Q3 2021 Gibraltar Industries Inc Earnings Call
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Greetings and welcome to the <unk> earnings Conference call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Carolyn PCL of Alley K Investor Relations. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining US today with me on the call is Bill Baas way, Gibraltar, Industries', President and Chief Executive Officer, and Tim Murphy, Gibraltar as Chief Financial Officer, The earnings press.
Yes release that was issued this morning as well as the slide presentation that management will use during the call are both available in the Investor Info section of the company's website Gibraltar one dot com.
These notes that Gibraltar has classified the industrial business, which was divested on February 23rd 2021, as a discontinued operation with fourth quarter 2020 results.
A terrorist Mark which was acquired at the end of December 2020 are included in year to date 2021 results.
Gibraltar is earnings press release and remarks contain non-GAAP financial measures tables, and 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 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 will turn the call over to Bill Berkley Bill.
Hey, good morning, everybody and thank you for joining today's call ill start this morning with an overview of the third quarter results and then we will spend a few minutes discussing the ongoing market environment. We continue to manage through and Tim you can provide a financial review of the quarter and then I'll give you an update on our 2021 parties in our guidance revision for the year.
The call up for your questions. So with that let's turn to slide three titled Q3 results.
Consistent with our experience in both the first and second quarter and with our expectations going into the third quarter revenue remained healthy and grew 24, 5% a three.
Three 9% of which was organic and 26%.
From acquisitions growth was driven by additional price increases participation gains and steady end market demand as the momentum from the first half of the year carried into the third quarter.
Customer backlog at quarter end, driven by new order activity reached $385 million, increasing 10% on a on a pro forma basis.
Our backlog represents a record level for the third quarter and supports a robust demand trends as we enter the fourth quarter.
Adjusted net income decreased $2 $1 million or six 5% to $32 million or <unk> 91 per share as inflation across materials transportation and labor for the accelerated above our expectations in the quarter sequentially.
Sequentially adjusted net income per share improved to 13, 8% or 11 cents per share driven by a strong focus on material productivity execution of additional price actions and implementing more 80, 20, and lean quote to cash initiatives and before I dive deeper into the broader operating environment I want to provide an update on two important initiatives and investments.
First the integration of tear smart, which after nine months is making really good progress organizationally, we have integrated our leadership across sales marketing supply chain finance and human resources with leaders contributed from both of our businesses. The team is doing a fantastic job as it builds and strengthens our systems and processes, which makes it easier for us to <unk>.
The business to support growth and also integrate more seamlessly across the total business and on top of this work. The team is also trying to do their day job executing the very strong demand environment, while helping our customers manage through the impacts of solar panel supply challenges and significant inflation.
Operating margin for the business has improved sequentially since the first quarter and the team is navigating relatively well through project management disruptions as our customers deal with inconsistent supply of key components for their projects.
I also want to comment on another key initiative, the upgrading of our operating systems and digital capability. These investments are critical to delivering additional value and service levels to our customers and our suppliers as well. We believe we can create more value beyond what we actually make by effectively simplifying and automating more intelligent business processes with our PA.
Partners. We also believe our systems will help facilitate additional 80 20.
Handling and quote to cash initiatives and accelerate productivity margin improvement as a result, both our renewables and residential business groups are engaged in upgrading their operating systems and digital simplification activities are in flight across your broker as we launch brands and a variety of customer initiatives.
Now, let's turn to slide four to discuss inflation in the broader operating environment.
Current environment, along with general supply challenges has probably been one of the most dynamic situations. Most of US has ever experienced the magnitude of change the speed at which it has happened.
And it's broad reach covering materials transportation labor and about every other operating costs, we manage effectively we've had 52 consecutive weeks four straight quarters of accelerating cost increases in the third quarter and for the third quarter. We did not anticipate another significant increase in broad based inflation as shown on this slide.
But this is the environment, we're in and we have to keep our focus on the things we can control.
First we have to keep executing our price plans, we have a well defined and effective price management process in place with our customers to help govern the review and approval of price actions and we did execute additional price actions during the third quarter.
The challenge in this environment is keeping pace with the daily acceleration of input costs trying to close the price cost gap on a moving target.
As inflation stabilizes, we do expect to see margins recover as our price actions better line with input cost.
We have to execute additionally, 20, and lean quote to cash initiatives.
Which will help us optimize operating profit dollars and improve margin.
Renewables AG Tech residential teams had been very active with manufacturing field operations and business system improvements.
Have also been developing automation solutions will be piloted in a few bar facilities.
Third we must remain incredibly responsive and flexible for customers, which we recently demonstrated in the aftermath of hurricane either our ability to respond continues to result in new business opportunities and participation gains in each of our businesses and finally it really most importantly, we had our entire team have to maintain the safest workplace possible for each other and the team is.
Done a very good job since the beginning of the pandemic, helping each other make this a reality.
[noise] of cases of Covid have remained very low over the last 18 months and we will remain diligent with our operating protocols to help maintain this environment going forward.
Yes, we're going to continue to fight with everything we have to perform well in what I believe to be a very unique and challenging environment I'm very proud of everyone on our team the team.
It's really been unrelenting and embracing and tackling our challenges and it continues to bring passion intensity for the task at hand.
With that let me turn it over to Tim for more detailed review of our results Tim.
Thanks, Bill and good morning, everyone.
I'll take you through our consolidated and segment results starting on slide five.
And as a reminder of my discussion will cover our results from continuing operations.
Consolidated revenue increased 24, 5% to $369 4 million.
Organic revenue growth of three 9% was driven by pricing.
Market demand in the renewable and infrastructure segments and participation games primarily in residential.
We generated 26% growth from the 2020 acquisitions of terrorists Martin architectural mailboxes.
Total backlog at quarter end approximated $385 million up over 10% from third quarter 2020 on a pro forma basis, driven by continued end market demand across our businesses.
Adjusted operating income decreased two 6% in the third quarter with adjusted EPS down seven 1%.
The decrease related to materials transportation and labor inflation curve steepening more sharply and the supply chain, becoming more difficult during the quarter across the businesses. This.
This was partially offset by price increases at the revenue line continued execution across the business segments. The terrorist smart acquisition margin expansion in the legacy renewable business and 80 820 productivity initiatives.
We continue to work with suppliers to manage materials and transportation procurement and with customers to manage pricing and expect margins to recover inflation moderates.
Now, let's review each segment, starting with slide six the renewable segment.
Segment revenue increased 85, 5% driven by the terrorist smart acquisition.
On a pro forma basis, including the tariff smart transaction revenues grew 19% with growth in both the legacy and terrorists not businesses.
Dan in the quarter reflected order strength across all product lines fixed tilt tracker cannot be any loss.
This strength offset in time, despite market headwinds from steel and transportation inflation, along with solar panel and other supply chain disruptions.
Bookings grew over 30% in the quarter driving backlog up over 80% to a record $184 million.
And that backlog has increased almost 15% on a pro forma basis.
Segment adjusted operating income increased 662, 6%, while adjusted operating margin contracted 150 basis points.
Our much smaller year over year decrease in margin in the second quarter.
The legacy business delivered adjusted operating margin improvement from last year, driven by 80, 20 productivity lean enterprise quote to cash initiatives price cost management and product and business mix benefits.
Tara Smart margin expansion continued to accelerate sequentially. Despite impacts from project management and field operation inefficiencies that were amplified by supply chain and consistency for solar panels and other key components that have been plaguing the industry along with price cost alignment.
Our integration of terrorists part remains on track with activities in organization process development information systems supply chain and in sourcing gaining momentum per plan.
Let's move to slide seven to review our residential segment.
Segment revenues increased 13, 1%, our fifth consecutive quarter of double digit growth driven by solid demand in mid seasonal strength increased pricing to combat continued material and transportation cost inflation.
Participation games in the building accessories business and demand related to the impact of Hurricane Ida.
Organic revenue grew 9% and the acquired architectural mailboxes business contributed 4% growth with integration of this business on track.
Segment, adjusted operating margin income was down $3 million or nine 2% and adjusted operating margin of 17 point to improved 60 basis points sequentially, despite inflation and supply chain disruptions accelerating further in the quarter.
Its key performance actions, we have taken begin to positively impact margin performance.
Specifically the implementation of additional price increases and executing key 80 20 in sourcing initiatives to mitigate the cost and delivery rest associated with imported product.
We continue to expect that as inflation moderates the alignment between pricing and cost will improve in operating margin will recover.
In the near term will continue to maximize operating profit dollars to further alignment of selling prices with ample cost execution and 820 productivity initiatives.
Let's move to slide eight to review our egg textbook segment.
Segment revenue decreased 15, 5% impacted by temporary delays in Proteus project schedules due to imported glass for roofing systems being held for extended time at U S ports and continued Canadian permitting delays related to water rights.
And the cannabis business revenue was impacted by project delays related to state licensing and permit approvals, which are delayed along with the continued challenges with financing for these customers.
Despite the above headwinds the commercial greenhouse business delivered solid sequential growth on strong demand.
Segment adjusted operating income decreased 57, 6% from last year and operating margin increased on a sequential basis driven by expansion in the commercial greenhouse business 80, 20 productivity and lean enterprise initiatives to help effectively scale the business.
Operating margin for the quarter was impacted by overall lower sequential sales due to scheduled slippage and the acceleration of inflation and continued supply chain disruptions in the quarter.
We continue to expect the benefits of our efforts to improve efficiencies and productivity to accelerate sequential margin improvement during the remainder of the year.
I'd check order backlog is improving from the second quarter up 22% year to date with a pipeline of expected new order and all of this all three businesses produce cannabis and commercial remains strong.
We expect this pipeline to support momentum through the fourth quarter into 2022.
Let's move to slide nine to review our infrastructure segment.
Segment revenue increased 11, 3% with solid demand for both fabricated and non fabricated products and improving state Dot and project funding driven by the overall economic recovery.
Not fabricated demand was somewhat held back by raw material constraints caused by hurricane I just damage to key suppliers in the industry.
Backlog at quarter end increased 29% to $49 million with new customer orders up 66% during the quarter, reflecting the strength across the business and end markets.
Segment, adjusted operating margin declined to eight 8% due to product line mix rubber supply issues production inefficiencies related to expanding fabrication capacity and price cost alignment.
We also continued to improve our manufacturing processes during the quarter, allowing the team to shift labor between production processes and combined with better material flow continue to reduce lead times.
Let's move to slide 10 to discuss our liquidity position.
We used $27 million of cash from continuing operations in the quarter driven by lower net income during a seasonally strong quarter marked by inflation and the tactical decision that certain of our businesses to build inventory to guard against supply shortages.
It sounds receivable increased due to the timing of revenues during the quarter.
The net impact of these investments was an increase of five days in our working capital.
During the quarter, we grew $27 million on our revolver to fund the working capital requirements.
At September 30th we had 334 million available on our revolver cash on hand of $14 million and our net leverage was slightly less than a half a turn.
We continue to expect to repay the outstanding balance on our revolver prior to year end using cash flow generated from operations.
While we've made a short term investment working capital our operating model is highly cash flow generative with relatively modest capital expenditures.
We have ample liquidity to invest in operational excellence organic and inorganic growth initiatives and organizational development.
We remain active in M&A discussions and remain focused on managing working capital now I'll turn the call back to Bill.
Okay.
Bill are you on mute.
Yeah, sorry, everybody.
Let's turn to slide 11, I want to talk about our three strategic pillars, our business system portfolio management and organization development.
All three remain foundational and supporting the ongoing transformation of the business and really the four core priorities of our business in 2021.
<unk> continue to move forward.
And I don't want to talk about each of those so let's start with number one scale the renewable energy Tech renewables in AG Tech businesses renewable legacy business delivered year over year improvement in both revenue and margin in the quarter further advancing its leadership position in the industry. The business continues to deliver good results and be a positive outlier in the solar rack or rack.
The market Terry Smart business as I discussed earlier is making good progress in its organization integration the building and scaling of its processes and systems and revenue and margin performance have improved sequentially since the start of 2021.
Tech business has demonstrated sequential improvement, we anticipated and we expect both revenue growth and margin to improve further in the fourth quarter.
Secondly.
Improving execution across the broker through improved health and safety, our 80, 20 productivity quote to cash lean initiatives and new product development.
Safety performance continues to improve and we are managing through the ongoing pandemic well with active cases currently less than 110th of 1% of our total workforce the.
The renewables AG Tech and residential businesses have all been very act with 80, 20, and quote to cash lean initiatives as well as executing on identified supply chain and manage manufacturing synergies.
Third managing.
Accelerating inflation and supply chain challenges you know in a relatively short period of time.
This environment evolved from mainly a steel price issue in October of 2020, becoming a much more broad based material labor and transportation inflation and availability issue all accelerated incredible spa.
Speed since the beginning of the year notes.
Team responded with expediency and has maintained a strong pace in the chase to catch a moving target.
We have executed aggressive supply chain actions, we have implemented multiple price increases and additional 80 20 initiatives or <unk>.
It takes them taken in this environment, although we have not completely offset the substantial input cost increases.
Help us deliver a strong fourth quarter and a record full year performance in 2021 that being said, we need to keep focus on closing the gap drive better alignment between our price and input cost and focus near term on maximizing margin dollars.
And fourth continuing.
To conduct business, the right responsible way and doing that every day.
We are finalizing our first annual corporate responsibility report for issuance in the fourth quarter. We're also developing both long term and interim performance targets supporting our CSR.
Initiatives.
For everyone on the phone today, if you have not already received an official limitation I want to invite you to our Investor Day in New York City on November 17th just in a few weeks.
Which will be held in person and virtually we are excited to host.
You and introduce our leadership team learn more about our vision and strategy provide insight about our businesses in the markets. We participate in and also understand our key priorities going forward. So if you will please mark your calendars.
Let's move to slide 12 to discuss the outlook for 2021, so our demand continues to be solid across our business and our EPS guidance revision reflects the current cost and supply chain environment, which we expect to remain as is through the fourth quarter. It also includes incremental costs for potential labor and productivity impacts associated with administering.
Upcoming Covid mandates.
We continue to be well positioned with strong backlog, increasing customer orders and healthy balance sheet and a continued focus on daily execution acquisition integrations and strengthening our operating systems.
Our revised full year guidance is as follows consolidated revenue full year 2021 is expected to range between $1 31 billion and 1.35 billion.
GAAP EPS from continuing operations is now expected range from $2.45 and $2 86 compared to $2 33 in 2020.
Adjusted EPS from continuing operations is expected to range between $2 95 and $3 six.
Two $2.73 in 2020.
While we do not as a matter of normal course give quarterly guidance. Given this is our third quarter call. We wanted to provide expectations for the fourth quarter two.
2021, GAAP EPS from continuing operations is expected to range between 48 60 compared to 53.
And adjusted EPS from continuing operations is expected to range between 70, 182 cents compared to 59 cents.
For the fourth quarter. This represents adjusted EPS growth of 21% to 39% driven by strong demand slight moderation in steel inflation and more favorable alignment of pricing and input cost.
For the full year outlook reflects year over year revenue and adjusted EPS growth of 27 to 32, 7% to 31% and eight 8% to 12% respectively.
Again, I want to express my thanks to our entire team for embracing this environment remaining resilient and are bringing passion enthusiasm every day I also wanted to paperboard.
Our suppliers and our customers for their continued support and partnership as we collectively take on today's challenges and execute on new opportunities and with that we'll open the call for questions.
Okay.
Yeah.
Thank you at this time, we'll be conducting a question and answer session I would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question. Kim You May Press Star two if you would like to remove your question from the queue. We want to be respectful of everyone's time, so are limiting each analyst.
One question plus a follow up question for additional questions. Please rejoin the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yeah.
Our first question is from Ken <unk> with Keybanc capital markets. Please proceed with your question.
Good morning, everybody.
Good morning, Ken.
Yeah.
Well a lot of moving parts I guess it doesn't seem to be a top line issue here. So as it relates to steel I know certainly on the renewable side, we had talked about how you position your price contracts on a more limited term basis.
<unk> integrated to your suppliers, which was given your very strong performance performance in the first half of the year. It seems as though most of your quote revision occurred based on the third quarter mix Miss.
And the fourth quarter is tightening up a lot. So could you maybe walk us through those different components. Because you said at first it was steel and now it's just a whole bunch of different things, but like in renewable.
I think what investors are going to be most.
Focused on is your ability to kind of say when these margins rate will be.
Other categories people are talking about cost neutral so do you see cost neutrality.
Happening by the beginning of the year and obviously with your analyst day coming up your.
A lot more venue to expand on this but or is that too simple because glass is sitting somewhere in long beach.
Yeah, no. It's a good question, Ken I think it's still a relatively complex environment out there across supply chain. So you know what.
<unk> in Q3, obviously as you hit on was which was much more than just steel steel itself.
As you see from the numbers accelerated significantly, but if you look at steel aluminum.
Propylene those are the three big buys for us.
Or are all those all accelerated 30 percentage points or greater.
From a market perspective, and then some of the things that we import as you referenced like glass.
Container rates are now at 420% and they accelerate another 185 percentage points.
In the quarter. So yeah, it's pretty broad based I would say the labor piece of this is as a E.
We got our arms around that in a much better way than in Q2, but the I'd say the broad in place around materials continues to be a challenge.
But as it relates to specifically to renewables you know our core business the legacy business.
Really delivered on top and bottom line, we improved year over year in this environment. So I think what the team has done and how they continue to operate it.
As a very effective in this pretty interesting environment.
And where you see a little bit of a drag came from terrorist smart, which although improved sequentially the big challenge with terrorist smart.
In the third quarter really is related to a lot of this claim.
Hi chain disruptions, our customers are having particularly as it relates to panel supply and a few other things and the reason that's more relevant for terrorist smart is because of the field operations.
We deploy.
We're moving people around.
And in a pretty interesting way to try to keep up with these changes where projects are moving day in day out and that's been amplified I think in the last 90 days by some of the supply chain issues that you read about every day.
Well overcome that but again, even in that environment. They improved sequentially over Q2. So I do think the renewables business is operating very well.
Given the environment and I think we'll continue to do so going forward.
But in terms of the overall environment I think it's still we're anticipating it to remain very challenging as we go into Q4 as I as I mentioned, we are seeing some.
Some of the materials, particularly steel our stabilize over the last two or three weeks, that's maybe an initial indication of things kind of.
Starting to get less inflationary, but but steel is the only one right now that has demonstrated that in the a and the.
Near term.
I appreciate those comments for my follow up I guess I'll drill into the renewable where you quote talked about project management and field operational inefficiencies would you say most of.
The margin pressure than in renewable.
While steel is there you had your contracts, but it's really the.
Project management field operation side. So it's your equipment at your labor, it's not necessarily the steel that was the predominant.
Margin pressure correct.
Yes, I think that's a fair assessment, we did a I think a very good job managing through the the additional increase in steel. The challenge has been more around again moving crews across different projects as they're getting disrupted from supply.
Supply chain issues with things that we don't buy our control, but we ended up having to to modify schedules around those specific projects that we deal with that.
On an ongoing basis my only point to everybody is that got amplified further spin.
Specific to the renewable as industry I think if you've seen this.
A couple of different issues going on with with panels and.
That created a challenge in the quarter for our field ops, just kind of navigating around those projects as customers had to change schedule themselves.
So when they do that we have to do that.
Yep.
Yeah.
Our next question is from Dan Moore with CJS Securities.
Please proceed with your question.
Thank you and good morning.
Maybe I'll piggyback a bit on Ken's question and walk through the other three segments and talk about the margin pressure by segment, how much is related to raw materials and more timing.
<unk> is really supply chain logistics, and things, which you know appear to be perhaps a little bit more open ended in terms of the.
When they'll be resolved.
Sure, So where would you like to start doing it.
Any particular segment and you want to jump out or just I mean, you can go go <unk>, and then down to AG Tech and and Oh.
Infrastructure spot either any orders great gotcha. Okay. So you know Rajiv if you think about resi business its steel aluminum.
And resin in particular.
Those also saw increases in the quarter again, and we they're subsequently implemented more pricing associated with those increases so that lag that we talked about on the material inflationary side with our pricing cost alignment.
It's just the chase continued in Q4 and that's the bulk of the pressure on the margins in the quarter was associated with that ability to get material into our facilities. I think we have our arms around our ability to manage through the labor piece of this is getting better.
And then it was in Q2, but the.
Material inflation challenges that happened during the quarter or just greater than we expected and so we're reacting appropriately but there is a process that you know as we've talked in the past that we followed to drive those price increases. So I think that's that's mainly the residential segment.
If you look at the the infrastructure segment and the Big thing that hit us in the quarter was.
Our supply of neoprene, and particular rubber based products for non fabricated.
Business really got impacted by hurricane item.
That really comes down to a facility there which has been shut down for an extended period of time since coming online now coming back online has really forced us to scramble to get.
Offset that from other locations around the world and I just took some time, so that kind of threw us off on the margin side during the quarter I think that's more temporary in nature that will correct itself.
As that business has continued to have strong topline. So as we get that piece are squared away I think you'll start to see things come back into line as we move into next year.
And then.
When you think about AG Tech Tim mentioned earlier, we had some.
Pretty interesting I'll consider more one time issues and we mentioned in glass that was held up in port for a lengthy period of time, there's a couple of different things going on with with that supply chain as it relates to glass number one we were held up.
To the price of the Ocean freight rates have gone up substantially I don't know how close you guys track those but.
In the last 12 months, they've gone from roughly $3800 a container to over 20000 hit over $20000 for that same container.
During the quarter. So you've got two things you've got a little bit of a delay issue and you've got this increasing the cost on the freight rates. So what we've done during the quarter, which will show up as we move forward as we've been able to identify.
Other suppliers, particularly in Europe, and that's a big deal for us because a shorter.
Short of distance to travel to the rates as a result for ocean freight are significantly less.
It doesn't mean, they're not elevated versus where they were a year ago, but theyre significantly less from what youre seeing coming from Asia. So we broadened our supply base.
That supply base wasn't available a year ago.
Now we have a you know.
Another level another tool in the toolbox to deal with some of those type things that really impacted the renewables or the exited business during the quarter.
And that's just one example, but that's a pretty Big example, because we do buy a lot of glass.
For building these large structures.
So I'll stop there.
But I think that's a we've been deal with some one off things I think we have some broad based inflationary stuff and the residential that you know, we're continuing to execute our playbook around how to approach that.
And in our infrastructure business, you know will overcome this hurricane Ida impact a portion of it or not and fabricated business, but those will clear themselves. It's just a timing issue with anything else on that.
Yeah.
Very helpful. I appreciate that and in a multiple parts, but if I'll sneak one more just in cannabis distract or equipment.
The market's evolving quickly obviously very dynamic just talk about your positioning of your products and solutions relative.
Relative to alternatives extraction methods are you, where you want to be and you anticipate additional M&A to build out those capabilities. Thanks.
Yeah, we have a pretty broad offering today, there's really three approaches are deployed in the marketplace today.
We have two of those technologies on hand, so you might say that.
There's a third leg of the stool as it relates to the technology options required because as everyone as we've talked in the past.
What's required the technology used to extract has a lot to do with what end products you are looking to actually.
Create.
And so we have two of those three I think that our mainstream and there's a third that are.
Is out there and frankly, there's a force that we're working on.
Which I think might be interesting down the road as well so you'll see us continue to broaden our technology capability in that area in general.
Very good appreciate the color.
Jump back in queue.
Thanks.
Thanks, Dan.
Our next question is with Walter Liptak with Seaport Global. Please proceed with your question.
Hi, Thanks, Good morning, guys.
Hey, Walt.
With a with all the moving parts and I thought I'd try one around the guidance and just ask about.
You know there's always a range I guess this time, it's a little bit different because it sounds like it's not a demand issue that would impact the range, but maybe you could talk a little bit about you know the difference between the low end and the high end of the revenue guidance and it looks like there's 400000 in sales what would what would you.
You have to see happen to hit the high end.
What would keep you from doing that.
Yeah well.
I think the team is I would say.
Feels better about the upper end of the guidance as we roll up today is versus the lower end, which is a good thing but but.
You know as we get into this quarter.
What are the things that could.
Gross more in one direction or the other.
You know if we have a and we feel pretty good about it right now, but if we have some additional supply chain disruptions that our customers deal with in our project based businesses could that delay a project.
A week or two or moving from Q4 to Q1, we always deal with that as I mentioned earlier, just trying to lock that down and and are working closely.
Closely coupled with our customers.
Day in day out as we finish up the year and so we're laser focused on that but that's always.
Our challenge that we deal with but it's probably a little bit more amplified now in this environment as I talked to earlier.
That would be one thing.
The other thing that I.
I mentioned in the in my my remarks is we have these we have updated our cobot mandates that are heading our way and so as we think about how to actually execute that.
We built that into but we're not exactly sure where.
That's going to land. So we built some of that into the plan.
And the reason, we don't know exactly where that's going to land as we had a date that's out there, but we don't have clarity in terms of the requirements of what we have to do as it relates to testing and we.
We don't have enough time today to take future Hall that will well do that and some follow up calls, but but we are we have been working on that for last couple of months and and I think that's going to be an interesting.
Set of variables that will deal with and that will then roll into obviously next year depending on.
With the mandate ended up finally being so those are just two examples of some things that are in play during the quarter, but fundamentally outside of that you know I think.
The businesses feel good about the demand profile and we have access to the materials we need.
It's just a matter of executing.
Executing as well as we can during the quarter.
Okay fair enough and those are you know.
I guess for my follow up on a terrorist smart.
You mentioned that that improves sequentially, how much labor cost ran through like we wouldn't have profit has been if you didn't have to.
You know I guess moved these crews around because as you know our supply delays.
Yeah, well, we would've made and and I think operationally the team actually.
When you're in this kind of business you have change orders that occur all the time that flow of windows for projects.
You're working on or that have been completed and sometimes those changeovers don't actually flow through until the following quarter, but if you look at the ones associated with Q3 that will pick up in Q4, the team really actually performed.
Better than what we're showing.
But I think inherently we would have crossed into the double digits.
Margin level, as we had expected going into the quarter and as we talked earlier in the year tariff smart margin.
Accelerates in the second half of the year, because that's the busiest time of the year and that's we're working seven days a week right now so that's a.
Important piece of the business as we flow into the second half year, and we expected our margins to cross into double digit.
<unk> historically has been the case, so we were a little short on that because of timing of some of these change orders but.
Dealing with.
You know the whipsaw effect of some of the supply chain issues. The team responded very well, but I think you would've seen us more than double digit in Q3 in that.
You know obviously would've continued would continue into Q4. So that's that's always been our plan this year did.
But I do think we'll continue to make progress so it's not where we thought we'd be but.
We continue to make.
Ziv steps forward sequentially in just a little bit less than we would've liked.
In this environment.
Okay. This terrorist them or have a better line of sight to supply chain for the fourth quarter or is there still variability in that where you got supply chain disruptions.
Yeah. It's good question.
For us the way that we try to manage that as every active project, which we're.
We're doing it we have about 300 plus projects that are always in flight, it's really getting down to understanding every day every week with each project, how that project and the folks that are driving their supply chain to support their project are dealing with some of these these issues. So it takes a lot of time and effort to make sure that.
Their panels are coming in and other key components are coming into the overall project doesn't have to move.
And so that's that's our line of sight is as you know.
Based on our ability to go talk to them, which I think is pretty good and our plan in the fourth quarter is based on what we know.
As of today, and how our customers feel about that so you know a lot of customers know what they have on hand, and it's coming in and they feel pretty good about that and there's always a bucket that has a little less.
<unk> environment there that.
It could be a little less confident.
Because oftentimes they don't learn Intel.
The day before or even a week before what's actually going to happen with some of the supply so.
So, it's just being meticulous and diligent with every one of these projects and that's.
The team has been and frankly.
And the second from the second quarter onward.
And as I mentioned earlier, it's a.
It's a really incredibly busy environment for overall renewables team.
The fundamental demand is up 20% on a pro forma basis.
Which is pretty significant growth in this environment or is it so.
Yes, that's that's that's the line of sight that we have right now that we're working through working towards.
Okay, great. Thanks, I'll get back in queue.
Okay.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is from Julio Romero with Sidoti.
Please proceed with your question.
Yeah.
Hey, good morning, Bill Good morning, Tim.
Hey, Julio.
So on the AD Tech business I wanted to dig a little more entity to thermo business integration.
What are the challenges that you're seeing specific to thermo and did you see sequential volume growth in thermo in the quarter.
Yeah.
Yes.
So from a challenged perspective, I think we've made a lot of progress on our integration we've talked a lot about that in the past. We are finally allowed to two step foot into Canada. So that's been helpful, but but I think the team's done a.
Pretty good John feels really good about.
Where we are relative to.
So that aspect of things that we're working on.
And we're starting to see that produce business accelerate from a growth perspective backlog is continuing to build in.
And there's a lot of activity ongoing right now in the pipeline.
Rather rather a large opportunities both in Canada and the U S. So.
Yeah, we feel pretty good about how that's coming together I would say the same is true for our legacy business and.
Yeah.
In AG Tech, which produced.
As a reminder, that's everything from horticulture too technical gardens to retail.
A lot of interesting things going on there that's performed quite well.
It was performing well and delivering and Theres a lot of interesting things that will carry us into 2020 to that.
Or materializing or had materialized into the backlog as well so.
Net net I think are outside of our.
Some some pretty big disruptions on executing some projects for each of those businesses. You know the outlook has continued to come.
Come together quite well as expected and I think you'll see us improve.
Improve again in Q4 sequentially as we've been talking about we're still targeting a two.
Two to reach double digit margins in the quarter.
And if we can avoid some of the.
Big supply chain issues that we absorbed in Q3 than you know I think we have a really good shot at making that a reality. So we we've not lost focus on what the what.
With the prices in Q4 for that business, so you'll see us make another step toward an improvement.
Got it but just to clarify you did see the sequential volume growth in thermo and <unk>.
Yeah.
Yeah, let me.
Actually we were off a little bit and talk right Yep.
I'm sorry that.
Yeah, sorry, sorry.
Backlog or growth.
Just on on revenue growth.
Revenue sorry go ahead, Tim Yeah, we were we were off a little bit on revenue not because of demand, but because of the ability to actually move projects forward because of supply chain disruptions. So that the demand is there, but if we can't get product we cant do the build.
And glass.
<unk> create.
Our lagging revenue there.
Yeah, absolutely I'm, sorry, I apologize that the the.
Port issue that we dealt with was specific to produce the demands are the projects their backlogs there, but it just pushed out or pushed us into to this quarter, but.
Yeah.
Okay, no minimum Proteus visits.
Momentum is is remains positive and continues to pick up so we're excited about that and produce.
Yeah.
Okay, and I guess just for my follow up on the guidance I guess the change to your free cash flow guidance to now 4% of sales for the year. So the sales guidance is unchanged. So I guess the implications.
The implication that the decrease for the free cash flow guide is just a function of lower net income or or as thermo.
Is there any change as it related to thermo integration.
Playing a role in the fall.
Yeah. So in general we're going to make less money right. That's not thermo specific it's you know a.
A little bit across the businesses from our original plan.
So that impacts it and then really when you look at where we've increased our investment in working capital, it's really in the residential and the renewables business.
And we expect to claw some of that back in the fourth quarter.
Yeah.
I don't think there was anything any significant investment in AG tech or infrastructure. It was really in it.
Rising in renewables and I expect them.
Those two get.
That will reduce the investment in the quarter, but.
But I don't think we'll get back to the days that we had at the beginning of the year quite yet and then part of that is just dollars because of inventory costs being.
So much higher and the effect that has on revenue just the amount of dollars sitting in.
Inventory and a R.
It was higher.
Yeah.
Got it thanks for taking the questions and look forward to your Investor day in a few weeks.
Thank you thanks.
Our next question is from Kenneth Pinheiro with Keybanc capital markets. Please proceed with your question.
Hello, again could you talk about residential in terms of the.
Lagged or comped effect versus last year when.
So you guys kept your operations functioning I think more than your competitors, which led to market share gains.
Based upon your being there and can you talk about how that's kind of settled out now that we're comping some of those.
Fi benefits you had last year, how are those relationships expanding because that was obviously.
What are the big segments that benefited from here.
Yes.
Distribution customers, how does that kind of played out in terms of.
Regional market share within that supply companies that your survey. Thank you.
Yeah, it's actually played out quite well we saw again in Q3 as everyone is continuing to deal with supply chain issues.
Issues or availability material, we were able to respond and pick up some additional business during the quarter and a couple of different regions I mentioned hurricane either that was or our ability to respond to that was it was very helpful. But it's also yeah, because we're well positioned in that part of the country, but we've also been able to expand in.
Some other regions, particularly the west coast.
Where we were able to do to respond to demand and deliver an and where others cannot get access to material or just couldn't respond so I think.
Suggests we've become a better partner.
They're demonstrating some abilities over the last year or so in the residential business and I think it continues to pay off for us.
So.
I mentioned earlier we.
So being able to respond to this environment as it is an advantage so having access to materials one aspect of that.
And then being flexible with some of the unique things that have been ongoing for a lot of our customers are you know we've just been in a better position to be able to to have to respond accordingly, so I feel good about.
The position, we're in and the expansion we've made.
In total as well as in some of the unique geographies that historically, we were not in as well as we needed to be.
Thank you.
Mhm.
It appears that there are no further questions at this time I would like to turn the floor back over to Mr. Basso for closing remarks.
Well again, thanks, everybody for joining us today.
We look forward to seeing all of you in person or virtually at our Investor Day in New York here on November 17th.
We'll also be attending investor conferences in both December and January.
I want to wish everyone, a safe and happy rest of 2021 and look forward to reporting our progress in the fourth quarter earnings release. So thank you and have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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