Earnings Call Transcript - ROCK Q1 2021

Operator, Operator

Greetings. And welcome to the Q1 2021 Gibraltar Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator provided instructions. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Carolyn Capaccio of LHA. Please go ahead.

Carolyn Capaccio, Investor Relations

Thanks, Operator. Good morning, everyone, and thank you for joining us today. With me on the call this morning is Bill Bosway, Gibraltar Industries’ President and Chief Executive Officer; and Tim Murphy, Gibraltar’s Chief Financial Officer. The earnings press release that was issued this morning, as well as the slide presentation that management will use during the call are both available in the Investor Info section of the company’s website, gibraltar1.com. Please note that Gibraltar has classified the Industrial business, which was divested on February 23, 2021, as a discontinued operation with fourth quarter 2020 results. Results of TerraSmart, which was acquired at the end of December 2020, are included in first quarter 2021 results. Gibraltar’s earnings press release and remarks contain non-GAAP financial measures. Tables of reconciliation of GAAP to adjusted financial measures can be found in the earnings press release that was issued today. Additionally, Gibraltar has separated its Renewable Energy & Conservation segment into two, renamed the Renewables and Agtech segments. Gibraltar has provided historical Renewables and Agtech segment information for the four quarters of 2020 and full year 2019 on the quarterly results page of its website, which can be accessed through the Investor section by clicking on Reports & Presentations. Also as noted on slide two of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future financial results. These statements are not a guarantee 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?

Bill Bosway, President & CEO

Hi. Good morning, everybody, and thank you for joining our call today. Let’s start this morning with an overview of our first quarter results and then a review of the segment reporting change we announced earlier today. Then Tim will provide more detail regarding our Q1 financials. Then I will come back and I will review our strategic priorities and our guidance for 2021 and then we will open the call up for your questions. So, let’s turn to slide three to discuss Q1 results. We delivered solid results that reflect ongoing execution, participation gains across our markets and healthy end market demand, while we continue to operate through the pandemic, managed some challenging weather across the country, worked through material inflation, and dealt with material and labor availability shortages. For the quarter revenue increased 34%, of which 10% was organic, driven by strong growth in our Residential segment, growth in our Renewables business, which compared to good volume related to Safe Harbor in the first quarter of 2020. Our acquisitions performed as planned with TerraSmart and Sunfig starting their integration into our Renewables business. Architectural Mailboxes completed its second full quarter of integration activity into our Residential business and Thermo Energy Solutions completed its first full year of integration in our Agtech business. Our order backlog strengthened to a record $355 million, up 27% on a pro forma basis and up 48% on an absolute basis versus last year, and we also generated good order bookings during the quarter as well. Adjusted earnings increased 30.8% to $17.4 million or $0.53 per share. The result was organic growth and continued margin expansion in the Renewables, Residential and Infrastructure segments, the TerraSmart acquisition, good products and services mix, good price cost management, and 80/20 productivity initiatives. Now let’s turn to slide four and I want to discuss a new segment reporting. As we continue our transformation of the business, I think it's really important going forward that we offer even greater transparency to our investors and stakeholders concerning our strategy, as well as the performance of our core businesses. As well, providing insight into the markets we participate in is also important to understand the unique and focused investments required and how we allocate our time, talent and energy in accelerating our vision and performance. So beginning with this quarter, we separated the former Renewable Energy & Conservation segment into two segments: Renewables and Agtech, and will now report business results across four segments. So we have Renewables, Residential, Agtech and Infrastructure. The graph on this slide shows the composition of our revenue and adjusted operating income by segment before and after the segment change. If you look closely in the first quarter of 2021, Renewables represented 30% of our revenue, Residential 49%, Agtech 16% and Infrastructure the remaining 5%. For comparison in the first quarter of 2020, the Residential business represented 41% of our business, while Renewables and Agtech segments collectively represented 38%. These three businesses accounted for 79% of our total business and this year these three represent 95% of the business. So the shift in revenue is the result of our portfolio actions we started in 2020 to really start shifting the business to higher growth end markets in a way for more monetized offerings. Let’s move to slide five and we will review our Renewables segment, which, as a reminder, serves the solar energy market, specifically the community, commercial industrial and utility solar segments. The slide should be similar to those who were able to join us in early January when we announced acquisitions of TerraSmart and Sunfig, but beginning in 2015, we started our solar business through the acquisition of RBI Solar and through both organic growth and subsequent acquisitions we more than doubled this business over the last five years and then in December of 2020 we added TerraSmart and Sunfig strengthening our position as the largest turnkey provider in the domestic solar energy market, with the broadest technology portfolio including ground mount, canopy, infrastructure, tracker technology and design software solutions, really focused on serving customers across all three solar segments that are investing in solar fields of any size and on any terrain. So let me provide you a quick update on integration progress with TerraSmart. The team driving our integration process has focused its initial efforts on optimizing key organizational functions with emphasis in sales and marketing, finance, business systems, human resources, engineering and product management. I think we are making pretty good progress in each area and over the last 120 days we have consolidated both our sales and marketing organizations and we are moving toward a single face for customers. We are also putting the entire business on a common ERP and CRM system. Our engineering and product management teams completed their assessment of our tracker technology portfolio: TerraSmart’s TerraTrack and our legacy Sunflower. The teams were challenged to select the best performing, most flexible and most reliable platform with a proven software-based operating and remote management system. We also challenged the team to simplify our tracker offering so we can focus feature engineering investments and expand bankability with the financial community. As a result, the TerraTrack technology has been selected as our go-forward tracker platform. For both existing and future customers, we have started transitioning everyone to TerraTrack and we will continue to support customers with existing Sunfig installations accordingly. There’s much more integration work to do, but we are off to a good start, we are making progress and remain on plan. Now let’s turn to slide six to look at our new Agtech segment. Rough Brothers was supporting two core markets when we acquired the business in 2015, the solar energy market which we just discussed and a controlled environment commercial growing market, which it had been present in for over 80 years. The RBI Greenhouse business was approximately $66 million in revenue in 2015 and provided design, engineering, manufacturing, distribution and installation of multi-purpose greenhouse structures, really focused on six market segments. Over the last five years we have more than tripled the size of the Agtech business through good organic growth and subsequent acquisitions adding best-in-class capabilities in cannabis and hemp growing and processing, as well as in fruits and vegetables produce growing. In 2016, we acquired Nexus based in Denver, Colorado, a provider of multi-purpose greenhouse structures and the leader in North America cannabis greenhouse structures. In 2019 and 2020 we added Apeks Supercritical and Delta Separations, both leaders in processing equipment used in the extraction and refining solutions for both cannabis and hemp. Then in 2020, looking to build a strong presence in the fast growing North America produce growing market, we acquired Thermo Energy, the leading provider of large scale turnkey greenhouse operations for controlled environment growing. This is an exciting market growing 7% per year and it’s attracting significant investment as consumer demand for pesticide-free produce grown locally year round and in more environmentally responsible ways continues to accelerate. Let’s turn to slide seven and I will take you through a brief overview of Agtech portfolio of technology and services and the key markets we serve. The left-sided chart really describes our services and domain knowledge, all of which are critical to providing and managing the successful growing environment. And the right side illustrates the six core segments we serve. The produce segment is actually our largest and you can see the size of the growing facilities we design, build and install and how grower scale and deliver successful results. The cannabis segment, which involves growing structures and extraction equipment for processing, is also an exciting segment with strong end market demand for the many consumable products produced from the extracts we process, whether for medicinal or recreational purposes. This industry is still relatively immature, but as more states legalize and approve licenses the consistency and balance of supply and demand will improve along with predictability and scalability of the market. The remaining four segments reflect our legacy business and we continue to hold leadership positions in each accordingly. Now let’s turn to slide eight to discuss our new go-to-market brand for the Agtech segment. We launched yesterday called Prospiant, which reflects our leadership portfolio for controlled environment solutions and leverages our six heritage brands representing 187 years of experience supporting over 2,500 acres of installed controlled environment operating solutions in North America. Prospiant represents by far the broadest portfolio of Agtech solutions for controlled environment agriculture and a soil-to-oil cannabis ecosystem. Our markets are relatively new and are moving quickly toward their next phase of maturation and we are now positioned well to help them accelerate. Our vision is to help build and shape our market with the best set of technologies, products and services and really do so with partner customers, one growing process environment at a time. We believe it’s important our customers have a single solution they would know and trust that creates the opportunities and solves the problems they have for success and really that is Prospiant. So now let me stop there, I will turn it over to Tim to take you through the overall results in total and by segment. So let’s turn to slide nine.

Tim Murphy, CFO

Thanks, Bill, and good morning, everyone. I will take you through our consolidated segment results. As a reminder my discussion will cover results from continuing operations. Consolidated revenue increased 33.5% to $287.6 million, driven by the Renewables and Residential segments. Organic revenue growth of 10% was driven by continued execution on strong demand and participation gains in the Residential segment, as well as continued demand and strong execution in the Renewables segment, which offset winter storm impact and shipping delays. We generated 23.5% growth from the 2020 acquisitions of Architectural Mailboxes, Sunfig, TerraSmart, Thermo Energy and Delta. The total backlog at quarter end was $355 million, up 27% over first quarter 2020 on a pro forma basis, driven by continued end market demand across our businesses. Adjusted operating income increased 33.1% in the first quarter, with adjusted EPS up 32.5%. The increase was the result of organic growth and continued margin expansion in the Residential and Renewables segments, along with the impact of our recent acquisitions, product and service mix, and ongoing benefits from operational excellence initiatives. As a result, we were effective in offsetting the impact of the pandemic, material inflation, labor and material availability, and increased performance-based compensation costs. Our teams have been working very hard to procure materials and obtain the labor and shipping services required to meet our customers’ needs and we expect this dynamic will continue for the foreseeable future. As Bill noted, we now report four segments: Renewables, Residential, Agtech and Infrastructure, breaking out with this quarter’s reporting the former Renewable Energy & Conservation segment into two, Renewables and Agtech. Now let’s review each segment starting with slide 10, Renewables segment. Segment revenues increased 80.8%, driven by the TerraSmart and Sunfig acquisitions, as well as 2.1% organic growth in our legacy business. As experienced during the fourth quarter of 2020, project schedule movement and timing remain dynamic in the quarter given record infection rates, some unique weather events and ongoing supply chain challenges. The current investment tax credit of 26%, which was scheduled to step down to 22% at the end of 2020, was instead extended in December for two additional years through 2022. The ITC helps our customers finance their projects and its extension removed the Safe Harbor incentive to invest 5% or more of the project’s costs prior to the end of 2020 to retain the higher credit amount. In the first quarter of 2020, a portion of revenues were related to projects that were initiated under Safe Harbor rules to maintain the 2019 ITC benefit of 30%. Despite not having ITC Safe Harbor benefit in 2021, we grew revenues, reflecting continuing customer activity levels. Strong demand was also evident in the quarter with significant increase in new business booked and backlog at the end of the quarter up 51% on a pro forma basis across the entire solar business. Adjusted operating margin performance in our legacy solar business improved 50 basis points through continued 80/20 productivity and execution, and TerraSmart performed as anticipated. Integration is proceeding on schedule and we have started implementing our 80/20 operating system and we expect TerraSmart to drive growth and be margin accretive in 2021. Let’s move to slide 11 to review our Residential segment. Segment revenues increased 35.6% from last year with strong organic growth and participation gains across all four Residential businesses, despite the impact from challenging weather in February and dynamics related to material and labor availability and logistics. Organic revenue grew almost 27% and the acquired Architectural Mailboxes business contributed 9% growth, with the integration of this business on track. Segment adjusted operating margin increased with higher volume, execution of 80/20 productivity initiatives and solid price cost management, which offset ongoing pandemic concerns, higher input costs, labor and material availability, and logistics management challenges. Now let’s move to slide 12 to review our Agtech segment. Segment revenue was down 5.1% as the pandemic, challenging weather and supply chain dynamics during the quarter impacted existing and new project schedules. The produce market continued to gain momentum and offset slower than improving market conditions in the cannabis and hemp markets. We are encouraged by the increasing activity we see from our customers in the cannabis and hemp markets, and expect this activity to convert to increasing demand as we progress through the year. Segment adjusted operating margin was impacted by the overall mix and timing of projects and volumes in the processing equipment business. The integration of Thermo Energy Solution, Agtech’s core produce market business, is progressing well despite the continued pandemic-related closure of the U.S.-Canadian border. We have worked through the majority of the lower margin projects we inherited through the Thermo acquisition and margins are expected to expand in 2021 through execution of newer higher margin projects and backlog and the benefits of the implementation of our 80/20 operating systems. We also completed the consolidation of facilities in the processing business, which will provide a better cost structure going forward. Segment backlog increased 5% sequentially to $96 million driven by an active produce market and this trend is expected to continue and drive positive results in 2021. Now let’s move to slide 13 to review our Infrastructure segment. As we discussed in our fourth quarter call, we completed the sale of the Industrial business on February 23 and have included its historic results as discontinued operations. My comments today will cover the continuing Infrastructure operations. Segment revenue decreased $400,000 or 2.6% as the pandemic continued to impact existing and new project schedules driven by state and federal DLT funding. Order backlog grew 14.8% to $52 million in the first quarter, reflecting positive momentum as the economy continues to recover. Segment adjusted operating margin improved 330 basis points driven by ongoing investment in operating systems and technology, 80/20 productivity initiatives and strong execution in fabricated products. This momentum has helped the business offset the slower recovery market for higher margin non-fabricated products and solutions. Let’s move to slide 14 to discuss our liquidity position. We used $1.2 million of cash for continuing operations in the quarter, driven by an increase in inventory to meet growing customer demand and rising raw material prices. We generated $22.6 million in cash from investing activities with $27 million in cash from the industrial divestiture, partially offset by capital expenditures of $4.4 million. Cash used in financing of $30 million was mainly a result of net repayment of approximately $27 million of outstanding borrowings. On March 31, we had $335 million available on a revolver, cash on hand of $21 million and our net leverage was approximately a quarter turn. We continue to expect to repay our remaining balance on our revolver within the year using cash flow generated from operations. Our strong operating cash flow and relatively modest capital expenditure model offers us ample liquidity to invest in operational excellence, organic and inorganic growth initiatives, and the development of our organization and the repayment of debt. We remain active in M&A discussions and continue to remain focused on managing our working capital. Now, I will turn the call back to Bill.

Bill Bosway, President & CEO

Thanks. Let’s turn to slide 15 for an update on our key priorities as we continue to accelerate our transformation in 2021, really through our three pillars: portfolio management efforts, improving our business system and strengthening our organization. Our key priorities remain consistent with our last earnings call and we remain very focused on them accordingly. Top priority number one is scale our Renewables and Agtech business. We have to continue integrator acquisitions per plan and execute our record and growing customer backlog, as well as apply our 80/20 operating model to scale our field operations and project management delivery system. We also continue to build organization capabilities and invest further in digital systems, processes and tools. In parallel, we are strengthening our solar energy portfolio with additional technology and IP, software development and defining our position and strategy in the operations and maintenance services segment of the market. Our priority number two is improving our execution costs at Gibraltar, with continued focus on health and safety, our 80/20 productivity initiatives, new product development, capability and enhanced quality control systems. Third, proactively managing and optimizing our supply chain, material inflation, availability of material, whether it’s steel, aluminum or resin, transportation and logistics, and really diligently managing our price cost opportunities and lead-time dynamics with our customers. We must also stay laser focused on managing labor availability in the near term, while we assess automation solutions in our facilities for the medium and longer term. Fourth, continue to conduct business in the right responsible way every day. Our effort to drive environmentally sound solutions via solar energy production, growing food and residential efficiency is progressing with over 90% of our portfolio now focused in these areas. On slide 16, I have summarized the list of initiatives supporting our effort to continue conducting business the right and responsible way. I absolutely believe the manner in which we build and support our ongoing relationships with our customers and our suppliers, our people and the communities where we do business is foundational to both our culture and is important to all our stakeholders. So, I just want to touch on a few of our key initiatives. Let me give you a brief update on five of them that we currently have in play. First, we continue with our employee education initiative requiring each employee and our Board members to complete 12.5 hours per year of online training with our curriculum focused on compliance and ethics with the intent of creating the best culture and environment where people feel included and can realize success. In Q1, our team completed 100% of their assignment representing over 5,000 hours of education. Secondly, we continued our diversity and inclusion mapping process for each of the 40 plus communities where we operate. This entails understanding our level of diversity in each location as a comparison of the diversity of the community itself. It’s important we understand this to determine appropriate initiatives to support each location. In parallel, we have been requiring diverse candidate slates when filling our new positions; over the last 12 months 50% of our new hires have been diverse. Third, we launched our partnership with the Department of Energy’s Better Plants Program and have partnered with local universities to help us with facility energy assessments and started the DOE program. We have also selected an outside energy management firm to help us assess our energy usage and spend, and the opportunity to source energy for our facilities from Renewables sources. Our partnership with the DOE is also contributing to the development of our company-wide sustainability report based on a science-based carbon reduction plan for each of our locations. We will have that ready by the end of 2022. Finally, we have evolved our Board of Directors over the last 15 months with four new members adding competency and experience in digital transformation, information technology, cybersecurity, renewable energy, ESG management, marketing and legal. Our Board is very diverse, and more importantly, brings a tremendous diversity of thought to the management team as well. We also recently restated all our committee names and expanded our missions and charters for each committee. So, let’s move to slide 17 and we will discuss our outlook for 2021. We are off to a good start and we continue to see solid end market demand supported by a strong customer order backlog. While challenges remain in terms of the pandemic, general inflation, labor availability and supply chain dynamics, we do have confidence in our business going into the second quarter. We will continue to manage through the current operating environment and focus on executing well and maintain a safe environment for our people. Given today’s environment we reiterate our previous guidance of revenue and earnings for the full year 2021 and we will continue to refrain from providing quarterly guidance until we have more clarity as we move through the year. As a reminder, consolidated revenue is expected to range between $1.3 billion and $1.35 billion, GAAP EPS is expected to range between $2.78 and $2.95, compared to $2.53 in 2020 and adjusted EPS is expected to range between $3.30 and $3.47, compared to $2.73 in 2020. That said, regardless of the quarter-to-quarter cadence, we have confidence in our overall 2021 outlook and we will continue to remain focused on executing our plans and delivering our full year plan. So, with that, we will open the call for questions.

Operator, Operator

Operator provided instructions. The first question is from Ken Zener of KeyBanc Capital Markets. Please go ahead.

Ken Zener, Analyst

Good morning, gentlemen.

Bill Bosway, President & CEO

Hey, Ken. How are you?

Ken Zener, Analyst

Good. Caught me off guard here. I want to stop here. Can we go—how do you say Agtech again, Pro—out here pros—pro—can you say that word again for me, prosphate?

Bill Bosway, President & CEO

Prospiant.

Ken Zener, Analyst

Prospiant. Okay. Two seconds to refer to it correctly. Appreciate the disclosures. Trying to think about the annual data you gave us in 2019, the run rate in 2020 the comments. Now, let me just start with Agtech, margins 2019, you had about 17%. It looks like you are just under 7% in 2020 and then, Tim, I believe you said that you are expecting, you are not giving quarterly guidance. It sounded like you were being descriptive about which segment margins you expect to be up in the year, is that correct, so you expect the Agtech to be positive margin growth this year?

Tim Murphy, CFO

Yeah. I think of all, we expect all to go up.

Ken Zener, Analyst

Okay. The reason I ask that is, I am trying to understand the decline in margin, which in 2019 was 17%, is 7% today, 7% plus in 2021. Can you maybe walk us through—when you bought Delta, Apeks and all these companies, you are obviously spending a lot of money on investments, right? I assume IT systems and safety, sales investments and then there’s volatile end market. Can you maybe give us a sense of lower margin, is that really just a function of volume leverage or investments that are happening and do you think the margin that you acquire these at is attainable over time? I really appreciate the breakout.

Tim Murphy, CFO

Let me take that. So, Ken, two separate pieces in there. One is the cannabis and hemp market which impacted the processing businesses that we purchased along with our core cannabis and hemp market business in the historic business. And that really took a downturn, certainly, towards the end of the first quarter, but certainly the remainder of the year and the volume in processing was way off. We actually had some losses in those businesses in a couple of quarters. The core produce business that we acquired in January—we acquired a series of projects that were either underway or were to start and they were at lower margins than we would normally be doing work at. But we had to honor our customers’ requirements. So the combination of those two items pulled margin down and as we move through this year and refill the pipeline with more normalized project levels and profitability along with seeing some recovery in cannabis and hemp markets in both our core and the processing businesses and/or restructuring we did in the processing business to reduce facility cost, all of those are expected to help. So, yes, volume is part of it, but there are other pieces.

Ken Zener, Analyst

Okay. It seems like when I look to next year, how crazy this year is, now that you have broken this out. I think it’s really good that you did that. The renewable piece can continue to grind it seems. But would—I mean 7% isn’t necessarily what you would be bidding projects at, right, whether it was on the Ag side. I assume on the flowers and vegetable stuff you are just kind of working through an acquired backlog, is what I hear you say. There is a drag on this year’s margin level versus last year as well? I am just trying to think about operating leverage. I mean do you think operating leverage in that business is generally going to be in that 25% range consistent with your broader business, 25% EBIT operating leverage?

Tim Murphy, CFO

It’s going to depend on project mix. So it’s hard to call out given that there’s a whole host of new businesses in there. So I wouldn’t—the processing business has a different leverage than the produce than the cannabis. But, in general, Ken, the 7% last year, 6.9% is not our target margin for that business. You will see it improve over time as we integrate these businesses and put the operating systems in place and then get some value back from a couple of the key markets.

Ken Zener, Analyst

Great. And I guess—and my last question I am just going to stick with Agtech, since it’s to me the most interesting and known category now that you have started breaking it out. As states go through, we continue to have legalization in states. How does federal involvement, for example, if the federal government gets involved at a national level and allows this industry to operate differently, how does that change the business? Does that actually elevate the business or does it just move things instead of taking cash within state lines you can take credit across state lines or accept the credit? I mean, how much is that actually impacting the business demand or stability of that and that’s my final question? Thank you.

Bill Bosway, President & CEO

I think what would happen, Ken, is as more and more states come on board, which is what you see happening and even more considering it now, the legalization process is one thing and then you get into this licensing process and that creates all this choppiness we have been dealing with and is part of the immaturity of the market. In the states that want to remain isolated, I suspect state-to-state restrictions may persist because the revenue associated with that is important to the states themselves. I think it depends on the involvement at the federal level and there could be a couple different angles that could be played. At the federal level there could be an FDA angle and there’s the banking angle; those are the two most often discussed. Regardless of that, I think over time as the industry matures you have multi-state operators right now that are trying to snap up licenses and buy licenses across states. Effectively that’s starting to happen and I think that will continue, and you will have consolidation over time. How that happens over the next two, three or four years will depend on what comes out of Washington. In the meantime, states can continue to move forward as they do, you will see multi-state operators trying to extend and those are the folks you want to partner with. Access to banking and funding will be helpful, but it’s been a challenge for a lot of small players up to this point. As multi-state operators get bigger, their ability to finance expansion gets easier. So I’d characterize it as a natural evolution of the marketplace. Access to banking and federal involvement will help, but the overall trend is toward consolidation and greater predictability over time.

Ken Zener, Analyst

Thank you.

Operator, Operator

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

Walter Liptak, Analyst

Hi. Thanks. Yeah. Thanks for the description in the last question. I guess, I know that 80/20 is not a silver bullet for higher profits. But can you tell us—Agtech or each of the different business units running their 80/20 numbers and doing 80/20?

Bill Bosway, President & CEO

In fact, Walt, good question. We just finished a week-long effort in our solar business. As part of our integration with our legacy business and TerraSmart, there’s teaching and education on 80/20. We just spent a week mapping and moving to cash for that business. We are helping people understand there’s 80/20 that most people are used to seeing in traditional manufacturing, but there’s also 80/20 as it relates to the field operations delivery—half of our revenue and profitability is field operations. We have to excel there as well as we do in manufacturing inside four walls. That drives product line simplification and applied improvements to the field operations. We are pretty aggressive and we are doing the same thing in our Agtech business. Splitting these two businesses out over the last year we have separated the organization, brought in leadership for each business, and implemented systems and processes—common ERPs, common CRMs. That work over a period of time has consolidated into a single framework, leveraging across the businesses but with focused execution. If you think about the business models for each, they are very similar in terms of putting things in the ground. So 80/20 going into solar is very active and we are going to kick that off in Agtech shortly. In our Residential business we have been doing a lot of 80/20 work and there’s still runway. Over the last three to four years we have seen a lot of improvement in Infrastructure due to 80/20 work and new leadership. Our ability to convert dollars today is much better than three years ago, and our ability to scale up and utilize capacity more effectively is much better. So when we think about 80/20 now across each business, there’s a different angle to why and what needs to be done, but the consistent theme is effective execution and scalability to meet the record demand in front of us. We just finished a very intense week of mapping and are now implementing the work.

Walter Liptak, Analyst

Okay. Great. Yeah. It sounds like the entire business is doing it and there’s maybe some uniqueness to doing 80/20 around project work. So that’s great.

Bill Bosway, President & CEO

Yeah. If you replace the words, whether it’s a service or a product, whether you are in lighting or PLS, it’s really not a whole lot different. We are drilling down into that important piece for us, because half of our business is project management and we have to apply that consistently and accelerate it.

Walter Liptak, Analyst

Okay. No. That’s great. Thank you. I want to ask—last quarter you guys were talking about five or six large projects that were having some issues with some components, NOI, as well as permitting and then this quarter we are hearing about the Safe Harbor. I wonder make sure I understood what the Safe Harbor comments were about. Is that related to the difficult comp in solar because of that Safe Harbor from 2019 and maybe an update on the large projects? Thanks.

Bill Bosway, President & CEO

So, first the projects: we had four projects about 50-megawatt or 60-megawatt that got delayed. Those are still in flight and will be spread out between Q1 and Q2. The solar panel issue was the big challenge for those specific projects; that’s working itself through, it’s still a bit of a challenge but it’s getting better. I think there was a particular component in a panel manufacturing facility in Asia that went offline for a bit and it’s coming back online. Those projects will get across the finish line in the first half of this year. Permitting is something we deal with all the time. We do a lot of smaller projects; those four projects were 60-megawatt projects. When a big project moves, it is more substantial. Permitting issues have always been part of the business and you learn to deal with them. Regarding Safe Harbor, this is an industry thing: with the step down of the ITC benefit over the last few years, developers could buy material in the fourth quarter to secure the higher credit and place at least 5% of the project cost in order to retain a prior-year ITC benefit. We had three years of step-downs, so the first quarter for the industry the following year tends to be inflated from a seasonality perspective when those Safe Harbor purchases are made. The December extension decision was late, and many people decided not to Safe Harbor this time, so the demand didn’t show up in Q1. Once you commit to a project you must actually start using that material within the next few months and that’s when it shows up as revenue. The industry itself for the next couple of years is likely to have a more normalized seasonality because there is no incentive to Safe Harbor given the extension. January and February are also tough months to put stuff in the ground due to weather. For us, not having Safe Harbor in Q1 was offset and we still generated growth year-over-year. So it’s an industry dynamic and we were impacted, but we still had a good quarter reflecting solid end market demand and bookings.

Walter Liptak, Analyst

Yes. Thank you.

Operator, Operator

The next question is from Julio Romero of Sidoti & Company. Please go ahead.

Julio Romero, Analyst

Hey. Good morning, Bill. Good morning, Tim.

Bill Bosway, President & CEO

Good morning, Julio. How are you?

Julio Romero, Analyst

I am good. Thanks. So I wanted to ask about the Residential segment. It looks like the organic growth rate in the segment is 27% this quarter—actually accelerating sequentially; I think it was 21% in Q4 and 20% in Q3. I was hoping if you can give us a little more granularity on what product lines or channels are driving that strong organic growth rate?

Bill Bosway, President & CEO

Across the board. We have been fortunate and part of it has to do with the work we have done the last couple years. We have made progress across each of our channels with participation gains. That’s a result of fixing things related to 80/20 initiatives and our ability to deliver more consistently. We have focused on reducing the costs of doing business with us, thinking about logistics and transportation and how we plan and help our customers with their distribution strategies. There’s been a lot of work that’s helped us gain participation. The market continues to be robust. In Q1 a chunk of our Residential business was shut down for over a week because of the February weather; we were told to stand down by a lot of utilities. We had to make up work with overtime and other measures. That whipsawed the industry with material availability issues and so on. In general, it’s participation gains, a strong market, and our ability to execute has helped us gain additional business. We have made investments in regions by adding people in places where we didn’t have them a year ago and those things are starting to pay off.

Julio Romero, Analyst

Got it. And maybe within the four Residential businesses that make up that segment, you mentioned price cost management will require continuous effort going forward. Do any of those four businesses stand out in terms of the effort required for price cost actions?

Bill Bosway, President & CEO

No. Our biggest businesses are ventilation, roofing accessories, and mailboxes and lockers. For the most part they are sold through the same channels, so the challenge is working with that group of customers—ongoing discussions around price and cost. Our HIG business, our Home Improvement business, is a little different; we sell through dealers directly to homeowners, so it’s been less challenging to implement. In general, we have been relatively successful managing price and cost in a timely manner and the discussions with customers are one-off; some are more challenging than others, but eventually we’ve been able to get there. This will continue to be an ongoing discussion until we have more clarity, which is part of the reason we are refraining from quarterly guidance. There are many variables right now: the infection rate is still high, material inflation is driving price cost actions, labor availability and material availability are ongoing issues. The team has done a great job working through it and that level of intensity must remain high.

Julio Romero, Analyst

Got it. That’s helpful. Maybe just switching gears to the Infrastructure segment, you mentioned backlog improvement there. Is that order backlog improvement weighted more towards fabricated or non-fabricated products? Any additional color there?

Bill Bosway, President & CEO

Mainly fabricated. We are starting to see more activity in non-fabricated as well. Last year the team did a great job offsetting the decline in airports and many investments that stopped; the team’s 80/20 execution around fabricated product has put us in a better position going forward. Part of the reason backlog continues to grow is the recovering economy—some DOD budgets that are funded by gas tax are picking up, which has been helpful. We are also starting to see non-fabricated orders kick in. It’s a combination of both. We are not seeing broad restructuring bills yet; what we are seeing is a general recovery of the economy. Because we are in a better position to execute, we are able to go out and get projects that we wouldn’t have been able to take three years ago from a margin or delivery perspective. That ability to expand our market while demand was flat is starting to show up, and I am excited about that. As the topline gets support from the economic recovery, we can capture a bigger piece of the market than we could a few years ago, which contributes to the backlog.

Julio Romero, Analyst

It does. Thanks for taking the questions. Appreciate it.

Operator, Operator

This concludes the question-and-answer session. I would like to turn the call back to Bill Bosway for our closing remarks.

Bill Bosway, President & CEO

Well, again, thanks everybody for joining us today. We will be participating in a number of U.S. and European marketing dates. We will attend the KeyBanc Industrials and Basic Materials Conference on June 4 and are looking forward to giving an update on progress in our second quarter earnings release as well. So thank you and have a great day.

Operator, Operator

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