Gibraltar Industries Inc (ROCK) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gibraltar Industries Second Quarter 2011 Earnings Conference Call. Today's call is being recorded. My name is Claudia, and I'll be your coordinator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference call.

I would now like to turn the call over to David Calusdian, from the Company's Investor Relations firm, Sharon Merrill. Please go ahead, sir.

Good morning, everyone, and thank you for joining us. If you have not received a copy of the earnings press release that was issued yesterday evening, you can find it in the Investor Info section of the Gibraltar website, gibraltar1.com.

During the prepared remarks today, Management will be referring to presentation slides that summarize the Company's second quarter performance. These slides are also posted on the website. Please turn to slide number two in the presentation.

Gibraltar's earnings release and this morning's slide presentation both contain adjusted non-GAAP financial measures and there are reconciliations of GAAP to adjusted non-GAAP measures which have been appended to the earnings release. Additionally, the Company's remarks contain forward-looking statements about future financial results. The Company's actual results may differ materially from the anticipated events, performance, or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the Company's website.

On our call this morning are Gibraltar's Chairman and CEO, Brian Lipke; Henning Kornbrekke, President and COO; and Ken Smith, Chief Financial Officer.

At this point, I will turn the call over to Brian.

Thank you, David. Welcome, everyone, and thank you for joining us on the call this morning. I'll begin with some brief opening comments and turn the call over to Henning and Ken who will give a more detailed review of our results. And then following that, I'll close our prepared remarks with some comments about our business outlook before opening the call to any questions that any of you might have. You can refer to slide three in our presentation now.

Gibraltar performed well in the second quarter, especially in light of the limited improvements in our major end markets. Our results for the first half of 2011 were in line with the expectations we discussed on our fourth quarter conference call and then again on our first quarter call. At that time, given our progress in restructuring, strategically repositioning the business and strengthening the balance sheet, we believe that we could attain profitability in a no growth or slow growth end market environment and that's just what we've done.

Q2 was the second quarter in a row that we've been able to generate significant improvements in profitability despite continued raw material volatility and lackluster conditions in nearly all of our major end markets.

Sales for the second quarter were up 18% year-over-year, reflecting both organic growth and acquisition-driven growth. Gross margins at 21% and our contribution margin from incremental sales dollars was 30% and both contributed to a doubling of adjusted operating income compared to Q2 of last year.

Capitalizing on our broad competitive product lines, our national manufacturing and distribution footprint and our available manufacturing capacity, we're continuing our efforts to capture additional share in the retail segment of our end markets, focused primarily on the repair and remodeling activity.

We are also continuing to expand our position in the industrial sector as well as in the non-residential building market. We are meeting with success in all of these areas despite low demand in the markets that we serve. At the same time, leveraging the strength that we've developed in our balance sheet, our lower debt to capitalization level and our favorable liquidity position, we've been able to take matters into our own hands and find new avenues for expanding the business in addition to organic growth.

The two acquisitions we've completed this year, the D.S. Brown and Pacific Award Metals acquisitions not only contributed to our double digit top line growth for the quarter, but also improved Gibraltar's profitability and operating performance characteristics.

Along with the acquisitions, earlier this year, we took another step in our long-term effort to strategically reposition the Company by divesting of our structural connectors business. This divestiture and the two acquisitions helped move the Company more solidly into leading product positions.

With these initiatives, along with our lower cost structure, we've successfully positioned ourselves to be profitable even at today's subdued levels of end market activity. In addition, a lower breakeven creates substantial leverage for each incremental sales dollar we generate and with the approximately $500 million of available manufacturing capacity that we currently have in place, we can continue growing our sales without investing in new capacity for the foreseeable future.

So in short, we believe that Gibraltar's results for the past two quarters prove that we have the ability to grow sales and improve profitability even absent meaningful improvement in end market activity.

Okay, at this point, I'll turn the call over to Henning for a more detailed look at our second quarter results. Henning?

Thanks, Brian. Turning to slide number four in the presentation, as in Q1, the bright spots have offset weak second quarter demand in the building markets for industrial construction and infrastructure. As a result, our overall business mix continue to shift in this direction. In addition, we continue to see growth in sales of products for residential repair and remodeling, primarily due to our success in deepening our penetration of that market.

This was a solid quarter for sales of our bar grating and perforated metal products to customers in the industrial and architectural markets. Our products are also continuing to sell well in the energy markets. For example, our manufacturing plant in Utah is running 24 hours a day to provide materials for oil field production in Alberta.

Elsewhere in our North American markets, we continue to see solid demand for bar grating and expanded metal products for filtration and other industrial applications. We're especially pleased with Gibraltar's performance in Europe this quarter. Our primary exposure to the European market is industrial equipment and automotive, and our business with customers in both of these sectors improved sequentially and year-over-year.

To cite just two examples, on the equipment side, we received a significant new order for expanded metal from a global OEM for heavy duty off-road construction vehicles, and in automotive, we booked a starter order for expanded metal design work for the front grill of a newly introduced high-end sports car. Also we're seeing increased demand for our core industrial metal products as well as for the products for bridge and highway construction provided by D.S. Brown.

The backlog in incoming business continues to be strong. We're making good progress integrating D.S. Brown into Gibraltar's organization, and the business performed at a high level this quarter meeting our high expectations. Our focus now is to convert an increasing amount of D.S. Brown's expanding backlog into sales, and we're looking forward to this new part of our business making solid contributions to our top and bottom lines in the second half of the year.

As Brian noted, we've been successful gaining share in the residential repair and remodeling market and our results in Q2 bear this out. As we've said in the past, we need two things to happen before we begin seeing significantly increased spending on deferred home repair and maintenance and upgrades like adding decks and new rooms. The first is higher US consumer confidence and the second is a break in the country's logjam of foreclosed housing.

Instead of improving as we expected, consumer confidence levels were flat to lower in Q2. As a result, residential repair and remodel demand grew only modestly in the first half of the year. Nonetheless, Q2 was another quarter of year-over-year growth for us. In otherwise lackluster residential markets, this growth is related to the excellent service that we have provided to our customers in the retail channel, which represents 52% of our residential business overall.

We're seeing good success in driving increased retail sales in several parts of the country by introducing new products for drywall and roofing accessories, safety equipment, rain management, ventilation, secured postal storage and next generation infrastructure protection. We are anticipating modestly increased residential repair and remodel activity over the next couple quarters, mainly related to the store damage in the Midwestern and Southern regions of the country.

Brian commented on these improvements we've made in the underlying operations of the business, and I'd like to expand on those comments. Turning to slide number five, our continuing long-term goal is to position Gibraltar as the low-cost global supplier. With that goal in mind, this was another quarter of progress on several fronts ranging from lean initiatives aimed at further reducing our cost structure to steps we've taken to more effectively manage commodity cost and working capital. As part of our Pacific Award Metals and West Coast operations plan, we're involved in a significant consolidation of facilities, primarily on the West Coast.

As you probably know, we've reduced our total number of facilities from 76 to 42 over the past three and a half years, and will continue looking for opportunities to streamline and optimize our footprint going forward. On our Q1 conference call in May, we forecasted continued commodity volatility in the second and third quarters of this year. We did see continued volatility in Q2, but with some evidence of leveling in prices as we moved through the quarter.

Looking forward, we are anticipating continued raw material volatility, but probably not to the degree we anticipated at the start of the year. On balance, we expect commodity prices in general, and steel specifically, to be less volatile for us in the second half of 2011.

As a business that focuses on providing customers with excellence service and competitive pricing, our priority is to manage the cost side of equation, continuing to be highly selective in terms of commodity cost pass-throughs. In addition to the new ERP and supply chain systems we put in place, we are keeping our inventories at favorable levels, which minimizes our inherent exposure to commodity pricing fluctuations. Keeping inventories turning quickly also enables us to maintain an excellent liquidity position and that allows us to manage the impact of raw material prices by periodically making opportunistic buys.

Our experience in Q1 increases our confidence that commodity costs will have less impact on our margins in 2011 than they did in 2010. This was another good quarter in terms of managing the speed with which we turn our working capital. With 28% sequential sales growth in the seasonally strongest part of the year, receivables and inventories were up in Q2, but working capital turns remained low at 61 days.

Our days sales of inventory for the second quarter was a low 59, only four days longer than the record low 55 days reported in the fourth quarter of 2010 and down dramatically from the high 80-day range only a few years ago. Most importantly we believe we can sustain these favorable levels of net working capital going forward.

Wrapping up and echoing Brian, we're continuing to lower our breakeven and enhance the performance of the business. We feel good about Gibraltar's ability to grow sales and improve profitability in 2011 regardless of whether end market activity picks up in the second half of the year.

With that, I'll turn the call over to Ken Smith for a financial review.

Thanks, Henning.

Let's turn to slide number six in the presentation entitled Q2 Highlights. We had a very sound quarter with a number of key measures showing favorable comps to Q2 of last year. Revenue is up double digits, profitability up triple digits and aided by the two acquisitions this quarter. We closed the D.S. Brown acquisition on April 1 and Pacific Award Metals acquisition closed on June 3. So their financial results are included from those dates forward.

The balance sheet also remains very solid as days of working capital continued to be maintained at the low levels we've achieved during the past two years and debt continues to be at a very manageable level with a modest $20 million drawn on the revolver this quarter, which essentially was used to help fund the cash purchase prices of the two acquisitions.

And the final bullet on the slide, our liquidity continues to be quite ample for our operations. Now turning to slide number seven, titled Q2 sequential improvement. Our sequential revenue growth was driven by nearly equal amounts of organic seasonal demand and the addition of the acquisitions, D.S. Brown and Pacific Award Metals. The seasonal growth came from the residential markets reflecting the typical ramp in construction activity in the spring. And the adjusted operating income was up significantly. That strong increase represented the contribution from the two acquisitions plus a nearly 30% contribution margin from the organic sales increase. The leverage on organic sales was certainly aided by the facility and business restructuring completed over the past year along with an improvement in margin relative to higher raw material costs. And as a result of the strong increase in adjusted operating income, EPS also increased dramatically.

Turning to slide number eight titled year-over-year profit improvement. For both comparisons the quarter and the year-to-date, the P&L results were dramatically up versus 2010 and for many common reasons. Starting with revenues, our organic sales increased in non-residential markets, of course we had the contribution from the two acquisitions.

The bright spots for us in the non-residential markets were oil and gas production, mining, automotive, OEMs, and filtration and applications for heavy equipment manufacturing. Product sales to residential markets were equivalent to those in the same periods in 2010 as macros that affect demand for new housing and residential repair and remodel activities have not improved much.

As with revenues, our adjusted operating income also grew substantially in the quarter in the half-year comparisons. We were more able to effectively manage the margin between raw material cost and selling prices, leverage our lower cost structure and benefit from the earnings of the acquisitions we purchased this quarter.

Concerning EPS, again, we had substantial increases over the 2010 time period. Besides the higher operating income levels in 2011, the other boost to EPS this year was a more favorable income tax rate compared to last year, and I'll talk more about the income tax rates when discussing slide nine in just a moment.

Our free cash flows in 2011 reflect 2010 benefiting from cash provided by discontinued operations, notably the Processed Metals business we sold in February of 2010 and lower inventory cost. In 2011, our free cash flow has benefited from higher profitability while we've used more cash to purchase inventories this year, and nearly the same quantities, just more cost per pound or ton.

Turning to slide number nine on net income and EPS, I'll comment on the non-operating and income tax expenses. Net interest expense increased compared to last year's Q2. The result of having drawn on the revolver this quarter to help fund our acquisitions. And regarding income taxes, slide nine shows more taxes in 2011 because we're more profitable this year. However, we also benefited from lower tax rates this year, approximately 900 bps lower than the rates in the 2010 period. And this rate reduction was largely due to this year's non-deductible items being lower in amount compared to 2010 and also proportionally less significant to 2011's higher profitability.

Now, turning to slide number 10, cash flow. As we expected, we used cash for operations in the first half of 2011 primarily for working capital, which was a net result of cash generated in Q2, but was more than offset by our cash used in Q1 this year. While we continue to keep our working capitals turning at a very good velocity, the seasonality of our business has resulted in higher amounts invested, particularly inventory. Looking ahead, I expect the second half of 2011 will generate positive free cash flow helped by a decreasing investment in working capital and for the full-year 2011, I expect the Company to generate positive free cash flow.

Turning to slide number 11, debt and capitalization, I'll focus on the rows of this slide that have changed the most, total debt and cash. At December 31, 2010, total debt was comprised of $200 million of sub debt plus some IRBs with no revolver draws.

In the first quarter this year, we sold the USP Connectors business for cash. So at the March end, cash balance included nearly $60 million of proceeds from that divestiture. And then in Q2 of this year, we acquired for cash the D.S. Brown business and the Pacific Award Metals business. We funded nearly $110 million in aggregate purchase price, we used $90 million of existing cash plus $20 million drawn on our revolver. And as shown on an earlier slide, we closed the quarter with ample liquidity of nearly $130 million.

And now, I'll turn the call back to Brian.

Thank you, Ken.

You can refer to slide 12 at this point. We believe that Gibraltar is well positioned to deliver top and bottom line improvements as a result of our organic growth initiatives and our acquisition activities. We feel good about our prospects for organic growth even though our improvements in market share can be masked by weak end market conditions in the short run. Seasonal cyclicality in the second half of the year will always be a factor and this year will be no exception and housing starts are likely to remain a headwind at least through the end of the year, if not longer.

Nonetheless, we've been successful in shifting our business mix towards the industrial, and more recently, the infrastructure markets, which have not fallen to the extent of residential and commercial construction and showed strength in Q2. And in residential, keep in mind, about 75% of our business is repair and remodel where demand promises to be far stronger than in new home building for the foreseeable future.

We are pleased with the progress that we've made on the commodity front both in managing our raw material cost and at the same time --maintaining or improving our spreads. At the same time, our reduced cost structure and improved operational efficiency provide us with significant leverage to future top line growth.

As a result, we expect to deliver favorable sales and earnings profitability in the second half of 2011 compared to 2010. And our success in managing working capital coupled with the strength of our balance sheet and our ample liquidity put Gibraltar in a good position with respect to the potential for acquisition driven growth. We continue to see opportunities to make accretive acquisitions that improve our overall operating characteristics.

That concludes our prepared remarks, and we'll be happy to open the call to any questions that any of you may have.

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

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

Good morning, Josh.

Good morning. Just wondering on the quarter, if you looked at your organic growth of about 6%, how much of that was due to price and how much of that was due to volume?

I think 7% was due to price and volume -- it was down 1% to 2%, unit volume.

Okay. I see. And then so going on the price cost side of the equation, are you at price cost parity right now or is the pricing net of commodity still a headwind for you guys?

We've continued to manage it very closely. We think we're in a balanced situation, and we continue to see ourselves staying in a balanced situation through the end of the year.

Okay. Great. And then last question, obviously the recent acquisitions are contributing very nicely. How would you characterize your appetite for further acquisitions at the moment, I guess financially and also organizationally?

This is an opportune time to be in a position to have liquidity to make acquisitions and we are going to be prudent in the decisions that we make relative to acquisitions, but I can tell you that we have a full pipeline of acquisition opportunities under review.

Okay. Great. Congrats on the quarter.

Thank you.

Tim Hayes, Davenport & Company.

Hey, good morning.

Hi, Tim.

Just a couple questions on the acquisition-related cost in Q2, was there an inventory, a fair value inventory adjustment during the quarter, and if so, is that in the acquisition-related cost?

Yes, it is. Yes and yes.

Okay. Any lingering, is that re-valued inventory all flushed through or will we get a little bit more in Q3?

It's all gone in the second quarter P&L.

And final question, Brian, you've given an update on your operating leverage over the next say, $150 million of sales. Now that we have -- sales are growing at least a little bit in the acquisitions, can you provide an update to your operating leverage over the next say incremental sales?

You're talking relative to manufacturing capacity utilization, that hasn't changed significantly. We still have roughly $500 million worth of available manufacturing capacity. I'm not sure if that's the question you are asking --

We've continued to maintain the 30% contribution margin that Brian cited in his presentation as we go forward with increased volumes.

Okay. And with that 30% leverage still beyond, say, the next $150 million of sales or is that sales levels --

It goes up and it goes up in smaller increments as you go forward.

Actually what our calculations have shown is that we are good with that 30% contribution margin until we get in the range of $900 million in sales. At that point, we may have to add a little bit of additional cost.

Okay. Thank you.

Seth Yeager, Jefferies & Company.

Hey, good morning. Good quarter.

Thank you.

So it sounds like things so far had been pretty successful for D.S. Brown, but just in the event that there is some degree of a cut in federal infrastructure spending beyond the current year, are you guys starting to see any projects that are being put on hold without long-term funding, and I guess what are the typical funding mechanisms for some of the larger projects in that segment?

Well, a couple of things. I'll take part of it, Henning can take part of it. But right now in this country, according to US DoT statistics, there are over 600,000 bridges in operation in the US today and that's before any new ones are built. And they say, 25% or 150,000 of those bridges are classified in their terms as either functionally obsolete or technically -- structurally deficient, which means there is a lot of bridge work to be done before any new bridges are built to keep the existing bridges in service. So the backlog at D.S. Brown is jobs that need to be done in order to allow for safe transport of passenger vehicles over those bridges, and in some cases, rail road transportation over bridges as well. So we are comfortable that the backlog is very solid.

If you look back at the federal funding for bridges, I think the current bill expired five years ago, but each year there has been a temporary measure passed, which is equivalent to one year of funding under the previous bill, which is a clear recognition of the state of the bridges and highways in this country today that there's a lot of work that needs to be done. So we are confident in bridges and roads, and I have not heard any one -- any politically elected officials talk about cutting spending to bridges and roads at this point in time.

Henning, you want to talk about their backlog.

Yeah, I think that's true. I think we would continue to see our incoming business on the infrastructure side to stay at least at the current pace of the proposed budget that the current administration has put in place is significantly higher than the current operating budget that they are using. So as a minimum, our business would continue to grow as it has and on the upside we would see more growth on top of that.

Great. Do you believe you are taking share in that business as well as that part of the growth strategy?

We have high market share on some of the products that we have. So, and we believe we are at least maintaining that market share.

All right. Great. Thanks. And then for the back half guidance around the neutral price cost environment, is that -- are you guys starting to see steel come off? I'm just tracking some prices here. Are you seeing that as well, and is that a function of further price increases or just pre-purchasing, or I guess what's behind that?

It's a worldwide situation. China has a big -- plays a big role in keeping -- in establishing where prices are going to be. Capacity here in the US is expanding against current flat level of demand, but our expectations are that as we get closer to the end of the year that steel prices which appear to have been leveling out will probably start to increase again.

I think what we have noticed during this year, which is different to prior years is that fluctuations continue, but the amplitude is small, and we would continue to expect that to be the phenomenon going forward.

Got it. Okay. Great. Thanks. And then as far as CapEx guidance for the full year, has that changed at all?

No it hasn't.

Okay, great. Thanks a lot, guys.

One last follow-up comment to that question. We've invested heavily in systems over the last three years. And a big portion of that investment was to help us forecast better and plan our supply chain management activities in much closer harmony to what our sales forecasts are. It has helped us significantly match -- significantly improve our ability to match our purchases to our sales forecast. And, in addition, utilizing a very tight working capital set of parameters, we have substantially minimized the disruption that will come from raw material volatility.

And then if you look at what we've done with our portfolio of companies, we're moving the business into higher value added product areas with a lower material percentage of our cost or selling prices so that we're minimizing the impact that raw material volatility can have on our overall profitability.

We're not where we want to be yet, but we're clearly making substantial progress there. So the combination of better systems, better linkage between our selling, our sales forecast in our supply chain management activities, our much tighter focus on working capital have put us in a much better position to manage this raw material volatility.

And have you plugged in the recent acquisitions into those ERP systems?

They are in the process of being put into those systems.

Okay. Great. Thanks a lot.

Our systems are fully capable of adding those businesses to the systems. So it's just a matter of time.

Got it. Thanks a lot.

You're welcome.

Robert Kelly, Sidoti & Company.

Hi, gentlemen. Good morning.

Good morning.

A question on, I think with the contribution margin of 30%, was that 2Q11 versus 2Q10 for your organic sales? Or was that sort of the goal you have in place with the new cost structure?

No, we had actually above -- a little above 30% for the second quarter compared to Q2 a year ago.

Yes, I guess, what I'm trying to just really determine is, what was the incremental either gross profit or operating profit from acquired sales in 2Q11?

Say that again, I --

What was the incremental profit contribution from acquired revenue in 2Q11?

On an adjusted basis, it was $4 million.

Okay. That's fair enough. So you saw a significant base increase in the organic business. And I guess, I'm just trying to figure out the buckets of cost improvement. How much of that gross margin improvement that you showed year-on-year is raw material alignment, cost productivity, anything else that that is driving improved margins compared to the year-ago period?

About 75% was improvements on pricing to material cost and 25% were efficiency improvements to gross margin.

Okay. So, I mean with prices leveling out for steel.

Right.

For the second half of the year, I mean, does that 75% incremental improvement from raw material and selling price alignment start to flatten out as well or do you still get that same kind of benefit as we move into 2H?

I think what we're trying to do is hold the improvements that we've had through the second half of the year. I think the second half of the year will likely, as Brian indicated, be more challenging because in fact if pricing starts to come down, we'll get more pressure to drop our pricing and even though our inventory is at low levels, we still have close to a month and a half to two months of inventory. So we do have that exposure going into the fourth quarter.

Understood.

It almost may seem counterintuitive.

Yes.

Saying that declining raw material cost is not a good thing, but in some of our business that is the fact.

It was encouraging you got ahead of them this year, I mean, it's a tough environment to get pricing. As far as D.S. Brown, is that or I guess all acquisitions, you kind of called out a mid-teen EPS accretion benefit in 2011. If it's a $4 million contribution in 2Q alone, aren't you, are you ahead of the pace as far as accretion from earnings compared to your previous comments?

Well, their business is like the other businesses of Gibraltar, have some seasonality to it. So, and typically our second quarter is amongst if not the strongest sales and profit period for the year-- out of the four quarters of the year.

So there's a seasonal component to D.S. Brown as well.

Yes, it's not linear across four quarters.

Okay. Great. And then just one final one, if I may. The SG&A run rate including acquisition is about where you thought it was coming out of 1Q or where you thought it would be coming out of 1Q. In the fourth quarter of 2010, you kind of had a much higher organic SG&A rate, should we expect $27.5 million or so each quarter for the balance of this year? Do you see a drop-off coming in 4Q '11?

No, I see it averaging about $27 million per quarter, for Q3 and Q4 of this year.

Okay. Thanks very much, guys. Good quarter.

Thank you.

Leo Larkin, Standard & Poor's.

Good morning. Could you just remind us again what CapEx is this year and depreciation, also could you give any preliminary guidance for CapEx for 2012?

I think we're looking at $14 million for this year. The accounting people are suggesting $15 million.

And depreciation this year is probably going to run around $23 million, $24 million.

$21 Million.

And so CapEx, I would expect CapEx in 2012 is going to be in the mid to high teens.

Yeah. I think in 2012, we have some larger projects that we are looking at, which are really related to the expansion of some of our faster growing businesses. So, we're likely to spend a little bit more in 2012 as those backlog start to come online.

Okay. Thank you.

Phil Gibbs, KeyBanc Capital Markets.

Good morning, gentlemen.

Good morning.

I have a question about the adjusted gross profit margin. It looked like it was about 23% in the second quarter. Do you feel like that level is a good baseline to move off of going forward from just starting from that point, I'd assume there would be incrementals?

Are you talking fourth quarter, third and fourth quarter?

Second quarter was I believe 23.1% adjusted, does that sound right?

Yes.

Third quarter, because of the seasonality may be a bit lower, but just off of the 23%, call it basis, is that a good level to use?

Yes, it is.

So you believe that's a sustainable level.

We do. I mean the targets that we've established are in that level going forward. I guess it's dependent on volume as you get -- if the volume goes up, we get more leveraging, and that takes our gross margin up. We've been able to manage for the most part, as we've said earlier, PPV going into the year and I think we are still planning on managing PPV at the same level through the second half of the year. That's where most of the challenge will come from.

The other elements in the gross margin are overhead. Obviously, it's going to be the same on direct labor, we are going to vary as we go through the quarter. So we will take our direct labor down in the fourth quarter. But for the most part, I think we are comfortable maintaining the gross margins relative to the unit volume growing through the plants.

Okay. And as we head into the back half of the year, do you -- with these new business contributions and further rationalization in the cost structure and management of the raw materials, do you expect to be profitable in the fourth quarter of this year or is it just too early to tell?

Too early to tell. We're looking very closely at both the third and fourth quarter. We do believe that we will have substantial improvement year-over-year when we finish the year.

Okay. And then --

Visibility at this point, particularly over the last couple of weeks has not improved, it's gone the other way. And as you know, we don't give guidance -- forward-looking guidance. Anyhow, other than from a trend direction and as Henning said, we believe that we are going to have substantial improvements on a year-over-year basis in both the third and fourth quarters of this year.

Okay. And then just lastly, just a question regarding the end markets. Any feel for just the breakout in the quarter of res versus non-res? Could you give us a feel for that?

We think that the ratio will remain the same as we go forward. We may post solid gains in residential and non-residential. I think we feel most optimistic about the non-building construction, which again, non-building construction was up 5% year-to-date where both the commercial and residential were down for the quarter. And again, we now have a larger participation in the non-building construction market than ever before. So that's going to help us as we go through this year and as we enter 2012.

Okay, so you're thinking 35%, 40% or so non-res, is that reasonable or is that too high?

On consolidated revenues ?

Yes.

I think the non-res, and I'll include both commercial and industrial, is running 46% for us.

Commercial, industrial, and architectural right now is in --

Yes, I put commercial and industrial both in there. Commercial is 20% and industrial is 26% on a year-to-date basis. So 46%, 54% in residential, year-to-date.

Okay. So that's interesting. So that has been very strong relative to the other pieces of the business. Okay.

That's right.

Okay. Thanks for that. It helps.

Yes.

At this time we've reached the end of the Q&A session. I'll now turn the conference back over to Mr. Lipke for any closing or additional remarks.

I do have a few additional remarks that I feel compelled to make today. We have come a long way in the last few years. We have cut hundreds of millions of dollars of costs permanently out of our cost structure. We've streamlined our overall business alignment. We've eliminated more than 30 facilities and we've done that without limiting our overall productive capacity. Our products are well accepted in the market. We have product leadership positions in the vast majority of all of our products and we enjoy a number one or a number two market share in those products.

From a balance sheet perspective, we've got a much stronger balance sheet today. We paid off the majority of our bank debt. We have a very strong working capital focus that has allowed us to continue to generate positive cash flow. And we have ample liquidity not only to manage our business on a go-forward basis, but also to make acquisitions at what is a very opportunistic time in the acquisition arena.

So we feel good about not only being nicely profitable in this difficult end market environment and as one of the questioners pointed out, our core business has improved substantially from last year to this year. And then on top of that we've had the additional sales and earnings from our acquisition activity. That puts us in a very good position right now to weather these weakened end market conditions, and we're confident of our ability to further strengthen our position as we do more portfolio management and as we acquire businesses that move up the value added chain to position ourselves to fully capitalize on the inevitable improvements that will come in our end markets. So if you deduct a better sense of confidence in this call than we had last year at this point in time is because we feel that we have positioned the Company much better over the course of the last year.

Thanks for participating in the call today, and we look forward to talking with you next quarter.

Ladies and gentlemen, thank you very much for your participation in today's conference call. You may now disconnect. Have a wonderful day.