Q1 2023 Gibraltar Industries Inc Earnings Call
Speaker 1: The I I.
Speaker 1: Qu most.
Speaker 2: session will follow the formal presentation. If anyone should acquire operators that's in the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyn Kapasio of LHA. Thank you, Carolyn. You may begin.
Speaker 3: Thanks, 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 the slide presentation that management will use during the call, are both available in the investors section of the company's website.
Speaker 3: Gibraltar1.com. Gibraltar's earnings press release and remarks contain non- GAAP financial measures. Table of reconciliation of gap 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.
Speaker 3: These statements are not guaranteed the 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.
Speaker 3: Now I will turn the call over to Bill Boswey.
Speaker 2: Thanks, Carolyn. Good morning, everyone, and thank you for joining today's call. We'll start with an overview of the first quarter 2023 results. Tim will then take you through our financial performance, and then I'll walk you through our 2023 outlook, and then we'll open a call for your questions. So let's turn to slide three titled first quarter 2023 results. Thank you.
Speaker 2: We got off to a good start in the quarter and delivered the net sales, earnings, and cash performance we expected going into the year and saw 20% sequential growth and order backlog as the pace of business really started to increase.
Speaker 2: 17% adjusted EPS growth, and 12% free cash flow margin on a net sales decrease of 8%.
Speaker 4: additional purchases on our share repurchase authorization.
Speaker 4: Current trends in our end markets and positive custom order activity are also developing as expected and aligning to support our expectations and 2023 guidance. Let me give you a quick snapshot of our end markets.
Speaker 4: Start with renewables. Bookings increased at a very solid pace during the quarter and nearly doubled sequentially. As a result, our backlog increased 34% sequentially and year-over-year backlog comparisons are expected to turn positive as the pace of business continues to strengthen.
Speaker 4: We also continue to partner and align with customers who are advancing through the UFLPA Lean and Learning Curb and security panels from other sources for their respective projects.
Speaker 4: In residential, we're starting to see positive market momentum. Recent customer point of sale results are illustrating positive in-market growth as the residential season begins.
Speaker 4: Channel inventory is back in balance with seasonal norms. Participation gains with new and existing customers are beginning to have an impact. And acquisition of QAP has expanded our presence in new geographies and in markets.
Speaker 4: In AgTAC, we saw good momentum across our commercial business, our largest greenhouse segment today. In the corner, we experienced some project reshoping as a couple of our customers increased the size and capabilities of the building that they're growing in design and when finalized we expect bookings and backlog to increase and drive demand this year. Thank you.
Speaker 4: The active project pipeline is currently at its highest level in company history driven by large produce and cannabis projects.
Speaker 4: Our infrastructure business is experiencing solid demand momentum and is expected to continue as new bookings accelerate and drive water backlog accordingly. This business is really set up for a good year.
Speaker 4: So in summary, we delivered good results in the first quarter by executing our key initiatives and staying focused on what matters most. We continued simplifying focus. We delivered the first quarter in line with our expectations. And as a result, we remain confident in our full year guidance as well. And with that, I'll turn it over to Tim for a review of our results. Tim.
Speaker 4: Thanks Bill and good morning everyone. I'll take you through our consolidated and segment results starting on slide 4.
Speaker 2: Adjusted first quarter sales decreased 8% to $290.8 million.
Speaker 4: Organic sales decrease 12%. Partially offset by the impact of quality aluminum products revenue in residential and sales growth in the infrastructure business.
Speaker 4: The organic decrease related to volume impacts from end market dynamics in the renewable segment, customer re-scoping and re-prioritizing produce growing projects in the agtech business.
Speaker 4: and a return to historical seasonal demand patterns and channel inventory correction in the residential business. Backlog at quarter end was 359 million, down approximately 17% versus the first quarter of 2022, but up 20% sequentially as the pace of business began to accelerate in the quarter, specifically in the renewables and infrastructure business.
Speaker 4: Adjusted operating income and adjusted EBITDOT dollars each increased 14% in the first quarter, with adjusted EPS up 17%.
Speaker 4: Margin improvement in the quarter was driven by continued solid execution of renewables, egg tech and infrastructure segments.
Speaker 4: Margin improvement in the quarter was driven by continued solid execution of renewables, ag tech, and infrastructure segments, and the residential margins delivering as anticipated.
Speaker 4: Weighted average shares outstanding decreased 6.1% to 31 million shares in the first quarter.
Speaker 4: with slide five, the Renewal Segment.
Speaker 4: The decrease in sales was impacted by two variables. First, the slowing of bookings in the second half of 2022, once the U.F.L.P.A. went into effect in June . And the second, adverse and late winter weather delaying construction of projects in the regions impacted.
Speaker 4: However, the pace of activity of booking strengthened throughout the quarter with bookings nearly doubling sequentially as customers secured panel from a variety of sources.
Speaker 4: grew 34% sequentially during the quarter.
Speaker 4: We continue to work with customers who are coming up the UF LPA learning curve and expect year-over-year backlog comparisons to turn positive as we move through the year.
Speaker 4: As we've stated, our backlog consists only of signed contracts with deposits.
Speaker 4: or verbal agreements with customers in our new bookings or backlog.
Speaker 4: As we expected, we improved segment profitability with adjusted operating in EBITDA margins increasing 920 and 120 basis points year-over-year, respectively.
Speaker 4: Margins were driven by 8020 initiatives.
Speaker 4: build operations productivity, and improve supply chain management.
Speaker 4: Margins declined on a sequential basis as overall volume declined 31% and the weather our installation crews faced was more challenging than in the fourth quarter. We expect sales and margin trends to strengthen throughout the year as customers continue to make more progress with the UFLPA importation.
Speaker 4: Continue to establish additional sources of panel supply.
Speaker 4: And we continue to enhance and integrate IT operating systems, accelerate best practices and supply chain management.
Speaker 4: The segment sales were flat with last year.
Speaker 4: Volumet products contributed 8% growth and we were able to drive additional participation gains across the business. These two contributors offset the decline in organic sales that was driven by the industry headwinds going into the year.
Speaker 4: The overall channel inventory correction, the markets return to normal seasonal patterns, market price reductions tied to commodities, and a late winter weather surge in key regions of the US.
Speaker 4: customer point of sale data reflects positive growth over last year.
Speaker 4: We also continue to see a number of opportunities to gain participation and expect to have success in 2023 similar to that in recent years.
Speaker 4: Adjusted operating and EBITDA margins contracted 230 and 190 basis points respectively.
Speaker 4: the quality aluminum products contributing about half of the decrease. The organic decrease was anticipated as price material costs continued to realign during commodity price deflation and the market returned to its normal seasonal demand pattern with a somewhat slower seasonal start.
Speaker 4: A sequential basis, margins expanded 300 and 300 basis points respectively, as price material costs alignment improved during the first quarter. The integration of quality aluminum products is going well, and we continue to identify additional opportunities to grade value.
Speaker 4: Price material cost comes into better alignment.
Speaker 4: the quality aluminum products integration benefits are realized.
Speaker 4: And we also expect to continue to standardize our systems on a common ERP platform over the course of the year in our residential business.
Speaker 4: which we expect will drive further efficiencies in the future. Let's move to slide 7 to review our AgTech segment.
Speaker 4: Adjusted sales decreased 18% as produce customers resized existing fruit and vegetable projects to prioritize the launch of future growing facilities, driving temporary project startways.
Speaker 4: While backlog decreased 31% year over year and 3% sequentially,
Speaker 4: Bookings and accordingly backlog are expected to increase in the coming quarters as the active project pipeline is at a highest level in company history driven by producing cannabis projects.
Speaker 4: Segment adjusted operating and EBITDA margins increased 440 and 510 basis points respectively through stronger business mix, additional improvements in operating systems which are now fully unified across the business.
Speaker 4: supply chain productivity and efficiency improvements. And we continue to expect solid, larger performance in 2023.
Speaker 4: Let's move to slide 8 to review our infrastructure segment.
Speaker 4: Segment sales increased 8.7% driven by strong demand, participation gains, and the positive impact of the Infrastructure Investment and Jobs Act. As we expected, momentum continues with backlog increasing 38% year-over-year as state governments gain access to federal funding and strong demand persists in both fabricated and non-fabricated product lines.
Speaker 4: We expect continued strength this year from increased infrastructure spending related to the Infrastructure Act and our ongoing efforts to increase market participation.
Speaker 4: Segment adjusted operating income more than doubled and adjusted operating and EBITDA margin improved 800 and 760 basis points respectively.
Speaker 4: driven by volume, strong progress in 80-20, and supply chain initiatives with improved price management.
Speaker 4: We expect continued strength and profitability through the rest of the year.
Speaker 4: Now let's move to slide 9 to discuss our balance sheet and cash flow. At March 31 we had $344 million available on our revolver and cash on hand of $7 million.
Speaker 4: During the quarter we generated $38 million in cash from operations through a combination of margin improvement and $8 million generated from reductions in working capital.
Speaker 4: Accounts payable is beginning to return to more normal levels from the depressed level at year end related to the timing of our destocking of inventory.
Speaker 4: As a result, our free cash flow generation during the first quarter was strong and counterseasonal 12.3% sales.
Speaker 4: We used the cash generated along with cash on hand to pay down $39 million on a revolver during the quarter. And at quarter end we had $52 million outstanding on a revolver for net leverage under one quarter of a turn.
Speaker 4: We remain focused on driving continued improvement in our operating cash generation on stronger profitability in 2023 with lower investment and working capital, and are targeting free cash flow in excess of 10% of sales for the year.
Speaker 4: We continue to expect to use generated cash flow to repay outstanding borrowings.
Speaker 4: fund investments in organic and inorganic growth along with opportunistic stock purchases.
Speaker 4: is needed by the use of our revolver depending on timing of any M&A or repurchases.
Speaker 4: Let's move to slide 10. We'll update you on the share repurchase program. During the quarter we repurchased approximately 154,000 shares with a market value of $7.4 million at an average price of $47.99. We funded this repurchase through operating cash flow.
Speaker 4: From inception of the buyback to the end of the first quarter, we've expended approximately 47% of our $200 million authorization.
Speaker 4: And at quarter end we had 30.8 million shares outstanding with a weighted average shares of 31 million during the quarter.
Speaker 4: at 30.8 million shares outstanding with a weighted average shares of 31 million shares during the quarter. Now I'll turn the call back to Bill.
Speaker 4: Thanks, Tim. Let's move to slide 11 to discuss our 2023 strategy and priorities. As we said on our fourth quarter call, we have successfully managed change and uncertainty by maintaining our focus on simplification.
Speaker 4: So while the external environment has settled somewhat in terms of inflation and supply chain, there still remains some areas of fluidity. So that required us to stay this course and to drive momentum and participation in all our markets. So really, our priorities and our focus for 2023 are unchanged. Number one, drive growth, quality of earnings, and margin improvement, and strong catch performance.
Speaker 4: Secondly, execute our 80-20 initiatives, win more participation, expand margin, drive service levels higher. 80-20 remains our foundation. It serves us well when in markets are dynamic, regardless of what direction we're going.
Speaker 4: Third, stay the course with our investments in digital transformation. Our ERP, CRM, and HRIS system improvements are really going to help us scale our business with speed and agility and productivity. Fourth, strengthen the organization in terms of diversity of thought, experience and capability through education development and with the addition of new members to the team.
Speaker 4: And it fits just continue to conduct business in the right responsible way with discipline and focus. It's really a non-negotiable insider for a wall.
Speaker 4: Now let's move to slide 12 to review our 2023 guidance. Testware bookings and demand across the business are shaping up as we anticipated, and we are on track for a solid second quarter.
Speaker 4: Given this, along with our first quarter performance, our outlook for 2023 is unchanged. It assumes modest full year growth, continued margin expansion, and strong cash performance.
Speaker 4: To recap our guidance is as follows. It can consolidate a net sales range of 1.36 billion to 1.41 billion compared to 1.38 billion in 2022.
Speaker 4: Assuming down organic scenario at the low end and modest growth at the high end with momentum building through the year.
Speaker 4: Gap operating margin expansion in a range between 9.9% and 10.1% compared to 9.4% in 2022.
Speaker 4: and adjusted operating margin expansion to a range of 11% to 11.2% compared to 10.9% in 2022.
Speaker 4: Gap EPS and a range between $3.04 and $3.24 compared to $2.56 in 2022 and adjust the EPS to a range between $3.46 and $3.66 compared to $3.40 in 2022.
Speaker 4: And finally, free cash flow is a percent of net sales of 10% compared to 6% in 2022. My thanks and appreciation go out to our entire team for the focus, the enthusiasm, and frankly really good results. As an organization, we continue to demonstrate agility, resilience, and fortitude in everything we're doing.
Speaker 4: and we're going to continue to build on a good start to 2023.
Speaker 2: So with that, now let's open up the call and we'll take your questions. Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. The confirmation tone will indicate your line is in the question queue. Anyway, press star two if you'd like to remove your question from the queue.
Speaker 2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment please while we poll for questions. Thank you. Our first question is from Dan Moore with CJS Security. Please proceed with your question.
Speaker 5: Hi, good morning. It's actually Lee Jagoda for Dan this morning.
Speaker 5: First question is on the renewable side. Looks like the backlog is really coming together nicely. Can you just talk through your updated thoughts related to the pin points of turning some of that backlog into revenue and how you envision that timeline playing out through the balance of the year?
Speaker 2: Yeah, Lee, thanks. Our typical conversion on backlog once an order is brought in across the finish line is anywhere from three to nine months. It really depends on the size of the...
Speaker 2: project and they do range. So you start to see backlog building beginning of the year, you're likely to see that turn the revenue in the three and nine months period following their after some. Could you extend beyond that? That's the general way to think about it.
Speaker 2: And then at the moment there's nothing in the supply chain or otherwise that that would prevent that timeline from kind of playing out as normal this year? No I think once you know once you get the contract signed and that's why we try to emphasize that that's a signed contract with a with a with a deposit in hand what that entails as a customer at that point has a panel.
Speaker 2: And that's been the, the dilemma of the last couple of years is that's a big change from the way business was done prior to this UFLPA thing happening, but Really there hasn't been any other things holding that up as there once was so it's getting better with the contract sign yet pretty good
Speaker 5: pretty good runway to execute accordingly. Got it, that's very helpful. Just one more question regarding capital allocation. Just given the net leverages is trending towards net neutral, wondering your thoughts on
Speaker 5: the M&A environment, the opportunities you see out there, sort of the areas that look attractive to you, and then from a multiple perspective, are you seeing anything in the market that gives you some hope in terms of multiples coming down and having it make pretty good sense from a return perspective?
Speaker 2: Yeah, so on a broader front, we started to see the M&A environment slow last year as interest rates came up, as you would expect. I do think there will be some opportunities later in the year, is what we're anticipating. We have a pretty well-defined group of targets that we've actually had discussion with in the past, but processes were stopped last year. I think some of those processes may start up and I think there'll be some...
Speaker 2: holding some of this back, but we'll see how things evolve. But in terms of where and the type of folks that we'd like to work with on that front, we have a pretty good idea of what we'd like to do.
Speaker 5: Okay, thanks very much. I will hop back into queue.
Speaker 5: Thanks very much. I will hop back into Q. Thanks. Okay.
Speaker 4: As a reminder, if you'd like to ask your question, please press star one on your telephone on keypad.
Speaker 4: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question too.
Speaker 4: Our next question is from Julio Romero with Todoti & Company. Please proceed to your question.
Speaker 6: Thanks. Hey, good morning, Bill and Tim. Maybe start on residential, really nice performance and sequential improvement there. If you could just speak to how far you are, how far along you are with regards to price-cost alignment. Do you think first quarter results represents the bulk of that alignment? Just help us get a sense of what inning we're in and how much more.
Speaker 2: where the start of the nine inning game happened and Q1 would be the second half of that nine inning game and we would expect the transition to almost be complete but you'll see more improvement in Q2, three and it's just gonna get better beyond that. So price cost alignment with the channel rebalancing of inventory, offsetting as well as the...
Speaker 2: you know, commodity price deflation that we saw in 2022, the second half, that's, you know, flushing through, I think, pretty well as we had anticipated. So I think, you know, Q2 onward is where you'll see the turn and an improvement kick in, which supports our plan as we head going into the year.
Speaker 2: Okay, that's really helpful. And if you could just speak to the runway for participation gains you have in the segment. Yeah, we're pretty excited about that. It's been part of our playbook as you know. We've talked about this a lot the last three years and I think the momentum is very strong there as well. So I tip the
Speaker 2: It's a combination of things, new customers as well as existing, just having an opportunity to do more with them and then there's an opportunity in some different regions. So you remember when we bought QAP, one of the things that we talked a lot about is there's some new segments we've gotten into, i.e. manufactured housing, there's some new geographies that we are now more present in in the upper Midwest and parts of the East that we weren't before.
Speaker 2: So yeah, just a lot of good work that really started last year. And anytime you have a major shift in market price points, PLRs start to open up.
Speaker 2: And those would just create a lot of opportunities. And so we've been pretty aggressive making sure we're at the doorstep of every customer opportunity and I think we're going to have pretty good success this year as we've had the last couple years.
Speaker 6: Great, and do you still expect the segment to have some reversion of seasonality this year, in other words, kind of better Q2, Q3, and kind of a more seasonal Q4? Yeah, I think the industry is back to that. Assuming we don't have another global supply chain issue that affects the world.
Speaker 2: I think the seasonality will return to what it's historically been for the last 60 years, which is typically a slower Q1 and then you start to build as a season. The season tends to start against a little bit regional, but tends to start late March. We had a little bit of delay in that this year because if you go back and look at where we had some pretty big snow events, they happened in the last couple weeks of March, which...
Speaker 2: You argue, it happens every year, but it pushes that season out. It can start that season, it can be pushed a couple of weeks one way or the other, but you tend to start up there. So Q2 and Q3 are your strongest. And Q4 is a little bit more weather dependent. It can go as long as the weather holds out because it's all construction season.
Speaker 2: Q2 and 3 are peak, Q4 is probably solid, and Q1 is always your lowest. I think the industry will get back to those norms.
Speaker 6: this year and going forward barring any major again supply chain disruption issue. Great and if I could just sneak one more in here on renewables just wondering how you know speak to how the panel supply expectations are trending relative to three months ago if that issue is getting better worse than expected or steady state.
Speaker 2: Yes, I would say it's improving. The tier one guys, which account for a large portion of the volume that comes into the US.
Speaker 2: A couple of those, one in particular is having more success and that's really good. I would say it's on track with where we thought. If you remember we said, look, the first half of the year the industry will still be going through that process and going through the learning curve. It will start to accelerate in the second half. I would say it's playing out that way right now. That's really for panels that are coming.
Speaker 2: from or through the traditional channels where we've been impacted by the U.F.L.P.A., etc.
Speaker 2: In parallel to that a lot of customers and it really does depend on who you partnered with because not every customer necessarily has the the same supply chain management capability But if you're partnered with the right folks or you're fortunate to be partnered with the right folks Those folks have really worked hard the last 18 months to find other sources from other parts of the world as well, and so we're seeing
Speaker 2: some of our larger customers had some success there. And I think that's why bookings really started to accelerate in Q1 and frankly, at a faster rate than we anticipated. So that's all towards goodness, but yeah, I'd say things are getting better.
Speaker 2: We still have a ways to go, but that's how our plan was built, as you know, going into the year. That would be first half slow, second half would accelerate. You know, I'd say we're there if not maybe a little ahead of that.
Speaker 6: I will pass it on. Thanks very much for taking the questions. Thank you. There are no further questions at this time. I would like to hand the floor back over to Mr. Bodley for any closing comments.
Speaker 2: Again, thank you everyone for joining us today. We do expect to present at the KeyBank Industrial and Basic Materials Conference in June and then at the CJS Summer New Ideas Conference in July . I look forward to updating you again when we report our second quarter results. Thank you and have a great day.
Speaker 4: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.