Gibraltar Industries, Inc. (NASDAQ:ROCK) Q1 2024 Earnings Call Transcript May 1, 2024
Gibraltar Industries, Inc. beats earnings expectations. Reported EPS is $0.8, expectations were $0.76. ROCK isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Gibraltar Industries First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Carolyn Capaccio of LHA Investor Relations. You may begin.
Carolyn Capaccio: Thank you, operator. 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 earnings 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 to 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. Further, please note that adjusted results exclude the net sales and operating results of the Japan renewables business that was sold on December 1, 2023.
A PDF containing 2023 quarterly and annual consolidated and renewable segment results recast for the sale of the Japan business has been posted to the Investors section of the company’s website, gibraltar1.com. Also, as noted on Slide 2 of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future financial 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’ll turn the call over to Bill Bosway.
Bill?
Bill Bosway : Good morning, everyone, and thank you for joining today’s call. We’re going to do this a little differently this quarter. We’re going to start with an overview of the first quarter results, and then Tim and I are going to take you through our segments, giving you both a financial and operating update, along with a closer look at what’s happening now in each of the segments. Then I will walk through our 2024 outlook, and then we’ll open the call for questions. So let’s turn to Slide 3, our first quarter 2024 review. We had a good first quarter in line with our plan. And on an adjusted basis, net sales increased 1%. Operating income increased 4%, EBITDA increased 6% and EPS increased 13%, all while absorbing a $4 million or $0.10 per share headwind associated with performance-based compensation.
We also generated $53 million of operating cash flow through margin expansion and better working capital performance, which resulted in a free cash flow rate to sales of 17%. Overall demand was in line with plan, with net sales up 1% despite renewables being down 10% as planned going into the first quarter. Residential, Agtech and infrastructure businesses collectively generated 4% revenue growth, reflecting solid end market activity as well as additional participation gains. Total backlog for Gibraltar was impacted at quarter end by both Agtech and infrastructure businesses. The AgTech backlog was down 21% at quarter end, but this does not reflect the current strength of the business. We signed over $40 million of new orders in April, which were previously expected in the first quarter, and we will start these projects in Q2, and they will accelerate in Q3 and Q4.
And obviously, we’re very excited about our additional pipeline of projects as well. The infrastructure backlog was impacted by a significant year-over-year comparison, which was driven by a large project signed in late 2022 and started in early 2023. We expect infrastructure backlog to turn positive during the year as bookings in Q1 were up 18% versus Q4. Backlog was up 2.6% versus Q4 and the overall strength of design and quoting activity. So at quarter end, total backlog was down 3% versus last year, but we are confident backlog and sales will grow as planned in 2024. For the full year, our outlook remains positive and unchanged, and we continue to expect all four segments to deliver revenue and margin growth as well as strong cash flow performance.
Now let’s review the segments and Tim will take it from here.
Tim Murphy: Thanks, Bill, and good morning, everyone. Let’s start with renewables on Slide 4. As expected, segment net sales, which have been adjusted for the divestiture of our Japanese renewables business decreased 10.1%. The decrease in sales is the result of a delay of revenue as a number of customers started switching their technology preference in late 2023 from fixed tilt racking to our recently launched 1P TerraTrak tracker technology. This transition has created some iterative redesign work and additional time to rescope and finalize projects for customers and, therefore, pushed revenue into the second quarter and second half of the year. We’re excited to see the rapid uptake of our 1P tracker and we’re working diligently, with suppliers to ramp capacity sooner to support customer demand.
Backlog in the renewables business finished, up 8% at the end of the quarter and we continue to have an active pipeline of projects across our TerraTrak tracker fixed-tilt, canopy and eBos product lines. At the same time, customers continue to experience permitting delays and the industry is still waiting on final domestic content tax credit guidance from the Department of Treasury. Adjusted operating and EBITDA margins decreased 80 and 40 basis points respectively, versus the prior year as volumes in the quarter were lower because of the product line mix shift, associated with the ramp-up of the 1P tracker product line. We continue to expect momentum to build throughout the year, assuming continued improvement in permitting and relative timeliness in the Department of Treasury guidance on the ITC tax credit.
Bill?
Bill Bosway: Staying with renewable, let’s take a closer look at TerraSmart’s, TerraTrak technology on Slide 5. TerraSmart introduced our 2P tracker product in late 2021, and really to provide our C&I customers an additional technology option to meet growing demand, in existing as well as new parts of the country. Then in late 2023, we further expanded our tracker offering with the introduction of our TerraTrak 1P tracker product line And like our 2P technology, our IP can be applied to different foundations making it adaptable for use in any terrain. And it’s also controlled and managed through our peak yield operating system. Our peak yield, continuously manages yield and uptime and also boost energy production, with backtracking guided by machine learning and employees on-site smart weather stations and weather forecasting, and does all this in a very secure way.
Effectively the addition of the TerraTrak tracker platform provides customers, with a broader suite of options to ensure project performance and returns regardless of the terrain the topography, soil conditions, weather environment and other local variables. And to date, we have installed over 500 megawatts of tracker both 2P and 1P, with 18 C&I customers across 84 projects. While our average project size has been around between six and seven megawatts, we have larger projects in our backlog with the largest to date be 97 megawatts. In regards to the size of the project, we typically have the opportunity to provide turnkey design, engineering, manufacturing and field installation services for foundations, racking systems and eBos systems. On the left side of the slide are a couple of pictures, of what we refer to as a Solitude II project located in Lostant, Illinois.
This is a 3-megawatt community solar project where we installed our screw foundations, the 1P tracker and modules. More and more developers continue to view Illinois as a key growth market, given its consistent runway of new capacity blocks i.e. land and favorable incentives through the state’s primary incentive program called Illinois Shines and we look forward to doing many more projects in the state. Let’s turn to Slide 6, and I’ll give you an update on the overall solar market, and we’ll start with the status of the 10% domestic content tax credit. The industry continues to wait for final guidelines from the Department of Treasury. And given the additional 10%, can greatly influence project returns and financing obviously, the delay continues to cause customers to pause and or delay moving forward on some of their new projects.
The industry continues to expect guidelines to be finalized at any time. Jumping to permitting, customers continue to experience delays and we are working closely, with them to effectively improve planning and scheduling. So revenue recognition expectations are better matched, with project execution schedules. As well earlier this month, the Solar Energy Industry Association referred to as SEIA letter on behalf of 200 companies to the House and Senate leadership, asking Congress to step in and resolve challenges with permitting, siting, transmission and public land access for solar. I think the industry is very hopeful congressional leadership will respond and accelerate the necessary changes to resolve these core issues facing the industry.
There has been a new development in the US solar industry. There is a second antidumping countervailing duty complaint, that was filed on April 24. A new petition was filed with the US International Trade Commission and the US Department of Commerce, alleging potentially illegal trade practices by Cambodia, Malaysia, Thailand and Vietnam and asking them to apply new tariffs both antidumping and countervailing duties, to imported solar cells and modules from these countries. The language in the new petition excludes products covered by the China, AD/CVD orders in the actin [ph] case to avoid doubling tariffs on an import. The DOC now has 20 days from April 24 to decide whether to open an investigation. While this complaint is new, the industry has been anticipating it for some time, and in discussing the situation with customers many are much better prepared to manage their business in the event another investigation takes place.
For example, we have a number of customers who have established panel supplies outside of China and Southeast Asia. We’re going to continue to assess the situation. But as of now, we do not expect a new DSC investigation had a significant impact on industry in 2024. Let’s move on to residential.
Tim Murphy: Residential segment sales increased 3.1% from last year. Organic growth was 2.4% and our recent acquisition added 0.7%. Organic growth was driven by participation gains with new and existing customers and through additional geographic expansion in the Rocky Mountain region. Customer demand continues to follow historical seasonality and our most recent acquisitions are performing to our expectations. Adjusted operating EBITDA margins of 18.5% and 20.1% respectively, both expanded 200 basis points through solid execution, effective price/cost management versus last year’s quarter and leverage of higher volume. We’re on plan to move additional locations to our common ERP system this year and we expect to continue to leverage our investments made to date.
And we continue to expect modest revenue growth with continued improvement in margins this year as increasing market participation gains and recent acquisitions contributions to the top line along with continuing 80/20 and operating efficiencies drive profitability. Bill?
Bill Bosway: All right. Let’s switch to Slide 8. We have two important residential initiatives I want to share with you, expanding our market presence and the launch of two new product lines. And let’s start with expanding our market presence. From 2019 to 2020-2023, the residential business has grown over 15% per year with revenue increasing over $350 million to more than $800 million in 2023. Also during the same period operating margins increased 370 basis points. Our performance has been driven by 80/20 more consistent execution, better overall service and participation gains. And what’s most interesting is we accomplished this, despite only serving 40% of the top 32 markets in the US, which provides even more opportunity for expansion and growth going forward.
So in 2023, we continued our expansion initiatives by coming more local in the Denver market, where we are leveraging an existing Gibraltar facility and are now supporting wholesalers serving this market. As well, we acquired a company based in Salt Lake City serving wholesalers in this market and surrounding region. Both of these locations provide us with very flexible and cost-effective operations supporting the 80s of demand with a goal to serve customers within 24-hour lead times. We will continue to expand into the 32 major US markets and drive growth participation and higher margins accordingly. We’re also launching new products in the third quarter of 2024, which I referred to during our Q4 call. Our new shingle vent role which we have applied for design utility and process patents creates a simpler and more cost-effective installation process for contractors versus the 4-foot stake ventilation products traditionally used in roof ventilation.
We will also launch our next-generation patented mailbox, recently approved by the US Postal Service. This is the first of its kind to market. It is consumer assembled and the packaging for this product has been reduced by 60%, eliminating waste and helping optimize shelf space for our customers. And given the packaging footprint, freight cost for this mailbox will be lower by up to 50% versus standard factory assembled mailboxes. Let’s move on to Agtech.
Tim Murphy: If we move to Slide 9, Agtech’s adjusted net sales increased 2.1% and as mentioned new bookings accelerated significantly in April, with over $40 million of new projects signed. Have these projects been signed in Q1 as originally planned, quarter-end segment backlog would have increased over 30%. The increase in bookings was mainly driven by demand in produce projects but we also had some good order activity in our commercial business. We’ll start these new projects this quarter and then accelerate execution in the third and fourth quarters. We’re engaged in additional design-build contracts and expect bookings to increase further in the coming months. Segment margin was impacted as adjusted operating and EBITDA income decreased less than $1 million due to start delays of some higher-margin refurbishment service work and market mix across the business. We expect volume leverage on stronger sales growth as we move through 2024. Bill?
Bill Bosway: So let’s move to Slide 10. I’d like to provide some background on our Hi-Tech CEA business which stands for Controlled Environment Agriculture and why we are so enthusiastic about our position in this market and our future going forward. As mentioned in our last call, we are experiencing good demand momentum driven by accelerating investment for CEA growing capacity in both the US and Canada. CEA growers continue to expand capacity to meet retailer and consumer demand. And we also see outdoor growers moving additional production indoor environments. Our growers are mostly focused on growing high-quality fruits and vegetables, localizing the supply chain for end consumers, minimizing the potential impact of disruptive climate-related events on production and doing this in a much smaller and efficient footprint versus outdoor farming.
For example, shown here is Boombery Farms, which is quickly becoming the largest high-tech strawberry farm in North America. And with our customer we have completed four phases of design and construction covering 80 acres of strawberry growing production. We’re currently building an additional 40 acres and with the final 55-acre phase planned for 2025 and 2026, a total of 175 acres will be producing £100000 per acre or £17.5 million of strawberries per year by 2026. If you think about what we do in this market, we are the leading turnkey provider in North America of large-scale controlled environment growing facilities, commercial greenhouses and cultivation structures. We oversee every aspect of structure and systems design and engineering.
We manufacture structures and systems. We integrate systems, both manufactured and sourced and we construct and install the entire facility. Our strength is based in our organization. We have significant growing experience and expertise and strong domain knowledge in design, engineering, manufacturing, integration and construction management. But our current demand momentum, as well as our design activity across a broadened customer base, we expect to deliver both revenue margin growth in 2024. Now for our infrastructure business.
Tim Murphy: Let’s move to Slide 11. The Infrastructure segment sales increased 17.1% on strong execution, continued solid end market demand and market participation gains. Backlog decreased 10%, which was expected due to our continued progress on a large project that was booked in mid-2022, when we began to work on in 2023. Driven by strong funding for infrastructure product projects, demand project design and quoting activity remains strong and we expect order foot to increase progressively over the course of the year. Segment adjusted operating and EBITDA margins improved 790 and 710 basis points respectively, driven by volume, price cost alignment, ongoing strong execution, 80/20 productivity and improving product mix. We expect continued sales growth and margin expansion in 2024.
Let’s move to Slide 12 to discuss our balance sheet and cash flow. At March 31, we had cash on hand of $147 million and $396 million available on our revolver. During the quarter, we generated $53 million in cash from operations through a combination of margin improvement and counter seasonal generation of about $17 million from working capital. As a result, our free cash flow generation for the quarter was very strong at 16.7% of sales. And our objective for free cash flow of approximately 10% for the year is unchanged. There were no share repurchases in the quarter and we remain debt free. We continue to expect to generate strong cash flow, driven by revenue growth and margin expansion in ’24 and beyond. Our priorities in capital allocation this year are to continue to invest in our organic growth and operating systems for scale, with capital expenditures plan between 2% to 3% of sales.
At the higher end, assuming we’re able to prove out cost savings we anticipate on a number of opportunities to in-source manufacturing to improve profitability. We also remain focused on high-quality M&A. We’re equipped with a strong balance sheet to pursue opportunities with a higher probability in the near term in the residential segment and the medium to long term and other segments. And we’ll opportunistically return value to shareholders through the remaining $89 million authorized under our repurchase program, but by cash generated from operations and supplemented as needed by the use of our revolver, depending on the timing of any M&A and repurchases. Now, I’ll turn the call back to Bill.
Bill Bosway: Thanks, Tim. Let’s move to Slide 13 and we’ll talk about our 2024 priorities. Our five core areas of focus for 2024 really are unchanged and they’ve been pretty consistent over the last year or 2. Number one, just continue to focus on driving growth, margin improvement, strong cash performance. Secondly, continue to focus on our 80/20 initiatives, expand our participation and our presence in the marketplace and just continue to drive service levels higher with speed and agility. We’re going to continue to invest in digital transformation to scale the business, connect better with our customers, suppliers and our organization and optimize our operating systems. Obviously, we’re going to continue to focus on strengthening the team, adding the right experience and competency and finally, just conduct business the right way and do it every day.
Now, let’s turn to slide 14, and we’re going to review our 2024 guidance. Our first quarter results and momentum to date validate our full year expectation for positive performance in all four segments, and we are reiterating our 2024 outlook. Consolidated revenue is expected to range between $1.43 billion and $1.48 billion compared to $1.37 billion in 2023, up between 4% and 9%. GAAP operating margin is expected to range between 12.1% and 12.4%, up between 120 and 150 basis points, and adjusted operating margin is expected to range between 13.5% and 13.7%, up between 80 and 100 basis points. Adjusted EBITDA margin is expected to range between 16% and 16.3%, up between 60 and 90 basis points. GAAP EPS is expected to range between $4.04 and $4.29 compared to $3.59 in 2023, up between 12% and 20%.
And adjusted EPS is expected to range between $4.57 and $4.82 compared to $4.09 in 2023, up between 12% and 18%. And we expect free cash flow of approximately 10% of sales for the year. 2024 is off to a good start with our first quarter performance and current momentum supporting our full year expectations. We look for renewables and ad tech to accelerate top line growth during the year in all four businesses improving revenue, expanding margins and delivering strong cash flow performance in 2024. Our performance, frankly, is just simply a resolved a great team effort and the ownership our people take each and every day for making things happen. And our team knows each day truly does matter. So I want to say a big thank you to everyone in our organization.
So, now let’s open the call up, and we’ll take your questions.
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