Q3 2019 Earnings Call

Good day, ladies and gentlemen, and welcome to the Gibraltar Industries third quarter 2019 earnings Conference call.

Today's call is being recorded webcast. My name is Robyn I'll be your coordinator today.

At this time, all participants are in listen only mode.

Well be conducting a question answer session towards the end of the conference call.

I would now let's turn the call over to Carolyn capacity from the company's Investor Relations firm belief <unk> Investor Relations.

Please proceed Carolyn.

Thanks, Rob Good morning, everyone. Thank you for joining us today with me on the call our Bill Dunaway, Gibraltar Industries, President and Chief Executive Officer, and Tim Murphy Gibraltars, Chief Financial Officer. The earnings press release that was issued this morning as well as the slide presentation that management will use during the call both available any investor.

In some section of the company's website Gibraltar, one dot com.

As noted on slide two 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.

Four minutes or results expressed or implied by these forward looking statements.

Gibraltar advises you to read the risk factors detailed and its FCC filing which can also be accessed through the company's website.

Additionally, Gibraltars earnings press release and remarks contain non-GAAP adjusted financial measures reconciliations of GAAP to adjusted financial measures have been appended to the earnings release and fly.

Now I will turn the call over to build <unk> Bill.

Thank you Carol good morning, everyone. Thank you for joining us today I, let me begin by sharing our third quarter highlights and then Tim is going to review the results of each floor.

Business segments. After a chance review all come back and update you on our key initiatives. Our current guidance and then I will take your questions. So let's start with I'll start on slide three.

[laughter], our third quarter results were consistent with our expectations from our Q2 earnings call.

As expected with our strong backlog coming into the quarter and our continued focus on topline execution, we delivered solid revenue growth of 6.8% to nearly 300 million dollarss of which 4.3% which generated through organic growth. The remaining 2.5% came from acquisitions that are renewed.

Watergate Conservation segment.

Including our first strategic investment into extraction processing.

One of our conservation business and also introduced this acquisition more detail shortly.

We also delivered solid margin and cash performance during the quarter gap.

Yes grew 25% adjusted EPS grew 34% and cash from operations grew 57%.

$6 million operationally.

Delivered positive.

Leverage on our incremental volumes, we executed our plan 80, 20 in productivity initiatives and improved working capital pharmacy suddenly inventory and payables.

We continue to folks that are topline performance as we build stronger positions that are.

Faster growing markets.

As we optimize the parts and service offered in.

And frankly continue to execute better or backlog currently at $241 million remains robust and is up 45% over last year, which gives a solid momentum as we entered the fourth quarter or.

Our backlog is driven mainly by three businesses, our return a renewable energy and conservation businesses, both of which continue to accelerate in our infrastructure business.

So at all for the quarter, we delivered solid performance in both growth and margin and although we have much work to do we're pleased with our progress and results.

Now I'll turn the call over to Tim for review of the results of each each first segments.

Thank you Bill and good morning, everyone, let's move to slide four in the presentation entitled solid consolidated financial performance.

Consolidated revenue increased 6.8% above our guidance as renewable energy conservation segment revenues accelerated and industrial and infrastructure and residential product segment revenues were essentially flat.

The 6.8% increase or revenue 4.3 was different driven by organic growth and 2.5% was driven by the Burger acquisition solar boss.

[noise] apex, supercritical, which we acquired during the third quarter 2019.

As Bill noted backlog at quarter end was 241 million up 45% from the prior year.

Driven by renewable energy conservation business.

Consolidated GAAP operating margin of 10.5% was equal to the prior year [laughter] and consolidated adjusted operating margin of 13.3% increase to 120 basis points from 12.1 of the part.

Consolidated GAAP and adjusted EPS grew 25, and 33.8% respectively with GAAP bps within an adjusted EPS exceeding the guidance provided on our second quarter earnings call.

This improvement was the result of increase profitability renewable energy conservation and industrial and infrastructure product segment.

Continued benefit of operational excellence actions as well as lower interest expense related to the repayment of our outstanding debt in the first quarter.

Included in GAAP results, our expenses was 6.7 million or 20 cents per share associated with restructuring senior leadership transition and acquisitions.

During the quarter, reaching $2.9 million, an interest savings from the first quarter repayment of our outstanding debt.

Now, let's review each of our three reporting segments, starting with slide five the renewable energy conservation segment.

[noise] segment revenue increased 18.6% driven by organic growth of 11.3% and 7.3% growth from the third quarter acquisition.

Solar Boston 2018, and third quarter 2019 acquisition of apex Super critical.

Organic growth was driven by strong demand for our commercial greenhouse growing solutions, including design structures system integration the old project management and general contracting services.

Operating margins expanded over last year with good operating leverage and increased volume and favorable mix in both products in vertical markets, along with improved operating execution.

We continue to make good progress, we feel modification or tracker installations, 90% of slight modifications completed and 65% of these operating with the remaining strikes waiting to be turned out.

Incoming order volumes are improving its customers experienced good results from the field modifications.

We entered Q4 with solid backlog across the segment up 72% over the prior year as we continue to gain participation and see strong customer activity in both end markets.

Backlog for conservation more than doubled and renewables is up over 40% from the prior year quarter.

Let's move to slide six review to review our residential product segment.

Residential product segment revenues increased slightly from last year as modest increases in volume were partially offset by market pricing.

Operating margin declined isn't true ups selling price to material cost alignment, there's the prior year benefited from timing as well as an unfavorable shifts in product and customer mess.

Partially offset by benefits from 80 20 simplification initiatives.

Looking ahead, we expect Mark demand, we similar to the prior year during the fourth quarter.

Let's move to slide seven to review, our industrial and infrastructure product set.

Segment revenues increased nearly 1%, it's higher volume in our infrastructure business was partially offset by lower industrial revenue is lower steel prices impacting for products.

The significant increase in operating margin was driven by stronger operating execution, 80, 20 initiatives and a better sales mix up higher margin products.

It's me or the fourth quarter, we expect to see solid margin performance continue.

Let's move to slide eight titled balance sheet continues to strengthen to discuss our liquidity position.

During the third quarter, we generated cash from operations or 66 million, a 50% up 57% over the prior year and improve liquidity by 56 million or 12% from the second quarter driven by improved working capital management.

We continue to optimize inventory levels and work with our suppliers to more closely match payment terms with those off with our customers.

Well, we use that cash of 8.7 million for acquisitions. This year at September Thirtyth, we had cash on hand of 137.6 million at an undrawn revolving credit facility, a 400 million.

Our untapped liquidity supports the execution of both our organic and inorganic growth strategies.

With that I'll turn it over to Bill. Please turn to slide nine five key initiatives makes sense. So as I mentioned on our last call. The next phase of our transformation is really focused on enhancing the growth and margin profile of our company.

Although we're we're on a journey we are making.

Some progress across a our five key initiatives. So let me start with accelerate operations excellence. We are building a stronger business system across Gibraltar effectively institutionalizing. Our 80 20 initiative, but also adding more focus on customer experience new product development working capital safety an organization develop.

But.

We're starting to see some positive results our third quarter adjusted operating income grew to 100 120 basis points to 30.3%.

Which is really driven by better operational execution, that's a good favorable product mix and obviously volume leverage on a full year basis, we expect to improve adjusted operating margin 50 to 70 basis points, So take a 10.6% to 10.8%.

As well, we generate $66 million a cash that's up 57% over last year and that's been driven by our food margin working capital performance.

So I'd say, we're getting better I'm excited with our progress and I really believe at our team's ability to deliver improved consistent performance over time.

Our second item or second initiative is.

Great and more direct relationship with our customers for us its critical we have a stronger relationship with all our customers those that we actually sell two and and all our channel partners.

Direct connection typically creates more clarity and identifying customer and marketing opportunities, while facilitate a little more efficient ideation and development of new solution sets and in the quarter.

Over half, 51% of our revenue was direct to customer that's up from 41% in Q2 and up from 47% in Q3 2018.

10 point increase over Q2 is actually driven by growth in our renewable energy conservation infrastructure in perimeter security businesses, all which are supporting our customers through direct to customer business model.

We're not the point a direct to customer model, we are continuing to deploy resources for strategic focus for our trade focused initiatives again, it's really important we connect with the folks that use or apply our products such as an example, connecting with roofing contractor is really helping us identify and prioritize our new product development plans.

And our residential business.

Our third initiative really revolves around new products and innovation.

During the quarter, our patented products represented 11.1% of our sales that's up from 10.4% 2018.

And with the recent launch of our next generation tracker product line for set a patented product sales will reach higher levels as we move forward as well in 2020, and we're going to start measuring the percentage of sales related to new products and services, which will include our credit products.

We believe this metric illustrates a better illustrates the company's ability to successfully bring new solution sets to market and it also tends to correlate quite strongly with both growth and margin performance.

Our fourth initiative portfolio optimization, we continue to deploy our strategic rubric modeling process.

We will evaluate a markets, but also our businesses business models product lines and customers you know I'm excited with the attractiveness of many of our end markets.

And frankly, the leadership positions, we continue to bill, particularly in our renewable energy conservation residential infrastructure businesses.

I'm also confident we have opportunity create additional by across Gibraltar each of our businesses and our teams are focused in doing so.

And we're going to continue to evaluate our portfolio as we strive to enhance as I mentioned earlier, the growth and margin profile or the overall business and lastly, our fifth initiative acquisitions as a strategic accelerator.

We continue to be very active in end markets. We believe the most attractive to strengthen our platforms.

Bill relevance with our customers and establish a strong industry leading position.

To access acquisitions are an important part of our strategy.

And they remain the primary focus of a that capital allocation.

The acquisition of apex Supercritical I mentioned earlier is a good example, how we're trying to strengthen our conservation platforms. So with that let's move to slide 10.

And I'll share with you a little bit more on apex Super critical.

So to brokers established a strong leadership position in the commercial greenhouse growing cultivation space we.

Scott I believe the industry's best portfolio of products and services focused on designing and building as long as optimizing growing cultivation operations.

What's the plan is finished growing it typically goes through processing stage to create a brighter than products for consumers.

And as with growing cultivation processing uses multiple technologies intelligent integrating systems highly controlled processes and it really require scalable efficient reliable operations, that's our experience and strength.

As while many of our customers are growers and process, so making entering the processing market a good fit for us. So in Q3, we took our first step of the acquisition of apex supercritical.

Leading extraction processing company with a strong leadership team patented technology, leading edge clean extraction technology.

Apex supercritical is a designer and manufacturer of botanical oil extraction technologies.

Utilizing some critical and supercritical CEO to its trailing 12 month revenues as of June 30.

2018 were 17.7 million certainly mostly customers primarily.

In the cannabis industry.

Growing in processing are both high growth markets, and we're going to continue to broader capabilities invest in the space.

Finally, let's move to slide 11.

And discuss our guidance.

So given our year to date performance, we're narrowing our guidance for full year revenues and earnings to the upper end of our previous ranges, we now expect.

2019 consolidated revenues in the range of 1.040 billion into 1 billion at 50 million.

GAAP EPS between $2.03 and $2, a 10 cents or $2.48 to $2, a 55 cents on an adjusted basis compared with $1.96 and to 14, respectively in 2018.

For the fourth quarter, we expect revenue between 251 million to 261 million.

Compared to 241 billion in the fourth quarter 2018, and GAAP EPS between 40, 855 cents or 52 cents to 59 cents on an adjusted basis, that's compared with 40 cents and 47 cents respectively.

So at this time, let's open it up for questions.

Thank you well now be conducting the question answer session I forgot to ask a question. Please press star one on your telephone keypad and the confirmation don't indicate your line is my question Q.

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One moment. Please so we poll for questions.

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

Good morning, Thanks for taking the questions I appreciate the time.

Starting with renewables where margins or.

Pretty exceptional exceptionally strong how talking about sustainability of those levels or is there anything unusual.

In the quarter other than just strong execution and.

Whether solar boss.

Meaningfully accretive for just generally sort of in line with the overall and quick follow up.

Yeah, I would say.

You know strong execution, you've got pretty high volume.

That's helping and quite honestly, the conservation business that side of business really.

Had a great quarter.

Sure no.

I don't know that I would say expect this level of margin every quarter going forward.

I think it's probably something we can achieve.

Conditions are right and what we strive to achieve overtime as we continue to improve the business.

And then it I wouldn't say solar boss was the driver.

Yeah.

Helpful.

And switching gears to apex, you talk a little bit about what organic revenue growth is look like over the last few years margin profile and really you started to touch on it a bill, but really what what differentiates them in terms of technology Pat.

Customer relationships et cetera. Thanks.

So thanks, Dan the.

Couple of things inside.

Processing market when you do extraction, there's really three technologies that are deployed today and COO to using Seo too.

It is one of those and they are.

The the leading companies you to stretch.

Number one and there are.

They had developed technology in our patents with a technology in that space.

So number one we I think we had the best and the the leader in this space.

Using due to technology.

We we continue to look at that that marketplace more to come there there are other technologies to consider but.

We thought that was a good start for us.

Very strong team as I mentioned earlier, very well expected a known in the industry.

That's a good fit for what we're trying to do as we build relevance with our.

Platform.

Particularly as we're doing more and more.

Direct work with customers, helping them build.

Build out there growing sites, but actually.

Trying to help and with processing, which tends to happen on site as well and then optimizing.

Those operations.

And data yet growth.

Has been strong yeah, I think it's consistent with what we're seeing an industry and reflective.

Very similar to what we're seeing in our.

Traditional core growing business.

Growing solutions business, it will and margins generally comparable with the renewable segment, a little better a little worse, how do we think about that.

Hi, there comparable and.

We're.

Yeah, as I mentioned earlier.

We've talked before you don't want to phase you're trying to do is enhanced both growth and margin profile overall, Gibraltar and I'd say this fits in our approach to doing so so we're we're.

What were we feel good about margin opportunity with this business and what it brings to the table.

And lastly, along the same lines.

So we think about this is a beachhead for additional acquisitions in the space, how I assume it's a pretty fragmented.

Industry.

Let's think about that says maybe first step if you will.

Yeah, I think it as a first step as we said it.

And as I also mentioned, we're going to continue invest in building out our platform. So.

Yeah, we have both organic and inorganic opportunities that that are in front of us and this is area. So we're going to remain active.

As I mentioned.

The new markets and.

So more to come.

Perfect I'll jump back with any follow up thanks.

Thanks, Dan.

Thank you. The next question comes from might have Ken Zener with Keybanc capital markets. Please proceed with your question.

Good morning gentleman.

We're done.

So.

Phil.

First acquisition here I really don't after spending some time with you earlier in the quarter.

It kind of feels like this is almost at the beginning of.

The third.

Adoration of Gibraltar as a company as you know your.

Thanks, Good is still a metal bending company, obviously under the prior CEO margins got righted generated a lot of cash which you still have.

Balance sheet, yet now.

You're talking about things like backlog.

You're talking about renewable and specifically are deploying capital in renewable and that's where your highest growth rates are.

I assume I think you know in time, you'll give us a broader view of the company I assume within a more formal setting analyst day or something but.

The implied growth rates in the renewable right. If you look out a couple of years I mean.

It seems like you're gonna be potentially much more of a renewable company than you are metal vendor and industrial and residential can you just take a.

Okay to comment on your kind of vision there because the math implies you could be much more of a renewable company than we are today and I'm not sure investors really.

Understand that I just want you to see if you would agree with that.

Yes, that's a good observation.

And as we've discussed with you as well.

Things are evolving.

Yes, we've talked about.

One of a four pillars being this ongoing assessment of the portfolio portfolio management and yes, just to remind everybody. If you think back going back three years ago, We made our first to step into the renewable space.

Which gave us renewables as well as the comp conservation business and.

Yeah, there's some foresight, they're not a now that we're seeing the markets of all weekend.

We can take advantage of that and build out.

And during that time we.

Just remind everybody we actually exited some of our traditional metal oriented businesses. So I would say that there's a there's a trend and there's a movement here towards evolving the portfolio and.

So happens that it's it's.

Because of some good end market dynamics right now that we anticipate continuing we'll just see more and more of that in the renewables conservation space that doesn't mean necessarily though that were.

Not happy with some of the other pieces that are in that portfolio still and we're working pretty hard on on that as well, but clearly.

I think you know, we're going to become a little more oriented towards some of the market. Some of the end markets that we believe give us the best.

Hey for growth.

Which.

Hopefully also will translate into a different growth and margin profile for us as a company and and.

I think.

Over time, you'll see more and more of that.

As the portfolio ball, so I think it's a fair observation.

But.

It's not the only thing we're going to be doing but clearly right now it's it's.

It's a pretty interesting space.

Okay do appreciate that I understand your constraints.

But like when you're looking at this.

You know this recent acquisition can you help us.

Think about I mean, just wasn't huge in terms of the revenue side, which.

So I think you've implied you have these acquisitions are markedly more likely to be bolt on not transformative, but how should we think about what your targeted returns on capital are I mean and are these.

Dilutive to.

Margins and Youre kind of be up towards where you are today after two or three years or how should we think about.

The capital going out and the potential impact on the segment margins and your.

Two or three or return on capital targets.

So we always target.

Teen percent.

In year three.

And then you know.

Larger technology based acquisitions.

Stretched out a little bit but generally.

We're looking strong.

You know I would say this canada's size that this business.

The day of acquisition doesn't have much of impact on margins at ways. Just stop you know, it's not big enough to to make a difference.

So in this instance, I think it's going to be market positive overtime as we continue.

What we acquire and.

And that business continues to grow and then our core portfolio increases.

Understood, so and that its job.

No.

You said it wasn't large more of a full time, but it is moving us.

Across this value chain, we've historically focused first just on structures, we expanded that to do.

This general contracting project management services for our customers, where we really give them a turnkey growing environment.

After they finished growing they have to process whatever it is they grew and this is an area that value chain that we've talked pretty attractive so.

It expands our service offering to that loop of customers that we define.

Very active right now.

And the renewable energy conservation what is that split between solar in greenhouse again.

It's about LTL, it's about a third it's about a third conservation two thirds renewable energy.

Okay and my last question I'll get back in queue, but the industrial.

Topline threeq versus Twoq, you I mean, how much of the sales change was price versus volume because obviously, there's a big swing into Q1.

People didn't take in volume just because the falling steel prices, but could you kind of break that out for three to do just so we can understand the dynamics.

Yeah, I think it's it's more.

Volume.

Then price.

The price neutral year over year.

What's that.

Are you talk a little early industry.

How are you talking sequentially quarter over quarter.

Well year over year base.

You had an industrial was that flat price flat volume, where as Chuck you was flat price down volume.

Yes, so year over year it's.

Generally.

Infrastructure, all that's volume.

And then really on the industrial side its price because again steel price was sort of peaking second third quarter last year into the fourth and this year. It's down a lot. So this is a core products the price adjust regularly.

Thank you.

Our next question, it's from the line of Julio Romero with Sidoti. Please proceed with your question.

Hey, good morning.

I want to go the overnight.

Wanted to ask about.

Raw material costs, just what's your outlook on maybe the commodity side going forward understanding steel has kind of continue to.

Maybe trend down Directionally.

When do you expect maybe cycle through some of the higher priced inventory and when does that maybe start to become a tailwind for you.

We don't have much of the way of high priced inventory on hand, I mean not.

I wouldn't say, that's a drag right now.

Well, we look out at steel.

Every time, we look at it you know the future.

Look is it's going to come down a little bit more.

It's not abnormal for steel in.

Fourth quarter to decline a little bit if you just look at the normal seasonal curves.

So.

No, it's going to and I know some of the mills have taken.

Capacity out.

So.

We it's hard to predict where it feels good to go for US we look at everything we look at it we really manage it by just staying.

Pretty close to.

Flow through so we don't carry a ton of raw material.

And we.

Tend to work with our customers to adjust prices need.

So you know.

Yearly basis, it doesn't usually have much of an impact will be.

If it moves a lot in one quarter.

I can see an impact in that quarter. The next quarter, but generally we just finished right and you can see that remember last year when it really moved around a lot.

Didn't have much impact on this 100 basis.

Okay understood and.

On the residential side can you just talk about volumes there I had seen the national arm and numbers, but we're pretty strong.

Understanding that I have a national number and you guys have a different geographic exposure.

Can you just maybe talk about volumes in the quarter and if you know labor availability or anything on that side kind of impacted you there.

No we saw modest volume increase.

I think.

Yes.

It's not direct to us labor.

Availability. So it's it's a market condition for the movers that impacts that.

We believe that continues where we can't get enough reduced to do all the work that's available.

So I think you know as we head into the fourth quarter, we sit here thinking there's.

At the end market demand for work and we'll have to see how the weather plays out.

I'd agree with your arm.

I think is a modest.

I think depending on which the shingle guys you look at.

There's some participation changes going on there so.

Regional strength in some of the markets.

But overall I think it's pretty consistent with last year.

Across the country and that's that's more or less but we've been seeing is relatively consistent markets and shop like you said, a little volume we gave a little price.

Okay very good thanks for taking the questions on best of luck in Fourq you.

Thanks.

As a reminder that question Chris Star One next questions from the line of Walter Liptak of Seaport Global. Please proceed with your question.

Oh.

Morning, guys good quarter.

Thanks. Thanks.

Well lumber.

One of them called little bit late November asked about the HM.

Mobile cloud grew quarter one loan.

No.

Of course is numbers on lumber.

Order you got all the time for real them, a little bit lower profit. So number one of those little about.

Fourth quarter no profit mix.

No I'm recalling them a problem.

Thank you Bob.

Well with the backlog drop off.

Mm Hmm one HM.

Yes, well I think you know.

Given that we have a fair amount of the business sets. This project based stuff.

We came in sort of high end of revenue.

You know closed.

That's a pretty profitable work completed.

So I think you know, it's not necessarily we see something different in the fourth quarter versus the third more that the mix of work that we had in the second half of the year.

The timing of it might have shifted a little bit.

But we're going into into the fourth quarter.

With strong backlog across the business.

You know you get into seasonally slower periods, depending on whether it's some of this is dependent on construction season, but.

Pretty good.

Okay.

Fourth quarter guidance <unk> well through.

Look at normal levels or Oh goodness.

For work.

Welcome.

Well. Thanks struggled the here the details. Thank you ended with yeah, well can meet your little muffled can you repeat that please okay, sorry about that.

Well I guess, what promises malden rather.

Assumptions.

First quarter, where you conservative about all the kind of what those.

Well I think what's the level.

So I think we I think normal.

What did I mean, it's hard to predict yeah, we're not good at Weatherford.

Oh, yes that now we I I would.

I did my reaction as a we plan.

Whatever normal is we don't have any exceptions made to to the plan based on.

Other forecast or whatever we're hoping that the weather stays reasonable so much of the work that we have.

In front of US we have a shot at so.

We'll see how goes but.

Nothing in our forecast.

For some exception to weather or what have you.

Oh, great <unk> I'll switch gears for now.

With the.

One of the backlog was up significantly what goes on but part of the bonds because a lot renewables business I Wonder if you could talk about new quoting a project backlog was just the backlog.

Both off was one off the top level on comes on those projects.

Yeah, well so the backlog we called out the conservation backlogs almost it's more than doubled from last year.

The renewables up over 40%.

It in renewables.

We're not utility focus so what you're going to see in there is a lot of community.

No the smaller sized projects. That's just that's our wheel house, that's where we play.

Oh, it's a very mild <unk> base right now.

Why don't smoke.

In solar market doing so well.

[noise] you know I think it's just the combination of.

Theres end market demand.

But the price of solar generating energy continues to decline.

There is.

The ITC step down at the end up this year goes from 30% to 26%.

But you have to have a percentage of the project in basket to take advantage of that and.

I can't imagine that we will start all of these projects is not necessarily the plans show.

Hard to say, there's just there's a lot of interest our guys continue to really do a good job executing and.

And I think.

No I was just at the no annual solar show a few weeks ago and.

And I think theres, a participation gain opportunity for us if we continue to execute well so you've got a good good end market we've got.

Good good array of products, if you will from both tracker fix still and and.

We're excited with activity, we're seeing and well see you out the ITC I mean, it's a it's not clear yet I don't think an industry is how people are going to.

Actually deal with that I think as you find in most situations like this.

She's tend to wait and wait wait.

Last moment, so we don't have clarity on that yet.

But we're starting to see more have more and more discussions with customers and how to transition through that but putting that aside it's been a again continued I'd say consistent growth in industry and.

And we're doing our best to participate as much as we can.

And then make when we make money.

Okay sounds good.

Just the last one for me with cell types acquisition.

Just as we paid in 20 do started even 20 right away with companies or Malone for little while not starting this month.

Uh huh.

So.

That's a great question for us, it's a an immediate integration process and so there's various pieces of integration then there's certain different levels, depending on the company or acquiring what to do this is very complimentary business to us.

So that's good.

So the initial efforts are backend, which that would include operating.

Operating cadences and processes as well as financial and then it's front end.

How are we are actually going out and talking to the industry because as I mentioned earlier a lot of our customers are doing both growing.

Slash cultivation and processing at the same site, so being able to go to customers have a broader discussions been very helpful. Frankly water customers had been pushing in pulling on us to to help them in that part of the world That's part of the process but.

Most of our integration all up front right now with Apacs is the backend.

So we have dedicated people that are responsible for making that happen and then on the front end where.

We're going to market and having discussions little differently.

So that's a roundabout question, but I.

The answer is yes, we'd like to go more immediate than than otherwise otherwise if you'd let it sit for.

Time on any of you never get there right. So.

Okay, Alright sounds good yes.

Thank you no follow up questions from the line of Ken Zener with Keybanc capital markets. Please proceed with your question.

Hello again.

Tim though could you just comment generically you know I know you give guidance.

By segment for the year, but I mean, how should someone think about certain growth rate there for EBIT leverage and your company.

Obviously with 80 20, you guys got a lot of lift there, but I mean, the extent someone wanted to forecast you know two or 5% growth rates should we be thinking about your EBIT leverage in the 25% range.

30% range consistent with your gross margin or is there is gonna be excess.

Investment cost as you workout.

Some of these yep investments that you're doing.

Thank you very much.

I would say if if if the growth came.

Wash the same product mix.

That we have today.

You would see a flow through higher than gross margin.

If it's modest because.

We are not capacity constrained generally.

So in any investments, we would have to make will be pretty modest.

If we needed to for growth. So you look at our Capex.

Yes, a portion of that is maintenance. Unfortunately that is cost reduction and a portion of that capacity and we've been spending 12 $13 million year.

Lastly, the for sale.

I'd expect the flow through better the gross margin and cannot but I'd say one other thing it's hard to add to that I think internally, it's our team.

Clarity around our expectations and as you as you describe what anytime that you had incremental volume.

You should be targeting.

Levering that at a level consistent you're just seeing are better than your linear gross gross margin right. So I.

I think everybody knows it that's what we expect I think how were institutionalizing our operating.

Business system I mentioned earlier is really important to us and that kind of gets at that so.

If you yeah, the variable that Tim mentioned that you've got to manage through but ultimately today the total volume.

Tom Sport large speculation is we perform better on that incremental dollar than we would otherwise so.

We're working really hard.

We're making some progress I referenced earlier.

Our work to be done, but well what a good problem to have.

We couldn't be some good solid end markets that.

For the growth.

And we hope to see the boy we.

Looking forward executing on it a better in the future than we have in the past so that's our objective.

Thank you.

Thank you we've reached the end of the question answer session I'll now turn the call over to Bill boss way for closing remarks.

So guys.

Thanks again for joining us today.

Just to let you know we do plan on attending the Baird Global Industrials conference in Chicago. That's in November how we're going to be at Suntrust Industrial Summit in New York in December .

And the CGS Winter Conference in New York in January .

And we look forward to seen many of these events I would say also there there were thinking about at Investor Day, We did not have it on the calendar, but that will probably be sometime early in the year 2020.

Import.

Hopefully host new and many others there as well so thanks again and have a great day.

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.