Gibraltar Industries, Inc. (ROCK) Q1 2019 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to Gibraltar Industries First Quarter 2019 Earnings Conference Call. Today's call is being recorded and webcasted. My name is Sherry, and I will be your coordinator today. [Operator Instructions] I will now 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 first 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 contains 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 press release and remarks this morning contain adjusted financial measures. Reconciliations of GAAP to adjusted financial measures have been appended to the earnings release and slides. On our call this morning are Gibraltar's President and Chief Executive Officer, Bill Bosway; and Chief Financial Officer, Tim Murphy. At this point, I'll turn the call over to Bill. And please turn to Slide 3.

Thanks David. Good morning everybody, and thank you for joining us today. So let's get started. We delivered solid performance across our business in the first quarter with revenues exceeding our guidance and earnings in line with our expectations. We continue to drive our four-pillars strategy, execute the commercialization of our new higher margin innovative solutions, and improve the performance of our Industrial & Infrastructure segment, as well we deployed the cash we continue to generate to repay our outstanding debt lowering our interest cost in the quarter. Revenue in Q1 increased 6% over prior year to $227 million driven by strong demand for our solar tracker, and from our security solutions, as well as increased activity in our infrastructure business. Our GAAP earnings of $0.19 and non-GAAP earnings of $0.28 were in line with our guidance. And as we will discuss in more detail, we've been stronger if not for the unanticipated cost related to the launch of our new tracker solutions. During Q1, we also announced the appointment of Pat Burns, our Chief Operating Officer. Pat brings a wealth of operating business development and strategy experience to our team, and we are excited to have him join the team. He's intimately familiar with the 80/20, as well as bringing new product development and a number of tools and processes required for us to drive perfect execution across our business. After Tim reviews our financial performance, I'm going to provide an update on the acceleration of our key initiatives supporting our four-pillar strategy. So with that, I'll turn it over to Tim.

Thank you, Bill and good morning everyone. Let's move to Slide 4 in the presentation entitled solid consolidated results. Our 5.6% increase in consolidated revenues exceeded our expectations and was driven by higher demand for innovative products in our Industrial & Infrastructure and Renewable Energy & Conservation segments, and increased activity in our infrastructure business. On the bottom line our consolidated GAAP earnings were in line with guidance but down year-over-year. The decrease reflects cost incurred in the field to improve the durability and ensure performance of our recently launched solar tracker solution, senior leadership transition costs and cost related to the recent repayment of our subordinated notes. Consolidated adjusted earnings were up 7.7% year-over-year in line with our guidance. The increase was due to strong demand for higher-margin innovative products, increased activity in the infrastructure business, continued benefits from the 80/20 simplification measures, interest savings from the recent repayment of our notes partially offset by costs incurred to improve the tracker solution. During the quarter we achieved $2.2 million interest savings from the recent repayment of our senior subordinated 6.25% notes. We continue to anticipate annualized savings of $13 million interest payments or benefit of $0.22 to diluted earnings per share for the full year 2019. Now let's review each of our three reporting segments starting with Slide 5 the Residential Products segment. Revenues in the Residential segment were essentially flat year-over-year as lower demand for building products due to difficult weather conditions were largely offset by increased selling prices. On the bottom line operating margin declined due to unfavorable product mix and volume leverage. These factors were partially offset by benefits from the 80/20 simplification initiatives. Looking ahead we expect increased end market activities as we move into seasonally stronger period of the year. Turning to Slide 6, the Industrial & Infrastructure Products segment. Revenues were up 1% year-over-year as increased activity in the infrastructure business and demand for innovative products were partially offset by the impact of lower demand for a more commoditized industrial products. A 95% increase in operating income resulted from favorable higher-margin product mix, volume leverage in our infrastructure business, and importantly from the benefit of 80/20 simplification initiatives. Looking ahead we expect the segment to continue to benefit from higher backlogs and increased bidding activity in the infrastructure business growing demand for our innovative products, and continued benefits from prior and ongoing 80/20 simplification activities. Now turning to Slide 7, the Renewable Energy & Conservation segment. Revenues in the segment increased 21% primarily driven by a strong demand for innovative tracker solution and to a lesser extent the impact of a prior year acquisition of SolarBos. During the quarter we incurred incremental cost related to our new solar tracker system that we've been piloting. We had a significant ramp in the installation of our product in the third quarter and fourth quarter of 2018 with approximately 75% of our projects for the year during those quarters. During the learning curve associated with the installation and commissioning of these new projects in the first quarter of 2019, we identified a few operational issues that led us to proactively perform in-field enhancements to the systems already installed. These activities improved the durability and ensured our tracker system meets our performance expectations. Based on our proactive and timely response customer feedback has been positive. The lower gap and adjusted margins for the segment were due to these additional tracker-related costs which offset the benefits of increased volumes 80/20 simplification initiatives. I would highlight that excluding tracker-related costs which were mainly for additional in-field service labor and approximated $3.4 million during the quarter, operating income for the segment increased from the prior year. We believe the bulk of these additional tracker-related costs are behind us and expect margins on these products to move towards our target as we progress through 2019. In addition to our renewables business, we're encouraged activities on the conservation front. We've seen increased activity in kind of the space along with strong customer demand in the other end markets including retail, institutional and structures. Backlog is up compared to the prior year for the segment and we're enthusiastic about continued opportunities in the end markets we serve. Please turn to Slide 8 Capturing the Opportunity. As we previously announced during the quarter we repaid $210 million of senior subordinated notes and refinanced and upsized our revolving credit facility to provide the company with $400 million of capacity. With $394 million available to us at the end of the quarter and our new revolving credit agreement priority enhanced flexibility for capital allocation, we're well positioned to execute on our acquisition strategy. As you know our focus on targets of EBITDA of $25 million up to $100 million that would be material to our performance, although we would consider smaller acquisitions that can benefit us from the technology standpoint. With that, I'll over to Bill. Please turn to Slide 9 4 Pillars Driving Value Creation.

Thanks Tim. So guys during the quarter I've had the opportunity to visit the vast majority of our locations and spend quite a bit of time with our folks on our team. It's been exciting to continue to see the enthusiasm and passion that our folks have for the business. Obviously the progress we've made and the numbers of opportunities in front of us both from a growth and margin perspective. And as I mentioned during our call in February, we are in year five of our transformation and we are focused on building sustainable profitable growth through really four key initiatives: One, acceleration of our 80/20 operating cadence; secondly, increasing our speed and the use of trade focus, I would say, three innovation and new product development; and four identifying acquisitions that really enhance our growth and margin profile and also create more presence and relevance for us in the end markets we serve. So let me start with the acceleration of 80/20. As I mentioned, Pat Burns joined us in early March and he's really hit the ground running working directly with all of our businesses. We are accelerating our operational efforts as we continue to reduce our business complexity, simplify our product lines and drive additional productivity initiatives, and improve our working capital performance. We continue and have advanced our in-lining market ready demand and outsourcing initiatives and have I think more opportunity in front of us. And during the first quarter we achieved 130 basis point improvement from these activities. Again I think good progress but we have much more to do. In parallel to our operating environment initiatives, we're also accessing our manufacturing footprint and supply chain to optimize our entire quoted cash process and our capacity to better serve our customers and to do it in the most cost-effective way. So when I think about perfect execution whether it's service quality or responsiveness, we do that with speed, we believe we'll create much more value for our customers but also differentiation for Gibraltar and be in a position to accelerate and enhance our growth and margin performance. So let me know discuss our efforts with innovation which really encompasses how we think about our business models, our products and our services, as well as use of trade focus to understand our end customers. And as we discussed in our last call, it is really critical for us to make sure our customers have really authentic demand for what we do both our products and our services. And what this means is we have to have better understand our customers' problems, back some motivations and their opportunities, as well as the robustness of the channels that they operate. And to do, so we have to continue to strengthen and invest in our trade focus and new product development capability, as well as prioritize our marketing and engineering resources on the opportunities that we think are mostly commercially viable. So we're making progress in this area. During the quarter our new patent solutions grew at faster rate than our core products with our patented products representing 15% of our sales that's up from 6% in the first quarter of 2018. So it's a substantial positive trend that we expect to continue. In addition to tracking the sales of our patented products, we're really begin tracking also our new product sales as a percent of our total sales and the percent of our sales that are directing customers and tracking these additional metrics is really important as we strengthen and evolve our innovation engine. I do want to comment further on our new solar tracker solution. As Tim mentioned we absorbed unanticipated cost in Q1. Our team has been very proactive and working closer with our customers to minimize any disruption we can to their operations. We have visited almost all of our sites that have installed our new tracker, and frankly when an underperforming tracker has been identified we've implemented the changes to that system accordingly. Our changes are working as planned both from a durability and performance standpoint. And I would like to express our appreciation for our customer support, as well as our patients as we work through this issue. It's always important that our customers know with confidence we stand behind our products and services. And we've done so in this situation. So we are collectively moving forward and it's good to see the continued demand for our tracker system. So carrying on, I just want to reemphasize that we're going to continue to fund our trade focus innovation, new product development initiatives building a stronger competency in each of these along with a more robust engineering and marketing process. We are redeploying resources to support this initiative. We have plenty more to do and we will continue to update you on our progress throughout the year. Also as I mentioned earlier, we're planning to further strengthen our key platforms really focused on enhancing the growth margin profiles and become more connected with our end customers channels and markets through acquisitions. Our simple goal really has three tenants: One become increasingly more relevant to our customers in industries we serve. Secondly we go to, our leading organization and industry that solves real problems. And three provide most value technology products services and support the market. And during the quarter we've been relatively active with our business development activities. We're going through number of prospects and approaches that support this goal. Finally our portfolio management efforts continue and we continue to focus on evaluating our product lines customers and end markets. So we can best allocate our leadership time and resources. At this time I'm excited about the opportunity we have to create more value in each of our businesses and we plan to continue to do so accordingly. So if you will please turn to Slide 10 titled 2019 guidance. So let's talk about Q2 and the full year. We remain confident in our end markets based on the macroeconomic and market information we have today and we will continue to execute on the four pillars as discussed as well. We believe our solar tracker challenges are mainly behind us and we do not expect any additional cost to have material impact in Q2 or beyond. We are reiterating our full year 2019 guidance expecting sales in the range of $1.30 billion $1.50 billion 2.03. We expect GAAP EPS between $1.95 to $2.10 per diluted share compared to $1.96 on a GAAP basis or between $2.40 and $2.55 on an adjusted basis up from $2.14. For the second quarter, we expect revenues between $268 million and $274 million up between 1% and 3% over second quarter 2018 and we expect consolidated GAAP EPS between $0.60 and $0.65 per diluted share or between $0.72 and $0.77 on an adjusted basis. In closing our team continues to make good progress with our four pillar strategy and we delivered solid performance in Q1 while addressing our solar tracker issue. At the same time, our new patent and product growth continues to outpace our core product growth and we expect this trend to continue. Our teams have identified additional operational improvement opportunities and I will ensure we're laser-focused on execution throughout the rest of the year. I think with solid end market activity across the portfolio we look forward to another year of driving profitable growth and making more money at a higher rate of return with a more efficient use of capital. So at this point, we'll open the call up for any questions you may have.

[Operator Instructions] Our first question is from Kenneth Zener with KeyBanc Capital Markets. Please proceed,

So let's see I have couple questions here. But starting just in the roofing it seems like you're flat did actually quite better than ARMA shipments and roofing distributors and manufacturers that we've heard from. Could you address if that strength was due to anything in particular through beside and market down somewhere between five and high single digits. You guys were flat it's quite good

Ken really what it is volumes were down, but as you recall last year with all the tariffs that went into place prices has increased. And so pricing is higher on a SKU volume generally on SKU unit generally than it was last year so that was really the difference, so consistent.

Right so I mean you're saying it could have been you can give a specific answer if you want about the pricing. But volumes were down 5 you got 5% pricing is what you're suggesting. What was the - but your margins - is that why the margins were down basically that you had the volume absorption was absent?

Look our volume and there is a mix to we have different products in that business and so if we sell more of one versus the other.

Bill obviously it's within this type of forum I'm sensitive to how you will choose to answer this, but to the extent you're saying the charges you outlined in solar tracker are largely behind you. Could you make some just general comments around perhaps how this issue was recognized and it sounds like it was resolved within all the most of the sites that were it was point to?

Yes, so first and foremost we found it ourselves and proactively went out and talked with our customers and subsequently went out and visited basically all our sites to ensure that those issues were being dealt with appropriately and in a timely fashion. Every one of our sites didn't incur all these or didn't experience all these issues but we felt important to go out to each of the sites to ensure that. So we recognized it working with a couple of customers and proactively went out and made the changes accordingly and did that in relatively short period of time. And so, we believe that it's mainly behind us as I mentioned and feel like the fix is in place are working as planned. And so that's kind of where we are, but as I mentioned earlier outside I'm very appreciative about the support we've gotten from our customers working with us hand-in-hand to work through this quickly get things up and rectify it in a timely fashion and move forward.

Tim you mentioned a number or Bill you mentioned it 75% of sales were tracker related. I'm not sure I heard that right give me that in a proper context?

Yes, what I said was. That we incurred this cost in the first quarter and it's really related to projects that mainly were done in the second half of last year. The 75% was of the tracker work we did last year 75% that fell in the third and fourth quarter. And then if you think about that we go out and install the system. But then handles get put on, electrical gets put on. When it starts to move is when we saw some of the, and I think - what is sitting in the field mounted. It's not operating yet and so we had to wait till projects started to commission to do our inspections.

Our next question is from Dan Moore with CJS Securities. Please proceed.

It's actually Mike Hagan on behalf of Dan Moore here. And I did want to piggyback on Ken's question with regard to Residential products. Obviously it was a challenging Q1 in terms of volumes but what are you seeing thus far in Q2 any pickup internal activity?

I think it's coming across the countries. I think April still had challenging weather in some markets. But our outlook for the year hasn't changed. Our conversations with customers are grouping market is expected to be effectively flat. You hear we're still hearing it's 3% upwards, 3% down depending on who you talk to which means flat to us so normal seasonal trends. I don't think we have any different view than we did.

On the industrial side of the business we saw a nice uptick in margins presumably at about mix. Are those margins sustainable and ultimately where do you see them trending in that segment over the next couple of years?

Our goal for that segment and I don't know if it's our call and interim goal is to get the segment to 10. And they're doing everything they can to do that. They've done a lot restructuring and taken a lot of pieces out of that segment. The pieces that are last are focused on more attractive end markets they're having good success with their innovative products. There is a little bit of a mix issue in this quarter and that there is still some commoditized product in there and the volume on those was off a little bit. So that mix of volume, but if you looked over the last few years with that margin improving year-over-year, we expect to continue to see that happen as we move forward.

And one last one for Bill. And in terms of M&A in the past, Gibraltar emphasized, expanding innovative products with more engineering design components. So as you look at your businesses, what are the areas you're most focused on expanding organically and inorganically?

Are you talking - are you asking - Mike, you're asking across the businesses or within or?

Yes, I guess across the businesses, yes, both the residential and industrial?

I would say in general, there is a really solid activity with new products coming on in each of our businesses. So I mentioned earlier that our patented products were up in the first quarter representing 15% of our sales. It's actually come from the contribution of that or to that has come from each of our businesses. So we have a pretty good footprint across the group by now in terms of current activity. I would say that our focus right now is building out our capability to drive more speed in each of our businesses which is down to investing in additional resources in that area or redeploying resources to that area and enhancing our processes to support that. But each of our groups has pretty good list of really create new ideas. It's a matter of working solid processes each of us to take advantage of that.

And obviously, you guys have such an excellent capital redeployment model. Are we seeing any listening yet in acquisition multiples out in the market?

I guess I would clarify. We haven't not done acquisitions because of pricing. It's really been around the quality and trying to find something that we believe enhances our portfolio and adds value for the long term. And so we've been patient. So market multiples haven't been a hindrance yet. So we haven't been finding price.

And then just one last one outside of M&A the priorities for capital deployment?

Today it's M&A. We do have regular conversations with our board around the other usage. But I think where we are and what we're trying to do with the portfolio we see the greatest value coming from M&A and obviously, at some point if we can't find the right things to invest in we'll have to do something else and we talk about those options regularly but nothing else is on the list yet.

Our next question is from Julio Romero with Sidoti& Company. Please proceed.

So I wanted to drill down a little deeper on that products commentary. Could you maybe say some examples of the more successful patented products and the margin profile of those products maybe now and what do you see them three to five years from now?

So Julio I would say that in general the patented products and/or we'll call it new products that we have come out recently are higher margin as you would expect as we would expect versus our core product line. That's the intense. I would tell you there is a really three, four main drivers of that engine right now. Our intent is to expand on that beyond four. And as I mentioned earlier in my earlier comments there is a number of new payments in the cooker if you will across each of our businesses. So broadening some kind of four, five main ones driving the numbers that you see today to something larger is we do our focuses right now. But I'll tell you in every scenario in every case, the margin profile associated with that is better than what we're doing today which I would expect everyone to expect from us. So that's how I characterize that.

And what percent of sales did patented products makeup in the prior year quarter?

In the prior quarter roughly 6%. If you look at the Q1 2018 we were 15 this year. So you look at that on a full year basis, we like to look at that it's a point metric but our hope is that we finished last year around 11% and going into the rest of the year our intent is to beat that number. So we look at it year-over-year and you look at sequentially we're progressing in the direction that we would like to be going.

And I think it's important to recognize is that there are patents around the tracker system and there is currently not performing obviously with the charge at a margin level that we anticipate, when we get that product fully commercialized.

And just last one from me here is so Billy, you've had a couple of months of Gibraltar under your belt, maybe you can speak to what's new that you learned over the last couple of months after having visited the facility as you mentioned?

I touched on this a little bit. I would say I've learned anything that has surprised me from a - and I think which is very positive. So what I thought I would see I saw, but I think what was exciting for me to see was I mentioned earlier this enthusiasm and passion. I don't want to underestimate that. It's really important aspect of the culture here because of what we're trying to do in terms of our fifth and sixth and seventh years, we continue our transformation. So I would say first and foremost that's been very positive. The second thing that kind of goes along with that this organization has done a lot in the last four years as you guys have seen. And you kind of wonder going into this sometimes a more runway and what has been exciting to see is the runway probably is longer than what I even I anticipated, so the team is now enthusiastic and passionate about what they've done. They continue to bring more opportunities and ideas to us at a relatively fast rate. So I am excited about that and that's why I mentioned earlier, accelerating our 80/20 initiatives is really something we wanted to do but it's been called by much of our organization. So to me that's probably been the single most positive thing I've seen, really haven't had or seeing anything negative there anything that I didn't anticipate.

We now have a follow-up question from Kenneth Zener with KeyBanc. Please proceed.

Gentleman, so I had a little more coffee and Tim, Bill, if you guys could bear with these questions. But the guidance you gave for 2Q is $0.60, $0. 65 that would equate to about 45% the midpoint of your guidance or excuse me 37% of the midpoint I just did the math. So for context, last year your first half was about 45% of first half of 2017 of 37%. My question is that EPS percentage, is that the same like from EBIT - if you were to give EBITDA is that about the same waiting and it appeared to make it a little more back half weighted than last year was that your initial expectations? Or is there something happening that is perhaps shifting that little more to the back half per square versus consensus square for the second quarter ?

I think it's in line with the way we looked at the year when we laid out our year. And I agree that if you have done the math and it's says that we're 37% of our earnings in the first half and more in the second half and that's we view the year. I don't know if there is any significant driver with that that I point you today.

And then on renewable, I mean, that was an area that was so volatile. You guys obviously did an acquisition that was priced in for a tax rate base carrying away kind of lot of growth. This tracker business could you comment on just the general and just exited the one category that I'm least familiar with day in and day out. Bill or Tim, if you guys can provide just a little backdrop for separate from your execution around the Solar tracking business. Could you kind just comment on what is happening in that end market in terms of demand in the key categories that you are serving? Thank you very much.

I'll take a whack at it and then I'll let Bill add if he wants to. So demand is strong across all of the pieces that we serve. So the fixed-tilt both sort of classic drama [ph] plus the canopy we are seeing a lot of activity, a lot of opportunities. Tracker, we took a little bit of a pause during the first quarter as we were identifying and going out in the field and adjusting systems. We wanted to make sure that we had it right before we signed up to two more projects. So if the demand is there customers are lining up and we've been - we turned that spigot back on so that is building again and the end-market demand and interest. And then if I think about the cannabis side, observation side of that business cannabis demand continues to be strong. We continue to find there's permitting and zoning every offshore projects always delay a little bit longer than initial plan but we've been dealing with that long enough that the ones that got delayed comes to you, ones you thought were going to happen get pushed but it's becoming a much more reasonable run rate. And the other parts of that business, the retail business we serve, the Institutional even structures of business are all strong.

Two other comments I would add and one is just kind of add to what Tim said on the greenhouse side of things. We have this broad level of activity from an end-market perspective that is pretty active right now. And on the cannabis side, it's hard to predict exactly what's going to happen and what we can tell there is the general activity is up in the marketplace significantly versus prior to last year or two. Is that ahead of where we thought it might be we're - it's one of those things we're learning month to month. But from an end activity perspective that's pretty solid. If you go back to the solar world I think we do have a change in the incentive at the end of this year in the marketplace. We don't inherently think that's going to slow things down as we move forward. There are still a good set of economics for doing this with the incentive beyond this year. Will it impact people wanting to move quicker this year towards in the year? Yet to be seen. We haven't - we're not planning on that, haven't factored that input say, but we'll see how that happens. But in general, really solid end-market activity on both aspects of our - of this segments business. It's been interesting to watch. You saw from our first quarter numbers in this segment, it's up versus last year. So hopefully that helps you

So what are the issues when you had that high growth in the past with competitive pressure? It doesn't sound like that is the issue that you're facing in fact, it seems as each year goes by you face fewer competitors because they're not as profitable as you. Is that a fair characterization.

Yes it's certainly. No listen, it's relatively new industry. So you have a number of people that jumped in early on and there are folks that just did not have the model and the capability to execute accordingly and have since fallen out. It's hard to make money whatever their reasons are but one thing that we're really good at there is lot of things we're good at. What we're really known for and what we're really good at our ability to do what we say we're going to do on time. And anytime you have a direct to end customer business that is project base. There is a huge differentiation in value story created around your ability to execute. And our team has done a tremendous job and that's on both sides whether you're building a cannabis growing infrastructure or basic greenhouse or a solar field, we're well known and differentiate from our customers to be able to actually deliver. And when you can do that well one you do it much more cost effectively and operationally you have to excel and we do that quite well. And customers really appreciate that because if you're not on time and we're not talking about missing a project by a week, we're talking about a lot of folks that struggled with the month or two delays. Well there are penalties associated with that for our end customers and we don't want that obviously to occur. And so I think the team from the day we started this business six or seven years ago has been laser-focused on making sure that that's a differentiator. So outside of the new technology that we're bringing to the market some of which is patented and our ability to execute I think that's why we continue to grow and see progress and I feel like there is a good margin profile for this business in a market that frankly we think has a good rising tied beyond this year and many years to come So that's probably more than you are looking for but that's kind of how at least I view the marketplace.

We've reached the end of our question-and-answer session. I would like to turn conference back over to Mr. Bosway for closing remarks.

So again thank you everybody for joining us today. We look forward seeing many of you at the KeyBanc Conference in Boston I think on May 30th and looking forward to have an additional discussion with you then. So thanks again.

This concludes today's conference. Thank you very much for your participation today. You may now disconnect and have a wonderful day.