Good day, ladies and gentlemen, and welcome to the Gibraltar Industries' Third Quarter 2017 Earnings Conference Call. Today's call is being recorded and webcasted. My name is Bob and I will be your coordinator today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of the conference call. I would now like to turn the call over to David Calusdian, from the company's Investor Relations firm, Sharon Merrill Associates. Please proceed.

Good morning, everyone, and thank you for joining us. If you have not received a copy of the earnings press release that was issued this morning, you can find it in the Investor Info section of the Gibraltar website, gibraltar1.com. During the prepared remarks today, management will be referring to presentation slides that summarize the company's third quarter performance. These slides are also posted to the company's website. Please turn to Slide 2 in the presentation. The company's earnings press release and slide presentation contain forward-looking statements about future financial results. 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. Additionally, Gibraltar's earnings release and remarks this morning contain adjusted financial measures. Reconciliations of GAAP to adjusted financial measures have been appended to the earnings release. On our call this morning are Gibraltar's Chief Executive Officer, Frank Heard; and Chief Financial Officer, Tim Murphy. At this point, I will turn the call over to Frank. And please turn to Slide 3.

Thanks, David. Good morning, everyone, and thank you for joining us on our call today. We delivered another quarter of solid results as we execute on our growth strategy and continue to build positive momentum at Gibraltar. Financially speaking, we exceeded our GAAP and adjusted earnings guidance, reporting a 49% increase in GAAP EPS to $0.64 and 22% increase in adjusted EPS to $0.67. These positive results demonstrate the success of our value-creation strategy, especially given that our sales remained essentially flat year-over-year. A 10% increase in sales from our Residential Products segment and 7% sales growth in our Renewable Energy & Conservation segment offset a difficult year-over-year comparison, due to divested businesses as part of our portfolio management strategy and lower infrastructure activity. Overall, consolidated revenues of $275 million were at the lower-end of our guidance. Return on invested capital continue to improve in Q3, increasing to 11.7% from 11.2% last year on a trailing 12-month basis. During the quarter, we made good progress on our four-pillar strategy. We delivered a 190 basis points of margin improvement from our 80/20 operational initiatives. Our innovation efforts are resulting in new product development successes across Gibraltar's businesses and the integration of Nexus and Package Concierge acquisitions are performed in line with their expectation in enhancing Gibraltar's long-term competitive position. After Tim reviews our financial results, I'll discuss each of the four pillars and our updated guidance for the year. Tim?

Thank you, Frank, and good morning, everyone. Let's move to Slide 4 in the presentation, entitled Solid Consolidated Results. We recorded solid results with revenues at the lower-end of our expectations and earnings exceeding our guidance. Strong results in our Residential Products segment, recovery in our Renewable Energy & Conservation segment and additional benefits from lower performance compensation offset a continuing challenging environment in our Industrial & Infrastructure segment. Highlighting our performance on an apples-to-apples basis, excluding divestitures and other non-repeating factors, our base revenues were up 4%. While raw material cost to selling prices remained out of alignment during the quarter, reduced corporate expenses due to lower variable compensation and 80/20 simplification initiatives resulted in a 170 basis point increase in adjusted operating margin. Now, let's review each of our three reporting segments starting with Slide 5, the Residential Products segment. Demand for commercial package solutions and improvement in the repair and remodel market, as well as new housing construction drove higher year-over-year sales in the third quarter. On the bottom line, we benefited from demand for electronic package lockers and integration of Package Concierge as part of our postal and parcel group. As Frank will detail later in the call, we are making excellent progress driving synergies with the ExpressLocker team. Adjusted operating margins increased 190 basis points year over year due to continued 80/20 operational improvements and leverage from the increasing volumes. We expect fourth quarter margins to reflect the normal seasonal slowdown in this business. During the quarter, two major hurricanes hit the U.S. While we do not anticipate a near-term impact on our business from Hurricane Harvey that affected the Texas region, it's still early days to determine the impact of Hurricane Irma which hit the Florida region. We expect there will be demand for…

Thank you, Tim. Our five year four-pillar value creation strategy continues to gain momentum and deliver results. Our first pillar of operational excellence is focused on reducing complexity, adjusting costs, and simplifying our product offering through the 80/20 initiatives across the organization. In Q3, 80/20 projects contribute to 190 basis points of operating margin improvement. Overall in 2017, we continue to expect $0.23 per share of increase from this project. During the quarter, we advanced our outsourcing initiatives across the organization for our B products, we continue to make progress on in-lining activities, particularly in two of our businesses. To demonstrate our progress in these efforts, we've tracked a number of metrics including line fill or percentage of complete orders delivered on time to our 80 customers. In 2014, when we launched our transformational plan, line fill approximated 65%. Today, we're tracking north of 95% further demonstrating our commitment to align our resources to support our key customer partnerships. In the fourth quarter, we'll continue to work on in-lining and outsourcing initiatives, and expect to begin implementing simplification projects in our newly acquired businesses. Next is our portfolio management pillar, focused on evaluating product lines, customers and end markets to best allocate leadership time and resources to the highest potential platforms and businesses. In 2016, we exited two industrial platforms as well as our European solar racking business serving the residential rooftop market. While, we do not have any planned activities for the remainder of 2017, we view portfolio management as a continuous process that we remain an important part of our strategy as we look to improve the Gibraltar's long-term financial performance. Our third pillar is innovation, where we focused on products with patent protection, developed internally or to acquired product lines. These products represent 7% of our sales,…

Thank you. Ladies and gentlemen, we'll now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Ken Zener with KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen.

Good morning, Ken. How are you?

Good.

Good.

Lots of things happening this quarter, so I want to start with solar, because I think that was causing some of the greatest earnings loss [for you in your] [ph] 13% EBIT. I think, Tim, you talked about that being kind of flat sequentially into Q4, is that correct? Did I misunderstand?

Yeah, correct.

Okay. You talked about solar having some pull forward, because the uncertainty around the ITC ruling. Yet, I believe, Frank, when you're kind of closing out your comments you talked about solar softness a little bit. Could you kind of, well, match - bridge those two comments there? I mean, is it just the third quarter you had some pull forward in demands? But you said your backlog was - so I'm trying to understand what the outlook is there specifically for sales.

Let me, Ken, let me address that. So we think fourth quarter, some of the activity that we're seeing coming in the fourth quarter may be people pulling forward demand in advance of any kind of tariffs going on panels. And it's a suspicion, we don't know that, but we're seeing activity at higher levels, so our backlog was up.

Ken, just an additional comment around that, typically the fourth quarter, since we've owned this business, has always been kind of a really strong quarter, simply because of the way the financing works, is people try to close out by the end of the year. So it always has a lot of activity. I think what we are seeing, that's kind of an increased level is the amount of engineering bidding activity proportional to that same quarter that's new and different. That we think it's tied to maybe companies trying to position themselves for maybe a less than favorable ruling on the Suniva case. That being said, I think by and large the actual revenue stream that's transforming the third quarter and the fourth - that's showing up in the fourth quarter, is not atypical than prior years. It's the increased bidding activity and engineering activity that gives us some pause as to is that really going to be pulled forward in early 2018, because maybe people have bought forward on panels. At the end of the day, we suspect it, we don't know it. But it's…

Okay, so the seasonality of sales is in line, the bidding engineering appears to be greater. So if you have, whatever, 100 bids out there, you are seeing conversion of a higher percent than normal, which would be more of a front half 2018 event, if anything, is what you're suggesting?

Right, yeah, - and at some point as Tim will articulate we've had recent releases of directionally where Suniva is going over the last 24, 48 hours. And then that's got to be confirmed or adjusted by the President at some point after the middle of the month. So it's still kind of shifting fence a little bit. But directionally it seems to be appropriate at this point. Tim?

Okay. And if I - I apologize, but solar is obviously so important. Now, I think your 13% is good, certainly surprised us. But if you take a step back into the beginning of the year, when I think the back half was going to be - if we have 13%, 13%, 3 and 4 Q, that would be 100 or 200 basis points below your initial expectations, obviously a lot above for 2Q. Could you put in context what is exactly driving that? I mean, how much compensation, and I apologize. Is compensation running through EBIT volumes in the segment or is that a separate line, because it sounded like compensation expense is helping you all with the lack of compensation expense. Is that running through the EBIT, that for example in solar? And what advantage did that pick up and why it didn't reach the 15% versus your initial expectation?

The compensation - there is a little bit of compensation in the business units, but the bulk of it sits at the corporate office. So really if you look from beginning of the year to where we are now on margins, its material costs are higher than we had anticipated when we originally set our guidance.

I think the other thing to put in perspective, Ken, when we bought this business, we bought it with the expectation that over the five years that we would manage it toward that we thought it had a 15% operating margin and 15% return on invested capital potential, which is one of the reasons we bought in for that rising tide and space. And what we thought was there, and continue to believe is the unique value proposition. The fact that we accomplished and that out in front of our original expectations in our first operating year 2016 was, as we articulated in several calls before, people executed what we thought were difficult projects faster and we brought online in-house rule forming and other types of things. And that allowed us to move quicker, the reality is that certain amount of that is given back into our contribution and the balance of systems to make sure the industry gets the grid parity, which [we - in fact RV] [ph]. So being at now tracking in sort of I think we're 13-and-change in terms of operating margin for this group. If we go back to our acquisition model, we're about a 1.5 point ahead of where we expected to be originally. And we feel pretty good that as we grow this business now going forward and the market has come down to pretty much grid parity, we got the business that we expected when we originally justified its acquisition. So I guess, in retrospect, one could argue maybe we accomplished a little bit too much early with this business, providing higher margins.

Yeah.

But you take the opportunity that they present themselves and our people did some great work, faster than we expected to be quite honest. So, but where we are today, we feel very good about where we are and directionally how stable the margins are going forward in the absence of the flat spot we had early in the year, because we kind of choked their backlog a little bit and had some - they were still carrying some fixed cost that weren't supported. But that was kind of a self-imposed action on our part.

Good. I have more questions, but I'm going to go back in queue. Thank you very much.

Yeah, thanks. Thanks, Ken.

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

Yeah, good morning, guys. It's Pete Lucas for Dan. Sticking with solar, just want to get your thoughts on, as far as recent proposals from ITC, still a lot of unknown in terms of what the President would do. But what do you think the current proposals would mean for overall demand? I know you're seeing a slight pick-up, but just your thoughts on if that was what it was going forward. How you see that impacting demand?

There is a range right now of proposals that would some impact on future demand. So we're really waiting to see what the President will do to get a better view of what would happen. I will say that the proposals that came out were much lower than what petitioners asked for, so that's encouraging. But we'll see what the President does.

Yeah, I would only add two words, maybe you can quote me. I would say directionally encouraging for the industry, the players within ourselves and - so I think that's where we are today. And I think, probably, the industry with have a similar view.

Okay, great. Thanks. And talking about your progress with the tracker products, you mentioned gaining momentum for system installed in Q2 when handful more hopefully by year-end. I just want to understand, how those projects are being received, and what type of mix between fixed in tilt tracker products is reasonable to think about over the next two to three years?

Yeah, I think that, I've personally walked some of the early installations, and sat with one of our key developers and partners on the installation side. And we design this product to be disruptive in terms of its technology, and how you could cost a site regards to the energy produced, but also the cost that went into both the racking system, but also the site itself in terms of grating, and I think the general response has been to all those different stakeholders is that people believe it's a disruptive approach to producing the most power out of the fixed geographic site with the lowest possible cost and the lowest OEM cost. So we feel pretty good so far about it, like in fixed tilt, we participated in the lower end of the market in terms of scale, the 1 to 10 megawatts in the tracker space, which is two or three times larger than the fixed tilt space. We expect to participate in the lower scale side of that space as well. We think it's going to be and continue to well accepted. Our view of the tracker of this technology relative to our core businesses is that, it will begin to have a material impact on our business in 2018 going forward and becoming a bigger and bigger part of the business over the next three to five years.

Okay. Great. Jump into the electronic package lockers, you talked about growing, I think it was towards 850 you've said and being a market leader there. Just wanted to know, if you could update us on the competitive landscape, as Amazon recently appears to be more aggressive to promoting the role out of their lockers built by lower cost oversea suppliers?

Yeah, I'll maybe start, and if Tim wants to add. I mean, here is what we do. Our primary focus is all the pain-point for the end user and we define the end user as the tenant or resident in a multifamily Class A or Class B property. So first and foremost, we think we are unique in that, we're trying to provide a safe and secure location at the consumer's convenience to receive packages. And we don't need everybody else in the competitive landscape approaches it in the same way targeting the same pain-points understanding that it's really the residence, we needs to be help. We do that by making sure that what we design both in terms of the software integration aspect of our business that interfaces with the building software, and our product is designed very specifically for that particular building with that group of residence that have certain demographic. So we go in and we design series of locker systems that are customized to the ages of population in the building and the number of residents. And the size of the footprint and the different sizes of the lockers are statistically analyzed to ensure that we get the right fit for that building population. We are the only ones who do that, other people have a - this is our program, this is what it looks like, and it gives every building in the same way and whether it fits for the age of the population or the number of people in the building. The rest of it will end up somewhere else, if there's peaking values in flow. The other thing is that, by the nature of how we designed our program. The data remains relative to the individual resident and related transaction data remains…

Very helpful. Thanks, guys. I'll jump back in the queue.

Thank you. Our next question comes from the line of Walter Liptak with Seaport Global. Please proceed with your question.

Hi, good morning. Thanks guys for the good quarter.

Thanks, Wal.

I just want to follow-on with price cost, and ask about pricing strategies, maybe the start with - I think, you talked about the raw material cost in the solar business. How are you addressing material costs, it sounds like you're not going to get to the 15% margin in the fourth quarter. But what's your - all things being equal, as you get into 2018 is 15% still the target, pricing strategies to pass through those higher material costs. So maybe talk about the other businesses too, Residential. What are you seeing from roofing material, and pricing, and pricing strategies as well as Industrial?

So, Walt, just at a high level, I'll give our philosophy around it and then I'll let, Tim, dig into the segments. Our price recovery approaches every months starting in early 2014. We track our top 80 customers against the top 80 SKUs they buy. And reconcile our raw material cost for those products monthly, and then we kind of look at trying to recover or adjust pricing up or down to ensure a certain gap in terms of targeted margin profile. So every month we kind of have at bottom right hand corner as to whether or not we're running above or behind them, then we can break it back down by segment, we can break it down to business unit, then we can break it down by customer and key products. So it's just fairly sophisticated tracking program, but the overall - so there's - it's very countable, very visible. The other thing is that we try to recover price, and we also try to recover margin. That being said, we do that - way that, we ensure that we can allocate the most amount of, I guess, price compromise or margin to our top 80 customers, in a way that helps them to be the most competitive in the marketplace to grow their share and return it's beneficial to us. So one of the things, the 20 process has helped us with it instead of blanket price increases, where it could be some harm to our key customer base, which we try to ensure that - our price management programs support our key customers, where we want to grow share in key markets. So that's our overall philosophy, and how we go about management and overseeing it from a corporate officer perspective. And then we have active conversations with the Group Presidents and the related businesses to how they're implementing recovery programs or get back programs, as raw material shift. So Tim, I don't know, if you want to address the part B of that.

Yeah, Wal. If I think about for the remainder of the year, I expect very similar to what we saw on the third quarter. And we're beginning to roll-up 2018 as we speak, so we don't really have a great view of 2018. The share will be sharing that guidance in February, but in general, to Frank's point, we try to do everything we can to fairly allocate material cost changes between our customers.

Okay. All right. Great.

Yeah. And Wal, just to wrap up. I don't see anything in our current performance, and the activities going on, the supporter that will suggest that our incident - we have inability to recover twice sort of overall in the Gibraltar portfolio, or within specific areas. Today, we take away from our long-term goals in terms of margin profile. I think the one that we continue to struggle with, and we said publically here as well, is that industrial area continues to lack our expectations.

Okay, great. And then, if I guess, other follow-on the Renewables. You mentioned backlog is up year-over-year and quarter-over-quarter, or orders up year-over-year. And are you expecting organic growth in the fourth quarter?

Orders are up year-over-year. And organic growth, yes. So the backlog numbers are pro forma, so we treated the backlog as if the acquisition that occurred in the third - during the fourth quarter had occurred beginning or at end of the third. So we took its backlog and added it in when we compared to the backlogs.

Okay, great. Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Brad Meikle with Coker Palmer. Please proceed with your question.

Brad?

Yeah, hello. Can you hear me?

Yeah. We can hear, Brad. Good morning.

Hi, okay. Thanks for the question. I don't understand the logic of this solar commentary in terms of the pull-ins, because the price spike happened really at the end of Q2. So how is it possible really that demand got pulled into Q3, because in fact, what we're seeing is, if anything, projects getting pushed out or the other bill of systems getting more competitive, due to the $0.10 increase in module prices. And then that's the first question, the second is just that, with the transition to tracking, do you have the [Black & Bead] [ph] certification yet? Usually, we've seen that suppliers get traction about a year after getting a [Black & Bead] [ph] certification and then what are you just seeing in the price trends in the fixed tilt? Thank you.

Yeah, first question, what we're seeing pulled forward is not in terms of core activity other than sort of the bidding engineering activity is up and moving different than what we've seen prior years. So what we see in terms of the actual business in forms of the order book and sales is similar to prior years. So I mean, I think we referenced that in earlier call. The second question is, relative to our tracker, early days in terms of our tracker, their test fields was existing customers and that's about what we're about - prepared to share at this point for competitive reasons. Understanding it's a fairly small market of players. So once we come out of test and we feel comfortable, ensuring more of that from a local business perspective we'd be happy to do that in future quarters.

And do you have the Black and B certification for tracking yet?

That's a question we're not prepared to answer at this point in time.

Okay. And then there is - did the backlog grow for renewables sequentially?

Correct, yes.

How much did it grow or…?

It's up over the prior period, supports our forecasts for the fourth quarter and our outlook.

Okay, because when I look in 2018, I see probably a 10% to 15% increase in utility scale. But overall, the market seems to shifting really rapidly. I think the fixed tilt business overall for the market will be down probably 50% next year, because developers are getting squeeze on module prices, look at the bill of systems cost, the next biggest line item is tracking or your mounting systems. But obviously switching to tracking increases your revenues by probably 20%, now for the average product. So that's the trend we see happening next year, and so do you think we'd be able to get enough tracking business to offset the steep drop in fixed tilt business?

I think that sort of the reference stats that you're sharing with us are, trends I think are right, specific numbers. We would suggest that they don't apply specifically to how we participate in the business and the types of customers and products that we use to participate in the market so, but that being said, I think directionally we would agree with your statements. And then I think the second part of your question, do we believe that we could continue to grow and enhance our margins relative to our original justification to get in the space? Yeah, the answer is yes to that question.

Okay, thanks for that. And then, could you talk about just the impact on steel costs increasing? Do you think you'd be able to pass that through? And then, I can see it possibility in residential, but in renewables where it's more of a competitive business?

Yeah, I think that, as I said, overall in our prior call, what our philosophy was on sort of price management. And certainly I think your comment relative to residential, I mean, it's - our residential - the residential market, is not easier, but I think it's made up of wide range of components in terms of new builds. It's segment between single and multiple. And it also has a major component of renovation and repair. And if you look at our distribution of revenue in residential you got the postal and parcel delivery aspect that makes up a pretty good part, roofing driven ventilation piece and then a building products piece within it, that's made up of rain management products and metal roofing, and so on and so forth. So, a lot more - not complexity, but aspects to the market, and then we definitely focus on allocating, if there is price recovery programs, you certainly do it in a way that minimizes the impact of our distribution or retail customer partnerships within all those businesses to compete in the marketplace. But generally, in the end, we end up in a spot where our customers are happy. They continue maintaining and grow their share. And we're happy with being able to continue to gain the kind of margin that we need to fund the businesses and the return to our shareholders. When you get into the Renewable Energy & Conservation segment, it's a different type of business, two-thirds, one-third; two-third is kind of solar; one-third, the greenhouse conservation segment. They're both designed, engineered, manufacturer installed. The nice thing about that is we get a margin profile at all different aspects of the value proposition. We're not just selling piece of bent metal in their one of those spaces. So…

Thank you very much for those questions. Just last one is impressive cost management with SG&A declining by about $4 million, while revenues grew $35 million. Could you just talk about the moving parts in that and then also accrued expenses increased by $14 million sequentially? So just wondering how those fit together. Thank you.

Yeah, the - if you're thinking SG&A, Brad, the biggest driver there is going to be our performance comp programs. And most of that is driven by the stock price, so decline in stock-price can drive most of that change. When I think about accrued expenses, I'm just taking a quick look.

Fred, while we look for some reference material on accrued expenses, prior to you joining us, back in 2014, we changed the comp program at the beginning of our transformation strategy launch, where we aligned our comp program with what we think is a better reflection of shareholder value. So it's tied to making more real dollar income year-over-year and to getting to the money you got to be up 15% to 20% depending on the business, where they are relative to competitors in their particular space. At a higher rate of operating margin percent year-over-year, with a higher and more efficient use of capital, so specifically return on invested capital. So this year on a GAAP basis we're going to make more money in a significant way, in an adjusted basis which is where we really have our target. It's going to be about the same. Our latest forecast guidance kind of takes us into a similar number. Our operating margin at 10% the prior year, is about the same number forecast this year and our return on invested capital is forecasted up a little bit into I think the 12% range versus three years ago 3.9. So nice progress, but the expectation for comp - variable comp is that we continue to make more money at higher rate of return, more efficient use of capital, and there has not been a material improvement 2016 to 2017. So we basically have tried to align our variable comp to our execution. So if the shareholders can't see a vast improvement, then people won't see a vast improvement including the people sitting on this call. So, Tim, you got…

Yeah, Brad, to your question on the accrued expenses, it's really related to just the timing of prepayments from customers on contracts. So during the quarter, we collected additional prepayments from customers for work that we're going to do in the next quarter or two.

Thank you.

Thank you. I'd like to turn the call back to Mr. Heard for closing comments.

Thank you, everyone, for joining us today. And we look forward to talking to you again next quarter. That concludes our call.