Gibraltar Industries, Inc.

Greetings and welcome to the Q2 2021 Gibraltar Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Carolyn Capaccio of LHA. Thank you, Carolyn. You may begin.

Thanks, Paul. Good morning, everyone, and thank you for joining us today. With me on the call are 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 section of the company's website, GibraltarOne.com. Please note that Gibraltar has classified the industrial business which was divested on February 23rd, 2021, as a discontinued operation with fourth quarter 2020 results. Results of TerraSmart, which was acquired at the end of December 2020, are included in first half 2021 results. Gibraltar's earnings press release and remarks contain non-GAAP financial measures. Tables of reconciliation of GAAP to adjusted financial measures can be found in the earnings press release that was issued today. Also, as noted on slide two of the presentation, The earnings press release and slide presentation contain forward-looking statements with respect to future financial results. These statements are not guaranteed the future performance, and the company's actual results may differ materially from the anticipated events, performance, or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the company's website. Now I'll return the call over to Bill Botway. Bill?

Hey, good morning, everybody, and thank you for joining today's call. Let's start this morning with an overview of the second quarter results, and then we'll discuss the ongoing market environment we continue to manage in. Tim will then provide a detailed financial review of the quarter, and then I'll give you an update on our 2021 strategic priorities and our guidance for the year. Then we'll open up the call for your questions. So let's start. Let's turn to slide three. You know, we delivered a solid quarter. with revenue up 36.5%, 14% of which was organic, and 22.5% came from acquisitions. We got off to a good start in the first quarter with 34% growth, and the momentum accelerated into the second quarter. Growth was driven by healthy end market demand, further participation gains, and the realization of multiple price actions implemented in the first and second quarters. In total, our order backlog, which reflects signed contracts, grew 54% to over $400 million last a record level really for Gibraltar. And on a pro forma basis, order backlog grew 32%, again reflecting accelerating order momentum as we exited a strong first half of 2021. The integration of TerraSmart is on track. We continue to evolve into one organization. We're six months into the process and have combined sales, marketing, supply chain, finance, HR, and have a strong leadership team in place. TerraSmart's operating margin nearly doubled versus the first quarter, and demand remains robust as we enter the second half of the year. Historically, the strongest quarters for this business and for the solar market. In our residential business, Architectural Mailbox has completed its third full quarter of integration activity and is delivering to plan as well. Adjusted operating income increased 8.2%, and adjusted EPS expanded 6.7%. to 80 cents per share. Although our margin contracted during the quarter, our success in implementing various price actions and productivity initiatives helped offset a large portion of the macro headwinds that accelerated during the quarter and drive positive growth in operating income. Our macro headwinds included ongoing inflation of materials, labor, and freight, and the supply and availability of materials, labor, and transportation. As it relates to the reemergence of COVID, we maintained our operating protocols through the quarter and were able to minimize disruption accordingly. So let's turn to slide four so I can share with you a little bit about inflation and supply chain dynamics. So let me provide some context concerning the macro headwinds and the environment we continue to operate in. And I realize there is plenty of debate and opinion regarding the inflation going forward. But regardless, June was the ninth month in a row with a significant market increase for core input cost. And inflation continued to accelerate in July as well. The magnitude of the increase combined with the speed in which it has occurred is really unprecedented. And I think it's been surprising for many industries. For example, in January 2020, if you think about it, in a good economy and prior to the pandemic, the CRU price for hot rolled steel was $570 per ton. And really over the next nine months, by September 30th, 2020, the price had increased 5.1% to $599 per ton. Now, in contrast, between September 30, 2020, and June 30, 2021, another nine-month period, the CRU price for hot-rolled steel increased 188% to $1,723 per ton, and during July, it increased another 4.8%, surpassing $1,800 per ton. The net result, hot-rolled steel pricing is more than three times higher in a market where demand levels today are actually less than they were prior to the pandemic. You know, pricing for their input costs and materials has risen as well with aluminum at 50%, resins up 97%, transportation rates up 29% over the same timeframe. Now there are a number of reasons for causing today's situation. You know, we have capacity reductions during the pandemic, labor shortages, tariffs, import duties, supply capacity management strategies, and other macroeconomic questions. But our expectations are these issues will continue in 2021. So yeah, it has been a tough and fast moving environment and we expect it will continue and we will remain proactive in attacking our inflation and supply chain challenges. As discussed in our first quarter earnings call, we started engaging customers and suppliers in the fourth quarter of 2020 and also started implementing our first round of price increases with subsequent price actions as inflation accelerated. Our supplier agreements with our customers, specifically within our residential customers, include commodity indexing clauses that support price changes and also a well-defined process and timing for approval implementation of changes this does create a natural lag for price realization relative to commodity increases and in the second quarter resulting in margin contraction force especially given the sharp and substantial cost increases in steel aluminum resins Historically, though, the price realization lag has been anywhere between one to two quarters once inflation turns down. Now, until this happens, we will continue to implement necessary price actions and really focus on maximizing operating profit dollars. And when input costs do start to fall, we'll manage price accordingly to facilitate margin recovery. Now, we've also continued to work to execute our 80-20 initiatives that we had planned going into the year. We're staying very close to our suppliers and trying to stay in sync with our customers at the same time. I think all of these efforts have helped us manage relatively well in the current environment and deliver this quarter's results. With that, let me turn it back over to Tim, and we'll give you a little more detailed review of our results. Tim?

Thanks, Bill, and good morning, everyone. I'll take you through our consolidated segment results, and as a reminder, my discussion will cover results from continuing operations. Consolidated revenue increased 36.5% to $348.4 million. Organic revenue growth of 14% was driven by continued execution on strong demand, participation gains, and pricing in all four segments, despite some supply chain dynamics and materials and labor availability, particularly in the renewables, residential, and ag tech segments. We generated 22.5% growth from the 2020 acquisitions of Architectural Mailboxes, Sunfig, and TerraSmart. Total backlog at quarter end exceeded $400 million, up 32% over second quarter 2020 on a pro forma basis, driven by continued end market demand across our business. Adjusted operating income increased 8.2% in the second quarter, with adjusted EPS up 6.7%. The increase was the result of continued execution on solid demand across the business segments that drove organic growth, as well as TerraSmart's acquisition and 80-20 productivity initiatives. Partially offset by the timing and alignment of higher input costs and price increases, supply chain disruptions, and in the ag tech and renewable segment shifts in project timing. As Bill commented, we continue to work with suppliers to manage materials, transportation procurement, and with customers to manage pricing, We expect margins to recover as inflation subsides with a one to two quarter lag. Now let's review each segment, starting with slide six, the renewable segment. Segment revenue increased 92.5% driven by the TerraSmart acquisition, as well as organic revenue growth of 4%. On a pro forma basis, including the TerraSmart transaction, revenue grew 25%. Revenue growth accelerated sequentially from 80.8% last quarter. And we achieved this growth through solid execution and converting strong backlog into revenue, despite solar industry headwinds of significant input cost inflation, supply chain challenges, particularly with panels that impact our customers' ability to finalize design and cause project timing delays, and the impact of the Safe Harbor ITC extension announced in December 2020, which served to remove incentives for developers to build early in 2021. Demand continues to be strong across our broad offering of fixed tilt, Tracker, Canopy, and EBOS product solutions, serving the community, commercial, and industrial market segments. Backlog ended the quarter over $218 million, up 54% on a pro forma basis across our entire solar business. Adjusted operating income improved 45.2%, while adjusted operating margin contracted 380 basis points, the majority of which was expected from the integration of TerraSmart. Of the remaining margin contraction, approximately half is related to a one-time tariff credit received in the second quarter of 2020, with the remainder the result of timing and alignment of price actions with input cost inflation and project movement related to supply chain schedule and logistics challenges. The TerraSmart integration is delivering the results as expected with adjusted operating margins nearly doubling sequentially as demand continued to accelerate and we begin to implement simplification initiatives. TerraSmart remains on track with its full-year margin plan. Let's move to slide 7 and review our residential segment. Segment revenues increased 17.7% driven by increased pricing and volume, despite supply chain dynamics related to material, labor, and logistics. Organic revenue grew 12%, and the acquired architectural mailboxes business contributed 6% growth, with the integration of this business on track. Segment-adjusted operating margin decreased versus last year, driven by the impact of accelerated inflation, material and labor availability, and the timing and alignment of price actions with input costs. As we anticipated this inflationary environment, we have implemented multiple price increases since the beginning of the year. The timing of these adjustments is not in lockstep with accelerating inflation, and going forward, as inflation begins to moderate, we expect alignment between pricing and cost to improve and the operating margin to recover. which historically occurs one to two quarter time period past the inflation peak. And during this transition, we'll continue to maximize operating profit dollars with a focus on continued alignment of selling prices with input costs, execution, and 80-20 initiatives. Let's move to slide eight to review our ag tech segment. Segment revenue increased 27% with solid activity across the produce, commercial, car wash, retail, and processing equipment segments, a sequential improvement despite the rescheduling of delays in expected projects on a number of projects from the second quarter into the second half of 2021 because of permit delays, rescoping of projects, and supply chain disruptions. For example, on one of our larger produce projects, imported glass for our greenhouse roofing system was delayed in a West Coast port for more than 11 weeks, waiting for the port authority to move the containers to a carrier for delivery to our job site. Like many other companies, the Port Authority is challenged with finding labor to increase capacity to support increasing demand. Segment adjusted operating income was flat year over year, with adjusted operating margin contracting year over year due to business mix, the movement of projects into the second half of the year, as I just mentioned, higher input costs and logistics challenges. These headwinds, which we view as temporary, were partially offset by improvements in the legacy greenhouse structures, cannabis greenhouse structures, and cannabis and hemp processing equipment businesses, which are encouraging. And on a sequential basis, adjusted operating margin expanded 180 basis points as the processing equipment business continued to improve along with continuing benefits of the integration of the produce business. Agtech order backlog experienced a temporary contraction during the quarter, followed by July customer order activity that is accelerating backlog momentum, and the segment remains on track with expectations for the year. Let's move to slide 9 to review our infrastructure segment. Segment revenue increased 29.7%, driven by demand for fabricated and non-fabricated products that increased as state DOT project funding improved with the strengthening of the U.S. economy. Quarter backlog increased 11% over $46 million during the quarter, indicating growing strength across the business. Segment adjusted operating income and margin expanded from last year, driven by favorable mix of higher margin non-fabricated products and solutions, strong execution on higher volumes overall, and continued investment in 80-20 productivity initiatives. We also continued to improve our manufacturing processes during the quarter, allowing the team to shift labor between production processes and, combined with better material flow, reduce lead time significantly. And let's move to slide 10 to discuss our liquidity position. We generated $14 million of cash from continuing operations in the quarter, driven by higher net income and increased accounts payable, partially offset by increased inventories and accounts receivable as we enter the seasonally strongest quarters. We generated $8 million in cash for investing activities with $13 million in cash collected on the note related to the sale of the industrial business, partially offset by capital expenditures of $5 million. Cash used in financing activities of $25 million was mainly the result of net repayment of $25.8 million of outstanding borrowings. At June 30th, we had $360 million available on a revolver, cash on hand of $17 million, and our net leverage was slightly less than a quarter term. We continue to expect to pay the remaining $33.2 million balance on a revolver prior to year end using cash flow generated from operations. Our operating model generates high cash flow with relatively modest capital expenditures, offering us ample liquidity to invest in operational excellence, organic and inorganic growth initiatives, organizational development, and to repay debt. We remain in active M&A discussions and remain focused on managing working capital. Now I'll turn the call back to Bill.

Thanks, Tim. Let's turn to slide 11, and I'll give you a quick update on our key priorities for the year. At the start of the year, we communicated really four key priorities important to executing the business in 2021. Our four business priorities remain very aligned with today's environment, and obviously we're very active and focused on all four. As a reminder, our priorities first and foremost scale our renewables and ag tech businesses, as mentioned earlier. You know, we are making good progress integrating TerraSmart while executing a very high demand environment with a dynamic supply chain situation. We continue to build processes, drive scalability, and integrate our key functional areas. Our broad and evolving solar portfolio, which really is the broadest turnkey offering in the market, is resonating well in the market. And with six months into the acquisition, our results relative to our expectations and acquisition plan demonstrate I think our strategy is working. The ag tech business is also making progress and demonstrating the sequential improvement we expected as we move through 2021. As we exit 2021, we expect ag tech revenue growth and margin run rate performance to surpass 10%. Integration of Thermo is expected to drive positive results in the second half, along with the market recovery of our cannabis and processing equipment businesses. and steady growth in our legacy business. Our ag tech presence is strengthening, and our M&A strategy is working here as well. Our second priority was to manage inflation and optimize our supply chain. We already discussed the environment and how we've managed to date and our continued focus going forward. I do want to mention we are accelerating our additional 80-20 projects, focused really on developing and implementing automation solutions to better optimize labor management for key facilities in 2022. Thirdly, focus on improving our execution with continued focus on health and safety, 80-20 productivity initiatives, new product development capability, and quality control systems. In today's environment, our ability to consistently execute is helping us navigate through the year and deliver our plan. We must also stay diligent in driving our health and safety progress as we move into our busiest quarters, continue to manage supply chain and labor challenges, and deal with the reemergence of COVID. Finally, we have continued with our investment in our business systems, ERP, CRM, HRIS, and quality system implementations, which I believe will drive additional productivity and scalability across our businesses. And finally, fourth, particularly in this kind of environment, we just want to continue to conduct business the right and responsible way each and every day. You know, regardless of how challenging or complex the operating environment, we've got to continue to focus our efforts on driving environmentally sound solutions for solar energy production, Food growing and residential efficiency is a while-acting response being helping to support our people, customers, and suppliers. Let's move to slide 12, and we'll discuss our outlook for 2021. So we do remain confident in our existing full-year 2021 guidance for both revenue and earnings, which we are reaffirming today. Although we expect the current business environment to continue through the second half of the year, our first half performance with revenue up 35%, Adjusting operating income up 17%, adjusted utility DPS up 15% reflects our ability to operate in this environment. And our first half performance is also consistent with our historical first half pattern. We are also well positioned with good demand and in markets, where the second half is seasonally the strongest. We have record order backlog and a very healthy balance sheet. Our outlook also includes profitability improvement in each business, a continued focus on daily execution. driving our acquisition integrations and further strengthening our organization operating systems. We continue to expect consolidated revenue in the range between $1.3 billion and $1.35 billion. GAAP EPS from continuing operations in the range between $2.78 and $2.95 compared to $2.53 in 2020. and adjusted EPS from continuing operations in the range between $3.30 and $3.47 compared to $2.73 in 2020. Finally, look, I want to thank our entire team and our board of directors, our suppliers, and customers for their support, their focus and diligence in today's environment. It's been an extraordinary 18 months, and our team has and continues to perform in an extraordinary way, and I'm really excited about what's in front of us. With that, We'll open the call up for questions.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question comes from Ken Zenner with KeyBank Capital Markets. Please proceed with your question.

Good morning, everybody. Hey, Ken. Morning, Ken. Just if we could spend a little time on renewable. I appreciate the slide for guys in terms of the steel cost inflation. But I wonder if you could put 2Q in context of some of the comments you made in 1Q, just so we can understand where the margin differences are coming. I think that's obviously an appropriate focus for investors. So in the first quarter slide on renewable, you talked about a 50 basis point lift in the legacy business. If appropriate, could you please update us how that organic moved? And I'm asking Tim so you can kind of force rank, what the other cost pressures are. It sounded like the TerraSmart, obviously steel, there was a credit timing, but I just want to see how the legacy business did and then the other drivers, please.

Yeah, so Ken, the TerraSmart was just its sort of planned operating margin was the biggest impact. Next in line was this, then these other two items are really on the core business. So we got In the second quarter last year, we got the benefit of a one-time tariff credit that had built up over. It wasn't just related to that quarter. It was just when we were able to get it back. And then third and less impactful than tariff credit was the just timing of price material.

Interesting. So I guess it does sound, though, just to stick on the legacy, the legacy was down year over year led by the tax credit and then steel costs. So it's not steel costs was only, it wasn't the main driver here in the operating margins.

Not the main driver, but there is an impact.

Oh, yeah. Yeah, but I don't think it was as great as perhaps the industry would have thought. Given that steel costs are so incredibly robust, despite the spread in U.S., you know, in international prices, I think scrap rolled over 60 days ago. Is there any – I think you guys have been better buyers of steel than others perhaps would have expected, but is there increased – could you talk to these price indexes, I guess, Bill, is what I'm talking about, and how customers are responding to – such robust pricing, which seems necessary in order to maintain your margins?

Yeah, so there's a number of variables that customers are thinking through depending on which business, but in the solar world, go back and remember the 4% benefit or elimination of the reduction that was expected going into the year was a plus for everybody, right? So you've got that, that's 4% on the total So that was towards the good. And then you have these other headwinds that developers and such have been facing. I think, you know, the economics, as we've talked for the year, have not been as good as they would have been for projects maybe a year ago, but they're still attractive. So, you know, I think customers continue to move forward. And I would characterize kind of three buckets of customers, if you will. Not necessarily equally spread, but you have a group that is, hey, send me everything you can. Let's keep going. Go hard. And you see that in our demand profile. You have a group of customers that are just struggling getting, say, panels or what have you. And that's the bucket that still wants to move, but they're just being disrupted a little bit by some of their supply chain challenges. And you see some movement flow through on that. And then you have a, I'd say, smaller group. And these are typically the newer customers. newer folks into the marketplace that are more in a wait-and-see mode because of inflationary environment. So, you know, you've got three different scenarios there. What I would say is, you know, the returns on these projects seem to be still relatively attractive, and that's showing up in our demand as we've seen the first half of the year in our backlogs. So, you know, we're trying to help them find ways to make those project economics a little bit better. There's ways we can do that through the design up front of the project itself and help them avoid maybe some of those planning costs, et cetera. But it's a tough environment, you know, in terms of, you know, every project is what it is. But, you know, we're staying very engaged with them, trying to help them navigate through each project across all the variables that they're dealing with. Yeah, as we said early, late last year and early this year, we are out in front engaging folks. I don't think people anticipated this. I can't say I did, not to the extreme, but walking hand-in-hand through this together has been, I think, very helpful with us and our customers. No one likes it at the end of the day in terms of the impact, but we're learning how to manage it.

Right. It seems like the industry is getting more rational, perhaps around pricing, given pressure on other competitors you face. The last question I have is, could you talk to the sequential nature of margins in specifically renewable, but also Tim, the company in the second half, for example, do you think renewable margins will be up year over year in the second half where you basically have a high 12 handle? in renewable and then just comment if you could on any 3Q or 4Q weighting overall. That would help consensus so we avoid surprises. Thank you.

Yeah, I guess I'm a little hesitant to tell you what I think margins are going to do because I don't know what inflation is going to do and that will impact it. So we see opportunity to improve. But if material costs don't moderate with both the speed and the rate of change, I don't know that we would get ahead. So we're set to make higher margin across the business, I think, or improving margins, but that's with a scenario that there is not rampant continued inflation. that we have to go on.

Right, but at today's net pricing, it sounds like you, which understandably, you don't want to comment about the spot or the commodity market, but in today's environment, given net price, it seems like it would be a favorable trend at today's known variables, correct?

Yeah, I think a fair way to think about it is at any given time, we are either working price to get to the current market or we've gotten there just depends on a given day across the businesses. And so if we stayed at a current price, definitely.

Thank you.

Yeah.

Thank you. Our next question comes from Dan Moore with CJS Security.

Please proceed with your question.

Good morning. This is Steph calling in for Dan.

Morning.

Morning. So on ag tech, what is your confidence that increases in the backlog will translate to revenue in the second half? And are you seeing that happen already in a more material way in Q3?

Yeah, I think our plan for ag tech has been sequentially get better throughout the year. The backlog that we have today reflects that. The temporary contraction that Tim mentioned is really a shift from June to July in the first three weeks of July. Those projects we thought were coming in June, they've come through the process, so they're on board now. And they'll start being executed. And when you think about the length of executing a project or when they'll start to flow through, it does vary by end market, but our backlog is shaping up where they're going to be contributing to. it will be contributing to the second half. So that's what gives us confidence that our plan to, again, continue to sequentially improve is on track.

Got it. Thank you. And then in terms of residential, you have some tough comps coming up. If you look forward to the next four quarters, do you still expect to continue to generate positive growth? And then also, how should we think about margin?

You know, I think the growth profile that is going to be consistent, I think, with what we see happen in the industry and and so obviously i don't think we're going to grow at the rates we did last year just because the comps to your point are pretty robust we had record you know quarters last year in history of the company for a residential um you know i think a lot depends on what happens with this inflationary environment at some point in time uh you know consumers are going to vote with their pocketbook relative to pushing forward or not and And all these variables that we've talked about, which we've assumed will stay in place for the next six months across all our businesses, they're still out there. And if they remain, not get worse, but remain, then we'll see margin recovery go forward. If things continue to move up on inflation, then we'll continue to chase those up and just continue maximize operating profit dollars. So that is, uh, you know, the question, uh, we think our margins will get better. Uh, and the assumption is that, that the environment we have today, an inflation fund, um, kind of holds where it is. It doesn't get markedly worse, meaning things continue to go up. Uh, but if it does go up further and further, then we will maximize operating profit dollars and margins will, will, will be delayed in terms of recovery. that's how that will work just like it has in the second quarter.

Great.

Thank you for taking my questions. Yep. Thank you. Our next question, our next Julio Romero with Sedoti and company, please proceed with your question.

Hi, good morning, everyone. Hey Julio. Hey, so I wanted to just, I guess, first day on Resi. Can you maybe rank order some of the headwinds you're facing there? I know you mentioned price lagging inflation, but also some availability issues with material and labor.

Yeah. So, you know, inflation is still very high, as we all know. And as I mentioned, July wasn't any better than the previous nine months in terms of increase. But I would say that availability of Some of the materials that we were struggling with, resin and aluminum in particular, are starting to work themselves out. We started to see that in the latter half of the second quarter. So we feel like that one is heading in a positive direction. Labor availability is something that I think everyone's going to continue to struggle with for some period of time, depending on what continues to happen with COVID. That could change. costs and challenges for folks, but we're managing through that pretty well. So, you know, that's just going to be a continuous, you know, battle as we move through the next couple of quarters. So, you know, inflation, number one, material availability starting to improve, but still there a bit, you know, and we still have strong demand. We're trying to support it, but, you know, we've got to have the material coming in. That's getting a little bit better. And then the third is, you know, any other disruption associated with COVID, which I think, you know, like I said, to this point, we've been managing relatively well.

Got it. So it sounds like the material shortages would be focused on, you know, non-steel, right? Steel, you didn't really have an issue with? Okay.

No, steel's not been an issue. It's really been aluminum. And frankly, if you go back in time, when the February – weather hit the Midwest, it hurt a lot of suppliers, particularly those that are doing some value add in the area of aluminum. Resin's been impacted by a number of things. So those things have kind of worked themselves out, but that gives you an idea of the magnitude of that weather disruption for eight days or ten days. It's just now kind of getting itself worked out, but I feel like that's gotten better.

Understood.

And is there any way to think about, you know, once steel starts to not stay on the upward trajectory, you know, just trying to think about how to quantify, you know, the impact of price lagging inflation, you know, either from an operating income dollar standpoint or a margin standpoint.

Well, one way to think about it is we don't need, we don't necessarily relative to the rest of the year need inflation to start going down. We just need it to, moderate. We just need it to flatten out. Our assumption, our plan is that everything stays elevated for the next six months in terms of input costs. So if our input costs, things like these major commodities issues just subside, that would be very helpful going forward. And then our pricing will start to read through and catch up. What we don't know today, what I can't tell you today is if that is going to happen with inflation. Because, again, for 10 months in a row, we've been wrong. Everybody's been wrong. And that's the piece that's kind of the open card right now. So we're assuming that everything stays elevated in our second half. We're assuming there are price increases that we've actually put in place. We implemented our fourth one yesterday across the residential businesses. Those will start to catch up, but if inflation continues to move up, then we'll continue to focus on, like I said earlier, maximizing the operating dollars, and then margin will recover as things subside and start to move down.

Okay, understood. And I guess just switching gears to ag tech, can you just talk about how the cannabis-related businesses within ag tech are performing, and are your customers on the cannabis side seeing better access to working capital, better financing, etc.? ?

Yeah, they are. And we've seen that in the backlog. Cannabis backlog has started to grow in Q2. And that's one of the reasons that ag tech will start to see improvement, sequential improvement in Q3 and Q4. So that backlog for growing structures as well as processing equipment has been steadily increasing. And we mentioned earlier this re-scoping effect. So when We had a couple of projects in cannabis that have gone through a couple of iterations where a customer has changed the scope of their project a couple of times. So it goes in and out of our backlog. We don't let it sit in our backlog if it's actually not a confirmed contract. So we'll take it out. In our scenario, we had a pretty large project that went in. We took it back out. That was the temporary contraction. associated with the backlog. They've since come back in and finalized the scope. So we put it back in because we don't want to have a false sense of backlog. But that's all cannabis oriented. So that market, I think, is gaining momentum, which is what we anticipated in the second half. And our backlog is reflecting that. So you'll start to see those projects read through. And in early first three weeks in July was also very positive in bringing more of that in. Specific to cannabis.

Okay. Okay. And then I guess just staying on ag tech, you know, a quick refresher on the thermal business within ag tech. Did you see any impact from those projects that you had acquired, you know, when you first took on that business, I think 18 months ago and, and, you know, are you completely worked through those acquired projects?

Yeah, I think, I think, you know, as it came out of the first quarter, we kind of got most of the, I'd say a very, very high percentage of that behind us. Um, What we had happen for the produce business was more related to some permitting delays that are being worked out. But fundamentally, the drag that was created with the projects that came with the initial acquisition, I think, are through the system. And now we're adding into that backlog projects now that we're managing. And again, that will drive a positive second half as well.

Great.

Thanks very much for taking the questions.

Yep. Thank you.

As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue.

Our next question comes from Walter Liptack with Seaport Global.

Please proceed with your question.

Hi, thanks. Good morning, guys. Hey, Walt. Hey, Walt. So I wanted to ask about Terrasmart and maybe a little bit more details. Can you help us understand a little bit more about some of the integration that's going on and maybe help us with some of the details about how those integrations play through to getting to the plan margins, and is that at the end of the year or is that in 2022?

Yeah, so, well, a lot of the synergy that we put into our acquisition plan really starts to flow through in 2022. A lot of the work we're doing now, which is 80-20 slash lead efforts, I think I mentioned in a previous call, we started working on a couple months ago is stuff we're working on now to put in place. And that will be, I think those are things that will help drive the margin beyond that weren't necessarily the original plan. But like anything, we tend to go back in each of our businesses, whether it's the legacy core business or TerraSmart, they both went through the same exercise most recently around an 80-20 refresh. And we wanted to do that collectively because as we're integrating the businesses, we want to see where our best processes are and where our gaps are and where the opportunities exist, et cetera. So that's identified some additional opportunity for us that we'll be able to read through, uh, as we get things implemented. So, um, but as it relates to this year in the margin, what drives TerraSmart, if you've looked at the first quarter, second quarter, I mean, they double effectively doubled their operating margin, their model is a little bit different than rbi's to start with and so as you get into the busier season q3 and q4 their field services or field operations portion of the business is a fixed cost model whereas rbi is historically variable cost so when the quarters are lower in volume in terms of activity in the field they run a different margin profile and then as they leverage leverage up with the volume and q3 q4 that's when they accelerate and that's really uh historically what's been the case there for them and you'll continue to see them uh drive forward with margin in q3 and q4 because of that phenomena just with the way that they uh they go to market with or field ops it's not right or wrong it's just different and uh the way they've always done it and um uh we'll continue with both models because it really is project dependent but that's a core piece of of how their margins flow through the year the weaker upfront or lower upfront and stronger in the second half. And it's because of the construction cycle. There's more and more of our revenue margin comes from those field ops, not just the design and manufacturer of the, of the materials that we put out for the field itself. That makes sense.

Okay. Yeah, that makes sense. So, uh, as we, we start thinking about 2024 or just how care smart, uh, fits into the picture, do we, do we see that same seasonality? to profits in the future too? Or was there more to the integration costs that we don't have to worry about lower profitability in the first half and then a pickup in the second?

Well, I think the seasonality and profitability may not change dramatically, but I think the overall absolute level for each portion of the year will go up and that'll come through the integration and the synergy work that we're doing. Q1 is always going to be seasonally less, lower margins just because of volume in Q1 due to weather and all that good stuff. It's going to be less than it would be in your summer months and so forth. But the ability to move up margins in each quarter relative to where they historically have been is absolutely our intent.

Okay.

And where do we think the planned margins can get to? So when we talked in January,

Yeah, so when Terrasmart came out of 2020, I'm going to hopefully get this right, about $147 million in sales, and I think they ran, Tim, 13%, 14%?

I think it was more around $12 million. We said the combined business was around $12 million.

That's right, sorry. So that's the starting point, Walt. starting point. And then we said, you know, uh, in the next five years, you know, the business will, uh, reach 750 men. This is kind of all organic 700 plus million and 15 plus percent operating income. And we're quite confident that, uh, that we'll get there and hopefully a little bit, be a little bit ahead of schedule, you know, sooner than we thought, but, uh, that we have a clear path to. And then I think some of the additional work that I just mentioned earlier, just some things that we'll be able to, secure that or maybe take it up a little bit better as well or a little bit more as we figure a few things out. But that's the plan, and we feel good about that.

Okay. All right. Great. And then just one on the backlog for renewables. The 54% growth, you know, is there an organic backlog that you can talk about? Yeah, so the – okay, go ahead.

So we say pro forma. Well, actually, I think that 54%, Tim, is pro forma for the renewable business.

For the renewable business, correct, yep.

And what that means simply is that is the organic number, if you will, for the two businesses. So if I took last year's actual backlog for each business and this year's backlog for each business, it's up 54%. They both have contributed and both have backlog coming in. So it's a very robust demand profile for the business right now. And it's frankly pretty consistent to what we saw in the first quarter as well. So the first half were renewables has been very good on organic backlog and frankly, organic sales. It's just, you know, it's a very busy, busy environment right now for renewables.

Okay. Yeah. And right. And so it sounds like, you know, based on the way you answered other questions too, and I've been talking about it, that it's not demand that there's any problem with, there's not any kind of trends with supply chain or price costs that are impacting demand. It's, um, The demand environment is fine.

Yeah, the only exception I would say in residential where we had some availability issues with material early in Q2, aluminum specifically in resin, that impacted demand a little bit. But in general, the rest of residential, the renewables, ag tech, we haven't really had – big impacts on demand because of supply chain stuff. We've had a couple events. I mean, Tim mentioned in his comments, you know, we had one of our bigger produce projects in the quarter get moved because we had an 11-week delay in glass. And, you know, that's just, you know, it happened. But it's not – that was a unique event that we think we hopefully were through. It was just it wasn't a supplier, couldn't get the glass to us. And it was a demand issue. It was just we literally didn't have labor at the port to pick the container off the ship and put it on a truck. And it took 11 weeks to figure that out. And you think, well, that's crazy. Well, these labor shortages around the country are real. And, you know, so we had a couple of events like that. But in general, well, yeah, you're right. It's not been a demand issue.

Okay. Okay. Thank you. Thank you. There are no further questions at this time.

I would like to turn the floor back over to Mr. Bill Bosway for any closing comments.

Well, thanks again, everybody, for joining us today. We do have a busy investor marketing schedule for Q3, including the Jefferies Industrial Conference tomorrow and then the Seaport Global Summer Conference on August 24th, as well as some other marketing dates. And we're looking forward to reporting on progress in the third quarter earnings release And keep your calendar open. We're planning on a shareholder day or investor day in November, hopefully in person in New York. Stay tuned on that. So thank you. Have a great day. And everyone take care. Stay safe. Bye-bye.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.