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#Thanks, <UNK>.
Good morning, everyone, and thank you for joining us on our call today.
Gibraltar delivered another quarter of strong results that included earnings above our guidance, plus top- and bottom-line growth over comparable period last year.
We reported a more than 300% increase in GAAP net income and a 90% increase in adjusted net income.
This earnings beat was largely a result of the accelerated traction with our 80/20 initiative, as well as our team's ability to effectively manage the impact of market dynamics.
Additionally, RBI continues to be accretive, as it has been since acquired in mid-June 2015.
We have continued to make excellent progress in executing on our transformative four-pillar strategy, and we're focused on transitioning resources to our most significant opportunities and achieving results from operational improvement initiatives.
And, as a result of our progress, we're raising our annual earnings guidance.
I'll speak more about our strategic progress and guidance expectations after <UNK> reviews our financials.
<UNK>.
Thank you, <UNK>, and good morning.
I'll start with slide 4 in the presentation, our consolidated results.
Second-quarter revenues increased 4% with RBI being the major contributor to revenues as it continues to grow.
And, as cited on the slide, we have two unfavorable comparisons: the divestiture of the European Industrial business and a sales contract for residential postal products that was completed last year.
The combined effect of both on 2Q revenues was $23 million in last year's 2Q that did not repeat this quarter.
Without those two items in last year's quarter, consolidated revenues would have increased 14%.
We continued to have a strong bottom-line performance from the combined contributions of our base businesses and RBI.
And, their combined results significantly increased earnings-per-share.
And, although not shown on slide 4, the Company's consolidated gross margin improved meaningfully by 780 basis points to 25.2% on a GAAP basis.
GAAP operating margin in the second quarter grew 540 basis points to 9.8%, and adjusted operating margin grew 380 basis points to a little over 10%.
The profit and margin improvements continue to be a direct result of our successful execution on the four-pillar strategy.
We are allocating internal resources to our largest operational opportunities and realizing benefits from executing on the 80/20 initiatives, which were 170 basis points of this quarter's margin expansion.
<UNK>so not shown on slide 4 is our 2Q results compared to guidance.
Our results did have softer revenues in our Industrial and Infrastructure segment, as we focused on serving key customers amid weak end-market activity.
However, despite a bit lower revenue, our second-quarter profitability was higher than guidance on better-than-expected traction from 80/20 projects within Residential Products segment, plus synergies within the Renewable Energy segment.
Let's turn to slide 5, the performance of our base businesses.
This slide represents the results of the Company excluding RBI.
As expected, revenues were unfavorable due to primarily two factors that continue to prevail.
First, we had 2015 revenues not repeating this quarter that involve the divestiture of the European Industrial business and the sales contract for residential postal products completed last December.
The second factor: sales to Industrial and Infrastructure markets were weaker due to lower shipment volumes and the effect of reduced steel costs on customer pricing.
Energy-related market activity remained weak, in part, affected by the continuing low level of oil prices.
Nonetheless, there was substantial profit outperformance by our base businesses.
Supplementally, we've also realized reductions on our balance sheet from 80/20 simplification.
Most noteworthy is the reduction of inventories, which for our base businesses went down $30 million in calendar 2015, and an additional $10 million in the six months just ended.
This was accomplished while also maintaining or increasing order fulfillment rates for customers.
Next I'll talk about each of our three reporting segments, and I'll start with the segment discussion on slide 6, the Residential Products segment.
Revenues for this segment decreased 11% to $120 million, all of that difference being a completed two-year sales contract for centralized mailboxes that we finished up last December.
That contract provided second-quarter 2015 with revenues of $15 million and without any meaningful profit contribution.
Apart from that completed contract, this segment has continued to see steady demand for its roof-related residential products, largely in line with the gradual improvement in the repair and remodeling activity.
This segment's operating margin increased substantially from the continuing and incremental benefits of improved operational efficiency and its implementation of the 80/20 simplification program.
Turning to slide 7, the Industrial and Infrastructure Products segment.
The revenues of this segment continue to be affected by three key factors.
First, we divested its European business in mid-April 2016, so 2Q of 2015 benefited from its then revenues and small operating loss.
Second, lower shipment volume continues from weak end-market conditions, primarily commodity-related and upstream energy markets.
And third, lower average selling prices due to the lower raw material costs, which have a correlation to average selling prices.
Yet, regarding profitability, profit dollars and margins increased.
This segment's profit improvements stem from a variety of increased efficiencies in its North American business.
Of this segment's 230 basis point increase in GAAP operating margin, the 80/20 related simplification projects contributed 180 basis points of it.
Now turning to slide 8, our third reporting segment, the Renewable Energy and Conservation segment.
Since Gibraltar did not own RBI for the entire second quarter last year, slide 8 presents RBI's pro forma results for the 90-day and 180-day period ended June 30, 2015.
This was made in order to provide an apples-to-apples comparison between the time periods.
As you can see, revenues continued to grow as expected, although Q2 2015 benefited from the completion of key projects.
Operating margins increased meaningfully.
<UNK>though the 80/20 program within RBI began just this year, its margin expansion is evidencing procurement synergies with which Gibraltar is assisting and trending towards our expectation of its operating margins rising into the teens.
At this point I'll turn the call back to <UNK>.
Please turn to slide 9, continued progress on value creation strategy.
Thank you, <UNK>.
Our ongoing strong financial performance is a direct byproduct of our team\
Yes, I think reflecting on when we first looked at the portfolio in early 2014, and what we thought we had in terms of a balance sheet, and how we could leverage that going forward in a thoughtful way in terms of the four-pillar strategy, certainly that five-year projection was, we thought, relatively aspirational at the time.
It depended on a lot of people doing the right things at the right time.
And certainly the track to the blue line we thought would have been ---+ represented a fairly dramatic transformation of the Corporation's financial results and hopefully put us more into best-in-class against the evolving peer group.
I think approaching two years into the process ---+ and I would emphasize just the approaching side ---+ is that it's still relatively early days.
But certainly at the end of 2016, we'll step back and reflect on whether or not that five-year projection needs some revision.
And if we think that's the case, we'll probably take steps to communicate that to the investor world in a more ---+ in a similar fashion that we did originally during our Nasdaq presentation.
But, yes, we've still got the back end of 2016 to complete.
Certainly we feel confident about how the various strategies are playing out and expect to see continued improvements in future years.
So I think it's a legitimate point.
The two subcategories that had the most favorable comparisons were the commercial side of commercial mailboxes.
So we sell to others than just that one contract we completed, and that balance of other customers had increased orders in the quarter.
And on the residential roof-related products, those also benefited from low double-digit improvements.
We had ---+ and that was on balance for the whole US; there were certain pockets of the country that were stronger than others for our roof-related products.
But those two subcategories were favorable this quarter compared to Q2 last year.
You were not mistaken.
In our view, if we remove those anomalies of incentives that affected different contiguous time periods, the market still continues to grow right around the 10% rate, absent those incentive aberrations that have affected.
And RBI has continued to participate fully in that.
While also, as you can see on the margins, they are focused on getting higher returns, so they are adjusting their sales prospecting and filters in order to optimize the resources and get higher returns while also participating in the market lift.
I think, <UNK>, the second part of your question is that certainly 2016, because of the bubble in 2015 has some limit ---+ some downward pressure on it, combined with <UNK>'s comment on being a little bit more strategic about which type of businesses and work we want to allocate our resources towards.
The byproduct of that is they're making a significant amount more money, combined with some of our synergistic activities.
For 2017, we expect the market to continue to grow at 9%, 10%, 11%, and we don't expect ---+ the whole bubble effect will have migrated away and we should be closer to market and hopefully above market, if we develop incremental strategies to drive share gains.
So we think this is kind of a 'one year off'.
We knew it going in.
What we knew going in was we thought credits were going to come off, and we expected to see an opposite effect.
But now that they've held, you get this artificial bubble for a very short period of time.
But the guys are doing a nice job working their way through that.
Well, I'll let <UNK> jump in as well.
We have ongoing product development processes that ---+ the whole balance-of-systems cost within the context of us getting solar installation has come down probably 75% over the last five years or so.
Getting closer and closer to grid parity.
We're down to the last final piece of that puzzle in terms of taking additional cost out from a systems perspective.
Balance-of-systems is part of that.
Our component within racking, we certainly are in the process and have taken additional costs out that will, number one, not only enhance our operating profit going forward, but also allow us to participate in the market in terms of remaining price-competitive.
So we're in very good shape from that perspective.
And that's something we knew going in, and our people have executed very nicely on that.
Yes.
As well as, <UNK>, we had 2015 ---+ at least it was the first half of 2015, RBI had some significant contracts that they were able to complete, and the size of which aren't nearly the same magnitude as we had this year and other small details.
The UK was a strong market in the front half of 2015, as they had a very strong governmental push to install renewable energy.
We participated in that in calendar 2015, and those features are not generally the same this year.
So that's an element of it.
And we have ---+ the team that leads RBI is doing a nice job in ---+ as <UNK> cited ---+ being more targeted in what projects they pursue and close out this year, in order to drive their margins up.
You can see the margin performance has been outstanding for them.
So we're ---+ it's all in the backdrop, though, of a market that continues to participate and grow and expand.
And RBI is doing a really good job participating in that and driving their profitability up while being selective on what they design, fabricate, and install for customers.
Ask that question again, <UNK>.
It is, but the duration and size of contracts aren't substantially different than their historical profiles of what they were installing.
And the backlog that they continue to have in any given day still approximates three- to three and a half months-worth of revenue.
So the highway of headlights beyond that is still dependent on securing new contracts.
I would say the ---+ a split answer, <UNK>.
Surely on short-term tactical capital expenditures, we do have dollar thresholds above which projects are reviewed and supported out of the Corporate office.
And there's been vetting since last fall through now as ---+ when we built a plan for 2016 and now as projects come up for formal approval, certainly circumstances can change and market conditions can change, where we favored something last fall but now we favor emphasizing some other piece of the plan or a new element of the plan.
There have been examples in 2016 where new projects not heretofore contemplated or presented or considered are now coming before us for approval.
And we have largely supported those because they are driving a new product or they are driving an increase in cost-reduction opportunities that have been identified by engineering folks or redesigns in response to customers.
So we're reacting tactically but still within an envelope that we ---+ of aggregate CapEx spending this year that's in the tens of millions to spend.
On a longer window of how we're spending capital for the portfolio management aspect of the Company, all of our potential prospects in the acquisition arena do involve the Corporate folks.
And there are times when we have multiple opportunities at the same time, and we're weighing where the most optimum returns and likelihood of returns that we can get.
And so we'll deemphasize certain opportunities while we go strong on the ones that we think we can be successful on and have high returns in the ownership period under Gibraltar.
Yes, I think that would be a ---+ obviously, there's overlap.
Some of the businesses are further through the early innings a little bit quicker than other businesses, simply because they're simpler businesses or they got started earlier.
So there is some overlap.
The second phase of tools, which we are well into in 2016, we're getting the benefits, some of the early inning work carrying over into that $16 million.
And we're getting some of the early benefits later in the year of the middle work, which is the in-lining MRD.
Where we're focused in those middle innings is the in-lining MRD.
Manufacturing A items for A customers in more of an in-line basis versus a batch-based process, not only is going to allow us to shed more unproductive inventories in various forms, as we get more focused at just making the top products in a more repetitive in-line basis, we fully expect to see lower manufacturing costs on some of our even biggest runners.
So our cost of goods sold should go down to some degree, and we're in the process of quantifying the magnitude of that going forward.
The other side of that, if we get focused at manufacturing A items, there may be other items that need to stay in the product line to support ultimately the end user who has to build a house.
We can't just sell them the high runners; we also have to sell them some of the slow runners.
We'll treat those differently.
We'll either make them in a batch-based process or outsource them.
And to be quite honest, I think our history of trying to do everything for everybody probably provides us some cost-reduction opportunities not only in the manufacturing of the A items but also the outsourcing of the B and C items as well so.
We're going to get some structural benefits in terms of reduced inventories.
We're going to get some lower costs that certainly weren't in the first year of $12 million in savings and, by and large, not in the second year of $16 million.
So we are going to exceed our $25 million.
To what degree.
I think we'll have a better understanding of that over the coming months, and we're certainly getting it sooner.
I think the other aspect ---+ and it goes to your question on capital allocation as it relates to at least supporting the businesses we own today.
What will come out of this is, to a large extent, quite a bit of excess capacity.
So as we move equipment around and get it more focused at manufacturing A items, we'll also find that we've got a fixed-asset base that's probably somewhat inflated over what our real needs are.
So that also suppresses some of the capital spending in future years as well.
And understand the number <UNK> has quoted of $15 million or $16 million of capital spend, that now includes RBI in that as well, not just the legacy businesses.
So it's quite a bit of improvement from the team.
The order activity continues to be elevated because of states doing some budgetary planning and estimating on key projects, as they involve general contractors in the planning effort.
So much like we described in our first-quarter call, we're expecting that elevated level of quotation and estimating to translate into bids, and then subcontracts that we bid on, and winning our portion of those so that we enter 2017 with a higher backlog.
And it will affect higher revenues in 2017.
But 2016 is largely and continues to be a planning effort for states to prioritize, particularly, their longer and more expensive projects.
I think as a general note, if you follow the press, there's been some various articles where the U.S. Postal Service has begun to change some of their policies on a federal level.
Whether or not they actually get embraced at the state level and various regions around the country becomes another issue.
I think ---+ so the general momentum in terms of the environment is, I think, moving in the direction that we expect: that over time all the regions will be adjusted in some way, shape, or form to utilize more centralized mail than home delivery mail, as first-class mail has quickly gone away.
What we see at an ever-increasing rate ---+ and certainly that shows up in our commercial core numbers in the mailbox, which is primarily centralized mail ---+ most new home construction starts get associated with centralized mail versus additional home delivery mail.
So that's certainly a rising tide as we continue, as you see new home construction, whether it's multifamily or single-family.
That becomes a greater and greater percentage of centralized mail delivery versus single-family mail.
<UNK>l that being said, to our knowledge there is no specific issue where a particular region is over the next ---+ over the coming months are going to try to take mail delivery away from an established group of residents in continental United States.
I gave it the top banner in the prepared remarks, Dan, about procurement savings.
But given Gibraltar's larger size and wider base of raw material and logistics providers that we utilize, we brought that to bear to the procurement of those same items that RBI utilizes for its customers and products.
So RBI is realizing some lower points of raw material costs and freight in-and-out costs because of attaching themselves to our greater purchasing power.
And yes, I do and we do think that this is going to be a sustainable level of profitability for them.
I think that's probably what we identified as a third of the opportunity in terms of transforming RBI's rate of return from a 10% to a 15%.
Another third would have been some project initiatives that they are taking to refine their ongoing product design in order to maintain a competitive position in the marketplace while also increasing their margins.
They've done a nice job executing on that.
And that new product, those new product revisions are becoming a larger and larger piece of their ongoing cost of goods sold.
And we expect that will probably peak at some point in 2017.
So we think ---+ we know we'll see some additional and meaningful benefits out of that next third.
Then I think the last third is the work we're doing on the 80/20 process that we're still very early days of looking at how those tools can be applied to a completely different business model that they have from a value proposition perspective.
And we're starting to see some opportunities present themselves, but I would argue that we're not getting any financial benefits on the 80/20 tools at this point.
We're still early days.
But we're feeling very good about RBI's top-line growth opportunities relative to the market, not only growing share within a rising tide, but also they have some adjacent markets, whether it be residential or commercial rooftop or the larger tracker space.
So we're feeling good about the top line, and we certainly are confident that they are going to continue to improve their operating returns going forward.
Let's see.
I'm thinking back on the prospect list.
They are pretty evenly distributed, although if there was one weight it could be in ---+ probably is Residential and Renewables where we have a slight advantage.
But all of those targeted categories do have prospects for us that are of high interest.
Oh, man.
I'd say it's ---+ if we didn't have the discontinued products or the completed projects contract that we finished last December, I'd say that segment would probably be up 5% or so this year compared to last year.
We did not.
But in answer to your question because that was not in my remarks this morning, that's a little over 200 basis points of the improvement, Mike, came from their 80/20 implementation.
Mike, we generally don't go into that level of detail for competitive reasons and others.
We booked approximately half of it through the income statement.
Of what was actually realized.
But several of those projects that have got initial traction in the first half have further benefits coming up in Q3 and Q4, and there's also identified projects yet to start that will be impactful for our second half.
Yes, I think certainly that would be an accurate conclusion that we're going to get ---+ probably be able to close out 2016 after two years of work, primarily out of the early innings, topping out the $25 million.
And then we're going into this Phase 2 of structural changes where we've got to ---+ and starting that process now and setting up 2017 where we'll start to focus on the in-lining and MRD and outsourcing programs which, to this date, we haven't.
We've done some conceptual work from a quantification perspective.
We think those are meaningful dollars.
But ---+ so we expect to get more and do it sooner than what we expected over the five-year cycle.
Well, the divestiture had essentially breakeven operating results.
So there was no contribution in the prior-year periods.
So the removal of that related revenue had no bearing, at least the absolute dollars of last year's profit.
Amazingly so.
At this point, all the businesses are making meaningful progress in terms of making more money at a higher rate of return and more efficient use of capital.
And we continue to support all the businesses in the near term.
And as they work their way through the 80/20 process, even the businesses in what we would have assumed are more commoditized markets from a couple years ago are finding opportunities for growth and transforming themselves in terms of reallocating their time and their capital.
So I think it's certainly early days to conclude that the portfolio ---+ if the portfolio changes going forward it would be the byproduct of new acquisitions as opposed to divestitures at this point in time.
Thank you, everyone, for joining us on our call today, and we look forward to speaking with you about our third-quarter results.
This concludes our call.
