Gibraltar Industries, Inc.

Greetings and welcome to the Gibraltar Industries Q1 2022 earnings conference call. At this time, all participants are in listen-only mode. A 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. I would now like to turn the conference over to your host, Carolyn Capaccio of LHA Investor Relations.

Thanks, Operator. Good morning, everyone, and thank you for joining us today. With me on the call is Bill Bosway, Gibraltar Industries Chairman, President, and Chief Executive Officer, and Tim Murphy, Gibraltar's Chief Financial Officer. The earnings press releases that were 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. As noted in the earnings press release issued today, Gibraltar has reclassified the processing equipment business in the ag tech segment as held for sale with the first quarter 2022 results and has removed the related revenues and expenses from the processing business from its adjusted 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 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 filing, which can also be accessed through the company's website. Now, I will turn the call over to Bill Bosway. Bill?

Good morning, everybody, and thank you for joining today's call. We'll start with an overview of the first quarter results, the current operating environment, and then Tim will review our financial performance. We'll then talk to our current trends and their key initiatives and guidance for the year, and then we'll open the call for questions. So let's turn to slide three, first quarter results. We got off to a solid start to the year and delivered double-digit revenue and earnings growth in the quarter, especially given the headwinds from solar panel supply issues, persistent inflation, labor availability, and general supply challenges facing our end markets. Revenue reached $316 million, up 10.5% on a reported basis, 11.8% on an adjusted basis, all of which was organic growth. Adjusted operating income grew 17%, adjusted EBITDA grew 12.1%, and adjusted EPS grew 11.1% to $0.60 per share. Customer activity remained robust, with total company backlog reaching $433 million at quarter end, up over 23% versus prior year, driven really by broad-based in-market demand across the world. As mentioned in our Q4 2021 earnings call, 2021 was tremendous, albeit tough learning environment, but the experience really forced us to challenge many of our internal and in-market operating paradigms. I think as a result, I believe we're in a much stronger position today to deal with current market dynamics, and we were able to demonstrate some of that strength in the first quarter. Let me share a few comments about our segments, and then we'll start with you. In renewables, as I communicated during our Q4 2021 earnings call, we expected a challenging Q1 due to ongoing industry panel supply issues, subsequent field project inefficiencies, and additional structural steel inflation. But admittedly, our results were less favorable than we expected. We had a substantial number of projects in process in the Northeast during the quarter, many of which were pushed from Q4 2021 due to panel supply issues. And these projects were further impacted by tough weather conditions in both January and February, compounding our challenge with execution. I'll circle back in a few minutes and address the current status of the renewables market and our expectations for business for 2022. Let's switch to residential, where revenue grew 28%, the seventh consecutive quarter double-digit growth. Adjusted operating margin reached 18.8%, up 240 basis points over the last year. residential team has delivered back-to-back strong performance quarters for both revenue margin and we have solid momentum moving into the second quarter our participation gains in 2021 and the carryover effect of these initiatives along with additional participation gains in 2022 continue to drive the business as well as much as i am not a fan of investing in additional inventory to run the business our strategy to invest in it last year and early this year has been beneficial first it bolstered our position to support customer demand starting the year right out of the gate. We were able to use some production capacity in Q1 to start building inventory to meet customer demand in Q2. It created better price-cost alignment while we continued to manage commodity price variability. It also mitigated supply issues of key materials, particularly aluminum, and finally it helped provide better visibility for our customers, suppliers, and our business. Switching to AgTech, and AgTech margin improved 160 basis points over last year on 2.9% lower volume. while continuing to manage through and overcome inflation supply challenges. We continue to gain momentum from the team's work to build and integrate stronger processes and systems for the thermal energy acquisition, which, if you recall, is our main operation serving our produce business. Relative to demand, new bookings continue to accelerate and backlog for the business was up 18% at the end of the quarter, given by strength across all three Ford greenhouse growing businesses, produce, commercial, and cannabis. As a result, we expect revenue to accelerate in 2022 and margin to read double-digit performance for the year. Also, as mentioned at the beginning of today's call, we made a decision during the quarter to exit the process and equipment market when we've adjusted our revenues and expenses to account for its reclassification. Despite the cannabis retail market growing over 25% in 2021, the market for processing equipment used to extract oils from cannabis and hemp remained flat. And more importantly, the market is 50% smaller than it was in 2019. The market reduction is driven somewhat by the pandemic and growing pains of being a new market, the latter of which, in retrospect, contributed to an overbuying of equipment to support hemp processing demand during 2018-2019 hemp gold rush, which really came to an end in early 2020. And although we expected the hemp gold rush to impact the market, we did not anticipate the magnitude of the oversupply conditions. Essentially, we missed it, and I take ownership for that. In summary, the market has struggled to return to 2019 levels, and the current protection for recovery no longer fits our timetable for growth and return generation. So now our ag tech team is putting 100% of its focus on accelerating our core, faster-growing, and more profitable greenhouse solutions that support our growers in the produce, commercial, and cannabis market. The infrastructure team continued to drive strong revenue growth in the quarter, but also continued to fight steel price inflation headwinds, particularly structural and plate steel. As well, during the quarter, the team experienced labor inefficiencies with the startup of a second shift capacity to support increasing demand. Finding people in January and February while COVID was peaking, along with general labor availability at that time, added to the challenge. Let's turn to slide four. We'll talk about today's market environments. We remain focused on our people, our supply chain, transportation, and the health of our team. And relative to Q4 2021, I think we've made solid progress, but we expect the macro environment to remain very dynamic for the rest of the year. In talking about our people, finding and retaining people continues to be a challenge, but we are in a better position today. In 2021, we accelerated the conversion of temporary employees to full-time positions, which really helped with hiring and retention as we moved into this year. We're also sharing resources across production facilities to help support our businesses with significant demand. Our supply chain teams are managing well overall, yet we continue to deal with ongoing geopolitical issues and general disruption in the market. Our main concern currently is panel supply for the U.S. solar industry, and I'll address this in a little more detail in a couple slides. In transportation, trucking availability has stabilized as more capacity has come online. However, price continues to fluctuate with fuel prices and overall demand, which remains pretty solid. And finally, COVID, our infection rates increased in January and February, similar to the general increases experienced across the country, which is somewhat disruptive for suppliers, some of our production facilities, and a number of solar projects in the field. And most importantly, our people have recovered relatively well, and currently our number of active cases are very low across the company. Let's turn to slide five for a quick snapshot of what is happening with our poor material costs. As a reminder, there are three poor materials we used. across the company, steel, aluminum, and resin. And in Q1, these materials moved in different directions, driven by some unique circumstances. Hot roll coil steel prices began to fall in Q4 2021 from the peak of approximately $2,000 a ton and continued into Q1 with the average price hitting a little over $1,400 a ton at quarter end. But inside Q1, there was quite a bit of price variability of hot roll coil steel, which caused short-term pause as the industry searched for more clarity on the direction of prices. On the other hand, structural and plate steel used in both our renewables and infrastructure businesses continue to increase, setting new highs. According to the April report from IHS Market, average steel prices are expected to rise to the end of Q3 2022 and then start to level off and or decline. But I think given today's environment and the unknowns going forward, we'll remain agile and flexible as we see steel prices move. Aluminum prices have been very erratic since Q4 2021, with prices initially moving downward and then quickly increasing substantially as we enter Q1 2022. Now, the initial price increase was really driven by the European energy crisis, both availability of supply as well as cost, causing some of the aluminum smelting capacity in the region to go offline. Prices then further accelerated when the Russia-Ukraine conflict began, given Russia's role in the global aluminum supply chain. Limited prices are expected to increase at least through Q3 and remain high throughout the year. So given that backdrop, here's what we're doing in this environment. Number one, keeping our price and cost inputs in balance with timely price management actions. Secondly, we're accelerating more 80-20 initiatives, specifically product line and customer simplification to drive more productivity and cost reductions. Third, changing and or adding terms and conditions to customer contracts and our renewables and ag tech businesses to balance risk and reward, better manage inflation drivers, and support the dynamics of today's environment. And fourth, continue our new product introductions that are driving more value for customers while improving our margins and profitability. Let's move to slide six. We'll give you an update on the panels, the supply of panels for the solar industry. Coming into 2021, the solar industry was already dealing with general supply shortages as global demand continued to outpace supply. The industry was also dealing with the impact of COVID across the broad supply chain, specifically in China where 80% of the key materials and components for panels are produced. To add, early in the fourth quarter of 2020, the industry began to see inflation, which the solar industry had never experienced. In January of 2021, inflation began to accelerate at an unprecedented rate, catching the industry by surprise and effectively pressure testing every business process and norm the industry had grown up with. Two additional major events also occurred in 2021. First, in June, the U.S. Customs and Border Protection issued a withhold release order on silicon-based products made by Hoshine Silicon Industry located in Xinjiang Province as a reaction to allegations of companies in the region using forced labor. Eighty percent of global polysilicon comes from from China with approximately 50% coming from Xinjiang province. The WRO currently bans any solar panel products containing Hoshine materials from entering the U.S., but the WRO will allow solar panel products to be imported if the importer can verify Hoshine materials are not contained in the product. The second major event was a petition filed with the Department of Commerce claiming Chinese solar panel manufacturers were using assembly operations in Cambodia, Malaysia, Thailand, and Vietnam to avoid or circumvent duties applied to solar panels imported directly from China. This petition was dismissed in November of 2021, but a second petition was filed in 2022, which the Department of Commerce has since accepted, and subsequently launched an anti-circumvention investigation to determine whether Chinese solar cell and module manufacturers in these four countries are avoiding existing anti-dumping and countervailing tariffs apply to imported solar cells and modules from China. Approximately 80 percent of panels used in the U.S. in utility-scale projects are shipped from these four countries. If the Department of Commerce finds in favor of the complainant, future panel imports from these four countries can be assessed significant duties, up to 250 percent. And it is possible the Department of Commerce will make these duties or penalties retroactive to March 22. when the petition was accepted or even earlier. As a result, it makes it difficult today for a developer or utility to move forward with a solar project until there is a ruling from the DOC. A preliminary ruling is expected in late August with the final ruling in January of 2023. So what does all this mean for our renewables business in 2022? First, before the DOC decided to accept the latest petition, we had been holding discussions with customers to understand their panel supply situation as we had concerns with panel supply challenges that we've been seeing over the last three quarters. The recent DOC announcement, we've gone back to our customers for daily, weekly discussions to understand their current and future supply situation and their plans going forward. We've had discussions. We've discussed the situation with 95 of our customers, which represented 83% of our 2021 bookings, and are a good proxy for at least 80% of our 2022 bookings. These customers, approximately 70%, are fairly confident in the current supply situation and are assessing potential project impacts for later in the year. Our largest customer has secured and has in possession 100% of the panels needed for their 2022 projects and is moving forward as planned. There also seems to be other panel sources available to fill near-term supply requirements. Panels available via safe harbor inventory, panels for sale from developers that do not have projects scheduled in 2022, and there are panel manufacturers willing to mitigate potential retroactive duty risks for customers by sharing the cost of a duty, if applied in the future, to the panels they supply. Currently, we do not expect an impact to our business in Q2, given the current status of customer projects in process. We've had three projects canceled since the DOC began its investigation, representing approximately $1.3 million of our planned 2022 revenue. We are monitoring the situation with our customer daily and will stay nimble to adjust as necessary and are confident in the strength of Gibraltar's position in the renewables market. So what is the potential impact to the industry beyond 2022? And here are my thoughts. I expect today's situation will get resolved in 2022 and the solar industry will have another strong year in 2023. And I also remain very confident in the strength of solar's long-term growth potential. The solar industry is working diligently with the administration to help it understand the immediate and long-term impact of the DSC investigation on the $30 billion U.S. solar industry, which employs over 230,000 people. And as important, the impact to the administration's climate agenda over the next three to five years if the solar industry is paused and loses significant momentum in the next 12 to 18 months. Everyone should remember that solar energy production has been the fastest-growing and largest source of renewable energy production in the U.S. over the last five years, and it is really, really important for the U.S. economy going forward. The entire administration is now aware of the recent developments and is working with industry and other constituents to bring a resolution, and I expect a positive outcome later this year. With that, I'll turn it over to Tim for a detailed review of our results.