Gibraltar Industries Inc (ROCK) 2009 Q3 法說會逐字稿

Welcome to the Gibraltar Conference Call to discuss its Third Quarter 2009 results. We'll begin today's call with opening comments from Ken Houseknecht from Gibraltar's Investor Relations department. After the Company has concluded its presentation, we'll open the lines to your questions. At this point, I will turn the call over to Mr. Houseknecht.

Thank you, [Amitie]. And welcome to Gibraltar's Third 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 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 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. Thanks 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 today.

Before I turn the call over to Henning and Ken Smith for a detailed review of our results and some comments on our outlook for the fourth quarter and coming year, I want to take a couple of minutes to highlight our continued progress in a few key areas, which have allowed us to generate substantial improvements in our earnings and operating margins in each of the last two quarters with only slight increases in our sales volume. And then after Ken and Henning have finished their remarks, I'll make a few closing comments before opening the call to any questions that any of you may have.

Referring to slide three, to start with, even though two of our largest end markets remain at levels well below a year ago with housing starts off 35% and the North American auto build down 21% compared to the third quarter of 2008 and that's not to mention well below the levels existing for 2007 or 2006, we reported sequential improvements in our performance for the second straight quarter.

Third quarter sales increased by 4% compared to the second quarter, a sign to us that our markets could have bottomed and could be on a slow path to recovery, yet we generated another strong sequential improvement in our operating profit excluding special charges.

Our consolidated operating margin increased to 8.2%, up 330 basis points from the second quarter as margins rose sequentially in both of our segments. In the last two quarters, we've seen clear evidence that Gibraltar is able to leverage small increases in sales to drive significant improvements in earnings and margins made possible in significant measure by our restructuring efforts and the close management of working capital.

The improvements in our operating performance in the last two quarters are to a significant extent a cumulative result of the many steps that we've taken over the last two to three years and especially in the early part of this year to aggressively restructure our business, cut costs, reduce working capital, conserve cash and pay down debt. All of these actions are part of our long-term focus to position Gibraltar as the low cost producer of the products we manufacture.

Let me highlight just a couple of specifics. In the third quarter, we closed another three facilities and we now have reduced our real estate footprint by 40% or 35 locations since the beginning of 2007 and we've maintained excellent service levels with all of our customers. And to reiterate a comment that we've made on recent calls, even after these facility reductions, we still have around $1.5 billion of productive capacity, so we can readily accommodate a substantial top line increase as business conditions begin to improve.

We also had another strong cash flow quarter. Working capital was again reduced, which contributed to the very strong free cash flow in the quarter and year-to-date periods. The free cash flow we generated has largely been used to reduce debt, which came down by another $40 million or 13% in the third quarter. And as this slide indicates, the June 30 balance of $40 million on our revolving credit facility was reduced to zero.

It's worth noting that we have now reduced our debt by nearly $300 million over the last 24 months, lowering our debt-to-cap to 32% and we expect to further delever the balance sheet through the remainder of 2009 and into the coming year.

Our results in the last two quarters, which were generated with only modest increases in sales, demonstrate how we've structurally changed the business, permanently lowered our cost structure, and reduced Gibraltar's break-even point. Even at the current level of business, we have reconfigured our business to operate profitably as the last two quarters have clearly demonstrated. Our many cost reduction actions, which we have embedded as permanent changes to how we run the business, also position us to generate stronger margins and profits than in past cycles as volume improvements develop.

With that overview, Ken, I'll the call over to you.

Thank you, Brian, and I'll turn next to slide number four, which looks at the sequential improvement in more detail.

Starting with revenues, we had sustained seasonal strength in our Building Products segment, where Q3 revenues remained level to Q2 as repair and remodel markets remain solid. In our Processed Metal segment, which serves the automotive OEM market and others, turned in a 32% sequential rise in revenues as many OEMs replenished their dealer lots following the Cash for Clunkers program.

Regarding profitability, the significant sequential improvement was fueled by better alignment with customer pricing with the cost of raw materials, including a smaller detrimental effect from FIFO inventories, the additional leverage from the sequential rise in revenues in the Processed Metal segment, and regarding EPS, the benefit of a lower income tax rate in Q3 compared to second quarter. The principal takeaways from this slide are Gibraltar's ability to be profitable even 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 and macro factors and thus it's not surprising that our revenues were down sharply compared to the 2008 periods as unit volumes have been unfavorable in the principal end markets we serve.

Likewise, looking at operating income, the 2009 periods were down sharply as a result of significantly lower unit volumes, coupled with the sale of higher cost inventory in 2009. To offset lower volumes, we've aggressively reduced costs 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 outstanding, with the largest source of cash coming from lower working capital and aided by curtailed spending and CapEx. So despite unfavorable comparisons to 2008, the summary here is that we've taken a number of actions to scale our operations and turn assets faster to generate positive cash flow at current low levels of demand.

Moving ahead to slide six, entitled 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 compared to 2008. The largest reductions have been in variable compensation, a much reduced level of staffing in the home office, and spending reductions and discretionary programs.

Net interest expense also has decreased. The 2009 amounts for net interest shown on slide six include a $1.2 million charge-off of previously deferred financing fees. The charge-off in Q3 2009 was a result of amending our senior credit agreement in late July 2009. Excluding that charge-off, interest expense was an even more favorable comparison to 2008 periods due to the continuous debt reduction during the 12 months ended the September 2009.

Regarding our lower income tax expense for the 2009 periods, the principal driver has been the much reduced level of profitability this year.

Moving to slide number seven, our free cash flow at 20% of net sales in Q3 was outstanding, with working capital again the major source of cash. And the third quarter reduced our inventories by another $10 million, and the reduction of inventories through the first nine months of this year has generated cash of $83 million.

And in terms of turning assets faster, the company's net working capital days for the third quarter and September end stood at 63 days, a notable reduction of 35 days from December end 2008.

Turning to slide number eight, you can see that we reduced our borrowings by another $40 million, a 13% reduction in the third quarter, and the first nine months of 2009, debt's been paid down by $90 million or 25%. And as Brian noted earlier, the $40 million debt reduction this quarter has fully paid off our borrowings on our revolver, leaving Gibraltar's total debt at $265 million as of September 30, which happens to be the Company's lowest level of debt in more than five years.

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

Thanks, Ken. For the second consecutive quarter, we generated a strong sequential improvement in earnings and margins on small sales gain. With third quarter sales up just 4%, our consolidated gross margin rose to 20.6% and our consolidated operating margin advanced to 8.2%, excluding special charges. Both are significant improvements from the second quarter and illustrate the repositioning of our business to the lower unit volume and material course volatility, which is expected to continue into 2010.

Looking first at our Building Products segment on slide nine, you can see that the sales were unchanged compared to the second quarter as market conditions continue to stabilize and followed the second quarter trends. Gross margin increased 380 basis points compared to the second quarter, and the operating margin improved by 360 basis points. Our ability to generate a significant improvement in margin on flat sequential sales was a result of improved operating efficiencies coupled with reduced spending and favorable mix.

Moving to slide number 10, our Processed Metals product segment, revenues improved with increased OEM orders, primarily to support automotive and industrial production planning, resulting in a top line improvement of 32%. Higher sales in raw material inventories valued at market improved the third quarter gross margin in our Processed Metal segment by 6.5 percentage points from the second quarter. And with tight expense control, the operating margin improved even more significantly with improvement in each month of the quarter and finally returning to profitability in September.

At this point, I'll offer a few comments on current business conditions, which are outlined on slide number 11. While our markets have stabilized as Brian noted, they've done so at levels well below where they were a year ago. We saw some strengthening in the third quarter, which we expect will continue next year, but volumes in all of our end markets remain below where they were in 2008.

To the good, each month seems to bring more signs of economic recovery. Single housing permits have increased for five months in a row. Housing starts have increased each month since February and existing housing inventory has decreased approximately 20% since February. Repair and remodel activity has picked up in many parts of the country as consumers regain confidence. In addition, many foreclosed homes require extensive repair before habitation.

All of the above is beginning to move to markets off as it recovers from the current downturn. The long-term outlook for the building and home improvement markets remains positive with core fundamentals well established. As is the case with Gibraltar, the reconstruction of our company was demanding, but we have emerged successfully with the flexibility to optimize our performance in the current economic and market situation and to accelerate our performance as external issues improve.

The second half, North American auto build, with inventories especially for better selling models now approaching normalized levels, will be an improvement over the first half, a trend we see continuing into 2010. As you saw in the most recent quarter, higher volumes would definitely help our Processed Metals product segment. It's worth noting that the North American auto build in 2009 is projected to be at a 50-year low. In spite of these historically low levels activity, our reconfigured business has turned the corner on profitability and will continue to improve going forward.

We will also continue to benefit from the new products that we've introduced and the market share gains we've made in our Processed Metal, Building Products and Industrial businesses. Overall, our view remains that there has been modest improvement in real demand, but the uncertainty in the US economy is still very high. We believe that real demand is in for a long slow recovery.

As in prior years, we expect that the fourth quarter will be seasonally slower, historically down 8% from the third quarter due to less construction in cold weather, the holiday season, year-end plant shutdowns and year-end inventory reductions by our retail and distribution customers.

Strategically, we remain committed to operate in our new streamlined mode, still providing outstanding service to our customers, continually looking for growth for new products and markets while reducing our debt and optimizing our cash flow. As the economy in our end markets continue to stabilize and eventually begin to strengthen, we will linearly improve our results, provide improved operating characteristics, higher shareholder value and drive our leading market share to new levels.

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

Thanks Henning. To sum things up, as we move through the balance of 2009 and into the early part of the New Year, we will continue to focus on cash management, further delevering the balance sheet, continually attack costs and carefully position all of our businesses to optimize their results in the current operating environment, while strengthening the foundation we're building for much improved results as end market and economic conditions continue their gradual improvement.

As Henning noted, eventually the economy in our end markets will rebound from what's been a long and deep downturn. Gibraltar is ready to capitalize on the opportunities that turnaround will present. For now, our focus remains on improving the performance and profitability of our existing businesses.

Don't take that to mean that we've forgotten about growth, which each month that passes as our balance sheet gets stronger and markets show more signs of having turned the corner, we will again begin to look at other growth opportunities. Having substantially lowered our break-even point with our inventory costs and selling prices now aligned, we've positioned Gibraltar to generate improving results in the year ahead as end markets strengthen and customer demand begins to increase. We've come through some very difficult days. I want to thank and acknowledge the men and women on the Gibraltar team for their outstanding contributions to the restructuring and cost reduction initiatives undertaken and executed so efficiently.

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

(Operator Instructions). And your first question comes from the line of Brett Levy with Jefferies and Company. Please proceed.

Hey guys. Now that you've got your revolver all the way down to zero and your highest cost debt now looks like the 8% notes, you're still trading -- you're still trading below par, are you able to or inclined to reduce that debt?

We still have an outstanding amount on some senior term notes, so additional cash flow at the moment, under the agreement, would require us to paydown the term notes first.

Got it. Are you guys in the current environment -- you got to be stronger than some of your competitors? Are you taking market share from anybody as best as you can tell, and where you have those opportunities or are in fact already taking market share, can you talk about the product areas that have the best potential?

Yes, we've been taking market share fairly regularly, which is normally the case if you do have high market share, which we do have. I think the taking of market share is fairly broadly spread over all of our products across the country. Many of the competitors we have in some of the businesses are not faring as well and some in fact are going out of business, so we had the opportunity to attenuate those sales as we continue to go forward.

All right. And I am guessing, I know the answer just based on the fact that multiples are pretty low right now. But as you guys look at expansion coming out of this downturn, are you thinking more along the lines of buy or more along the lines of build?

We're going to do both. We put in place some very aggressive product development programs and that's starting to show results. We'll get some organic growth, but we also have our eye on a number of other opportunities, which will accelerate our growth even faster.

We're in an interesting position right now too. We have somewhere around $1.5 billion worth of productive capacity existing within our businesses today, even after the closure of the facilities we noted during the prepared comments, which provides us with a lot of upside potential from where we are today with very insignificant capital expenditures.

So as Henning mentioned, we're working on a number of new product developments. We also have a lot of available capacity. And as the picture gets clearer and more stable, we will be looking for acquisition and for opportunities, and there are number of them out there. Some smaller, what we refer to as bolt-on or tuck-in acquisitions that we can put into some of our existing facilities, and then some larger plays that could potentially broaden and strengthen our product leadership positions that we've already established.

And without including any acquisitions, have you begun to think about CapEx in 2010?

Yes. We do have a budget process and that's been going forward as we speak.

All right. But there is no rough number or range of numbers that you could give at this point?

We would expect at this point to remain conservative going into the year and as the year turned up a little bit, we probably would end up being more aggressive. We've historically spent well below depreciation, and we would plan on starting on that basis going into the year. We'll continue to spend money on systems, because we believe that's important to the future of our business, so we've not cut back those types of expenditures, critical expenditures will continue to be made. And as we get further into the year, we will reevaluate and perhaps be more aggressive with capital spending. We've not held back on new product development and cost reduction areas, the areas that will continue to help the business.

And last question. What you guys estimate your exposure to the commercial real estate market?

We do not have much exposure to the commercial real estate market. We deal primarily with industrial companies that do participate in commercial products into that market, but we're really not that involved in commercial real estate per se.

A lot of our products go to the gas and oil industry, chemical industries, water treatment, sewage treatment, and installations of that -- and industrial manufacturing facilities.

Right.

Thanks very much guys.

You're welcome.

Your next question comes from the line of Sal Tharani with Goldman Sachs. Please proceed.

Good morning.

Good morning.

Good morning, Sal.

I just wanted to get some color on how much further restructuring we should expect over the coming quarters, are you almost done with it?

I would say that we are mostly done with the restructuring. We've taken all the facilities offline that we reasonably can at this particular point. We've taken our break-even down to an exceptionally low level. There is not much else we can do beyond totally revamping the company, which we don't expect to do. We are in the right position as the markets show signs of improvement going forward to capitalize as we move in 2010 and '11.

Okay, great. And when we think of about -- of a progression of your earnings and you gave some color on sort of your historical pattern and so forth for the fourth quarter, should we start from the unadjusted base or adjusted base?

I would start with the adjusted base, typically the fourth quarter and I think I significantly -- specifically indicated, we're usually down about 8% from the third quarter. With the economies where they are, we are not sure if that will continue, but there is no reason to believe that fourth quarter trends won't follow that pattern. So we would expect the fourth quarter to be lower and we'll be able to optimize our participation as we always have in the fourth quarter, and then we'll see as we go into 2010, we believe a nice pickup going forward.

Okay. And you gave the progression of your -- of Building Products, I am sorry, the segment -- sorry the Processed Metal segment that you were actually profitable by September.

Yes.

And that continues to be the case in October. How was the progression in Building Products, did you see improvement continuously throughout the quarter?

Building Products have performed outstandingly well in the third quarter, in fact their operating margin in our third quarter was equal to the operating margin in 2008 on much lower unit volume. And again that's attributed to all of the reduction activity that Brian talked about, Ken talked about, and I talked about. So clearly the evidences is in -- on our P&L. Again, if you looked at our third quarter, you would see that was equal to prior year. It's the outline, it's 13% -- it was 13% last year.

And very quickly last...

I agree. But when you consider the down -- the fall off in unit volume, that's really outstanding. I mean that's sort of the best of the best.

Yes. And very quickly on SG&A, it was up quarter over quarter. Are there some charges in there, is that the reason?

Yes, there were some charges. And you're looking at dollars, Sal or...?

Yes, dollar amount, yes. $27.1 million to $31.6 million?

We had some special charges in there and we can outline them for you specifically.

No, that's fine. I was just wondering what -- how should we think going forward, should we take a midpoint of these two...?

Yes, I think it was a one-time event in the third quarter, I think we continue to focus on taking our SG&A down to minimal levels, and we'll continue to do that as Brian indicated.

Okay, great. Thank you very much.

Welcome.

Your next question comes from the line of Peter Lisnic with Robert Baird. Please proceed.

Good morning, gentlemen.

Good morning, Pete.

I guess first question if we can just continue on the -- maybe on the capital allocation side. Balance sheet in pretty good order and generating strong cash flow and the turns have come down really nicely. Can you talk about at what point maybe you reconsider instituting a dividend or share buybacks relative to the acquisition environment? And if you could also address what the acquisition environment looks like in terms of availability of companies and multiples that would be great?

I can tell you from the dividend perspective first, Pete, we do intend to start a dividend up at the appropriate time. I don't know exactly when that will be yet. Hopefully it would be during 2010, but we want to be more certain of a few things before we take that step.

And I guess the same answer would apply to acquisition activity. We are continuing to look at acquisition candidates, but -- and have ongoing discussions with a number of businesses throughout this entire period of time and continue to have those discussions. So again, at the appropriate time, we will begin to step back into the acquisition arena. We haven't totally stepped out of it, we just haven't consummated any in a while, but we're continuing to look for acquisitions that can add to our niche product leadership positions, find other areas where we can establish niche product leadership positions and at the same time broaden our overall product offering.

Okay. And what are you seeing in terms of pricing in the environment and is the pool of candidates more on the distressed side or...?

Yes, we do not look at distressed companies; we don't do well with those. We tend to look for companies that have good operating characteristics. We've been very strategic in our acquisitions. We'll continue to do that. I think the multiples are probably lower today than they have been. Where in the past you could pay eight or nine times, I think today five or six is probably an appropriate number. We do have a very active list even though we've not done anything. As Brian indicated, we've been still very aggressive at evaluating, so we're ready to go.

Okay, all right. Shifting gears then. If you look at the Building Products business, I think you mentioned pricing and mix is adding to or helping improve the margin. Can you talk about the pricing dynamics in the businesses within Building Products, specifically I am wondering what pricing looks like on the more residential-oriented businesses versus pricing on the non-residential or --

I think we've been able to maintain the margins that we have retention price very aggressively with our customers that we want our customers to be able to have an advantage when they are selling. So we're very careful on pricing issues. We realize that we're a partnership and there is a balance and we try to stay close to that balance. I think material volatility has been an issue, but not as much an issue in Building Products, because the material cost is lower as a percent of sales in that particular segment than it is in some of our other segments.

Okay. And is there any way of giving us a ballpark range as to what pricing may have added or contributed to the margin line in the third quarter.

Pricing was a smaller piece in the third quarter. Most of it came from efficiency gains in the businesses themselves and mix. We've had some businesses with very high margins had much stronger performance in the third quarter, particularly three of them.

I am sorry, particularly three?

The three of our businesses did exceptionally well in the third quarter with very high margins.

Okay, all right. I appreciate the input. Thanks.

Welcome.

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

Great. Thanks very much. Good morning.

Good morning, Mark.

One question. It seems like you had very strong margin recovery in Building Products with very little sequential revenue momentum. And the revenue momentum you had in the steel processing area, while there was some improvement in profit sequentially, seem like there would have been an opportunity perhaps to show a little more upside and I guess maybe that reflects the FIFO situation. And I apologize if you've addressed this already on the call, but I am just curious if you could give some sense of the -- how the FIFO mismatch unfolded over the quarter? And you said that the business was in the black in September, was that in the absence of or with the continuing presence of FIFO mismatches?

It was in the decline of the FIFO mismatch, let's say we had lower unit volumes through the year, and so it took us longer to work through the inventories that we talked at during the year.

That and the fact, Mark as you well know, steel prices continue to be volatile and came down through the first part of the year to a low of -- for hot-rolled of $380 a ton and I believe we started the year out well north of $500. So with each -- while we're working our way through excess inventories that we brought into 2009, that was not only more volume than we needed, but also higher price. With each sequential quarter, the prices got lower, making that -- working through that inventory situation that much more difficult. But for the most part now, that is behind us for Processed Metals business and the business overall.

And fundamentally Processed Metals, really it's a nice business proposition that we have, and I think as we go forward I think the expected outcomes will be there.

It is difficult as you know and you've written an awful lot about it, about the volatility in the steel industry, what is it going to be tomorrow.

Well, come on, having a steel industry is not volatile at all. So am I. And one other -- I appreciate that color. One other question if I could, and again I apologize if you've already addressed this. But I know that there have been -- there has been an ongoing marketing effort in steel to broaden the customer base. I'd just like to get an update there to see if there is anything new, new applications, new end markets for you to achieve some success?

We looked at some end markets that we find very encouraging. Our folks are working -- are hard at work those. We've seen some gains in those and...

And anything in particular you can talk about that you brought over the transom?

I would say not yet. I would say maybe perhaps the next review we can give you more color on that.

We're a little reluctant to do that Mark, it gets into some competitive information that --

That's fine.

Keep under our vest.

All right. Is it another way to say do you have any sense of how much unit volume you might be able to derive from -- in 2010 for example, from markets that your customers, that you're currently not serving them?

At least another 10% to 15% and we're talking in tons now, not price.

Yes.

But at least 10% to 15% of what they've identified so far.

Okay. That's really encouraging. Anything similar you could share on the Building Products side?

We still -- we make good gains in Building Products. I think we're very grateful that many of our businesses have held up as strong as they have. I think that the folks have done an outstanding job in managing leading the business and going forward and I think we are very optimistic about the future.

With a number of new production introductions in various stages of action at this point in time too that we are optimistic it will help bring additional volume over in 2010.

Okay. I mean that certainly was one of the highlights of the second quarter update. And the other fact that your Building Products revenues were flat sequentially in what typically is the seasonally strongest period, is there something -- is there...?

Yes, there is. I think what -- and it doesn't show in there. The part that's pulling Building Products out is obviously the industrial, commercial end of it, which is the big part of our Building Products, and that was down significantly. The retail part actually did quite well.

Okay.

But the only visibility you have is in the total segment and the total segment in the third quarter was weighted by the commercial/industrial piece. Commercial/industrial piece was rather strong last year and started to -- as we all know started to come down this year. And again, we're working hard, they're working hard to develop. It's a new product and new market opportunity and I think we expect that to start rebounding for us in 2010, and I think when you see that you will see the -- maybe the full scope of the Building Products contribution.

Okay, terrific. Thanks for all the color and congratulations on a great progress.

Thank you.

Thanks Mark.

Your next question comes from the line of Jamie Sullivan with RBC Capital Markets. Please proceed.

Hi. Good morning everyone.

Good morning.

Good morning, Jamie.

Question on the raw materials. I think you mentioned that you expected something in the $4 million range in terms of margin benefit in 3Q, is that about where things shook out?

Yes.

We think...

I think it was a tad a little less than that.

Lesser than that. We think closer to $2.2 million at pre-tax line.

Okay. And you expect the fourth quarter -- you expect in the fourth quarter things will start to normalize?

Yes.

Yes.

Okay. On the cost savings front, can you give us a sense of the temporary items in 2009 like incentive comp, 401-K, et cetera, of the magnitude this year that you would expect to come back as things get better?

Particularly the comp is directly tied to the performance of the company so that as the company improves in terms of unit volumes and its profitability, there is a small element that will add to comp benefits, but it will always be outweighted by the size of the gains in both sales and profitability. I mean that's not going to -- will not offset it I guess is what we're saying. I think it's designed so that it's very proportional to the performance of the company that that will not be a factor in 2010.

I think the way our compensation plan was devised, it's meant to reward when we have improving performance, and the amount of the incentive compensation goes down when our results go down, which I believe is what all the compensation experts are saying is the way a good comp plan is supposed to be designed.

The key thing though, as Henning pointed out, is that in either case, we'll have a negative impact on profitability, it will be directly related to our profitability. And in all cases as we're moving up, profitability will exceed any additional expense charge for incentive compensation because it's only a percentage of the increase that comes back to the employees as rewards.

All right. Okay. So any sense on some of the other things that won't necessarily pay for themselves on an improvement scenario?

I think in 2010, most of the reconstruction charges that we've had during the year will be behind us. We've had a number of one-time charges this year. We expect those to be minimal next year. Those are well behind us. So I think everything else we've talked about in terms of reduction, we view as permanent.

I guess, and Brian I think maybe outlined it earlier, things like the 401-K retirement match, which we've abandoned this year, we would expect to return once the business came back into the right levels of profitability. I think everyone, not only us, other companies would expect the same return on those, but none of them would be disproportionate to the increase in volumes. And the way we've reconfigured the business, our profitability would increase as I say linearly as you go forward.

Okay.

We got a lot of models at different levels going forward and it's confirmed at every level.

Just on an annualized basis, the 401-K match is somewhere around $2 million.

Okay. That's helpful. Thank you. And then just wanted to -- moving to, on the retailer side, if you could talk about any trends in some of the big box names that you're seeing restocking, traffic, kind of things you've observed in the third quarter?

Yes, we've seen volume pick up in certain stores, certain locations. We see the southern part of California becoming more active. Other areas like South Florida is not very active right now, that still hasn't moved into a recovery mode. But most parts of the country, we have seen some level of recovery. We do see more remodeling activity. Many of the product lines that we have had been sharing in that, we'll call it recovery.

And I think going forward the retailers see it the same way. They -- I think that right now they tend to be promoting more of the remodel products that they have, that rather than some of the other products, and now they are putting together a lot of promos that will be highlighted in the fourth and first quarter to kind of shore up their sales as they move out of the winter season into the spring season.

An interesting sidelight is that a lot of the recent home sales have been foreclosure sales, and an interesting phenomenon coming out of that that Henning mentioned during his prepared remarks is that many of the foreclosed homes are pretty badly ransacked by the former owner as they are walking out the door. So anybody buying one of those foreclosed homes is going to have to spend money on repair and remodeling to make the home habitable again, which we think has been one of the factors helping not only stabilize but turn the repair and remodel side of the market in a positive direction.

Okay, thanks. If I recall right the big box names are about 20% of the total business goes through them?

Approximately, yes.

Okay, great. Then just lastly, with all the facility closures you've done, can you just kind of update us on what your distribution network looks like now? I know you mentioned 35 facilities that come out of the system?

Yes, the distribution network and again looking at where we run our businesses, we really run our businesses somewhat autonomously. So we are not a let's say a centralized company that runs a centralized distribution system. We run separate distribution systems for our businesses. Some of them are national business, some of them are regional, and we've been able to using some expertise from some folks that we've hired, been able to optimize our distribution. We've taken our transportation costs down about 2%, 2% of sales to total corporate level, and we've been able to continue to provide outstanding service to our customers. We tend to deliver at 99% complete and on-time in spite of the fact of closing many distribution centers.

I think the easiest way to get a sense of that, maybe next time we'll include a map showing what we looked like before we started closing facilities and what we look like today. And what you'll see is that we're still covering the same geographic areas. We're just doing it with far fewer facilities. In many cases, we had numerous facilities in a limited geographic area, and we've gone through and streamlined a lot of those right out of existence.

The key thing to point out though is that going through this process, we have closed very few, I think two or three in total, manufacturing facilities, and those were consolidated into other existing manufacturing facilities. So we haven't affected our total overall manufacturing capacity. We streamlined it, made it more efficient, but we haven't reduce the overall capacity. And in the case of the distribution facilities, there we've just streamlined. We're still covering the major population sales areas for our business, but we're doing it with just fewer facilities.

The other side of that is we're working hard to improve the efficiencies of our existing manufacturing facilities so that we can shorten the lead time, shorten the delivery schedule. And with a good logistics planning area that Henning mentioned we spent a lot of time focusing on, we believe that we're in an excellent position to continue to provide excellent service to our customers, as we have throughout this whole reconstruction period, going forward just with fewer facilities but more efficient plants and a better logistic system between us and the customers.

Thanks. That's great. And if I can just sneak one...

Just one last thing, Jamie.

Yes

This -- all of this cost cutting that we went through on facility closures, this was a much longer plan. This wasn't initiated as a result of the downturn in the markets that we were in. We've gone through -- we've made a lot of acquisitions over the years, and back in '06 maybe and a little bit before that, we started to say, "Okay, look, we've made all these acquisitions, now it's time to start to maximize the efficiency of all of the assets that we put together." So we've started on a plan of reconfiguring, reconstructing, streamlining this group of companies that we had put together several years ago, we accelerated that clearly during late 2008 and 2009, but it was a plan that we had in place for an extended period of time.

So this wasn't just, okay what's our level of business activity going to be, we've got to cut this many heads and this many facilities, it wasn't anything but that. This was a well-organized, well-thought out, well-devised plan that we initiated several years ago. This environment frankly gave us the opportunity to more aggressively do that than we might have been able to if business conditions have stayed as strong as they were back in the early part of 2006, but this is just a lot more than simply cutting costs to meet the current business volume. This is about restructuring this company for improved profitability going forward on a long-term basis, so we think we put ourselves in a very solid position to do that.

Thanks. That's helpful. And then just, the last one I have is on, what's maintenance CapEx on an annual basis? Do you have that?

Between $5 million or $6 million.

$5 million or $6 million, okay. Thanks a lot. I appreciate the time.

Your next question comes from the line of Daniel Carasso with Hain Capital. Please proceed.

Hi, good morning. My curiosity was piqued by your press release comment that the fourth quarter is the slowest quarter. I would like to get a better feel for your fourth quarter '09 prospects. You [start up] and you get about 85% to 90% as much revenue in the fourth quarter as you do in the third quarter of that same year. In '08, the fourth quarter revenues were only 73% of the third quarter. I'd say that was probably an outlier due to the economic trough. So ignoring the '08 seasonality, that would give you revenues in the range of say $195 million to $205 million this coming fourth quarter. The street expectations are for $232 million of revenues within a range of like $210 million to $264 million, is there going to be a reason I should expect a material difference in your seasonality this year relative to kind of normal years like '06 and '07?

We would expect it to be more normal to '06 and '07, that's our expectation.

So...

Although we have to say the visibility in the last two years has been less clear than it was in the previous years.

All right. So -- but in terms of like kind of if we say it's going to be something normal, that would be kind of a normal range of revenue in the $195 million to $205 million for the fourth quarter, is that would you say that's what normal years sort of like before 2008 came along?

I mean what we don't know was where the markets are going at this particular point, but...

Plus we are not -- we don't give quarterly guidance.

Okay. So the question, in terms of...

In fact it goes down the path that we just don't go down.

All right. But we should expect a normal seasonal reduction in revenues from third to fourth quarter?

Yes. I think we [said] something that was in the order of probably 10% down off of '03 and probably as closer to what we expected. There's some variability. We think automotive could be stronger in the fourth, but that's just us speculating based on what we see.

Okay. And then also in terms of margins, I think you mentioned on the call that you've done probably most of the cost cutting at this point, and I know you guys have done a great job at it. If you look at the margins for the fourth quarter, they are usually 4% to 5% lower than in the third quarter, like 400 to 500 basis points lower than in the third quarter. So and again in 2008, it was much more, but let's just throw that out and say it's not a normal year. If you take your just reported third quarter, income from operations of 6.6% and give it a haircut of 4.5%, so it gets -- you get basically 2% income from operations margins for the fourth quarter, which would get us to about income from operations of about $4 million. And then you take that $7 million to $8 million in expense I believe, and you're looking at a net loss for the fourth quarter before even going to bigger and better things in 2010. Is that all sound reasonable or you have some reason why in the fourth quarter you expect to be making money similar to maybe what you had in the third quarter, some change?

(Inaudible -- multiple speakers).

Sorry?

You've done a really good job, you could be our controller. I like it.

Yes, it's an interesting analysis you've done, and I guess we'll leave it at that.

Okay. But I am just kind of curious, because I can get into that and I'm just wondering if there should -- we should kind of assume normal seasonality that we've seen in the years past in the fourth quarter, or is there something different that's happening that's going to cause the fourth quarter to be where people are assuming, because street expectations are of $0.13 some people have $0.27 estimates, which is you need to make a lot of money in the fourth quarter?

What you've done is an analysis of past trends and applied it to the current environment. The question is what really will be the current environment? Will the fourth quarter because the economy, the auto industry, the housing industry, the commercial construction industry has been so low, will it buck the normal trend or not?

Right. I can see you guys are so close to the order trends, I have a better shot of getting answer from you than I do from myself.

Well, thanks Dan.

The actual question is which way we're seeing the fourth quarter stabilize in terms of acceleration away from the norm or is it a normal fourth quarter and that's what we don't know.

That's right.

That's true. We don't -- and that's the part we don't know. We worked at it very hard. As you know, we've taken an awful a lot of cost out of the business. We can operate at lower unit volumes, I think that sure will produce better margins. But like yourself, we're somewhat uncertain in the fourth quarter. We have more certainty on the first quarter and even -- probably I would say even in 2010, even though it's further way. Fourth quarter last year was absolutely horrendous, not only for us, for everybody. It just fell off the shelf.

Right.

And so we're looking at this fourth quarter with a lot of caution.

You probably listen to market sentiment as well as any of us. And up until a few weeks ago, I think there was more of a positive sentiment than exists today. It hasn't gone negative, but it's not quite as positive as it was.

For us, the big teller in the ultimate fourth quarter results is what happens in December and that's always a wild card. What will the customers do during the month of December? Sill the automotive companies shut down and it's usually a decision that seems to be made on the spur of the moment? Will the major retailers have a good season or not, will they continue to take inventories throughout the end of the year or will they shut down, there is just a lot of uncertainty in every year and that's probably greater this year than in past years.

Right. If you are likely to see that Street expectations are far off from where you think you are going to be once you've gone deep enough into December, are you likely to like pre-announce some kind of expectations for the quarter and for 2010, or is that information going to come out when you actually report full year results?

That's a determination that will be made at that point in time. Historically, unless there is a substantial change one way or the other, we -- from guidance that we've given and since we're not giving guidance that leaves an open question. We haven't gone back out to the Street.

Okay. Thanks very much. I really appreciate it.

You're welcome.

Your next question comes from the line of John [Fowler] with [Stone Tower]. Please proceed.

Hi guys. Can you hear me?

Yes.

Yes.

So can you give you more granularity just maybe by predominant SKU or something along those lines with regards to really consumer, Building Products, repair and remodel, what groups of products or types of products seem to be doing better from that type of demand?

I think repair and remodel products seem to do better, 80% of our participation happens to be in the repair and remodel segment of it. Those products dealing specifically with new housing starts are not faring quite as well, in fact they are quite way off. But those -- the other product lines again that dealing with the remodel seem to be doing much better.

One area for sure that has held up strong is ventilation products.

Okay.

That's I think primarily driven by the fact that when a roof needs to be replaced, it needs to be replaced whether the economy is in good shape or not. And that portion of our business has performed well throughout all of 2009, even compared to 2008 levels.

And in the Building Product segment, can you help me again reconcile something you said earlier, which was that the commercial/industrial is weighing down overall mix and revenues year-over-year, but yet -- earlier you you're your exposure to commercial construction is very little. Is that really more the industrial side and if so what is that comprised of?

It's more on the industrial side. We don't really as you would envision it participate heavily in the commercial. I think the question was commercial real estate. We don't deal in commercial real estate. We are not heavily involved in commercial construction. We are more involved in the industrial construction part of it, and therefore we are not as affected by commercial, but more affected by industrial activity, plant activity, rebuilding...

Infrastructure.

People expanding PP&E that kind of thing?

Right.

Okay. Thank you.

We look at commercial, most people when they talk about commercial building they are talking about big buildings being built.

They are talking big building and they are talking shopping malls.

Shopping malls, things like that.

We really don't do much at all in those areas.

Okay. So in a sense this build -- this business as you say is a leading indicator of capital expenditure and capacity increases in the end -- across very industrial -- (inaudible -- multiple speakers).

We work on projects in hospitals, we work in projects as Brian indicated in the energy field, we work in projects in the sub-architectural fields and that's where we participate. We've got a lot of wealth there, but not on the commercial real estate. And I think we already -- that that's considerably overbuilt and is probably in for a long hiatus before it returns, but we are not there. That's not where we participate.

And how much that segment is exposed to schools or public work kind of projects that sort of things?

We do have good participation there. We do different programs with flooring and some other products in those areas, and we would expect those will continue to -- always being funded. We're just waiting for the funds pass to the contractors.

You say in terms that this is really granular, last question here. Public school construction, is that continuing throughout this downturn?

Yes. I think we are putting more money into the education field at all levels. I think that's well publicized.

Yes.

Hospitals remain strong, they are going to promote more funding into the re -- or the construction or reconstruction of hospitals and medical facilities. Energy is another hotspot, I know oil is moving around, but energy is an area that will continue to grow.

Okay.

But we do participate in those areas.

All right. Thanks guys.

Welcome.

Your next question comes from the line of Sal Tharani with Goldman Sachs. Please proceed.

Thanks. Brian, you have always taken pride in being #1 or #2 in the products you manufacture, and you have given some color on the acquisition. I just wanted to get a feel, are these going to be in products which will push you into the higher level where you are not in or are these going to be newer products you are looking at?

Clearly, Sal you've identified a key component of our strategy. We want to be niche product leaders. We also want to drive the business in areas where we are -- our products are generating higher margins, which also means that raw material cost becomes a lower portion, a lower percentage of our overall selling price, driving some of the volatility out of the business. There are a number of areas that we've identified internally, and it's going to have to stay that way, that we think offer us the ability to meet those criteria and help to drive Gibraltar's overall operating performance in an upward direction that we wanted to go in. We're just -- We're just biding our time, Sal.

Got you. And last thing on Processed Metal side, flat-rolled prices are under pressure and coming down, should we be worried about some FIFO headwind over here going into the fourth?

We've done an outstanding job in getting control over inventory particularly in that business. I think they are -- right now they are probably running close to 7, 7.5 turns. I think we can keep it that way. So any overhang we have on material pricing relative to inventory is going to be very small. We all learned the lesson from what we have gone through in the past, and we don't intend to repeat it.

The best way for us to deal with raw material volatility in the flat-rolled business is to carry as little inventory at all times as we possibly can and that's been a change in thought process in that business and as Henning pointed out they are turning inventory 7 times now. So we got them in a good position. We are not speculatively buying. We are trying to link as many of our buys to as many of our selling price arrangements as we possibly can, and our focus in that business is just to turn the inventory over as fast as we can, which reduces substantially the exposure to FIFO inventory issues.

Is this increase in turn besides the effort you're putting is also due to some changes you made in the business, getting rid of the couple of businesses in that one?

Yes.

Great. Thank you very much.

You're welcome.

(Operator Instructions). This concludes the Q&A session of today's conference. I'll now turn the call back over to Mr. Houseknecht for closing remarks.

It's actually Mr. Lipke. Thank you all for your continued support and we look forward to talking with you again in three months or so. Thank you.

Thank you for joining today's conference. Have a great day.