Gibraltar Industries, Inc. (NASDAQ:ROCK) Q4 2023 Earnings Call Transcript
Gibraltar Industries, Inc. (NASDAQ:ROCK) Q4 2023 Earnings Call Transcript February 21, 2024
Gibraltar Industries, Inc. misses on earnings expectations. Reported EPS is $0.85 EPS, expectations were $0.86. ROCK isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Gibraltar Industries Fourth Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Carolyn Capaccio, LHA Investor Relations. Thank you. You may begin.
Carolyn Capaccio: Thanks, operator. Good morning, everyone, and thank you for joining us today. With me on the call is Bill Bosway, Gibraltar Industries’ Chairman, President and Chief Executive Officer; and Tim Murphy, Gibraltar’s Chief Financial Officer. The earnings press release that was issued this morning, as well as a slide presentation that management will use during the call are both available in the Investors section of the company’s website gibraltar1.com. 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 financial results.
These statements are not guarantees of future performance and the company’s actual results may differ materially from the anticipated events, performance or results expressed or implied by these forward-looking statements. Gibraltar advises you to read the risk factors detailed in its SEC filings which can also be accessed through the company’s website. Now, I’ll turn the call over to Bill Bosway. Bill?
Bill Bosway: Thanks, Carolyn. Good morning, everyone, and thank you for joining today’s call. We’ll start with an overview of fourth quarter and full year 2023 results, and Tim will take you through our financial performance and I’ll walk you through our 2024 outlook and then we’ll open the call for your questions. So let’s turn to Slide 3, titled 2023 year in review. We delivered a strong finish to a very good year for Gibraltar and I like our momentum as we moved forward. In 2023, we expanded our market leadership positions. We continued to improve our quality of earnings and generate strong cash flow. Our Residential and Infrastructure businesses delivered solid growth and strong margin expansion, and Renewables delivered excellent margin expansion despite ongoing industry headwinds impacting revenue.
For the year adjusted operating income grew 16%, adjusted EBITDA grew 15%, and adjusted EPS grew 21% on essentially flat sales. Through solid margin expansion and improvement in working capital, we generated $218 million of operating cash flow and a free cash flow rate to sales of 15%. In the fourth quarter, all four segments contributed net sales growth, demonstrating solid momentum going forward and booking strength resulted in the backlog being up 10% as we closed out the year. As well our recent acquisitions in residential executed to plan and during the fourth quarter we further optimized our portfolio by divesting our small, non-strategic solar business located in Japan. In all, we had a very productive year and I’m incredibly proud of our entire organization for staying focused on what matters most, doing things the right way and building a stronger foundation for the future.
We enter the New Year with solid end market fundamentals, improving market conditions in Renewables and Agtech end markets, and a more scalable and efficient operating engine, and we look forward to another strong year in 2024. Let’s turn to Slide 4 for an update on the solar market. Although the overall industry has improved, there remains some short-term headwinds in the industry is navigating through. First, the industry is waiting on the Department of Treasury to issue final guidelines on IRA tax credits, specifically a 10% domestic content bonus. The delay of these guidelines, particularly in this high interest rate environment, has caused some customers to pause finalizing executing projects as they try to pin down project economics and returns, and therefore project financing.
The most recent consensus is that the guidelines are expected in the first quarter or second quarter of 2024. Secondly, permitting delays at the local level are impacting some customer project start dates. Though the situation is improving as local government offices add capacity to support normalized demand levels. For our customers each permit situation is unique to a location and local government office, and ultimately project schedule changes create a timing impact for revenue. For context, historically we experienced about 10% of our planned revenue to shift from one quarter to the next or to a future quarter. Toward the end of 2022, and for the first three quarters of 2023 we experienced a revenue shift of approximately 25%, which is a significant change to historical norms.
We started to see the situation improve during the fourth quarter, which is reflected in our business generating positive growth in the quarter. With respect to module supply continues to improve and be less of a headwind for our customers. For the UFLPA, importers continue to move up the enforcement learning curve and there seems to be much more consistency and flow and availability of modules. In regard to the Department of Commerce Anti-Dumping and Countervailing Duty Case, as of now, three of the eight module suppliers investigated by the DoC are expected to export modules to the U.S. are able to export modules to the U.S. without duty. An executive order from the administration to waive tariffs for two years has remained in force and will so until June 2024.
In December, the plaintiff in the original case sued the Department of Commerce and the U.S. Customs and Border Protection Agency for not collecting duties on Southeast Asian imports, claiming the Department of Commerce was not required to follow administration’s executive order. The plaintiff has asked the U.S. Court of International Trade to end the tariff waiver and open up the opportunity for retroactive duties on modules imported from Southeast Asia. It is challenging to predict the timing and outcome of the current legal situation, but regardless of where it lands, customers have been preparing for the executive order to end in June, and they have worked hard to develop and implement more flexible and reliable solutions for modules.
With that, I’ll turn over to Tim to review our results.
Tim Murphy: Thanks, Bill, and good morning everyone. I’ll take you through our consolidated and segment results starting on Slide 5. Adjusted fourth quarter sales increased 5% to $329 million. All segments contributed to the growth in the quarter as Renewables and Agtech businesses converted backlog to sales at higher rates than in previous quarters, and we grew market participation. These drivers were partially offset by pricing adjustments related to prior year commodity deflation in the Residential business. Backlog at quarter end was $330 million, up approximately 10% versus the fourth quarter of 2022. Demand and order flow remains strong heading into the first quarter of 2024. Adjusted operating income and adjusted EBITDA dollars increased 10% and 9% respectively, in the fourth quarter, with adjusted EPS up 18%.
A recent acquisition in the Residential segment added about a $0.01 to adjusted EPS. Margin improvement in the quarter was driven by solid execution, price cost management, higher volumes, operational improvements and additional 80/20 benefits. Weighted average shares outstanding decreased 1.7% from the fourth quarter of 2022 to 30.7 million shares in the fourth quarter of 2023, and there were no share repurchases in the quarter. Now, let’s review each segment, starting with Slide 6, the Renewables segment. Segment net sales increased 1.9%, with backlog converting to sales at higher rates than in the previous quarters as customers continue to work through scheduling challenges related to permitting delays and await final tax credit guidance for the Inflation Reduction Act.
Module availability continues to improve as module importers advance up the UFLPA enforcement learning curve and permitting delays are gradually improving at the local level. Bookings of new orders were robust, with year-over-year growth again accelerating to 20.9% versus last year. And as Bill mentioned, while some customers are waiting to sign contracts until Department of Treasury issues Inflation Reduction Act Tax credit guidance, our pipeline remains really strong. And as a reminder, our backlog consists only of signed contracts with deposits. We do not include purchase orders without a signed contract and deposit MSAs without specific work orders or verbal agreements with customers and our new bookings are backlogged. Adjusted operating and EBITDA margins decreased 210 basis points versus the prior year.
A strong execution across the business was offset by warranty cost incurred during the quarter for a project completed in 2022. The cost relates to a project where we were delayed in installing after materials were delivered to the job site according to our agreement. As we’ve discussed, we’ve changed our contract terms and conditions and our internal processes to ensure our customers are ready for us when we arrive on site according to the agreed upon schedule. Before this charge segment profitability improved in the fourth quarter of 2023. We expect full year 2024 growth and continued margin expansion in the Renewables business, assuming industry constraints continue to ease with continued improvement in module importation, IRA guidance issuance and the additional recovery in local permitting.
We do expect a slower first quarter as more of our backlog is for our new 1P tracker and this product has longer lead time than some of our other offerings. Let’s move to Slide 7 and review our Residential segment. Segment sales increased 4.3% from last year. Organic growth was 3.1% and the recent acquisitions added 1.2%. Organic growth was driven by participation gains of volume, partially offset by pricing adjustments related to prior year commodity deflation. We continue to benefit from increased participation with new and existing customers and from having expanded into new regions. We’ve seen our customer demand continue to follow historical seasonal demand patterns and our most recent acquisition is performing to our expectations.
Adjusted operating and EBITDA margin of 17.5% and 19.2% respectively, both expanded 410 basis points through higher volume, improved price cost alignment versus prior year’s quarter and 80/20 initiatives. In this year, we plan to move additional locations to our common ERP systems and expect to begin to leverage the IT investments made to date in the Residential business. In 2024, we expect modest revenue growth with continued improvement in margins as your increased market participation gains and contribution from acquisitions support the top-line and continued 80/20 in operational efficiencies drive margins. Let’s move to Slide 8 to review our Agtech segment. Adjusted net sales increased 12.8% as our team executed well, converting new orders including a large project into sales.
Backlog at quarter end was down 4.2% as some customers continue to undergo project redesigns and our pipeline of project remains very strong. Segment adjusted operating and EBITDA margins decreased to negative levels because of the inclusion in our operating results of a $3.5 million charge related to a receivable associated with the distressed cannabis customer. We determined during the fourth quarter that the likelihood of recovery was sufficiently low and wrote it down. Before the charge, adjusted operating margin was approximately 5%, an increase of 40 basis points from last year, driven by higher volume, strong customer and product mix, and benefits from 80/20 initiatives. We expect sales growth and margin expansion in 2024 as the headwinds affecting our customers shift to tailwinds and expected upcoming orders from our strong pipeline reflect improving industry demand.
Let’s move to Slide 9 to review our Infrastructure segment. Segment sales increased 12.1%, driven by solid end market demand and market participation gains. Backlog increased 3% year-over-year. Segment adjusted operating and EBITDA margins improved 490 basis points and 460 basis points respectively, driven by strong execution, 80/20 productivity and favorable product and customer mix. Segment reported [ph] a strong year of growth and expanding profitability, and we expect continued sales growth and margin expansion in 2024. Now, let’s move to Slide 10 to discuss our balance sheet and cash flow. At December 31, we had cash on hand of $99 million and $396 million available on our revolver. During the year, we generated $218 million in cash from operations through a combination of margin improvement and $41 million generated from working capital as we reversed the impact from the prior two years increased working capital investments as we managed through pandemic era supply chain challenges.
As a result, our free cash flow generation for 2023 was very strong at 15% of sales. There were no share repurchases in the quarter and we entered 2024 debt free. We expect to continue to generate strong cash flow driven by revenue growth and margin expansion in 2024 and beyond. This year, our priorities in capital allocation are on continuing to invest in our organic growth and operating systems for scale. We might spend more than we historically have on capital expenditures this year as we see a number of opportunities to in-source manufacturing to improve profitability. We’ve historically spent less than 2% of sales. We could invest approximately 3% of sales this year if we’re able to prove out the cost savings we anticipate. We also remain focused on high quality M&A.
We’re equipped with a strong balance sheet to pursue opportunities realistically in the Residential segment in the near term and in other segments in the medium to long-term. And we’ll opportunistically return value through the remaining $89 million authorization under our share repurchase program. And we’ll fund these investments through generated cash supplemented as needed by the use of our revolver, depending on the timing of any M&A or repurchases. Now, I’ll turn the call back to Bill.
Bill Bosway: Thanks, Tim. Let’s move to Slide 11 to review our 2024 strategy and key priorities. There are really five core initiatives we continue to focus on as we enter 2024. First, drive growth, margin improvement, strong cash performance, and execute M&A to expand our leadership positions across our core businesses. Secondly, execute our 80/20 initiatives, expand our participation and drive service levels higher with speed and agility. Third, continue to invest in our digital transformation to scale our businesses, connect with our customers, suppliers in our organization and optimize their operating systems. Fourth, continue to strengthen the team, add the right experience and competency, drive diversity of thought across the businesses and optimize our structure to drive focus, scalability and accountability.
And finally, as always, conduct business in the right way every day. Let’s move to Slides 12 and 13 and we’ll review expectations for each of our segments as we move into 2024. On Slide 12, we’ll start with Renewables and current market conditions. The industry is expecting final Treasury IRA guidelines on tax credits in the first half of 2024, which, as mentioned earlier, should have a positive effect for customers. We expect module supply to be more consistent, reliable and we also expect local permitting challenges to improve. We are excited with our new products in the market. We launched our 1P tracker in 2023 and along with our 2P tracker technology launched in 2022, customer reception has been very positive and new bookings are helping build our order backlog.
As well, in 2023 we experienced significant growth in our SolarBOS solution for utility-scale applications and our combined and optimized offering of Racking and eBos is gaining momentum with more and more customers. We are the only company in the world that manufactures and offers Racking, Foundations and eBos and our ability to create specific solutions for solar installations is really starting to create value added differentiation for us. Renewables is positioned to perform well in 2024. We have momentum in our backlog and order flow and we expect sales and margin to grow as the business is positioned to scale and support our growing customer base. Let’s move to Residential. The supply of existing and new homes relative to inherent demand continues to create a tailwind for the industry and despite the higher interest rate environment, in demand for new homes and or repair projects like roofing remain relatively consistent in 2023, as well there are regions in the U.S. and different types of new home construction that continue to experience solid demand and we expect these trends to continue in 2024.
From a product perspective, we have a number of new products in development or coming to market in the near future, our new shingle vent roll, our new line of pipe flashings, our next generation mailboxes, and our Wireless Valance Drop offering in our home improvement business. We continue to expand our presence in key product categories and geographies both organically and through our recent acquisitions. As well, we will continue to roll out our ERP and digital initiatives to additional facilities across the business. These business systems initiatives are driving customer connectivity, really helping us improve productivity and drive our speed and agility. Based on the success to date in the Greater Salt Lake City region, we will also expand our local asset-light service model into new markets and are currently launching in the greater Denver, Colorado market, leveraging an existing Gibraltar facility to do so.
Now on Slide 13, let’s discuss Agtech and Infrastructure. For Agtech we are seeing strong end market tailwinds, which started to pick up pace last year in Q4. We see them continuing throughout 2024 with significant project investment for controlled environment produce growing in both U.S. and Canada. Controlled environment growers are accelerating investment capacity to serve growing demand from both food retailers and food service operators. Providing high quality produce while localizing the supply chain and minimizing risk related to climate events is resonating well with retailers and end customers alike. Additionally, the commercial end markets remain steady with solid demand in retail garden centers, plant flower growers, institutional and research facilities, and our car wash customers.
Gibraltar is the largest provider in North America of large scale controlled environment growing facilities, commercial greenhouses and cultivation structures offering design and engineering, field project management and construction management services. We deliver turnkey services including the design, manufacturing and construction of structures developing, integrating and operating subsystems and refurbishment optimization services for existing growing facilities. And in 2024, we’re well positioned to support U.S. and Canadian growers having invested in the right resources and systems to support execution to scale more effectively. We expect solid growth this year and margin expansion will be driven by the investments we made in design and engineering project and construction management and supply chain productivity.
In our Infrastructure segment. Infrastructure Investment and Jobs Act continues to create good visibility of available federal funding for state DOTs as they plan for their respective projects. This has enabled states to remain focused on multiyear projects as well as planning for future projects. In demand remains robust and this is reflected in the growing number of projects we are designing, quoting, bidding and winning. In general, state DOT funding remains healthy and airport runway resurfacing investment is expected to grow as well. We are also excited with our newer products in the market as well as the products currently in development. Our Pavesaver and Delpatch Reformulations will help us grow our coatings business further and our extensive line of bearings designed for highway bridges, rail line bridges, stadiums and buildings are well received.
And there’s more coming in our modular joint product line. We are well positioned across the core industry product categories and as important, we are well positioned with our partner customers in the states where there’s significant investment being made and we look forward to another good year in this business. Now, let’s move to Slide 14 to review our 2024 guidance. For the year, we expect strong performance in all four segments, with Renewables and Agtech returning to top-line growth and Residential and Infrastructure positioned for continued performance. We remain focused on our five key priorities and we will leverage our operating engine to drive revenue growth, expand margin and deliver strong cash flow performance. Here’s our guidance for earnings for the full year 2024.
Consolidated revenue is expected to range between $1.43 billion and $1.48 billion compared to $1.37 billion in 2023, up between 4% and 9%. GAAP operating margin expected to range between 12.1% and 12.4%, up between 120 basis points and 150 basis points, and adjusted operating margin is expected to range between 13.5% and 13.7%, up between 80 basis points and 100 basis points. Adjusted EBITDA margin is expected to range between 16% and 16.3%, up between 60 basis points and 90 basis points. GAAP EPS is expected to range between $4.04 and $4.29 compared to $3.59 in 2023, up between 12% and 19%. An adjusted EPS is expected to range between $4.57 and $4.82 compared to $4.11 in 2023, up between 11% and 17%, respectively. And we expect free cash flow of approximately 10% of sales for the year.
Our team delivered terrific results in 2023. I think we executed well with focus and flexibility and we continued to invest and improve in each of our businesses. I am really proud of and grateful for our team’s work and accomplishments, the entire organization’s commitment to what we do and frankly how we do it. We’re looking forward to another good year in 2024 and expect a solid start to the year in the first quarter. And finally, as you may have seen in a separate press release this morning, Tim Murphy, our Senior Vice President and Chief Financial Officer, has announced he will retire from the company in early 2025. Tim is going to continue in his current role until the successor is named, and then he will lead the onboard and transition process accordingly.
I think back over Tim’s 20 year tenure with Gibraltar, he’s played an incredibly crucial role in transforming Gibraltar into the business it is today. He’s been a tremendous partner for me and he has been incredibly instrumental in driving change across the organization. And I think of his skill and integrity and commitment and judgment have just been greatly appreciated. And I’m excited for Tim as he enters this new phase of his journey. But I’ll also say in the meantime, given we’re going to have Tim for another year, we have a lot of work to do, and I know he’s excited to deliver our plans in 2024. So with that, let’s open up the call and we’ll take your questions.
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