Conference Call Transcript

Conference Call Transcript ROCK - Gibraltar Industries to Acquire D.S. Brown Company Event Date/Time: Mar 11, 2011 / 02:00PM GMT 1

C O R P O R A T E P A R T I C I P A N TS David Calusdian Sharon Merrill - IR Brian Lipke Gibraltar Industries - Chairman & CEO Henning Kornbrekke Gibraltar Industries - President & COO C O N F E R E N C E C A L L P A R T I C I P A N T S Robert Kelly Sidoti & Co. - Analyst Timothy Hayes Davenport & Co. - Analyst Josh Chan Robert W. Baird - Analyst Simon Baruch Analyst Michael Manzo Aberdeen Asset Management - Analyst P R E S E N T A T I O N Good day, ladies and gentlemen and welcome to the Gibraltar Industries conference call. My name is Jeff and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. ( Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Mr. David Calusdian from the Company's investor relations firm of Sharon Merrill. Please go ahead, sir. David Calusdian - Sharon Merrill - IR Good morning, everyone and thank you for joining us on such short notice. If you have not received a copy of the news release issued last evening announcing the acquisition of the D.S. Brown Company and divestiture of USP, you can find it in the Investor Info section of the Gibraltar website, Gibraltar1.com. Management'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 the forward-looking statements. The Company advises you to read the risk factors detailed in its SEC filings, which can also be accessed through Gibraltar's website. On the call this morning are Gibraltar's Chairman and CEO, Brian Lipke; Henning Kornbrekke, President and COO; and Ken Smith, CFO. At this point, I would like to turn the call over to Brian. Thanks, David. Welcome, everyone and thanks for joining us on our call this morning. I will begin with some brief opening comments and then we will open the call to any questions that you may have. 2

Last evening, we announced two different, but strategically important transactions. We are very excited by the opportunities that these transactions bring to Gibraltar in the short and long term and incrementally will improve our expected 2011 earnings. First, we sold our United Steel Products company, or USP, to MiTek Industries, which is a Berkshire Hathaway company. USP is a supplier of structural connectors for the residential and commercial building industry. Divesting USP enables us to focus management's time and allocate Gibraltar's capital resources on businesses that have strong market leadership positions and attract top and bottom-line growth potential. It also provides the opportunity to diversify our building market participation. That leads us to our other strategic transaction, the agreement to acquire D.S. Brown Company. Based in Ohio, D.S. Brown is a manufacturer of expansion joints, structural bearings and pavement sealments for bridges, highways and other infrastructure projects, largely in the US, but also internationally. The acquisition of D.S. Brown is in line with our strategy to acquire businesses that have a strong growth profile, offer immediate accretion, provide value-added products, hold market leadership positions and provide opportunities for Gibraltar to further expand its marketshare. D.S. Brown, led by its strong management team, provides us with a number of important benefits. First, it broadens our coverage of the building markets. D.S. Brown targets the bridge construction, highway construction and airport runway end markets. A large number of bridges and elevated highways are reaching the end of their useful life. The average age of the approximately 600,000 US bridges is 43 years and 25%, or 150,000, of those bridges are currently considered structurally deficient or functionally obsolete and they will need to be repaired or replaced. Combine that with an increasing need for new highway and rail systems and you can see easily the significant opportunity for D.S. Brown's infrastructure products in the coming years, both for repair and replacement, as well as new construction. Secondly, D.S. Brown broadens our product platform with additional market-leading products. Its market-leading expansion joints are fabricated to specific design requirements to allow for movement in bridge structures due to temperature effects, traffic vibration and possible seismic events. To bring this home for some people, when you drive from a road to a bridge and you feel a thump, and when you are driving on a bridge and you hear repetitive thumps, those are the sounds that a car makes when it is driving over an expansion joint. Its structural bearings are designed, manufactured and installed as interfaces between the bridge substructure (abutments or piers) and bridge superstructure to transfer loads and allow movement of the bridge deck due to thermal changes, seismic activity and traffic flow while fully supporting the roadway. These functional critical products are pervasive throughout the transportation infrastructure and they are found on nearly every bridge, highway and airport runway in the US. Third, D.S. Brown has a record of strong and profitable growth over a substantial period, outpacing its overall markets growth with a five-year CAGR of 10% and strong prospects for continued growth. Short term, we expect that the acquisition of D.S. Brown will be immediately accretive to our non-gaap earnings, excluding acquisition and other one-time costs and expected to be accretive on a GAAP basis in the first 12 months of combined operations. And fourth, there are opportunities for Gibraltar and D.S. Brown to further expand its market share on the bridge and highway markets, as well as complementary markets. Looking at the effects of these two transactions, Gibraltar will have greater revenue, a stronger profitability profile, a higher percentage of valueadded products and more diverse coverage of the building markets. After the effect of the two transactions, about 70% of our combined sales will be from the repair and replacement activities, which we feel are far more consistent through various market end conditions and have been far more resilient during the current downturn. These characteristics will help provide improved stability to Gibraltar's future performance. Additionally, we have maintained our liquidity profile. Before we go to your questions, I would like to take just a moment to offer our sincere thanks to the employees of USP for their contributions to Gibraltar for the past 13 years. We wish them continued success as part of MiTek. MiTek is a fine company and the combination of MiTek and USP creates an even stronger combined entity., at this point, we are ready to take questions. Q U E S T I O N A N D A N S W E R 3

( Instructions). Robert Kelly, Sidoti. Good morning. Lots of questions. How big is sales or earnings for the business you acquired? The sales for the D.S. Brown Company are in the mid-$60 million annual revenue. And we are anticipating that the effect on earnings per share in 2011, excluding purchase accounting, is going to be in the -- and this is on continuing operations without USP, but plus Brown, will be an incremental EPS in the high teens. Okay. Does the divestiture of USP add -- I mean are you eliminating a loss with that sale? No, we are not. Okay. So that is going to be reducing? That is the net effect, so when I say high teens -- That is the net effect of the acquisition and the divestiture? That is correct. Okay. Now, are you using the proceeds of the divestiture to pay for the D.S. Brown acquisition or is that coming from cash or debt? How are you financing the transaction? 4

The purchase price of Brown, which we expect the closing to be somewhat later this month or the very beginning of April, will largely be from existing cash, which will include proceeds from the divestiture of USP. And we will have a very modest amount of borrowings I think off the revolver of maybe $15 million. The rest of it being cash, which includes the proceeds from USP. What is the purchase price of D.S. Brown? We are paying a base purchase price of $96 million. Okay. And now the CAGR that you described for D.S. Brown, is that number accelerating, decelerating in the last few years? Are they getting a benefit from the recent boom or proposed boom in infrastructure and in repair? They have had a very positive trend upward over the years and we did a complete study. A lot of positive data indicates infrastructure activity will continue to trend up independent of which budget is eventually passed. I think another way to look at that is the backlog going into 2010 was about $26 million and the backlog going into 2011 is at $40 million. So the pattern of growth in that business is solid and continuing. Very helpful. Thank you. And then as far as the decision to divest USP, are you trying to get -- limit your exposure to the new residential or just new construction altogether? Is that part of the thought process? Not really. There's a very strong market leader. We had number two marketshare. We didn't think we had the resources or the synergies that we could propel that business forward. We thought the Company would be better served, shareholders better served by reinvesting that money in a business where we do have leading marketshare and has for us better growth potential. Okay, thanks very much. Timothy Hayes, Davenport & Co. Timothy Hayes - Davenport & Co. - Analyst 5

Good morning. With these two transactions, how does the number of distribution centers, how might that change? Was USP -- did it have some of its own facilities given all the number of SKUs that it sold or was that rolled up in other facilities? If you could give us a more color on what will happen to the number of locations and perhaps any more consolidation. USP had a total of five locations. D.S. Brown has a total of one location. USP was run as a standalone autonomous business unit, was not interrelated with any of our other businesses. So there really has no impact on our other business. Timothy Hayes - Davenport & Co. - Analyst And for some of the products that D.S. Brown is producing, their expansions, were you doing some of that already? Give some details in terms of say like the metal grating, metal (inaudible). Is that a similar product or is this a brand-new product for you? It's an infrastructure product and we were involved in infrastructure products. This just brings us further into infrastructure products and with a higher technical component than we have ever had before, which, as Brian said, plays very much into the strategy of developing a product line for the higher value added. This is an excellent example where we are moving into a product line with a much higher value added. Also, when we looked at this business, it was quick to appear that the infrastructure products fare much better during various end-market conditions, including this recession that the country is going through right now. Spending in the infrastructure area was very consistent and the D.S. Brown Company was actually able to grow their business during this recession. So we are moving the business in a direction of, as Henning mentioned, higher margins, but also in a direction of greater stability. Timothy Hayes - Davenport & Co. - Analyst And then did USP, though, have margins above your average? It depends on what market we are talking about. I think in a full market, it was above our average and in the recent markets, it was well below our average. Peter Lisnic, Robert W. Baird. Hi, this is Josh Chan filling in for Pete. I guess, with D.S. Brown, you seem to inherit, it looks like, a meaningful portion of products that are nonmetallic in nature. Do you view that as a positive, negative or neutral and what is the appetite for further acquisitions in nonmetallic? 6

I think, in general, we view their material content as a positive to Gibraltar. On material costs as a percent of sales, it will come down a little bit, so we will not be as dependent on commodity materials. And clearly, they are working with materials other than metals, other than steel specifically. Again, we view that as a positive as we go forward with our broader strategy of reducing our material costs as a percent of sales. Okay. And then you sort of alluded to being able to grow -- expand your marketshare in existing businesses. Are there any revenue synergies that you are speaking of or even on the cost side, manufacturing and distribution, are there any synergies from the acquisition? We think there are synergies going forward as we continue to broaden some of the exposure with some of our other businesses like AMICO. We think there are some adjacencies that we are looking very closely at. Okay. And then should we think of this infrastructure exposure as a new platform that you would like to grow relatively more aggressively than the construction side? We think there are opportunities to grow this particular segment and I think we are excited about the growth prospects. We envision this adding more, as Brian said, stability to the total platform of businesses that we have. Historically, that has been true and if there is any cycling in this segment, it tends to be countercyclic to the other segments that we are in. And so we should have, over the long term, a flattening effect on our business. Okay. And then finally just trying to square away some of your numbers. This would assume that D.S. Brown on an EBIT margin basis kind of pushing 20%. Am I way off there or is that the right ballpark? You are in the right ballpark. Okay. All right, thank you for your time. Simon Baruch. Simon Baruch Analyst Good morning. I just want to make sure that I understand correctly. Are you saying that the 2011 non-gaap earnings per share, net net of the two transactions, is likely to increase in the high teens of cents per share? 7

Yes, for continuing operations. Simon Baruch Analyst Thank you. ( Instructions). Michael Manzo, Aberdeen Asset Management. Michael Manzo - Aberdeen Asset Management - Analyst Hey, guys, how are you? A few of my questions have been answered, but can we -- maybe some financial details on the USP business. How big was that potential or profit contribution and the sale price? The sale price was a base of $58 million and I would just -- the other part I would say, as Henning described its profitability, in a full market, it was at or above our performance consolidated and in recent times, it has been a bit below. Michael Manzo - Aberdeen Asset Management - Analyst Okay. And then -- okay. And the 20% margins is a good number to use for the D.S. Brown business? Yes. Michael Manzo - Aberdeen Asset Management - Analyst Okay, thanks very much, guys. ( Instructions). Ladies and gentlemen, this concludes the Q&A portion of the call. I would now like to turn it back over to Mr. Lipke for closing remarks. Thanks. We are pretty excited about these two transactions and strategically moving away from a solid business, which USP was, but a business that we didn't feel operating as part of Gibraltar provided us the kind of growth that we are looking for from all of our businesses. And then acquiring D.S. Brown, which is a business that we are very comfortable with and we see significant growth opportunities gives us momentum going into 2011 to drive our earnings per share upwards. And we are hopeful that we will see at least some incremental improvements in our normal markets, but even absent those, we are looking for a better year and we started the year with some pretty good momentum. Thanks for participating on the call and we look forward to talking with you again in the near future. 8

Ladies and gentlemen, that concludes today's conference. Thank you for your participation in today's conference. Have a wonderful day. D I S C L A I M E R Thomson Reuters reserves the right to make changes to documents, content, or other information on this web site without obligation to notify any person of such changes. In the conference calls upon which Event Transcripts are based, companies may make projections or other forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks, which are more specifically identified in the companies' most recent SEC filings. Although the companies mayindicate and believe that the assumptions underlying the forwardlooking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realized. THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS. IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. 2011 Thomson Reuters. All Rights Reserved. 9