Gibraltar Industries Inc (ROCK) 2010 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2010 Gibraltar Industries Inc. earnings conference call. My name is Fab, and I'll be your coordinator today. At this time all participants are in a listen only mode. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Ken Houseknecht. Please proceed.

Thank you, Fab. And welcome to Gibraltar's third quarter conference call. Yesterday evening, Gibraltar issued its third quarter earnings release. A copy of which you can obtain from the Gibraltar website, gibraltar1.com. And for our presentation today, we will be referring to presentation slides that summarize key elements of our third quarter and year-to-date performance. You can access these slides from our website.

Our earnings release yesterday and our presentation today both contain non-GAAP financial measures, and we have provided reconciliations of GAAP to non-GAAP measures that were appended to our earnings release. Additionally, our remarks contain forward-looking statements about future financial results. Our actual results may differ materially from the anticipated events, performance, or results expressed or implied by our forward-looking statements. We advise you to read the risk factors detailed in our SEC filings, which can also be accessed through Gibraltar's website.

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'd like to turn the call over to Brian.

Thanks, Ken. Welcome, everyone. Thanks for joining us on the call this morning.

I'm going to be making some brief opening comments to give you an overview of the Company which will then set the stage for Henning Kornbrekke and Ken Smith, our President and Chief Financial Officer respectively to review or third quarter results in greater detail, discuss current market conditions and our outlook for the balance of this year and into 2011. Following that, I'll make a few brief closing comments and then we'll open the call up to any questions that any of you may have.

I think it's not a surprise to anyone but market conditions were not what we had hoped for in the third quarter, but we continue to make progress nonetheless in spite of the very difficult operating conditions we continue to face. We strengthened our balance sheet again. We improved our cash position by more than $20 million, effectively managed working capital, continued to improve our operating efficiencies and pursued both internal and external growth initiatives. Sales from continuing operations in the third quarter of this year were $182 million, which is down 4% compared to the third quarter of 2009. And we generated EPS before special charges of 6%, as persistently weak activity levels in our end markets reduced our volumes. The good news is that our decline in sales was less than the decline in our end markets, showing that we're able to launch new products and gain market share even in this difficult operating environment.

Raw material volatility and weak demand also added to competitive pressures in some of our product lines. As we've demonstrated over the last two years, we're not content to simply manage our way through this prolonged downturn. We've continued to focus on ways to position the Company for long-term growth and improved profitability while reducing expenses and generating positive cash flow. These steps have helped maintain our performance and strengthened our business in the long run, even in the midst of deep and protracted slowdowns like we've never seen before in our major end markets.

As a result of faster working capital terms, a proven ability to generate positive cash flow, a growing cash balance and the stronger balance sheet, we once again had the capital to grow our business and the opportunity to evaluate a wide range of value creation activities, including bolt-on and strategic acquisitions. As we discussed on our last earnings call three months ago, we're becoming more active in evaluating acquisition opportunities that strengthen existing leadership positions or provide new product categories to build into leadership positions while enhancing our margins. While the timing and pace of any meaningful recovery in the US economy in general, and our end markets in particular, has been much lower than we had expected and hoped for, we continue to take steps to improve our performance in the short run while positioning Gibraltar for record results once market conditions begin to improve.

We still believe the current level of overall construction activity is not sustainable and will improve over time. And also we believe that our strategy to reduce costs, focus on cash flow and now, with a stronger balance sheet to more aggressively focus on growth opportunities will allow us to emerge from this recession stronger and more capable of producing higher returns. With that, I'll turn the call over to Ken.

Thanks, Brian. I'll start with slide number four entitled highlights. Revenues held up solidly this quarter, particularly considering the continued weak macro factors affecting our key end markets. As Q3 revenues experienced a slight 4% decrease compared to the prior year quarter. Our profitability in the quarter, however, was lower than expected as weak demand, coupled with competitive pricing and higher raw material costs negatively affected our bottom line compared to Q3 of 2009.

Cash flow continues to be very solid with working capital turns in 2010 being at the best levels in the Company's history. On the balance sheet, we further lowered our net debt position and generated over $20 million in cash this quarter, and we continue to have no draws on our revolver. As a result, liquidity increased again in the quarter, and we clearly had ample funds to invest in our working capital needs and growth initiatives.

Now turning to slide number five titled year-over-year performance. Revenues for both the quarter and year-to-date periods were quite similar to the comparable periods in 2009 as macro factors related to housing, unemployment, GDP and consumer spending have remained weak. With those head winds, our revenues in 2010 were only slightly unfavorable, predominantly due to lower unit volumes. For revenues from our residential products, lower unit volumes were the principal factor in 2010 compared to 2009. For our nonresidential products, both Q3 and year-to-date 2010 periods benefited from steady volumes and a bit higher pricing.

And in total, the unit volume decrease on residential products more than offset the revenue rise in our nonresidential products. Operating income in this year's third quarter was unfavorable due to much higher raw material costs compared to last year. To underscore that, hot rolled steel costs approximated $400 a ton in the summer of 2009, and have since risen to approximately $600 per ton this past summer. Additionally, competition has tempered consumer price increases. During this period of raw material volatility, and customers have been reluctant to accept raw material based price increases in this low demand environment. Free cash flow continued to be very solid as the Company continues to efficiently manage its working capital.

Looking at slide number six, net income and EPS, I'll comment on the nonoperating and income tax expenses. Net interest decreased compared to the comparable periods last year; the result of lower average borrowings. Regarding our credit facilities, we've had no draws on our revolver since early May 2010. And we have no near term debt maturities. And our $200 million of subdebt has bullet maturity in late 2015. Regarding income taxes, we recognized a tax benefit during the three months ended September 30, of this year. This benefit was the result of updating our full-year forecast and the related tax position. And then adjusting our September year-to-date tax provision to be in line with our updated full-year expectations. That said, our full-year tax expense is now expected to be lower than we had anticipated at June end. And therefore, have reduced our tax expense for the year-to-date September period.

Turning to slide number seven, positive cash flow. We've done well in the first nine months of 2010. Certainly 2009 benefited from larger amounts of working capital being reduced. And 2010 has benefited from faster turns of working capital, allowing us to continue to generate cash from working capital. We ended the third quarter with working capital at 60 days down from 69 days at the beginning of 2010, a 13% improvement in days. Cash flow also benefited from CapEx spending; that was 40% of depreciation expense in the year-to-date period and free cash flow was 9% of sales thus far this year, which is a very solid performance.

Looking at slide number eight, net debt reduction. We lowered our net debt by approximately $75 million in the first nine months of this year. As you can see by more than $360 million over the past 36 months. Cash on hand has increased nearly $50 million at the end of September. And that coupled with availability on our revolver improved our total liquidity to more than $150 million. Which is at an ample amount to support the Company's growth needs in the quarters ahead. For that I'll turn the call over to Henning.

Thanks, Ken. As we discussed on our last call, activity levels in our major end markets slowed in May. That slowdown continued and in some areas deepened in the third quarter. Housing starts in the third quarter were down slightly compared to 2009. But this market appears to be poised to build momentum as the inventory of existing homes decreases and mortgage rates remain at very low levels. Financing restrictions remain an impediment to stronger housing starts. Even with the current projections from the Joint Center of Housing studies and others of 630,000 housing starts in 2011 and 720,000 in 2012, from under 600,000 expected starts in 2010, activity levels will remain well below the average from the last 50 years of 1.5 million starts.

We continue to believe that in light of demographic and long-term trends, current bill levels are unsustainably low and will rebound to a normal trend rate of 1.6 million units by 2014, according to the Joint Center for Housing. Repair and remodel demand, which accounts for approximately 70% of our sales in the residential market has also been challenged in the short run, and fell by 0.1% in the third quarter from the previous quarter, which is up 1.6% according to LIRA, the leading indicator of remodeling activity. Current LIRA projections suggest that repair and remodeling activities will improve by 11.8% in the first quarter of 2011, and by 12.8% for the second quarter. The run rate in the second quarter of 2011 is expected to be $132.8 billion versus a high point of $144.2 billion in the third quarter of 2007, or down 7.9%.

Analysis of activity indicates that professional installations are leading the market recovery. 85% of our products are installed by professionals. The nonresidential building market has also slowed, falling from its peak of 0.7% of GDP in 2008 to a low of minus 1.1% of GDP in 2010. Institutional, infrastructure, hospitals and higher education buildings have noticed some improvement, but other segments continue to fall. Current projections anticipate a leveling of activity in 2011, followed by slight improvements in 2012 to approximately $290 billion per month, versus 2009 at $366 billion per month, and 2010 at approximately $260 billion per month. Despite the challenging end market conditions, our business leaders did a solid job again this quarter, by maintaining our sales penetration with key customers by providing outstanding customer service, new products, and innovative marketing approaches. Increasingly, competitors are being forced to retreat from this tough market and Gibraltar has stepped up with solutions for stranded customers. Our market share has remained solidly intact.

As Ken noted, we have continued to effectively manage our working capital. We're also making progress with the implementation of our two new ERP systems, which we expect will further improve our efficiency and provide improved delivery solutions to our customers. We remain focused on lean initiatives throughout the Company with the goal to be the low cost supplier on a global basis. We believe that we are achieving our target. As part of the ongoing rationalization of businesses, we are consolidating three facilities into one existing facility, which we expect to be complete by year end. Total restructuring costs will be approximately $350,000 in Q4 and the related consolidation is expected to yield an improvement in margins of 5 percentage points for those affected businesses, and most importantly, provide highly efficient, centralized manufacturing and distribution facilities with over 5,000 SKUs and a quick-ship system to maintain high levels of customer service.

Looking ahead to the fourth quarter, which is historically our slowest period, we anticipate the normal seasonal slowing of or business, with the now abnormal pickup in market activity. We expect the business trend experienced in the third quarter will be carried into the fourth quarter. In 2011 and beyond, we expect an improving trend particularly in the repair and remodel markets, a key driver of our businesses. In addition, we anticipate a leveling of activity in the nonresidential markets, particularly the infrastructure, education and institutional markets where we have good presence. We remain confident that our category-leading products, strong and growing relationships with market leaders in every major distribution channel, and improved operating efficiencies has effectively positioned Gibraltar to deliver outstanding customer service, profitable growth and enhanced shareholder returns.

As markets begin to recover, and volumes rebound, incremental sales increases will yield industry-leading margins. In spite of historically weak conditions, we continue to outperform our end markets, and gain share with major customers as a result of our financial strength, broad product offering, product leadership positions, high service levels, and cost advantages. At this point, I'll turn the call back over to Brian.

Thanks, Henning. We remain confident in the long-term fundamentals of the residential and nonresidential markets, and we believe that we're well positioned in each area, as you just heard from Henning. We also expect some market and demand improvement, albeit modest in 2011. And while it will be some time before these markets return to past levels of activity, with our lower cost structures, even incremental demand improvement will have a meaningful impact on our bottom line.

In addition to our actions related to further efficiency gains in our business, we've positioned the Company for growth through market share gains, new product additions, and through acquisitions. All of which positions the Company for improved bottom line performance in 2011 and beyond. I want to acknowledge again, the men and women on the Gibraltar team for their continuing solid execution in what remains a very challenging economic and operating environment. With that, we'll open the call to any questions that any of you may have.

(Operator Instructions) Your first question will come from the line of Peter Lisnic with Robert W. Baird.

Hello, good morning. This is Josh Chan filling in for Pete.

Hi, Josh.

Hello, can you talk about the pricing pressures you guys were seeing? Were they particularly significant in certain products or categories, or did it have to do with specific competitors?

First of all, the real issue here is that we've had a lot of volatility and raw material pricing, and that coupled with low demand has put our customers in a position of saying to us, look, even though your raw material costs have gone up, we're thinking that raw material costs are going to come down and therefore we're not willing to pay an increase right now based on raw material costs. That's been pretty much the sentiment by a lot of customers out there. In some of our product lines, there has been a little bit of pricing pressure from competitors but moreover, it's a reluctance by customers to accept price increases in this low demand environment.

Fundamentally, on nonresidential building segment, experienced the most significant decrease. As you know, it's been a precipitous fall in that particular market, and with the very low opportunities available, it has intensified the competitive situation. In that particular segment, so that most affected our business in the quarter.

Okay. That makes sense. And then switching over to acquisitions, you seem a lot more confident about possibly making acquisitions even in the near future. Could you talk about the acquisition environment and how that has changed over the last several months?

I mean, we've been -- Brian noted earlier we've been very active at looking at acquisitions, although we've not done anything. We've looked at many opportunities. We find there are very good opportunities for Gibraltar going forward, and I think we remain very optimistic that we'll be able to, as Brian indicated, grow our business by, in fact, making some of these outstanding companies part of the Gibraltar team.

Okay. And then relative to that similar line of logic, could you rank your different ways of possibly deploying cash, I mean, between acquisitions calling back some of your senior notes and possibly reinstating the dividend? Any thoughts on any of those?

Well, our first priority on deploying new capital would be on the acquisition front where we think we would have for current and future shareholders the biggest return and increasing the value of the company. So right now, given what seems to be appealing prospects that Henning and Brian have described, we think that should be and is our priority.

Okay. Great. Thank you for your time.

We should probably add though too, we're considering the possibility of using some of our available capital to buy back some of our bonds once the timing is -- the opportunity exists for us which comes later this year. And then also we are reviewing the possibility of a share buyback, although as Ken pointed out, we think we still believe we can get a very good return for the shareholders by investing in growth opportunities for the company.

Okay.

Considering all alternatives.

Okay. Great. Thank you.

Your next question will come from the line of Seth Yeager from Jefferies & Company.

Good morning.

Good morning, Seth.

I think in the previous call, you guys had guided towards gross margins basically flat sequentially. And it looks like they were down a couple hundred basis points. It seems like if it's sort of a surprise to you guys, can you attribute, I guess, the puts and takes as far as pricing versus raw material and how that affected your gross margins?

If you look at the material question percent of sales, that's where the decrease was, and so it all came out of that particular area. We did have some gains. We had efficiency gains effectively helped offset, but not enough. I think that coupled with the unit volume decrease -- I think that we all talked about that, resulted in the lower gross margins. It's that simple.

Fortunately or unfortunately that's why we're very optimistic as the markets pick up. I think we all talked about margins going along with it very nicely. Again, if we, I think if we underestimated the third quarter, it was the market itself. I think all of us and other companies while anticipated our stronger third quarter relative to the market, and that never materialized.

Do you think, I guess with steel pricing typically a bit on the slower side in the fourth quarter, do you see some of those gross margins kind of crawling back to more normalized levels?

Yes, we've already noticed our material cost of percent of sales has now flattened off right -- and if you look at the year-to-date basis, we're right about at the average and right where we were last year. So that, eventually that volatility does even itself out.

Okay. And do you think you guys would be able to -- I know you said there were some pricing pressure from competitors sort of maintain where you are at with some of the lower raw material prices.

We think that the competitive pressures, we believe, have started to abate. We've seen competitors now being more active in the marketplace with their pricing. And I think that we're very much in line with them, so we don't anticipate the same degree of competitive pressures going forward.

Okay. And it looks to me as if you guys are running a little bit lean on the inventories line item. Do you anticipate sort of building into the fourth quarter, or given the slower seasonal activity are you going to kind of maintain where you're at into the first quarter?

Typically, our inventory is down in the fourth quarter, even though that we're lean, we would say that we've managed ourselves at the levels we're at. We have better systems. We talked about the systems we've put in place. And they provided a much stronger production planning system than we've had in the past. That has allowed us to run our business at the lower inventory levels. And that's why a number of instances we highlighted the outstanding customer service that we have provided through this entire period. We have not sacrificed our ability to deliver products to customers while taking inventories down.

Keep in mind too, that the reduced levels of inventory we're carrying today is within a totally different organizational structure than we had in the past. We've eliminated 23 out of 39 -- 26 out of 39 distribution centers, and with each one of those distribution centers, most of the inventories that was housed in those facilities is gone. That's a permanent change to our business. And as Henning said with our new IT systems that we've spent a substantial amount of money on over the last few years, we're in a position to control the entire process from ordering material, through production planning, through finished goods, and ultimately out to our customers. So it's not just that we've said, okay, we're going to ratchet down our working capital artificially; we've done it structurally.

And we believe that these are levels in relative to the days of working capital that we have in our system, that we're going to strive to maintain going forward. When we started this process, we were at around 97 days, and I think at the end of the last quarter, we were at roughly 60 days. So we've made a substantial improvement in our ability to manage our working capital system by structurally changing the business. This isn't a one-time event based on a decline in sales. This is a structural change that we made in the business that in the long run is going to allow to us generate much better shareholder returns as we start to see some incremental volume improvement.

Okay, I appreciate the call. Just one final follow-up, you guys. Obviously acquisitions remain a priority for you. You've done a good job of reducing debt over the last couple of years, and you've got a substantial amount of cash on the balance sheet. What level of leverage are you comfortable with in terms of looking at different acquisition opportunities?

I can tell you in general, in this operating environment, we're still going to take a conservative position relative to leverage. There's still uncertainties that exist out there; visibility into the future, even through next year is still limited. So we're going to maintain a conservative position. But in general, our debt to cap is about 30%, and wouldn't want to go above 4.5 leverage.

Okay. Thanks for the call.

Okay.

Your next question will come from the line of Robert Kelly from Sidoti.

Gentlemen, good morning.

Good morning.

Question on the raw material increases you felt on a year-over-year basis. It sounds like you weren't able to pass on all of the increase on your hot rolled sheet. Do you attempt to going forward 4Q into '11 or do you just expect raw materials to flatten out? That's how we see an improvement on the margin line?

I think the volatility in raw materials will diminish going forward. We have good evidence that that's likely to be the case. We've seen our material costs flatten out and we, again, as I said earlier, we've averaged year-to-date basis exactly where we were last year, and I think we've mentioned, also, that as we go forward particularly as we look at other business opportunities, we'll find that our material costs will be an increasingly smaller percentage of our selling prices and therefore less of a factor of the overall results of the company.

Okay, so now you took some price action earlier in the year. They were successful. There's no plan to use any more or were the price increases not successful from earlier in the year?

I think what we put in place has worked well. I think we continue to maintain a competitive position in the marketplace and we continue to price accordingly in the marketplace. Of course you know it's a balance. It is a very tough environment, and we believe that we're priced appropriately going forward.

Sure. As far as your major product categories, can you just talk about on a year-to-date basis or year-over-year basis, how they performed relative to the market? You guys talked about gaining share. Can you give us any color on share trends within those major categories?

We'd love to give you a lot of color, but that's very confidential information, and we have to respect our business posture with our customers. So we're reluctant to give you the information you're looking for. It is, we believe, a very positive trend for the company.

Okay. Just as far as the retail channel, maybe a modestly less optimistic look from those to the big box channel. What are their thoughts? Have you all begun to discuss 2011 thoughts for them? What is their take on the next couple quarters?

We've had many conversations with our retail customers. And I think there's varying degree. Like most of them are indicating 3% to 4% increases in 2011. I think we share that. I think we find the categories we compete in might do a little better than that as they have in the past. They did last year and we'd expect because of the cycles we're going through that that will be the case in 2011. So I think we continue to work very closely with those very important customers, and we believe we're doing a good job in helping them grow their business. And with that, we will grow our business.

Very helpful. And then just as far as M&A, obviously, you're finding the right candidates at the right prices. It's a key factor in there. But what kind of strategic direction does that take? I've got to imagine you have significant excess capacity. Do you go into a new product and adjacent type of market to what you're selling now? What are your just kind of 50,000 foot thoughts on what M&A looks like?

I think we do. I think Brian highlighted it. We look at two. One, we call a bolt-on acquisition, which is an acquisition that would be bolted on directly to an existing business. That could be product expansion, it could broaden our market participation. And then the other is a totally stand alone acquisition and again we've got a very tight filter on what we're looking for. We spent a lot of time with their team defining the filter characteristics. So, we think we've got a very strong handle on what kind of acquisitions to make and how it will help achieve the goals that we've described continually on these calls.

Excellent. Thanks, guys.

Your next question will come from the line of Mark Parr from KeyBanc Capital Market.

Hey, good morning.

Good morning, Mark.

I had one question. I continue to be really encouraged with the working capital and liquidity initiatives, and certainly I think we're all discouraged by the lack of recovery in markets, and I just came back from a conference earlier this week where people are looking for another 6% to 8% decline in residential real estate pricing in 2011 because of all of the houses still on the foreclosure process. So I agree Henning, with your outlook with this recovery over the next 12 months for residential is likely to continue to look pretty anemic, but one thing, Brian, seems like your liquidity and such is getting to the point where you can start making acquisitions. Just curious if you could provide us your thought process on how you value acquisitions, given the structurally, or not structurally but at least the cyclically impaired level of profitability for the industry right now.

We've remained true. I know what you're asking for and we're reluctant to give you the exact answer, because we're in the process of implementing what we've talked about and therefore we don't want to get you the answer that you're looking for. You can understand. But we think there are good companies out there. We think there are some cases that are fairly value. We think there are good opportunities for Gibraltar to take in some companies and make them part of the Gibraltar family and I think both will benefit, both the company and Gibraltar going forward.

That was Henning. This is Brian.

I can still tell you two guys apart. I'm not that old yet. Almost.

I wasn't worried about you, Mark. It was the rest of the callers. When we're looking at acquisitions, there are companies out there right now who have been dramatically affected by overall market conditions. And who are not performing very well from an earnings perspective. Those companies would be valued one way. There are other companies out there, though, because of the product categories that they're involved in, and the activity levels in those specific product categories who have performed well throughout the entire period and are continuing to do so. Those companies would, of course, be valued a different way.

We're looking at companies at either end of the spectrum that I just described and some in between. So the pricing would be dependent upon the performance that any one of these individual companies would be displaying right at this point in time. When Henning mentioned a bolt-on acquisition before, one of the things that appeals to us is was that some of the smaller bolt-ons, when we say bolt them on, we really mean take their production assets, move them out of the facility that the company is operating currently, pick those assets up and move them into one of our existing facilities, eliminating the overhead almost entirely and improving as a result, improving the profitability for our remaining operations. So while the bolt-ons may be smaller, they can have a significant impact on the performance of some of our existing operating units.

The other type of acquisitions, we're looking to find ways to continue to drive up our operating margin performance and we're looking for companies that, like our Auth Florence acquisition, have a higher engineering component, a higher structural build component, and thus reduce the level of raw material relative to selling price in its end products. The more we can reduce the raw material percentage of selling price, the less volatility will impact our overall margin generating activities. So that kind of business also would be valued differently than a weaker performing business. So we're -- I think a lot of people want to think that if you go out into the acquisition arena right now, you should be able to get some great bargains, and maybe you can. But I think the lower amount that you you'll pay for those businesses carries higher risk. And the more -- the higher the multiple that you'll pay for a business, the less risk that you'll have because of the already solid performance of the company. So we're trying to measure all of those things as we review the pretty long list of acquisition opportunities that we have before us today.

Okay. That's good color, Brian. I appreciate that. I have one follow-up if I could. And again, just to address this issue. Brian, you and Henning have been successful in taking and consolidating so much of the distribution infrastructure with the organization. I'm thinking there may be a concern that perhaps some of the big box people, or people who may have depended upon lots of distribution facilities to ensure that they have a call on supply whenever they need it. That potentially could be impaired. Just if you could reassure us that what you're doing is either maintaining or actually improving service levels as far as a customer base is concerned, that would be helpful.

It's a great question, Mark. There are a number of components to that. And I'll throw some color on it. And I know Henning's got some he wants to make as well. But this reduction of distribution facilities was a structural change to the business and it started first by us going in and putting lean manufacturing techniques into all of our manufacturing facilities. That allowed to us shorten our production times and it also allowed us to create more space into our existing manufacturing facilities for a consolidation of facilities as well as -- well, I already said it, as well as shortening the lead times that it takes to get product out into the marketplace.

Today when you look at the major retailers, what they are looking for are smaller shipments on a more frequent basis. With our shortened production process and shortened production lead times now, that ties directly into the strategy that we've built into our operations today. So I think that we've not hurt ourselves at all, and in fact we've strengthened our position there. The other side of it is really basic and simple. If you're not providing 99.5%, and I think that's an actual requirement, 98.5% or 98% on-time and complete shipments, you lose the business. And we have not been losing business.

And in fact, many major retail customers have been coming to us and saying, look, because of your stronger balance sheet, because of your very broad product line, because of your ability to distribute a very broad range of products on a nationwide basis, we need to do more business with you. So, we have not hurt ourselves at all and in fact all of our actions have strengthened our position with the major retail customers that we have.

I think in general, I think I mentioned it a number of times. We have outpaced competitors considerably in providing good service to our customers. We've been recognized by those customers for the service we have provided, we know, in some instances where there was some storm damage in certain parts of the country, we stepped up and we were able to fully supply our customers to unusual demand levels and again we're able to do that because we do have a much more productive planning tool and delivery system in place.

We just haven't arbitrarily eliminated distribution centers and forsake customer service. In fact, if we have done it in a very thoughtful way that allows us to improve our deliveries to our customers throughout the full system and in the US.

Keep in mind, Mark, too, that one of the factors that allowed us to reduce distribution centers is that we had a lot of overlap. I believe you've seen our map that shows where we had facilities in 2006 and where we have them today.

Oh, yes, right.

You still have the same geographic coverage with distribution centers, but we're doing it with far fewer facilities. The reason we're able to do that is we had lots of overlaps in major population areas where we had four or five different distribution centers that came into existence as a result of us making acquisitions of different companies, who are all penetrating the same market, had manufacturing facilities and distribution facilities to serve those markets. Well, we simply rationalized a lot of that, and are storing more than one product line in a distribution center. It was really a very easy set of decisions to make when it came to reducing the number of distribution facilities that we were operating. It was eliminating the overlaps.

The other thing, Mark, I would add on this discussion, we haven't gone through this process because of the recession in the market downturn, we have been going down this path for the last, well, ten years that I've been here, we've started this. So the recession, the downturn is somewhat coincidental. We have forced ourselves to be smarter at competing in the marketplace and we continue to strive to be smarter than our competitors. It's the only way that we'll survive and prosper. And therefore, when we're talking about the investments we've made in IT, we're making those investments because it will allow to us remain stronger in the marketplace.

We laid the blueprint for this reduction and consolidation of facilities before the recession hit. And started to execute on it before the recession hit and actually we're quite lucky that we did. If we had waited until we were in the middle of this recession to start doing this stuff, we would have been way behind the eight ball. In fact, the matter is, we started it early and it has served us well. It's been part of the blueprint that we established as Henning said, a number of years ago. We were executing it slower at the beginning, and frankly, we did accelerate the execution of it, but it was something that we start as the conditions worsen, but it was something that we've started long before the recession.

Okay. Terrific. Thanks for all that color and good luck managing through this nasty market environment.

Oh, we're confident of our ability to manage through it. And what we're focused on, though, most importantly, Mark, is finding ways to grow the business in spite of it.

Yes. Okay. Terrific. Thanks.

Thank you.

(Operator Instructions) Your next question will come from the line of Tim Hayes from Davenport and Company.

Hello, good morning.

Good morning, Tim.

Two questions. The first is a bigger picture question. And Brian, you mentioned housing start -- that's such a low level and a level that is far below what the long term demographics would suggest indicating that there's a lot of pent up demand. And pent up demand for new housing is nothing new following a recession. We've seen that in every recession since World War II with the exception of 2000. So certainly expect a big rebound for new housing, over the coming years. My question is what is unusual in this cycle is the foreclosed homes and that number. I wanted to get your thoughts on the likelihood that you would see big pent up demand being released for remodeling and repair once these foreclosed homes change hands. Maybe it's not '11 but eventually they will say '12, '13. Might we see an unusual amount of pent up demand for remodeling and repair that we've never seen in any other cycle? Your thoughts on that, please?

I think we believe that's highly likely. I know in meetings that we've had at Harvard we indicated, and again LYRA's put out by the Join Center for Housing. We're looking at demand as indicated earlier at around 12% going through the first and second quarter. And we believe it will accelerate as you go through the rest of the year.

Keep in mind that, Tim, that our number one we agree with all of your assumptions. But keep in mind that when you look at our overall business, 65% of our business is repair and remodel. I'm sorry, is residential. 35% is nonresidential. Of that 65% that is repair and remodel -- I'm sorry, is residential, 70% is repair and remodel. As you look at these cycles, I think the area that starts to come back first, once the consumers start to get comfortable, that the job that they have is one that they can keep, and those who are out of jobs start to get comfortable that maybe there's a better opportunity for them to get jobs, a lot of the deferred repair and maintenance on homes will start to kick in. And then after that, the desired activities that homeowners want to get involved with by adding decks or adding new rooms on their house or things of that nature, start to kick in. And then because of the uniqueness of this environment, then we'll start once people get more confident that housing prices have bottomed and aren't going to be going down anymore, then people are going to start looking at building new houses.

In the interim period, though, you do have this foreclosure issue that looms large, and one of the things that we picked up is that a lot of the foreclosed homes gets sold relatively cheaply but that's because they've been badly abused as people are exiting those homes. At which demands that repair and remodeling activity. So, while the foreclosure activity may be a drag on new housing starts, we think, and I think this is your premise that that could stimulate more repair and remodel activity as well.

Right. Yes. Certainly in better years to come at some point and on that better years to come, a bit of a different topic. When you look at the rest of 2010, could you handicap for me the likelihood that the Buffalo Bills went out and get a wild card berth? Thank you.

I think it's Chris Bermen, I'll quote "I think they could go all the way" without a victory unfortunately.

That's all I have, thank you.

There are no further questions in the queue at this time. I would now like to turn the call back over to Brian Lipke for closing comment.

Thanks for participating on our call this morning. We're focused on driving for improved performance in 2011 and creating improved shareholder value in the process. We look forward to talking with you again in three months. Thanks.

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