Gibraltar Industries, Inc. (NASDAQ:ROCK) Q3 2023 Earnings Call Transcript

Gibraltar Industries, Inc. (NASDAQ:ROCK) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Greetings. And welcome to the Gibraltar Industries Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyn Capaccio of LHA. Thank you. You may begin.

Carolyn Capaccio: Thanks, Christine. Good morning, everyone, and thank you for joining us today. With me on the call is Bill Bosway, Gibraltar Industries’ Chairman, President and Chief Executive Officer; and Tim Murphy, Gibraltar’s Chief Financial Officer. The press release that was issued this morning, as well as a slide presentation that management will use during the call are both available in the Investors section of the company’s website gibraltar1.com. Gibraltar’s earnings press release and remarks contain non-GAAP financial measures, tables of reconciliation of GAAP to adjusted financial measures can be found in the earnings press release that was issued today. Also, as noted on slide two of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future results.

These statements are not guarantees of future performance and 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. Now, I will turn the call over to Bill Bosway. Bill?

Bill Bosway: Thanks, Carolyn. Good morning, everyone, and thank you for joining today’s call. We will start with an overview of the third quarter results and Tim is going to take you through our financial performance and then I will walk you through our updated 2023 outlook. Then we will open the call for your questions. So let’s start by turning to slide three, titled the third quarter results, third quarter 2023 results, sorry. Our focus on driving quality of earnings in 2023 continues to pay-off in our delivery of higher profitability and strong cash flow duration. We executed well in the quarter, continuing our momentum from the first half of the year. We continue to experience solid end-market demand. We also expanded our market participation, particularly across our Residential and Infrastructure businesses.

In both our Renewables and AgTech businesses, we did experience some delays in start dates of contracted in active projects and those projects has since begun or shifted to either the fourth quarter or into early 2024. As well during the quarter, on an adjusted basis, we increased operating income 19%, EPS 23% and free cash flow increased to 23% of net sales. We continue to accelerate our 80/20 initiatives across product lines and operations and also optimize our supply chain management with market price actions. Our improvement in operating margin and working capital continue to drive solid cash generation performance. In all, our results [Technical Difficulty] we expect our momentum to continue in the fourth quarter and support strong full year performance in 2023.

As a result, we are changing our guidance for 2023. We are narrowing our net sales outlook and raising our outlook for both profitability and EPS, which we will review shortly. Now let’s turn to slide four for an update on the solar market. Our demand pipeline in Renewables is very active and bookings continue to grow as the industry continues to navigate through three basic issues, module supply, permitting delays and clarity on the final rules governing IRA tax benefits. First let’s start with module supply. It is improving as additional module suppliers are having more consistent success importing through the UFLPA process and this is encouraging, and yet we need to see additional progress as we close out 2023 and move into 2024. Also related to module supply, the Department of Commerce issued its final ruling in August on its AD/CVD investigation.

The DOC final report indicated three of the eight module suppliers were found not to be circumventing and as a result are able to export to the U.S. without duty. The report also confirmed that module suppliers using non-China wafer supply are also not subject to duty. The DOC also implemented the administration’s tariff waiver, which is in effect until early 2024 and maybe reevaluated at that time, because of the administration’s waiver, the DOC investigation results, a little less concerning relative to the UFLPA importation process. Secondly, delays in obtaining permits for projects remains an issue. Although, customer supply and permitting a challenge in the near-term, we are confident this situation will continue to improve as local government agencies ramp capacity to improve the approval process for us permit applications.

And finally, customers are anxiously awaiting final guidelines from the Department of Treasury on how to secure additional tax incentives under Inflation Reduction — under the Inflation Reduction Act. Tax credits directly affect project economics and returns and we are seeing some customers with projects in process pause and/or defer additional projects until they had a clear understanding of how to realize incremental tax benefits. We expect the industry to work through these challenges and as AEs will improve our customers will be in a better position to execute current demand and really properly plan to support robust demand pipeline as expected going forward. With that, I will turn it over to Tim for a review of our results.

Tim Murphy: Thanks, Bill and good morning, everyone. I will take you through our consolidated and segment results starting on slide five. Adjusted third quarter sales were flat at $390 million, timing shifts of the active projects in Renewables and AgTech business, as well as price management initiatives in the Residential business were positively offset by revenue from recent acquisitions and market participation gains across the business. Backlog at quarter end was $375 million, up approximately 5% versus the third quarter of 2022. Demand and order flow remained strong heading into the fourth quarter. Adjusted operating income and adjusted EBITDA dollars increased 19% and 18%, respectively, in the third quarter with adjusted EPS up 23%.

Margin improvement in the quarter was driven by solid execution, additional 80/20 initiatives, productivity and price cost management. Weighted average shares outstanding decreased 3.4% from the third quarter of 2022 to 30.7 million shares in the third quarter of 2023 and there were no share repurchases in the quarter. Now let’s review each segment starting with slide six, the Renewables segment. Segment net sales decreased 4.2% as customers start dates of contracting and active projects were impacted by delays in both global permitting and final Inflation Reduction Act Tax credit guidelines. The rate of decline is slowing compared to prior quarters as module availability continues to improve as the module importers climb up the UFLPA enforcement learning curve.

Bookings of new orders remain robust with year-over-year backlog growing 13.3%. And as Bill mentioned, some customers are waiting to sign contracts until Department of Treasury issues IRA tax credit guidance and our pipeline remains really strong. As a reminder, our backlog consists only of signed contracts with deposits. We do not include purchase orders without a signed contract and deposit, MSAs without specific work orders or verbal agreements with customers in our new bookings and backlog. Segment profitability again improved with adjusted operating and EBITDA margins of 16.7% and 18.9%, respectively, increasing 380 basis points and 390 basis points from last year. Our team executed well with supply chain productivity field operations efficiency and solid price cost management.

Assuming industry dynamics remain constant with improving module importation and continued delays in local permitting, we expect relatively flat sales in the fourth quarter with net sales in the second half accelerating from the first half. Let’s move to slide seven to review our Residential segment. Segment sales increased 5.6% from last year and recent acquisitions added 8.8% growth and organic sales decreased 3.2%, driven by prior quarter price adjustments in response to decreasing commodity prices and 80/20 initiatives we took to phase out less attractive product lines. Volumes built according to normal seasonality in the third quarter and we benefited from increased participation with new and existing customers, and from having expanded into new regions.

Both of our recent acquisitions are performing to our expectations. Demand remains at normal levels in the fourth quarter with the expectation of normal seasonal inventory reductions at our customers and we expect to continue to grow participation. Adjusted operating and EBITDA margin of 18.8% and 22%, respectively, expanded 200 basis points and 220 basis points through increased volume, improved price cost alignment, implementation of additional 80/20 initiatives and favorable product line mix. Quality Aluminum Products margin performance continues to improve towards Gibraltar levels as the integration continues. We expect continued year-over-year margin improvement in the fourth quarter through improved price management, increasing participation gains mix and the contribution of the two acquisitions we made over the past year.

Let’s move to slide eight to review our AgTech segment. Adjusted net sales decreased 26% as new product construction starts were delayed in the quarter. We began a large project which continued to drive improving results beginning in September. Orders continued to accelerate in the quarter driving backlog of 9.4% sequentially. On a year-over-year basis, backlog decreased as a few customers worked through project redesigns. We expect increasing activity to drive revenue acceleration in the fourth quarter. Segment adjusted operating and EBITDA margins of 5.6% and 8.1%, respectively, decreased 510 basis points and 540 basis points on lower volume as the timing of net sales shifted into the fourth quarter from the third quarter. Margins improved in September with project starts and are continuing into the fourth quarter and we expect volumes from new project execution underway to drive improved results in the fourth quarter.

Let’s move to slide nine to review our Infrastructure segment. Segment sales increased 22.5% driven by solid end-market demand and market participation gains. Backlog increased 6.2% year-over-year. Market activity remained strong, including from commercial customers and airports, and the Infrastructure Bill continues to provide strong tailwinds. Our momentum continues into the fourth quarter and we expect to leverage these strong trends by increasing market participation through the remainder of the year. Segment adjusted operating income increased 146% and adjusted operating and EBITDA margins of 25.6% and 29.1%, respectively, improved 1,300 basis points and 1,230 basis points, driven by strong execution and price cost alignment, 80/20 initiatives, additional productivity investments, supply chain efficiency and product line mix.

The Infrastructure team continues to execute very well and we expect to report a strong year of growth and expanding profitability for this segment. Let’s move to slide 10 to discuss our balance sheet and cash flow. At September 30th, we had cash on hand of $86 million and $396 million available on our revolver. During the quarter, we generated $93 million of cash from operations through a combination of margin improvement and $43 million generated from reductions in working capital. We collected cash from accounts receivable and inventory reductions, and benefited from increases in accounts payable and other liabilities. Inventory is getting closer to normal levels as in-stock positions and supply from the balance. As a result, our frequent cash flow generation during the third quarter was again exceptionally strong at 23% of sales.

Free cash flow in the nine months of the year benefited from approximately $84 million of reduction in investment in working capital, reversing the prior two years impact from the increased working capital investments we managed through the pandemic era supply chain challenges. We expect strong cash flow for the remainder of the year. There were no share repurchases in the quarter and we paid down the outstanding balance on our revolver, therefore, we ended the quarter with an unlevered balance sheet. We will continue to focus on — we will continue to focus our capital allocation on organic growth, selective high quality M&A and opportunistically returning value to shareholders through our share repurchase program, and these investments will be funded through generated cash and supplemented as needed by use of our revolver, depending on the timing of any M&A or repurchases.

Now, I will turn the call back to Bill.

Bill Bosway: Thanks, Tim. Let’s move to slide 11 to review our 2023 strategy and priorities. Our focus on five basic initiatives is driving solid performance and will continue to do so as we finish 2203; first, focused on driving growth, quality of earnings and margin improvement and strong cash performance; secondly, continue to execute 80/20 initiatives and win more participation and drive service levels higher; third, stay the course with investments in our digital transformation to help scale our businesses with both speed and agility; fourth, strengthen our organization with the addition of experience and competency and a structure that drives more focused scalability and accountability; and fifth, conduct business in the right responsible way every day.

Now let’s turn to slide 12 and review our revised 2023 guidance. Given our results to-date, momentum heading into the fourth quarter, we are adjusting our guidance as follows. We are narrowing our consolidated net sales range to between $1.37 billion and $1.4 billion, compared to $1.38 billion in 2022; we expect GAAP operating margin to be between 11.2% and 11.4%, compared to 9.4% in 2022; and adjusted operating margin to be between 12.6% and 12.7%, compared to 10.9% in 2022. We expect GAAP EPS to be between $3.51 and $3.71, compared to $2.56 in 2022 and adjusted EPS to be between $4.05 and $4.15, compared to $3.40 in 2022. And finally, we expect free cash flow to exceed 14% of sales for the year. This compares to 6% in 2022, driven by higher margins and working capital performance.

We expect to execute well in the fourth quarter and are relatively well-positioned going into 2024. Our team continues to execute and remain focused, and is really excited for what we do and how we do it and they deserve all the credit for our results. And the team is also very proud we are able to raise our profitability EPS guidance for the second time this year. So a big thank you to our team. We look forward to delivering a strong finish to a good year. Now let’s open the call and we will take your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Dan Moore with CJS Securities. Please proceed with your question.

Dan Moore: Thank you. Good morning, Bill. Good morning, Tim, and congrats on another really solid quarter. Maybe start with Resi, as we kind of look beyond Q4, are you seeing any change in tone in the overall market up or down? And second, your performance and participation gains, obviously, very impressive year-to-date. How do we think about that going forward, does it create tough comps or conversely is that momentum you have created kind of easier to continue to drive participation and share gains? Thanks.

Bill Bosway: Yeah. So, Dan, we haven’t really seen a major shift. As you know, we have talked in the past the — we get visibility for the out sales from our big box retailers in particular. And I think we continue to see the growth that we have been seeing all year. It’s everything adjusted obviously for the seasonality and it’s back in the marketplace. So I — we feel like there’s a relatively solid continuation of what we have been seeing going forward and as it relates to participation, that’s a combination of working with existing customers, and again, a little bit bigger piece of the pie and some things that we are in today. It’s also the other big push there is picking up new customers that we traditionally haven’t had as much with and I think we are hitting both of those pretty well and I think that will carry us into 2024 with some decent momentum.

So like I said, we are on solid footing I think entering the year and we are in the middle of putting our plans together as we speak. In fact, we will meet the teams all next week to get our first really hard look at 2024, but from a Residential perspective, we feel pretty solid about going into next year.

Dan Moore: And a similar question and maybe a little bit more focus on the margin on AgTech. Maybe talk about Tim, the opportunities you have and the cadence for continuing to improve margins as we look out and maybe kind of your expectations in terms of timeframe getting back to those more low double-digit, low-teens margins that we have seen previously?

Tim Murphy: Yeah. So we had a project that we thought was going to start pretty much at the beginning of the second quarter and it got delayed a few months and so — I am sorry, beginning of the third quarter. And so it got delayed and started up in September, running as expected. So we know headed into the fourth quarter we have got more normalized volume and so you should see margins begin to recover there. And then there’s a lot of stuff in the pipeline that we are pretty excited about, not in hand yet though. So hard to say when, we will know more over the course of the next few months, get ready for our plans there. But then our plan, we don’t really have fourth quarter next year in front of us. But in general, our expectation is always, grow topline and expand margins, that would be my expectation for each of the business every year.

Dan Moore: Helpful. And given that obviously strong free cash flow and liquidity position, maybe just talk about your priorities for capital allocation over the next several quarters, and specifically in this market, are you seeing more opportunities in the M&A funnel? Thanks again for the color.

Bill Bosway: Yeah. I think that maybe the M&A funnel will begin to open up a little bit more. Although, we made acquisitions, we made two in the last sort of 14 months from here. So — but I think, yeah, it’s active, we are always pretty active in that space and we are really selective. So there’s a combination of things that are available, things that makes sense for us, but I think we will continue to focus there. Certainly, when we can invest in safety or productivity internally. Although that’s not a huge use of capital. I don’t see any real change to that. And then the share repurchase program when appropriate we use there. I will also remind everyone, right, this year we are outperforming on free cash flow sort of making up and I have tried to be very clear that a part of it is making up for that big investment in working capital, we had to make in 2021 and 2022 as we dealt with that supply chain.

So I think we pulled — I think I said $84 million of our cash flow, which really owing the investment that we made in working capital out. But our margins much better than it was a year ago and so that’s going to obviously increase cash flow.

Dan Moore: Very good. Thank you again. I will jump back with any follow-ups.

Operator: [Operator Instructions] Our next question comes from the line of Walt Liptak with Seaport Global. Please proceed with your question.

Walt Liptak: Hey. Good morning, guys. Good quarter. I wanted to ask of the Renewables segment. You called out a number of different issues. I wonder if you could do those in rank order. And if any of them got worse or if they — if they’ are all getting better. Just how things changed during the quarter, like the permitting delays, you guys talked about that last quarter, I don’t know how long that takes or how long we will be talking about that as an issue. But I wonder if you can go through in rank, and then if things get better or worse?

Bill Bosway: Yeah. Well, I’d say that, sorry, excuse me, the panel supply, the module supply is still a little bit of a challenge, but it’s getting better literally month-to-month. So we continue to see progress and we have seen that all year, and I think, if you think about our business, you don’t really sign contracts, if you will, if you have, if you don’t have the panel. So in fact, that our backlog continues to grow. I think customers are getting more confident, they can get their hands on panels and that’s just a function of the panel manufacturers having more consistent success getting things through the UFLPA process. So that’s getting better. Permitting, I think is holding with kind of where we said the last quarter.

It’s still an issue and it’s really down to the individual projects. So it’s hard to tell you [Technical Difficulty]. Some of those start to free up is, I think, put few of these government offices behind that. The 8 Ball trying to catch up and that’s what we hear from our customers and they are working it every day and it’s frustrating for them. So I’d say that’s probably similar to what we saw last quarter, but that’s probably the number one thing right now. The number one would be that. What’s crept into the equation is the third item, which is the IRA incremental tax benefits or the additional tax benefits that you can get from the IRA and that’s really Department of Treasury finalizing the rules. And so what’s really clear today is prior to the IRA you had a certain investment tax credit [Technical Difficulty] level you have to do a couple of things and that’s very clear.

That’s prevailing wage and apprenticeship program and people moving in that direction. So that allows you to maintain your tax credit. To get the incremental ones above that, that’s when you start getting into a couple of other things like local manufacturing, Made in America, et cetera. and we are — I think the industry is still waiting for the final rules and actually what that means and how to keep score and all that good stuff from treasury and that will give you the extra benefits on top [Technical Difficulty] And I thought treasury — I think treasury even thought we would be out sooner and that’s probably coming late this year or early in Q1 is the latest we have heard from the industry. So number one is permitting [Technical Difficulty] incremental tax credit opportunity just being delayed, and number three is a module supply.

That’s how I would rank them today.

Walt Liptak: Okay. Great. You broke up a little bit as we were talking about, I think, I got most of it. And so as we are thinking about that IRA and the final ruling, should we have an expectation that at some point maybe going into the spring construction season that this the IRA rulings are behind us and some of that benefit from the IRA showing up in terms of more orders and the industry…