Gibraltar Industries, Inc. (NASDAQ:ROCK) Q4 2007 Earnings Call February 19, 2008 9:00 AM ET
Ken Houseknecht - Gibraltar’s Vice President of Communications
Brian Lipke - Chairman, CEO and Chief Exec. Officer of Gibraltar New York
Henning Kornbrekke - Pres and Chief Operating Officer
David Kay - Chief Financial Officer, Principal Accounting Officer, Exec. VP and Treasurer
Analysts
Sal Tharani - Goldman Sachs
Carl Reichardt - Wachovia Capital Markets, Llc
Peter Lisnic - Robert W. Baird & Co., Inc.
Mark Parr - Keybanc Capital Mkts
Martin Pollack - NWQ Investment Management
Amit Daryanani – RBC Capital Markets
Robert Lagaipa - Oppenheimer & Co
Natenda Haya - Lehman Brothers
Dennis Olkey - Dermott Capital
Operator
Welcome to the Gibraltar Industries, Inc. Fourth Quarter 2007 Results and its outlook for the first quarter of 2008. We will begin today’s call with opening comments from Ken Houseknecht, Gibraltar’s Vice President of Communications and Investor Relations.
(Operator Instructions.)
At this point, I will turn the call over to Mr. Houseknecht.
Ken Houseknecht
Welcome to our quarterly conference call. Before we begin, I want to begin that this call may contain forward-looking statements about future financial results. Our actual results may differ materially as a result of factors over which Gibraltar has no control. These factors are outlined in the news release we issued last night and in our filings with the SEC. If you did not receive the new release on our fourth quarter results, you can get a copy on our website at gibraltarone.com. At this point, I would like to turn the call over to Gibraltar’s Chairman and Chief Executive Officer, Brian Lipke.
Brian Lipke
With me today is Henning Kornbrekke, our President and COO, Dave Kay our CFO and Ken Houseknecht, our VP of Communications and Investor Relations and on behalf of all of us, thanks to you for joining our call today.
As usual, I am going to make some opening comments and I will be focusing those comments at three main areas today. First of all, I will highlight our 2007 results and the many actions we took last year which strengthened our business platform and gave us positive momentum as we moved into the year ahead. Next, I am going to provide a quick overview of our fourth quarter results which Henning and Dave will discuss in greater detail and finally, I want to make a couple of comments that are more strategic, longer term looks at the steps that we are taking to transform and position Gibraltar for increased success in the future, and then following that, Dave will discuss our financial results and Henning will go over our corporate and segment performance and provide a more detailed outlook for the year ahead.
And of course, after our prepared remarks are completed, we will open the call to any questions that any of you may have.
For the year, our sales increased by 6% to $1.3 billion, which was a function of the acquisitions we have made over the last two years. Moreover, in spite of a very difficult operating environment, it intensified as the year progressed. We generated net income from continuing operations before special charges of $36 million or $1.19 per share during 2007. We also generated positive cash flow which allowed us to pay off $65 million worth of debt in the fourth quarter alone.
As we continue to manage our inventory and working capital, our focus is to continue to pay down debt as we move through 2008. Importantly, we also initiated a number of action in 2007, some of which are continuing as we speak that will provide continued positive momentum as we move forward.
We acquired three companies, Dramex, Noll/NorWesCo, and Florence, which together added approximately $160 million of annualized higher-margin sales, broadened our geographic coverage and continued to build our niche product leadership positions. We continue to divest businesses that no longer provide a good strategic fit, or which cannot meet our performance targets. Last year, we sold our Hubbell service center and a small bath cabinet line. Those businesses had combined annual sales of approximately $55 million. This process of evaluating our portfolio companies and businesses is ongoing and we will continue to focus our resources and capital on those areas which provide the best strategic fit and produce the highest returns for our stakeholders.
We have also taken a number of steps to lower the cost structure and approve the performance of our remaining businesses. We will continue to streamline our operations and use lean manufacturing techniques to improve the performance of the existing businesses. Last year, we consolidated our two Buffalo area cold-roll strips facilities into a single operation and in total, we have consolidated or eliminated 11 facilities since the beginning of 2007 with a number of additional consolidations underway or planned toward 2008.
As we said in our news release last week, slower conditions in our two primary markets, residential building and automotive reduced our fourth quarter results from earlier expectations. The slow down in the residential building market deepened in the quarter and many of our customers responded by substantially reducing their orders in order to control their inventories which adversely affected our volumes and mix.
The weakness in the housing and credit markets spilled over into other areas including the automotive sector and our business there was also below our earlier expectations. Our four quarter earnings were also negatively impacted by a tax related charge as well as some purchase accounting adjustments which together resulted in a loss from continuing operations of $0.01 per share.
It is very important to note however that we had earnings from continuing operations of $1.1 million or $0.03 per share exclusive of these items. Sales in the quarter increased by 11% to $309 million again driven by our 2007 acquisitions despite a decline in sales from existing businesses of approximately 5%. Unfortunately, much of the progress we have made during 2007 were acquisitions, divestitures, improvements to our remaining businesses and active asset and working capital management has been obscured by lower volumes and adverse changes to our mix which are solely a result of the sharp downturn in our two largest markets.
Even though it is not fully apparent in this operating environment, our many activities to strengthen and strategically transform Gibraltar have better positioned the company for new thresholds of performance as the markets we serve turn to more normal levels of activity.
It is also important to note that even if difficult conditions do persist in our two primary markets and our 2008 business forecast anticipates additional softening in both the residential and building and automotive markets, we see opportunities for improvement in the year ahead simply as a result of streamlining and consolidation efforts completed during 2007. A full year of activities from our three newest acquisitions without the impact of purchase accounting adjustments which are behind us now and the improved operating platform of the business overall. Longer term, the actions we have taken have positioned us for a significantly improved results once the markets we serve begin to move back toward more historic activity levels.
As we work our way through this slow down, we have identified a series of additional actions that will continue to improve Gibraltar’s core operating characteristics, generate cash flow from operations, all is to pay down additional debt, which is a key focus during 2008.
That takes care of my opening comments. At this point, I will turn the call over to David Kaye for a deeper look at our operational performance.
David Kay
As Brian mentioned, our fourth quarter sales from continuing operations of $309 million increased by approximately 11% from a year ago directly as a result of our 2007 acquisitions of Dramex, Noll/NorWesCo, and Florence, sales from continuing operations in 2007 were $1.3 billion up by approximately 6% when compared to 2006. Exclusive of acquisitions, sales were down by 5% in the quarter and 6% for the year largely the result of the slow down in the residential building markets.
Income from operations in the quarter was $9.7 million compared to $20.3 million in the fourth quarter of last year.
For the full year of 2007, income from operations was $81.3 million compared to $119.4 million in 2006. As noted in our earnings release, our fourth quarter results from continuing operations were negatively impacted by an income tax related charge. This pre-tax income fell below projected levels at the end of the third quarter, the impact of permanent differences between booked and taxable income caused an increase in the effective tax rate used in the fourth quarter. The result of this tax adjustment reduced our earnings by approximately $0.03 per share.
Fourth quarter income from continuing operations were also negatively impacted by inventory purchase accounting adjustments from the Noll/NorWesCo and Florence acquisitions. The impact of expensing these charges on a pre-tax basis amounted to approximately $700,000.00 or $0.01 a share after tax.
Our reported fourth quarter results from continuing operations after the effect of these special items was a loss of $332,000.00 or $0.01 a share. Without the special items, our fourth quarter income from continuing operations would have been $1.1 million or $0.03 a share. For the full year 2007, reported income from continuing operations was $31.1 million compared to $50.1 million in 2006.
Earnings per share from continuing operations in 2007 were $1.03 compared to $1.67 per share in 2006. Selling, general and administrative expenses amounted to $38.1 million in the quarter or 12.3% of sales compared to $30.2 million or 10.9% of sales in the same quarter of last year. Excluding the effect of acquisitions which added $5.1 million, SG&A increased by $2.9 million from last year. Fourth quarter of 2006 SG&A costs were favorably impacted by several adjustments most notably vacation and Workers Compensation accrual adjustments, as well as the favorable impact of accruing bad debt reserves.
The total interest expense amount to $8.8 million in the quarter compared to $6.6 million in the fourth quarter of last year. The increase was primarily the result of higher average borrowing levels largely as a result of acquisition activity. From a cash flow perspective, we have generated EBITDA from continuing operations from $19.2 million in the fourth quarter of this year compared to $26.9 million in the fourth quarter of 2006. For the full year of 2007, we had generated EBITDA of $115.6 million compared to $145 million in 2006. On a consolidated basis, we turned our inventories 4.8 times during the quarter compared to four times in the fourth quarter of last year.
In addition, we were able to reduce our inventories by approximately $16 million in the fourth quarter and $43 million during the year. In the fourth quarter, we re-paid approximately $65 million worth of debt reducing our yearend debt to total capital ratio to 46% from approximately 49% at the end of the third quarter. As Brian noted, we will continue to aggressively manage our debt and working capital levels in the year ahead with a clear objective of further reducing our debt.
Average days outstanding and receivables were 55 days for both the current and prior year quarters. Our capital spending amounted to $18.8 million in 2007 which is approximately 71% of depreciation. We expect to spend a total of $20 million to $22 million in 2008 or approximately 70% to 75% of projected depreciation expense. During the year, we also paid out approximately $6 million in dividends. At December 31, we continued to be in full compliance with all of our debt covenants.
Looking forward to 2008, we will be focusing a great deal of attention on managing the capital we have invested in the business. We have built specific working capital targets into the operating plans of each business unit with the goal of further reductions, which combined with cash generated from operations will permit us to generate more free cash flow and further de-lever the company.
Now, I will turn the call over to Henning for a more detailed analysis of operations.
Henning Kornbrekke
Net sales from continuing operations as Dave noted earlier were $309 million in the fourth quarter up 11% from a year ago. A gross margin of 15.5% fell 2.7 percentage points from the fourth quarter of 2006 and our operating margin of 3.2% was 4.1 percentage points lower than the year ago quarter. The declines for the quarter and year were the result of adverse volume and mixed changes in our building product segment, higher material cost in our processed metals business, higher SG&A expenses driven by acquisitions and unfavorable purchase accounting adjustments. Looking at the results of our two segments, building products had a fourth quarter sales increase of 15% to $218 million. The increase was the result of our acquisition of the UK based expanded metal company in November of 2006 and our three 2007 acquisitions as well as continued strength in the commercial, industrial building product’s markets which helped offset much lower sales for the retail and new-built housing market.
Excluding acquisitions, building product sales were down 9.1%, a function of the 52% decline in housing starts over the last two years and the approximately 23% decline in the repair and remodel market. Gross margins were 17.9% compared to 22.2% in the fourth quarter of 2007, a result of lower volumes, higher material cost and unfavorable product mix and purchase accounting adjustments related to recent acquisitions.
The operating margin was 6% compared to 11.3% in the fourth quarter of 2006, a function of the lower gross margins and higher yearend adjustments to accruals. Our processed metal product segment had fourth quarter sales of $90 million, up 3% from a year ago, a result of higher material prices. Our gross margin was 10.3%, up 1.3 percentage points from a year ago quarter and the operating margin was 6.3%, up from 5.4% in the fourth quarter of 2006 driven by improvements of the strips deal and powdered copper businesses.
At this point, let me provide some perspective on our outlook for 2008.
From its peak at the beginning of 2006, the new housing market has fallen by more than 50% and some markets like Florida, California, Arizona and Nevada, areas where we have sizeable operations are down even more. We are now in the 26th month of the housing market downturn. A 2008 business plan anticipates additional softening in the housing and automotive markets. We expect 965,000 single and multi-family housing starts in 2008 and an auto build of $14 million. Our business plan also expects macro economic growth will be slow with the GDP of 1.5% for the year. Both the magnitude and length of the current slow downs indicate that they could stabilize and begin to rebound later this year.
Our building products businesses that are most closely aligned with the new built housing market, like our structural connectors, metal lathe and some ventilation products will continue to experience below normal activity levels and see some of our highest valuated products and this is adversely affecting our mix and margins. Helping to offset the new build activity levels are commercial, industrial and international markets, which are still growing. In addition, we have closed our consolidated eleven facilities, reduced corporate SG&A by 11% and restructured our businesses to run at lower volumes.
We will also benefit from a full year contribution from our three most recent acquisitions Dramex, Noll/NorWesCo, and Florence, which together added approximately $160 million of higher margin sales primarily in the commercial and industrial markets. In our processed metal product segment, the consolidation of our Buffalo area strips deal facilities, the disposition of our Hubbell assets continued the growth of our powdered metal operations in China and steady volumes at our North American powdered metal business will provide improved margins even at lower volumes for our strips deal business which are being driven by a North American auto build that is down approximately 7% from 2007.
In light of all of these considerations, we expect our 2008 earnings per share from continuing operations will be in the range of $1.05 to $1.25 acquiring a significant change in business conditions.
As we move through the first half of the year, we expect to see the normal seasonal increase in activity. As we look further ahead, we will continue to benefit from our 2007 initiatives including our many lean projects, facility consolidations and a continued streamlining of our existing businesses, all of which have lowered our cost structure. As a result of these actions and our continued focus on operational excellence and driving our cost, we see opportunities for an improved performance in 2008 even with difficult conditions in our two primary markets. Longer term, Gibraltar is well positioned to optimize its performance when the markets we serve improve and move back towards the historic levels.
Throughout 2008, we will remain focused on generating progressive improvements in all of our businesses, carefully managing our assets and maximizing our cash flow to pay down debt while continuing to improve Gibraltar’s core operating characteristics.
At this point, I will the call back over to Brian.
Brian Lipke
Before we open the call to any questions that you may have, let me make just a couple of closing comments, in spite of I think what is clearly the most severe housing market downturn in a generation, we continue to operate profitably in 2007, made a number of operational improvements to the business. We clearly ended the year a much stronger company than we began it even though our financial results may not be indicative of that fact.
More importantly, as Henning said, we see opportunity for an improved performance in the year ahead. We believe Gibraltar is strategically well positioned, poised to do well even in a weak and uncertain economic environment. The markets we serve turn for the better, the progress we have made will become readily apparent. And with each passing day, we are one day closer to seeing our markets return to more normal levels as they always have.
That concludes all of our prepared comments. At this point, we would be glad to open the call to any questions that any of you may have.
Question and Answer Session
Operator
(Operator Instructions)
Your first question comes from the line of Sal Tharani of Goldman Sachs, please proceed.
Sal Tharani - Goldman Sachs
I just wanted to get some more color on your guidance. You generally gave out a quarterly guidance, this time you are giving out a full year guidance, what are some of the assumptions you have made in terms of your volume going forward, is it all coming from cost benefits, or are there any improvements in the business conditions also?
Brian Lipke
Let me take a shot at that first and then Henning and Dave, you guys can fill in more the details. The big reason for the change, Sal is we think that by giving annual guidance, we are actually providing more information for our shareholders to use to evaluate where the company is headed. Talking more, we have always looked at this as a long term business proposition and we think talking more about the trends we are seeing and the long term steps that we are talking and then providing the annual guidance is more useful to the shareholders.
When we talk about next year, we still think that the housing and auto markets are going to be weak and in fact, our projections show them getting somewhat weaker, so our improvements in performance are driven by an expectation for our markets, the two main markets, housing and automotive to turn around during 2009. As Henning said, there is always the chance of that, but our assumptions are not based on that happening. Our assumptions, as Henning laid out a pretty good detail are based on internal actions that we have taken on top of the full year benefits from the acquisitions that we made along with the fact that a number of the one time negative impacts that we had during 2007 will not be recurring in 2008.
Henning and Dave, you want to add anything more to that.
Henning Konbrekke
Again, we will answer it as we can, the net I think of what we said that we expect our volumes in 2008 to be up slightly over 2007. The net of all we talked about.
David Kay
That is driven by full year acquisition activities.
Henning Konbrekke
That is right and a decline in markets which would impact our business.
Sal Tharani - Goldman Sachs
And just for this purpose, it is an even distribution of this number or are you seeing a more back end loaded performance?
Brian Lipke
We used a normal distribution curve that we normally would see during the year. We absolutely did not backload it. That would be uncharacteristic of our business.
David Kay
Although, I think it is fair to say we expect the stronger fourth quarter in 2008 than we had in 2007.
Sal Tharani - Goldman Sachs
Okay, great. And one last thing on the contracts you have with the auto industry on your processed steel side, how much flexibility do you have to pass on the rising steel prices and then how often do they get re-priced over the course of the year?
Brian Lipke
We have ongoing discussions with our customers as we do with our suppliers and I think we stay very diligent at making sure that as the market moves, the market on pricing of materials move that we are responsive to that and we work closely with our customers. In some instances, we do have indexing schedules available with some of our customers and some of our main businesses that are very heavily dependent on material cost.
Sal Tharani - Goldman Sachs
And do you do any tolling also?
Brian Lipke
There is some tolling in some of our business, yes.
Operator
Your next question comes from the line of Carl Reichardt of Wachovia Securities, please proceed.
Carl Reichardt - Wachovia Capital Markets, Llc
I had a question about your outlook for commercial, industrial and international markets. Your start numbers are not terribly different than what I have, but how are you thinking about how the commercial side and industrial side in particular are likely to impact your business in 2008?
Brian Lipke
We think that commercial, industrial and international is going to stay relatively strong. It is not going to be exceedingly strong, but we think we will continue to see the types of gains we saw in 2007 into 2008.
Carl Reichardt - Wachovia Capital Markets, Llc
So you are expecting sort of a percentage increase from a product’s perspective that it did to the market or are you expecting some share gains there in some of your core products?
Brian Lipke
I think we see both. I think some of the business we have had done a fantastic job at developing some new products and we also have some new marketing programs that are being laid out as we speak, so I think we do anticipate to get some market share pick up and we also see the markets growing, although slow growth. Again, the GDP that we use is 1.5% and the gains that we use on those markets that are growing is in line with that.
Operator
Your next question comes from the line of Peter Lisnic of Robert W. Baird, please proceed.
Peter Lisnic - Robert W. Baird & Co., Inc.
I was wondering if Dave or Henning or Brian, if you guys could talk about the working capital targets that you alluded to in your opening commentary. It sounds like all the businesses are under or have new guidelines on the working capital front, could you give us a sense of what you are trying to get to there?
Henning Kornbrekke
We have looked very carefully at all of our businesses and I think we have concluded that we have an opportunity to significantly improve the management of the assets that we employ and we have given specific realistic targets for all of the businesses and we have found that they have quickly responded. I think Dave can provide some more detail on the progress that we have made so far and expect to see in 2008.
Brian Lipke
What I think too is that this might seem like it is a reaction to the current market conditions, but overall, we went out and Dave Kay did a substantial amount of benchmarking relative to working capital being used by a whole host of other businesses. We have compared those businesses to ours and that is why when Henning said we feel that there is a substantial opportunity for us to improve that is the basis upon which we say that.
So that this is more of an ongoing effort as opposed to an effort that is brought about simply because of the current economic conditions, although one of the things that makes Gibraltar unique is that in slower economic times, we cannot flex the business very quickly and very easily reducing our inventories and managing our working capital better so that we can actually take money out of the business without negatively impacting the business and so that is another activity that we are involved in right now. So it is both a short term and a long term look at this.
David Kay
And I would just say that this is just an additional focus. I think, in sort of the timeframe where we made a lot of acquisitions and the business is growing very, very rapidly, we were actually building working capital. I think when we looked at other companies in our space and looked at the amount of working capital that we had out there, so we really need to make this an additional focus to the other things that we do and we have just put some targets out there for people.
I would say on a broad general basis now, every company has slightly different, but we have a target of reducing working capital by somewhere between $65 million and $75 million on a consolidated basis.
Peter Lisnic - Robert W. Baird & Co., Inc.
And then on, I guess there is also pretty significant commentary on debt reduction being the primary focus for 2008 and I know in the past you have been obviously looking for growth and a lot of that has come through acquisitions, has that changed now as the acquisition environment is adverse and you do not want to—
David Kay
We would not say that it has changed at all. We are still very much focused on growth. We are focused on profitable growth. We are focused on better utilization of the assets and I think we are more determined than ever since we do have the leverage at this particular point to do a lot of the acquisitions through cash that the business generates rather than continually go out to the debt markets. I think the position that we have at this point in time is clearly appropriate for $1.6 billion business.
Brian Lipke
Let me put all of that just a little bit differently. Clearly, acquisitions have played a major role in the growth of Gibraltar. As we sit today though, Henning, David and I have analyzed it and we feel comfortable that on a normalized run rate, with the businesses that we have today, our sales would be in the range of approximately $1.6 billion, so we have got growth opportunities already built into the business for the short term which take the pressure off of the need to go out and make an acquisition to help fund the growth.
And then in this current environment, I think it is fair to say that we have raised the bar on any acquisition activity that we would be involved in. Clearly, we are continuing to look, but our focus for this year, particularly until we see a solid statement that the markets that we serve have turned around is going to be very conservative relative to acquisitions and that paying down debt will be a more important priority.
David Kay
And I think it is fair to say that just as a management team, part of the philosophy, even though we are very growth oriented and have been for a number of years and we will continue to be, we are also sort of conservative, so we are not going to put a lot of leverage on the company and we are not going to do things that I guess in the current environment, we would call foolish or risky, so there is a focus on getting our leverage down and we may still make some acquisitions, but be a little more judicious in the process.
The key word I used which I guess which I guess most missed is profitable growth and that does not mean just growing the top line, it means paying a lot of attention to the bottom line which is where we are.
Peter Lisnic - Robert W. Baird & Co., Inc.
And then, I guess if you kind of look at it, Dave, if you are going throw out that amount of pre cash flow through working capital improvement, and the leverage I think, at these levels maybe take it down a bit, but have you given any consideration to stock buy back with that kind of level?
David Kay
I would say that we have talked about a stock buy back. As a matter of fact, once a year, at a Board Meeting, it is a scheduled annual agenda item that we talk about and we did that within the last three months, and I think the general consensus of both management and the Board that right now, that is probably not the best use for free cash flow that we generate, however that does not mean that we would not consider that in the future. I mean, obviously the stock price is not where we would like to see it and given there are a number of things that we would be doing to try to improve that and that is one of the items that is always on the agenda.
Henning Kornbrekke
Clearly, with the stock under value, it gives us an outstanding opportunity to buy back some of our stock.
Operator
Your next question comes from the line of Mark Parr of Keybanc Capital Markets, please proceed.
Mark Parr - Keybanc Capital Mkts
I had a couple of questions, first of all, what is the correct normalized run rate for corporate expenses that we should be thinking about for 2008? I think you had some acquisition cost in the fourth quarter.
Brian Lipke
We typically target an SG&A total at 10% and I think when you look at the numbers, we have a budget that is slightly a little bit higher than that.
Mark Parr - Keybanc Capital Mkts
So your overall SG&A is targeted a little above 10% of sales. I was just looking at the way that you do the segment reporting and the corporate reconciliation for the fourth quarter look like it was a little higher than last year. It maybe a little higher than normalized, what I was trying to get into is if we were going to look at a normalized fourth quarter rate, I mean, what would a more realistic steady state number have been?
Brian Lipke
Probably almost a point less than what you saw in the fourth quarter, above seven, I think we were 11.5%.
David Kay
Now the fourth quarter of 2006, a little artificial and low, there are a lot of things that are accounted for here at corporate like Workers Comp reserves and things that were favorable in 2006, but not 2007.
Mark Parr - Keybanc Capital Mkts
So maybe 100 basis points reduction?
David Kay
I would say that is probably reasonable.
Mark Parr - Keybanc Capital Mkts
And that would be to account for the cost of acquisitions? Anything else?
Brian Lipke
It was acquisitions. It was a reversal of a lot of accruals in the fourth quarter. There was an income tax charge that was larger than we expected.
Mark Parr - Keybanc Capital Mkts
But the income taxes would not have hit the SG&A though, would it not?
Brian Lipke
Are we talking about SG&A?
Mark Parr - Keybanc Capital Mkts
Right, I was talking about SG&A.
David Kay
I will say the reversals in the accruals in the fourth quarter were exceptionally high in the fourth quarter of 2007 versus 2006.
Henning Kornbrekke
2006 as I said was a little bit low. As I said, we had a big Workers Comp assessment for the reserve adjustments, bad debt expense was very favorable, vacation accruals, I mean those things were all very favorable in 2006. It is not that 2007 is the odd year, it is more of the 2006 that is a little bit odd.
Mark Parr - Keybanc Capital Mkts
Brian, you had mentioned the outlook in 2008 for additional consolidation activity and I think Dave it was either you or Henning that had talked about likely additional actions on the cost side, can you give some more color on what the potential impact of that might be?
Brian Lipke
We are looking at it right now consolidating some of our businesses. We are in the midst of consolidating, actually moving a large manufacturing facility into another manufacturing facility. I think we are looking at another four or five plant consolidations as we move through the year 2008.
David Kay
I would say that when you look at those kinds of activities, a lot of the facilities that we acquired over the years tend to be clustered together and a lot of those facilities actually happen to be leased facilities and then another one that Henning was just referring to was sort of a leased facility. The lease was expiring, we needed more space, so we said, let us move it to another location that is much larger and can deal with growth and expansion. These are not the types of activities that will result in multi-millions of dollars of restructuring charges. I mean, we do these things all the time.
Henning Kornbrekke
Most of the cost of the restructuring, we got some in the fourth quarter. There will be some in the first quarter, but the gains far offset that so in a full year basis, it will have no impact, in terms of cost, I am not sure that is what you are asking.
Mark Parr - Keybanc Capital Mkts
Clearly, there is a cost side to doing this, but there is an upside as well and I guess I was kind of looking for color on both. I mean, should we be thinking about a cost of say one or two million and an upside of two or three million?
David Kay
I think, I am not sure if said in the comments, but we are looking at an improvement of gross margin of 1.5% year-over-year. That has given the same volumes that we have just talked about. So you do the number at 1.5% and it will probably give you a pretty good indication of what our sales would be.
Henning Kornbrekke
But I mean on the other side, it is not unreasonable to assume that there will be some cost and it could be $1 million or it could be $2 million during the year.
We are not talking about any major write downs. That is where we are going with this.
Mark Parr - Keybanc Capital Mkts
I was just trying to get both sides of the situation. I mean I recognize there is a bright side of this.
Henning Kornbrekke
Yes, I mean we are moving our gross margins towards the targets that we have always talked about. We have always had a target of 20% and if you kind of looked at where we were in 2007 we were less than that. Now, clearly it was the mix in the lower volumes that we are loosing the leverage shaking at this particular point. We are reconfiguring so that we can get the types of gross margins we talked about at the lower volumes. And you could imagine the leveraging that you get as the volume starts to pick up because we are not taking capacity offline. That is the key point we are not diminishing the capacity.
Mark Parr - Keybanc Capital Mkts
Okay, if could ask another question on the strip steel business and I realize this is not as big a piece of the overall company as it used to be but we have got some very dynamic changes going on in the flat-roll carbon steel market right now. And I was wondering, how we should think about the ability of Gibraltar to either benefit or maybe have a bit of a margin squeeze as a result of the very aggressive pricing that we are seeing on the spot market.
Henning Kornbrekke
Well at this point we all recognize that all of their spot market all of the mills we are talking about is significant price increases we go through the year. We are very much aware of it, our business is very much aware of it. They are working closely with their customers. We are working with our folks internally to optimize the situation for Gibraltar.
Mark Parr - Keybanc Capital Mkts
At this point, how do you feel about the ability or what is the risk for some margin squeeze?
Henning Kornbrekke
I think it is not going to be terribly different in 2007. I think in some cases we will get squeezed and in some cases we have taken a good chunk of course out of the business. We have talked earlier and I think Brian highlighted part of it. We did close one of the three plants that we have had and so now we are getting the same unifying an attitude plan so that we have increased our efficiency in running that business and so, we have given ourselves some additional room which is going to help us manage the situation as we go forward.
Brian Lipke
I think for proof of that all you have to do is look at fourth quarter results 2006 compared to 2007 at the operating margin line and you will see an improvement. We have not even put ourselves in a position yet where we are fully capitalizing on the cost reductions that have come through this consolidation.
Mark Parr - Keybanc Capital Mkts
I was hoping you would say something like that Brian because that number did not look that bad.
Brian Lipke
Yes, in spite of slower operating environment.
Mark Parr - Keybanc Capital Mkts
Okay, just good luck working through this really tough macro-head wins. I think you guys got a good plan and we look forward to more progress and more uptakes.
Brian Lipke
Well, Mark, there is a light at the end of the tunnel. Our objective is not just to survive and then come out and get back to where we were. Our objective is to come through this period and take as many positive edges as we can during these slower times. So that when we come up the other side and return, we are not only going to get back to where we were. We are going to set new performance records for the company, and that is our objective.
Operator
Your next question comes from the line of Martin Pollack of NWQ Investment Management.
Martin Pollack - NWQ Investment Management
Let me ask you, with regard to the level facility closures, it seems that your are suggesting, most of them already have taken place in 2007, the actual benefits, can you describe the benefits in 2008 just by effectively having them now.
Henning Kornbrekke
It is management that we are going to see in 2008 that we have got in our budget is an improvement gross margin of 1.5%.
Martin Pollack - NWQ Investment Management
Okay, with regard to the contribution from the acquisitions. I know that there are usually accreted right out of the stocks but are they particularly, are they likely to be essentially be even in a stronger mode because such relying targets may have been weaker all around in 2007 so that is 2008 in your model considerably improved just as because the those acquisitions now –
Henning Kornbrekke
Yes, I think 2008 is going to improve. I would say considerably that the business do have better margins and one of the business, we are in the process of using its synergy with some other businesses we have, which will provide a much improved outcome over the base business that we purchased and that is heavily involved with one of the consolidations that we have just talked about.
Martin Pollack - NWQ Investment Management
Also, with regard to the model itself, where you have perhaps some business segments that are, I guess like Hubbell, or maybe loosing money but negative to cash flow, are there such businesses that in an event that things get worse you can immediately respond and reduce that?
Henning Kornbrekke
Yes, coming out of 2007, I think we basically had addressed all of those issues that you just described, Hubbell being one of the primary ones, the bath cabinets is another and as you know we have sold this business and now we are involved in and the remaining business that we have were all positive relative to cash flow. We do have alternative strategy. We were considering a number of different options as Brian, myself and David thought. We still look at the business as a business that does have growth opportunities even in down markets. So we have continued to position the business to grow our bottom line to increase our cash flow and we still have an open window we look at opportunities to grow to the top-line as well. Within the parameters that we have talked about.
Martin Pollack - NWQ Investment Management
Last question, on free cash flow generation, obviously working capital can always be critical, especially in an environment like this. Do you still have room as you look at the business to actually reduce those levels of inventories and receivables?
Henning Kornbrekke
Absolutely! Yes we did.
Martin Pollack - NWQ Investment Management
Can you be a little bit more specific in terms of maybe working capital target ratios?
Henning Kornbrekke
What we can tell you is that we are taking our DSIs down from – the total DSIs for the company are probably around 82 and we have a target to take them down. Actually, our target is 60 but we believe realistically we can get them down in to the mid-65s.
Martin Pollack - NWQ Investment Management
So, on the receivable side?
Henning Kornbrekke
Receivables were pretty good. We typically have receivables that are down in the 50’s. I think we find that we are in good space with our receivables. We do a good job in collections, we always have. To take this opportunity we have – is doing a better job in managing our inventories in which will fall steam into that program.
Brian Lipke
We need to sort of take the ratio between payables and receivables and get us closer together.
Martin Pollack - NWQ Investment Management
On the receivables as far as those receivables have you noticed any particular distressed customers?
Henning Kornbrekke
We talked about a lot, we are fortunate we have very good customers and as you know, the world is consolidating and so by far as most of the customers that we have left are what we called blue chip customers and they are certainly capable of paying the growth. If we had any business where we had issues with receivables, I would tell you know that it was Hubbell. And Hubbell is no longer part of Gibraltar.
Operator
Your next question comes from the line of Michael Cox of Piper Jaffray
Michael Cox – Piper Jaffray
My first question is within the building product segments of your business. I was wondering if you could undergo forward basis including the acquisitions in 2007. Would the mix would be between residential and non-residential?
Brian Lipke
The ratio is about 2/3 residential or retail but you have about 60/40.
Michael Cox – Piper Jaffray
Okay 60/40 and then on the go-forward basis, shall we continue to expect building products at about 70% of the total?
Henning Kornbrekke
I think when you look at the mix of our businesses, clearly with some of the acquisitions, we have moved more into the commercial and industrial space than the pure residential building space and therefore that mix has changed a little bit.
Brian Lipke
I think on the total business of the 70/30 split probably is not too bad. Probably maybe even upto 72%.
Henning Kornbrekke
But 70% is not all residential building, it is commercial, industrial and residential.
Michael Cox – Piper Jaffray
Sure, that is what I was trying to get up to, given the declines in residential and acquisition for non-residential I would have expected the 40% to be higher. And I just want to clarify that some of the comments that you made previously on the call, that you are expecting gross margins to improve by 1.5 points in SG&A to leverage by about one point, merely we have 2.5 points in margin improvement, is that the correct way to think about it?
Henning Kornbrekke
The one point for the SG&A was at fourth quarter. I think if you look at Full Year, it is close to 0.5% and yes the gross margin improvement of 1.5% is what the budget is or our target is for the year.
Michael Cox – Piper Jaffray
Okay, that is helpful and then, as we are looking at the full year sales expectations, you have mentioned that on an organic basis you are expecting a slight decline, is the 5% decline of the fourth quarter of 2007, is that a realistic expectation to carry forward through 2008 or ?
Henning Kornbrekke
Yes, order for magnitude; that is not too far off.
Michael Cox – Piper Jaffray
Okay, that is great and then lastly, i think someone asked this earlier but I was wondering if you just quantify as it is today the cost sales of the actions taken in 2007 from our facility closure standpoint, is it possible to pinpoint a dollar amount that has been taken out of the cost structure at this point?
Henning Kornbrekke
Yes, we have had that conversation. It is approximately $22 million.
Operator
Your next question comes from the line of Amit Daryanani of RBC Capital Markets.
Amit Daryanani – RBC Capital Markets
I was wondering if you guys could just talk about what is your perception on the inventory levels in the channel right now and if you think maybe their estimates inventory –in PDR expected seasonality in the full step of 2008?
Henning Kornbrekke
Yes, we think that the inventory and the channels that this particular points for the most part have been fairly levelized. And we started off a lot of that in the fourth quarter. I think Brian talked about that in his comments. We saw a lot of the customers really pushing back on the road in the fourth quarter. I think it was their attempt to bring their inventories in line. I think based on what we are seeing in January, I think that that is probably true because the January order rates were pretty much in line with our expectation.
Amit Daryanani – RBC Capital Markets
The CAPEX from 2008, I think you talked about $20 to $22 million, that is about 10% higher than 2007. Given on the restructuring of the cost containment that we are doing, could you talk about why are we seeing CAPEX dollars go up?
Henning Kornbrekke
The CAPEX dollars, and again, we would probably spend at a level somewhat analogous to 2007. One of the focuses we have on spending capital is in the systems area. As we have grown, we have become a large company and we have become to be more aware that we need to be more systems oriented. That gives us the higher efficiency to look at all the different planning systems. So, if there are expenditures that we are looking at in 2008, but different in 2007 is probably putting more money into systems, particularly in some of our larger businesses and newer businesses.
Amit Daryanani – RBC Capital Markets
So, increasing pretty much ERPs, something in the backend?
Henning Kornbrekke
For the most part it is the ERP systems and its course reduction programs.
Amit Daryanani – RBC Capital Markets
Looking a bit from the $15 million or $16 million sequentially, despite the fact you ended up lower sales that you had initially expected. Assuming that to me, you probably stopped with a little bit more finished goods than you would have liked? Can you talk about how much fell off?
Henning Kornbrekke
I think the only area that we have some finished goods inventory actually was directly related to some of the plant consolidation, because as you know, as you consolidate plans, you have to do an inventory built to be able to service your customers as you are closing operations and moving into other locations. So, as we have gone through some of those consolidations, we have built as much as much as three or four months finished goods inventory to handle the movement from one plant to another and that gave a little bit of spike in finished goods. But I would say it is an artificial spike. It was intentionally built to accommodate the closure of a facility or consolidation.
Brian Lipke
And at the same time, if you look at our fourth quarter inventory turn-over level, we improved in the fourth quarter of 2007 over the fourth quarter of 2006.
Operator
Your next question comes from the line of Robert Lagaipa of Oppenheimer & Company.
Robert Lagaipa - Oppenheimer & Co
Few additional questions, the trends within the quarter, you mentioned January, can you just talk about the trends from month to month, I mean times like December, it was exceptionally weak. You mentioned January was in line with your expectations. But how did that compare to December, how did that compare to October and November and have you seen any data for February thus far?
Brian Lipke
Obviously we tracked the business daily, I would say our comments that we think January is tracking to our full year forecast that we have provided to you.
Henning Kornbrekke
I think if you just look at the trend in Gibraltar overtime. Obviously, the month of December was bad, which we have talked about in our releases. Probably a little below what it normally is, but the first quarter is the second week this quarter of the first quarter and obviously it starts off very slow and builds momentum through the quarter so March is the real key month for the first quarter and we do not know March yet.
Brian Lipke
I would say we are online with the guidance we have given you; that the January is very much in line with the budgets that we have built for the year 2008. We would also characterize December specifically or the fourth quarter to be uncharacteristically weak for all the reasons that we have mentioned.
Robert Lagaipa - Oppenheimer & Co
That January was actually improvement versus December and how does that compare to October or November?
Henning Kornbrekke
Yes, it clearly was an improvement.
Brian Lipke
It follows the normal pattern that has been established over the years where the fourth quarter of the year is our weakest support. The first quarter comes back up – it is an improvement over the fourth quarter and the second and third quarters follow that trend and then the fourth quarter again gets weak. That is pretty much the seasonal nature of the business and that pattern is playing out this year. Just as good last year where the first quarter of 2007 was better than the fourth quarter of 2006. The second and third quarters relative to the market conditions improved over the first quarter and then obviously dropped off again. We expect to see that pattern unfold again this year and that is what so far what went in. That is what we see happening.
Robert Lagaipa - Oppenheimer & Co
How was February been tracking so far?
Henning Kornbrekke
We are very much on target with what we have given you for guidance with the full year.
Robert Lagaipa - Oppenheimer & Co
Moving on, I guess if we look at the guidance for the full year, I know you have mentioned in the fourth quarter, you are expecting to be obviously much better than the fourth quarter of 2007. I mean is that the first point in time, the fourth quarter when we should expect earnings to better on a year-over-year basis, or should it happen sooner than that?
Henning Kornbrekke
I think our guidance suggests that the year will be better than 2007.
Robert Lagaipa - Oppenheimer & Co
But did it just went into fourth quarter and the first recorder should be lessened?
Henning Kornbrekke
I think you will see the trends unfolding there in the year as they typically do. I think we would expect and we are pleasured at this way to see improvements and as we go through the year and I think you will see that as we will have subsequent conference calls.
Robert Lagaipa - Oppenheimer & Co
And moving on, I guess, an additional question is related to the acquisitions so far. Obviously, given the quarter growth rate for the overall company, where is the core growth in the acquisitions? You know the acquired businesses over the course of this year? And what was the margin contribution from these businesses?
Henning Kornbrekke
It depends on the businesses those businesses in Europe, they experienced the growth of the date and forecasted which are in the area of 4% to 5% what the businesses that we have recently acquired are and we have only had it for a short period of time. They were very much on target with growth objectives that were to 5% and one of the businesses which is more of a participant in the standard we call retail building product segment with some commercial. Their growth was flat to down a little bit but they were being impacted by the retail building market.
Robert Lagaipa - Oppenheimer & Co
Quick clarifications, your answer to the previous question that the 1.5 points in growth margin improvement that you are expecting. You are also expecting 1.5 points of operating margin improvements?
Henning Kornbrekke
That would go down to operating margin, assuming the SG&A does not go up.
Robert Lagaipa - Oppenheimer & Co
Okay, and then the other clarification of the tax rate. I did not hear that. What tax rate are you assuming for 208? What tax rate are you assuming for 2008?
David Kay
We should use a normal tax rate for 2008, the 38% to 29%. The fourth quarter was of pure anomaly.
Operator
And your next question comes from the line of Natenda Haya of Lehman Brothers, please proceed.
Natenda Haya - Lehman Brothers
On inventory, there had been a number of questions. Obviously, the performance in the fourth quarter was very good, but I think you mentioned that you could see inventory days go down another 7 or 8 days, that itself would mean that there would be $20 million, am I doing the math right?
David Kay
Yes.
Natenda Haya - Lehman Brothers
And so is that kind of a target for 2008?
David Kay
Could you just rephrase that just one more time?
Natenda Haya - Lehman Brothers
From working capital, is it fair to assume based on those statements that working capital could be a $20 million your source of cash during 2008?
David Kay
I would say considerably more.
Natenda Haya - Lehman Brothers
And does that factor in the possible increase in steel cost that is steel cost that is likely?
David Kay
We did factor in some, I think, what we are hearing right now is that some of the increases are as high as 30%. We did not factor in 30%, but we did factor in a price increase.
Natenda Haya - Lehman Brothers
In terms of channel inventory, you talked about December being weak and people kind of pulling back on purchases, but are channel inventory very wanted to be at this point?
David Kay
We think at this particular point, the channel inventories are where we think that they should be. I think for the most part, most of our suppliers have spent the year and a half in getting their inventories about where they need to be, so we would see that situation more stable going forward.
Brian Lipke
That should be the difference between 2007 and 2008 too. In 2008, we saw a lot more inventory adjusting going on by the customers which was a direct reflection of the dramatic pull down in both the remodeling and repair market as well as the new build market. This year, while we expect it to continue to weaken, I do not think it will be weakening by another 50% the way that it did last year, a much lower level.
Natenda Haya - Lehman Brothers
And obviously, shifting to acquisitions, I mean, you have revolver availability, but it would be fair I suppose to assume that without asset sales, you are not going to make any big acquisition and also related to that, how much of a room do you think you need in terms of availability for you to become comfortable?
Brian Lipke
I do not know if we could put a pure dollar amount on it. We are comfortable at certain levels of leverage and to meet our debt service requirements. I think it is probably fair to say, as you said, you will not be making any big acquisitions; we are probably not going to make $400 million acquisition. The credit markets do not support that, and we would not be comfortable with it in this current environment any how. We do believe that we need some liquidity just around the business, so we will not push it, we will not take it to a level where we have no liquidity.
David Kay
And again, Brian, we reiterate this early, we do have good opportunities for internal growth. We are hard at work at coming up with a number of new products in 2008. We have a number of new marketing programs. We spent a lot of time with some of our customers in taking broader products in through those new channels that the customers have opened up for us, so we do have opportunities for growth in spite of the down market which should help us offset some of the market decline.
Natenda Haya - Lehman Brothers
And lastly, you talked about an environment around stock buy backs and how attractive it could be, but what is the RP basket right now under the bonds that would allow you to do that?
David Kay
Right off the top of my head, I would have to get back to you on that. Right off the top of my head, I do not recall it.
Operator
(Operator Instructions)
Your next question comes from the line of Sal Tharani of Goldman Sachs, please proceed?
Sal Tharani - Goldman Sachs
I just want to get more clarification on working capital. You said, working capital would be a source of fund for about $65 million or $70 million in 2008, is that what you said?
Brian Lipke
Yes.
Sal Tharani - Goldman Sachs
This means that you are actually, if you look at the steel prices, if you are moving from $500.00 in September to almost $700.00 plus dollars in March-April, does it mean that you are going to actually reduce the physical volume of the inventory dramatically this year?
Brian Lipke
I think there are some business units that can reduce their physical volume, others are already optimized volume-wise. I mean, I think we went from $560.00 because we have heard $750.00 in that range. I do not think anybody is forecasting the price to stay at $750.00 for the whole year right now. It seems like it is peaking in the second quarter and then the anticipation is that it will go down. We certainly have not put a plan together that would say that steel pricing will be between $750.00 and $800.00 a ton.
David Kay
I think you ought to remember is that we are not totally a steel company that if you look at it as a percent of our sales, 28% of our sales are in steel purchases, not 80%. I think it is in recognition that our inventory mix is not totally dependent on steel prices. Steel price is very important to us for sure, but we are not totally dependent on steel pricing.
Sal Tharani - Goldman Sachs
But the decline in the inventory or working capital, the working capital will come out mostly from the building part of the business or from the processed steel business?
Brian Lipke
From both.
Sal Tharani - Goldman Sachs
So equal distribution or?
Brian Lipke
No, 70% is building products, 30% is processed metals and from 30% processed metals, 10% is copper.
Sal Tharani - Goldman Sachs
And so, 90% is that steel?
Brian Lipke
Yes.
Operator
Our next question comes from the line of Dennis Olkey (ph) of Dermott Capital.
Dennis Olkey - Dermott Capital
Just going back to your reserve to payments basket, have you guys thought about buying back bonds, I think bonds are in the low 80’s and have you guys looked at that and what your outlook is on there.
David Kay
I mean, we have certainly discussed it. We obviously cannot do a tender for the bonds, but we have looked and we will continue to look at open market purchases.
Dennis Olkey - Dermott Capital
And then finally, have you been in touch with the rating agencies and discussed any business with them?
David Kay
We have a scheduled appointment, our annual appointment with the rating agencies to bring them up to date and that will take place within the next several weeks.
Operator
And there are no further questions. At this time, I would like to turn the call back over to Mr. Brian Lipke for closing remarks.
Brian Lipke
Thanks for joining us for the call today and for your continuing interest in Gibraltar. Clearly, we believe we are taking a wide variety of actions that will both in the short term help us improve our performance even during these difficult markets, but more importantly, set the stage for substantially improved performance once our major markets return to more normal levels of business activity and as said earlier, everyday that we are in these markets, we are one day closer to coming out of them. So we look forward to talking with you again in three months and updating you on our continuing progress. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes the presentation, you may now disconnect. Good day.
Dennis Olkey - Dermott Capital
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