Good morning, ladies and gentlemen, and welcome to Gibraltar Industries Third Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a questions-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Carolyn Capaccio of LHA. Ma'am, please go ahead.

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 on the Investor info section of the company's website, gibraltar1.com. As noted on Slide 2 of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future financial results. These statements are not guarantees of future performance and the company's actual results may differ materially from the anticipated events, performance or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the company's website. Additionally, Gibraltar's earnings press release and remarks contain non-GAAP financial measures. Reconciliations of GAAP to use financial measures have been appended to the earnings release and slides. Now I will turn the call over to Bill Bosway. Bill?

Hey, good morning, everybody, and thank you for joining our call today. I hope everyone is doing as well as it can be and remain safe and healthy. Let's begin today with an overview of the third quarter, and then Tim is going to provide more in-depth review of our Q3 results, and then I'll wrap up with an update on our three strategic pillars and some thoughts on the rest of the year, and then we'll open the call for your questions. So if we can, let's turn to Slide2, Q3 overview. We delivered solid performance as we execute our plans. We continue to invest in our business and really work on improving our positions in the markets we serve. Revenue increased 10.2%, driven really by solid organic growth in our renewable energy and residential products as well as growth from acquisitions made in our growing and processing business. GAAP EPS improved 36% to $1.02, and adjusted EPS improved 11.6% to $1.06. We also continue to make operating margin progress with GAAP margin up 280 basis points and adjusted operating margin up 40 basis points. I'm pleased with our revenue and operating margin performance, particularly despite the continued market slowdown we discussed last quarter, impacting our processing business, the cannabis portion of our growing business and our core industrial business. I guess the good news is that consumer demand for cannabis and hemp-based products remains healthy. And I think with the processing equipment market stabilized in the second half of 2020 as well as with the improvement in bed and award activity for the cannabis growing solutions business. We expect a much better performance in 2021 and beyond. And I'll let Tim provide more commentary regarding Q3 results during his review of the businesses. Also during the quarter, our…

Thanks, Bill, and good morning, everyone. I'll take you through our consolidated and segment results. Consolidated revenue increased 10.2% as growth in the residential products and renewable energy and conservation segments offset the revenue decline in our industrial and infrastructure segment. Continued execution drove organic revenue growth of 2.1% in the residential and renewable energy businesses. We generated 8.1% growth from our third quarter 2019 acquisition of Apeks Supercritical, and our first quarter 2020 acquisitions of Thermo Energy Solutions and Delta Separations. Backlog at quarter end was $304 million, up 26% from the prior year and 9% from the prior quarter, driven by continued end market demand in our renewable energy and conservation segment and, to a lesser extent, demand in the infrastructure business. Consolidated GAAP operating income was up 39.8%, and adjusted operating income increased 13.9% in the third quarter. Third quarter 2020 operating income included approximately $1 million of ongoing net direct investments in the safety and financial security of our people directly related to COVID 19. Consolidated GAAP and adjusted EPS grew 36% and 11.6%, respectively. The increase was the result of organic growth and marked margin expansion in our residential products segment, product and services mix, effective price to material cost management and ongoing benefits from operational excellence initiatives. Now let's review each of our three reporting segments, starting with Slide 5, with renewable energy and conservation segment. Segment revenue increased 9.8%. Organic growth in the renewables business was more than offset by an expected decline in our core conservation business due to the current year weakness in the cannabis and hemp markets, combined with tough comparisons in last year's third quarter, which saw strength in the cannabis end market, resulting in an organic decline of 10.8%. Our recent acquisition of Apeks Supercritical, Thermo Energy Solutions…

Thanks, Tim. Let's move to Slide 10 for a quick update on our three strategic pillars. First, let's talk about our business system. We continue to invest and optimize our operating playbook, really to try to keep this as agile and aggressive as possible in today's dynamic environment. We also remain very focused on maintaining the best and safest work environment for our team, executing consistently every day. Very focused on supporting our customers and supply chain and further building our digital systems capability. In regard to portfolio management, after a temporary pause in Q2, I'd say discussions have accelerated across a robust pipeline of strategic assets that we believe will further strengthen our position in the markets we're in. As mentioned earlier, we did recently complete the acquisition of architectural mailboxes. I think that's a good example of building our presence and creating access to do market segments for mail and package business. We're also making progress with our organization development initiative. Throughout 2020, we've actually added key positions. We've filled organization gaps and we've upgraded some talent as part of our development effort. And really through an initiative actually started in 2019, we launched our digital education initiatives requiring all Gibraltar employees, salary and hourly, to complete approximately 12 hours per year of online education across a really broad curriculum of topics. This requirement also includes our online cybersecurity education, which also started in 2019, and that's become even more important in today's work from home environment. Let's move to Slide 11, and we'll discuss our outlook for the fourth quarter. Through the first three quarters, we've been able to deliver solid revenue and earnings growth relative to 2019. And I believe our market trends and our momentum remain positive. However, there is still a significant amount of…

[Operator Instructions] Your first question is from the line of Mr. Daniel Moore from CJS Securities. Sir, your line is now open.

Bill, Tim, good morning thanks for taking my questions. I'll start with the renewables and conservation, specifically process equipment. It sounds like the market is stabilizing there and cannabis bidding activity increasing. How would you characterize activity in the processing side, maybe compared to pre-COVID levels? And you said you expect much better performance in general for the overall segment in '21 given the backlogs. Is double-digit growth achievable? I know you don't want to get into the guidance, but just how are we thinking about the type of growth rates that we might be able to see going forward when we get past this year and given the easy comps from early in the first-half.

Yes. Well, so Dan, we like this marketplace because of inherent long runway we think it has. And I do think the industry itself as it's going through this correction and dealing with COVID will come back, and we'll see growth rates as we had hoped going into this year. And I think we've always said, this market seems to be growing high single-digit type of growth in the past, and we hope to see that return next year. We got a little bit more of a, I think, market flush, if you will, that's going to happen in Q4 and a little bit into Q1, and then you'll start to see that return. A lot of that has a lot to do with the imbalance I mentioned earlier with the hemp market. Remember, the Farm Bill Act came about and made hemp better illegal and then you had a lot of people rushing into the space and artificially pumped up the market a bit. We saw that, and we knew that. It's just taking more time, I think, with COVID for that to rebalance because of access to capital and other things that a lot of the participants in the industry have dealt with the last nine months. So all that's kind of getting flushed, if you will. It's probably taking longer. It has taken longer than I think I anticipated. And from our understanding of what we've been working on with the market, I think you'll start to see that recovery in next year. And I think we hope to see the business start generating that type of growth we expected going into the year. And I think the other aspect of that is, obviously, there's a margin drag that has come with the reduction in the market, which we've shared with you guys over the last two quarters, and hopefully, we'll start to see that turn. We should see that turn in a positive direction as well.

Very helpful. And along the same lines, backward looking, but I missed the revenue contribution from Apeks, Delta. What were those in the quarter? And what was organic growth in renewables and conservation?

So again, renewables was up and conservation was off the core business basically cannabis market, and that is down. When you combine, it was down in the 10% range. And then the acquisitions added 20%, and that's out to the 10%.

$20 million. Great.

Those are percentages. Sorry.

Okay. Got it. Yes, the cannabis is down 10% and the acquisitions added 20%.

Basically, right. Yes.

Got it. And then very interesting, architectural mailbox. What's the margin profile today? What's the opportunity set? And do you see a big opportunity in kind of residential parcel boxes reflecting the growth in e-commerce. Is that part of the thought process here?

Yes. Well, there's a couple of things. As I mentioned, we mentioned, hey, it's complementary to say, well, how is that? There's a core mailbox business that we've built out over time. And what architectural in the single-family world, they're really in that architectural design, very innovative type of mailbox. So that's a complement on, call that, single family. Both us and they have been working on trying to find the best solution for residential homes for package delivery. So there's some interesting things going on there that we think we can leverage as that end market continues. And of course, our existing business, we do a lot of cluster boxes and large lockers for both commercial and new neighborhoods where you're going to more centralized mail delivery. So when you add it all up, it's interesting because we now have kind of three or four markets that this gives us a little more access to, and it just adds to the thought process around how to solve this home delivery thing in a way that I think a lot of people are looking for. So that's how it all fits. And then the back side, there's obviously, some interesting things that we can do together as we operate the business. So…

Very helpful. Okay I'll jump back with any follow-ups. Thank you.

Yes, thank you.

Thanks, Dan.

Your next question is from the line of Ken Zener from KeyBanc. Sir, your line is now open.

Good morning, everybody.

Good morning. Ken, how are you?

Good morning, Ken.

Oh, I have electricity. So that's good.

The basics in light...

Most important.

Yes.

So I'm hoping you guys could be as transparent as possible because I don't want to interpret this quarter as a miss. But I think this is one of the concerns about investors is, clarity in the renewable because many of your investors come from the building products world and solar have vegetables. So let me rephrase what you've said, I believe, so I can get some clarity. The 20% growth that you had in renewable is from acquisitions. You said though hemp margins were negative. Were you referring to these acquisitions collectively, which would include the Canadian greenhouse? Or how should we think about parsing out your negative margins in hemp to start with processing?

Yes, that'd be processing the two in processing, which are Apeks and Delta serve that market that we're talking about that really has slowed significantly, and that's where the bulk of the negative margin drag has come from this year as it did in Q2 and Q3.

Right. And my recollection is you had $75 million at the time of acquired sales in the vegetable business and $46 million in '17, so about 60 in those two businesses. Is that correct for sales?

That was trailing. Yes.

So how should - I added up the M&A line in renewable, and it looked like it's on track for about $80 million this year and your acquired sales were about $140 million. So it fell 40%. Obviously, timing, COVID, you couldn't control that. But is the hemp down like more than that 40%? I mean, is it down like 80% and the vegetables is okay? The reason I'm asking these questions is, your core renewable, so legacy solar and greenhouse, are those margins up organically year-over-year? Because this is kind of central to the fact, are you facing COVID issues or are you facing execution issues? And that's got to be on investor's mind today. The question is what's going to grow at?

Let me parse it. Renewables, we had growth in revenue despite the fact that we created a headwind by stopping tracker last year, where we had decent tracker revenues in the third quarter. So the other components in that segment, which are the fixed tilt, the canopy and the electrical balance of systems. Bill pointed out in his comments, revenue growth of those pieces of the business were greater than 25% each. And so that...

Okay. So those categories grew 25%. Your organic in those categories grew 25% year-over-year.

It created cover and so we generated growth from renewables in total. Margins are solid in renewables. And you go to core conservation, the core conservation business had a fair amount of cannabis in the third quarter of last year projects.

Right. It was up, yes.

And it's down this year. So cannabis market was tough at the beginning of the year from just getting any contracts raining down. So backlog decline creates a hole, and we're starting to see cannabis activity pick up in backlog build. So in that core business, there's a timing issue, but no real concerns. But that impacted margins negatively, missing that volume of revenue.

Is it fair to say then - sorry to focus on this? I think it's just this is a great opportunity for you guys to expand investors' understanding of this nascent business. The conservative, which is both - which is led by hemp in terms of the downside, but that would also be greenhouses and everything else, correct?

So we are not talking about core conservation.

Yes.

When I'm talking about core conservation, I'm talking about the entire greenhouse business. But the driver of its performance this quarter is really the tough year-over-year cannabis markets. So there's always noise in every business. But if you're looking at what happened. And then the acquisitions in total generated decent, they generated 20% sales growth. So I made up some of the shortfall in the conservation business. But in total, no revenue. In fact, in total it's negative revenue.

Margin.

I'm sorry, correct, negative margin.

Could you quantify that negative margin? I mean, is it like mid-single digits? Or is it like low double digits? And the reason I ask just as you guys ponder that is, if you have, for example, minus - if you have low-single digit margins, it means your actual margins in your renewable organically were basically flat to up. And I think it's hard to understand the magnitude of these obvious COVID-induced declines in the conservation business, that's all.

Yes. I mean, I guess what I would say is that acquisitions drove the majority of the revenue decline. And then the next piece of it is the piece in conservation. The quarter...

Okay. I'll move on. All right. Fair enough. I do appreciate it. Residential, 20%. How much pull - I mean, I know you guys are - your 4Q guidance, my guess, my last question, I'll back it out here. I do appreciate the details you offered. Your slide, about Slide 11, 4Q outlook. I don't know I heard you guys, I wasn't sure how to exactly interpret this. Are you saying sales are up? If I say sales are up, whatever, core, 3%. Should I have that 3% sales growth, be 37% renewable because this is percent of fourth quarter revenue? Or is this kind of - I just didn't know how to interpret when you said renewable at 37% of revenue. Is that for the fourth quarter basically?

I'm just looking at slides now.

Is that for the full year?

No. That's sort of trailing. That's just, hey, you're just trying to give people a relative weighting of these three segments on our portfolio.

Okay. Thank you, guys. Thank you very much.

Hey, Ken. Ken, I just want to clarify something for you as well. Maybe you know this, and for the audience. Hemp and cannabis are two distinctly different drivers of market stuff we talked about today. So hemp is really processing, impacts the processing aspects of our business. Not the growing because people grow hemp outside. So our core growing business or conservation business, whether it's cannabis or - that's going to be cannabis that's grown inside in a greenhouse. The hemp and cannabis market that is also impactful to processing equipment, but that's really where we've seen a big reduction or in the marketplace a slowdown as it related to hemp in processing. Does that make sense?

It does.

And so there are two things that are impacting the processing market. One is the hemp maturation process because there was a harm bill act that was approved. And so we had a lot of people running into that space. That's balancing itself out. The second piece of the processing business or second impact of the processing business has been around COVID. And that's all the processors having access to capital, whether they're processing cannabis or hemp. So those two things that are hitting, and that's my point, we're flushing through that this year. It took a little bit longer than we thought to flush out because I think COVID has extended that a bit. And that's where Apeks and Delta Separations, that's 100% of where their business is focused, processing hemp and cannabis. So two impacts on processing. Those are the two acquisitions that were directly impacted by it that's flushing itself out. That's the stabilization we're starting to see. That will start to pick back up next year. Cannabis for growing is really just associated with hemp - COVID upfront where people have things slowed down, getting access to permits and all that. And that's kind of started to work itself out in those projects. The bid activity and the projects we started to see increase throughout the quarter. And so we think that's recovering at a little faster pace from an end market perspective. And that particular piece of our business last year was at record levels. So you got a little bit of a comp thing and you've got a market recovery thing happening on the growing side as it relates to cannabis. Is that helpful?

Very good. Yes, it is. And I think these type of detailed explanations are very helpful to you guys. Thank you.

Yep.

Your next question is from the line of Julio Romero from Sidoti & Company. Sir, your line is now open.

Hey, good morning. Hope you'll are well?

Hi Julio, how are you?

Good morning.

I'm good. So on the resi business, I think you mentioned in your prepared remarks you expect a better topline and bottom-line year-over-year. I guess, would you expect the margins to be up in the same range that you've seen in the last two quarters because you've seen very good strength year-over-year in the second and third quarter. So is that fair that 300, 400 basis point for 4Q of '19?

Yes. I think we're going to be up on both top and bottom-line year-over-year. It is seasonally adjusted obviously versus - we won't be sequentially because of the seasonality of the business, but I think we've each quarter been performing a little bit better than the previous year. And I would expect that to continue in the fourth quarter. What is that really going to look like? I think it will be better. I can't give you a number now only because if you thought Q3 or Q2 is a little bit unique in trying to understand some things. We're in the middle of a pretty crazy time right now, too. But we're pretty confident that we're going to get through the fourth quarter with better performance. So I hope to see as you described better performance for sure on top and bottom line.

Got it. Staying on that segment, I mean, on the architectural mailbox acquisition, I think you mentioned it's more of a single-family offering than the cluster boxes that you traditionally offer. Is that sold through the same channels as your legacy mailbox offering?

Yes. I would say, architectural, there's a lot of overlap in terms of where we sell-through, and I would say there's a good online presence for them as well. So if you think about distribution channels, it gives us a little more breadth across all of those, and there are multiple channels between big box, small box, online, so on and so forth. And then we talked earlier about the various product lines it brings, which effectively helps you get to additional subsegments within the customer base, which we haven't really been in. So that's very helpful for us.

Yes. And I guess my last one is, is your total mailbox offering, does that now make up like about a fifth of your total resi segment? And would there be more tuck-in acquisitions to target in the pipeline?

As it relates to mail and package or residential?

Parcel and post, yes.

Not in the near-term. I think what we have now is a pretty strong foundation to go after some of the problem sets or opportunities that are out there, whether it's home delivery or in the multifamily world. There's home delivery there as well. There are different solution sets there. I think they bring a strong engineering organization that helps us strengthen our engineering organization. They bring some good marketing as well. And so I think collectively, we're going to - it'll help us focus a little bit more on some of the organic opportunities that might exist. But we'll keep our eyes open, but there's nothing obvious right now in that space that we would add.

Got it, thanks for taking my questions and best of luck in the fourth quarter.

Yes, thanks.

Thank you.

Your next question is from the line of Walter Liptak from Seaport. Sir, your line is now open.

Thanks. Good morning, guys.

Hey, Walt.

I wanted to go back to the previous discussion and maybe just to ask the question about organic growth. What was the organic growth or decline in the renewable and conservation business?

So the comeback in the organic renewable and conservation, renewables were up, conservation was down, and that combined was a little over 10%. I think it's 10.8%.

10.8% organic or 10.8% all in?

10.8% organic, because we've got almost 10% growth in the segment, and that difference is the impact of the acquisitions.

Okay. Great. And then on the backlog, I wonder if you can talk a little bit about - you said the composition of the backlog was split, the growth in backlog from the fruits and veggies, greenhouse and the solar. I wonder if you could talk a little bit about the solar part of it. How much of that is Sunflower 2? And how much of it is a traditional fixed tilt?

So while both sides of the businesses had backlog growing 28% plus, which is kind of cool. And you kind of mentioned fruits and vegetables. That's good end markets and very active things going on in the marketplace there. So we're excited about that. And that's really going to show up in 2021. In the solar side, the majority of that backlog growth is still in our core business, community solar. It's still heavily oriented toward fixed tilt and canopy. And our electrical balance of systems business. And then with the launch of Sunflower two toward the end of Q2, our backlog is starting to build in our tracker solution. So I would say the majority of it, gosh, probably 80% on the solar side is, 75% or so is still our core business, and the tracker just starting to pick up. So we relaunched it. Now we're obviously in discussions with a variety of projects. And as they come across, it gets put in the backlog. We don't put anything in the backlog until it's a signed agreement, legal document. So we started to see that build, get some projects across the finish line in Q3, and I think that will continue. We'll have a better Q, we'll have a better 2021, because these sales will actually show up in 2021. But the backlog is building, but it's still a smaller piece of the total right now, which is good and bad in the sense, I really like the fact that what it tells you is the marketplace really does need more than one solution, particularly in the community space where we've made our mark. We have three solutions that we're proving that are of great demand. And so as I said before, we'll give us another arrow in the quiver going into 2021. But yes, it's starting to build.

Okay. That sounds great. Yes. And I realized it was the late second quarter launch in that Sunflower 2. But it sounds like you did get some orders commensurate with the...

Yes, we do. We have projects that came across the finish line in Q3 and a lot of active bidding going on as we speak. And given the conversion time frame being anywhere from nine to 12 months once the project is done. So before you see it, it will start to take off?

Okay. Great. And on the fruits and veggies side, it sounds like that ships later in the year. That will be 2021. Is that - can that start shipping in the first quarter? Or is that...

It will be a mix. Yes, we have projects that been entering the backlog throughout the year, and you'll see stuff flow starting in Q4, Q1, Q2. The idea behind building that backlog, what's really relevant about it, I know it sounds obvious, but it gives us this constant cadence across each of the quarters as you build it up, and that's what we're trying to do across both businesses. So we take the lumpiness out of as best we can. But I think you'll start seeing fruits and vegetables as well as cannabis. They flow as easily as you have access to put them in the ground. So if you have good weather, it doesn't matter if it's in December, if it's in June. They can flow out there. So this year is disrupted a little bit because of permitting and crews being available and all that good stuff, and it's been a bit of a challenge moving schedules around, and that's a little bit of our challenge this year with a lot of businesses are going through that. But I think you'll we'll get a steady flow going as the backlog continues to build for both sides of the business.

Okay. Great. And then we haven't talked about industrial yet, but in that business, the margins look great. Looks like there's much of a recovery happening yet. What do you think about the timing? Is there a funnel where you can say, okay, maybe this will be first-half or second-half of 2021 where the revenues start to recover on easy comps?

Yes. I think the second-half will be - we'll see it show up more in the second-half than the first. And the reason I say that, one, I think it's hard to understand what's going to happen with the economy, depending on some results that we get in the next few weeks on the election and so forth. But the other thing that we've been working hard on is really pushing our permit security initiative and our architectural initiative. And this year, it's really hard to say how much of that's been impacted with - again, these are project-based kind of things that are going out there. And we're hoping to get more clarity and more consistency and being able to execute those projects in the field, not us to be able to make them but our customers to be able to execute them. And I think it's going to take some time for that to work itself out as we deal with the pandemic, and everyone kind of gets back to some level of normalcy. And that's why I say the second-half is probably more reflective of something that would be more positive on the topline than it would be the first-half.

Okay. Fair enough. And then the last one for me is just, did you provide any details about the M&A mailbox, acquisition, sales, EBITDA, kind of accretion or purchase price, et cetera?

Yes. We said so we paid just under $27 million for it, and its sales for 2020 should hit a similar number, 26s, 26 plus somewhere around there. So effectively kind of onetime sales was the price and that's the sales level. I think the margin profile is similar to what we have today.

Okay.

This is what we have today, sorry.

Okay.

Your last question is from the line of Mr. Daniel Moore from CJS Securities. Sir, your line is now open.

Thank you, again. Just remind us where you expect margins on the processing side to get to once the market does recover? And what do you see as a reasonable time frame?

Yes. Dan, when we acquired the business, obviously, we believe it's accretive to Gibraltar. So we're going to be moving toward, I think, mid-teens is what we've said in the past, and I think that's very reasonable to get there, and we'll obviously try to drive it up over that over time. And I think we'll start to see us getting back to that level toward the end of next year, second-half next year. It depends on, I'm hoping the market as we've seen to stabilize starts to turn, starts to see more positive activity as we come out of Q4. And it will come down to that. The integration work that we've done has gone really well. We've brought the teams together. We have now one team. We've implemented the common ERP system, common CRMs. So we did all the hard work. It's just I think when the market returns then we'll be in a really good position. And hopefully, the margins will flow as we expect. I think that's what the industry margins look like from the work that we've done, and I fully expect us to get there. And I'm hoping that we see that toward the second half of 2021. Maybe we'll that in 2021, second-half.

That is helpful. Thank you again.

Yes.

I am showing no further questions at this time. I would now like to turn over the conference back to Mr. Bill Bosway.

Hey, guys, well, again, thanks for joining us. We'll be participating in Baird's 2020 Global Industrial Conference that's coming up. And hopefully, we'll get a chance to spend some more time with you there, and as well as our follow-up calls that we have scheduled. So stay safe, have a great day, and we'll talk to you soon. Don't forget to vote. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.