Gibraltar Industries, Inc. Q1 FY2022 Earnings Call

Greetings, and welcome to the Gibraltar Industries Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Carolyn Capaccio of Investor Relations.

Thanks, Operator. Good morning everyone and thank you for joining us today. With me on the line is Bill Bosway, Gibraltar Industries' Chairman, 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, gibraltar1.com. As noted in the earnings press release issued today, Gibraltar has reclassified the processing equipment business in the Agtech segment as held-for-sale with the first quarter 2020 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 2 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 filings, which can also be accessed through the company's website. Now I will turn the call over to Bill Bosway. Bill?

Hi, 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 Tim will review our financial performance. We'll then talk to our current trends, some of the key initiatives and guidance for the year and then we'll open the call for questions. So let's turn to slide 3 of our first quarter results. We got off to a solid start to the year. We 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 by 17%, adjusted EBITDA grew by 12.1%, and adjusted EPS grew by 11.1% to $0.60 per share. Customer order activity remained robust with total company backlog reaching $433 million at quarter end, up over 23% versus prior year, driven really by a broad-based end market demand across the world. As mentioned in our Q4 2021 earnings call, 2021 was tremendous albeit a tough learning environment. But the experience really forced us to challenge many of our internal and end market operating paradigms. I think as a result, we are 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 we'll start with renewables. 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 than favorable or 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 of 2021 due to panel supply 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 our business for 2022. Let's switch to residential where revenue grew 28%, the seventh consecutive quarter of double-digit growth. Adjusted operating margin reached 18.8%, up 240 basis points over last year. The residential team has delivered back-to-back strong performance quarters for both revenue and 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 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 a better price-cost alignment, while we continue to manage commodity price variability. It also mitigated supply issues of key materials particularly aluminum. And lastly, it helped provide better visibility for our customers, suppliers and our business. Switching to Agtech, Agtech margin improved 160 basis points over last year on 2.9% lower volume, while continuing to manage through and overcome inflation and supply challenges. We continue to gain momentum from the team's work to build and integrate stronger processes and systems for the Thermo 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, driven by strength across all three core greenhouse growing businesses; produce, commercial and cannabis. As a result, we expect revenue to accelerate in 2022 and margin to reap double-digit performance for the year. Also as mentioned at the beginning of today's call, we made the decision during the quarter to exit the processing equipment market and 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. 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 the 2018-2019 hemp gold rush, which really came to an end in early 2020. Although we expected the hemp gold rush to impact the market, we did not anticipate the magnitude of the oversupply condition. 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 Agtech 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 markets. 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 start-up of the 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 4. We'll talk about today's market environment. We remain focused on our people, our supply chain, transportation and the health of our team. 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. 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 US solar industry and I'll address this in a little more detail in a couple of slides. In transportation, trucking availability stabilized as more capacity has come online. However, pricing continues to fluctuate with fuel prices and overall demand which remains pretty solid. Lastly, 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. 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 5 for a quick snapshot of what is happening with our core material costs. As a reminder, there are three core materials we use across the company: steel, aluminum and resin. In Q1 these materials moved in different directions driven by some unique circumstances. Hot-rolled 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. Inside Q1, there was quite a bit of price variability in hot-rolled steel which caused a short-term pause while 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 continued to increase setting new highs. According to the April report from IHS Markit, average steel prices are expected to rise until the end of Q3 2022 and then start to level off and/or decline. Given today's environment and the unknown going forward we will remain agile and flexible, as we see steel prices move. Aluminum prices have been very erratic since Q4 of 2021 with prices initially moving downward and then quickly increasing substantially as we enter Q1 2022. This initial price increase was 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. Aluminum prices are expected to increase at least through Q3 and remain high throughout the year. Given that backdrop, here's what we are doing in this environment. First, 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 reduction. Third, changing and/or adding terms and conditions to customer contracts in our renewables and Agtech businesses to balance risk and reward better manage inflation drivers and support the dynamics of today's environment. Lastly, we continue our new product introductions that are driving more value for customers while improving our margins and profitability. Let's move to Slide 6. 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 2021, inflation began to accelerate at an unprecedented rate catching the industry by surprise and effectively pressure testing every business process the industry had grown up with. Two additional major events occurred in 2021. First in June, the US 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. 80% of global polysilicon comes from China with approximately 50% coming from Xinjiang province. The withhold release order currently bans any solar panel products containing Hoshine materials from entry into the U.S., but the order 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 the anti-circumvention investigation to determine whether Chinese solar cell and module manufacturers in these four countries are avoiding existing antidumping and countervailing tariffs applied to imported solar cells and modules from China. Approximately 80% 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%. It is possible that 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 have concerns about panel challenges that we've been seeing over the last three quarters. With 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 discussed the situation with 95 of our customers, which represent 83% of our 2021 bookings and are a good proxy for at least 80% of our 2022 bookings. Of 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 that are 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 risk 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 customers 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? I expect today's situation will get resolved in 2022 and the solar industry will have another strong year in 2023. I also remain very confident about 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 DOC investigation on the $30 billion industry, which employs over 230,000 people. As important, we need to highlight the impact on 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. We must 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 critically important for the U.S. economy going forward. The entire administration is now aware of the recent developments and is working with the 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.

Thanks Bill, and good morning everyone. I'll take you through our consolidated and segment results starting on Slide 7. As a reminder, my discussion will cover results from continuing operations and also excludes the related revenues and expenses from Agtech segment's processing equipment business, which has been removed from the adjusted results for both 2021 and 2022, as we classified this business as held for sale with this quarter's results. A summary of the 2021 adjusted results recasted to reflect the removal of the results of the processing business is available on the Investor Relations portion of our website at www.gibraltar1.com. Adjusted first quarter revenue increased 11.8% to $316 million and this growth was purely organic, driven by participation gains and price management in the residential segment, partially offset by continued supply chain challenges in the renewables segment. Backlog at quarter end approximated $433 million, up over 23% from first quarter 2021, driven by solid end market demand. Adjusted operating income and adjusted EBITDA increased 17.2% and 12.1%, respectively, in the first quarter with adjusted EPS up 11.1%. Margins in the quarter were driven primarily by profitability expansion in the residential segment through participation gains, price management and 80/20 initiatives and in the Agtech segment through 80/20 and lean enterprise initiatives, supply chain optimization activities and favorable business mix. Renewable margins were pressured as we had expected by the carryover supply chain challenges that affected the industry in 2021 and also by the project inefficiencies resulting from severe winter weather in January and February. Infrastructure margin was impacted by steel inflation, labor availability and second shift start-up inefficiencies to support demand in the fabrication business. Our income tax rate in the first quarter increased over the prior year rate due to lower excess tax benefits from stock compensation and a difference in the allocation of income to states where we generated revenues. Now let's review each segment starting with Slide 8, the Renewables segment. Segment revenue decreased 7.8%, all of which was organic. As we communicated on our fourth quarter call, the industry-wide supply chain challenges that affected the solar industry throughout 2021 continued to delay and disrupt project schedules in the first quarter, and severe weather in the Northeast in January and February also contributed to project delays and disruptions. These pressures began to abate in March when we saw an improvement in project margins. We continue to work with our customers to ensure panels are secured before we begin to manufacture racking and mobilize our field installation groups. Regardless of the revenue decrease, end market demand remained robust with new bookings up 22% over the first quarter last year resulting in backlog up 41% compared to the prior year. To date, as Bill mentioned, we have had three orders canceled as a result of the anti-circumvention investigation, and our team is in constant contact with all customers to ensure panels are secured for projects. We've talked to customers that make up over 80% of our 2022 planned backlog and bookings and the vast majority are not currently anticipating impacts to existing projects. Segment adjusted operating loss was $4.3 million and the EBITDA loss was $1.9 million. Adjusted operating and EBITDA margins contracted to a negative 5.4% and a negative 2.4%, respectively, on project and field management inefficiencies related to project delays and disruptions as I described. Again, these factors began to abate in March, and we expect significant sequential margin improvement in the second quarter, driven by stronger revenues as construction season begins, improved field efficiencies as the severe weather impact has ended and less project disruption from customer supply chain issues. Our integration of the Renewables business remains on track, with information systems, supply chain and in-sourcing activities gaining momentum per plan. As Bill mentioned, we continue to monitor the impact on our solar customers of the Department of Commerce's panel anti-circumvention investigation. Let's move to Slide 9 to review our Residential segment. Segment revenues increased 28% organically, our seventh consecutive quarter of double-digit growth. Revenue was driven by market price and participation gains in building products and mail and package businesses. We're seeing strong traction in participation gains with new customers, additional product offerings, and expanded geographies. There was an impact from the participation gains we achieved in 2021, as well as new wins benefiting the first quarter 2022. We expect the momentum in this segment will result in strong growth continuing in the second quarter. Segment adjusted operating income and EBITDA grew 46.5% and 41.4%, respectively. Adjusted operating and EBITDA margins improved 240 and 190 basis points, respectively, as we achieved improved price-cost alignment enjoyed the benefits of favorable business product and customer mix, and as our 80/20 and product redesign initiatives continue to drive year-over-year margin improvement. We continue to work with our supply chain partners to support our customers' needs and are maintaining our focus on price-cost management, effective staffing management, simplification, in-lining and automation. As we previously mentioned, finding temporary employees continues to be a challenge and we took advantage of the seasonally slower first quarter to increase production to ensure we're able to meet our customer demand as we move into the seasonally stronger period of the year for these businesses. We're also making additional investments in information technologies to increase internal efficiency and support our customers' efficiency. We continue to expect continued top and bottom line growth for this business this year. Now let's move to Slide 10 our Agtech segment. As I mentioned earlier in the call, we've classified the processing equipment business, which accounted for 10% of the Agtech segment's 2021 revenue as held for sale with the first quarter 2022 results and removed the related revenues and expenses of this business from adjusted segment results. Adjusted segment revenue decreased 2.9% through project delays as states and local agencies continued to work their respective permit backlogs and the scheduled timing of projects. Despite near-term project schedules causing revenue delays, market demand across produce, commercial and cannabis continues to grow, with our order backlog increasing 18% in the quarter. Segment adjusted operating and EBITDA margin improved 160 and 140 basis points, respectively, on improved business mix, continued execution, 80/20 and lean enterprise initiatives and integration activities. We are investing this year in supply chain optimization projects, with a new dedicated supply chain leader, closer relationships with key suppliers, improved material planning management and transportation logistics and schedules. We expect positive margin momentum to continue this year as we convert strong backlog, make additional system improvements and benefit from an improved business mix. Let's move to slide 11 to review our Infrastructure segment. Segment revenue increased 13.9%, driven by growth in fabricated products. While order backlog declined a few million dollars from last year on timing of orders and revenues, pipeline and bidding activity remains strong. We continue to expect a positive impact of incremental government spending on the infrastructure business towards the end of 2022. Segment adjusted operating and EBITDA margins decreased year-over-year, but remained flat sequentially, as steel inflation impacted fixed price projects that were booked in 2020 and early 2021. Margins were also affected by the fabrication business experiencing challenges with labor availability and inefficiencies related to adding second shift capacity to support increased demand. We expect margins to improve through 2022 as incremental capacity becomes more efficient and orders for higher-margin non-fabricated product increase as we move into the construction season. Now let's move to slide 12 to discuss our balance sheet and cash flow. At March 31, we had $352 million available on our revolver, cash on hand of $16 million and our net leverage is approximately 0.2 times. We used $7.8 million in cash from continuing operations in the quarter, primarily in working capital investments. Receivables, as is typical in first quarters, were affected by seasonal timing of revenue during the quarter with strongest revenues in March. The investment in receivables normally reverses in the second half of the year as revenues peak and begin their seasonal decline. As Bill mentioned, we invested in inventory to ensure strong customer support during a challenging supply chain and inflationary environment and shifted some production into the first quarter from later in the year, in anticipation of the possibility of temporary employee challenges during the seasonal peak. We don't typically like inventory builds and we've been heavily invested over the past few quarters to allow us to navigate through the current tough supply chain environment. We have been able to gain participation precisely because of having product. We are winning business because, among other reasons, we've maintained the ability to deliver at high levels. We're also carrying more finished goods during the seasonally slower first quarter as we built more to avoid hiring as many temporary employees to ramp production as we have historically. Payables were affected by timing of inventory purchases, both in Q4 and Q1, and growth in other liabilities was driven by an increase in billings in excess of cost, which is a result of timing of billing based on contractual project billing schedules. If you look back in time, our free cash flow as a percentage of revenues has typically run in the high single digits, and we expect to return to more normal levels of positive free cash flow during 2022, with a target of generating approximately 10% in 2022 on improved profitability and lower working capital investment. We expect to use generated cash flow to fund repayments on our revolver, investments in growth, including opportunistic M&A and on our newly announced stock repurchase authorization, with the latter two items supplemented by opportunistic use of our revolver, depending on the timing of any M&A or repurchases during the year. Now let's move to slide 13 to discuss our new share repurchase program. Our operating plan anticipates that we'll generate significant cash flow this year and through 2025, and we have an unlevered balance sheet. We believe Gibraltar's intrinsic value is not properly reflected in the current valuation and we will have sufficient cash to deploy into operations to strengthen our leadership position in our markets and offer incremental returns to shareholders, we asked our Board of Directors to authorize a stock repurchase program for the first time in Gibraltar's history. Our Board approved a $200 million common stock share repurchase plan ending May 2, 2025. The amount and timing of any share repurchases will depend on market conditions and we may make limited use of the revolver to capture opportunities to generate incremental returns for shareholders. Now I'll turn the call back to Bill.

Thanks, Tim. Let's turn to slide 14 for an update on key trends, as well as our initiatives for each of the businesses. We'll start with renewables. Despite the current challenges facing the solar industry, our customers remain very active. New bookings are on plan and backlog increased 41% by quarter end. We have four key initiatives for the business. First, as discussed, we're working diligently with customers on panel availability and project execution plans. Secondly, we're upgrading our operating systems and processes to support growth and improve execution performance. Third, we're supporting the ramp-up of the TerraTrak tracker platform, as well as the development of our new 1P product line for launch in Q4. Lastly, we're implementing the TerraSmart acquisition in-sourcing and supply chain cost synergies originally planned for 2022 in both Q3 and Q4. Switching to residential. The market remains relatively strong, both in remodel and repair, as well as new construction. Demand for single-family homes continues to outpace supply and there is a large inventory of existing homes that are aging out and in need of repair and upgrades. While we expect multiple interest rate increases to have some impact going forward, we've not seen a material impact to date. We continue to gain participation, a focused initiative we've had success with over the last five quarters. We delivered strong revenue and margin performance in Q1. Customer backlog and order activity are solid as we entered the second quarter, and our outlook is positive for growth and margin expansion in 2022. Our four initiatives for the residential business also remain on track. First, expanding participation gains further through new products and services, key customer expansion and geographic expansion. Secondly, continue our price management discipline and proactively partner with customers as market dynamics evolve. Third, execute our ERP implementation and system upgrades and fourth, accelerate 80/20 in automation projects to help offset labor and supply chain disruption, especially in our peak season quarters, Q2 and Q3. Moving to slide 15. In Agtech, our commercial segment continues to see solid growth across all businesses with research facilities, retail and carwash leading the charge. We also see solid investment in the produce growing segment that should drive market growth of 7% to 8%, similar to the annual growth rate over the last five years. We expect the cannabis growing segment demand to accelerate as licensing approvals are implemented for states that legalized in 2020. Our four initiatives in the Agtech business are, number one, execute on our order backlog with higher-margin produce projects and deliver margin improvement as planned. Execute well on participation gains with our new retail customer and scale and support accelerated expansion plans with our carwash partner. Strengthen our supply chain for roofing structures and glass to eliminate and or minimize project disruption in the field, and lastly exit the processing equipment business by year-end. In our infrastructure business, we see state and federal department transportation budget funding becoming more consistent and providing a more predictable cadence. This cadence is driving solid investment in bridges and surface protection for bridges, runways and structures. We expect the implementation of the infrastructure bill to drive additional demand starting later in the year. Our four initiatives for the infrastructure business are, one, mitigate structural and plate steel inflation through 80/20 and price management initiatives. Secondly, expand our engineering design capacity to support accelerating demand. Third, add and optimize production capacity to support demand and, fourth continue process and system upgrades for manufacturing operations. Now let's move to slide 16, and we'll review our 2022 guidance. We reaffirm both revenue and earnings guidance for the full year 2022. Consolidated revenue is expected to range between $1.38 billion and $1.43 billion compared to $1.32 billion in 2021. GAAP EPS is expected to range between $2.80 and $3 compared to $2.25 in 2021. Adjusted EPS is expected to range between $3.20 and $3.40 compared to $2.86 in 2021. Given our solid start in the first quarter, current demand and outlook across Gibraltar, we are confident in our revenue and margin guidance for the year. Renewables are on track to improve in the second quarter, and we have taken into consideration the industry panel supply situation and our current outlook for the year. We see strength and momentum in the residential business with good performance continuing. Agtech is improving, delivering solid growth and double-digit margin for the year, and Infrastructure is having a solid year of favorable business mix, good volume and improved operating efficiencies. The broad strength of Gibraltar is absolutely helping us navigate through the current solar industry headwinds in a relatively effective way. With that, I want to thank everyone on the Gibraltar team for their continued effort, agility and resiliency in this environment. We are executing well in 2022 and are focused on delivering a great year. So now, let's open up the call and we'll take your questions.

Ladies and gentlemen, we will now be conducting a question-and-answer session. Our first question is from Daniel Moore with CJS Securities. Please proceed.

Thank you. Good morning, Bill. Good morning, Tim. Thanks for taking the questions and all the color. Start with renewables. You mentioned, obviously, you expect significant sequential margin improvement in Q2. Can you provide a little more specificity or maybe a range you're targeting? And maybe a bridge of the key factors that are changing or abating giving you that confidence, whether it's revenue less how much from what less severe weather, supply chain customer supply chain disruptions, just sort of how does the math add up and what does it add up to from your perspective? Thanks.

Yes. Thanks, Dan. So if you remember going into the year, we have a plan for renewables to run double-digit margin. We still feel solid about that plan despite the start of Q1. Much of it has to do with our confidence in what we started to see in March as things abated. This DOC investigation has actually driven everyone to have a much better in-depth understanding of what panels are available, which ones are not. That actually provides a benefit in terms of having a little bit more straightforward planning associated with how we execute our projects. As tough as the investigation has been on the industry in the short term for a lot of folks, for us, it's actually creating more visibility as to what we do and do not have such that we don't deploy in an inefficient way. So we expect and see pretty good momentum going into Q2 and significant improvement based on what we saw in March and what we're seeing now. We think that will continue to accelerate into Q3 and Q4 as well.

And so not to get too precise, but should we think about double-digit margins in the back half of the year versus the full year relative to what we saw in Q1?

Yeah. We're still planning on and we still have a target to hit double-digit margins for the year, which implies that Q2, Q3 and Q4, obviously, we have improvement that we're expecting will bleed through.

Got it. So overall, the guidance hasn't changed. And so what I'm hearing is coming out of Q1, I would have expected maybe a little bit more strength out of residential in the plan and a little less out of renewables. But it doesn't sound like that's the right takeaway from what you're saying.

The renewable side is quite interesting right now because we have three projects that have been delayed, resulting in an impact of just over $1 million. Many of our customers are optimistic about their plans for 2022. For ongoing projects, having a panel by Q2 is crucial, and it should have been delivered by now. As the year progresses, there might be updates, but we anticipate that the administration and the Department of Commerce will reach conclusions soon. Currently, our business outlook hasn't changed significantly concerning the DOC investigation. We expect some impact and have included this in our yearly guidance, taking into account various scenarios. We believe we can manage these scenarios effectively and still achieve our full-year goals, leveraging the strength of our other business segments.

That's helpful. Maybe one more and I'll jump back in queue. You mentioned participation gains, which seems to have been accelerating through the back half of last year, can you talk about specific product solutions where you've taken the most share? And what your confidence that those gains are permanent versus temporary over the longer term? Thanks again for the color.

Market share gains can be as enduring as we make them through our ability to deliver value to customers. As long as we continue to perform well, we are less likely to lose them. Overall, I believe these gains are fairly stable, evidenced by our continued growth. Regarding the types of gains, I can share a few examples, including geographic expansion, new product launches, and an increased base of existing customers. A lot of this is due to our success in navigating a challenging supply chain environment in 2021, which was recognized by our customers when we were awarded significant business last week. Additionally, we've heavily invested in enhancing our digital connectivity with customers to reduce the costs associated with doing business with us—not just in terms of product pricing, but in terms of overall business costs. These efforts have been crucial, and that’s why we've committed to improving our IT systems, aiming to transform the traditional commodity-like marketplace. We began these investments in early 2020 and continue to see positive results from them alongside other initiatives.

Very helpful. I’ll jump back if any follow-ups. Thanks.

Thank you.

Our next question comes from Julio Romero with Sidoti & Company. Please proceed.

Hi guys. This is Noah on for Julio. Thanks for taking the questions. I had one on Agtech. Could you speak to how you view the Agtech business going forward and talk about some of the organic and inorganic opportunities for the segment?

On the organic side, if you think about the process equipment coming out of the portfolio we're kind of back focused on the roots we've been in for 80 years and over the last couple of years, we've added more emphasis on produce in particular, which is a relatively fast-growing end market with a lot of investments going in, in North America particularly in the US here in the last year but continues in Canada as well. We are in a really good position to take advantage of that. We made an acquisition to put ourselves in that position that was the Thermo acquisition a couple of years ago that we have since integrated. The demand profile that business continues to grow; the number of projects in flight, the backlog etc. So we're really excited about the investment dollars going in the end market to build out these structures. We feel like we're in a much better position to support that today going forward. So we're very bullish about that with the trends going on in market, along with our ability to now support that in a pretty significant way. Our commercial business is actually our biggest segment, so if you look at our three segments, commercial is number one and produce is a close second while cannabis is our smallest but an important segment as well. This commercial segment covers everything from floriculture to retail, research facilities, carwash initiatives, botanical gardens, and so forth. That business remains very strong and very active and there's a lot more funding flowing there as well. We're quite excited about that and that's a business that has historically performed very well both top and bottom line. If you go back to our 2019 results for Agtech, when that was our core focus which is what we're back to, we were running margins in excess of 15%. We know that how to do this and do it well. The top line and backlog continues to build; we feel really good about the demand in the commercial and the produce segments continuing to accelerate. That brings you to cannabis, and cannabis from a growing structures perspective we've actually been in since 2018 when we acquired a company called Nexus. Nexus is based in the Denver area and they were really one of the first folks that learned how to build structures appropriately to help grow cannabis in an indoor controlled environment. We had a very strong year in 2019 and all the things we talked about relative to permitting and expansion in the last two years for that industry has slowed but we've really started to see activity pick up and our backlog has grown there as well. Our confidence in Agtech this year is strong. We're continuing to make progress, starting last year we said sequentially we're going to get better every quarter on margin and we have not as fast as I would have liked, but we've continued to improve. You'll see us generate double-digit margin performance for the year in the Agtech business this year and you'll see us grow as well. That's one of the strengths of the team that helps us this year, particularly if there is something that happens in the solar industry that we're not anticipating today. It's a long answer to your question about the Agtech business relative to are there bolt-on opportunities? Yes, there are. Our key value proposition resides largely with our domain expertise and the systems that we help customers select and integrate as we design and build and construct the facilities that we do across our growing sites.

Okay. Perfect. Thank you for that color. I just had one more, circling back around to renewables. You kind of touched on a little bit some of the challenges you had in the quarter. Would you say that weather supply chain was a bigger factor? And do you see supply chain getting better or worse?

Well, weather was a big impact in January and February. We have a population in the US and you think about where C&I solar installations are heavily oriented, traditionally it's been in Northeast which is highly populated and unfortunately, the projects that were supposed to be done in Q4 of 2021 because of panel supply and other supply chains got pushed into January and February timeframe and then we got into some unfortunate weather and that was a problem. That can be very impactful, if we haven't priced for that. Typically, projects that go into heavy weather months like that are priced differently than those that we know are going to land in other quarters where the weather isn't so extreme. We didn't have that advantage because of delayed projects. I think that was a big incremental impact in Q1 that was unfortunate. The supply chain relative to panels has also been an issue for three quarters now, but right now it's gotten a little bit better, but it's not because it has just improved. It has, because frankly there's been so much emphasis on the panels that we, as well as others, had to really sit down with customers and talk through what they actually have in hand versus what they think they may be able to get. This new development in the industry with the DOC investigation has actually forced our and other customers for every project in flight or in plan to understand what materials are already in hand. The last three quarters have been challenging. It makes us a little more confident knowing what's out there than we were in the last three quarters.

Yeah. That makes sense. Thank you very much. I'll go ahead and hop back in queue.

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

Good morning.

Good morning.

Quite the quarter. So, I have some broad questions to put the actions of the quarter and the choices you're making kind of within the context or a bridge from the Analyst Day if that's okay with you just to kind of see how these things are shifting given the landscape. So, just looking at Agtech in your Analyst Day presentation cannabis was kind of about 30%. It was supposed to grow to about 30%. You mentioned it's about 10% of sales that you're divesting today but that was a large piece of that growth platform when you think about the 2022 targets. Could you maybe just give us a little sense of how this decision kind of impacts the 2025 goals that you laid out just so we could have a better interpretation of that presentation?

Yes. So, Ken, good question. It was 10% of 2021 sales, which is around $19 million. What you saw in the Investor Day was still heavily oriented on cannabis with growing structures. That's the bigger piece that always has been of that business. We don't really see that as impactful in 2025. The other thing I would say is the produce business is just over the last six months has been growing faster than we probably thought then and will more than offset the $19 million that we're talking about today.

Good. I apologize for digging deeper, but I find this quarter particularly compelling for you to explain the nuances of your business, which aren't easily understood. In conversations I had last quarter, vegetable approvals came up. I was aware of previous approvals for vegetables related to the greenhouse. Could you elaborate on that entire approval process? On the residential side that I cover, we often hear about approvals, but last quarter was the first time I learned about delays due to approvals. Could you provide us with more insight into that, especially given the growing significance of this business in light of the divestiture?

Yes. Ken, a lot of the permit delays we’re seeing are in one region just across the border and it’s around water rights. There's an area in Canada where a lot of these greenhouses go. They have a significant amount of water committed to people who apply for the right to use water and aren't using that water. The locality is working on saying, 'Hey, use it or lose it.' We have customers that need water or need to move; they’re a little bit in a different location where they have access to water. That’s been going on for probably three quarters. It’s being fixed, it’s just moving at a slower pace. The other impact on scheduling permits is still around the states that legalized cannabis like New York State. New York allowed around 46 licensees who might have had a license for hemp to grow cannabis for the recreational market. They haven't yet selected the licensees for the dispensary side nor have any of the licenses that they just granted been permanent; they’re sort of for a year, I think it goes through next December. So, still some of that legislative delay from the states that legalized. It’s starting to move, but it’s just a little slower. We have some projects that clients won't invest in until they have a permanent license. New York State being an example it could be another three to six months before we see some activity there.

I appreciate it. So, the vegetable related to the water in Canada, why do you see that as a near-term cyclical issue as opposed to a secular issue you given something else if it wasn't anticipated?

Yes, it’s one region where we operate. If you go get land 15 miles away, you're not stuck with that. Or if you're close enough to the lake where you have water rights directly from the lake and you're not dependent on the municipality. What we've seen is growers that we work with are shifting their location a little bit. You need 30, 40 acres or whatever you're going to need; land is available, but it just is the process. It's very specific.

It's important to remember, too, is our expansion in produce, the vegetable and fruit side has traditionally been inside that region we talked about. A lot of our growth and backlog going forward is expansion into the US, where there's a lot of investment going in as well. We're not as dependent on a single pillar foundation; the industry is expanding in the US where you don't have some of those stipulations or challenges.

I really appreciate that detail because it provides a deeper understanding. Bill, this is more directed to you regarding your discussions with the Board about the divestiture. We'll have to see how that unfolds. However, it's clear that a decision has been made. Considering the buyback alongside this, and given your position in high-growth industries, you've encountered several challenges, some of which may have been self-inflicted, while others are external events. It appears that the broader objectives discussed at Analyst Day, in light of the challenges you're facing, have shifted. You seem more confident in asserting that you have ample cash and an unlevered balance sheet. You plan to reinvest some of this capital back into the company. You've established growth platforms, some of which have been successful while others have not so far. With a solid platform now in place that shows enough activity, does this indicate a change in your discussions with the Board regarding what you control? Is your organic platform now so robust that you believe you can begin distributing cash as you work towards your goals for 2025?

No, I don't believe it's a simple situation. It's more complex than that, and I want to emphasize that we expect to generate a substantial amount of cash this year and into the next few years, up to 2025 according to our plan. The solar industry is facing significant challenges, and in the short term, we need the flexibility to ensure fair returns for our investors while observing how these issues will unfold in the coming months due to these unique circumstances. These challenges will be resolved; action will be taken. We see an opportunity to benefit our shareholders, which is why we seek that flexibility. However, this does not imply a shift in our overall plan. We believe we will invest capital over the next three years, utilizing a mix of mergers and acquisitions to further develop our platforms. Our organic growth, which showed double-digit increases in the first quarter, will continue to support our platforms, and we see additional opportunities for capital in the near future as well. Thus, I don't consider this a drastic change at all; rather, it's about showing flexibility for our shareholders to adapt to emerging situations in several markets that we aim to leverage in the near term.

Thank you very much.

Our next question comes from Walt Liptak with Seaport. Please proceed.

Hi. Thanks. Good morning guys.

Hey, Walt.

Hey, Walt. Good morning.

I wanted to ask about the processing divestiture. What do you envision for the timing? And I think you said it was $19 million of sales. What should we be thinking about for cash inflow from it, or is it immaterial?

Yes. I would say, Walt, both timing and value are a little bit TBD, right? We've publicly announced today, we've had some conversations, and we're going to continue that. So, we'll keep you updated as it moves. It's not going to be years, but I don't think it's also a month, right? So, it's somewhere between those two brackets and more to come.

When considering the divestiture, I understand some growth resulted from it. However, I had viewed all the cannabis businesses as an integrated system with a diverse product range. Why retain the cultivation segment of the business? Why not consolidate everything into one entity and completely exit that division? That particular segment has certainly experienced inconsistent revenue timing and fits, among other issues.

Yes. So, Walt, I'll clarify for everybody just a little bit. When you get into the growing business, it is fundamentally one business. If you think about our history, we've been in these growing structures, and they serve so many different end applications. From a go-to-market perspective, as we talk to customers, we found these segments a little bit different. But the back end of how you support a cannabis growing site, a tomato-growing site, our carwash side a retail site. The business has very common processes across the back end from estimating to design to manufacturing to stick them in the ground and field execution. So it’s – I would characterize, this move as getting back to our growing structures core that we've been in for 80 years. We now have an opportunity where there are some market segments that evolve that have unique customer sets. So it's kind of come out of one group; it's just selling to the three or four different buckets. The commercial market has always been there. So think about this as a commercial growing structures business with nine segments, instead of seven, produce being one and cannabis being one. We have been in the cannabis growing business for three or four years since the Nexus acquisition. Nexus also makes structures for floriculture and other types of greenhouse structures. They had more domain experience in how to do a structure for cannabis.

Okay. All right. Fair enough. Yeah. Okay. Great. Thank you. And then I want to try and drill down a little bit about the solar comments. And I understand that your customers are telling you that they have the panels for the second quarter so these projects should be on track. I wonder, if you could tell us how deep did you go down into the conversations? Can you talk to? Were you able to audit it? I mean, were you able to physically see or – because we've heard some of the stuff before where customers were saying they had their permits or they were going to be able to get these panels and then they weren't there. How deep did you drill down with some of your top customers to understand that they were going to be able to get these projects moving in the second quarter?

Yeah. So the second quarter projects obviously we're in flight. We’re kind of POC accounting, so those projects were starting in Q1. We're getting some of that revenue flowing through Q2. So sitting down with every customer a lot of it has been face-to-face obviously lots been on the phone. But being able to audit warehouses is something we've not been able to do per se. The difference is this: our incentive before was we needed to understand, do you have panels or not? If the answer was yes, it could be couched around the perspective of we have the panels on order, they're coming and they'll be here in the next 30 days. Now it's different. Now you physically have to have the panel in hand. If you don't have it or haven't bought it, you risk penalties. This has forced a different discussion than over the last three quarters on panel supply, because the risk has shifted significantly to them on the potential penalties that come with doing the wrong thing. We are currently in the field and we see panels in the projects that we're involved in. I think the question's going to be what does Q3, late Q3, Q4 look like? And that's what a lot of – I think the customers are trying to figure out at this stage.

Thank you for the explanation. I have one last question about solar; the $7 million loss this quarter raises some concerns. Can you clarify whether that was due to your installation teams not being fully utilized, or what caused the loss? Were there additional costs related to project delays this quarter? I'm looking for some assurance that this loss is a one-time issue and that there won't be ongoing costs affecting the second quarter or the whole year.

Yes. The GAAP loss was $7 million, and the adjusted loss is $4.3 million for clarity. The main issues this quarter relate to project inefficiencies rather than significant fixed costs. We had teams setting foundations, and when bad weather hit, they had to clear ice from the ground to attach the racking system. We anticipated completing that work in October, November, and December, but we faced some setbacks that contributed to our loss. A slight decrease in volume also affected the results. Those factors were significant. Since the weather has improved and through our discussions with customers, we have been coordinating effectively to track when panels will arrive, which is crucial.

Walt, one other point I want to mention that what's different today versus just five weeks ago is the financial risk for a customer developer in the field by not knowing what's going on with the panels is much greater today than it was. They cannot afford to take the risk of buying something they don't have. If they don't have it, they're not doing a project. If they have it, they need to verify it before they actually move forward with each other. They’re not going to move forward unless they know they have and bought prior to the Department of Commerce investigation beginning.

Okay. Okay. Thank you. Appreciate it.

Ladies and gentlemen, this does conclude the question-and-answer session. I'd like to turn the call back to Mr. Bosway for any closing remarks.

Again, everyone thanks again for joining us today. We will be presenting at the KeyBanc conference in Boston in June and the CJS Summer Ideas Conference in July, as well as holding a few non-deal road shows. We'll speak to you again in a few months and look forward to follow-up conversations and look forward to talking to you at the end of the second quarter as well. Thanks and have a great day.

Thank you. This does conclude today's conference. Thank you for your participation. You may now disconnect.