Gibraltar Industries Inc (ROCK) 2010 Q2 法說會逐字稿

Welcome to the Gibraltar conference call to discuss the second quarter results. We'll begin today's call with opening comments from Ken Houseknecht from Gibraltar's Investor Relations department. After the Company concludes its presentation, we'll open the line for your questions.

At this point, I will turn the call over to Mr. Houseknecht. Sir, you may proceed.

Thank you, Silmeda, and welcome to Gibraltar's second quarter 2010 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 and were updated in the first quarter 10-Q, both if which can be viewed on Gibraltar's website at gibraltar1.com. If you did not receive the earnings release on our second quarter results, you can get a copy on our website. The presentation slides that we will be referring to during this call are also available on our website.

On our call this morning are Brian Lipke, our Chairman and CEO; Henning Kornbrekke, our President and COO; and Ken Smith, our CFO. Thank you for joining us.

At this point, I'd like to turn the call over to Brian.

Thanks, Ken. Good morning, everyone and thanks for joining us on our call this morning. As usual, I'm going to make a few opening remarks then Henning Kornbrekke and Ken Smith will provide a little more detailed review of our second quarter results, talk about current market conditions and our expectations for the third quarter and the balance of the year. And then, we'll open the call up to any questions that you may have.

Our second quarter results were pretty solid and further evidence that the strategic transformation that we've taken Gibraltar through, consisting of many steps to aggressively restructure our operations, improve operational efficiency, cut costs, reduce working capital and debt, has put us in a position where we can be profitable at the current historically low activity levels in our major end markets, and that we're prepared to expand our margin, profits and returns on incremental sales growth once market activity improves.

After order levels improved in March and then April, we expected even stronger results in the second quarter than we delivered. But the expiration of the Federal Tax Credit for first-time homebuyers, persistently high unemployment, and a barrage of negative news events had the effect of weakening consumer confidence, which caused them to put their wallets deep in their pockets, and that had a direct impact on our incoming order levels in May and June.

Even still, though, with flat sales compared to the second quarter of 2009, we generated earnings per share, before special charges, of $0.13 in this year's second quarter. And that's up from $0.07 a year ago, and that's also before special charges. Which clearly demonstrates the improved operating characteristics of the business. So, we've made good progress on that front.

The results for the first six months of the year are even more striking when compared to last year. On a sales decrease of 2%, driven in large part by a continued decline in commercial construction activity compared to 2009, we generated a sharp increase in EPS of $0.09 before special charges in the first half of this year, compared to a loss of $0.12 per share in the first half of last year, also before special charges.

These results are the cumulative effect of the many initiatives that we've taken to allow the Company to be profitable, even at these low levels of business activity. We've lowered our breakeven point to annual sales of $650 million to $670 million, depending upon mix, which allows us to operate profitably at current demand levels. Again, evidenced by our second quarter results.

This is possible in part because of our multi-year investments in better ERP systems, allowing us to more tightly manage and control all aspects of our business, including production planning, supply chain management, working capital and logistics, all key components of our strategic repositioning of the Company.

Taking a look at slide three, to help give some perspective to the magnitude of our restructuring efforts, we need only to look back at how much our major markets are off from historic levels. The repair and remodel segment of the residential building market is estimated to be off by approximate 25% from its peak. New housing starts are just 25% of their peak and only one-third of their average over the last 60 years. That's a significant decline.

The nonresidential building market is down approximate 40% from its recent peak, another substantial decline. Order levels from many of these markets are at historic lows and are well below normalized levels. And then, we believe those levels are unsustainably low over the long term. They will rebound at some point.

Our restructuring efforts have overcome these market declines and returned us to profitability. More importantly, our restructuring efforts have set the stage to leverage our lower cost structure against incremental value to drive higher profits.

Because of the strategic approach to our restructuring activities, which was driven by our confidence that our markets will rebound, we retained an annual sales capacity of approximate $1.6 billion, and that's prior to any additional acquisition activity. So, we could readily absorb additional business with our existing operations at little incremental cost, which will accelerate improvements in our margins, earnings and returns. We are ready and able to accept additional business immediately when conditions improve, and that's very important.

Since 70% of our sales in the residential building market are in the repair and remodel activity, and half of our nonresidential revenues come from replacement activities, we expect to benefit from any early cycle improvements in demand as these are the areas where the dollars are first spent when confidence in the economy begins to improve. And that's either consumer confidence or business confidence.

Throughout this downturn we never lost focus on our long-term growth plans. And acquisitions continue to be an important part of our growth strategy. We never stop searching for the right opportunities, targeting businesses and product lines that will strengthen or expand our product leadership positions, further diversify our business mix, and improve our overall performance characteristics.

At this point, generally, we're pleased with our positioning, our restructuring activities, and our ability to generate profits and positive cash flow, all of which elevates acquisitions on our list of key next steps. I want to thank and acknowledge the members of the Gibraltar team for helping us deliver another solid quarter in what remains a very difficult operating environment.

With that as a backdrop, I'll turn the call over to Ken Smith.

Thanks, Brian. And I'll start with slide number four, highlights of the second quarter.

There were a number of important financial improvements in Q2, which resulted from strong execution by the Company during this period of continuing weak economic condition.

First, a continuing rise in profitability for both the quarter and the half year versus the comparable periods in 2009, largely benefiting from lower costs this year compared to the 2009 periods. Free cash flow continued to be positive, generated at a very respectable rate of 8% of revenues.

And regarding debt, we continue to have no draws against our revolving credit agreement. We had expected to do so and have some borrowings this quarter, but given the cash generated from the P&L and faster working capital turns this quarter, we had no need to borrow. And the last bullet on slide number four, importantly we've added ample liquidity to help fund our growth initiatives and working capital needs.

Now, moving to slide number five titled year-over-year profit improvement. Revenues were slightly up in the second quarter. Revenues from the residential markets were up approximate 5% compared to Q2 a year ago as decreased shipments to distributors and contractors more than offset the modest revenue growth that we had in the second quarter to our retail and home center channels.

Revenues from nonresidential markets increased approximate 11% compared to Q2 a year ago, largely on stronger pricing that corresponded to rising raw material costs. Revenues in the first half of this year approximated those of a year ago as a sustained recovery in our end markets has not yet materialized, as Brian noted in his remarks.

Regarding operating income in the second quarter, it decreased compared to Q2 a year ago. This was the net result of an improvement in gross margin that was offset by higher SG&A expenses.

Regarding the gross margin rise, we generated a gross margin of 20.4% in the second quarter, up 50 basis points from Q2 a year ago, driven by our improved efficiency, despite keen competition amid lower than expected seasonal volumes.

The second quarter 2010 SG&A expenses were unfavorable to last year. In Q2 2009 we had very favorable and unusually low costs in two categories; employee health claims where claims were exceptionally low, and in the category of the compensation. Our second quarter SG&A this year was equivalent to Q1 this year and much lower than the fourth quarter of '09.

Although not shown on slide five, we realized notable operating margin expansion in the second quarter compared to the first quarter of this year. On the sequential revenue increase of $34 million, or 22%, operating income increased $9 million, or 27% of the incremental revenue increase, which does evidence the leverage available by the Company.

And earnings per share had nearly doubled in Q2 compared to a year ago, before impairments and special charges. The large increase in EPS was achieved by the gross profit improvement, lower interest costs and lower income taxes. Also, the EPS for the six months of 2010 were much improved, the result of sharply higher operating efficiencies and operating income.

Free cash flow continued to be a source of cash. And although 2009 greatly benefited from reduced working capital, in 2010 we've continued to generate cash at a steady rate due to our much improved profitability.

Moving ahead to slide six, titled net income and EPS. On this slide we break out the non-operating and income tax expenses. For net interest, it decreased compared to the periods last year due to the lower average borrowings. And as we've previously stated, we repaid all of our variable rate debt in February of this year.

Regarding income tax expense, we incurred a lower tax rate to tax expense in the second quarter of this year. The effective tax rate for Q2 2010 was 46% compared to a rate of 76% in the second quarter of 2009. Last year's Q2 rate was unusually high due to a mid-year change in forecasted full-year earnings and full-year tax rate and, therefore, had to adjust the second quarter of '09 tax rate accordingly. For the rest of 2010, I expect an effective tax rate percent in the high 40s.

Turning to slide number seven, positive cash flow. Our significant earnings improvement this year has helped maintain strong cash flow in the first six months, even though the total free cash flow in the first half of this year compares unfavorably to 2009.

And as I mentioned earlier, 2009 was particularly strong from our aggressive reductions in working capital throughout all of last year. And since we began 2010 with a much lower amount of working capital, there's not as much cash to generate from working capital this year.

Nonetheless, in 2010 we have further improved our use of working capital by faster turnover. At the outset of this year we had 69 days invested in working capital. By March end of this year we were down to 65 days, and we ended June 2010 with a 58-day investment in working capital. This improvement of 11 days or 16% as of June end was primarily in the receivables and inventories that we carry. And as I look at the 58-day position and look back at the downward trend in working capital days achieved by the Company over the past two years, the Company's done a really good job in becoming efficient with working capital.

And finally, as the last row on slide seven reports, we continued to generate a solid rate of free cash flow in the first half of this year at 8% of revenue. And in my view, high single-digits and better is very solid performance.

Now, moving to slide eight, debt reduction. We reduced our net debt by over $50 million thus far in 2010. $7 million of that improvement was in the second quarter of 2010. In early May this year, at the time of our first quarter earnings call, we had expected to make some borrowings this quarter to support working capital. However, we did not because of the cash generated from the P&L and faster working capital turns.

The Company's overall liquidity position increased to a little over $140 million as of June end, based on cash on hand of $27 million plus the availability in our revolver. And I believe this liquidity position is quite ample to support Gibraltar's growth initiatives. Looking ahead, we expect future free cash flow would increase our cash on hand, and our priorities to use excess cash are expected to be focused on internally driven growth and potential acquisitions, initiatives that Henning will describe in his remarks.

And with that, I'll turn the call over to Henning.

Thanks, Ken.

As Brian noted, the second quarter reversed the pattern of the first by starting strong in April, and then activities slowed in May and June following the expiration of the Federal Tax Credit, which lowered volumes at all of our businesses selling to the residential building market.

Activity also slowed in the nonresidential market as the weak and uncertain economy hurt demand, and customers continued to buy to fill specific orders instead of inventory. Inventory levels remained at record lows at all levels in the supply chain. Any pickup in activity will challenge the supply chain. Fortunately, Gibraltar's improved and systems-focused efficiencies will allow the Company to quickly respond to higher sales levels with continued high levels of customer service, allowing renewed growth and leverage in our served markets.

While we continue to believe that housing starts will increase from last year's levels, we currently expect a range from 580,000 to 620,000 units, which is down from a previous expectation of 743,000 starts. Even though inventories of unsold homes are at 40-year lows, continued foreclosure activity, high unemployment levels, tight consumer credit, and economic uncertainty is hurting demand. We did see some recovery in starts and permits in June off of May's record low levels, but conditions remain difficult in this market.

With respect to the residential repair and remodeling demand, LIRA, the Leading Indicated Remodeling Activity, home improvement spending is expected to accelerate with nearly 5% growth in the fourth quarter of this year, and even stronger growth in the first quarter of next year. Our product participation is skewed toward the remodeling, home improvement segment so demand levels have remained fairly constant and will rise with the expected uptick in remodeling activity.

Nonresidential building activity has leveled off in 2010 at an annual rate of $275 billion, down from $366 billion last year. As we discussed last quarter, this portion of our business is focused to a large extent on industrial facilities like sewage and waste water treatment plants, gas and oil rigs, chemical plants and manufacturing facilities of all types. Other than for architectural and decorative applications, our products are not focused on the high-rise building market, which remains well constrained compared to previous years.

We continue to identify and pursue internal growth initiatives. Last month we reviewed our strategy of the Company's 50 top executives, focusing on specific actions that will generate innovation, growth, operational improvements, and enhanced performance.

As Brian mentioned, acquisitions also remain an important part of our growth strategy, and we continue to elevate a number of opportunities -- evaluate a number of opportunities of various sizes in every area of the business.

Our category-leading products and strong relationship with top customers in all of our distribution channels have allowed us to gain share, a trend that continues this year in spite of historically low demand levels in our end markets. We continue to develop new products, while taking our existing line to new customers and additional geographic markets, all of which further strengthens our competitive position.

The building markets we serve are large and fragmented, with many of our customers looking to consolidate their supply base. And, we have capitalized on numerous growth opportunities created by the turbulence of the last few years. Consistent with our strategy of growing through product leadership position and share gains, we are also driving to be a global low-cost producer. We're continuing to keep a tight rein on spending and we are finding additional ways to further reduce our expenses, aided by our multi-year investments in ERP systems.

With our streamlined core structure we are now generating annual sales per employee of $321,000, an increase of 13% from a year ago, and this is a very favorable comparison to our industry peers.

Looking ahead, we continue to move through the strongest seasonal period of the year for our businesses, and we expect to generate a profit in the third quarter. Although in comparison to Q3, 2009, that quarter last year was advantaged by the lowest raw material costs of 2009, as our material costs slid to the lowest levels in several years in reaction to the 2009 economic contraction. And, we expect a much higher tax rate in the third quarter of 2010.

Nonetheless, we expect to be solidly profitable this coming quarter and for the full year in spite of uncertainty as to when the markets we serve will recover. And, we remain excited and very optimistic relative to the quarters ahead as we assertively execute our growth strategy.

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

Thanks, Henning.

As you've heard, we've taken a series of steps to strengthen the Company's position and our results; ongoing operational efficiency and cost containment initiatives, the reduction of working capital, and a continued emphasis on growth. In short, we're taking a series of steps to strengthen the Company's performance and our results, both in the short term and in the future.

These steps have resulted in solid second quarter profitability, faster turns of networking capital, and lower net debt, which improves our liquidity and provides the wherewithal to make acquisitions as part of our growth plans. All of this continues to be accomplished in spite of historically weak economic levels affecting our major end markets.

We believe these results validate Gibraltar's strategic positioning and the ability of our people to deliver solid results, in spite of the very difficult circumstances that we are currently working our way through.

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

(Operator Instructions.) And your first question comes from the line of Seth Yeager from Jefferies & Company. Please proceed.

Good morning, guys.

Good morning.

Good morning.

As far as the momentum that you guys had in the beginning of the quarter, was some of that pent up from some of the bad weather that you guys had in the first quarter, or was that true, sort of organic demand that you were seeing?

It was organic demand. We did have some regional activity due to some of the storms. But on average, it was normal, solid activity that we saw.

Alright. And as far as some of the softness in the latter half of the quarter, has that continued into July?

So far it has, yes.

Alright. And then, as far as the -- I guess unit volumes year-over-year on an apples-to-apples basis was flat. The -- was there a shift in mix or price during the quarter?

Not much -- there was mix change but, on balance, not very much. And I'd say that we would say the same with pricing. Pricing was relatively stable during the period.

Okay. And as far as -- you've noted acquisitions a few times. Is there anything in particular that you guys are looking at as far as size or geographic location and that sort of thing?

We've continued to look at acquisitions throughout this entire period and we have a long list of acquisitions under consideration at this point in time. The size range of those acquisitions starts with product acquisitions or bolt-on acquisitions that we can tuck in to existing facilities, improving the performance of those operations by eliminating the costs associated with those acquisitions when we tuck them into our businesses.

The next level up is companies that are up in the range of $75 million to $150 million, or perhaps even $200 million in annual sales that will either strengthen an existing product position, or give us a solid foothold in a new product area that's synergistic to ones that we already have.

And then today, as you might expect, there have been a number of companies like Gibraltar who have been successful in keeping their head above the water throughout this entire period and are now starting to think about what's their best course of action going forward. Should we go it alone? Should we find somebody to merge with to create a larger platform through which we could eliminate more costs than either of the two parties alone have done, and create a broader, larger, stronger platform to catch what will be the inevitable improvement levels coming to the markets that we serve?

So, we're looking at a broad range of different opportunities. Some are just normal operational and others could be transformational. But we're looking -- we're casting a very broad net at this point in time.

(Inaudible) we're very excited about Gibraltar's future. I think we're positioned, as Brian said earlier, the right way. And we have the wherewithal to step the business up to the next level.

And those businesses, are you looking at guys with sort of that normalized 8% to 10% EBITDA margin, in that range?

Absolutely.

At least.

Yes.

I mean, our plans are to get the whole business above double-digit margins. So, as we look at acquisitions, we've got a little tougher hurdle rate that we're looking at to make sure that they contribute positively to moving the margins in the directions that we want to take them.

Okay.

That's one of the things that Ken Smith has brought to the table is a series of additional filters through which any acquisition has to pass in order to make muster going forward.

Okay. And then I guess one final question, if I may. On a pro forma basis, just to make sure I have my numbers correct here, in the third quarter EBITDA was about $25 or so million, correct? Excluding the Processed Metals division?

Last year.

Last year.

Yes.

Yes, that's about right.

Yes.

Okay. Alright. Thanks a lot, guys.

And your next question comes from the line of Jamie Sullivan from RBC Capital Markets. Please proceed.

Good morning.

Good morning, Jamie.

A question -- Ken Smith. In your opening comments you were talking about the residential market up 5% year over year. I just had trouble hearing some of the moving parts that you talked about. Would you mind repeating that?

In the residential we had positive revenue growth in our channels through retail and home centers. And that got a little offset by our shipments through distributors and contractors. So, net on the residential piece of our market, we were down about 5% compared to Q2 a year ago. In non-res we were up.

Right.

And the lines were pretty steady. We did have some pricing realization in the non-res.

Okay. And volumes were flattish you said?

Yes.

Okay. And when you talk about the quarter sort of slowing as it progressed, does that mean that April and May on an absolute level were above -- or March and April were above May and June?

Yes.

Yes.

Okay. Alright. And so, we could see -- with the current trends, we'd suggest that 3Q could be flattish or even down a bit from 2Q?

It's difficult to project at this point in time. We still have optimism that the last two months of the quarter could improve. But I think it's possible that the sales could be flat to slightly down.

Okay. Alright. And then in terms of geographies, are there any geographies that are surprising you one way or the other at this point?

No. I think we've seen the trends. Southeast, particularly Florida, is off considerably. Southern California remains off. Phoenix is down. Las Vegas is down. Midwest has started to pick up. Northeast has started to pick up. The northern part of the Southeast has started to pick up. And Texas remains relatively strong. So, those patterns have persisted. I think eventually we'll see the leveling off first probably in Southern California and then spreading to the rest of the Southwest.

Okay.

We think Florida's going to take longer to recover, particularly South Florida. It's got more inventory of houses down there it has to work through. So, we think that'll be the last vestige of recovery.

Yes. The overbuilding there in both res single-family home and multi-family dwellings was the most overblown of any part of the country.

Right. Okay. And then just one last quick one on the effective tax rate. What should we be thinking about going forward?

As I mentioned in my remarks, we expect that for the balance of the year we'd be in the high 40 percents.

High 40. Okay.

The 40s.

Thanks a lot.

You're welcome, Jamie.

And your next question comes from the line of Yvonne Varano from Jefferies. Please proceed.

Thanks. I just wanted to ask about the tax rate. You said high 40s% in the back half of the year. Any preliminary thoughts on what it would look like in 2011?

I do not. No, I don't. I would expect it would come down.

Typically, we're in the high 30s and we would expect that it will level off in the high 30s. I think we're typically 36% to 38%.

And what would drive that is--.

The accountants are saying 38.5%.

We expect the markets will rebound, sales would grow, and we'd get more profitability.

Yes.

And it should shrink the rate.

Although some of that will depend on what happens in Washington DC, too.

Right. And we don't know that yet.

We don't know that yet, right.

On the gross margin side, any commentary on the raw materials? And do you think that gross margin will end up sort of flat in 3Q versus 2Q?

I think the gross margins are going to be relatively flat in Q3 given the same volume. We've seen pricing or material cost as a percent of sales to be relatively flat. Certainly it was true in the second quarter year over year. And we heard just two days ago that steel pricing went up, but we think that's going to level off. I mean, that's our expectation and that's what we're forecasting.

From our overall perspective, Yvonne, I'm sure you know that our preference from a raw material -- commodity raw material standpoint is to have raw material costs be flat to increasing.

Right. That's why I was wondering. With some of the rumblings that prices might be heading up again, do you get a little benefit on the pricing side for a product sales perspective?

I'm not so sure about that, but it is easier for us to manage in a flat to upward raw material cost environment.

Okay. And then, I know you talked about acquisitions out there. Any indication of what kind of price range transactions are being done at?

We think in the businesses that we look at, we usually look at, I don't know, four to six times. It all depends on our valuation of what it is that we're looking at, of course. As Brian said, we tend to look very closely now at performance and we judge accordingly. We are looking for good businesses.

Yes, that's the key to it, is that we're looking for good businesses that have performed well relative to the conditions that we've been facing. You could probably buy distressed companies at lower PEs, PE multiples, than companies that have performed well, but you get what you pay for. And we're going to be very selective and make sure that we get good value for what we look at.

Okay. And then just lastly, do you see yourself at all as an acquisition target here?

Do we view ourselves as an acquisition target?

Yes.

I don't -- I guess at this point I'd have to say anything's a possibility, but somebody would have to be willing to pay a very large premium in order to acquire this Company at this point in time. Because we have a strong belief that we are going to be able to generate improvements on our stock price as we start to see any incremental volume improvements in the business. And to consider selling at this point in time really doesn't make any sense.

We're a solid business. We've got our balance sheet completely under control. We've got our costs lowered substantially. We've shed the businesses that aren't part of our long-term future. We think we're in an excellent position to come out of this recession and to be an early stage beneficiary of improved activities in the construction and industrial markets.

So, all of those reasons put us in the position of saying it would take a heck of a premium to get somebody -- to get us to consider any kind of a sale at this point in time.

Okay. Thanks very much for the comments.

And your next question comes from the line of Peter Lisnic from Robert W. Baird. Please proceed.

Good morning, everyone.

Good morning, Peter.

I guess, Brian, just to go back to that question in terms of there being significant upside. How do you think about that relative to the acquisition argument? Specifically, if you've got the balance sheet in shape and if there is pretty good stock upside, how do you balance that versus potential share repurchases? I would think those would look pretty attractive if indeed what you're saying is accurate.

Absolutely, they do. But the problem is, we've got bonds out there that preclude us from doing that.

Okay. Alright. And if you look at the acquisitions, when you're putting those through your filters, what sorts of long-term growth expectations do you kind of work with in terms of both resi and non-resi as you kind of put those into your -- into the model?

We like to look at businesses that have growth of at least two times GDP.

And you feel pretty comfortable that, over the next three-plus years we can get that out of a combined resi and non-resi environment? Is that sort of--?

Absolutely.

Okay.

Especially, Peter, starting at these very low levels of activity. I think that's the kind of thing we're looking for.

Okay. No, that's fair. Alright.

And Peter, that doesn't mean that we're thinking that residential construction is going to go back to the $2 million plus level of single-family and multi-family dwellings, or that commercial construction activity is going to go back to the rah-rah days of 2005 and '06 and early '07. With our new cost structure, we don't need to get back to that level to have substantially better profitability than we had back in those days.

Okay. Understand. Alright. And then a separate question. I guess if you look at -- I guess the commentary on materials costs, third quarter materials costs probably going up year over year, but it also sounds like the pricing environment is competitive. So, can you maybe describe where the competition is or are you able to get pricing environment enough to the point of where you can actually offset those materials costs in the third quarter?

Well, pricing is always competitive and we've found ways to deal with it. But as I said in response to an earlier question, in a flat to improving raw material cost market, we've displayed historically the ability to maintain the spread between our raw material costs and selling prices. The more difficult environment is where raw material costs are plummeting. And there, it's a little bit more difficult to maintain the spreads in the short term until that higher-priced inventory is worked off.

Yes. And--.

The -- but the key to the whole thing is not any of that. The real key is that we have better systems in place to manage all elements of the business, and specifically working capital. The working capital gains that we've made over the last few years aren't just driven by lower demand levels. We have taken out a substantial chunk of inventory on a permanent basis. We've restructured the business to allow us to operate with that lower level of inventory.

And with the new ERP systems that we have in place, we're in a much better position to control all of our supply chain activities, including production planning, which drives our order -- our raw material placement rate. So, we've changed this business dramatically and we think we're in a much better position to control and be competitive in any pricing environment.

Okay.

Peter, to answer it, we expect our gross margins to be flat on the same unit volume quarter over quarter.

And I guess--.

We think the gross margin might go up a little bit in the third quarter, but that's the effect of the efficiencies that we've been talking about continuously.

Okay. Anecdotally, are you seeing your competitors become more aggressive on pricing?

I think everyone is more aggressive everywhere. I think we fight hard for businesses. But I think we have an advantage in terms of cost structure that allows us to maintain the gross margin objectives that we do have.

Okay. That is helpful. Thank you, all.

You're welcome.

And your next question comes from the line of Mark Parr from KeyBanc Capital Markets. Please proceed.

Thanks. Hey, good morning, guys.

Good morning, Mark.

I've got a couple of questions here. First, if you look at the nuances and, Brian, I know that you're -- you and your team have always been focused around acquisitions and that's been a big part of your strategic long-term focus. And it seems like you're getting back in, getting reengaged here. And I just want to congratulate you for that. You're probably feeling better about being able to get to a point where you can actually indicate that things may occur.

I mean, if you were going to handicap order of magnitude transaction volume here over the next 12 to 18 months, is there -- I realize you -- it sounds like you've got opportunities literally across the board. I mean, where would you see the most likely scenario? I mean, is it just going to be bolt-ons? Do you think you could make a $100 million to $200 million acquisition? Which do you think looks more likely at this point?

We've talked about that at great length internally. And I can tell you that the most likely, of course, would be the bolt-on acquisitions. There's much lower risk there. And generally, since they'd be somewhat smaller, they'd be very manageable from a cost perspective.

At the same time, we believe that we can handle an acquisition that would cost us in the range of $75 million to $100 million without any problem and still have plenty of liquidity left within the business to manage going forward.

So, in order of likelihood, bolt-ons. We can move into the higher -- to the larger size acquisition. And then the third, of course, would be the kind of transformational merger/acquisition scenario that I talked about a little bit in my earlier comments.

Yes. On the transformational side, do you have any way of handicapping the percentage of you being on the buy side as opposed to the sell side?

Well, that's our intent.

Yes. We expect to make substantial progress, as I think we've indicated, in the quarters ahead.

Alright. That's helpful. I appreciate that. And in terms of -- I had a couple other questions, first in terms of unit growth. I mean, you had talked about certain of the end markets that you serve have been seeing some growth. Do you have -- and Henning, I know you had mentioned that your hurdle rate for acquisition target growth is 2X GDP. I mean, how -- your base of business. I mean, how do you feel like it's performing relative to the underlying market? I mean, are you growing or are you performing better than the markets? I mean, where -- I guess maybe a better way of asking the question is where are you really beating the market dynamic and where do you have opportunities to get better from a growth standpoint, relative to the underlying markets that you're serving?

I think in most of the businesses we're meeting or exceeding the underlying markets that we're in. I think we do have leading market share. I think we've talked about that. And that allows us to capitalize on this downturn, which is normally the case for a market leader. I think we have some businesses that we've combined in a very substantial way that's going to provide some external -- internal growth above GDP. And that's internal. We think those businesses are going to do probably 1.5%.

Recognize that, as the markets come up, the economy gets better, the GDP comes up. So, that's why I'm talking a multiple of GDP. It's growth beyond the markets coming back to full levels. So, those are the internal pieces.

Mark, a couple of things. Some things haven't changed. All along we've been talking about one thrust of our growth opportunities comes from deeper penetration into existing customers. The big-box stores, getting more of their stores in more regions and taking more of our products to each of those stores and regions, and we're continuing to make progress in that area even in this market.

Ken had reported earlier that we had growth in the retail section of the business in the second quarter, and that's due to deeper penetration into some of these accounts. So, that's been a core component of our growth, and still will be.

And when you look at the fact that we've got a lot of available capacity, we can take on additional business with only incremental costs. And we have that capacity ready so we can move on a moment's notice as things start to pick up. So, I think that's why we're continuing to be optimistic about what can happen as things start to improve.

Okay. And just -- and that's been an ongoing opportunity for you guys.

It has and it hasn't gone away. That's the only reason I brought it up.

Yes. I mean, I certainly see that as one of the tremendous longer-term value enhancement opportunities for your business. No doubt about it.

And as I was rambling through it, I forgot to say also that one of the keys to it is many of the competitors that we have, have gone through very difficult periods of time and have found themselves in very weak positions. And the major retail customers are constantly looking at the stability of their supply base.

So, in addition to wanting to consolidate their supply base, they also don't want to be stuck with a supplier who finds themselves in a difficult financial position. And they have shifted business as a result of that, and we've been a beneficiary of that as well. So, it's an ill wind that doesn't blow some good, and it's clearly coming in our direction.

Okay, that's helpful. In terms -- have you thought -- given much thought to the fourth quarter yet? And do you think revenues for 4Q could show some upside? What are some of the puts and takes you're thinking about? This housing market is really bouncing along a pretty depressed bottom here. I don't know if there are any early warning signs you're seeing that could make the fourth quarter look a little better or not, but just any color you could give there would be helpful.

Henning had mentioned earlier, Mark, that the LIRA, the Indictor on the Remodeling Activity, is pointing towards better activity in the fourth quarter.

Yes. Actually, a very strong fourth quarter and even stronger first quarter. And they have not backed off on that forecast. It's a well thought out forecast and, therefore, we tend to believe what's out there. So, I guess there's reason to be optimistic as we look into the fourth. I think everyone's reluctant to jump in that wagon yet because we've gone through so many down quarters.

Yes.

But there's enough good rational to support a stronger fourth quarter.

Keep in mind, Mark, that's their forecast, not ours.

Not ours, yes.

Alright. And that's good color and good anecdote. I appreciate it. But have you seen anything in terms of your customers, your sales guys, that would point to anything picking up in the fourth quarter yet?

Yes, we've seen some of our backlog start to pick up. I think that was a good sign. We've seen some of the industries that we serve -- one most noticeable, and I think everyone is aware of it, the oil industry with the calamity that's happened in the Gulf seems to -- is in the process of being resolved. And we've seen a little bit more activity in that part -- and we do serve that part of the market, so that becomes meaningful for us. Our sales folks have been down there in the Gulf Coast for a while and they've come back with some better forecasts. I think that's a pick.

We've seen some of our businesses, particularly on the West Coast, start to build backlog, and their sales now are getting better than they were last year. So, that's a positive trend as well. We have signed some additional wholesale distributors who've decided to go with some of the Gibraltar businesses. So, we view that as positive. That's business that will start to build the back end of this year and into next year. So, yes, I think we are seeing better signs.

In the commercial area there's a higher level of quotation activity. It doesn't all turn into orders at this point in time, but a lot of things are coming back up for re-quote. So, it's a mixed bag, I guess is the best way to put it at this point in time, Mark. But it's not all bad, either.

Okay. Alright. Well, good luck as you continue to navigate your way through these -- this environment. And a good job on the quarter. Congratulations.

Thank you, Mark.

Thanks, Mark.

And your next question comes from the line of Tim Hayes from Davenport & Company.

Hey, good morning, gentlemen.

Good morning, Tim.

A couple of questions. When I look at the gross margin for Q2, I guess at first glance, I read in maybe there was some mix weakness in the quarter. And I got there and just looking at sales back in Q4, you had basically a similar level -- or a much lower level of sales, but yet roughly the same gross margin Q4 versus Q2. Was there a little bit of deterioration in mix or am I missing something on that?

We're tying to -- our folks are sort of looking at questions that are -- we don't think -- I mean, usually there is a different mix in the fourth quarter historically. Usually, a lot of our sales through the retail usually are in the down period, and usually the commercial end of the sales tend to be stronger in the fourth quarter, because they're really operating the capital budgets which tend to close at year-end. And therefore, usually our fourth quarter would have a better mix of those commercial products, which historically have had relatively good margins. Why don't you let us get back to you. We'll have the financial folks go through it and give you a more definitive answer.

Okay. That's--.

Rather than speculating. But I'm just -- I know the way that the product mix usually is on a full-year basis, we do usually have a higher component of commercial in the fourth. Usually the residential is falling off as they get ready for the new season. And that's not a busy time for new house construction in most parts of the country.

Or repair and remodeling.

Or repair and remodel.

Alright. And then on the last conference call you mentioned in Q1 there was a loss of a major customer. Did that come back in full in Q2 or partially, or how does that stand for Q2 versus Q1?

I think at that point we were talking about one particular business unit that was -- whose end markets were restructuring and that it was going to take a bit of time on with that end market exposure--.

Yes. That's a particular business that serves a particular customer that really controls a specific industry. And they were in the process of rethinking their strategy and how best to go forward. That's being resolved. We think it's going to be very positive for our particular business because we're a leader in that particular product category. So, we're very, very optimistic about that business going forward.

Then it will be resolved, but there wasn't any rebound in Q2 versus Q1?

No. I think it's because of the magnitude of that particular customer. We'll start to see it as we go into -- we think in 2011. We've had some very good meetings with them.

Okay.

I think we've -- in fact, they've asked us to look at some additional opportunities in working with them.

Okay. And a couple of quick questions just to clarify. The LIRA number of 5% for Q4 that you stated, is that a year-over-year or a sequential change?

Year-over-year.

And then lastly, I was thinking -- is there still some proceeds to be had from the remaining sale of Processed Metals? I sort of had penciled in some more proceeds in Q2, but I didn't see it on the cash flow.

We have -- going forward we have one remaining net asset that -- which is some real estate here in Buffalo that had a manufacturing plant on a parcel of land that we both own and we're in the process of marketing that property. So, when we find a willing buyer at the price we're interested in and think it's worth, we'll consummate that.

Okay. And is that still a $30 million ballpark expected proceed?

No. That bulk of money we're already realized through the collection of receivables.

Oh, that's what -- okay, that's receivables. Okay.

Receivables. So, that was largely liquidated. We've already collected all that stuff.

Okay. Thank you.

The only thing left is maybe nearly $4 million of real estate proceeds.

Alright, thanks.

Before we leave that subject that was raised about a business unit that we have, I don't want to leave anybody with the -- with any question in their mind. That business is not in trouble. It wasn't in trouble.

They have exceptionally good margins.

Right.

It's a very nice business with an awful lot of upside. That business' growth is three to four times GDP.

Yes.

And your next question comes from the line of Robert Kelly from Sidoti. Please proceed.

Gentlemen, good morning.

Good morning.

Good morning.

A question on the SG&A expense in the quarter. If we see a similar sale level in 3Q '10 as we saw a year ago, or what we just saw in Q2 '09, would -- I'm sorry, Q2 '10, would you expect a similar increase in the SG&A run rate?

Compared to a year ago?

Yes. You saw about $3 million up in 2Q '10. Would that be the kind of increase we'd expect for 3Q?

Modest, but not to the same extent.

Somewhat lower than--?

(Inaudible.)

Yes. The answer's no.

Okay. So, is what we're seeing here in 2Q on the SG&A line going to flatten out, move lower as we progress into the back half of 2010 and into 2011?

I think it'll flatten out.

Okay, great. And then, as far as the earlier comments, I believe you said residential markets were up 5% and non-res was up 11%?

No, I said residentials were essentially down -- down 5%.

Oh, down 5%. Okay, that would add up. So did you not--.

Non-res is up 11%.

Did you not take pricing action in 2010?

Many of our businesses have had selected price increases during this first half of the year.

So, were they successful for the most part?

—I think for the most part.

Yes, we would say that they were very successful. We look at our material costs, our material costs were flat with the prior year same quarter.

So, would the price increases help you cover some of the raw material increase you expect in 3Q?

Yes. I think for the most part in the businesses that we're in, material costs don't play as an important part in our margins as our businesses had when we were in the Processed Metals business.

Right.

At this point, I think in total we sell over 15,000 SKUs. Each one has, as you recognize, a separate price. Many cases, we sell programs and we do a program and we have a program price, not a product price. So, it's a more complicated issue and that's why we tend to go back and will make comments relative to gross margin, because that's all brought into the gross margin calculation. And we look at material variances. And our material variances were flat year-over-year.

Now, you saw growth in the retail home center channel. Did that growth come from consumer demand picking up, or was that sort of a restock on part of your customers?

It wasn't so much a restock. We picked up some additional geographies with some of the big box customers that deal with -- we I think alluded to it early. We do -- we're very proud of the fact that we have excellent customer service levels in spite of the downturn, in spite of the restructuring. And we are in many cases the preferred supplier. And we've been given the opportunity to supply more of the stores at retail.

Great. Thanks, guys.

You're welcome.

And your next question comes from the line of Brad Hoffman from Columbia Management. Please proceed.

Yes, hi. This is Brett Kaufman. Good morning.

Good morning, Brett.

Good morning.

So, I appreciate -- you went through a lot of information in terms of the range of M&A activity that you would consider. How do you view, I guess, the financing as you go through that range? Obviously, I would imagine on the bolt-on and some of the lower-end you could do it through existing cash and revolver. As you get more towards the transformational side, I mean, what do you view as the right way to finance such a transaction?

The right way to do it?

I guess how would you like to do it, or intend to do it?

Well, ideally--.

As (inaudible) as possible.

I'd like to do it without taking on any additional debt.

Okay.

But we're also going to have a keen eye to be sure that we're not diluting exiting shareholders--.

Exactly--.

When we take on. So, we're expecting expansion to existing shareholder value rather than any neutralizing or decrease.

One of the key tenets to our acquisition approach right from the beginning was that each acquisition would be immediately accretive to earnings per share at the time the acquisition was consummated. So -- and that is still a key tenet to our acquisition approach.

(Operator Instructions.) And you have a follow-up question from Seth Yeager. Please proceed.

Hey, guys, just a quick housekeeping item. Are you still sticking to the $15 million or so for CapEx for the full year?

Yes, we are.

Yes.

Okay. Alright. Thanks.

And you have a follow-up question from Mark Parr. Please proceed.

Hello, can you hear me?

We can hear you.

Okay, great. Hey, Brian, just have one quick follow-up. Have you guys starting paying more for steel yet?

Not really. We know that it went up $30 to $40 a ton for hot roll bands, but we're well positioned at this particular point in terms of our purchases.

We've worked hard on our supply chain management issues and the main focus is to, number one, make sure we've got available supply, which isn't an issue right now.

Right.

But on top of that is to make sure that we smooth the volatility as much as we can. And we're doing that through a number of different approaches, buying some in the short term, buying some on a little longer term commitment. None with volume commitments to bank it up though, of course. And controlling our inventories as tightly as we can to make sure that we're never over or under-stocked. And in a time when there's volatility, having as little on hand as possible is the best course of action there.

Do you think those price increases are going to stick?

No, we don't. Maybe I shouldn't be so bold, perhaps. Mark, this is a little bit different. Most of it -- we buy very little directly from the mills today. We only have one business that deals with a mill direct. All the rest of them are through service centers. And when you're buying through a service center, you have different buying arrangements, as you can appreciate.

Right. Okay, terrific. Thanks very much.

That's part of the key change in the business, Mark. When we were a steel processor we worked directly with the steel mills and it was a different ballgame. Today, we're managing our purchasing issues in a completely different manner than we ever did before.

Right. Okay. Alright, thanks.

You're welcome.

And ladies and gentlemen, this concludes the question and answer session. I will now like to turn the presentation over to Mr. Brian Lipke for closing remarks. Please proceed, sir.

Thank you all for participating on our call today. We believe we've worked exceptionally hard to restructure and reposition the business. And we are excited about our long-term future and are looking forward to seeing our stock price begin to move in the right direction as soon as we get any incremental volume whatsoever. We look forward to talking with you next quarter. See you then.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.