Earnings Labs

Gibraltar Industries, Inc. (ROCK)

Q4 2019 Earnings Call· Fri, Feb 28, 2020

$39.95

+0.10%

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Transcript

Operator

Operator

Greetings. Welcome to Gibraltar Industries Fourth Quarter 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Carolyn Capaccio, Senior Vice President of LHA. Thank you. You may begin.

Carolyn Capaccio

Analyst

Thank you, Operator. Good morning, everyone, and thank you for joining us today. With me on the call is Bill Bosway, Gibraltar Industries 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 Investor Info section of the company’s website, gibraltar1.com. As noted on slide two of the presentation, the earnings press release and slide presentation contains 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. Additionally, Gibraltar’s earnings press release and remarks contain non-GAAP financial measures. Reconciliations of GAAP to adjusted financial measures have been appended to the earnings release and slides. Now, I will turn the call over to Bill Bosway. Bill?

Bill Bosway

Analyst

Thanks, Carolyn. Good morning, everybody and thank you for joining the call this morning. Let me begin with sharing highlights of the quarter and then we will have Tim review our overall financial results, as well as results from each of our business segments and then after Tim’s review I would like to take a few minutes and just preview some initial thoughts regarding our go-forward strategy, which I will do an in-depth review of our strategy at our Investor Day on March 18th in New York City and I hope all of you will be able to join us. Then I will finish up with our 2020 guide -- guidance and then we will open the call for your questions. So let’s start with slide three. Our fourth quarter results reflected our momentum from the third quarter. We continue to execute our growth and margin plan and delivered solid operating financial results. We finished the fourth quarter consistent with our expectations with revenue growing just over 7% to $258 million, of which 5.3% of that was generated organically. The remaining 1.8% was generated from our Renewable Energy and Conservation segments acquisition of Apeks Supercritical, which is our first strategic investment into extraction processing and we completed that in the third quarter. As well we delivered solid earnings and cash performance with our GAAP EPS of 10%, adjusted EPS of 32% and cash from operations of $57 million. Our results reflect more consistent operating performance, better productivity across our operations and supply chain, with some obvious solid volume, leverage and continued focus on a working capital management performance. We also benefited from market, business and product mix during the quarter and our backlog continued to strengthen in the quarter up 35% to $218 million as we expanded our participation in Renewable Energy and Conservation, as well as Infrastructure and Residential end markets. For the year, we delivered solid results as well, revenue grew 4.5%, of which 2.8% was organic, GAAP EPS grew 2%, adjusted EPS grew 21% and cash flow from operations grew 33%. So it was a solid year for us. I am proud of our team for the performance that we delivered in 2019. I’d say we all know we have a lot of work yet to do but I have a conference with our momentum and that will continue as we enter into 2020. So now, I will turn the call back over to Tim for give you the results of each of the -- of our segments.

Tim Murphy

Analyst

Thank you, Bill, and good morning, everyone. Let’s move to slide four in the presentation entitled Consolidated Financial Performance. Consolidated revenue increased 7.1% above the midpoint of our guidance range as Renewable Energy and Conservation segment revenues continue to accelerate, while Industrial and Infrastructure and our Residential Product segment revenues were down slightly. Of the 7.1$ increase in revenue, 5.3$ was driven by organic growth and 1.8$ by our third quarter 2019 acquisition of Apeks Supercritical. As Bill noted, backlog at quarter end was $218 million, up 35% from the prior year, driven primarily by our Renewable Energy and Conservation business. Consolidated GAAP operating income was up 4.3% and adjusted operating income increased 25.1% in the fourth quarter. Fourth quarter 2019 operating income included $3.2 million charge related to our decision during the quarter to exit a Multiemployer Pension Plan at one plan in the Industrial business. A plan that was significantly underfunded. We work with the union in this business to modify their contracts and provide a benefit under our companywide 401(k) plan. Consolidated GAAP and adjusted EPS grew 10% and 32%, respectively, excluding the $0.07 per share related to the Industrial Pension Plan exit charge, GAAP EPS would have been within the guidance range provided on our third quarter earnings call. Adjusted EPS exceeded our guidance range. The improvement from last year resulted from organic growth in the Renewable Energy and Conservation segment, lower interest expense related to the repayment of our outstanding debt in the first quarter and continuing benefits from 80/20 operational initiatives, partially offset by lower earnings in the Residential Product and Industrial and Infrastructure Products businesses. Including GAAP results were cost of $7.2 million or $0.18 per share associated with acquisitions, restructuring and senior leadership transition. During the quarter we achieved $2.8 million interest…

Bill Bosway

Analyst

Thanks, Tim. So let’s move to slide nine. I want to talk a little bit about how we are accelerating our transformation. Our fundamental strategy is to improve the growth and margin profile of the company and accelerate returns by being as well-positioned as possible in attractive end markets where we can actually solve customer problems and also help shape the industries that we operate in. I believe we have a clear view of our markets. We -- I think we understand the inherent growth landscape, the profit share of the entire value chain, the role we play today and how well we play it and the expected role we have or the expanded role, we have the opportunity to play and what is required to play it well. So slide nine really outlines our market assessment rubric. It’s a disciplined thought process. We used to assess market attractiveness and our ability to generate value in that market or in those markets. Not only just for our customers but also for our shareholders. So the first assessment step is about market attractiveness and what good really looks like. So we forced ourselves through a series of questions, like, does the market have a strong outlook based on sustainable growth, margins and returns, is the demand profile stable and predictable, is the market structure based on the solid foundation? The second assessment step is about our ability to create sustainable value in these markets that we are in. So it’s important we build leading relevant positions in our markets. Such that we do solve customer problems and create opportunities for them better than anyone else can and this really does require us to have a direct connection and relationship with our customers and deliver innovation, not just through new products and…

Operator

Operator

Thank you. [Operator Instructions] Our first question is from Daniel Moore with CJS Securities. Please proceed.

Daniel Moore

Analyst

Bill, Tim, good morning.

Bill Bosway

Analyst

Good morning, Dan.

Tim Murphy

Analyst

Good morning, Dan.

Daniel Moore

Analyst

And just quickly, Frank, if you are listening, congrats on your success. Thank you for all your help and best of luck in the future. I wanted to start with, Bill, you gave a lot of great detail on the recent acquisitions Apeks and Delta. If you wouldn’t mind, maybe talk a little bit more about how they fit together as far as the extraction market is concerned, how much additional opportunity you see for consolidation, what that could look like, just ultimately, what’s the market size opportunity and the kind of margin profile you expect for this business?

Bill Bosway

Analyst

So, Dan, one, we are excited about these two companies in particular. When we looked at this market months ago, we did a pretty detailed assessment of all the players and our strategy has revolved around as much of finding the right people, the founders and the right leaders in these businesses as anything else. So that was kind of step number one. And that’s important when you start bringing these companies together. How they operate going forward really is people dependent with strong leadership and systems and processes, as well as technology and products. So those are two companies that we thought were important to have on the team. We are spending a lot of time with the team together today laying out our roadmap of how we are going to approach this market. As I mentioned earlier, we want to continue to build and scale this platform. We think there is runway here. I think it’s a solid market, as I think I referenced earlier and there are -- it brings us two of the three core technologies that the market deploys today. So, I guess, maybe answering your question, there’s still some work to do and looking at maybe adding the third technology that would build out the platform further, but good businesses, good end markets and we are excited to have them.

Daniel Moore

Analyst

All right. Look forward to hopefully more to come at the Analyst Day there. Tim, guidance for 2020 implies some really healthy continued margin expansion 50 bps to 90 bps adjusted operating margin uplift. Maybe can you break that out or rank order mix versus continued operating efficiency gains versus any favorability in raw materials or any other assumptions there?

Tim Murphy

Analyst

As I go through that, I would say that, building products get a lot of restructuring, 80/20 work throughout 2019 and you get some carryover impact And to a lesser extent that’s also in the Industrial and Infrastructure segment, plus the new projects they have planned and modest growth. So that’s how I think about those two segments. And then we got Renewable and Conservation which has, I mean, we did a lot of -- fair amount of revenue from acquisitions, right? 75% of the revenue growth we think we will see is from the acquisitions of Apeks at the end of ‘19 and the back half, and then the two we did January, February. Those will come in, Dan, probably a little lower margin year one then the core group, with the expectation that as we integrate and apply our business systems we will improve those up above, so they will help pull up in the future. You also have from an adjusted basis, we did have tracker field retrofits, which we are calling out. It’s about $7.5 million full year and we think that’s behind us and won’t recur. So you get margin expansion from that. And then I would say, in the Renewables business, there is both operational efficiencies, there’s volume leverage. Material hasn’t really been an issue either way for us in the past. I think we have been doing a good job of just keeping that somewhat neutral and you will see, we are going to generate earnings from all those things. We are investing more in the business, you just see SG&A go up a little bit because we have got some investments we want to make to drive future growth and so we have made some of those already in people and in systems. And we will continue to invest a little bit of our incremental earnings and making sure we can drive growth going forward.

Daniel Moore

Analyst

Got it. And then lastly, if I am paying attention to what I heard so far, just as far as that the organic piece of revenue growth guide, Renewables mid-to-high single somewhere continued solid growth, Industrial positive but lower single and kind of flattish on Resi, is that the right kind of way to think about it?

Tim Murphy

Analyst

We will have modest growth in Resi, I would say.

Daniel Moore

Analyst

Helpful. Okay. I will jump back with any follow ups. Thank you.

Bill Bosway

Analyst

Thanks.

Operator

Operator

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

Julio Romero

Analyst

Hey. Good morning, everyone.

Bill Bosway

Analyst

Good morning, Julio.

Julio Romero

Analyst

I wanted to ask on patented products, can you talk about the earnings contribution in the fourth quarter and maybe what you expect there for 2020?

Bill Bosway

Analyst

Our patented product portfolio tends to have a higher gross margin than our regular product portfolio. So I think year-over-year, there wasn’t a huge difference in what we sold from our patented portfolio. And what I would say is as we look at it patented is a piece of it, but probably a broader view of just new products and services. And so, certainly, Renewable and Infrastructure, I am sorry, Renewable Energy and Conservation segment, we have expanded the scope of work we do, where we are doing more full service for our customers and that certainly helps from a just a volume leveraging perspective it helps our margins.

Julio Romero

Analyst

Got it. And just housekeeping one here, I don’t know if you called out an expectation for tax rate in 2020 at all?

Bill Bosway

Analyst

I think in the press release that works out to be about 27% on an adjusted basis and about 28% on a GAAP basis.

Julio Romero

Analyst

Got it. I will hop back in queue. Thanks.

Bill Bosway

Analyst

Thanks.

Operator

Operator

Our next question is from Walter Liptak with Seaport Global. Please proceed.

Walter Liptak

Analyst

Hi. Good morning, guys.

Bill Bosway

Analyst

Hi, Walt.

Tim Murphy

Analyst

Hi.

Walter Liptak

Analyst

Congratulations on the great end to the year. I wanted to ask one of the questions that’s already been asked but in a different way. You talked about the M&A as being lower margin in 2020. So I guess a little bit dilutive to the margin, but over time that will start coming out. So, I guess, the question is, what’s the timing of, I guess, 80/20 improvements on the M&A that you have done and just as a single point, in 2020 what’s the EPS accretion that you are expecting from M&A?

Bill Bosway

Analyst

So, I would say that the integration process, which includes a whole host of processes and opportunities for improvement, including 80/20 and some other tools. It will be -- its part of our planned earnings for 2020 and beyond. Well, when we do acquisition we usually target sort of a three-year run rate to get to what we think is a maybe a view of a longer term margin profile. It doesn’t mean it won’t get better every year. But the incremental improvements might slow after three years if we do the first three years of work right. So from an expectation they should be providing some incremental revenues and margins over the next couple of years. And your other question, Walt, at the end I missed that one.

Walter Liptak

Analyst

Okay. Well, just -- maybe just for the final point on this, so for 2020, the EPS accretion, it sounds like it’s going to…

Bill Bosway

Analyst

Yeah.

Walter Liptak

Analyst

…be modest from these M&A deals because of system integration investment.

Bill Bosway

Analyst

Yeah. I mean, it’s probably around $0.30 on a standalone basis, if just run out their earnings.

Walter Liptak

Analyst

Okay. Okay. Great. And then if I can ask one about the Renewables. The change that happened to the tax incentive was -- I wonder, maybe you can explain to us, how that impacted the order trends in the backlog for 2020?

Bill Bosway

Analyst

Walt, I guess, my first reaction is not -- it wasn’t much on the high side, I think, as the industry thought it might be and any time you have this, of course, you have this last minute rush and so up until December 31st, we had a lot of customer conversations. But it did not -- it was not a windfall for us and I don’t think it was for the industry either as much as maybe some people anticipated. So I would say, as a contribution to overall backlog, it was relatively minor. I mean, we got something out of it, but nothing impact -- nothing in Q4 -- nothing impacted Q4 and the stuff that you get from that will be spread out throughout 2020 as well.

Walter Liptak

Analyst

Okay. Great. Okay. Thanks, guys.

Operator

Operator

Our next question is from Ken Zener with KeyBanc Capital Markets. Please proceed.

Ken Zener

Analyst

Good morning, everybody.

Bill Bosway

Analyst

Good morning, Ken.

Tim Murphy

Analyst

Good morning, Ken.

Ken Zener

Analyst

Well, I see you have a new slide deck here. So I am excited to see all this stuff, Bill. If we could go through the, well, before that first the $0.30 was in reference to what, Tim, just for me to be clear?

Tim Murphy

Analyst

So, that’s probably the -- and its approximate but that’s about the contribution we would expect from the acquisitions that we completed end of last year and then the ones we did at the beginning of this year.

Ken Zener

Analyst

With -- so just to be clear, I think, revenue of $45 million in your deck, $75 million and is it $17 million approximately?

Tim Murphy

Analyst

Yeah. But if you wanted to do it a different way, we called out the growth being 75% from acquisitions,, so you are right.

Ken Zener

Analyst

It’s about $130 million?

Tim Murphy

Analyst

In that ballpark, yeah.

Ken Zener

Analyst

Okay. Okay. So I am going to -- so the reason I am asking this is, right, so that’s about a 10% margin, okay? Slide, I believe, 10 for Thermo Energy and I really look forward to your Analyst Day as you educate us around this. But $75 million of revenue, is that $7 million purchase price and $25 million working capital investment, that’s what’s in your box there. But can you kind of talk about what that means about the industry and it looks like you have got the revenue very cheap and you have used a lot of working capital. How should we think about what that implies for -- what that means, it seems like a different profile than we are used to?

Tim Murphy

Analyst

Yeah. I guess, I would say that it was probably nothing to do really with the industry other than the growth and it was more a specific situation. So Thermo experienced some pretty explosive growth and to smaller team. So they got a little bit behind, how they would like to perform, how they had historically performed.

Ken Zener

Analyst

Right.

Tim Murphy

Analyst

And they created a situation where with our -- we have a little bit larger scale from our greenhouse just the size of our team and the processes we use, so it made a lot of sense for them to join us. The leader of that business is incredibly respected in that organic fruits and vegetables. We have always -- it’s quite honestly one of those competitors that you will lose work to because they are really good. So we are really excited to join the team and we paid a fair price in total, but instead of all of it being purchase price some of was just investment back into the business.

Ken Zener

Analyst

Now as I look at these pictures and read your language, this is more, I mean, this is the type of greenhouse that you are building or is it the systems in terms of vertical -- the full service turnkey site provider? Is it similar to what you do and what’s -- who’s the leader in this market?

Bill Bosway

Analyst

Ken, it is both of those things. So it’s a full service from design of the structure itself, all the way through specifying, integrating and installing the systems and getting it up and running, very similar to what we do. So it’s really a mirror image of what we do. It’s just -- they have been really focused on the organics and that’s been a pretty explosive growth market the last 10 years and so these are quite complex and very technology driven sites, if you will. So it’s a nice complement to what we do. But it looks very similar, we are just able to leverage our scale with their front-end and I think operationally we are excited about what we can do with this going forward, particularly given the end market it is in.

Ken Zener

Analyst

It does look very attractive. I agree with you.

Bill Bosway

Analyst

Yeah.

Ken Zener

Analyst

Tim, if I could just clarify, the $7.5 million that you had from the solar retrofit, is what I assume, the $7.5 million was referring to. That’s about 200 basis points of drag in FY’19. Could one assume that, in terms of the margin in Renewable, I mean, all else equal, it would go up 200 basis points because of that $7 million lacking, but you have growth, growth from acquisitions, which is at about 10%. Are there any other factors that we should put into the margin expectation for FY’20 in the Renewable segment, it seems like those are the two big puts, minus $7.5 million and EPS contribution you just highlighted?

Tim Murphy

Analyst

Yeah. I mean, I think, that and both of the -- both sides of the business continue to grow at a decent rate too, so.

Ken Zener

Analyst

Correct.

Tim Murphy

Analyst

I’d say as those think of, yeah.

Bill Bosway

Analyst

Yeah.

Ken Zener

Analyst

And interest expense for the year, I am sorry, if I missed it, Tim.

Tim Murphy

Analyst

Effectively nothing, right, we paid off our debt at the beginning of the year. We don’t have any debt, as we said. So I hope to have some interest expense to report to you if we can complete some of our strategic work that we are working on, but nothing in the plan.

Ken Zener

Analyst

Thank you, gentlemen.

Bill Bosway

Analyst

Thanks, Ken.

Tim Murphy

Analyst

Thanks, Ken.

Operator

Operator

And we now have a follow-up question from Daniel Moore with CJS Securities. Please proceed.

Daniel Moore

Analyst

Thank you, again. If you gave this and I missed it, I apologize. Just backlog on an organic basis, what would that have looked like on a year-over-year?

Tim Murphy

Analyst

I did not give it, but give me a second, I need to take a quick look. We break it into the beginning, Dan. So I don’t have it in front of me. I am looking what I have is summarized. But I know when we do our backlog numbers. We do sort of pro forma and I am sure that the acquisitions have some backlog increase, but it shouldn’t be...

Bill Bosway

Analyst

Here.

Tim Murphy

Analyst

Yeah.

Bill Bosway

Analyst

They weren’t in it.

Tim Murphy

Analyst

Yeah. Yeah.

Daniel Moore

Analyst

Okay. We can talk offline. That’s fine. And then one other quickly, just perimeter security, one of the drivers…

Tim Murphy

Analyst

Hey, Dan…

Daniel Moore

Analyst

Yeah. Go ahead.

Tim Murphy

Analyst

Yeah. 33%.

Daniel Moore

Analyst

Up 33%. Got it.

Tim Murphy

Analyst

Yeah.

Daniel Moore

Analyst

Okay. Very helpful. And then perimeter security, just can you give us a sense of the size of that business run rate basis coming out of 2019, and you mentioned, as you just called it out as one of the potential drivers for 2020. What kind of growth we are looking at? Thank you.

Tim Murphy

Analyst

So, it’s small. It had in excess of 20% growth last year and we expect that same kind of growth level that sort of single, I am sorry, double...

Bill Bosway

Analyst

Mid-double digits.

Tim Murphy

Analyst

Mid-double digits, not teens and not 50%. But it should be in between there and it is margin accretive. It’s been really helping along with a bunch of other work. That team has done great work over the last two or three years. You can see it in their margins and they have continued plans to improve.

Daniel Moore

Analyst

Very good. Thank you.

Operator

Operator

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

Bill Bosway

Analyst

Well, again, guys, hey, thanks for calling in today, and hopefully, you will be able to join us March 18th in New York City at our Investor Day and we are looking forward to seeing you then. So have a great day, and again, thanks again.

Operator

Operator

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.