask you, your comment on acquisition, does your new covenant distract you from any acquisitions? Are there are opportunities? Where are you looking at? Any products you want to add? Any products you want to strengthen?

Well, the facility itself, Sal does not restrict our ability to go after acquisitions although we still have to maintain covenants before and after such a transaction.

We do have our eyes on a number of exciting opportunities for Gibraltar. We're waiting for the right time to move on those. I think we feel very positive about the future and the opportunities that some of the acquisitions will hold from Gibraltar.

Okay. And also, on the FIFO impact, can you give us an idea what kind of impact you had in the second quarter?

Incrementally is was a decrease of about $7 million.

Okay. What should we expect for interest expense going forward? Add $1 million to what you had in this Q2?

Yes. It's going to average $7 million or tad beneath that.

Okay. Second thing, tax rate for the second half?

37%.

Okay. Any -- what was your CapEx in the quarter?

CapEx in the second quarter was $3 million.

Okay. And just same run rate for the next second half?

It tapers down a little bit. We expect the full year to be around $10 million.

$9 million or $10 million. Yes.

Okay. What are you seeing in the non-res side of the business? I know housing has obviously started to pick up and you'll definitely benefit.

I think commercial is still depressed. I think that's well known. I think the specific industries that we're serving, including the energy industry, that shows signs of resurgence. As we know, oil is still bouncing around, but as oil starts to pick up, that's going to start to move forward. And we're starting to see some early signs in that area. Some of the commercial products we have now are kind of moving into residential as we expand our product lines.

For instance, some of our lath product lines are now moving into both residential and commercial. It probably takes another quarter or two to get back at the same pace. But it looks encouraging at this point. I think we're going to try to accelerate the increase by looking at some new product opportunities which our teams are working on.

My last question is that when -- last time when the housing was in good shape, you were trying to get into exclusive arrangements with large retail stores to get your product in like the mailbox that you have deal. Is that continuing on? I remember you had created a special position for that in the Company. Is that an emphasis still?

It does. We work very closely with our retail customers. I think we view ourselves as partners with them. I think it's mutual. We do have some exclusive products with some of the retailers. I think they're starting to benefit as we are and we'll continue to focus on that exclusively arrangement. I think new products is the best way to do that because as we develop new products with new features, we can offer through specific retailers and that gives them some continuity going forward.

Great. Thank you very much.

You're welcome.

Our next question will come from the line of Brett Levy with Jefferies and Company. Please proceed.

Good morning, guys. This is actually Seth here calling in for Brett. Good quarter. Now, a quick question. Going forward, you mentioned an incremental sales increase in the third quarter. Have you guys pretty much eliminated all the, I guess, low hanging fruit in terms of cost cutting? And what is it going to take to get you guys back to a sort of run rate of closer to 20% gross margins going forward? Is that possible here in the near-term?

It is possible. It's not going to take very much. I think when we look at our run rate at what I would call normal volumes, our gross margins would be up in the 23% to 24% area. So, it's not going to take much more to get us to 20%. I think if you looked at our current sales at about $1 billion is my calculation, we would be a little bit North of a 20% gross margin.

So, it's primarily a fixed cost absorption issue?

Primarily fixed cost absorption. Yes.

Okay. So, you said the CapEx for the full year is, I think your previous guidance was $11 million to $12 million, is now $9 million to $10 million? Is that correct?

Yes, that's correct.

Okay. And then in terms of working capital, are you guys going to be seeing a build in the third quarter as everyone starts to sort of restock?

It's interesting because as volumes pick up, obviously we'll have to take in more inventory. That will take our receivables up. That could do a build in needing more working capital but very quickly offset by higher unit volumes and higher profitability. I think when we're finished, our return on equity and return on investment will not decrease. It probably should increase as we go forward even with an increase in working capital.

Okay. And then I guess lastly as you see looking forward for the full year, I know you probably don't have a crystal ball for the fourth quarter, but do you anticipate being neutral or close to free cash flow breakeven for the year?

I tend to be the optimist of the group. I think the fourth quarter will be strong for the factors that we've talked about. I think Ken might have -- he would say a more conservative and balanced view. But the signs are there. We're starting to see movement going forward. I guess I suspect our fourth quarter could look different this year. So, the external factors.

We had strong first half performance. I don't see - I'd still say we're going to be in the black even with a more conservative view on the second half with working capital investment. I still think we're going to be in the black with free cash flow.

Okay. I guess one last question. There were no restructuring charges in the second quarter, correct?

Correct.

Okay. Alright. Thanks a lot, guys.

Our next question will come from the line of Mark Parr with KeyBanc Capital Markets. Please proceed.

Hi. Good morning.

Hi, Mark. How are you doing?

Okay, Brian. Great work. You guys are on a roll. I wanted to try to get some more color on the revenue upside, sequential upside in the second quarter. You've talked about a couple of things. You've talked about restocking or you've talked about the elimination of destocking. You've talked about restocking. And you've talked about a little bit of demand pick up. I was wondering if you could break that -- what is it? $15 million down in building products and talk about the -- any way you could give us some color on the contribution of those three pieces?

I think we would say or I would say that probably a quarter of the gains was from seasonal pickup. I think about 50% of the gain were new products in new markets that we went into and I think the remainder is probably some pick up in inventories that our customers are starting to take in rather that waiting until they run out.

Okay. And if, as you look at the number of your customers that have begun to undertake more normal inventory programs, can you handicap in terms of how far along in that process you are? I mean, the second quarter is probably just the beginning. There's probably more that they could --

They have just started. I think they, like the rest of the world are looking very cautiously. They see their orders picking up. I think if you go to any of our customers, in most of your shops, some of those customers you'll see far more activity in the parking lots than in the stores. We do go in and we talk to the store managers themselves and ask them how things are going and for the first time they've said things have started to pick up. I know that's anecdotal but it's real. We see it. We can feel it. I think that's starting to move along.

I think some of the wholesalers are seeing the same thing. I know on the automotive side, if you look at the data they have, since it's just in a broad range, if you look at the end of February, the total inventory in the automotive market was 147 days. If you measure it coming out of the end of the August, it's closer to 74 days.

So, they've taken their inventories down by half. A little bit more than half. So, they're also starting to move in the same direction. There's issues of market share loss. I think you'll see a lot more aggressiveness in the coming quarters, even in the automotive. I think there's reason to feel positive that things now are starting to move and the indicators are there. They're early, of course, but nonetheless they're there.

I was just really talking about building products. It sounds like -- that was my next question. Talk about the potential for revenue -- sequential revenue upside as your customer base moves away from a destocking environment. Is it fair to say, Henning, that we could see positive effects from the easing off of destocking momentum from both segments in the third quarter?

Yes. We believe that's the case.

Okay. Because we're definitely seeing signs of that with other companies and kind of other parts of the steel supply chain.

Yes. I think you'll see it and I think it will continue to gain momentum as we go forward.

Anything -- the new product side? I would imagine shelf space is something that you're thinking about as well. Is there a way to handicap say second half upside versus say the second quarter? Could there -- how more progress could there be along those lines from new product?

I think the third quarter could be rather good for us. I think the fourth quarter is a little cloudy. Typically the fourth quarter is more of a downturn, seasonal downturn. I guess I'm of the opinion -- I don't think we'll see as much downturn in the fourth quarter as folks go to reorient themselves. So, I'm in the camp that tends to be optimistic for the fourth quarter. I think it could be a stronger than usual quarter because of the broader characteristics of the economy and the markets.

Okay. Also I had a couple other questions on the cost side. You said the delta on FIFO impacts for the second quarter was $7 million. How much of a mismatch in the second quarter did that leave you with? Do you understand where I'm coming from?

Yes.

I'm trying to get a sense of how much more as your inventories fully normalize what --

There's probably another $4 million that we think is going to come out and benefit us in the third quarter. That will finish us off.

Okay. That's really helpful. Another question I had was you seem to have a real outsized pickup in EBIT given the magnitude of the revenue recovery from a sequential perspective. I was just wondering -- if you could -- Brian, you may have mentioned this and I probably missed the number if you did. Could you talk to what extent the improvement in EBIT 2Q versus 1Q was driven off of just normal sorts of operating leverage as opposed to just pure fixed cost elimination?

I think we saw most of it from fixed cost elimination, taking down our SG&A. We did get some leveraging but the leveraging wasn't the driven though.

Clearly. Yes.

If you want to differentiate it, I would maybe say 30% could've been the leveraging slightly higher volumes. But it was really the cost reduction activity. I hate to use the word cost reduction. The restructuring of the business that we've gone through that really helped provide the base for the improvement.

Alright. Is there any --

And you know we substantially -- and Brian talked about it -- substantially took down let's call it our breakeven point. We measure our breakeven point very closely. We knew where it was a year ago, a year and a half, and we're substantially below that. As Brian said, where the volumes are at right now, if you look at our results, you can extrapolate on a full year basis very quickly. We were about a breakeven. Even the tax in there for the second quarter. And you looked at the volume and you kind of know where our breakeven for the year is. I think all of the cost savings were not all in the second quarter yet. There's a little bit more that we'll get in the third quarter as they filter through.

Mark, simply put, I'd summarize it this way. I think we've proven that we can make money at the current levels of business activity. We don't expect it to stay at this current level, but if it does, we can continue to make money at this level.

Okay. I remember -- this will go back a few years and probably date me, but remember when your corporate goal was to get to a 20% gross margin and a 10% EBIT margin?

I do remember that.

The commentary that you and Henning are making would indicate that you seem to have structurally changed the business, the level of profitability by 300 or 400 basis points. Is that -- am I reading into that the right conclusion?

Yes, you are.

You are.

Definitely.

I think I said it earlier, our gross margins at a normal run rate are above 20%.

A lot of that would reflect the facility consolidation and all the synergies.

The facility consolidations and I think the other thing it represents, we've restructured some of our businesses. We've grouped them together. I did talk indirectly about the synergies we've gotten and that's in play right now. We are getting the synergies out of that reconfiguration.

I think the other thing that's helping and we've talked about it indirectly is the acquisitions we've made. And typically the acquisitions have much stronger operating characteristics. That's also pulled all of those margins up. So, at the end of the day, Gibraltar's configured with very different, more positive operating characteristics. I think as the volumes gained are more normal levels you'll see that. It will be very clear.

Mark, one of the key things that we've continued to invest in, even during the downturn are systems that are going to allow us to maintain this much lower cost structure with fewer people. Better systems are going to play a key part in our ability to maintain this lower cost structure and thus get us to those long-term goals of 20% gross margin or better and 10% operating margin or better. It's not just a wish. It's not just a -- we took some quick short-term actions to right the ship. This is a long-term strategic initiative that we've had underway for the last couple of years.

And, Mark, we talked about CapEx, we talked about the $9 million or $10 million this year. I would tell you that the preponderance of the CapEx expenditures have been on systems. We've not pulled back on that. We've continued to investment in those. We've got two major systems we're putting in. We've remained aggressive in that area because there is real long-term benefit. We're not short circuiting or short sighting the business at all. Even though we talk about the levels, there's some CapEx expenses you can legitimately push off to a better time, but the ones that you shouldn't, we are not.

I really appreciate all that. I've got one more question but I'll get back in queue because I would imagine there's some other people on and I don't want to hog this. But thanks for all that. Congratulations. I'll get back in queue to ask my last question later if there's time.

Thanks, Mark.

Thanks.

Our next question will come from the line of Peter Lisnic with Robert W. Baird. Please proceed.

Good morning, gentlemen.

Good morning.

I guess first question on the sequential FIFO impact of $7 million. Can you break that apart by segment for us?

It was almost evenly split between the two segments.

Yes. That's what I was going to say.

Okay. Alright. And then -- so, that's one piece of the margin equation, sequentially from first quarter to second quarter. And then the other piece you're saying 30% is just from the leverage on volume and 70% is sort of the fixed costs of restructuring initiatives that you've put through? Is that the right way to interpret it.

Yes.

Okay. And then if you look at the $1.5 billion to $1.6 billion in sales that you're scaled to, are you comfortable that that's the right number? In other words, are there potentially more restructuring plans that you might look at to take that capacity number down? Or are you pretty comfortable where you're at?

I think the -- and I think we've talked about it in the past. We didn't start this restructuring last year or the year before. We've been doing this for about five years. As we've continued to acquire business, we've continued to look at structuring so that in the long-term we could meet the objectives that we've talked to you and our shareholders about.

So, the answer is we'll continue to look at ways of improving the business as we go forward. This is not just a temporary focus. It's an ongoing focus. We've talked about continuous improvement with intent. We'll always do that. We'll still look -- we've got a major reconfiguration of about eight of our businesses underway. That will produce some results. We haven't seen all of it yet. They're still getting their hands on it.

The systems are going to help them. It's going to improve our distribution across the United States. It's going to provide some good sales opportunities with some of our larger customers. I think the answer is you'll continue to see Gibraltar looking at better ways to reconfigure the business.

Pete, let me respond to this question just a little bit differently. If I heard the question right, I think what you may be asking is do we still have excess capacity? I would say, "No, we don't." I believe that as both the auto and the residential and commercial-industrial markets begin to pick up again, at some point in time in the not too distant future, a year or two out, this capacity will be very important to us.

So, I don't consider it excess capacity. It isn't driving extra costs. Basically, this is just getting our operations back to running three shifts a day which they have not been doing through this downturn and most of getting back to this level is strictly incremental costs of adding additional shifts to those plants.

So, if you're suggesting or if your asking are we still going to be doing some major cost cutting initiatives and are there other charges that may come from it, I would say, "No", although Henning was responding to as we grow the business, as we add new product lines, as we add additional acquisitions to the group, we're constantly going to be blending those together to find further operating efficiencies.

Okay. Alright. That's helpful. And the follow-up question I guess is I'm probably also old enough to remember the 10% plus margin target that you guys were throwing out a few years ago at least. When you look at the business now and the restructuring actions and the structural improvement that you've made, my guess is that you get back to the $1.5 billion or just short of that in terms of revenue that this is -- 10% is a pretty easy threshold. Is this now -- has this become a 14%, 15% operating margin kind of business?

We think with the current configuration we're a little bit north of 12% to be direct.

North of 12% operating margin?

Yes.

Okay. And then I just wanted to clarify. On the free cash flow answer that you were answering earlier, were you talking about the fourth quarter being in the black or in the black for the year.

For the year. Because we've turned in - in the first half, we've turn in nearly $55 million of free cash flow which is approximately 14% of revenues.

Yes. What I'm wondering is will the second half be that significant of a working capital use to absorb nearly all the $55 million, $60 million?

Heck, no. No.

Okay. Alright.

We will not be reinvesting that full amount, I don't think. In the second half.

But conceivably some piece of it is what you're saying?

Yes.

Okay.

If that whole piece of working capital that we've carved out had to be put back in. The only reason that I could think to justify that would be a dramatic increase in business levels which we're not anticipating.

I would think -- I mean you throw up something on the order of what? $70 million or so in free cash flow last year? Is that a reasonable proxy for this year or should it be - ? I would that with the volumes declines that we've seen that potentially you could have a number that could be higher than last

Initially that was our thought.

But it still is -- as Brian pointed out, it's dependent on customer demand in the second half.

Okay. Alright. Thank you for your help.

You're welcome.

You're welcome.

Your next question will come from the line of Tim Hayes with Davenport and Company. Please proceed.

Good morning.

Good morning.

First question, in the building product side, have you had any private competitors actually exit some businesses such that you could gain some market share?

Yes. We've had a number of smaller competitors exiting a number of the markets we participate in.

And we understand that some larger private competitors also are on the ropes.

Are on the ropes. We'll leave it at that.

And some of these -- what products would these be concentrated in? It's certainly not lumber connectors or mailboxes, right?

That's true. That's true. I think the general building products that we supply, both metal and plastic building products in a general sense, metal roofing, trims, flashings, ventilation products. I think a pretty broad scope of where we participate and our scope is broadening. We're into ducting as well. HVAC support products. We've seen a number of changes in the markets relative to competitors in all those areas across the country.

Okay. And then do you have the D&A by segment?

We do. We'll look it up and we'll answer you after you -- after we get through your other questions.

Actually that was my last one.

We'll come back with that.

Alright. Thank you.

Here it is. You still there?

One moment. I'm sorry. Our next question will come from the line of Leo Larkin with Standard and Poor's. Please proceed.

Good morning. Could you -- do have any guidance for CapEx and DD&A for 2010?

We're just in the process of putting that together. We usually start the process in August. So, we're in the early stages of that. I think the answer is, at this point, "No". We would tend to at this point in time plan conservatively. Our depreciation is $28 million so we certainly plan on being well below that, but we're not, at this point haven't solidified how much below.

Okay. Second question. How are the valuations just as it's related to what another caller just mentioned about people, competitors leaving the business. Are these people just shutting down? Are they selling? Is there an opportunity here to maybe get something at a reasonable price?

All of the above actually. We're looking very closely at does anything make sense. Some of them are shutting down. Some of them are going to private equity. They're going in a number -- some places they're just walking away from the business depending on their size and configuration. We're looking very closely. We are spending a lot more time looking at those potential opportunities.

Okay. Thanks very much.

You're welcome.

And to answer the D&A question that was posed earlier, building product segment has approximately $6.3 million a quarter D&A. And the processed metal segment has about $1.5 million.

Your next question will come from the line of a follow-up from the line of Jamie Sullivan with RBC Capital Markets. Please proceed.

Hi. Just wanted to follow-up on some of the sequential margin improvement in 3Q. I know you talked about the FIFO benefit of about $4 million. Just wondering if you could bracket how much more restructuring benefit you expect to see sequentially?

I think it's going to be rather modest because we had a significant amount in the first quarter and I would say we got to a large extent the full and incremental effect through the second quarter. To what Henning talked about as modest increment in the third quarter is correctly described as modest.

Okay. So, mostly coming from sequential volume increases?

Right. Indeed, the leveraging will provide a pickup. There's some other reductions we've made that will continue to filter in right through the end of the year. And they're everywhere, all the individual businesses and corporate. I think we're looking at all of our expense levels, all of those expenses are being looked at and negotiated as we go forward.

Which is why we're going to have a lower FIFO impact as well.

Sure. Okay. And then just wondering what percentage of the business today is auto now that it's at such a depressed level?

About 12% is auto.

Okay. Great. Thanks a lot.

You're welcome.

Our next question will come from the line of Sal Tharani with Goldman Sachs as a follow-up. Please proceed.

Hi. I just wanted to get some more color on these new products you mentioned. Are these something you were in in the past or is this something totally new for you? And also how does it tie into your sort of long-term policy or long-term strategy of being number one or number two or top three on any of the products that you're in.

I ties in very closely. Some of the products that we have are brand new products. The Edge Vent that we introduced is a patented product. I think we're excited about that. That's being introduced. We've got a group of people, marketing folks going around the country talking to distributors and users of that product. The Gold Coat is something that we spent a long time developing with some nationally known labs. I think we're excited about that and I think that we have a large retailer who's now bought into that product and they're stocking it at all of their locations in the country. A number of the other new products we've been constantly introducing, usually two or three a quarter. So, that's providing a little bit of uptick at this point. I think when volumes are down, you look at every corner to find out where the opportunities are because there are always opportunities and we've been, if nothing, heightened our focus on product and market development.

Are you introducing or are you buying new equipment to make these? Or are these extensions of something you're making and just adding a little bit of tooling to convert it into a new product?

Actually both. In some cases it's new tooling, it's new capacity that we're adding. In other cases, it's redesigning some of the dyes that we have, for instance. We use progressive dyes and in some cases it's changing some of the steps in the configuration. So, we actually are doing both. We're investing in those areas. I like to think we focus on getting more of our CapEx into systems and new product development and we see more of the CapEx going in that direction.

The capital requirements for some of these new product additions have not been substantial.

No. They tend to be modest. I'll tell you in terms of the expenditures to support the new products. They're not complicated products. But nonetheless they can be very innovative. Like the Gold Coat, it's just a coating that goes on the connectors that we have, but it's a very innovative design. In that case there's almost no cost associated with the coating. Rather than the zinc coating, we're going to a gold plate coating.

Great. Thank you very much.

You're welcome.

Our next question is a follow-up from the line of Mark Parr with KeyBanc Capital Markets. Please proceed.

Thanks a lot. I had a follow-up related to the structural profitability associated with the strip steel business.

Yes?

There's been an awful lot of change in the makeup of the demand for those products and more capability being directed toward larger mills because of technological advancement. I'm just curious, I know you, Brian, it was a difficult decision to do all the consolidation that you've done and you've pretty much got that behind you.

But could you talk a little bit about the restructuring that you've undertaken in the last nine months associated with that business along with some of the marketing initiatives and the success there that you've had on some new product areas? I'd really like to get you assessment on the structural profitability of the steel processing operation going forward and how the outlook might've been changed.

Okay. There's a bunch of component parts to your question, Mark. Let me start with the macro look at things. I think what you're referring to is the fact that some of the steel mills have improved their production capacity of their cold rolled sheet to a point where it's starting to infringe upon some of the commodity grades of cold rolled strip steel. I guess we're fortunate in that we've never really participated in the commodity grades of cold rolled strip steel.

The best example of where our cold rolled strip steel goes is in the very demanding tolerance critical area of clutch plates for automatic transmissions. Here the surface conditions, the inherent metallurgical conditions of the product, the parallelism of the product, to name just few of the very tight specifications have not been even approached by the integrated steel producers or the mini-mills at this point in time. From that perspective, the portion of the automotive markets that we're serving is pretty secure for us.

From an overall standpoint, a lot of the consolidation that we went through business-wise, first of all, was based on getting more efficient in our production process which includes not only what we do once we get the steel in the plant, but our overall scheduling processes, material flow processes, et cetera, et cetera, a lot of which are driven by the systems that we're putting in place to help us manage those processes more efficiently which also, going backwards, help us in maintaining our inventories at much lower levels which is part of our overall working capital play.

So, we made some -- and then when we look at the consolidation that took place going from three cold rolled strip steel producing operations down to two, a lot of that was driven by internal operating efficiencies allowing us to maintain a higher level or productive capacity than we had in the past. Not so much that we saw our market shrinking. So, I think longer-term, once we get back to a more -- I guess if you will normal level of operational activity, we're going to see improved levels of profitability in that business over what we had produced historically over the last five or six years prior to this period of time.

Okay. Thanks for that very much.

Our next question will come as a follow-up from the line of Peter Lisnic with Robert W. Baird. Please proceed.

One more cash question, I guess. In the past you've talked about days sales in inventory numbers somewhere around 60 days. Is that a reasonable target that you can maybe approach in or by the end of '09?

Yes.

Okay. Alright. That was it. Thank you.

Thank you.

You're welcome, Pete.

At this time we have no further questions in queue. I would like to turn the call back over to Mr. Lipke for closing remarks.

I hope you've picked up some of the excitement that we're feeling right now. We've worked real hard and made some very important decisions and taken some critical strategic actions over the last 12 months that have put this Company in a much better position and as you saw with only a slight improvement in sales, our bottom line performance improved dramatically.

So, we're pretty excited as we look out into the future about the position that we have put the Company in. Thanks for being on the call today and we look forward to talking with your in three months.

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