Gibraltar Industries, Inc. Q2 FY2022 Earnings Call

Greetings, and welcome to Gibraltar Industries Q2 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 LHA Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good morning, everyone, and thank you for joining us today. With me on the call are 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 a slide presentation that management will use during this call are both available in the Investors section of the company's website. 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?

Good morning, everyone, and thank you for joining today's call. We'll start with an overview of second quarter results and financial performance, and we'll talk about our outlook for the rest of the year, and then we'll open the call for your questions. So let's turn to Slide 3. We'll start with second quarter 2022 results. We generated solid revenue growth and margin expansion in the quarter with adjusted revenue up 7%, adjusted operating income up 20%, adjusted EBITDA up 16%, adjusted EBITS grew 19% to $0.96 per share. Renewables, Agtech, and Infrastructure margins improved sequentially as expected, and our residential business delivered both strong revenue and margin performance. Our order backlog increased 5% to $408 million. The demand drivers remain relatively healthy across our end markets despite ongoing trade challenges impacting our renewables customers and continue to drive additional participation gains in our Residential business, and Agtech and infrastructure bookings are accelerating. Renewables customers continue to wait for clarity on panel availability so they can finalize projects and book additional orders for the second half of the year, as well as in 2023. Our performance reflects our continued focus on Agtech execution, supply chain optimization, and accelerating the digitization of our operations to keep our organization as healthy and flexible as possible and to conduct business in the responsible way every day. I'd say at the halfway point of the year, we are tracking for full-year performance objectives. Let's turn to Slide 4 for an update on commodity price and supply. Just as a reminder, there are really three main core commodities we use across the company: steel, aluminum, and resin. We are focused on three drivers relative to each commodity: first, the absolute price of the commodity; second, the price variability of the commodity; and then third, the availability of the commodity. In general, availability of each core commodity is better than last year. But pricing continues to be dynamic due to the macro environment and the geopolitical situation. Hot-rolled coil steel price fell from its high of $2,000 a ton in Q4 2021 to $1,329 at quarter end, and it continued to fall as we entered the current quarter. Structural plate steel used in our renewables and infrastructure businesses increased during the first half of the year. But recently, structural steel prices have come down between 3% and 4%. According to the June report from IHS market, steel prices are forecast to come down further over the next 12 to 18 months, and we'll see how that happens, and we'll remain agile as steel prices move. A little bit lower from peak levels in Q1 2022 and then came down slightly during the second quarter. There are several variables impacting aluminum price, including the ongoing energy crisis in Europe, which actually started in 2021, the rolling lockdowns in China, and additional energy supply pressure in Europe stemming from the Russia-Ukraine conflict. We do expect the aluminum prices to remain elevated and probably through 2023. Given the current price cost environment, we're just going to continue to execute across our three core initiatives. Number one, trying to keep our price and input costs balanced and implement changes in a timely manner. Secondly, just continue to execute and accelerate more A20 initiatives to drive productivity and cost reduction. And finally, third, continue to optimize our contract terms and conditions with our customers to try to balance and share potential risk in the current environment. Let's move to Slide 5 for an update on solar panel supply to the solar industry. The two trade issues, the withhold release order or WRO which has been succeeded now by the UFLPA, which stands for the Uyghur Forced Labor Prevention Act. And the Department of Commerce's anti-dumping and countervailing tariffs investigation referred to as ADCBD. Forthcoming ph assets will continue to limit visibility and clarity for panel supply. First, let's start with UFLPA, which was signed into law last December, and it was implemented here just recently in late June and is enforced by the U.S. Customs and Border Protection. Effectively, the law requires importers to improve via traceability processes and documentation that the court site material mined in the Shenzhen province is not containing panels deployed in the U.S. I would say the industry is working with the U.S. Customs and Border Protection to understand importing traceability requirements for both successful, efficient importation, and there's a learning curve associated with that. Second, the Department of Commerce is expected to issue its preliminary ruling in late August, so later this month, with its final ruling in January 2023. If the Department of Commerce finds in favor of the complaint, future panel imports can be assessed duties, and it is possible the DOC will make these deals attractive to when the petition was accepted or earlier. Now that being said, while the administration instructed the DOC to implement a 2-year waiver on tariffs, the DOC has not yet executed in order to do so. We believe this will be done in conjunction with or around the time of the DOC’s preliminary ruling on the AD/CVD case. As a result, the industry has effectively continued its pause in executing and finalizing many existing and future projects as we had expected. We do expect a 2-year tariff labor to be implemented and provide much-needed clarity on tariffs for the industry going forward. Also, in our view, the DOC’s preliminary ruling will provide solid direction to the industry and what to expect in its final ruling, again, due in January. We also believe the administration will continue to support the solar industry given the importance of renewable energy production, including a balanced energy plan for the U.S. For our Renewables business, the scenarios as we play them coming into 2022 further remain consistent given our experience in Q2, the first half, and our current outlook for the second half. I would say the industry really looks forward to the DOC's preliminary decision and getting through the UFLPA learning curve so the industry and our customers can finalize project plans for 2023 and 2024. With that, I'll turn it over to Tim for a review of our results.

Thanks, Bill. And good morning, everyone. I'll take you through our consolidated and segment results, starting on Slide 6. And as a reminder, my discussion will cover the results from continuing operations and exclude the related revenues and expenses from the Agtech segment's processing equipment business, which have been removed from adjusted for both 2021 and 2022 as a result of the classification of this business as held for sale during the first quarter. Adjusted second quarter revenue increased 6.8% to $364.2 million. This growth was purely organic and was driven by price management and participation gains in residential, partially offset by panel supply challenges in renewables and project delays in Agtech. Backlog at quarter end was $408 million, up over 5% from second quarter 2021, driven by continued end market demand. Adjusted operating income and adjusted EBITDA increased 19.9% and 16.3%, respectively, in the second quarter with adjusted EPS up 18.5%. Margin improvements in the quarter were driven by price management, participation gains, business mix, and 80/20 initiatives, with residential and Agtech margins continuing to expand and renewables and infrastructure generating sequential improvement. Weighted average diluted shares outstanding decreased 1.2% to 32.7 million in the second quarter due to our share repurchase program. Now let's review each segment, starting with Slide 7, the Renewable segment. Segment revenues decreased 5.8%. The decrease reflects movements in project schedules, as customers work through trade issues affecting panel supplies Bill outlined. We continue to work with our customers to ensure panels are in hand before we begin to manufacture racking and mobilize our field installation groups. End market demand in our commercial and industrial space continues to be very active with new project planning discussions despite the general industry costs related to panel issues. The industry cost, as expected, slowed new bookings in the second quarter, and our backlog was down 2% as a result. As a reminder, we only include signed contracts with deposits as an actual order. Purchase orders without a signed contract and deposit and/or verbal agreements with customers are not and never have been included in our bookings or backlog results. We do expect the pace of signed orders to resume once the DOC issues its preliminary decision later this month. As expected, profitability improved from first quarter 2022 with stronger project execution, the completion of a handful of lower-margin projects impacted by price material cost misalignment and labor inefficiency related to severe weather. Segment adjusted operating income was $7.1 million, and EBITDA was $9.4 million. This represents an $11.4 million and $11.3 million sequential improvement, respectively, for sequential margin expansion of 1,240 and 1,170 basis points with margins reaching double-digit levels in both May and June. Versus last year, adjusted operating margin and EBITDA margins decreased 430 and 420 basis points, respectively, through the aforementioned project inefficiencies and delays due to panel supply, along with price material cost misalignment driven by structural steel inflation. Our integration remains on track. We went live with our common ERP system across the segment, and we're on schedule to execute our in-sourcing synergy plans during the second half of the year. These investments will further simplify our business and increase service levels with our customers. Let's move to Slide 8 to review our Residential segment. Segment revenue increased 21.9%, all organic, and this quarter marks our eighth consecutive quarter of double-digit growth. Revenue was driven by price/cost management and participation gains, both new and carryover in the Building Products and Mail and Package businesses. Our residential segment continues to see solid demand with 80% to 90% of its business driven by existing home repair, either due to the aging of homes or weather damage. Historically, home repairs have not seen significant impact from changing interest rates; repairs, especially to a route, typically occur regardless. Segment adjusted operating income and EBITDA grew 36% and 32.2%, respectively. Adjusted operating and EBITDA margin improved 190 and 150 basis points, respectively, through effective price cost management, continued supply chain initiatives, labor management, and 80/20 activities. We went live with a new ERP system in our Mail and Package business during the quarter, and the system is designed to provide better visibility into the business and allow for greater automation as we work through change management and mature the lease of the system. We'll continue to implement this ERP system across the remainder of our residential operations to create stronger customer connections, drive speed and agility of service, win participation gains, and increase productivity across the entire organization. Let's move to Slide 9 to review our Agtech segment. Adjusted segment revenue decreased 11.9% as the producing cannabis projects shifted into the second half of the year. The commercial business continues to be robust with good momentum as we head into the second half. Despite second quarter demand shifting, backlog was up 30% in the quarter, and given the number and size of projects currently in final planning stages, we expect demand momentum to accelerate into the second half and for 2023. Segment adjusted operating EBITDA margin improved 80 and 100 basis points, respectively, on improved business mix, effective price/cost management, benefits from continued supply chain optimization, continued 80/20 and lean initiatives, and our integration activities. We're set up well for continued performance improvement in this business and expect positive margin momentum through the year as we convert our backlog, make additional system improvements, and benefit from improved business mix. With respect to the potential processing equipment sale, we're in active discussions, and we'll provide updates as appropriate. Let's move to Slide 10 to review our Infrastructure segment. Segment revenue decreased 5.3% against a very strong Q2 2021, which benefited from the timing of projects. Order backlog was essentially flat in the quarter versus last year, due again to the timing of orders, while engineering backlog activity was very strong. Bookings accelerated early in the third quarter with a beneficial mix. We continue to expect incremental government spending from the infrastructure build towards the end of 2022. Segment adjusted operating EBITDA margins improved sequentially 690 and 600 basis points, respectively, as we work through fixed price projects with the State and Department of Transportation that were signed in 2020 and 2021 and have been affected by structural steel and plate steel inflation. On a year-over-year basis, operating EBITDA margins were down due to unfavorable product mix. We continue to expect margins to improve through 2022 as lower-margin projects are completed, business mix improves, and volume growth is leveraged. Let's move to Slide 11 to discuss our balance sheet and cash flow. At June 30, we had $302 million available on our revolver and cash on hand of $17 million. We generated $8.3 million in cash from continuing operations in the quarter. Our working capital investment increased $31.4 million, primarily in receivables as a result of our normal seasonal build. This increase typically reverses in the second half of the year as revenue peaks and begins their seasonal decline. We also continue to make small investments in inventory as our season ramps up to ensure strong customer support during the current challenging supply chain and inflationary environment, and that's enabled us to continue to support our customers' needs. Our payables were affected by the timing of inventory purchases, and growth in other liabilities was driven by an increase in billings in excess of costs, which results from the timing of billings based on contractual project billing schedules. During the quarter, we grew $51 million on our revolver, primarily for share repurchases. Our net leverage at quarter end was approximately half of a turn. Given our first half performance, customer activity levels, and backlog coming out of the second quarter, we continue to expect strong cash generation in the second half of this year with strong earnings and a reduction in our working capital investment. Our target for free cash flow generation in 2022 remains approximately 10% of revenue. We expect to use generated cash flow to fund the repayments on our revolver and investments in organic and inorganic growth, along with opportunistic stock repurchases supplemented as needed by the use of our revolver depending on the timing of any M&A for repurchases during the year. So let's move to Slide 12 to update you on our share repurchases during the year. Last quarter, our Board of Directors granted our request to authorize a common stock repurchase program for the first time in Gibraltar's history. This program authorizes the repurchase of $200 million over 3 years ending May 2, 2021. During the quarter, we repurchased 1.2 million shares with a market value of $50 million at an average price of $41.84. As I mentioned, we financed this repurchase through our revolver. At quarter end, we had 31.6 million shares outstanding, with a weighted average of 32.7 million shares during the quarter. Now I'll turn the call back to Bill.

Thanks, Tim. Let’s move to Slide 13. I just want to give a quick update on our five key priorities. This year has been, for us, a theme around simplifying focus. It's been consistent since the beginning of the year. As common sense goes as this sounds, the lessons learned and challenges over the last 2.5 years have highlighted the need for us to simplify and focus on execution even more on other things that we can control. So as a reminder, our five priorities are: first, 80/20, which drives higher service levels, expands our margin, and wins new business with existing and new customers in each of our segments; secondly, while many supply chains are for customers, minimize disruption across both manufacturing and field operations, and optimize our cost position to reduce working capital; third, we really want to accelerate our digitization in our operations. We completed two ERP implementations in the quarter. This is consistent with what we've been doing in the last couple of years. We did one in residential and one in renewables. We will continue to invest in digitization and cybersecurity for our customers, as well as our suppliers and our business strategy; fourth, support to maintain organizational health. We remain agile and flexible in today's operating environment. It continues to attract and retain the best talent we can. Finally, really work on the best environment we can for our team; to conduct our business in a responsible way every day – not only for our teams but for our customers and suppliers. Let's move to Slide 14, and we'll talk about 2022 guidance. Our first half results were in line with our expectations, and our current demand profile and focus on execution, including supply chain optimization, price cost alignment, labor management, and simplification initiatives, really do give us confidence in delivering our full year performance commitments. Overall, the continued strength and durability of our business, underlying fundamentals, and the power of our leadership positions in each of these markets, as well as our long-term partnerships with our customers remain intact. I think this supports this year's outlook and our long-term strategy. As a result, we reaffirm both revenue and earnings guidance for the full year 2022. As a reminder, 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. On an adjusted basis, adjusted EPS is expected to range between $3.20 and $3.40 compared to $2.86 in 2021. Lastly, and most importantly, I want to thank everyone in the Gibraltar team. This is a team that has continued to find great opportunities for our future and do so while following through on the challenges in marketing dynamics over the last 2.5 years. I'm very grateful for the team we have and remain excited about the journey that we're on as well. So with that, now let's open the call up for your questions.

Thank you. Our first question comes from Dan Moore with CJS Securities. Please go ahead.

Good morning. This is Stefanos Crist calling in for Dan. Thanks for taking my questions. First, can we just start with the renewables? What's your visibility into 2023 and beyond? And what would give you more clarity there?

Well, the two big issues you talked about, Stefanos, one is really the UFLPA, which went into play on June 21 or thereabouts. That's the importation process the industry is going through a learning curve. How to get those in efficiently and effectively is really important to the industry. Secondly, the DOC decision at the end of this month will be very helpful. In regard to that decision, because the administration has issued an executive order, the DOC will find a way to neutralize any tariffs. So therefore, tariffs are expected not to happen. It comes back to the UFLPA and importers being able to bring panels in efficiently and effectively. I think that's what the industry is looking forward to, to see how that plays out. By the end of August, we'll have about 6 or 7 weeks of experience with the UFLPA, assuming tariffs don't impact the industry. Customers will start working on finalizing projects for the end of this year, as well as next year. So that's the current outlook. We'll know a lot more, I think, in the next 3 to 4 weeks.

Got it. Perfect. And then just staying on renewables. Can you just talk about the cadence of margins for Q3 and Q4? And how we should think about margins in 2023?

Yeah, we've mentioned before that we feel like this business has turned the corner. We ran double-digit margins in May and June, and we expect to run double digits in the second half as well – barring any major shift in outlook on demand that we're not anticipating. As I mentioned earlier, the scenarios we painted, we feel pretty good that we've got that understood. But you never know. Right now, we feel pretty good about double-digit margins in Q3 and Q4. Assuming that, that's eight months in a row of double-digit margins, that should carry into 2023 at a similar level that you see us finish 2022 at. That's how I would think about it for now.

Perfect. Thanks for taking my questions.

Sure.

Our next question comes from Ken Zener with KeyBanc. Please go ahead.

Good morning, gentlemen.

Good morning, Ken.

Good morning, Ken.

So obviously, you know, it’s good stuff. Personally, it's a good update on the margins. Hopefully, we'll get clarity here, so you can start getting visibility into next year for your customers and for you guys. But I wonder if we could just go back to kind of the basics on residential, which has been doing quite well in terms of margins, which was one of the first real businesses that turned around in the 80-20. The reason I want to focus on this is the growth you're having, and the 28% you saw in the first half, could you be a little more clear? I mean, you did lead with commodity costs in your presentation slide, obviously touching metal. How much of this is price? I mean, are you doing a couple of points of volume which can be share gains, and the rest is price? I just want to get a better baseline on how we think this growth – the volume trends are going because most of the categories we cover, there's very moderate unit growth, and it's all right. And I just want to get better clarity as we think about the end of ’22 into ’23?

Yeah. So Ken, we said last year in the second half that that time was heavily driven by volume with a little bit of price, and the second half was driven more by price and less volume. Coming into this year, we projected volumes to be relatively flat on a market basis. I would say that what we've seen on volumes is consistent from a market perspective. Our volumes have kind of come in a little bit higher than that, and that's related to participation. So we're winning more business, and then, of course, we get the benefit of the price on the more business on top of the base business. So it's still more weighted towards price. But I would say we have more volume coming into our business now than we had thought originally, and that kind of connects back to the participation gains.

Right. And then, I guess, I mean, the level setbacks, given you at 22% in the quarter. Does that – I mean, it sounds like that's across a couple. Were flat? You guys might have 2% to 4% unit volume. I'm trying to ask because I am trying to see where price kind of neutralizes as we exit the year, right? So are we going to basically be at 1Q ‘23 where today plus would be basically flat? So, you're just getting onto that core volume that's in your residential business. I'm just trying to see how that covers because it's such high core, and it seems like a lot of it would be price?

Yeah, it's a good question. I would say there's not a lot of incremental price versus the start of the year, that is for sure. I think it was probably a price increase around aluminum-based products that effectively, we've not had a lot of incremental price increases this year. But we have carryover pricing from last year because there were multiple price increases, so you're getting an effect of that. So it does carry into this year, and you're getting this participation volume, full-year effect from last year and new participation this year. Right now, we feel pretty solid with where the volume position is on the demand side going into the second half. We'll see how the fourth quarter evolves. But right now, we're holding relatively steady on volume demand relative to where we thought we would be.

I appreciate your patience with this question. I guess on the renewable, you said obviously, end of August, you know, the next ex-week it can be really important. Is there any perspective that you're getting from people in the industry about this? I don't want to call it a hiccup or a bump because it's pretty impartial, and obviously, there's a long-term demand. Are you seeing any capital stress from installers or developers that took down land? I mean, are you starting to see this slow demand and uncertainty really start to squeeze the industry...

No, we really haven't seen that. Inflation in general is impacting price points; cost points are much different today than they were 2 years ago. But I would tell you, we look at the number of the projects that we have; we call it red line. A lot of people throw that into the backlog. We don't. Those are repeat issues to us. They’re in red line. So that red line activity is kind of our leading indicator and that's remained very robust. The issue that you have now for everybody is just everyone is waiting. If you think about whether you had financing already lined up or you still had to get financing, you're not going to pull that final trigger until you get the most expensive component understood as to when you're going to have and what the price point is going to be. The first one is UFLPA, when am I going to get it in and can I get it in? The second one is at what price are tariffs going to impact. Those are the two elements that people are thinking about. But in terms of the planning and what's on the docket, that remains robust. Another way to think about this, when the Department of Commerce initiated the investigation in March or end of April, everyone placed orders for tariffs because the demand is out there. It's just a matter of knowing when you're going to get them so they can plan accordingly for the next six months, a year, or even two if you’re in the utility or C&I space. This is not one of those things where you flip a switch, and everything is back to where it was overnight. We've effectively shut down a portion of the industry for six months; by the time we get to the end of August, it's going to take some time for people to re-energize and flex their muscles and start running again. But it's not a demand issue; it's a supply issue. In terms of the inflation reduction act, if you talk about the executive order from the administration, that's all demand, which is great, and that will help us long term for sure, but it's not an issue of demand; it's an issue of supply coming in on a consistent basis so that our industry can actually continue to work on a cadence. I think in the next 3 or 4 weeks, you'll get a better feel for that. I wish I could tell you something different, but that's what I'm looking for.

Thank you.

Our next question comes from Julio Romero with Sidoti and Co. Please go ahead.

Hey. Good morning, Bill and Tim.

Hey, Julio.

Just to start on residential, you see a very nice performance in the quarter. What are you seeing or hearing from your customers regarding inventory levels and just speak about any potential destocking risk that you may or may not be hearing?

Yeah, we haven't seen a lot of that, Julio. We have access to point-of-sale information every week with our big box customers, so we know what our outgoing sales are from those stores, and we can see if inventory is building. We saw an adjustment in inventory levels start probably 6 to 9 months ago coming into the year and then subsequently to that. I'd say, it's been happening, but at the same time, that's been offset for us by additional participation gains. So right now, it feels like levels have been adjusting consistently for a period of time as we've been seeing. I don't think there's a shock-and-awe situation in front of us on that front. We have pretty decent visibility to anticipate that. But we haven't seen a lot of that at this stage; we've just seen a continuous slowing; that’s a rightsizing is a better way to say it, as opposed to slowing. A lot of that's related to just the supply chain being so dynamic the last 2 years across the world. If you think about that in the residential world, '20 and '21, the industry kind of got caught for different reasons, and I think people were ensuring that didn’t happen in '22, and then I think inventories have been sized and adjusted quarterly as the year has gone on. But nothing extreme one way or the other.

Okay. That's very helpful. And then I think you guys made a good point in the prepared remarks that on residential, you're mostly R&R versus new construction, and even within R&R, your most familiar repair than remodel. Is there a way to quantify that? Like how much within your R&R exposure in residential is repair versus how much is remodel?

Well, if you think about remodel for us, it is mainly our HIG business, the audience and the ... I'd say owns only. So it's a very small percentage of our total within R&R. I'd say we're 95-plus percent, within residential if you think about it that way. Now you could say, well, what about mailboxes, and there's a debate on that internally. But I would say within repair and remodel, we're very high percentages, repair, I'd say 80% to 90% at a minimum.

That's 80% to 90% in mailboxes or within R&R general?

That was R&R. So it's between R&R for residential; it's 80% to 90% is R&R within R&R; there's a high percentage of repair, is the way we think about that.

Okay, perfect. Thanks so much for segmenting that for us. And then maybe just the last one for me is on the Agtech side. Are any of your end markets, cannabis, produce, maybe your legacy performing better or worse than the other? And can you maybe expand on the positive margin momentum you expect for Agtech in the back half?

Yeah. So the commercial business, which is our traditional business, continues to run well on both the top and bottom line. There’s a lot of activity, and that business is spread across numerous applications. That one has been running well for some time. Our backlog is starting to build; we've got some backlog building in cannabis as well. But at the end of the day, produce continues to drive backlog and accelerate on the demand side; that's what's really going to drive the top line of the overall business. Those are large projects, and if you look at our pipeline of projects that are in those final stages, it's a substantial amount, and we don't include this in backlog. But that'll set us up for a strong end of the year and beginning next year. Produce is a big engine for us; that's starting to really improve the line. That's part of what you see in the sequential improvement. Commercial has been steady and rock solid for us, and then cannabis has been lumpy mainly due to the demand side of that business. But as that backlog continues to stabilize and grow, we expect that will generate double-digit margins we've seen in the past as well. So that's how we break those three out.

Okay. That's very helpful. Thanks very much for taking the questions.

Yeah.

Thank you. Our next question comes from Walter Liptak from Seaport Global. Please go ahead.

All right, thanks. Good morning, guys.

Morning.

Let me, on that slide one, on the residential side. And maybe you've already talked about this, but just for clarity's sake. So in residential, let's say that the volumes are stable over the next year and some of these materials, these industrial metals prices of HRC come down. With the things that you're doing with participation gains, 80-20, and other things, would you be able to maintain the same profit level or improve the profit level from where you are?

Yeah, it's a good question. That's frankly at the forefront of our discussion with the residential group coming into this year. You know how our customer contracts were indexing around inflation. As they go up, we lag, we have to cover that cost, and we caught up last year where the first three quarters were running behind in margin. We flipped the switch in Q4, and we expect them to naturally improve now that we're set up for a down slope. When those indexes kick in with commodity costs coming down, we should manage it better this year. So on the way up, get hurt by it, and the way down can expand if you manage your input costs proportionately and in a more proactive or timely manner than when you have to guide your prices or change prices accordingly. We are laser-focused on that. I'm not saying we're perfect at it, but we haven't – we've got it – it's been on the table and people are managing that appropriately. So far now, market activity looks relatively flat based on participation gains, and I'm cautiously optimistic that we can maintain or improve our margins as we adapt towards a changing environment.

Okay. Great. Okay, thank you for that. I'll ask one on infrastructure; you talked about orders picking up in the third quarter around the infrastructure bill, and maybe getting better in the fourth quarter. Is this a small segment, but is that going to be enough to maybe - what does that do for the visibility in 2023?

It would be very helpful. I mean, I think Tim mentioned in his remarks that the new orders that have recently come in just at the start of the quarter are quite substantial, and the backlog is growing. I think that will be impactful in the second half of this year, but it is the start of the momentum going into next year. A leading indicator for infrastructure, when you think about backlog, is we measure two things: actual order backlog and new bookings which we traditionally discuss externally, and then internally, there's an engineering backlog that is at a peak right now—probably higher than we've ever seen. I think that's a reflection of the investments that a lot of states and federal DOTs are planning on and starting to ink projects to get them in focus. We’re definitely starting to see that activity accelerate, and that should bode well for 2023.

Okay. Great. And then maybe a last one for me around the renewable segment. You guys did the press release a few days ago about a Connecticut solar plan that was utility scale; it was a little bit larger. I wonder if you could give us an update on the two different markets and the community solar as well as the utility scale and any participation gains that we might be able to look forward to in the utility part.

Yeah. So I don’t know, the C&I space, which we attributed and which is really community—look at our industry certification on track; three buckets within C&I. We’ll call it community—C&I and Industrial and commercial. Those are the three that we refer to as C&I. In general, most of my comments have been about activity in project planning and so forth. That’s all around C&I and that’s where we continue to send 95-plus percent of our effort. We do have some customers expanding into larger-sized projects, like utility, but we just don’t play in that space a whole lot. In terms of market status, I can't speak too clearly about utility, but just from reading and listening to others, it’s kind of a challenge with this panel issue. Once I clear to play that, I think things will accelerate for utility, as they will for C&I. We see a lot of activity. We're excited about that, and we always say, think about where the population exists and where renewables will land, and then think of the type of solar solution sets that will go in. That’s a heavy mix towards C&I, and that’s kind of right where we’re set up to run with. So I do think C&I will have a good runway in front of it. I think all the incentives that are being discussed now will help if further over the next 10 years, and we’re well-positioned to activate around that. One thing that we are working on is expanding our tracker platform and really looking to expand into the utility space. You need what we call a 1P configuration, which is a single panel—important model. That’s where the majority of utilities scale use. We will have that in Q4 ready to go in Q1, so we’ll have the option to expand into or pick and choose where we want to play in utility if a customer wants to go that route. That’s how I would characterize it. Long answer to your question. Sorry, but I hope that covers how we think about it.

Great. Thanks. Okay, thank you very much.

Thank you. I would like to turn the call back to Bill Bosway for closing remarks.

Yes, thanks again for joining us. We're going to be presenting at the Seaport Global Summer Conference later this month, as well as upcoming conferences in non-deal road shows. We'll speak to you again in a few months when we report third quarter progress. I hope everyone stays safe and healthy and looking forward to catching up with you all. Have a good rest of the day. Thank you.

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