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. [Operator 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 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 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, gibraltar1.com.

As noted in the earnings press release issued today Gibraltar has reclassified the processing equipment business in the Agtech segment as held-for-sale with the first quarter 2020 results and has removed the related revenues and expenses from the processing business from its adjusted results.

Gibraltar's earnings press release and remarks contain non-GAAP financial measures. Tables of reconciliation of GAAP to adjusted financial measures can be found in the earnings press release that was issued today.

Also as noted on slide 2 of the presentation, the earnings press release and slide presentation contain forward-looking statements with respect to future results.

These statements are not guarantees of future performance and the company's actual results may differ materially from the anticipated events, performance or results expressed or implied by these forward-looking statements.

Gibraltar advises you to read the risk factors detailed in its SEC filings, which can also be accessed through the company's website. Now I will turn the call over to Bill Bosway.

Bill?.

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 [ph] execution, supply chain optimization, accelerating the digitization of our operations to keep our organization as healthy and flexible as possible and to conduct business in the right 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, obviously the availability of the commodity. In general, availability of each core commodity is better than last year. But pricing continue to be dynamic due 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 $1329 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 been come down between 3% and 4%. According to the June report from IHS market, steel prices is 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 lows to peak level in Q1 2022 and then came down slightly during the second quarter. There are a number variables impact in aluminum price, including ongoing energy crisis in Europe, which actually started into 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 cost balanced and implement changes in a timely efficient 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 is - which was signed in the law - last December, it was implemented here just recently in late June and is enforced by the U.S. Customs and Border Protection.

You know, effectively, the law requires [Indiscernible] to improve via traceability processes and documentation the court site material mine in Shenzhen province is not containing panels deployed in U.S. I’d 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. And we believe this will 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, finalizing many existing and future projects as we'd 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 important renewable energy production, including a balanced energy plan for the U.S.

For our Renewables business, the scenarios as we play in 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 20240. With that I'll turn 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 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 cost related to panel issues. The industry cause, 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 in 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 because the home aging or weather damage. Historically, home repairs has 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 lease of the system.

We'll continue to implement this ER 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 and 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 a 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 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 beneficial mix. and 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 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 as leverage. 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. And our working capital investment increased $31.4 million, primarily in receivables as a result of our normal seasonal build.

This increase normally reverses in the second half of the year as revenue peaked and begin their seasonal decline.

We also continue to make small investments in inventory as our seasoned ramps 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 in 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 one half of a turn. Given our first half performance, customer activity levels and backlog coming out of the second quarter, we continue to expand 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 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. So let’s move to Slide to update you on our share repurchase program. Last qua as our Board of Directors granted our request to authorize common stock repurchase program for the first time in Gibraltar's history.

This program authorizes the repurchases 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 for an average price of $41.84. As I mentioned, we funded this repurchase through revolver.

At quarter end, we had 31.6 million shares outstanding with a weighted average shares of $32.7 million during the quarter. Now I'll turn the call back to Bill..

Thanks, Tim. Let’s move to Slide 13. I just want to get a quick update on our five key priorities. So this year has been for us a theme around simplifying focus.

It's been consistent since the beginning of the ;year and as common sense goes as this sounds, I think the lessons learned and the challenges over the last 2.5 years have really high the need for us to simplify and focus on execution even more and other things that we can control. So as a reminder, our five parties, first 80/20.

Derivatives drive higher service levels, expand our margin and win new business with existing new customers. That's in each of our segments. Secondly, while many supply chain is for customers, minimize disruption across both manufacturing and field operations and to optimize our cost position and finally, to reduce working capital.

Third, we really want to accelerate our digitization in our operations. We did complete 2 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 renewable.

We will continue to invest in digitization and cyber securities for our customers, as well as our suppliers and of course, our business strategy. Fourth, support to maintain organizational health. We remain agile and flexible in today's operating environment. It really continues to attract, retain the best talent we can.

And then finally, really work on the best environment we can for our team. And then finally, in that business right responsible way. Every day is 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.

So overall, the continued strength and durability of our businesses, underlying fundamentals. The power of our leadership positions in each of these markets, as well as our long-term partnerships with our customers remain intact. And I think support 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 million 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 important, I everyone in the Gibraltar team.

This is a team that has to continue to find great opportunities for our future and do so while following through really the last 2.5 years and today the challenges in marketing dynamics. I'm very grateful for the team we have and remain super excited to be on the journey that we're on as well.

So with that, now let's open the call up, and we'll take your questions..

Thank you. [Operator Instructions] 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 is went into play, I think June 21, somewhere around there. And that's really this importation process you know, the industry is going on a learning curve and how to get those in efficient and effectively is really important to the industry.

And secondly, the DOC decision at the end of this month will be very helpful. And I think in regards to that decision, because the administration has issued an executive order, the DOC will find a way to neutralize any tariffs. So therefore, I think tariffs are expected not to happen.

But it comes back to the UFLTA and importers being able to bring panels in an efficient and effective way. And I think that's what the industry is looking forward to see how that plays out.

And 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, then I think customers will start working on finalizing projects for the end of this year, as well as year or 2 as well. So that's the current outlook.

We'll know a lot more, I think, in the next 3 to 4 weeks, I guess, is the short answer.

Got it. Perfect. And then just staying on renewables.

Can you just talk about the cadence of margins for Q3 and Q4? And then how we should think about margins in 2023?.

Yeah. So we've mentioned this before that we feel like this business is turn the corner, we ran double-digit margins in May and June, and we expect to run double-digit in the second half as well. That's far any major shift in outlook on demand side that we're not anticipating.

But as I mentioned earlier, I think the scenarios we painted, we feel pretty good that we've got that understood but you never know this well right now, but we feel pretty good about double-digit margins in three and four.

And I think if you assume then that that's eight months a row of double-digit margins, that should carry into 2023 at a similar level that you see as finished 2022 at, that's the way 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 a 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 that - the first real businesses that turned around in the 80-20.

So the reason I want to focus on this, is the growth you're having the - could you - 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.

So how much of this is priced? I mean, are you doing a couple of points of volume which can be share gains and demand and the rest of 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 last year, first half of last year was heavily driven on volume with a little bit of price and the second half was driven more by price and less volume, coming into this year, we had projected volumes to be relatively flat on a market basis.

And I would say that what we've seen on volumes is consistent from a market perspective where our volumes have kind of come in a little bit higher than that is 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 off 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 what we had thought originally, and that kind of connecting 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.

And I'm trying, am asked because I am trying disown where price kind of neutralizes, as we exit the year, right? So are we going to basically be 1Q ‘23 where today plus [ph] would be basically flat. So you're just getting on to that core volume, that's in your residential business.

I'm just trying to see how that cover is because it's such high core and it seem like a lot of it would be price?.

Yeah. It's a good question. I would say there's not - we have not had 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. So - but we have a carryover.

We have some 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.

So 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 questions. 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 kind of 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 its – its 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 starts to squeeze the industry…..

No, we really haven't….

Viability….

Yeah, it's a good question. Inflation in general is price points, cost points are much different today than you 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 an issue 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 at this stage for everybody is everybody 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, 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, which is the first one is UFLPA, when am I going to get it in and can get it in? And the second one is at what price, is it going to have a tariff or not.

And so those are the two elements that people are thinking about. But in terms of the planning and what's on the docket that remains quite robust. Another way to think about this [Indiscernible] when the Department of Commerce took investigation in March or end of April, everybody 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 2 to pain if you're in utility or C&I space. So that's ultimately I would say the way to think about it. I will add to one other thought. I mean,.

this is not one of the things where you flip a switch and everything is back to where it was overnight. We effectively shut down a portion of the industry for six months, by the time August end of August rolls around, and 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.

The issue is, frankly, supply. So when you're talking about the inflation reduction act or whatever we're going to call that. 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 our industry can actually continue to work on a cadence. And so that will come. And I think in the next 3 or 4 weeks, you'll get a better - a much 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 - as you know from our discussions in the past, 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, excuse me, start probably 6 to 9 months ago coming into the year and then subsequent to that. So its been - I'd say, been happening, but at the same time, that's been a bit 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 all kind of situation in front of us on that front. I think we have a pretty decent visibility to anticipate that. But we've not 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. And a lot of that's related to just - supply chain has been so dynamic the last 2 years across the world.

But if you think about that in the residential world got each year ’20 and 2021, the industry kind of got cost for different reasons, and I think people were making sure that it didn't happen in '22 and then I think inventories have been being sized and adjusted quarterly as the year has gone on. But nothing to stream 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 you are remodeled.

Is there a way to quantify that? Like how much within your R&R exposure in residential, how much is repair versus how much is remodeled?.

Well, if you think about remodel for us, it is mainly our HIG business, the audience and the - and I would say ownings 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 an R&R. So its between R&R for residential, it's 80% to 90% is R&R within R&R, there's a high percentages to repair, is the way we think about that..

Okay, perfect. Thanks so much for segmenting that for us. And then maybe just 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, and you guys know, if you go back to '19, that's the business that's always run double digit. It continues to run well on both the top and bottom line. There's a lot of activity and that business is spread across a number in applications.

So that one has been running well for some time. And we produce where our backlog is starting to build. We've got some backlog building in cannabis as well. But alternate end of the day is 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 that we don't include in backlog, but that will – as those come across the finish line, it really sets us up for a strong end of the year, as well this starting into next year.

So produce is a big engine for us, that's starting to really improve the [Indiscernible] line, that’s part of what you see in the sequential improvement. Commercial has been steady and rock solid for us and then cannabis is been lumpy mainly due to the demand side of that business.

But as that backlog continues to stabilize and grow you know, we think that will generate in terms of margin, 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. And frankly, at the forefront of our discussion coming into this year with the residential group. So while you know how our - as we've talked in the past, our customer contracts were indexing around inflation.

So as they go up, we lag when the prices of covering that cost and catch up, and you saw that last year where the first three quarters, we were running behind in margin and we flipped the switch in Q4 as continued as we come into this year.

And we had planned on and our planning on pricing coming down as those indexes kick in with commodity costs coming down.

So how do you manage it the way down is really, in my view, the potential to expand margins if you manage you input costs in a more proactive or timely manner than, obviously, when you have to guide your prices or change prices accordingly.

So on the way up, you get hurt by it and the way down, you can expand if you manage your supply chain appropriately and your input cost. So we're 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 to that appropriately.

And we do expect and have planned for prices to come down over time, it just has to happen in our contracts call for that. So coupled with that, there's also a mix between big box in wholesale. And so there is some business mix things there and levers that are available for us to go and work through.

And so we're fairly confident that we can, one, continue to grow in a down cycle. I'm not saying we can grow 20% a quarter like we have in the last 8 years or so. But I think we can grow. And I think we can manage our margins for improvement as we go through that as well.

So we have work to do, but I think we're in a better position today where we're a few years ago to make that happen..

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, we - the new orders that have recently come in just at the start of the quarter are quite substantial. So the backlog is growing. I think that will be impactful in the second half of this year, but it is start of the momentum going into next year.

A leading indicator for infrastructure, when you think about backlog, as we capture kind of two - we measure two things, actual order backlog new bookings which we traditionally talk about externally. And then internally, there's an engineering backlog that is at a peak right now, that is probably higher than we've ever seen.

And I think that's a reflection of the investments a lot of states and federal DOTs are – so the Federal DOT and state are planning on and starting to ink projects to get those projects in focus. So 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, is that you guys did the press release a few days ago about a Connecticut solar plan that was utility scale, like 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 attritioned and which is really community - look at our industry certification on track 3 buckets within C&I, we'll call community – all right, C&1 train industrial and commercial. So those are the three that kind of we refer to as C&1. And we think of it as we had two, but it's really measured as three.

And the distinction between community and the other - there's a lot of gray there. But I'd say, in general, most of my comments were about activity in project planning and so forth is all around C&I and that's where we continue send 95-plus percent of our effort.

And we do have some customers that are expanding into larger size projects, like utility, but you just don't play in that space a whole lot.

And in terms of market status, I can't speak too clearly about utility because I think we're not in it, but just from reading and listening to others, that's with today's market situation, its kind of a challenge with this panel issue and once I get cleared to play that, I think things will accelerate for utility, as they will for C&I.

But what we see in the forefront, going forward with C&I, there's a lot of activity, and we're excited about that and we always say, hey, think about where the population exists in the country and think about where renewables will land and then think of the type of solar solution sets that will go in those spaces.

And that's a very, very heavy mix towards C&I and that's kind of right where we're set up to run with. So I do think that C&I will have as a market, a good runway in front of it. I think all the incentives that are main talked about now, they’ll get passed, will help if further over the next 10 years. And we’re well positioned to activate around that.

One thing that we are working [Indiscernible] is expanding our tracker platform and really to get in the utility space, you need what we call a 1P configuration, which is a single panel - important mode. That's where the majority of the utilities scale use. We will have that in Q4 ready, way 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 or to want to go down that path. But - that's how I would characterize Long answer to your question, Sorry, but I hope kind of how we think about it..

Great. Thanks. Okay, thank you very much..

Thank you. [Operator Instructions] And I would like to turn the call back to Bill Bosway for closing remarks..

So 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, and we report third quarter progress. I hope everyone stay safe and healthy and looking forward to catching you out.

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..