Thanks, 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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 is Bill Bosway, Gibraltar Industries Chairman, President, and Chief Executive Officer, and Tim Murphy, Gibraltar's Chief Financial Officer. The earnings press release that was issued this morning, as well as the slide presentation that management will use during the call, are both available in the investor section of the company's website, gibraltar1.com. As noted in the earnings press release issued today, Gibraltar has classified the processing equipment business in the Agtech segment as held for sale with first quarter 2022 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 on the earnings press release that was issued today.
Also, as noted on slide two of the presentation, the 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 any 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?
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. Let's turn to slide three, and we'll start with second quarter 2022 results. You know, we generated solid revenue growth and margin expansion in the quarter with adjusted revenue up 7%, adjusted operating income up 20%, adjusted EBIT up 16%, adjusted EPS grew 19% to $0.96 per share. Renewable, 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 Renewable customers and continue to drive additional participation gains in our Residential business and Agtech and Infrastructure bookings are accelerating. Renewable 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 80/20 execution, supply chain optimization, accelerating the digitization of our operations, keeping our organization as healthy and flexible as possible, and continuing to conduct business the right responsible way every day. I'd say at the halfway point of the year, we are tracking to our 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 focused on three drivers relative to each commodity. First, the absolute price of the commodity. Second, the price variability of the commodity. Third, obviously, the availability of the commodity. In general, availability of each core commodity is better than last year, but pricing continues to be dynamic due to the macro environment and the geopolitical situation. Hot rolled coil steel price fell from its high of $2,000 a ton in Q4 2021 to $1,329 at quarter end, and it continued to fall as we entered the current quarter. Structural and plate steel used in our Renewable and Infrastructure businesses increased during the first half of the year, but recently, structural steel prices have come down between 3% and 4%.
According to the June report from IHS Markit, steel prices is forecast to come down further over the next 12-18 months. You know, we'll see how that happens, and we'll remain agile as steel prices move. Aluminum rose to peak level in Q1 2022 and then came down slightly during the second quarter. There are a number of variables impacting aluminum price, including the ongoing energy crisis in Europe, which actually started in 2021, the rolling COVID lockdowns in China, and the additional energy supply pressure in Europe stemming from the Russia-Ukraine conflict. We do expect aluminum prices to remain elevated and probably through 2023. Given the current price cost environment, we're just gonna continue to execute across our three core initiatives.
Number one, just trying to keep our price and input costs balanced and then implement changes in a timely and efficient manner. Secondly, just continue to execute and accelerate more 80/20 initiatives to drive productivity and cost reduction. 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 panel supply to the solar industry.
The two trade issues, the Withhold Release Order (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 duties investigation , referred to as the AD/CVD, both remain active and continue to limit visibility and clarity for panel supply. First, let's start with the UFLPA, which was signed into 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 importers of record to prove via traceability processes and documentation that polysilicon material mined in Xinjiang Province is not contained in panels deployed in the 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 and efficient importation, and there's a learning curve associated with that. Second, the U.S. 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 U.S. Department of Commerce finds in favor of the complainant, future panel imports can be assessed duties, and it is possible the DOC will make these duties retroactive to when the petition was accepted or earlier. Now that being said, while the administration instructed the DOC to implement a two-year waiver on tariffs, the DOC has not yet executed an order to do so. We believe this will be done in conjunction with or around the time of the DOC's preliminary ruling on the AD/CVD case.
As a result, the industry has effectively continued its pause in executing and finalizing many existing and future projects as we'd expected. We do expect the two-year tariff waiver 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 on what to expect in its final ruling, again, due in January 2023. We also believe the administration will continue to support the solar industry given the importance of Renewable Energy production in creating, you know, a balanced energy plan for the U.S. For our Renewable business, the scenarios we plan coming into 2022 really do remain consistent given our experience in Q2, the first half, and our current outlook for the second half.
I would say the industry really looks forward to the DOC's preliminary decision and getting through the UFLPA learning curve so the industry and our customers can finalize project plans for 2023 and 2024. With that, I'll turn over to Tim for a review of our results.
Thanks, Bill, and good morning, everyone. I'll take you through our consolidated and segment results starting on slide 6. As a reminder, my discussion will cover the results from continuing operation and exclude the related revenues and expenses from the Agtech segment's processing equipment business, which have been removed from adjusted for both 2021 and 2022 as a result of the classification of this business as held for sale during the first quarter. Adjusted second quarter revenue increased 6.8% to $364.2 million. This growth was purely organic and was driven by price management and participation gains in Residential, partially offset by panel supply challenges in Renewable 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 Renewable 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 supply, as 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 crews.
End market demand in our commercial and industrial space continues to be very active, with new project planning discussions despite the general industry pause related to panel issues. The industry pause, 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 project 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 due to 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 insourcing synergy plans during the second half of the year.
These investments will further simplify our business and increase service levels with our customers. Let's move to slide 8 to review our Residential segment. Segment revenue increased 21.9%, all organic, and this quarter marks our eighth consecutive quarter of double-digit growth. Revenue was driven by price cost management and participation gains, both new and carryover, in the building products and mail and package businesses. Our Residential segment continues to see solid demand with 80%-90% of its business driven by existing home repair, either because of home aging or weather damage. Historically, home repairs has not seen significant impact from changing interest rates. Repairs, especially to a roof, 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 in the use of the system. We'll continue to implement this ERP system across the remainder of our Residential operations to create stronger customer connections, drive speed and agility of service, win participation gains, and increase productivity across the entire organization. Let's move to slide 9 to review our Agtech segment. Adjusted segment revenue decreased 11.9% as the producing cannabis project 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. 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 and EBITDA margin improved 80 and 100 basis points respectively on improved business mix, effective price cost management, benefits from continued supply chain optimization, continued 80/20 and lean initiatives, and our integration activities. We're set up well for continued performance improvement in this business and expect positive margin momentum through the year as we convert our backlog, make additional system improvements, and benefit from improved business mix. With respect to the potential processing equipment sale, we're in active discussions, and we'll provide updates as appropriate.
Let's move to slide 10 to review our infrastructure segment. Segment revenue decreased 5.3% against a very strong Q2 2021, which benefited from 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 bill towards the end of 2022. Segment adjusted operating and EBITDA margins improved sequentially 690 and 600 basis points respectively as we worked through fixed-price projects with State Departments 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 and EBITDA margins were down due to the unfavorable product mix.
We continue to expect margins to improve through 2022 as lower margin projects are completed, business mix improves, and volume growth adds leverage. Let's move to slide 11 to discuss our balance sheet and cash flow. At June 30, we had $302 million available on a 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 peak and begin their seasonal decline. We also continued to make small investments in inventory as our season ramps to ensure strong customer support during the current challenging supply chain and inflationary environment.
That's enabled us to continue to support our customers' needs. 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 drew $51 million on a 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 expect strong cash generation in the second half of this year, with strong earnings and a reduction in our working capital investment. Our target for free cash flow generation in 2022 remains approximately 10% of revenue.
We expect to use generated cash flow to fund 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 or repurchases during the year. Let's move to slide 12 to update you on our share repurchase program. Last quarter, our Board of Directors granted our request to authorize a common stock repurchase program for the first time in Gibraltar's history. This program authorizes the repurchases of $200 million over three years ending May 2, 2025. 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 the 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 wanna give a quick update on our five key priorities. You know, this year has been for us a theme around simplifying focus. It's been consistent since the beginning of the year. As common-sensical as this sounds, I think the lessons learned and the challenges of the last two and a half years have really heightened the need for us to simplify and focus on execution even more and on things that we can control. As a reminder, our five priorities, first execute 80/20, really to drive higher service levels, expand our margin, and win new business with existing and new customers. That's in each of our segments.
Secondly, manage supply chain to support customers, minimize disruption across both manufacturing and field operations, and to optimize our cost position and finally to reduce working capital. Third, really wanna accelerate our digitization in our operations. We did complete two ERP implementations in the quarter. This is consistent with what we've been doing the last couple years. We did one in Residential and one in Renewable. We will continue to invest in digitization and cybersecurity to support our customers as well as our suppliers and, of course, our business strategy. Fourth, support and maintain organizational health, remain agile and flexible in today's operating environment, and really continue to attract and retain the best talent we can. Finally, really work on the best environment we can for our team.
Finally, conduct business the right and responsible way, you know, every day, not only for our teams, but for our customers and suppliers. Let's move to slide 14, and we'll talk about 2022 guidance. Our first half results were in line with our expectations and our current demand profile and focus on execution, including supply chain optimization, price cost alignment, labor management, and simplification initiatives really do give us confidence in delivering our full year performance commitments. Overall, the continued strength and durability of each 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 billion in 2021. GAAP EPS is expected to range between $2.80 and $3.00 compared to $2.25 in 2021. On an adjusted basis, adjusted EPS is expected to range between $3.20 and $3.40 compared to $2.86 in 2021. Lastly, and most importantly, I'd like to thank everyone on the Gibraltar team. You know, this is a team that has continued to find great opportunities for our future and do so while plowing through really the last two and a half years and today's challenges and market dynamics.
You know, I'm very grateful for the team we have and remain super excited to be on the journey that we're on as well. With that, now let's open the call up and we'll take your questions.
Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Daniel Moore with CJS Securities. Please go ahead.
Good morning. This is Stefanos Crist calling in for Dan. Thanks for taking our questions.
Good morning, Stef.
First, could we just start with the Renewable? What's your visibility into 2023 and beyond, and what would give you more clarity there?
Well, the two big issues we talked about, Stefanos, one is really the UFLPA, which went into play, I think June 21st, somewhere around there. That's really this importation process. You know, the industry is going up the learning curve, and how to get those in efficiently and effectively is really important to the industry. Secondly, the DOC decision at the end of this month will be very helpful. I think regardless of that decision, because the administration has issued an executive order, the DOC will find a way to neutralize any tariffs. Therefore, I think tariffs are expected not to happen. It comes back to the UFLPA and importers being able to bring panels in in an efficient, effective way.
I think that's what the industry is looking for to see how that plays out. By the end of August, we'll have about six or seven 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 the next year or two as well. That's, you know, the current outlook. We'll know a lot more, I think, in the next three to four weeks, I guess, is the short answer.
Got it. Perfect. Just staying on Renewable, can you talk about the cadence of margins for Q3 and Q4, and then how we should think about margins in 2023?
Yeah. We've mentioned this before, that we feel like, you know, this business has turned a corner. We ran double-digit margins in May and June, and we expect to run double digits in the second half as well. You know, that's barring any major shift in outlook on demand side that we're not anticipating. As I mentioned earlier, I think the scenarios we've painted, we feel pretty good that we've got that understood, but you never know in this world right now. We feel pretty good about double-digit margins in Q3 and Q4. I think, you know, if you assume then that that's eight months in a row of double-digit margins, that should carry into 2023 at a similar level that you see us finish 2022 at. That's the way I would think about it for now.
Perfect. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from Kenneth Zener with KeyBanc. Please go ahead.
Good morning, gentlemen.
Good morning, Ken.
Good morning, Ken.
You know, the solar stuff, you know, obviously it's good to update on the margins. Hopefully, we'll get clarity here so we can start getting visibility into next year, for your customers and for you guys. 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, you know, one of the first real businesses that turned around in the 80/20. The reason I wanna focus on this is the growth you're having, you know, the 20%. And the 28% you saw in the first half, could you be a little more clear? I mean, you did lead with commodity costs, in your presentation slide, obviously touching metal. How much of this is price?
I mean, are you doing a couple points of volume which could be, you know, share gains and demand and the rest is price? I just wanna get a better baseline of how we think this growth, you know, the volume trends are going. Because in most of the categories we cover, you know, there's very moderate unit growth and it's all price. I just wanna get better clarity as we think about the end of 2022 into 2023.
Ken, you know, we said last year, the second half last year. Well, the 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, you know, volumes to be relatively flat as a market, you know, on a market basis. I would say that what we've seen on volumes is consistent from a market perspective, where our volumes have kinda come in a little bit higher than that is related to participation. We're winning more business, and then of course, we get the benefit of the price on the more business on top of the price off of the base business. It's still more weighted towards price.
I would say we have more volume coming into our business now than what we had thought originally, and that's kinda connecting back to the participation gains.
Right. I guess, I mean, to level set that, given you had 22% in the quarter, does that? I mean, it sounds like that's perhaps a couple versus flat. You know, you might have 2%-4% unit volume. I'm asking because I'm trying to discern where price kinda neutralizes as we exit the year, right? Are we gonna basically be when Q2 2023 where today price would be basically flat, you know, so you're just getting down to that core volume, that's in your, you know, Residential business? I'm just trying to see how that curve is 'cause it's such high growth, and it seems like a lot of it would be price.
Yeah. It's a good question. I would say we have not had a lot of incremental price versus the start of the year.
Okay.
That's for sure. I think we had a price increase around aluminum-based products, but effectively, we've not had a lot of incremental price increases this year. But we have a carryover. You know, you have some carryover pricing from last year because there were multiple price increases, so you're getting an effect of that. It does carry into this year, and you're getting this participation volume full year effect from last year and new participation this year. You know, right now we feel pretty solid with where the volume position is on a demand side going into the second half. We'll see how the fourth quarter evolves, but you know, right now we're holding relatively steady on volume demand relative to where we thought we would be.
I appreciate your patience with those questions. I guess on the Renewable, you know, you said obviously, you know, end of August, you know, the next weeks are gonna be really important. Is there any kind of perspective that you're getting from people in the industry about, you know, this, I don't wanna call it a hiccup or a bump because it's, you know, it's pretty impactful. But obviously there's the long-term demand. Are you seeing any capital stress, you know, from installers or developers that took down land? I mean, are you starting to see this slow demand and uncertainty really start to squeeze the industry?
No. We really haven't.
viability?
It's a good question. Inflation in general is you know, price points, cost points are much different today than they were two years ago. I would tell you know, we look at the number of projects that we have, what we call in Red line. A lot of people throw that into backlog. We don't. Those are not an issue to us, but they're in Redline. So that Redline 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's waiting.
If you think about whether you had financing already lined up or you still had to get financing, you're not gonna pull that final trigger until you get the most expensive component understood as to when you're gonna have it and what the, what the price point's gonna be, which is the first one is UFLPA. When am I gonna get it in, and can I get it in? The second one is at what price, and is it gonna have a tariff or not? Those are the two elements that people, you know, are thinking about. In terms of planning and what's on the docket, that remains quite robust.
Another way to think about this too, Ken, and for everybody on the phone, when the Department of Commerce took the investigation in March or end of April, everybody placed orders for panels, you know, 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, you know, the next, you know, six months, year or two, depending if you're in utility or C&I space. You know, that's ultimately at the end of the day, the way to think about it. I will add to one other thought. I mean, this is not one of those things where you flip a switch and everything's back to where it was overnight. You know, we've effectively shut down a portion of the industry for six months by the time August, end of August rolls around.
It's gonna take some time for people to reenergize and flex their muscles and start running again. It's not a demand issue. The issue is, frankly, supply. Whether you're talking about you know, Inflation Reduction Act or whatever we're gonna call that, if you talk about the executive order from the administration, that's all demand, which is great, and that'll help us, you know, long term for sure, but it's not an issue of demand. It's an issue of you know, supply coming in on a consistent basis so our industry can actually continue to work on a cadence. That will come, and I think in the next three or four weeks, you'll get a much better feel for that. I wish I could tell you something different, but.
No, that's.
You know, to me, that's what I'm looking for.
Thank you.
Yep.
Thank you. Our next question comes from Julio Romero with Sidoti & Co. Please go ahead.
Hey, good morning, Bill and Tim.
Hey, Julio.
Just to start on Residential, you know, very nice performance in the quarter. What are you seeing or hearing from your customers regarding inventory levels? 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, have access to point-of-sale information every week with our big box customers. We know what our outgoing sales are from those stores, and we can see if inventory is building. We saw an adjustment of inventory levels, excuse me, start probably six-nine months ago coming into the year and then subsequent to that. It's been, I'd say, happening, but at the same time, you know, that's been a bit offset for us by additional participation gains. You know, right now it feels like, you know, levels have been adjusting consistently for a period of time as we've been seeing.
I don't think there's a shock in all kinds of situations in front of us on that front. I think we have 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. I'd say rightsizing is a better way to say it as opposed to slowing. You know, a lot of that's related to just supply chain has been so dynamic the last two years across the world. But if you think about that in the Residential world, for each year, 2020 and 2021, the industry kind of got caught for different reasons. I think people were making sure that that didn't happen in 2022.
I think inventories have been being sized and adjusted accordingly as the year's gone on, but nothing too extreme one way or the other.
Okay. That's very helpful. I think you guys made a good point in the prepared remarks that on Residential, you're mostly R&R versus new construction. Even within R&R, you're more repair than you are remodel. 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 remodel?
Well, if you think about remodel, for us, it's mainly our Residential business, the awnings and I would say awnings only. It's a very small percentage of our total within R&R. I'd say we're 95%+ within Residential if you think about that way. Now, you could say, "Well, what about mailboxes?" and that there's a debate on that internally. I would say within repair and remodel, we're very high percentages repair, you know, I'd say 80%-90% at a minimum.
That's 80%-90% in mailboxes or within R&R in general?
No, within R&R. If between R&R for Residential, it's 80%-90% is R&R. Within R&R, there's a high percentage it's repair, is the way I would think about that.
Okay. Perfect. Thanks so much for segmenting that for us. Then maybe just the last one for me is on the Agtech side. Are any of your end markets, you know, cannabis, produce, maybe your legacy performing better or worse than the other? Can you maybe expand on the positive margin momentum you expect for Agtech in the back half?
Yeah. The commercial business, which is our traditional business, and you guys know if you go back to 2019, that's the business that's always run double-digit, continues to run well on both top and bottom line. There's a lot of activity, and that business is spread across a number of, you know, end applications. That one's been running well for some time. Produce, where our backlog is starting to build, we've got some backlog building in cannabis as well. Ultimate end of the day is produce continues to drive backlog and accelerate on the demand side. That's, that's what's really gonna drive the top line of the overall business. Those are large projects.
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 as, you know, a good start into next year. Produce is a big engine for us. It's starting to really improve on both top and bottom line. That's part of what you see in the sequential improvement. Commercial's been steady and rock solid for us. Cannabis, it's been lumpy mainly due to the demand side of that business. As that backlog continues to stabilize and grow, you know, we think that will generate the double-digit margins we've seen in the past as well.
That's how I'd break those three out.
Okay. That's very helpful. Thanks very much for taking the questions.
Yep.
Thank you. Our next question comes from Walter Liptak with Seaport Global. Please go ahead.
Hi. Thanks. Good morning, guys. Let me try one on the Residential side, and maybe you've already talked about this, but just for clarity's sake. In Residential, let's say that the volumes, you know, are stable, you know, over the next year, and some of these materials, these industrial metals prices, the HRC come down.
Mm-hmm.
You know, with the things that you're doing with participation gains, you know, 80/20, you know, 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, you know, at the forefront of our discussion coming into this year with the Residential group. Walter, you know how, as we've talked in the past, our customer contracts work with indexing around inflation. As they go up, we lag with price covering that cost and catch up, and you saw that last year, where the first three quarters we were running behind on margin, then we flipped the switch in Q4, and that's continued as we've come into this year. We have planned on and are planning on pricing coming down as those indexes kick in with commodity costs coming down.
How you manage on the way down is really, in my view, a potential to expand margins if you manage your input cost in a more proactive or timely manner than, obviously, when you have to, drive your prices or change prices accordingly. You know, on the way up, you get hurt by it, and on the way down, you can expand if you manage your supply chain appropriately and your input costs. We're laser focused on that. I'm not saying we're perfect at it, but we have it, you know, we've got it's been on the table and people are managing to that appropriately. We do expect and have planned for prices to come down over time.
It just has to happen, and our contracts call for that. Coupled with that, there's also a mix between, you know, big box and wholesale, and so there's some business mix things there and levers that are available for us to pull and work through. 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 the last eight or so, but I think we can grow, and I think you know we can manage our margins to for improvement as we go through that as well. We have work to do, but I think we're in a better position today than we were 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. This is a small segment, but is that gonna be enough to, you know, maybe, you know. What does that do for the visibility in 2023?
It'll be very helpful. I mean, I think Tim mentioned in his remarks, 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'll be impactful in the second half of this year, but it's the start of the momentum going into next year. The leading indicator for Infrastructure when you think about backlog is we measure two things, the 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's probably higher than we've ever seen, and I think that's a reflection of the investments a lot of state and federal DOTs are planning on and starting to ink projects or get those projects in focus. We're definitely starting to see that activity accelerate, and that should bode well for 2023.
Okay, great. Maybe a last one for me around the Renewable segment is that you guys did a press release a few days ago about a Connecticut solar plant that was utility- scale. It looked like it was a little bit larger. I wonder if you could give us an update on, you know, on the two different markets, on the community solar as well as the utility scale and any participation gains that, you know, we might be able to look forward to in the utility part.
Yeah. The C&I space, which we've traditionally been, which is really community. If you look at our industry association, they'll track three buckets within C&I. We'll call it community.
Commercial and Industrial.
Sorry, C&I, community Industrial, and commercial. Those are the three that kind of we refer to as C&I. We think of it as, you know, two, but it's really measured as three. The distinction between community and the other, there's a lot of gray there. I'd say in general, you know, most of my comments are about activity and project planning and so forth is all around C&I, and that's where we continue to spend 95%+ of our effort. We do have some customers that are, you know, expanding into larger size projects like utility, but we just don't play in that space a whole lot. In terms of market status, I can't speak too clearly about utility, as I said, because we're not in it.
Just from reading and listening to others, you know, that's with today's market situation, it's kind of a challenge with this panel issue. Once that get cleared up, you know, I think things will accelerate for utility as they will for C&I. What we see in the forefront, you know, going forward with C&I is a lot of activity, and we're excited about that. We always say, "Hey, think about where the population exists in the country, and think about where Renewable will land, and then think of the type of solar solution set that will go in those spaces." That's a very, very heavy mix towards C&I, and that's kinda right where we're set up to run with.
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 being talked about now, if they do get passed, will help it even further over the next 10 years. We're well positioned to activate around that. One thing that we are working diligently on is expanding our tracker platform. Really to get in the utility space, you need what we call a 1P configuration, which is a single panel in portrait mode, and that's what the majority of utility- scale projects use. We will have that in Q4, ready to go in Q1. We'll have the option to expand into or, you know, pick and choose where we wanna play in utility if a customer or two want to go down that path.
That's how I would characterize. Long answer to your question. Sorry, but that's-
Okay.
Kinda how I think about it.
Great. Thanks. Okay. Thank you very much.
Yep.
Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Bill Bosway for closing remarks.
Guys, thanks again for joining us. We're gonna be presenting at the Seaport Global Summer Conference later this month, as well as upcoming conferences and non-deal roadshows. We'll speak to you again in a few months and we'll report our third quarter progress. I hope everyone stays safe and healthy and look forward to catching you up. Have a good rest of the day. Thank you.
Thank you. This concludes today's