Gibraltar Industries, Inc. (ROCK) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Gibraltar Industries’ Fourth Quarter 2015 Earnings Conference Call. Today’s call is being recorded and webcasted. My name is Bob and I will be your coordinator today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. David Calusdian from Investor Relations firm, Sharon Merrill. Please proceed.

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 fourth quarter and year end performance. These slides also are posted to the company’s website. Please turn to Slide 2 in the presentation. Company’s earnings release and slide presentation contain forward-looking statements about future financial results. The company’s actual results may differ materially from the anticipated events, performance or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings, which can 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 are Gibraltar’s Chief Executive Officer, Frank Heard and Chief Financial Officer, Ken Smith. At this point, please turn to Slide 3 in the presentation. I will turn the call over to Frank.

Thanks, David. Good morning, everyone and thank you for joining us on our call today. Gibraltar closed 2015 with a strong fourth quarter capping a successful year relative to the progress we are making with our transformation strategy. Nearly a year ago, we laid out that strategy at our first ever Investor Day conference. Since then, our results have exceeded our expectation in these early days of our journey to transform Gibraltar. The highlight of the fourth quarter was our bottom line performance, where we reported adjusted EPS of $0.29 compared with just $0.02 last year. We reported $1.09 per share in adjusted EPS for 2015, beating our latest guidance of $0.90 to $0.95 and more than doubled the $0.47 per share we reported in 2014. This is not only the result of good accretion from RBI, but also the success of our operational excellence initiatives within our base businesses. I will speak more about our strategic progress after Ken reviews our financials. Ken?

Thank you, Frank and good morning. I will start by referring to Slide 4 in the presentation, our consolidated results. As Frank pointed out, fourth quarter revenues were up 40% year-over-year. RBI acquired in June 2015 were the solar racking and commercial greenhouse businesses added 45 percentage points for the net revenue increase, while organic sales decreased 5%. And in subsequent slides, I will describe this segment’s performance, but the consolidated results on this slide are noteworthy from two important perspectives: first, the contribution of accretive earnings from RBI and second, the profit contribution of the base businesses, which all are the businesses except the acquired RBI entity. Regarding RBI, it contributed $0.17 to adjusted earnings per share in the fourth quarter coming from the continued demand for solar and greenhouse projects and we continue to be very pleased with the growth and profitability of it. Regarding the base businesses, our collective success in driving bottom line improvements was derived from focused operational improvements and better than expected traction in our first year of our 80/20 simplification initiative and we are expecting continued momentum into 2016. Turning to Slide 5, you can see the degree of outperformance of our base businesses compared to prior periods. Our base businesses in aggregate added an expected net decline in revenue of 5% for the fourth quarter as growth in residential products was more than offset by the continued double-digit decline in sales within our industrial and infrastructure segment. Nonetheless and most impressively, operating income and operating margin improved for our base businesses. We overcame the loss of contribution on the net revenue decline and reported a triple-digit increase in adjusted operating income for the quarter. The profit increases came from incremental efficiencies and margin improvement initiatives, including the initial benefits of our 80/20 simplification efforts. And for the full year 2015, our consolidated adjusted operating margin increased 25% compared to 2014 despite the slight net decline in the annual sales. Next, I will talk about each of our three reporting segments. We will start with segment discussion with Slide 6, the Residential Products segment. We continue to have favorable demand from this segment’s products. Demand from new construction plus orders for remodeling led to revenue growth despite a negative 2% decline from the effect of translating foreign currencies. This segment’s margin expansion was impressive, up 510 basis points as a result of volume leverage and again the benefit of operational efficiencies and targeted margin improvement actions, including the 80/20 simplification projects launched during 2015. Turning to Slide 7, the Industrial and Infrastructure Products segment, revenue in this segment continued to be unfavorable to 2014 by double-digits as expected, a result of the downturn in the oil and gas and related upstream energy markets and the collateral effect on other markets we serve. Here again, this segment’s focus on margin improvement resulted in a stellar operational performance for the quarter and the year despite the macroeconomic headwinds. Adjusted operating income and operating margin both increased double-digits in basis points in the quarter due to strong cost management and the initial results of its 80/20 actions. And as we look at this slide for all of 2015 compared to 2014 on the annual decrease in revenues of more than $50 million, operating income rose meaningfully and the operating and margin expansion was impressive. Now, I will turn to Slide 8, our third of three reporting segments, the Renewable Energy and Conservation segment. As described in this morning’s press release, this newly named segment contains only the results of RBI, which Gibraltar acquired in mid-June 2015. And this segment name change better reflects a broad description of strategically vetted new market verticals, which we are interested in adding to Gibraltar’s portfolio. Specifically, now the performance of this segment’s RBI business. The double-digit sales growth continued on strong demand for RBI’s ground-mounted solar racking products and also growth of its market leading commercial greenhouse offering. And while international revenues also increased compared to 2014, RBI’s strongest element of its revenue growth came from the U.S. market for ground-mounted solar arrays. Like our base businesses, we are assisting RBI with operational improvements and it began with Gibraltar’s supply chain assisting it with its procurement of raw materials and transportation, which are beginning to show up in RBI’s profitability. At this point, Frank will provide an update on our four-pillar strategy, which is beginning to have the desired effect on our financial performance. Please turn to Slide 9 continuing progress on value creation strategy.

Thank you, Ken. When you appreciate how our initial progress on the four-pillar strategy contributed to our solid performance in 2015 compared to the unsatisfactory results in 2014, you can see the potential of Gibraltar’s fundamental transformation. The first of these four pillars is operational excellence. We have been working to reduce overhead, price our products more strategically to better support our partners, consolidate facilities, improve our raw material sourcing and increase efficiencies across the business. The Gibraltar team at every level has embraced the cultural change we are making very quickly and that has resulted in some excellent results in these early days. In leveraging the work we are doing in 80/20, we are taking a more strategic look at customers and end-markets to evaluate our portfolio in terms of best use of our financial and human capital. We continue to realign our talents and expertise to be closer to our customers and redeploy capital to enhance these partnerships. As a result of all our businesses – as a result, all our businesses are becoming more valuable. During the first year of our 80/20 initiative, we derived $11.2 million of year-over-year profit improvement compared with a target of $5 million that we developed midyear. We also reduced inventories during 2015 by over $20 million, significantly surpassing our initial target of $12 million reduction. Our portfolio management initiatives leverages the work we are doing in 80/20 by taking a more strategic look at our customers and end markets as we allocate leadership time, capital and resources to the highest potential platforms and businesses. As a result, we are spending less capital in 2016 compared to historical levels with a much higher expected rate of return. We anticipate capital expenditures in the range of $16 million to $19 million in 2016 compared with a CapEx of $12 million in 2015. We continue to see four of our product platforms as key areas for greater product innovation, centralized mail and parcel delivery, residential air management, transportation, infrastructure and renewable energy, including green technology. In centralized mail and parcel delivery, we have made some excellent progress with our Express Locker having nearly 150 installations as of the end of 2015. For residential housing, we are developing an energy efficient whole house fan and higher efficiency smart vents that self-regulate as environmental conditions change. Additionally, we are launching a new meta-roofing installation system that’s been tested to withstand hurricane force winds. Many in the roofing industry see this as a potential game changer. Innovative products, which we define as products with patent protection introduced within the past 3 years, represent 4% of revenues for 2015. Our objective is to approach 10% of revenues by 2020, driven by acquired product lines as well as internal product development. Our fourth strategic pillar is acquisition. We are focused on making strategic acquisitions in five key markets postal and parcel solutions, residential air management, transportation infrastructure, water management and renewable energy. RBI is an ideal example of the type of acquisition we are focused on. In 2016, we plan to close on further acquisition – acquisitions in target markets that offer higher returns on investment than we have realized in the past. Now I will talk about our guidance for 2016, referencing Slide 10. While none of us have a crystal ball, we do believe that Gibraltar should fare pretty well in 2016, since we are less exposed to the most serious global challenges than some other companies. 85% of our 2015 revenue came from the Continental United States, one of the largest developed markets in the world and one that has a comparatively healthy economy today. Looking at our segments specifically, demand for our residential products is generally tied to residential housing starts and renovation activity, which both have positive outlook. We expect middle to single-digit growth in the U.S. residential market as the gradual recovery to mid-cycle housing starts continue. We expect that these improving market conditions will partially offset the decline in revenue from centralized mail receptacles due to the December 2015 completion of a specific customer’s 2-year contract. As a result, we expect residential product revenue will decrease by approximately 15% for the year. Our industrial infrastructure sales have already been affected by the industrial slowdown, including the severe energy downturn. We believe that, that has flattened out, so we are cautiously optimistic for 2016. Looking at transportation infrastructure products sold by this segment, the newly signed federal transportation appropriation is a helpful development for states, allowing departments of transportation to plan larger scale projects. In 2016, these states will start issuing RFQs and awarding initial contract. We expect this will meaningfully benefit our backlog by the end of 2016 and our revenues in 2017 and beyond. In this segment, we are expecting equivalent revenues to 2015 with lower demand – level demand for the key industrial markets such as upstream oil and gas continuing. In renewable energy and conservation, we see a continuing tailwind for growth in the solar market over the next few years, supported by the recent 5-year extension of the U.S. federal investment tax credit. This also bodes well for the next several years as solar installations are expected to increase across the U.S. And solar accounted for nearly 20% of our consolidated revenues in 2015. This segment’s 2016 revenue should increase over 2015, led by higher market demand from renewable energy. For 2016 as a whole, we expect consolidated revenues to range between $1.60 billion and $1.80 billion, up approximately 3% from 2015. Regarding profitability in 2016, we expect consolidated adjusted earnings per diluted share in the range of $1.32 to $1.40, up substantially from the $1.09 reported in 2015. The expected improvement in earnings comes from the additional cost efficiencies benefiting from the 80/20 simplification initiative plus the incremental accretive earnings from RBI. For the first quarter of 2016, we expect revenues to crease nearly 15% and adjusted EPS in the range of $0.12 to $0.15 compared with $0.06 for the first quarter of 2015. EPS benefits from the accretive income from the RBI acquisition in June of 2015 plus the contribution of other profit improvement initiatives across our base business. In summary, Gibraltar is well on track for a strong 2016 and we are fully committed to achieve three goals. First, increase adjusted earnings; second, making more efficient use of our capital; and thirdly, delivering higher shareholder returns than we did in 2015. At this point, we will open the call for any questions that you may have.

Thank you. [Operator Instructions] Our first question comes from Mr. Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen.

Good morning, Ken.

I am going to ask two questions. It’s going to be really impacting for solar and for mail, Frank. And if you could just comment, obviously, you outlined FY ‘16, your thoughts there, but in residential, you know the fact that – and I am not sure candidly I believe they canceled some contracts, so if you could – or not canceled, but kind of changed their view on the centralized mailbox system. If you could without citing specifics kind of highlight if that changes your view on how the cluster mailbox market might grow or if you just see it as lumpy? If you could add some comfort there that would be my first question, because you guys obviously have lot more visibility on that, but it obviously impacted you in FY ‘16?

Yes. I think as we have said in the past, we see the centralized mail will continue to grow with new housing starts on both sides of the border. The lion’s share of new developments get centralized mail. So, that’s the underlying part of the transformation that year-over-year that’s a growing market and expanding market and because we hold a large share position, we do quite well there. The one-time contract, 2-year contract that we had is falls in that element of governments looking at existing home delivery and trying to transform it into a centralized mail solution to drive 50% of their losses out as first class mail declined to 20% year-over-year. That is as much a business decision on their part as probably a political decision. And as we have described it in the past, we see that transformation continuing throughout our lifetime. That’s something that has to happen. What’s probably going to happen in more of a stair-step type of manner and despite us having the benefit of one government’s transformation efforts, we still see a continuing improvement in that centralized mail piece year-over-year. And despite not having a similar level of business in 2016, we expect to make more money in 2016 in that segment than we did in 2015.

Okay. And then solar, it is a relatively new business to Gibraltar. There are different components of it, so rooftop, the ground-mounted array [ph] and then the larger utility market. Given that Nevada had changed some of their regulatory issues, there has been a lot of volatility. Could you talk – give us comfort a couple of elements around solar? For example, the visibility you have in terms of how backlog works for you. Just put some of the different context in of how Nevada’s actions might impact residential different than the 1 to 5 gigawatt market that you are in. And then talk about the prospects of perhaps internal initiatives in ‘17 offsetting ‘16’s growth rate given that the federal incentives, while extended now, ‘16 seems like it’s a higher year than ‘17, if you could just give us comfort around your visibility on those elements please?

Yes. Maybe I will just set some context and I will ask Ken to jump in as well. As you know, our solar racking business, we are number two in one of four segments, commercial ground-mount. And that represents pretty much the lion’s share of our business. So, as we move forward in that space, we look to expand our presence in some of the other three areas, whether it would be residential rooftop, whether it would be commercial rooftop or some of the large tracker sites that are probably the most affected by the expansion of the federal tax credit where we found it probably would have dropped 65% to 75%. For us, it would have affected us year-over-year from ‘16 to ‘17, maybe 15% in market activity and similar rates in residential. So a lot of the press, the people read is generally attached to the residential space where you have little exposure today. But at the same time, we still see that as a growing market. So, regulatory changes in various states, today don’t affect our year-over-year strategies or performance as it relates to our core business, the commercial ground-mount today. Ken, you may want to jump in and have that – spend that into how that affects our backlog going forward?

What it does and RBI does have increased backlog. As we entered 2016, converted we were at any point during 2015 and that generally reflects about three months to four months of revenue, Ken. So we still need to book a lot of orders and deliver those in 2016 to achieve a revenue element of what our guidance includes for RBI. Specifically to Nevada, where a state net credits were adjusted downward, RBI had very little revenue derived from that state during 2015 with most of the actions are in that state related to an effective residential installations, which is at least domestically not a strong element of RBI’s U.S. derived revenues. So right now, we still continue to think that it’s going to be a very good year for 2016 and certainly as you cited the extension of investment tax credits for – meaningfully for another 5 years, bodes well for periods beyond this year.

Thank you. And if I could ask one more gentlemen, it’s kind of a follow-up on the solar, since you said Nevada was a small portion, is there a way you can give us a sense if you have, if you re perhaps over indexed to certain areas like, let’s say California if that’s, can you give us maybe just some sense of where the sales are. A, talking about backlog, Ken I think it’s very useful for solar, so I suggest them how if you guys can kind of repeat that, that might help us on some concerns that are out there. And then for metal, since it’s such an important piece, have you guys been balancing the deflation in steel and how much has it been helping you? Thank you, guys.

Well, on the regional concentrations for solar installations, certainly are weighted to California. It’s being the top U.S. state where there is promotion and high degree of acceptance and high number of installations. Once moving off of California, the Southwestern states in the U.S. are a strong state markets for RBI as well as selected states in the East of Northeast. And then we also have international markets where our largest one is over in Asia-Pacific were in selections of RBI’s ground-mounted arrays. I forgot the other aspects of your question, Ken.

I am sorry. It just was the metal benefit?

Well, certainly it’s benefited virtually every – each one of our segments as lower costs have come down. And it’s gone into kind of corresponding values that we undertake with our key customers. So we have many of our businesses adjusted pricing to take into account the benefits we are having with lower raw material costs. So that we don’t enjoy it, we are not keeping all of that our self, because we try to maintain and improve the value offering that we have on our customers.

Good, gentlemen.

Thank you. Our next question comes from the line of Dan Moore with CJS Securities. Please proceed with your question.

Good morning.

Good morning, Dan.

Maybe Ken and Frank, switch gears to industrial, when we lapped the most significant impact of the declines in energy on top line growth and when might we would expect to begin the top line to grow again in that segment by H2 or is it a little too early to tell?

That’s a good question.

I think our general sense, Dan, at this point is based on what we see in our related businesses that we are bouncing around the bottom now in terms of market activity and depending on the projects that are out there in process and relative to our backlog, that’s kind of a fixed number as an opportunity now. Now, it becomes a question of how aggressive our people become relative to some of the cost management programs they have been working on through the 80/20 process and how they want to leverage those benefits in terms of growing share. So, I think, to some degree, it’s within our control. And from a planning process, I guess, our taking is let’s not count on the tailwind in the early days of 2016 and kind of work within the context of its kind of a flat market running along the bottom. Ken, you want to add something?

Just supplementally that we probably have our strongest unfavorable comparisons here in the first half of 2016.

Very helpful. And maybe just switch gears for one more, forgive the baseball analogy, but you have had really material improvements in margins and ROI returns given the 80/20. Maybe talk about what innings we are in with regard to the overall impact on the core legacy businesses of the 80/20 improvements? Did you – have we gotten sort of 2 years of benefit already, where are we in that continuum? Appreciate it.

Yes, I think we are obviously feeling pretty good about the progress the team is making. The level of engagement and the quality of work that’s being done and how quickly it’s translating into some real benefits, not just from a financial improvement, but just the lens that people are now looking through as they make decisions about how to lead their businesses going forward, markets to pursue and how to approach customer relationship and so on and so forth. And then that translates into our back-end cost. I think we are both – we are in about the third inning, fourth inning. I think we are a little bit ahead of the curve in terms of our 5-year target. Certainly, on the income statement, I think with a surprising progress in the fourth quarter on the balance sheet that was meaningful. And we see similar types of proportional progress I think in 2016 as we head into our senior leadership meeting in late February and where we will have our top 75 people, 80 people there working our way through the next phases from a training perspective. And then I think we have an enthusiastic group. So, we see this as continuing. We are not done yet.

Thank you.

Thank you. Our next question comes from the line of Michael Conti with Sidoti & Company. Please proceed with your question.

Hey, good morning.

Hey, Michael. How are you doing?

Good, good. I guess just a couple of questions in regards to the RBI solar. Did we, I guess, see perhaps a pull forward effect in case the ITC is going to get extended, I mean, what exactly played a role in the 15% increase on year-over-year sale?

Is it 2015 to 2014?

In the fourth quarter, yes.

Fourth quarter. We just continued strong demand domestically certainly, but also internationally for developers and contractors who want to complete projects in the calendar year. So, there was one extra request upon RBI’s workforce to make sure that we have got materials delivered and installations completed for the greatest extent possible.

Yes. And Michael, what I would add to that is, is an addition to the market, the rising tide of the market and the demand. I think the other thing is that we hold a solid number two position in commercial ground mount with a very unique value proposition where we design, we engineer, we manufacture, we install and we kind of standalone in terms of that complete value proposition. So when people are looking for a complete project management team, RBI is the natural choice. And they have got a strong reputation of delivering on budget and on plan through all elements of that value proposition, whereas some of the competitors in the marketplace have to work with various other third parties to deliver the same results. So I would argue that in addition to the market activity, we are growing share.

Okay. And is that typical to see, I guess influx of orders in the fourth quarter before year end?

I think we are skewed to the back end.

I think – well, specifically there are seasonally highest periods than June through the end of November. So that certainly encompasses two months of the fourth quarter, but they also had a strong Q4 2015 compared to its prior periods as well. So maybe it’s just the nature of what customers do want to complete projects before a calendar year closes out.

Okay. And the margins on RBI, pretty solid, but are there any opportunities for the 80/20 within RBI solar?

Yes. I mean as we looked at this business, we looked at all of them. One of the aspects in our acquisition filter is whether or not we see opportunities to improve it from the margins through the 80/20 process. And we certainly identified opportunities in terms of make versus buy decisions, operational excellence as it’s related to sourcing of raw materials and freight management, but also that 80/20 simplification process. And we just acquired them in 2015. And as you can see the top line that they are growing like crazy and we have been getting some pretty good flow through. We just initiated the beginning of the training process for my understanding I think we trained 40 people in the early part of this year. And we will follow-up with another group late February. So we have not – we have started to see some of the benefits in the obvious areas of raw material and make versus buy decision by investing some capital equipment, bring some business inside and also freight management. But the 80/20 process we are just about to start. And the feedback I got, we had a lot of positive comments around from the 40 people who are involved in that training in terms of opportunities going forward.

Okay, sure. And then with the contract termination on the resi side, can you give us an idea what’s in the pipeline maybe replenish that gap, I mean what’s the typical lag time between negotiation process and then going back and really hit your statement?

Well, I have said a few variables, including the drive within postal authorities to particularly convert existing door-to-door to centralize and how that changes within their operating regions over time can vary. So one region here in North America undertook a conservative effort for an initial 2-year period, which we are fortunate enough to be able to secure that contract and complete it here at the end of December 2015. When those resume, and to what degree, remains part of the choppiness, lumpiness of how we think growth will continue to be in this – that particular vertical.

Okay, great. Thank you.

Thank you.

Thank you.

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

Good morning guys.

Good morning Al.

I wanted to try and maybe focus on the residential side. I guess I am struggling on the 3% growth where at least from the guidance, which you provided top line considering that 15% decline on the postal side, what’s driving that, is that price, is it some new wins? Help us appreciate that 3%.

Well, the 3% is made up of the three segments. We are having different comparisons to 2015. So, in the case of residential, with this completion of a key contract last year, that particular residential segment, we do think it’s revenues are going to be 15% unfavorable compared to last year. And the second in the three segments, the industrial infrastructure, we are expecting somewhere to be equivalent and maybe up small single-digits compared to 2015. And then on our third and newest segment, which is the renewable energy including RBI, we are going to have 12 months of revenue in 2016 compared to only having 6.5 months of its revenues in 2015. So, getting to that plus 3%, which is net of all three elements combined. The residential decrease is being slightly offset by what we are going to be getting from essentially the RBI segment, Renewable Energy segment, which is both kind of the incremental 5.5 months of revenues that we did not enjoy in 2015, but overall, calendar 2016 for RBI is going to be up probably above 10% compared with 12 months of 2015 revenues.

Sorry if I may have been not very articulate in my question. But if I look at residential and I extract the contract loss or the completion, let me rephrase that, is the residential business showing some growth? And if that growth is coming from price or is it more volume based on some of those 80/20 refocused on higher potential market growth opportunity?

We do have single-digit improvements that are coming from a combination of volume and mix in 2016 that partially offset the impact of the completion of that one contract, which nets us out to about a 15% overall revenue decline on that segment, ‘16 to ‘15. And if I still haven’t answered your question, Al, I am not sure I understood it again even on the second time you asked it.

I can follow up on that, not a problem. Switching gears to 80/20 and Frank, I don’t know to what extent you are able to help us through. And I know you have a big meeting coming up at the end of the month in the early March. But as you take a step back, the P&L is showing the progress on the margin, which is good. It sounds like there is very good momentum through ‘16. But from a product SKU perspective, what have you – where are you out in terms of the process of determining and having customer conversations about products that maybe you don’t want to keep in-house or you will be reducing the footprint such that when we look forward we can see what the organic growth of the business really is?

Yes. I think that we have worked our way through the 80/20 process in a way that – just to give you some high level numbers. In 2014, we would have had close to 30,000 part numbers. We have reduced upwards of north of 7,000 part numbers. And if you look at customers – and this is Gibraltar – across the Gibraltar portfolio, excluding RBI, alright. If you look at it from a customer perspective, we would have been – we probably reduced customers in terms of the 20 in the area of about 1,700. This is a legacy portfolio of businesses that really hasn’t kind of had a 80/20 viewpoint in the last decade and a half. So its culture has been kind of all things to all people and supported by we are going to make it all, so a lot of low-hanging fruit. And I will be honest, a lot of customers that as our people started to work through this and the related inventory and fixed assets attached to it, most of those part numbers weren’t very important to any of our A customers or even our B customers. So I mean there has not been a lot of difficult conversations in actual fact, I think as we have gone back to our customers with some of our action plans, which we always do, we just don’t do it autocratically, I think the lion share of those conversations are quite positive because we have got very sophisticated customers and understand that the complexity has been pertinent sort of our ability to service in a consistent manner in terms of price service and quality. And they are seeing refined pricing. From a partnership perspective, they are seeing service levels that are improving dramatically in the building products space on A customers with A products. We have gone from mid-60s to high-90s. And it’s allowing those customers to consolidate and partner with people like ourselves instead of having three and four different types of suppliers, which creates a lot of work for them, duplicate inventory and less sustainable kind of service to the end contractor. So I think our customers see this as a tremendous improvement in terms of Gibraltar’s past 12 months and are looking forward to seeing it refined a little bit more in 2016. So it’s been a good new story, I think, right across the board.

Alright. My final question, if I may. Thank you for the color. What – you have had some balance sheet improvement, we have talked in the past about the importance of cash flow. How much more benefit do we have either on the working capital side, I know you have given the guidance and the 6% growth, I think or free cash flow as a percentage of net sales about 6%, but how much do we have on the working capital side still in your back pocket to come out in ‘16?

Well, we are not expecting the same degree, although we are hoping that the 80/20 and further simplification will bring further reductions of working capital in 2016. At this point, we are not – we are not sure what that hole in that was, but there is more, but I would like to say that our net working capital days for 2015 went down six days compared to where we were in 2014. We are now down at 57 days of working capital, that includes most of that reduction was in inventory, although we did reduce our DSO or receivables. So we are in really good territory of 57 days of net working capital investment.

Yes. And I will – maybe I will just relate back to where we are inning wise. I said we are in the third inning or fourth inning and certainly the progress we have made in the income statement is better than we expected and we expect to see that continue through 2016, especially as we bring on the second tier businesses that we couldn’t get to in 2015 and also bring on RBI, which is a material opportunity for us. The later inning stop, to be quite honest that I think we made some nice progress, you heard Ken on days working capital and a big part of that is there are some early deems in that $20 million drop in inventories driving that. But we are really just getting started on the balance sheet in terms of working on reconfiguring the back end of our businesses in terms of manufacturing and supporting the A products for our A customers and looking at alternative service approaches for the balance of those products. So structurally, we are just going to start working on that in ‘16 and to be quite honest, my experience is on the balance sheet, that’s where the money is. So in the context of the balance sheet, I would say we are just coming out of the first inning at this stage.

Great. Thanks a lot.

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Hi, thanks. Good morning, guys. Congratulations, guys, especially you Frank, good first year.

Well, thanks, Walter. Appreciate it.

I wanted to ask about the kind of a follow-on to the last one with the PLS. And in the 2016 guidance, how much product line simplification did you factor in as kind of a negative impact on the top line growth?

I would say – I would answer that as not very much, because we are, as Frank earlier cited, we are seeing with the improvements in on-time deliveries, complete orders on-time performance, improving substantially to key customers that we are actually seeing a really nice impact that people want to buy more from us even though on lower volume products, we are finding other ways to deal with those. It would affect the top line. So, I would say very little.

Yes. Just to support that, Walter, I mean, remember, a year ago, there is just a couple of people in this organization who had really any experience in the 80/20 simplification process and we kind of build the team both internally and externally and then ultimately bring a group of people together to start a training process in late February, had that translate into, hopefully, a level of engagement and then go out in the fields and start to work through in developed areas, works [ph] being teams and project. I would say, we didn’t expect to get any real projects that would materially move the needle until late third quarter. To be quite honest, we got them earlier and we have got more meaningful ones earlier. And the level of engagement and the work that had been done was a lot more meaningful. So instead of getting the $5 million, we came in around $11.2 million in terms of benefit. And so with that in mind, we really didn’t believe that there would be much top line impact in 2015. And I think I would concur with Ken’s comment, in a couple of areas where we made some real progress quickly, the response from our A customers and their ability to consolidate purchases back to us that maybe historically, we didn’t benefit from really. In actual fact, those business grew on the top line despite the work. So, I think we kind of netted out in 2015.

Okay. Alright, good. Then kind of looking at your Slide 9 and thinking about the portfolio management. I was thinking that it was – that you are referring here to kind of PLS and allocation of capital, but if you are not losing revenue because of PLS, are you thinking about divestitures? And I guess more specifically, are there some businesses that are not earning their cost of capital where it’s kind of just to exit and is that part of the plan for this year?

Well, what’s really been nice at the moment beginning in 2015 and continuing this year, is every one of our businesses are improving their profitability and quality of earnings. And as we think about whether any assets are more or less strategic, we are trying to improve before reaching final conclusion. We are trying to get our values up before considering other alternatives. And so at this point, we are really looking forward to continued momentum into 2016 and improving the values of what we have got.

Okay, that sounds good. It’s another follow on to someone’s question on RBI, the revenue look great during the quarter, but when you look at the incremental margin, it looks like it leverages about 10%. And it sounds like you are still early stages with implementing the 80/20 strategy there. Ultimately, where do you think margins go in the RBI business and what kind of operating leverage we have?

I think just as a general comment and I will let Ken add some color. Whenever we look at an acquisition, our target within our acquisition filters look for a potential of 3 points to 5 points of margin improvement over the 3 years of ownership – future ownership, RBI falls within that range.

I would agree with that.

Okay, great. And then maybe just as the last one. The weather conditions, I think for construction, both resi and commercial were pretty decent during the fourth quarter, I wonder if we have more mild winter this year, it had much of an impact on any parts of your businesses?

I don’t think – it certainly may have been favorable in certain parts of the country here in the U.S., Walter. And I think on our consolidated top line quarter-to-quarter, I think it’s relatively modest. It was warmer by 10 degrees for a longer period of time than previous periods.

Yes. I think it goes to kind of the diversity of the portfolio to some degree. Some of the businesses actually do quite well in harsher weather. And we prefer that whereas the business, some of the larger scale businesses in another vertical allow them to extend the season and do more installations, for example, in the solar racking side versus residential roofing and rain management products. So, at the end of the day, I think it balances out in our portfolio whether it’s good, bad or indifferent.

Okay, fair enough. I will get back in queue. Thanks.

Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Yilma Abebe with JPMorgan. Please proceed with your question.

Thank you. Good morning. My question is in the context of acquisitions, can you remind us the company’s financial policy with regards to balance sheet leverage?

We currently have – let me start where we ended in 2015. At least, in my view, relatively low, easily managed leverage of essentially gross leverage of around 2x. And I think as we look forward to deploying new capital, particularly to accelerate growth via acquisitions into the 3s, mid-3s, even high-3s, I think it will be easily managed by us. Also premised on due diligence, we would know ways to identify ways pre any closings of how we would benefit from cash flows after closing to bring our leverages back down. So I would characterize that would be the range of what we currently think about new capital being put to use and in fact un-levered.

Thanks very much. That’s all I had.

Thank you. Our next question comes from the line of Dan Moore with CJS Securities. Please proceed with your question.

Thank you. Again, along those same lines, Frank you mentioned in your remarks that you did expect to close the deal or deals in 2016, has the pipeline or activity increased materially over the last few months, do you see more opportunities and anything you might share in terms of which segment of your acquisition target things might be bubbling up a little bit more?

Dan, a good question, I mean a big part of our transformation is continuing to try to make thoughtful acquisitions like we have with RBI and certainly as we enter new spaces, we would like to reinforce the space that we enter. So certainly, we continue to look and consider different opportunities in that space. While at the same time, our corporate development team is looking at our current spaces as well in partnership with each vertical’s president. We probably proactively, over the course of 2015 looked at somewhere north of 11 or 12 potential targets and all the way down to level of management meeting. And the nice thing about our position is we only have to buy one or two to move the needle, so to speak, not just in terms of our financial progress, but also balancing the right type of portfolio that will allow us to provide sustainable value to our shareholders. So, we are trying to be thoughtful about it and we are pretty confident that as we move through 2016 at the right opportunity as we look, like in ‘15 through ‘10 or ‘12, we will come across the right one. And the pipeline is improving as our people are kind of getting their feet under them being a little bit more proactive prospecting versus reacting to maybe incoming stems through the corporate offer.

Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Clark [indiscernible]. Please proceed with your question.

Yes, hi. Can you tell us what your tax rate you have assumed in your guidance is?

I have assumed 38% effective tax rate.

Okay. And for cash taxes?

Approximately the same.

Same. Okay, thanks. Are there any remaining cash restructuring costs that will be paid out in ‘16?

That we have accrued at the end of 2015?

Yes.

Yes, some. But I would also complete my answer by saying that as we go through 2016 I am anticipating that there will be additional projects that are going to be coming forth from our project teams in the various businesses and additional actions to take. And during 2015 or 2016 rather, I would expect that we are going to continue to have restructuring charges that will overall improve our longer term margins. And the amount of that restructuring could rival what we incurred in 2015, which is I think $8 million or $9 million.

Okay, thank you.

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Just as a follow-up on the RBI, Ken, the 188.5 million of reps debt that you guys reported for this year, what was the annualized number, if you include that extra 5.5 months? What’s the base run rate as we start this year?

Well, the 12 months December 2015 revenues for RBI was about $270 million.

$270 million.

$270 million.

$270 million. Okay, good. And the mail contract, what was the annualized number there that’s rolling off?

I think we have got enough VGE [ph] pieces into our guidance that you are getting determined that impact. Given specific contracts, we are not going to disclose that detail.

Okay, fair enough. And given your view on the market, I would imagine that there is not another requisition out there from the customer or is there?

We are – we are pursuing all commercial opportunities in each of our verticals, Walter.

Okay. Okay, fair enough. Thanks.

Thank you. At this time, we have reached the end of the Q&A session. I would now like to turn the conference call back to Mr. Heard for any closing comments or additional remarks.

Thanks, operator and thank you everyone for joining us today. We expect – we look forward to speaking with you on Friday, May 6, where we expect to report our first quarter results. Thank you again and this concludes our call.