Gibraltar Industries Inc (ROCK) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Gibraltar Industries fourth-quarter 2011 earnings conference call. At this time all participants will be a listen-only mode. We will be conducting a question-and-answer session toward the end of the conference call. I would like to now turn the call over to your host for today, Mr. David Calusdian from the Investor Relations firm Sharon Merrill.

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 presentations slides that summarize the Company's fourth quarter and full year performance. These slides are also posted on the website. Please turn to slide number 2 in the presentation. Gibraltar's earnings release, and this morning's slide presentation both contain adjusted non-GAAP financial measures. Reconciliations of GAAP to adjusted measures 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 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.

Thanks, David. Welcome, everyone, and thanks for joining us on the call this morning. I will begin, as usual, with some brief comments, and turn the call over to Henning and Ken for a more detailed review of our results. Following that, I will close our prepared remarks with some comments about our business outlook before opening up the call to any questions that any of you may have. You can refer to slide 3 in our presentation at this point. Gibraltar continued to deliver solid results in the fourth quarter, including a year of strong performance, despite near zero growth in our traditional core end markets. Net sales grew 21% for the quarter, and 20% for the full year. Adjusted gross margins were up by 180 basis points and 250 basis points for Q4 and the year, respectively. Excluding special items, adjusted EPS from continuing operations improved modestly for the quarter, and significantly for 2011 as a whole.

Three years ago, we made a very strategic decision not to simply wait for housing and the other end markets we serve to recover. Instead, we decided to aggressively reconfigure our business, based on the belief that we had to position the business to make a profit at these historically low levels of end market activity, because we didn't believe it was going to turn around quickly. Three years later, our major end markets are still operating at historically low levels of activity. There are signs, growing signs, of improvement in these markets, and the rebound is expected to gain momentum over the next couple of years. We have been reducing our costs through lean initiatives, facilities consolidation, and a drive for operational excellence, while pursuing growth throughout the Company. With no meaningful help from housing starts and remodeling activity, we've been able to grow the business and improve Gibraltar's financial performance, and most importantly, deliver a return to profitability as a result of our various cost reductions and growth initiatives. You can turn to slide 4 at this point.

We've increased the Company's share in our traditional residential markets, while capturing opportunities for both organic and acquisition driven growth in adjacent industrial and infrastructure markets. Our residential business now represents 50% of total sales, compared to 70% four years ago, as a result of our diversification into adjacent markets and products, and the divestiture of a non-core residential related business. And, only one quarter of our sales into the residential market is related to housing starts, with the other three quarters being driven by residential repair and remodeling activity. So in both major markets, we are in an early stage beneficiary position of repair and remodeling, and replacement activities which typically precede new construction.

Looking at the other half of our total sales, which come from non-residential markets, it's roughly split between building construction, infrastructure, and industrial markets. Approximately 55% of our sales into the nonresidential markets come from repair and replacement activities. You can refer to slide 5 at this point.

While growing and diversifying on the top line, we've significantly improved the operating leverage in our business. Since the start of the recession, we've scaled down our footprint from 76 to 41 facilities, without compromising our overall production capacity, while consistently improving our ability to manage commodity costs. We have eliminated $60 million from our annual cost structure, and reduced our working capital by nearly two-thirds, and we begin 2012 with approximately $1.4 billion of manufacturing capacity in place and available to support our future growth, based on our current capacity utilization of approximately 60%.

We have also been able to pay off our bank debt, reducing our net debt from $450 million 4 years ago to approximately $150 million today. Gibraltar's improved liquidity has enabled us to supplement our organic growth with two accretive acquisitions completed in 2011, and we have a pipeline of potential candidates as we enter 2012.

As a result of these initiatives, we believe that our business has the capability to leverage sales growth and margin improvement from even modest recovery in our end markets. The Company has made significant progress and a return to profitability as a result of the many initiatives completed over the last couple of years.

I will talk more about the trends we are seeing in our markets after Henning reviews our fourth quarter results in more detail. Henning?

Thanks, Brian. Picking up where Brian left off on slide number 6, Gibraltar's growing presence in the industrial infrastructure markets has enabled us to offset weak demand in housing by selling our products into two of the fastest-growing areas in the economy. Equally important in our traditional core markets, residential and nonresidential construction, we have not only established ourselves as the leader in the majority of our product categories, but we are also being aggressive in launching new products, expanding our geographic coverage, and improving our penetration of existing nationwide customer accounts to continue increasing our overall market share.

Looking at the fourth quarter specifically, although housing starts in residential repair remodeling demand remained generally weak by historical standards, net sales are up 7% year over year on an organic basis, with 11% in non-residential sales, more than offsetting the decline in residential. As we indicated on our call in November, our bright spot in residential was demand for our roof ventilation projects resulting from last spring's storm damage, which generated unifying growth in the Southeast US.

Although this and other storm-related repair and remodeling activity is likely to diminish in the near term, the warm weather we are having this winter is driving stronger construction activity, which is spilling over into the first quarter, with order rates remaining stronger than historical first quarter trends.

Our strong position and repair and remodeling is enabling us to continue gaining share in the retail channel, with a focus on expanding our presence in home centers. Looking at our residential products specifically, our sales in the home center channel grew in the high single digits for the fourth quarter and 2011 as a whole, year over year. We are offering targeted programs to our home center customers on a region-by-region basis, securing more shelf space for a larger portion of our total product line in an increasing number of stores across the country, and continue to gain market share as a result.

In the wholesale channel, as well as retail, the leaders are looking for suppliers who have a broad geographic footprint, offer a broad line of products, offer compelling marketing and merchandising programs, and have the proven manufacturing and distribution capacity to service their business on a nationwide basis.

We've worked hard to make Gibraltar a Company that meets all of these parameters, which is why, during the past year, we have been able to increase our market penetration on a national and regional basis.

Brian outlined our progress we've made in shifting our business mix towards the nonresidential construction, industrial, and infrastructure markets. Although demand in the new and replacement construction sectors remained well below historic levels in the fourth quarter, we continue to see improved industrial and infrastructure demand. Sequentially from the third quarter, we continued to see year-over-year growth in sales of grading, perforated and expanded metal products for industrial applications, such as filtration, platforms, and engineered products for architectural applications. Although demand related to oil and gas production was down sequentially, we continue to benefit from our exposure to the exploration side of the business. Q4 was a solid quarter for orders related to oil and gas exploration activity in Alberta, in the Rocky Mountain region, and in the Gulf of Mexico.

On the infrastructure side, Q4 was D.S. Brown's third full quarter operating as part of Gibraltar. The integration process is moving ahead as planned. Business continues to perform very strongly, and our backlog and new business pipeline both continue to grow, driven by a good mix of bridge and highway-related opportunities. D.S. Brown made solid contributions to both our top and bottom lines in the quarter, and we are expecting further growth and accretion from this business in 2012.

Please turn to slide number 7. Brian mentioned the improvements we are seeing in our margins. These improvements reflect consistent progress toward our goal of positioning Gibraltar as the low-cost global supplier in our markets. We have 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 and commodity costs. Q4 was another quarter of solid progress in each of these areas. Three facilities were closed in 2011, and we plan to close two more in 2012. We continue to consolidate facilities, particularly on the West Coast. We are integrating one of the newest acquisitions, Award Metals, into our existing West Coast manufacturing footprint. We are developing two manufacturing centers of excellence that serve the entire West Coast and the Central Mountain region. These centers, coupled with an innovative distribution system, provide our businesses with a distinct competitive advantage.

Let's turn now to working capital. Although receivables and inventories are up from 2010, reflecting a longer cash conversion cycle for our two acquisitions, working capital for 2011 remained low, at an average of 63 days. We are effectively managing inventory as well. Only a few years ago, our day sales inventory was in the high 80-day range. For the fourth quarter, our day sales of inventory was 58, and net working capital averaged 60 days in 2010. Working capital in day sales of inventory were both well within the optimal range we are targeting for the long-term, and we believe we can sustain these favorable levels of net working capital going forward.

We said on our conference call in November that we expect commodity prices, in general, and steel, specifically, to be less volatile for us in the fourth quarter of 2011, and our experience was consistent with that expectation. Utilizing the systems investments made over the past few years, we continue to focus on effectively managing the purchase price variance in inventory in all of our business units.

We are committed to providing our customers with competitive products and service, which means placing a high priority on managing the cost side of this equation. On balance, based on experience in the fourth quarter and in the beginning of 2012, we believe that commodity costs will have less impact on our margins in 2012 than they did in 2011.

Overall, this was another solid operational quarter for Gibraltar. We continue to lower our break-even and enhance our performance, and we look forward to further improvement in both of these areas in 2012.

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

Thanks, Henning. Let's turn to slide number 8 in the presentation, entitled year over year improvement. Regarding the fourth quarter, revenues in underlying operations improved very nicely. The two acquisitions we completed in the second quarter of 2011 contributed as expected. Regarding the organic growth, higher revenues from non-residential products were the principal contributors. Adjusted gross profit continued to be favorable. Slide 8 shows the improvements versus the prior-year periods, with gross profits increasing at a faster rate, than the revenue increases. We demonstrated our ability to leverage our lower cost structure, and improving efficiencies. The adjusted gross margin for the fourth quarter 2011 was 16.6%, an increase of 180 basis points, compared to the fourth quarter year ago.

In the full year 2011, adjusted gross margin of 19.8% was 250 basis points higher than the full year 2010. Our improving efficiencies came from supply chain and production processes, plus savings from facility consolidations.

Now to slide 9, and starting with our SG&A expenses. SG&A expenses for the fourth quarter 2011 amounted to $33 million, an increase of $6.5 million from the fourth quarter a year ago. The increase stemmed from incremental SG&A from acquisitions of [$3.4 million] (corrected by company after the call), plus higher expense for equity-based compensation. The accounting for equity-based accounting under GAAP uses fair value methods, which I liken to mark-to-market accounting, and our stock price is one key variable in the valuation. The dramatic increase in our stock price during the fourth quarter of 2011 contributed to a $6 million charge for performance-based equity comp in the fourth quarter 2011, compared to a $2 million charge in the fourth quarter a year ago.

While the Q4 2011 charge was $6 million, the charge for the full year 2011 was $4 million. So the quarterly valuations can be quite different. More importantly, for the full year 2011, SG&A expense increased in absolute amounts, due to the SG&A of the two acquisitions completed in Q2 of 2011, with other cost savings more than offsetting the year-over-year rise in all other expenses, including equity-based and other variable compensation. We continued to make progress in lowering our SG&A as a percent of sales, declining by 160 basis points for the full year 2011, compared to the prior year. In 2012, we expect quarterly SG&A to approximate $27 million per quarter, and to decrease further as a percent of annual revenue.

Now turning to slide number 10 titled net income and EPS. Starting with the top row, for the fourth quarter 2011 adjusted operating income improved, albeit slightly, from Q4 2010 on revenue and gross margin improvement, but was dampened by the timing of the volatility in equity comp in the fourth quarter 2011. For the full year, adjusted operating income grew significantly, due to the aforementioned organic revenue growth, contributions from acquisitions, and efficiencies in supply chain management in our manufacturing plants, all of which resulted in the adjusted operating margin rising significantly to nearly 6% for the full year 2011, compared to 2% for the prior year.

Regarding the net interest expense on slide 10, which are the amounts of interest expense for continuing operations, there are unfavorable comp's to 2010, primarily due to 2010 benefiting from larger amounts of interest expense that were reclassified to discontinued operations in 2010. If I combine the interest expense in discontinued operations and in continuing operations, the Company actually paid less cash interest in 2011 compared to the prior year. Regarding income tax expense, the quarterly amounts merely reflect the true-up to the final full-year provisions, so my comment is on the full year. The full-year amounts for 2010 and 2011 reflect an identical effective tax rate of 40.5%. The differences from the statutory rate for both years were state taxes and non-deductible expenses. For 2012, I do expect the effective tax rate to approximate 40%.

Turning to cash flow, as outlined on slide 11, 2011 was another solid year for Gibraltar, generating positive free cash flow equal to 5% of revenues. While 2010 benefited from cash generated by discontinued operations, 2011 benefited from Gibraltar's much improved profitability from continuing operations and 5% of revenues represents a very solid performance in this economic environment, without the benefit of working capital reductions that we already realized in prior years. To underscore my point on working capital, we added, at the bottom of the slide 11, the net working capital of the Company. Not only do those dollar amounts and days represent much lower levels of investment, and a much quicker cash conversion compared to 4 years ago, the Company had $271 million invested in net working capital at the end of 2007. So there was nearly $200 million of net working capital converted into cash prior to the start of 2011. The $7 million rise in working capital that we had in 2011 was due to the acquisitions we had in mid-year. 2011 was another strong year for free cash flow, due to the improved profitability and continued close management of working capital.

Turning to slide number 12, titled continuing de-leveraging, we ended the year in very solid condition, with a low position of debt-to-capitalization, and net debt-to-net capitalization. All our debt has maturity several years out. The current outstanding debt is largely comprised of bonds due in December 2015, and our undrawn revolver was just extended to October 2016. Regarding leverage, we ended the year with a further reduction on our leverage to 2.9 times, which was determined by our funded debt divided by trailing EBITDA, including add-backs for non-cash charges and non-cash equity compensation. As noted in the earnings Press Release, our liquidity increased, reaching $170 million at the end of December 2011, which represents a steady and significant increase in liquidity since July 2009, when we switched our revolver to be asset-based, and had $78 million in liquidity at that time.

And now, Brian has some more remarks.

Thanks, Ken. My wrap-up comments are summarized on slide number 13. As I said at the outset, and as Henning and Ken have outlined in their comments, we have taken control of our own business by reconfiguring it with a much lower cost structure, and returning it to profitability, in spite of the historically weak end market conditions which exist today. As a result, we believe that Gibraltar is well positioned to leverage improved margins from incremental sales as 2012 begins. We expect this to be the case regardless of whether those sales are driven by continued growth in demand in the industrial and infrastructure markets, by future accretive acquisitions, or by even a modest recovery in new construction and remodeling. If we are lucky, we will get some of all of that. We are feeling more optimistic about the outlook of our end markets than we felt at the time of our third quarter conference call in November, although overall levels of end market activity remain historically weak. We can point to three indicators that suggest a pickup in 2012.

The first is the American Institute of Architects' Architectural Billings Index, or ABI. The ABI measures overall demand for design services, and is viewed as a reliable 9 to 12 month leading indicator of commercial construction activity. December marked the second consecutive positive month for the ABI, indicating that non-residential construction may have bottomed, and could potentially improve modestly year over year in 2012. This is also true for the industrial portion of non-residential construction end markets. Second, it appears federal spending for infrastructure will continue at levels equivalent to current levels or better, as the need is clear that this kind of spending creates jobs immediately. This is positive for our bridge, road, and airport projects. As Henning said, D.S. Brown began 2012 with a solid pipeline of new business, a renewed commitment to future investment, and the nation's transportation infrastructure is likely to expand that pipeline going forward. The backlog at D.S. Brown has improved from its already high level when we purchased the Company.

Third, the economy's slow recovery may finally be lessening in housing that we've been facing for the last 4 years. In terms of new construction, 2011 was the weakest year on record for single-family housing starts, but housing starts in January 2012 increased to a seasonally adjusted annual rate of 699,000 units, up nearly 10% from a year earlier. In addition, the National Association of Home Builders' Sentiment Index rose to a reading of 29 in February, from 25 in January, and 21 in December, marking the fifth consecutive month of improvement. Putting this in perspective, even at 29 points, the index is well below the 15-year median of 58 points, but it does indicate a more positive trend in the home builder sales environment. In addition, Harvard University's leading indicator of remodeling activity, referred to as LIRA, is signaling that home improvement spending is likely to trend up later this year, and conclude 2012 with higher home improvement spending than in 2011. This improvement is being driven, in part, by sales of existing homes, which rose 5% in December. This was the third monthly increase in a row, indicating that existing home sales may finally be rebounding off of the multi-year lows we have seen for the past 4 years.

In addition to these macroeconomic reasons for optimism in 2012, we are well-positioned to continue accelerating Gibraltar's overall top line growth. Not only was organic growth initiatives aimed at further penetrating the industrial and infrastructure markets, but also with bolt-on acquisitions, similar to the D.S. Brown and Pacific Award Metals businesses we acquired in 2011. Both businesses not only contributing to our double-digit top line growth for the fourth quarter, but also improved our operating characteristics. We have been successful recently in adding to our deal pipeline, with ideas generated at both the Corporate, and at our business unit levels. These are primarily companies that we've come to know as solid competitors, or as well regarded suppliers of products that we could broaden our product portfolio, and whose market position and business performance could be enhanced by joining forces with Gibraltar. The acquisition of Edvan Industries' metal grating products business in Western Canada, which we announced earlier this month, is the latest example of how we are putting this strategy to work. We are not going to comment on the timing of any future acquisitions, other than to say that we are currently looking at a number of small to mid-sized opportunities, and continuing to be careful and systematic in our approach.

Summing up, during the past three years, we've been able to significantly improve Gibraltar's top and bottom lines during a period of unprecedented weakness in our traditional end markets. We feel good about Gibraltar's prospects for continued performance improvements this year and beyond. As our end markets rebound, we expect our performance to improve to an even greater extent.

That concludes our prepared remarks, and at this point we will open the call to any questions that any of you may have.

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions)

Our first question is from Peter Lisnic with Robert W Baird. Please proceed with your question.

Good morning, this is Josh Chan filling in for Pete.

Hi, Josh.

Good morning. I wanted to ask about your comments on the residential market. I guess you are talking about weak demand currently. The first part is -- you did comment that your home center sales were up, so I'm wondering where you saw the weakness, in particular? And then the second part would be -- are you seeing actual signs of improvements in your business, given some of the indicators that you're talking about?

Yes. The residential weakness is clearly spread evenly. I mean, some of the outlets were up, but then others were down. I guess I don't want to really identify specifically, for other reasons, but in general they moved as we thought they would move, down pretty much in line with the downturn in housing. But I think, as Brian said, we are encouraged going forward. We see those opportunities starting to pick up. We've already started to generate some backlog and our incoming business coming into this quarter is moving ahead stronger than we expected.

Your second question was what?

Have you seen actual signs of improvement in your underlying business, based on the indicators improving?

We have. We've just come back from the housing study group that we're part of in Washington, and I would tell you that it was probably the first meeting that we've been to in four or five years where there was general optimism, which was very encouraging. I think everyone is, at this point, everyone we've talked to, both in the industry, and in Washington, was optimistic going forward for 2012 and beyond.

Okay. And could you give us the volume and price breakdown of the 7% organic growth for the quarter?

It was, I'd say, probably 75% to 80% was in the price realization category. And the other fill-in would be from volume.

Okay. And then kind of based on your commentary on some optimism, is it reasonable to expect that volume growth could accelerate as we enter into 2012?

Yes.

Particularly as we make our way into the year.

Okay. Great. Thank you for your time.

Thank you.

Thank you. Our next question is from the line of Ken Zener of KeyBanc Capital Markets. Please proceed with your question.

Thank you. Good morning.

Good morning.

Can you talk about the strategy of acquiring Edvan, the Canadian distributor? Was that the result of any bottleneck issues related to inventory, or was it more market share? How do you see that trend persisting?

It was clearly market share. We work very closely with a distributor who did a great job of growing in that particular area. He was ready to exit the business, and we worked with him at pulling the business into Gibraltar. We see that as a great growth opportunity for us up in that Northwest section of the country. Very closely tied into oil exploration. So, we're very encouraged.

Mining, too.

Yes, and mining. It's this whole acquisition, but it's going to have a nice effect, a nice growth opportunity for us.

Thank you. And then on the SG&A, is it fair to say, based on 2011's stock treatment that essentially $1 quarter-to-quarter on the stock price is equal to $0.01 in EPS? Or is there going to be a change in your guys' methodology that would alter that?

Generally, that's true. For every $1 that our stock price moves, there can be a $0.01 impact on EPS. But the other determinant that is important in the calculation is the performance of the peer group, or how the TSRs compare. Because it's how our stock price moves against another group. So, if the other group's performance held steady, even, unchanged, then a change of $1 in our stock price would essentially equal $0.01 a share.

Thank you. And the last comment was on the increased retail share. Was there any shift in terms of the dynamics, in terms of the opportunity that you had in terms of pricing, servicing, portfolio --?

Increasing on retail. We've had the opportunity to broaden the programs that we have with those retailers. In fact, we are working with one of our customers to start build-up in inventory to start supplying them in some new product areas that we did not previously participate in.

Can you comment on the benefit of that channel fill?

We are going to have a nice increase in sales. I think for the total Company, it probably represents close to 1.5%. Again, that's on total Company. That's a nice increase in that channel, and we are also exploring within the opportunity to do it nationwide --.

Okay.

-- which would be a substantial opportunity, certainly, for our Company.

So, that 1.5% is a percent of the whole Company, but that's on the residential, and that's only a partial regional load?

Yes.

Thank you.

You're welcome.

(Operator Instructions) Our next question is the line of Tim Hayes with Davenport and Company. Please state your question.

Good morning.

Good morning.

If I recall it right, third quarter was hurt by some trends in metal prices where you had some high cost inventories going through the P&L. How did that impact Q4? Was it still a hit, but a much smaller hit or --?

For the full year or the quarter?

Just the quarter, Q4 versus the impact in --?

For the quarter, we were just about flat. In fact, we picked up 0.1 of a percentage point. I would say in the quarter flat. On a full-year basis, we managed it well. We picked up 1.3 percentage points on a full year basis. So, as we indicated earlier, we've done a much better job at managing the volatility. I think Brian indicated, 2012, we think we are even going to be -- we'll even have a smaller purchase price variance.

Okay. Thank you.

You're welcome.

Our next question is from Robert Kelly of Sidoti and Company. Please proceed with your question.

Good morning.

Good morning.

With industrial and commercial being 50% of the business via sales, does that change the incremental margin story for Gibraltar? Does it enhance it compared to where you were even a year ago? Just curious with the mix of business changing so much.

I think it does. I think we all talked about, and I think Brian, at great length, talked about our focus at improving our operating characteristics. And with the mix of businesses we have today, as the volume picks up, you will see our operating margins and gross margins continue to increase. We will get the leverage with the higher volume, but their operating characteristics have switched, also. We saw some of that full year. Our gross margins were close to 20%, and with the previous mix, we would have been at least 2 percentage points lower than that on gross margin. So, you are seeing exactly what we have been telling you that you would see, and that will continue to increase going forward.

Great. And then, just tying that back to some comments you made in the past, when you weren't so heavy on the industrial side. You talked about a longer-term operating margin goal in the 12% range. Is there now a higher target because of the mix of business?

Our operating margin goal is 12%. We are on target for that.

I'd say the change would be that we hope to get there quicker.

Thanks a lot, guys.

Thank you. (Operator Instructions)

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

Number one, thanks for participating in the call. Number two, we look forward to talking with you again when we release our first quarter numbers. Number three, we are entering 2012 with a higher degree of optimism than we had entering 2011. I think the progress that we made during 2011 strengthens our overall position to perform better in 2012. Thanks again. We will see 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.