Gibraltar Industries Inc (ROCK) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Gibraltar Industries Third Quarter 2011 Earnings Conference Call. At this time, all participants will be 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 your host for today, Mr. David Calusdian from the Investor Relations firm Sharon Merrill. Please proceed.

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 third quarter performance. These slides are also posted on the website. Please turn to slide 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 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'll turn the call over to Brian.

Thanks, David. Welcome everyone and thanks for joining us on our call this morning. I'll begin with some brief opening comments and then turn the call over to Henning and Ken for a more detailed review of our results. Following that, I'll close our prepared remarks with some comments about our business outlook before opening the call to your questions.

You can refer to slide three in our presentation now. Our strong continued performance this quarter demonstrated how far we've come in the past few years. Instead of biding our time and waiting for our end markets to recover, we've taken matters into our own hands.

Although the business environment hasn't significantly improved from Q3 last year, we were able to grow our sales by 30%, improve our adjusted gross margin by 330 basis points, and we delivered 550% growth in adjusted EPS from continuing operations. We achieved these results by continuing to successfully execute on a clear simple three-point strategy. First, by focusing on operational excellence across the Company; second, from a product standpoint, by diversifying our way to greater market share; and third, by capitalizing on the strength of our balance sheet to make accretive acquisitions.

Compared with where we were at the start of the recession, we've permanently eliminated $80 million from our annual cost structure and reduced our working capital by nearly two-thirds, shrinking our footprint from 76 to 42 facilities and we've done that without compromising our overall production capacity. We have approximately $1.4 billion of available manufacturing capacity in place today putting us in a position where we will not have to invest to generate additional capacity as our markets improve.

In the marketplace, we're continuing to shift our overall business mix away from the residential building market and towards industrial and infrastructure markets. Although we're recognized as the longstanding leader in the majority of our product categories, we're not resting on our laurels, instead we're being aggressive in launching new products and expanding our geographic market coverage to drive organic growth in all of our market segments.

Looking ahead into 2012, the steps that we've taken to restructure and refocus the business position us to generate higher margins and continue delivering solid year-over-year profitability improvements.

In the third quarter, our contribution margin from incremental sales dollars was close to 30% and when demand starts to rebound, this restructuring has provided us with operating leverage that positions Gibraltar to translate even a modest level of market improvement into stronger margins and growth on the bottom line.

Meanwhile, our focus on generating cash from operations has enabled us to pay off the majority of our bank debt, reducing our total net debt for more than $550 million four years ago to less than $200 million today. As a result, we have the liquidity we need to grow our business organically, at the same time pursuing accretive acquisitions.

We've already completed two acquisitions this year, each of which is meeting or exceeding both on the top and bottom line expectations that we had, and we believe the current environment remains favorable for additional deals that will enable us to provide added value to existing and new customers.

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

Thanks, Brian. I'll provide more detail on our third quarter performance in each of the three strategic dimensions that Brian just discussed. The first is operational excellence, as outlined on our slide number four in the presentation.

From an operational perspective, our continuing long-term goal is to position Gibraltar as the low-cost global supplier. We've advanced towards that goal during the past few years through Lean initiatives that have lowered our cost structure, through steps we've taken to reduce working capital, and through more effective management of commodity cost. Q3 was another quarter of solid progress in each of these areas.

As Brian said, since the start of the recession, we've reduced the number of facilities we operate by a total of 34. In the process of integrating the recently acquired Pacific Award Metals business and executing on our West Coast operations plan, we did some further facilities consolidations in that part of the country in the third quarter. And we'll continue looking for opportunities to streamline and optimize our footprint in the future, including merging congruent product lines and business units.

Most importantly, we've been able to accomplish this consolidation without compromising our production capabilities. After nearly four years of aggressive facilities closures, we stand today with approximately $1.4 billion of total manufacturing capacity and capacity utilization of approximately 60%, providing us with significant headroom for profitable growth.

In terms of managing our working capital, this was also a successful quarter. Although receivables and inventories are up in Q3 from year-end, reflecting our sales growth and acquisitions, working capital turns remained low at 63 days. We're effectively managing our inventory as well.

Compared with a high 80-day range we were seeing only a few years ago, our days sales inventory in the third quarter was a low 58, very comparable to the record low 54 days we've reported for the third quarter of 2010.

Working capital turns and days sales of inventory were both well within the optimal range we're targeting to the long term and we believe we can sustain these favorable levels of net working capital going forward.

Across the Company, our business leaders are continuing to do a very good job in managing raw material costs. Although there seems to be significantly less volatility than a year ago, we continue to see fluctuations in commodity pricing in the third quarter. We said on our conference call in August that we expect commodity prices in general and steel specifically to be less volatile for us in the second half of 2011 and our experience in the third quarter is consistent with that expectation.

We feel good about the Company's performance in managing through the volatility that we did see. As a business that focuses on providing customers with competitive products and service, our priority is to be highly selective and very judicious in terms of commodity cost pass-throughs, focusing instead on managing the cost side of the equation. In that regard, our new ERP and supply chain systems are helping us quickly turn to our inventories, minimizing our inherent exposure to fluctuations in commodity pricing.

Fast inventory turns also enhance our liquidity position, which has allowed us to manage the impact of raw material prices by periodically making opportunistic buys. On balance, based on our experience in the third quarter, we continue to believe that commodity costs will have less impact on our margins in 2011 than they did in 2010.

I'll turn now to the second part of our strategy, as outlined in slide five of the presentation, driving organic growth. As Brian said, we continue to be successful in offsetting weak demand in the residential building sector with growth in other markets.

Leveraging our broad and competitive product lines, our nationwide manufacturing and distribution footprint and our available manufacturing capacity, we're continuing to gain share in the retail segment, focused primarily on repair and remodeling activity.

Unless we see a material jump in consumer confidence or some growth in sales of foreclosed housing, we're not likely to see significantly higher spending on deferred home repair and maintenance and upgrades like those adding decks and new rooms. Neither of these improvements occurred in the third quarter and as a result, residential repair and remodeling demand generally remained weak.

For the second quarter in a row, however, we generated year-over-year organic sales growth in a lackluster economic environment, reflecting the high-quality service and competitive proposition we provide our customers, particularly in the wholesale channels where sales have picked up as retail business declined in part to the inventory adjustments and slower-than-expected remodeling activity.

This is also a quarter of growth in sales to customers in the industrial construction and infrastructure markets highlighted by demand for grating, perforated and expanded metal products, and industrial applications such as filtration, platforms and engineered products for architectural applications. This was a particularly strong quarter for sales in the oil and gas markets, fueled not only by oil sands production activity in Alberta, but also by natural gas production in the Marcellus Shale region in the Eastern United States.

We also benefited from solid demand for engineered metal products in the European automotive market this quarter. Q3 was D.S. Brown's second full quarter operating as part of Gibraltar. We're now well into the integration process and very pleased with the sales and cost synergies that have materialized thus far.

Spending for bridge and highway construction seems to be surviving the budget debates at Congress and we were able to convert an increasing amount of D.S. Brown's expanding backlog into sales in the third quarter. D.S. Brown made solid contributions to both our top and bottom lines in the quarter and we're expecting further growth and accretion from this business through the end of the year.

As Brian said, our overall business mix has shifted toward non-residential and we expect this shift to continue going forward. At the same time, we're continuing to make progress on the third part of our strategy, as summarized in slide six of the presentation, capitalizing on the strength of our balance sheet to make accretive acquisitions.

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

Summing up, Gibraltar delivered yet another strong quarter. We found ways to enhance operations and grow, and our strong balance sheet has enabled us to continue making strategic and accretive acquisitions. We're confident in our ability to continue to control own destiny and deliver further performance improvement.

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

Thanks, Henning. Let's turn to slide number seven in the presentation entitled year-over-year profit improvement. The quarter and the year-to-date P&L results were significantly up versus 2010. Our stronger operational performance certainly has driven the excellent financial results.

Revenue was up by 30% for the quarter, driven both by our organic growth initiatives, as well as our two acquisitions this year. And as previously noted, both D.S. Brown and Pacific Award Metals are performing to our high expectations in the top and bottom lines.

Q3 revenue also had double-digit organic growth, led by increased sales in non-residential markets and benefited from both favorable volume and price changes. Revenue strength in the non-residential markets came from oil and gas and European auto markets, as Henning noted, plus other industrial-related markets such as transportation and chemical processing.

We also turned in another impressive quarter in terms of adjusted operating income, which grew significantly for both the quarter and the nine-month period. We continue to effectively manage the margin between raw material costs and selling prices and leverage our lower cost structure.

And additionally, the 2011 acquisitions contributed to the significant improvement of profitability. And the overall contribution margins for the quarter and the year-to-date periods approximated 30%. And free cash flow, we had another strong quarter generating cash while we also had increased revenues. And I'll add more color when discussing a later slide.

Now, turning to slide number eight on net income and EPS. Commenting on the net interest and income taxes specifically, net interest expense increased compared to the time periods in 2010 as a result of borrowing on our revolver this year for our April and June acquisitions and the nearly $20 million borrowed for the two acquisitions was paid off in early September of 2011 ending Q3 with no draws on the revolver. And in 2010, we essentially had no revolver draws after early May 2010.

The amounts of income tax expense were higher in the 2011 periods, as a result of significantly higher profitability this year. And the Q3 2011 expense was based on an effective tax rate of 45% for the quarter. And we expect the full-year 2011 effective tax rate to approximate 44%, with the primary items causing a difference from the statutory federal rate being state taxes and non-deductible expenses.

Turning to slide number nine, our cash flow, the year-to-date 2010 results certainly benefited from discontinued operations, while year-to-date 2011 has benefited from Gibraltar's much improved profitability.

And the year-to-date 2011 amounts are net of the first quarter's $14 million investment in working capital to service the higher seasonal sales that we're going to follow, but followed by positive cash flows in each of Q2 and Q3 this year of $4 million and $29 million respectively. I do expect the Company to generate additional free cash flow in the upcoming fourth quarter and end the full-year 2011 with free cash flow approximating 6% to 7% of revenues, which is very solid performance in this economic environment.

Turning to slide 10, debt and capitalization. With the $20 million borrower on the revolver in the second quarter this year being paid off in Q3, we ended September with a low net debt position of $174 million. And this low position is a benefit of the continuing solid operating performance and closed ranges on working capital.

Besides the 31% debt-to-cap at quarter-end, we also ended September 2011 with further reduction on our leverage at 3 times, which is funded debt divided by trailing EBITDA, including add-backs for non-cash charges and non-cash equity comp. And as you read in the earnings press release, we continue to increase the liquidity of the Company reaching $158 million as of September end.

Lastly, after the quarter ended and specifically on October 11, we closed on a new five-year credit agreement replacing the prior agreement which was scheduled to expire in August of 2012. The new five-year agreement goes out to 2016 and includes a $200 million revolving credit facility, plus an additional $35 million term loan commitment. And not only does this new agreement provide Gibraltar with a five-year maturity, but also reduces the cost of borrowing and provides additional financial flexibility.

And now the call goes back to Brian.

Thank you, Ken. My wrap-up comments are summarized on slide 11. We've made significant progress in the past few years. Focusing on operational excellence and product leadership, while strengthening our balance sheet and making accretive acquisitions, has enabled us to significantly improve the Company's performance without the assistance of growth in our end markets.

We've cut over $150 million from our cost structure and working capital since December 31, 2008. We've successfully managed volatile commodity costs. We've gained share in our traditional residential markets, while dramatically expanding our presence in non-residential markets. We've rationalized our business structures through strategic divestitures and acquisitions.

And as a result, we're generating positive cash flow, growing our sales and increasing our earnings from continuing operations in a less than favorable business environment. There's been a lot of talk about the continuing headwinds in some of the construction markets.

And I think it's clear now that our strategy is dealing with those headwinds and allowing us to grow and improve our profitability in spite of those continuing headwinds. And as we stated a few quarters back, we're taking matters into our own hands and moving the business forward in spite of those headwinds.

Looking forward, when our end markets begin improving, we're in an excellent position to leverage margin growth both from incremental sales and from further portfolio management, as we acquire new businesses that take us further up the value chain. Overall, we're optimistic about Gibraltar's prospects for continued improvements in 2012 and beyond.

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

(Operator Instructions) Robert Kelly, Sidoti & Company.

Gentlemen, good morning.

Good morning.

On the organic growth of about 13%, could you give us the breakout between price and volume?

Yes. 8% was volume and 5% was price.

Okay. Thanks. As far as the comments for the incremental profit from the organic sales growth, you said it was about a 30% incremental margin, was that at the EBIT line or the gross margin line? Where I'm going is, I'm trying to figure out what the contribution from acquisitions was in 3Q?

That was an EBIT statistic.

Okay. So, you've got $8 million of increment from acquisitions compared to a year ago, on about $28 million in sales, is that about right?

No, it's not nearly that high. I'd say we also had some greater than favorable contribution from reduced spending in SG&A specifically at the corporate entity, that -- what have made up a good portion of that figure.

I mean if you look at our gross margins, we're up a little bit over 3 percentage points over the prior year and out of that, probably the acquisitions added probably about 0.7%. Well, they clearly made a contribution, but it wasn't an overwhelming contribution.

So, what was the dollar contribution from acquisitions on EBIT and gross margin in 3Q?

We'll provide operating EBIT, but that was approximately $4 million [from both of those].

Okay. So, you're still on pace for that sort of mid-teens accretion in 2011 or are you well ahead of that pace now?

I'd say we're still on pace.

Still on pace.

It was a very healthy contribution.

Okay, $4 million from contribution. Great, very helpful. And then I'm just looking at 3Q compared to 2Q. You talked about raw material volatility -- I'm sorry, lack of raw material volatility in 3Q. I'm just trying to reconcile, sequentially your sales were up about $12 million, your gross margin is down about -- your gross profit is down about $5 million, what's the disconnect there?

Well, we did have -- we did have some margin compression in the sequential quarter of the third quarter. It was not nearly to the extent that we've experienced.

It was primarily one business unit that tends to be more closely related to commodity price variations. And if we look at material -- cost of material as a percent of sales, we were approximately 2 percentage points better than the prior year, but probably not as strong as the prior quarter.

Right.

I think 3 points less than the prior quarter.

It's a pretty big sequential drop to just call out one unit, is it -- that's been an important business unit?

It is, it's a large business unit. It has had the most impact, but I think fortunately we've put some good plans in place to help moderate those variations as we go forward. So, we feel good about, as Brian said, going forward and into 2012. They've done a great job in managing a tough situation as you could imagine.

Yes, hopefully raw materials get no worse than the first nine months of 2011.

We don't think they will. We see some moderation going forward, I think the general market, it's not just ourselves.

Right.

I think we too have taken a lot of steps both with internal systems to help mitigate the impact that raw material volatility has on our profit generating equation. And on top of that, we're moving the business in a direction where more of the businesses have raw material cost as a percentage of sales at a much lower level than historically we've averaged in the past.

And that's another part of our strategy to deal with the continuing raw material -- commodity and raw material cost volatility. So, the combination of those two things have helped us mitigate what has continued to be a pretty volatile cost environment for raw materials.

Our biggest raw material is steel, of course, although we're buying aluminum and copper and some stainless steel as well. But the biggest one is steel and of course, resins for our plastic products. But the steel volatility, I think, has been most noteworthy over the last couple of years and we're refining our ability to deal with it.

Understood. Just one follow-on, during Ken's prepared comments, talked about a 67% of sales, free cash flow target for 2011, so $30 million positive free cash flow in 4Q, is that the implication there?

It's going to be approximating that, yes.

And that's -- is that just working capital?

Yes.

Okay, got you. Thanks, guys.

Thank you.

Peter Lisnic, Robert W. Baird.

Good morning, gentlemen.

Good morning.

Good morning.

I guess first question on the SG&A line as a percentage of sales, looks like it was one of the lowest levels in many or several quarters, just wondering how sustainable that is on a go-forward basis?

We did have some favorability in the third quarter related to variable compensation and professional fees to the tune of approximately $3 million and I'd say it was a fair portion of that that probably would not, it's kind of an adjustment for the year-to-date period.

Okay.

At the same time though when we look at SG&A, we've got a continuing focus to drive the dollar amount that we're spending on SG&A down across the board in the Company, and we expect to make continued improvements there.

On top of that, as our sales grow, we're not anticipating that we have to add to SG&A for the foreseeable future. So, as a percentage of total cost, we would expect to see SG&A continue to go down.

Okay. But that $3 million basically is a year-over-year number, is that right, Ken?

It's year-over-year, yes. But it was also we had substantially reduced from the second of quarter this year.

Okay.

SG&A was about $27 million.

Okay. Is there a way to think about SG&A from a fixed or variable cost percentage basis, what portion of SG&A is fixed?

Now it's all variable in a relatively mid-term sense. I'd say a good -- we have -- we don't have that much in the way of commissions or other variable expenses.

Okay. So, it's truly a variable item, okay. All right. And then second question, separate topic, the commentary on share gain, you've had that over the past several quarters and it shows on the numbers. Just wondering how much more runway do you have on share gain initiatives and then if you could identify where some of the strongest trends have been from a share gain perspective, that would be really helpful.

That's a little bit of a sensitive area. So, I'll answer that in a general way. If you look at the retail portion of the business, as an example of the opportunity for share gain, we're selling a very limited portion of our total product line to all of the Home Depot or Lowe's, which gives us opportunities to sell more of our products to more of their stores and we're approaching that on a, pretty much a region-by-region basis. And in the last quarter, we've made some pretty good gains in penetrating more regions with more of our products.

I mean in general, we've increased our market share by increasing the program depths that we sell to our customers. We do it both at retail and wholesale. So, we've continued to expand the programs that we provided to our customers and that has allowed us to take larger portions of our products into those same customers. I think we continue seeing doing that, we've generated a number of new opportunities as we expand the programs into some adjacencies going forward.

So, we don't see that as a truncating item that's going to limit our ability to improve our, as we say, market share with those customers. Again, but it's not just purely taking market share, it's really expanding -- we sell programs for the most part instead of products, particularly at retail. [We're going to see] broadening the programs that we're selling and we see that continuing going forward.

Okay. And is it more -- is it retail-oriented or can we say that share gains are broad?

Yes, we see -- both wholesale and retail, and industrial. We see expanding in all three areas on an ongoing basis. I think Brian and Ken have both talked about that. And I think in the coming quarters, we'll provide more color as we develop more assurance on those growth opportunities.

Okay, perfect. And then last question, the organic growth in the quarter double digits, quite strong. Just wondering if you could talk about maybe the cadence of demand through the quarter and then give us a feel for what October might have looked like from a demand perspective given the macro that we're enduring.

The demand, it was heavy in the front part of the quarter and it sort of waned in the back part of the quarter. We see it picking up a little bit into the fourth quarter.

We did have some activity relating to storms that occurred earlier in the year and we saw that's sort of being reduced towards the back end of the particular last month in the quarter, but we see some pickup going into the fourth quarter. So, we think our fourth quarter will be a more normalized basis and I think we're fairly optimistic about 2012. We see some pickups already as we get into the first quarter of next year.

Keep in mind, Henning's comments are all relative to the current level of end market activity. When he said heavy at the beginning of the quarter, it wasn't heavy -- on a normalized basis, it was heavy relative to this quarter only.

Okay, I got you.

Things are still at a very low level of end market activity.

Understood. Okay, perfect. Thanks for the time and the color.

You're welcome.

Tim Hayes, Davenport & Company.

Hey, good morning.

Good morning.

Most of my questions have been asked, just to clarify that the margin hit Q2 to Q3 from metal prices, did you say that was a 3 percentage point hit sequentially?

Yes.

Okay. Thank you.

You're welcome.

Seth Yeager, Jefferies & Company.

Hey, good morning guys.

Good morning.

Good morning.

Most of my questions have been asked as well, but as far as, can you just give us a sense as to your current mix between res and non-res and repair and remodel versus new and sort of what your longer-term targets would be?

Res is actually about 45% of our sales, and I know that I think about last time we looked about 35% of our sales are non-residential construction, the remainder is what we classify as industrial sales, or industrial products or industrial and non-building construction and infrastructure.

And then of the res, only 25% of that, of the residential only 25% of that is for the new build portion of the residential construction market, the rest is basically repair and remodeling activity.

Got it. And as far as longer-term targets, you sort of alluded to the fact that you want to shift a bit way from consumer-oriented products. I guess what is the primary focus and what sort of mix would you look at going forward?

We see a lot growth in both the industrial and non-residential market, but we're not shying away from the residential market, and we think there's great opportunities in the residential market. We have a very strong presence in those markets and we continue to see ourselves growing rather nicely in all those markets going forward.

I think Brian talked about our ability to use the cash we've now generated to expand the Company. And so as we expand the Company, we're continuing to expand in all three areas, but probably with a stronger focus on the industrial and non-residential construction. I think that's probably fair, we see more opportunities in those areas.

So, it's not that we're moving away from residential, we're expanding into other areas to give us a broader coverage of all of the available construction markets, particularly those that have the higher margin generating product lines.

I think we're very excited about 2012 because we see our footprint stabilizing going forward, which I think will please our shareholders.

Okay. Great, thanks. And as far as your expansion plans with acquisitions, anything sort of imminent in the pipeline and just as a follow-up, do you have a first sort of guess, as a budget for CapEx next year?

We're in the midst of our budgeting process right now, so probably too early to comment on our CapEx at this particular point.

And we've got a very full pipeline of acquisition opportunities that we're looking at, not only are we generating those here at corporate, but our business units have all been put on notice. We'd be looking for acquisitions that would improve their product leadership positions by identifying companies that they view as good competitors who would make a nice addition to our -- nice addition to our existing product offering.

Great. Thanks a lot guys.

You're Welcome.

(Operator Instructions) There are no further questions in queue at this time. I would like to turn the floor back over to Mr. Brian Lipke for closing comments.

Thank you, operator. Thanks to everyone for listening in on the call today. Thanks for all the great questions. I can tell you, you guys are trying to dig deeper into what's driving our performance and I want to assure you that we have recreated Gibraltar and we've got it on a path to continuous improvement and sales growth, and earnings. And we're looking forward to generating improved performance in 2012 and beyond. We look forward to talking to you again next quarter. Thanks.

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