Gibraltar's (ROCK) CEO Frank Heard on Q2 2016 Results - Earnings Call Transcript

| About: Gibraltar Industries, (ROCK)

Gibraltar Industries, Inc. (NASDAQ:ROCK)

Q2 2016 Earnings Conference Call

July 28, 2016 09:00 AM ET

Executives

David Calusdian – Investor Relations, Sharon Merrill

Frank Heard – Chief Executive Officer

Ken Smith – Chief Financial Officer

Analysts

Ken Zener – KeyBanc Capital Markets

Al Kaschalk – Wedbush Securities

Daniel Moore – CJS Securities

Michael Conti – Sidoti & Company

Walter Liptak – Private Investor

Operator

Good day, ladies and gentlemen and welcome to the Gibraltar Industries’ Second Quarter 2016 Earnings Conference Call. Today’s call is being recorded and webcasted. My name is Chris and I will be your coordinator today. At this time, all participants will be in 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 conference call over to your host, Mr. David Calusdian from the Investor Relations firm, Sharon Merrill. Please proceed, sir.

David Calusdian

Good morning, everyone and thank you for joining us. If you have not received a copy of the earnings press release that was issued this morning, you can find it in the Investor Info section of the Gibraltar website, gibraltar1.com. During the prepared remarks today, management will be referring to presentation slides that summarize the company’s second quarter performance. These slides also are posted to the company’s website. Please turn to slide two of the presentation. The company’s earnings release and slide presentation contain forward-looking statements about future financial results.

The 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. Additionally, Gibraltar’s earnings release and remarks this morning contain non-GAAP financial measures. Reconciliations of GAAP to adjusted measures have been appended to the earnings release.

On the call this morning is Gibraltar’s Chief Executive Officer, Frank Heard; and Chief Financial Officer, Ken Smith.

At this point, please turn to slide three in the presentation, and I will turn the call over to Frank.

Frank Heard

Thanks, David. 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 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 transformation four pillar strategy and we are focused on transitioning resources to our most significant opportunities and achieving results from operational improvement initiatives. And as a result of our progress, we are raising our annual earnings guidance.

I’ll speak more about our strategic progress and guidance expectations after Ken reviews our financials. Ken?

Ken Smith

Thank you, Frank and good morning. I’ll start with slide four on 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 product that was completed last year. The combined effect of - and 2Q revenues was $23 million in last year’s 2Q, it did not repeat this quarter. With outsourced two items in last year’s quarter consolidated revenues would have increased 14%. We continue to have strong bottom line performance from the combined contributions of our base businesses and RBI. And our combined results significantly increased earnings per share.

And although not shown on slide four, the company’s consolidated gross margins improved meaningfully by 780 basis points to 25.2% on a GAAP basis. GAAP operating margins 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 of our four pillar strategy. We are allocating internal resources to our largest operational opportunities and realizing benefits from executing our 80/20 initiatives which were 170 basis points on this quarter’s margin expansion. Also not shown on 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 in mid-week and market activity. However, despite of bit lower revenue, our second quarter profitability was higher than guidance and better than expected traction from 80/20 projects within residential products segment, plus synergies within the renewable energy segment.

Let’s turn to slide five for 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 have 2015 revenues not repeating this quarter that involved the divestiture of the European industrial business and the sales contract for residential projects 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 cost on customer pricing.

Energy related market activity remained weak impart affected by the continuing low level of oil prices. Nonetheless, there was substantial profit outperformance by our base businesses. Supplementally, we have also realized reductions on our balance sheet from 80/20 simplification. Most noteworthy is the reduction of inventories for our base businesses $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 the customers. Next

I’ll talk about each of our three reporting segments and I’ll start with the segment discussion with slide six, the residential product segment. Revenues for this segment decreased 11% to $120 million, all of that difference being completed two year sales contract for centralized mailboxes we finished up last December. That contract provided second quarter 2015 with revenues of $15 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 modeling activity. This segment’s operating margin increased substantially from the continuing and incremental benefits of improved operational efficiencies and its implementation of the 80/20 simplification program.

Turn to slide seven the industrial and infrastructure product side, the revenues on this segment continued 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 the 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 cost which have a correlation to average selling prices. Yet, regarding profitability, profit dollars and margin increased, the segment’s drop in improvement has come 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 turn to slide eight, our third reporting segment; the renewable energy and conservation segment. Since Gibraltar did not own RBI for the entire second quarter last year, slide eight presents RBI’s pro forma results for the 90 day and 180 day period ended June 30, 2015. This would made an order to provide an apples-to-apples comparison between the time periods and as you can see, revenues continue to grow as expected although Q2 2015 benefitted from the completion of key projects. Operating margins increased meaningfully, although the 80/20 program within RBI began just this year, this margin expansion is evidenced in procurement synergies of which Gibraltar is assisting and trending towards our expectation of this operating margins rising into the fees.

At this point, I’ll turn the call back over to Frank. Please turn to slide nine to continued progress on value creation strategy.

Frank Heard

Thank you, Ken. Our ongoing strong financial performance is a direct byproduct of our team’s ability to rapidly transform our culture and effectively executing on our four pillar strategy. The first of these pillars is operational excellence, so our focus remains on reducing complexities, simplifying our product offering and adjusting our construct to better support our partners. The emphasis here continues to be our 80/20 initiatives and we are extremely pleased with the results that we are delivering.

We now have all four of our business units participating in 80/20 process including the RBI business. As Ken cited, our second quarter and year-to-date results have been lifted by the success of this initiative. In 2015, we removed $12 million of cost from our income statement and we’re on track to achieve an incremental $16 million in 2016. As a result, we are well on our way to achieving, if not exceeding, our initial five year target of $25 million of pre-tax savings. And presently, we are in the fourth innings of this process. In innings one, two and three, we’re focused on saving money on the income statement by implementing things like data analysis, segmentation, and zeroing up individual cost structures as it relates to products and customers.

Among other benefits, this has resulted in better alignment of our pricing, overhead and resources to better support our key customers. Innings four, five and six, our target is yielding greater structural changes affecting the balance sheet. This is where we are today. As we are preparing to implement follow-on management tool of in-lining our manufacturing processes with market rated demand [indiscernible] tools. These follow-on tools are focused on manufacturing the highest volume products for our largest customer on a much higher level of capacity utilization. We expect these methods will yield additional benefits in the area of lower manufacturing cost, lower inventories and fixed assets and in even higher level of service to our customers. Innings seven, eight, nine will take place between years three to five, focusing on driving top-line growth with new and innovative products.

During these later innings, our initiatives will be tailored towards reallocating sales and marketing talents to target specific end user groups, in order to better understand their needs and the various market opportunities that may be available, resulting in new product ideas and opportunities that generate profitable growth. The second of the four pillars in our strategy is portfolio management. We’re leveraging our work in 80/20 to improve the financial health of each one of our businesses. We’re taking a very strategic look at our customers and end markets and how we allocate leadership time, capital and resources to the highest potential platforms and businesses.

Through this measured approach, we are able to more deeply understand and evaluate each business’s optimum business models and market opportunity and financial returns before determining the best approach and options available for each business. Already we’re seeing a significant payback from this strategy including spending that capital in 2016 compared with historical levels with a higher expected rate of return on invested capital which for 2016 may reach low double-digits. As noted on our last quarter’s call at the start of Q2 2016, we divested our European industrial business from our portfolio which contributed $36 million in revenue to our industrial and infrastructural product segment for full year 2015, so breakeven operating results.

We based our decision to divest this small business on our assessment to capital would be better applied to more significant opportunities at this point in time. Ultimately, our near-term emphasis in portfolio management is on positioning the company and resources so that we can add more attractive markets and businesses to Gibraltar’s portfolio. The third and the fourth pillar is greater product innovation. As we noticed last quarter, we continue to expect four of our current product platforms to be key areas for greater product innovation and are focused on accelerating their development. They are centralized mail and parcel delivery, residential air management, transportation infrastructure and renewable energy including green technologies.

We define innovative products as those with patent protection. These continue to represent 4% of revenues from the quarter and our objective is to approach 10% of revenues by 2020 driven initially by internal product development, but by then by acquiring product lines as well. To give you an update on our express lockers and centralized parcel products, we have already sold 112 units and we are only halfway through 2016 compared with 100 units in all of 2015. Our fourth strategic pillar is acquisitions. Over the past 18 months, our focus has evolved from reaction area and opportunistic to a very proactive and strategic approach to driving growth. As a result, we’re building a quality pipeline of opportunities. We continue to look for opportunities in five key high growth markets involving prospects that have clear opportunities, include market share and drive operational enhancement.

Before leaving slide nine, I wanted to note another very important corporate initiative; leadership and talent development. During the past 18 months, we’ve added new talent through promotions, external hiring into 24 of our top 75 key roles in the organization. Under our new and season Senior Vice President of HR and Organizational Development, Cherri Syvrud will focus on further developing a solid bench of well match talent across and deep into the organization to help ensure our focus on operational excellence remains sustainable. Ultimately, our success comes down to our people and our team has never been stronger.

Now in turning to guidance on slide 10, we’re increasing our earnings guidance for full year 2016. This comes from over-performance in the first half of 2016 and continuing momentum propelled by the 80/20 program and the increasingly accretive contribution from the RBI acquisition. On a GAAP basis, we expect earnings for 2016 in the range of $1.38 to $1.48 per diluted share, compared with $0.74 per diluted share in 2015. With those special items, adjusted earnings per share for 2016 are also higher than our previous guidance now expected to be between $1.37 per diluted share to $1.47 per diluted share and compares favorably to the $1.09 and adjusted EPS for 2015.

Our updated and increased earnings guidance reflects continuing and meaningful profit improvements by all segments including the very favorable comparison in third and fourth quarter to the segments’ aggregate operating profit for the second half of 2015, along with higher charges for equity related compensation. Regarding revenue guidance, we have modestly lowered our expected 2016 top-line as revenue from industrial related markets particularly upstream energy markets was weaker in the second quarter of 2016 and likely will persist throughout the balance of the year.

Comparing expected 2016 revenue to revenues at 2015, 2016 top-line is up against the unfavorable comps aggregating $100 million. This includes $30 million related to the European industrial business which we have divested; $50 million divested to the two year sales contract for residential postal products completed in December 2015 and $20 million of sales for what we have estimated as the sales bubble related to the solar market in 2015 as developers pushing to complete new solar installations ahead of the then expected reduction in the investment tax credit. And revenue growth in 2016 would have been a positive 9% when compared to 2015 absent these three factors.

Now to conclude our prepared remarks, we are off to an excellent start on the company’s transformation. We are midway through year two and for 2016 we’ll deliver a second consecutive year of sequential and meaningful financial improvement in terms of absolute profit dollars, returns in cash flows or specifically operational excellence in the initial 80/20 simplification tool is delivering higher than expected operating results and we’re only in the early innings of implementing the full suite of the tool box.

So the continuing momentum and incremental profitability from 80/20 will be complemented by the next series of tools of in-lining the market rated demand replenishment plus the tools for top-line growth including trade focus. And, we continue to track the five year chart that we share with you depicting the opportunities for higher EPS and return on invested capital. We remain fully confident in our ability to continue achieving our three key goals; first, increasing adjusted earnings; second, making more efficient use of capita; and third, delivering higher shareholder returns that we did in the prior year.

At this point, we’ll open the call for any questions you may have. Thank you.

Question-and-Answer Session

Operator

Thank you, gentlemen. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions]. And our first question comes from the line of Ken Zener with KeyBanc. Please proceed with your question.

Ken Zener

Good morning gentlemen.

Frank Heard

Good morning, Ken.

Ken Smith

Good morning, Ken.

Ken Zener

Lot of different elements going on here, obviously raised guidance, the success in residential as well as RBI, but I think what I hear from investors Frank and Ken is that when I think about the opportunity slide as you describe it, it really hasn’t changed since your March 15 [indiscernible] which is good, it’s good. You’ve executed on what you thought, but it really goes to the -- doesn’t it seem like you are doing better than you perhaps would have thought then, Frank, I mean how can it not move given all the success that you had, I don’t know does it seem like it’s conservative now on some of these lines that you drew out because obviously the acquisition portfolio simplification, the blue line is almost a 250 for ‘17, is that something that you’re comfortable investors thinking about, obviously as your equity stock prices moved up, the bar has been raised.

Frank Heard

Yeah, I think reflecting on when we first looked at the portfolio in early 2014 and what we thought we had in terms of the balance sheet and how we can lever to 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 did dependent on a lot of people doing the right thing at the right time and certainly attract to the blue line we thought would have been represented a fairly dramatic transformation of the corporation’s financial results and hopefully put as more into best-in class against the evolving peer group.

I think approaching two years into the process, I would emphasize just the approaching side is that, it’s still relatively early days certainly at the end of 2016, we’ll step back and reflect on whether or not that five year projection needs some revision. If we think that’s the case, we’ll probably take steps to communicate that to the investor world in a similar fashion that we did originally during our NASDAQ presentation. But, we 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.

Ken Zener

Okay, that’s a big question given the momentum both in earnings and the stock price. Going to the quarter now, the rise in residential margins, you obviously talked about the $15 million, I think Ken going away that had no margin. Having said that, you still went up even adjusting for that, you went up very nicely. Can you refer to the components of that growth? I mean we had some – reporting at 34% rise yesterday in the second quarter as functioning those shipments which I assume are fairly correlated to your vent and gutter products. I mean can you talk about the growth you saw in the roofing? I know you did a big 80/20 initiative last year in the residential and in the West, was roofing the biggest driver of that or was it the mailboxes, I mean quantifying the dilution that went away from the Canadian part of the business.

Ken Smith

The two subcategories that had the most favorable comparisons were the commercial side of commercial mailboxes. So we sold others and just that one contract we completed and that balance of other customers had increased orders in the quarter. And then on the residential roof related products, those also benefited from low double digit improvements. We had mails on balance to OUS over 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.

Ken Zener

Thank you. And then you said solar bubble Frank, was I mistaken?

Frank Heard

You were not mistaken.

Ken Zener

Could you clarify I mean, it was down a little organically, can you talk about what that I realized that was this huge pull forward because of the expectation FY17, credits were going to go away which has now been extended which is a good thing, but can you talk about what that, organically, I think you suggested it was down. But what does the cadence mean? Does it mean we’re kind of entering the tough back half of the year and then ‘17 could be flat or I know you guys obviously got it at a good price and execution has been very good, can you give us the cadence so people don’t end up with the wrong impression?

Ken Smith

In our view if we remove those anomalies of incentives that affected different contiguous – time period, the markets still continue to grow right around the 10% rate that absent those incentive aberrations that were affected. And RBI is continuing to participate fully in that while also as you can see in 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.

Frank Heard

I think Ken in second part of your question is that certainly ‘16 because of the bubble in ‘15 had some downward pressure on it combined with Ken’s comments being a little more strategic about which type of businesses in working with allocator resources towards. The byproduct of that is they are making a significant amount of money combined with some of our synergistic activities. For ‘17, 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 strategy 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 up then we expected to see an opposite effect but now they have held, we get this artificial bubble for very short period of time, but guys are doing a nice job working our way through that.

Ken Zener

Yeah, just so we have the right context, and this is my final question, installed cost of solar, I mean you’re in that kind of that mid-market in terms of you’re not doing the utilities which I believe bidding for utilities in Texas are even getting down to $0.04 to $0.05 a kilowatt. So could you talk about your general installed cost so investors have an understanding about the following cost curve that solar makes it commercially viable? Thank you.

Frank Heard

Well I’ll let Ken jump in as well, we have ongoing product development processes that the whole balances systems cost in the context of us giving 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 of system perspective, balances systems is part of that. Our component within racking we’re certainly in the process and have taken additional costs. So 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.

Operator

And our next question comes from the line of Al Kaschalk from Wedbush Securities. Please proceed with your question sir.

Al Kaschalk

Good morning guys. Just to follow up on the renewable energy side on slide 10, I think you clarified and said going forward meaning ‘17 and beyond, you’re still comfortable 9% to 11% type of top-line growth in renewable with some margin benefit on higher return oriented project. I just wanted to clarify that the 5% growth that you have in there on the ‘16 assumption after you annualize for the $80 million from the acquisition?

Ken Smith

Yes as well as we had 2015 at least in the first half of 2015 RBI had some significant contract that are complete and the size of which aren’t nearly of the same magnitude as we had this year another small detail is that UK was a strong market in the one half of 2015 as they had a very strong governmental push to install renewable energy and we participated in that in calendar 2015. And those features are – the same this year and so that’s an element of it and we have the team that leads RBI is doing a nice job as Frank cited being more targeted and 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 of our market that continues to participate and grow and expand and RBI is doing really good job participating that and driving profitability while being selective on what they design, advocate and sell to customers.

Al Kaschalk

And does this imply more profitable or higher return oriented projects are necessarily longer in duration or shorter in duration?

Frank Heard

Ask that question again, Al.

Al Kaschalk

I’m just trying to, if there is any change – short order, short visibility business and I’m just trying to understand if your focus or the enhancing the profitability is a key component there, therefore may show a little bit slower top-line and may be some have thought still keeping it in the 9% to 11%. I’m just trying to…

Frank Heard

It is but the duration and size of contracts are substantially different than our historical profile that they are installing. And the backlog if they can have in any given day still approximates 3.5 months worth of revenue. So, the highway of -- lights beyond that is still dependent on securing new contracts.

Al Kaschalk

Okay. Second, in the prepared remarks, I don’t know if it was Ken or maybe it was Frank, in terms of capital resources and allocation, you commented allocating capital to some of the largest opportunities. Are you at a spot where you are, for a lack of better word, controlling the dollars that are being invested to those with absolute highest returns regardless of the size or are you focusing on where was the next incremental dollar of capital being allocated?

Ken Smith

I would say the, split halves here Al, surely on short term tactical capital expenditures, we do have dollars to – above which projects are being reviewed and supported out of the corporate office and there’s been betting since last fall through now we built the plan for 2016 and now as projects come up for formal approval, well certainly circumstances can change and market conditions can change, where we favored something less volatile now we favor emphasizing some other piece of the plan or a new element of the plan. And there have been examples in 2016 where our new projects not – contemplated 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 increasing in cost reduction opportunity, has been identified by engineering folks or redesigned in response to customers.

So we’re reacting tactically but still within an envelope that of aggregate CapEx spending to this year in the teams 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, when we’re – the most optimum returns and likelihood of returns that we can get. So we’ll deemphasize certain opportunities while we go strong on ones that we think we can be successful on and have higher returns and the ownership period…

Al Kaschalk

Great. And finally if I may, Frank, just on a broader picture and you used the baseball analogy in each of those had a nice little split of the third. Are you suggesting or setting us to expect that each of those groups of processes including the innings four to six to follow on tools, is that from a duration standpoint? Is the expectation that those will take an equal amount of time, in other words, if the initial part, if the entire plan was five years, then the initial first three innings were 18 months? Is innings four to six sort of a timeframe of 18 months as well or what should we expect?

Frank Heard

I think that would be a -- obviously there’s overlaps, some of the businesses are further through their early innings a little bit quicker than other businesses simply because they are simpler businesses or they got started earlier but there is some overlap. The second phase of tools which we’re 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, manufacturing A items for A customers and more of an in-line basis versus batch based process, not only it’s going to allow us to shed more unproductive inventories in various forms as we get more focused just making the top products in a more repetitive in line basis we fully expect to see lower manufacturing cost 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 point to support ultimately the end user – house we can’t just sell them to the high runners, we have to sell them some of the slow runners. We’ll treat those differently, we’ll either make them in a batch base process or outsource them and be quite honest, I think our history of trying to do everything for everybody probably provides us with some cost reduction opportunities not only in the manufacturing of the A items but also the outsourcing of the B items 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 cost that certainly weren’t in the first year of $12 million of 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 to stick 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 the A items, we’ll also find that we 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 that Ken’s quoted $15 million or $16 million of capital spend, that now includes RBI in that as well not just the legacy businesses. So, it’s a quite bit of improvement from the team.

Al Kaschalk

Great. Thanks for the color and good luck.

Frank Heard

Okay. Thank you.

Operator

And our next question comes from the line of Daniel Moore from CJS Securities. Please proceed with your question sir.

Daniel Moore

Good morning and thank you. Wanted to focus on the industrial side, obviously some challenges here in the very short term, wondering if you’re seeing any evidence yet or tangible evidence of pickup in activity or conversations as it relates to the highway bill as we look out to 2017?

Frank Heard

Yeah, the order activity continues to be elevated because of state’s doing some budgetary planning and estimating on key projects as they involve general contractors kind of planning effort. So, much like we described in our first quarter call, we’re expected that elevated level of quotation and estimating the translate into bids then subcontracts that we bid on and winning our portion of those so that we enter 2017 with higher backlog and it will affect entire revenues in 2017. But 2016 is largely and continues to be largely a planning effort for states to prioritize – that are longer and more expensive projects.

Daniel Moore

Very helpful, and kind of a similar question postal and parcel without obviously the highway impact, is there any conversations at this stage regarding other regions potentially shifting to centralize mail?

Frank Heard

I think as a general note if you follow the press, there has been some various articles where the U.S. postal service has begun to change some of their policies on a federal level on whether or not they actually get embraced at the state level and the various regions around the country becomes another issue. And I think so the general momentum in terms of the environment I think moving in the direction that we expected. Over time, all the regions will be adjusted in some way shape or form to utilize that 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, that’s certainly a rising tide as you see new home construction whether it’s multi-family or single family, that becomes a greater and greater percentage of centralized mail delivery versus single family mail. All that being said, to our knowledge there is no specific issue where a particular region has been over the coming months are going to try to take mail delivery away from an established group of resins in Continental United States.

Daniel Moore

Okay. And lastly, may be just shifting over to renewable energy, very nice uptick obviously in margin and as you said, you said on the last call you haven’t really attacked that area with 80/20 may be just a little bit more detail on what drove the upside as 12% plus sustainable here in the near term and how much room is left in that segment?

Ken Smith

I gave it the top banner in the prepared remarks about procurement savings, so 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 RBI utilizes for its customers, products. So realizing or RBI is realizing some little points of raw material cost and freight in and out cost because of attaching ourselves 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.

A – Frank Heard

I think that’s probably what we identified as a third of the opportunity in terms of transforming RBI’s rate of return from 10% to 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 and they have done a nice job executing on that and 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 that we will see some additional and meaningful benefits out of that next third and then I think the last third is the work we’re doing on 80/20 process that we’re still early days of looking at how those tools can be applied to 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 are not getting any financial benefits on the 80/20 days, we’re still on early days. But we’re feeling very good about RBI’s top-line growth opportunities relative to the market not only growing share within the rising tide but also they have some adjacent markets whether it’d be residential or commercial rooftops or the larger tracker space. So we’re feeling good about the top-line and we certainly are confident that they’re going to continue to improved their operating returns going forward.

Daniel Moore

And lastly if I may sneak one more in, in terms of M&A, are there any of the three or four areas of your focus that you are seeing it’s a greater increase level of dialog or potential over the next I mean 6 to 12 months?

Ken Smith

Let’s see, I’m thinking back on the prospect list, they are pretty evenly distributed although if there was one way it could be – residential we’ll notice. But we have – but there is all those targeted categories that do have prospects for us of high interest.

Daniel Moore

Very helpful. Thanks for the color.

Frank Heard

Thank you.

Operator

And our next question comes from the line of Michael Conti from Sidoti. Please proceed with your question.

Michael Conti

Hey good morning.

Ken Smith

Good morning, Mike.

Frank Heard

Good morning, Michael.

Michael Conti

Oh yes, so most of my questions have been answered but just a few follow-ups on the residential organic growth rate if you didn’t – items within residential and I’m talking to the full year guide. Do you have an idea on what that organic growth rate would be I’m just trying to get a sense of apples-to apples comparison and get an idea on how much growth you guys are – due to 80/20?

Ken Smith

I’d say, if we didn’t have the discontinued products or the completed projects contract that we finished last December, I’d say that same – would probably be up 5% or so this year compared to last year.

Michael Conti

And then with the drivers on the margin expansion, did you break out how much of that was due to 80/20 on the residential side?

Frank Heard

We did not but to an answer to your question from my remarks this morning, that’s a little over 200 basis points of the improvement Mike came from 80/20 implementation.

Michael Conti

Got it. And then just switching over to the infrastructure side, are there any other major projects that D.S. Brown is currently bidding on just giving us an idea on the demand for their products and can you just remind us of the margin profile of D.S. Brown compared to residential and industrial?

Frank Heard

Mike we generally don’t go to that level of detail for competitive reasons and others.

Michael Conti

Got it. Thanks. That’s all my questions. Thanks.

Frank Heard

You’re welcome.

Operator

Thank you. And our final question comes from the line of Walter Liptak, private investor. Please proceed.

Walter Liptak

Thanks. Great quarter guys.

Frank Heard

Thanks, Walter

Walter Liptak

Thanks. Great quarter guys.

Frank Heard

Thanks, Walter

Walter Liptak

Wanted to ask from a high level with the $25 million over three years of benefits, so the $16 million for 2016 that’s been identified or is that already been kind of booked through your income statement?

Ken Smith

We booked approximately half of it through the income statement we only actually realized but several of those projects that have gotten initial traction in the first half further benefits coming up in Q3 or Q4 and there’s also identified projects yet to start still being backward for their second half.

Walter Liptak

Okay that’s great. And so it sounds like some of those that had come through in 2017 or are there more projects so then $25 million, it looks like it’s already been up but it could go up further, is that the case?

Frank Heard

Yeah, I think certainly that would be an accurate conclusion that we’re going to get probably we have a 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 space to structural changes where we got and starting that process now and setting up ‘17 where we’ll start to focus on the in-lining and MRD and outsourcing programs which to this date we haven’t, we have done some conceptual work from a quantification perspective. We think those are meaningful dollars, so we expect to get more and do it sooner than fully expect it over the five year cycle.

Walter Liptak

Okay great. Then switching gears over to the industrial business, the margins looked very good specially with the volume decline 8% and I wonder how much is the margin improvement, profit improvement because of the divestiture and just elimination of losses? And how much is 80/20?

Ken Smith

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 – it’s the absolute dollars of last years.

Walter Liptak

Okay, great. So it looks like these businesses industrial is making great progress with 80/20?

Ken Smith

Probably, myself.

Walter Liptak

So I wonder at this point, when you look through the whole portfolio, are there still things that are potential divestitures or you guys have done and this is the business the way you look into the future?

Frank Heard

At this point, all the businesses are making meaningful progress in terms of making more money at a higher rate 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 80/20 process, even the business in what we would have assumed are more commoditized markets from a couple of 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 – if the portfolio changes going forward, it would be the byproduct of new acquisitions as opposed to divestitures at this point in time.

Walter Liptak

Okay. Sounds good. Okay. Thank you guys.

Frank Heard

Thanks, Walter.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Heard for any closing remarks.

Frank Heard

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.

Operator

Ladies and gentlemen, this does conclude our teleconference for today. We thank you for your time and participation. You may now disconnect your lines at this time and have a wonderful rest of the day.

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