Gibraltar Industries, Inc. Q2 FY2020 Earnings Call

Greetings, and welcome to the Quarter Two 2020 Gibraltar Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. It is now my pleasure to introduce your host, Carolyn Capaccio. Please go ahead.

Good morning. Thank you, Larine. Good morning everyone, and thank you for joining us today, and thank you for waiting for the call to begin. With me on the call is Bill Bosway, Gibraltar Industries' President and Chief Executive Officer; and Tim Murphy, Gibraltar's Chief Financial Officer. The earnings press release that was issued this morning as well as the slide presentation that management will use during the call are both available in the Investor Info section of the company's website gibraltar1.com. As noted on slide two of the presentation, the earnings press release and slide presentation 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 adjusted financial measures have been appended to the earnings release and slides. Now, I will turn the call over to Bill Bosway. Bill?

Thanks, Carolyn. Hey, good morning everybody, and thank you for joining our call today. It's a little late with the storm that hit the coast; it was a little bit of a challenge getting everybody on today. Let me start with, I hope you and your families and friends and co-workers are keeping safe and healthy as our pandemic continues. I will start today with an overview of the second quarter results, and then give you an update on our execution plans, and then Tim will review our Q2 results, then I'll come back with some thoughts on the rest of the year, including updates on some key strategic initiatives, and then we'll open the call for questions. Let's turn to slide three and our Q2 overview. Before we share the results of the quarter, I do want to first thank our entire team and their families for their effort and dedication, resilience, and frankly resourcefulness since the pandemic began, and I also want to thank our Board of Directors for their ongoing guidance and support. It's been a difficult time for everybody, and our families and friends, both mentally and physically, and everyone has been challenged through this pandemic, and everyone has a story, a specific challenge, and I continue to be amazed how well the team has responded. We're talking a lot internally about how important each day is, how every day truly matters, both at home and at work, and the importance of staying balanced, focusing on what we can control and doing it as well as we can, and I'm very confident in our team and our ability to keep moving forward. You know, as we discussed during last quarter's call, April was a challenging month, which did make it difficult to understand and predict the economic impact of the pandemic in the quarter, particularly for Residential Building Products and Industrial businesses. However, we start to see positive end market demand develop in early May, which then continued into June as consumers spent more time nesting at home and working on repair and remodel projects, as well as our renewable business continue to make good progress in a solid renewable energy market, and I think collectively, these two trends really helped us offset – more than offset slowdowns in other end markets. Early on, as the pandemic unfolded, we made two key decisions. First, we implemented our pandemic operating protocols, which we continue to execute and adapt as the pandemic moves into the next phase; and second, we kept our team intact. We transitioned two manufacturing lines to make masks and sanitizer and then provided PPE to our team and their families. Keeping our team together along with our pandemic operating protocols has allowed us to respond quickly to much of the changing demand, support our customers in a timely manner, and do so while improving operating performance at the same time. As a result, our Q2 revenue increased 8.8% over last year. Adjusted EPS was up 15% and our backlog increased 14% to $277 million. Furthermore, we delivered operating margin improvement of 200 basis points on a GAAP basis and 130 basis points on an adjusted basis. So, let's turn to slide four. I've shown this before, but we executed our operating playbook in the second quarter and we remain very focused on executing our plans moving forward. I think the current phase of the pandemic requires ongoing discipline and diligence and we will continue to support CDC mandates, our customer requested protocols, our facility reconfigurations and zoning to maintain social distancing, our shift management approaches, temperature checks, sanitization protocols, employee tracking and follow-up as well as visitor policies. We will also continue our internal communication cadence across the organization. We implemented a lot of best practices that we've learned during this time and adapt accordingly. We've been fortunate to be in a position of readiness. As our customers have requested or needed support in hindsight, I think having our team intact has given us the opportunity to grow with customers and respond a bit better than what others may not have been able to do. That being said, as the pandemic continues to spread, our top priority still remains our people, keeping our team safe as we can, and staying disciplined and diligent, executing our protocols and processes, and finally, our communications across the organization. We're going to continue to operate our facilities and offices as we have been, and then we'll reassess this approach later in the year or early next year. Now, let's turn to slide five, and we'll have Tim review the consolidated financial results.

Thanks, Bill, and good morning everyone. I'll take us through our consolidated and segment results. As Bill mentioned, our April results were initially impacted by the economic disruption caused by the pandemic, followed by sequential increases in the markets served by our Residential Products and Renewable Energy & Conservation businesses as we move through the quarter. Consolidated revenues increased 8.8%, 1.6% was organic growth as strength in our Renewable Energy & Conservation and Residential Products segments offset the decline in our Industrial and Infrastructure segment. We also generated 7.2% growth from our recent acquisitions of Apeks Supercritical, which was completed in the third quarter of 2019, and Thermo Energy Solutions and Delta Separations, which were completed in the first quarter of 2020. As Bill noted, backlog at the end of the quarter was $277 million, up 14% from the prior year and 7% from the previous quarter, driven primarily by our Renewable Energy & Conservation to a lesser extent our infrastructure business. Consolidated GAAP operating income was up 30.1% and adjusted operating income increased 20.6% in the second quarter. Second quarter 2020 operating income included $1.2 million of net direct investments in the safety and financial security of our people directly related to COVID-19. Consolidated GAAP and adjusted EPS grew 36.1% and 15.1%, respectively. The improvement from last year was a result of organic growth and continued execution in our core Renewable Energy & Conservation and Residential Products businesses, marked margin expansion in the Industrial & Infrastructure Products as well as product and service mix, better price material cost management and ongoing benefits from operational excellence initiatives. Now, let's review each of our three reporting segments starting on slide six, the Renewable Energy & Conservation segment. Segment revenue increased 29.3% with organic growth of 4.2% and 25.1% growth from the acquisitions of Apeks Supercritical, Thermo Energy Solutions and Delta Separations. Organic growth was driven primarily by strong demand in the renewable energy market. The cannabis growing and processing markets were down in the second quarter as the pandemic caused some issues with access to capital for our customers in these markets, and as the industry continues to mature and adjust to regulations. Strong margin expansion in the core business was driven by volume leverage, strong execution, continuing productivity improvements and the mix of products and services, which was partially offset by softer demand for cannabis growing solutions. The margin expansion in our core operations was offset by losses generated from our recent acquisitions, due mainly to the weak demand in the cannabis processing market, while there have been a few integration challenges, integration overall is expected to be completed on time to deliver targeted returns. Second quarter 2019 operating income included $2.3 million in incremental costs incurred in the field to improve durability getting share performance from our solar tracker. We entered Q3 with strong backlog across the segment up 15% from the prior year as we gained further participation and see strong customer demand. Backlog from renewables is up 25% from the prior year quarter from continued strong end market demand and growing and processing is up 7% driven by our recent acquisitions. Let's move to slide seven, our Residential Products segment. Residential Products segment revenues increased 7% from last year, a result of strong repair and remodel activity as homeowners began to nest during the pandemic as well as participation gains with key partners. Adjusted operating margin increased 400 basis points, a result of consistent execution, better price material cost management, continued benefits from 80/20 simplification initiatives and volume leverage. Let's move to slide eight to review our Industrial & Infrastructure Products segment. Segment revenues decreased 14.4% driven by lower demand for core industrial products during the pandemic. The infrastructure business was comparable to last year's quarter and its backlog grew modestly. Adjusted operating margin was up 490 basis points through continued strong execution producing sizable industrial margin expansion, better price material cost management, favorable mix and continued execution on 80/20 initiatives. And now, let's move to slide nine, titled strong balance sheet provides resilience, supports growth to discuss our liquidity position. We generated $36 million of cash from operations during the second quarter driven by higher net income and reduced investment in working capital. During the quarter, we sold the Tour24 business, a multifamily service offering in our Residential Products segment for $2 million and invested $2.4 million in capex. At June 30th, and as of today, our revolver remains undrawn. Given $121 million in cash on the balance sheet and an undrawn $400 million revolving credit facility, we've got solid liquidity to weather the economic impacts of the COVID-19 pandemic while continuing to invest in operational excellence, growth and the development of our organization. We've resumed active M&A discussions and continue to remain laser-focused on managing working capital. Now, I'll turn the call back to Bill.

Thanks, Tim. Let's move to slide 10, titled outlook, our confidence is building, but uncertainty remains. I'd like to comment on trends we are seeing in our markets and businesses effectively really up through the end of this past month July. Let's start with our Renewable Energy & Conservation segment. Our Renewable Energy business continues to see good momentum in a growing end market and sales and backlog for the business are very solid. We continue to invest in our solar business and recently launched Sunflower, our second-generation tracker solution, and also acquired intellectual property supporting our solar canopy business. Our growing business, our largest segment, vegetables and produce continues to see solid momentum in growing backlog. I think the addition of Thermo Energy Systems, a leader in this market has been very positive for us and our integration plan is on schedule as well. Our second-largest segment in our growing business is the Cannabis segment, and during the quarter, the market slowed as customers paused to assess the situation, but we expect the market to improve in the second-half based on recent project bidding and order activity. For both renewables and growing businesses, as it relates to this pandemic, we're also closely monitoring state and local pandemic-related mandates that could impact our existing or future project schedules. Our processing business is still dealing with the soft market, although, we start to see more activity in June than early in the quarter. Market is dealing with the pandemic and its impact on customers' access to capital for equipment purchases and the market is also resetting itself as the industry continues to adjust regulations and consolidate and mature. We expect the market to continue to recover in the second-half and really build momentum as we move to 2021. We're executing our integration plan with Apeks Supercritical and Delta Separations, and I think we'll be ready to move forward with strength and speed as the market recovers. In our Residential Building Products business, the market remains healthy as customer weekly point of sale results indicate ongoing demand for our products. As I mentioned earlier, consumers working from home and/or nesting continue to execute repair and remodel projects, which we believe will continue at some level going forward. Our direct to homeowner business, which experienced a significant slowdown going in April, really saw a strong recovery in May and June as our dealers were able to adapt their sales process to meet homeowner requirements for in-person interactions at the home. Demand in this business remained steady and as with our other project-based businesses, we are monitoring state-local pandemic-related mandates that could impact existing or future installations of these products. Our Industrial business will continue to experience a slow market during the second-half, particularly for core products. We do expect our architectural and perimeter security project business to be more active as long as state and/or local regulations allow project sites to remain open. Our infrastructure business should remain steady, particularly if we have more clarity on state and federal infrastructure spending plans in the second-half. And to summarize, as we see things today, we are confident our second-half will be stronger than our first-half, but I do remain concerned with the current state of the pandemic, the impact of the next round of government stimulus and the economic impact that both may have in the coming months, not just on the overall economy but also our markets and customers. I think we all learned in the second quarter how swiftly things can change in this kind of environment. And so, as a result, we've decided our quantitative guidance will remain suspended and we will revisit this obviously in the next three months. Let's move to slide 11. I want to talk a little bit about our pillars. Our long-term goals remain the same, accelerate growth, improve profitability, utilize assets more effectively and deliver higher return on invested capital, and I think we continue to do that during the quarter. We're focused on our operating pillars, as a reminder, business system, portfolio management, organization development and we have actually continued to invest in all three so far throughout the year. In our business system, we continue to work on the business, invest in improved earnings and fund critical growth and profitability initiatives. We've also implemented or continued new operating protocols for today's environment. We've implemented business continuity protocols for today, I think, as well as for tomorrow. We've made key investments in our digital and IT processes and tools, SAP implementations are on track, CRM initiatives in a few of our businesses and a variety of e-commerce investments to support a few of our platforms. And then, we've just had really intense focus on monthly execution and then try and find ways to accelerate additional 80/20 initiatives. From a portfolio management perspective, our effort remains focused on asset optimization and then integrating our recent acquisitions as we planned, and then continuing discussions with companies to build out our platforms for our strategy, and finally, organizationally, really our main focus has been to keep our teams safe, healthy and intact, and be in a position to execute, respond to customers better than anyone in our markets, and also continue adding top talent across the organization, which brings even more from a broader perspective diversity of thought and experience competency to the team. I'd say, although this year has been challenging and I think it will continue to be, I do believe we're in a good position with a healthy balance sheet to keep investing in our strategy and deliver better performance in the second-half of this year as well as over the next 24 to 36 months, I think the flexibility and adaptability we are building into our business and our focus on execution, are really helping us support our markets and customers, and still deliver improved growth, profitability, asset optimization and stronger return on invested capital. As I opened with today, I just want to reiterate how proud I am of our team and how grateful I am for their ongoing support and dedication to each other as well as the company, the communities we operate in, our customers, and of course, our shareholders. And with that, we'll open the call for questions.

Thank you. Our first question is from Ken Zener of KeyBanc Capital Markets. You may go ahead.

Thank you. Good morning, everybody.

Good morning, Ken. How are you?

Good morning, Ken.

I'm doing well. Trying to unpack what was a very good quarter in a lot of ways, so the two areas I want to focus on are, first, just going to be the Renewable segment and growing, I guess that's how you'll be categorizing it. So, renewable in your slide deck, you said up 16% year-over-year, is that correct? Just to make sure I'm tracking that correctly.

Yes, organically, we were up and it was driven by renewable energy. So, we gave that growth number.

Okay. Now, because you have a lot of acquisitions in the growing, you know, earlier this year, can you just highlight what the mix is, again, where we are in a kind of run rate for that segment in terms of what's renewable and growing if you could just reset that for us given all the acquisitions?

Yes, Ken, we expect it to run about half-and-half. It's not quite there yet, but it should drift in that direction.

Okay. Regarding the customers in the Renewable segment, you are building a backlog here, and I believe that if this segment expands more quickly than your traditional segments, it will become a crucial area for your business. Can you elaborate on how this backlog, which is up by 15%, relates to your growth rates? I'm curious to understand how we should view this backlog in terms of future growth, especially considering the impact of COVID on the conversion of that backlog compared to traditional expectations.

Yes, I would say that the impact of COVID has not significantly affected our solar or renewable business. The backlog we've generated continues to convert into sales as we typically expect. While there have been some interruptions due to permitting and similar issues, overall, the flow has remained relatively steady compared to the situation before the pandemic. When looking at growth, it's important to consider that our largest market is produce, specifically vegetables and leafy greens, and that backlog is also continuing to grow, similar to our renewable sector. We entered this market at the beginning of the year with the acquisition of Thermo and a small existing presence. Based on current order activity and the expanding backlog, we anticipate that this will translate into sales in the second half of the year, providing us with solid momentum heading into next year. On the other hand, the cannabis market for growing and processing has slowed significantly, which is harder to predict and has been more directly impacted by COVID. As mentioned earlier, this market has effectively paused, and it coincides with two of our three acquisitions in the processing space. I would consider this market a drag on our overall results, which has affected our two businesses involved. However, on a positive note, this situation has allowed us ample time to focus on integration, potentially moving faster than we would have otherwise. Despite working remotely, we've managed to accomplish a substantial amount of the integration work before COVID hit, and we continue to follow up virtually. Overall, we feel that we've put in significant effort into the business.

Yes.

We'll wait for the market to step back up and recover accordingly. So the backlog has really been built around renewables. The growing piece associated with produce and less so on the cannabis side in the quarter.

Yes. If I could ask one more question, regarding your acquisition in Northern California near Santa Rosa, I don't have a clear understanding without your specific comments. You mentioned capital constraints related to the cannabis market. My understanding, based on press articles, is that consumption has increased. Is this related to spatial issues or something that Northern California counties are doing with manufacturing? Tesla has raised concerns about this. Could you share if your perspective on that market has changed given the current constraints? I apologize for going into detail, but I haven't found an answer, and it seems like you haven’t communicated this publicly. Thank you.

Yes, that’s fine. The market is experiencing some challenges, one of which is the pandemic. In many industries, companies paused to assess the situation. The market is still developing, and there are numerous small private companies involved. Initially, when the pandemic hit, many of these companies were not classified as essential, causing them to focus on preserving capital. A month later, they were recognized as essential, leading to staffing changes due to the pandemic. Many small companies across various states were navigating different definitions of what was essential, creating disruption in the second quarter. Consequently, companies were hunkering down to reassess the landscape. Additionally, ongoing regulatory changes are evolving in the market, which the industry is also adapting to. As a result of these factors, there is a certain amount of adjustment happening. For many small companies, banking has been difficult, and while access to capital was previously not an issue, the pandemic has made it a challenge. We are beginning to see resolution in this area. The market's structure seems stable, though there has been a pause in activity over the past five to six months. We witnessed a notable increase in activity in June compared to earlier in the quarter, but this adjustment will take some time. Looking ahead to 2021, we anticipate a return to previous activity levels. Overall, we remain optimistic about the market and our goals, and we are managing the current challenges through other aspects of our business and various end markets.

Excellent, thank you so much.

Yes.

Our next question is from Daniel Moore of CJS Securities. Please go ahead.

Good morning. Thank you for taking the questions, Bill and Tim. Just to clarify, I believe you mentioned twice, Bill, that you are confident H2 will outperform H1.

Yes.

Margins, EPS, all three?

Yes.

Okay. It gives us some directional help, so thanks.

Okay.

And then, I want to focus on the margins, start with resi, strongest margins we've seen in those businesses in quite some time. Maybe a little bit more detail into the jump in how sustainable are high teens, low-20s operating margins going forward?

So, Dan, good question. If you recall, we came out of Q1 with, in residential, about a 130 basis point improvement. And we talked a little bit in the last call about the work that we did in '19 and continue to do. And I so I guess my point there is, I think we're starting to build some momentum in that segment to get us back to where we think we should be and beyond hopefully. So, (a), I do think our ability to continue to improve is very valuable and doable, it's our expectation. I think the investments we made last year and continue to make now will help that. We've put a new leader in place a year ago inside the organization. I think we've done a tremendous amount of work top rating talent and adding key positions that we didn't have. So this is one of those stories where we had good end market demand that helped, obviously, but we also made investments throughout the last six months in all of last year that put us in a position to operate much better than we could have otherwise. So I'm excited about the segment. I think we've start to demonstrate to ourselves what we can do. So, what we thought we could do and I think we're just getting started, so to speak. I would not tell you that we're going to improve 400 basis points every quarter forever, but the team has done a nice job. Obviously, the end demand has helped. We've had good mix, we've had good price cost management, and recognized too, this is all in the midst of having to also manage shifts much differently in our factories, which is at the most effective way, but we've been able to offset all the things associated to COVID and still bring things across the finish line. I think the biggest thing also for us and people may or may not recognize that we did make this decision some time ago to keep our team intact. And when things moved and they moved quite quickly, we were able to respond. So I do think there is a participation gain going on here. We do know that for sure with a couple of our key partners. We're excited about that. And I think we're in a good position to continue down that path as well. So it's a combination of a lot of different things.

Helpful. And nothing unusual in terms of mix that would be difficult to sustain, or not repeatable?

No.

No, not really. I mean, within each of the Residential businesses, they've been quite solid in terms of mix, year-over-year and quarter-over-quarter. Across the businesses, we've previously discussed that our most challenged sector in Residential has been our more commodity-like business, which includes building and roofing accessories. That business has really turned around due to many changes we've implemented. Also, when we entered the quarter, we faced a very difficult outlook for our direct-to-consumer product line, which includes the Sonesta and Gutter Helmet products sold through dealers, but is essentially a direct-to-consumer sale. It did not look promising going into April, but we saw a significant turnaround in May and June. That is a good-margin business and contributed positively in the quarter. We nearly reached last year's levels in just two months instead of three, as April was not very active. The team executed extraordinarily well to achieve what they did in two months compared to what was typically done in three months. We feel very good about that, and I think the demand remains steady moving forward, although not at the same pace as we observed in the last couple of months.

Helpful. And similar question for Industrial and Infrastructure, I think that jump was even more impressive given the top-line headwinds. So, again, was that mix away from Industrial, was it all 80/20 sustainability, et cetera, any color there? Great.

In the Industrial sector, it has really just been about effective execution, and the team is performing well. We have made some investments in our core Industrial businesses through some capital expenditures, which have been beneficial, although not huge. Our higher-margin perimeter security and architectural businesses have also contributed positively. Overall, I would say it’s a combination of factors, but primarily, it reflects the ongoing efforts of our leadership team over the past couple of years. The situation in Infrastructure is quite similar, with a solid team that has implemented many good processes and focused on key priorities. Our manufactured products in that sector continue to perform strongly, allowing us to enhance margins through effective execution from production to the bidding process. It's really about consistent effort and staying focused on our goals and making progress every day.

Okay. Maybe one more, if I could sneak it in; just expectations around working capital and cash generation as we look to the back-half of the year.

We expect modest improvements in working capital, I'd say. We've done a fair amount year-over-year. We'll continue to be a little bit better and continue to generate cash. Certainly, historically, if you look, second-half of the year is really the stronger cash flow period for us and we don't expect any change to that.

Perfect. I'll jump back with any follow-ups. Thank you.

Next question is from Walter Liptak of Seaport Global. Please go ahead.

Hi, thanks. Good morning, guys.

Good morning, Wall.

Good morning, Wall.

Congratulations on the good quarter. I wanted to see if I could get you to talk a little bit about some of the residential trends in July. And it sounds like the business continues to pick up and I think in the past, there was concerns about labor issues, I wonder if that's changed at all and how that might impact the second-half?

Yes. Throughout July, our residential businesses maintained similar demand levels as observed in the latter part of the previous quarter. We're monitoring this weekly. We now have access to point of sale data from our big box retailers and many wholesalers, which tracks our product sales. The positive aspect is that there hasn't been significant inventory buildup, indicating sustained consumer demand from both contractors and homeowners. While we expect some seasonal slowdown, as we typically see every year, we feel optimistic about the outlook for Q3 in our residential segment. Regarding labor, much of our business focuses on repair and replacement. In the second quarter, we noted a strong demand from homeowners, especially for our products like mailboxes. Our direct-to-consumer segments, such as awnings and gutters, require different installation crews compared to our ventilation and roofing accessories. Currently, labor shortages have not posed a problem for us, but it's difficult to predict if this will change in the next three to six months. There are various factors to consider in the coming months, including the ongoing pandemic and the upcoming national election, which may create distractions. However, at this moment, we don't anticipate any significant shifts in demand in the near term.

Okay, great. And switching over to Infrastructure and Industrial, the margins there were really good. And just a question about sustainability, are there structural changes now that have happened? Are we at a new level of profitability?

Yes. This has been a long slog for the teams in both of those businesses over the last three years to kind of put themselves in a position to deliver what they delivered, not just in Q2, but I think structurally, we've shifted up in terms of how we operate. Clearly, in infrastructure we have a little more demand than we had a couple of years ago, so that's helpful, and if we can continue to see that, I'm confident the team has the ability to continue on the pace it is. Again we've made investments in that business with some key people and a lot of work has been done on process. So, I think operating cadence of that business is better and I think it's more sustainable than it would have been otherwise. On the Industrial side, it really is a tale of a couple of different stories as we've said. You get the core business and that's more macroeconomic-driven in a lot of respects, and that's still the bulk of the business. And then you have perimeter security and architectural that inherently is a more profitable business and if we can mix that way more that would be helpful, and we're working that pretty hard, but internally in terms of how we operate, the team has I think really got to a cadence as well. So they know how to operate really well in this environment and I think that's showing up. If we can get some demand, which we're not really anticipating the market to recover in the next six months for core Industrial, obviously, that's very helpful, but when you have that kind of reduction in demand and still deliver what they've done, clearly they're able to do some things quite differently today than before. So, I would say, yes, we've made a shift in how well we operate and we'd like to get some demand, more demand on that business. They could really do some interesting things if we could get it for them, but unfortunately the market is not cooperating as much as we'd like right now.

Okay, great. And kind of along those lines, as we've seen M&A in more of the Renewables and Conservation segments, I'm wondering if with the profitability coming up in industrial, infrastructure, if there's opportunities that you're looking at in that or are you going to stay kind of in these growth parts of the business for M&A?

Yes. It's a good question. This entire pandemic and its impact on so many different industries, and how people are thinking in challenging paradigms and such. We'll see how things work out. I'd say, right now, we remain focused on what we went into the pandemic with as it relates to acquisition targets and we kept all of those discussions warm and hence continued them. So, I don't think there is a shift in our thought process from six months ago to today in terms of the end markets that we want to participate in and grow out, grow and build our platforms in.

Okay. Thank you.

Our next question is from Julio Romero of Sidoti & Co. Please go ahead.

Hey, good morning. Hope you all are well?

Good morning, Julio. How are you?

Good morning.

I'm good, thanks. So I wanted to start on the solar business. I think we've seen increased sentiment in this space. So I was hoping you could talk about maybe the current market tailwinds you're seeing as well as what maybe you just other is uniquely doing in that area?

The market continues to be quite strong, particularly in the community solar sector where we have established ourselves as a leader. I've mentioned in previous calls and our last earnings discussion that we are beginning to take more pride in our ability to respond swiftly and better understand opportunities. This improvement is largely due to the CRM system we implemented about nine months ago. The increased visibility and access to opportunities have enhanced our responsiveness, which has historically been one of our strengths. This has led to greater participation. Additionally, we have our canopy business, which we don't often discuss but is performing well. The acquisition of IP this year is expected to differentiate us further in this space and accelerate growth. Overall, there are many positive developments in our solar business that give us confidence in our direction. We are executing better, growth is on the rise, and we anticipate continued margin improvements. Investments in technology, such as Sunflower, our second-generation tracker that is now starting to generate orders, and the canopy IP we acquired with our partner, are expected to propel us forward. That's how I would summarize our position.

Okay. And can you give us any additional clarity on the integration challenges that you may be seeing on the cannabis side? I know you mentioned some softness in the overall market, but I think earlier in response to Ken's question you talked about some, accelerating some integration initiatives because of the end market slowdown. So could you just maybe help me square away those two statements? And has anything changed relative to what maybe was originally thought?

Yes. So, I think there is a, first and foremost, there is a market that has slowed. I mean we all, I think understand that, from an integration perspective, remember, on the processing side of the businesses, integration really is the front end, wasn't necessarily a back-end where we had planned consolidating facilities and all, these are large companies to start with, but it really is about combining the front end and that's where we've done a lot of our work. So having a leadership team come together with two different organizations, we just launched a common ERP system for both of these now on the same ERP system. We've launched a new CRM system that both are on. So those kinds of blocking and tackling things that we had planned to do that we were able to accelerate and pull forward, it would have been easier to do those things if we could physically get on planes and go see each other and that's where I think some of the inefficiencies are more, you'll find more of it, but we effectively have been able to bring forward some things as the market has slowed. As I just mentioned, it's just been, it would have been a lot easier to do if we didn't have a pandemic I guess is the point from an integration perspective. So that's where my comments come from.

Okay. That's really helpful. I appreciate that, and I guess just on the residential side. I think you talked about roofing products rebounding and as well as the gutters and awnings business, how about the postal and parcel business? Can you maybe talk about the run rate for those products as you exited the quarter?

Yes. I'd say all four businesses contributed nicely to the growth rate you see. It's pretty consistent for this segment across each of the four businesses. I think the two that started out slow in the quarter we talked about was the direct-to-consumer awnings, gutter business that one really picked up the second two months and then ventilation started out slow, and then it accelerated significantly in May and June. The postal business and our roofing accessories business were pretty solid throughout the entire quarter. And I would suggest a lot of this nesting that we see that we will continue to see as people were finishing up their home improvement projects, whether it's painting or out in the yard would have your mailboxes and the flow-through of that demand particularly through big box because they were open, continue to stay strong during that time. So people we start to see replacing mailboxes or upgrading mailboxes. So I would say roofing accessories and postal and parcel have been consistently solid and I think, we continue to see that through July, and hopefully, that will continue through the quarter, but yes, they've had a pretty good run like roofing accessories.

Helpful. And then just my last one is, could you give us what percentage of sales are either for the Resi segment or your company overall went through the home centers in 2Q?

I know it’s not something we disclosed, but I would say the residential segment is certainly significant. The two largest sales channels in residential are home centers and wholesale, with a smaller direct-to-consumer business included. Some of the mailboxes go through a different distribution channel.

Yes, I want to add one more point. Julio, when you examine this business, it's intriguing. I previously mentioned that we've been making substantial investments in our e-commerce capabilities. As we monitor sales through our traditional channels, which have primarily included big box retailers and residential product wholesalers supporting the Residential Products business, we've found that this has been the straightforward approach. The distribution structure tends to heavily favor some products through one channel while others through the other. What we're also noticing is that the online sales segment for all our products, which typically went through those two channels, is becoming increasingly significant compared to just a year ago. There are various online distribution avenues such as Buy Online Pick Up In Store, Buy Online Ship to Store, and Direct-to-Consumer, where we're collaborating with these wholesalers or big box retailers. We may now be assisting them with direct sales in ways that weren't considered a couple of years back. Keeping track of these developments has become a bit more complex and has accelerated this trend. The positive aspect is that we've invested wisely to address these diverse channel developments, which has contributed to our increased participation over the past year or two due to these investments. We still have more to do, but it's an exciting time as we witness the evolution of these distribution channels, with technology playing a pivotal role in transitioning away from traditional marketing methods.

Great, thanks for taking the questions. Appreciate it.

Yes.

We have a follow-up question from Daniel Moore.

Thank you. Again, just housekeeping, Tim, tax rate in the back-half of the year is expected still in the kind of mid-20s and any capex expectations for the remainder of the year and maybe preliminary thoughts for 2021 in terms of potential projects, et cetera?

Yes. I would say that tax rate be probably just a little bit higher than it was last year in the second-half, but yes, so that mid-20s range is good. CapEx remainder of the year, I mean if you look at the run rate that we've had, it's going to modestly increase in the second-half. Yes, one of the things we're doing is improving the ventilation and the air movement in all of our factories to make it more comfortable for our employees who are working with masks on generally. So we'll spend some money on that. And then I think normal levels of spend in early to ask about 2021, but I don't see anything different than what I would look at today, but still a lot of time to go before we get there.

Okay. Thank you again.

We have a follow-up question from Ken Zener. Please go ahead.

Thank you for your patience. I have a question regarding Renewable EBIT composition, particularly since your second half of 2019 had strong comparisons. Last year, your margin in the second quarter was 12.6%, and I believe there was about a 200 basis point drag from the tracker cost. For the second quarter of 2020, can we assume that, given you experienced organic growth and faced those tracker costs last year, it is reasonable to think that the organic aspect of your Renewable business improved year-over-year? This would suggest a flat or possibly negative margin from M&A, especially considering a significant portion of your sales. That’s the assumption I want you to address. Additionally, if that holds true, when do you anticipate the M&A side will break even or achieve a positive margin, especially given the substantial investment in the Canadian business and your comments about the weed-related initiatives? Can we expect this breakeven or positive margin to materialize realistically in 2021? I mention this because you had strong margins in the second half of 2019 in that segment, and I want to ensure expectations are managed regarding the EBIT composition. Thank you.

Okay. So, Tim, I'll let you take your turn.

Yes.

And I'll take as well.

Yes, we mentioned that we experienced negative margins from our recent acquisitions in the quarter, while our organic businesses showed improvement. Looking back, we've had solid results in our core business for four consecutive quarters, and we see no reason for that to change. As for the acquisitions, we anticipate gradual improvements throughout the year, although it's too soon to predict precisely when they will outperform the second quarter. We are witnessing increased activity, but it may take a couple of quarters for those businesses to reach their expected performance levels.

Thank you.

I would like to emphasize that our thermal business, which focuses on fruits and vegetables, is performing well. Our main challenge lies within the processing market. As the processing market, particularly cannabis, begins to recover, we anticipate that we will also see a positive recovery, as our core business is doing quite well. That's the situation.

Thank you very much.

Yes.

We have reached the end of our question-and-answer session. I would like to turn the floor back over to Bill Bosway for concluding comments.

Okay. I wanted to say thanks again for joining us. I appreciate everyone's interest in the company. We look forward to obviously talking with you on some upcoming virtual conferences and some non-deal road shows those are scheduled next weeks and we will give you an update obviously on our third-quarter call as well. So, have a great day, and again, thanks for joining us.

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