Gibraltar Industries Inc

NASDAQ:ROCK

Earnings Call Transcript 2017-Q4

[Operator]

Good day ladies and gentlemen. Welcome to the Gibraltar industries Fourth Quarter 2017 Earnings Conference Call. Today's call is being recorded and webcast. My name is Kevin and I'll be your coordinator today. At this time all participants are in a listen-only mode. We'll be conducting a question-and-answer session towards the end of the conference call.

I will now turn the call over to David Calusdian from the company's Investor Relations firm Sharon Merrill Associates. Please proceed.

[David Calusdian, Investor Relations, Sharon Merrill Associates]

Good morning everyone and thank you for joining us.

If you have not received a copy of the earnings press release that was issued this morning you can find it in the investor info section of the Gibraltar Web site gibraltar1.com. During the prepared remarks today management will be referring to presentations slides to summarize the company's fourth quarter performance. These slides also are posted to the company's Web site.

Please turn to Slide 2 in the presentation. The company's earnings press release and slide presentation contains forward-looking statements about future financial results. The company's actual results may differ materially from 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 Web site. Additionally, Gibraltar's earnings press release and remarks this morning contain adjusted financial measures; reconciliations of GAAP to adjusted financial measures have been appended to the earnings release and slides.

On our call this morning is Gibraltar's Chief Executive Officer, Frank Heard; and Chief Financial Officer, Tim Murphy.

At this point, I'll turn the call over to Frank and please turn to Slide 3.

[Frank Heard, Chief Executive Officer]

Thanks David. Good morning everyone and thank you for joining us on our call today.

With a strong fourth quarter, we closed another successful year for Gibraltar as we achieved meaningful progress in all elements of our transformation. Financially, we exceeded both our top and bottom-line guidance in the fourth quarter; we reported revenues up 11% year-over-year and achieved GAAP EPS of $0.78 up from a loss of $0.24 a year ago.

Our earnings this quarter include a $0.39 benefit from tax reform, which we will discuss later in the call.

From a Q4 end market perspective, we achieved a 34% increase in sales in our renewable energy and conservation segment and a 13% increase in our residential product segment. Our industrial infrastructure segment recorded modest organic growth excluding the impact of the divestiture of our bar grading business in Q1 2017 indicating that this segment has turned the corner.

On a full year basis reported an increase of 86% in GAAP EPS to $1.95 or 49% to adjusted EPS of $1.56 excluding the one-time benefit of tax reform and a 2% increase on an adjusted basis to $1.71. We're particularly pleased with the delta between our GAAP EPS and non-GAAP EPS has narrowed significantly over the past few years signaling that we've been making the right strategic moves on our transformation journey to generate increasing returns to our shareholders.

We're now three years into our five year transformation strategy and our results for the quarter and the year demonstrate that we've made tremendous progress both operationally and financially.

Since 2014, we've improved annual GAAP EPS from a loss of $2.63 in 2014 to earnings of $1.95 in 2017 and we increase return on invested capital from 3.9% to 12.6%. Through operational excellence, portfolio management innovation and acquisitions, we now have a platform for sustainable growth built upon a portfolio of markets and businesses that have a much greater ongoing upside potential.

I'll provide an update on each one of these strategic pillars later in the call.

With that, I'll turn the call over to Tim to review the financial results.

[Tim Murphy, Chief Financial Officer]

Thank you, Frank, and good morning everyone.

Let's move to Slide four in the presentation titled solid consolidated results. We reported solid fourth quarter results with revenues and earnings exceeding both prior year and guidance. Strong demand in our residential products, renewable energy and conservation segment offset a challenging year-over-year comparisons in our industrial and infrastructure segment due to portfolio management actions beginning in 2017. On an apples-to-apples basis excluding divestitures, our base revenues were up 20% in each of our segments experienced growth.

On the bottom-line, our consolidated earnings benefited from higher volumes in our residential with Noble Energy and conservation segment, reduced corporate expenses due to lower variable compensation 80/20 simplification initiatives resulted in a 130 basis point increase in adjusted operating margin and a $12.5 million or $0.39 per share benefit from tax reform.

We take a moment to review the impact of the new tax legislation on our results. Please turn to Slide five titled tax reform impact. The Tax Cuts and Job Act has and will have a material positive impact on Gibraltar, as we generate substantially all of our pre-tax income domestically. Over the past two years, our portfolio management actions we exited industrial operations in Europe in our residential solar racking business in Germany.

In 2017, due to the signing of the Act on December 22, we recognize the benefit of $16.2 million related to the reduced rate at which we will settle our deferred income taxes, partially offset by a $3.7 million charge resulting from the dream repatriation of our foreign earnings.

As a result, we're reporting a benefit of $12.5 million or $0.39 per share in the fourth quarter related to tax reform.

In 2018, we expect our effective tax rate to approximately 28% which will benefit our earnings and cash flows. For 2018 effective rate is expected to be 730 basis points below the 2017 rate before the impact of tax reform. The pro forma reconciliation of our 2017 GAAP and adjusted EPS, as if our 2017 rate is equal to the expected 2018 rate, these included in the appendix for the slides to provide comparable earnings for our [crunch] [ph] points as we move throughout the year.

Now let's review each of our three reporting segments starting with Slide 6, the Residential Products segment. Top-line growth in this segment was driven by strong sales and building products, centralized mail and electronic package lockers. To continue to benefit from enhanced service levels resulting from 80/20 initiatives, which [indiscernible] strengthen partnerships and increased market share.

Increasing ecommerce activity and the related demand for safe secure at your convenience solutions continue to drive sales of our electronic package locker systems in the multifamily space. On the bottom-line strong sales as well as the benefit of 80/20 initiatives contributed to the segments operating income improvement. Adjusted operating margins decreased slightly due to product mix.

Turning to Slide 7, the Industrial and Infrastructure products segment, overall revenues were down over the prior year solely due to the impact of our domestic bar grading business which represented 23% of fourth quarter 2016 sales. On an apples-to-apples basis excluding the divestiture our base revenues were up 4%. The sign that we're coming off the bottom and beginning to see growth in this segment.

In the fourth quarter as expected lower market activity continue to impact infrastructure sales. At the same time, we are encouraged by growing backlog and our new perimeter security solutions continuing to gain traction. We expect these items to accelerate to rebound of the segment throughout 2018.

Bottom-line growth in the fourth quarter primarily reflects operational efficiencies from 80/20 projects and we expect that margins will continue to improve in 2018 as security products gain further traction and infrastructure activity increases.

Now turning to Slide 8, renewable energy and conservation segment, strong demand in the domestic market more than offset a $2 million impact from the exit of our European solar racking business. We drove over 34% increase in revenues for the quarter. The bottom-line is affected by higher material costs and other pricing actions and adjusted operating margins for that segment were 12% for the quarter in line with expectations.

On January 22, the President approved a 30% tariff on imported solar panels in excess of 2.5 gigawatts which is scheduled to decline by 5% per year over the next four years and the tariff will drop off. GTM Research estimates that panel prices will be in the range of $0.45 to $0.49 per watt in 2018, which would take prices to the level last seen in 2015. That price is higher than the mid-30 central operation early 2017, but lower than the mid-50 cent per watt price from the latter half of 2017. We expect the tariff will have a nominal impact on the rate of growth of our sales in this segment due to the nature of the products we participate in, our distinct advantage in helping to reduce overall costs for solar projects and our continued development of trackers and [indiscernible] to market more than twice the size of the fixed tilt market we currently serve.

The focus of our solar business is in smaller scale community solar and commercial projects under 10 megawatts because our value proposition provides an integrated solution of cycling out racking design, structural engineering, manufacturing and installation.

We are confident this business will continue to provide a distinct competitive advantage due to the combination of our close customer relationships in new value proposition.

Please turn to Slide 9 capturing the opportunity. We continue to be well-positioned to execute on our acquisition strategy with low leverage and high liquidity. Cash increased $52 million from $170 million at the end of December 2016 to $222 million at the end of 2017. We remain focused on targets with EBITDA between $25 million and $100 million that will be material to our performance although we'll consider smaller acquisitions that can benefit us for the technology standpoint.

At this point, I'll turn the call back to Frank. Please turn to Slide 10 four pillars driving value creation. Frank?

[Frank Heard, Chief Executive Officer]

Thank you, Tim.

In 2017, we made great progress on our four-pillar value creation strategy. And operational excellence, our first pillar, we focused on reducing complexity, adjusting costs and simplifying our product offering through 80/20 initiatives across the organization.

In Q4, 80/20 projects contributed 130 basis points of operating margin improvement. In 2018, we expect to implement key projects in in-lining and market rate of demand replenishment which will improve operating characteristics when complete. We expect to start benefiting from these projects in the latter half of 2018.

In conjunction with the in-lining projects, we expect to advance our outsourcing initiatives for our B products across our business.

To recap our progress since we launched our strategy from 2014, to-date our average adjusted invested capital has decreased 15% from $601 million to $511 million. Inventories have been reduced by $43 million or 33% and our fixed assets have decreased by $20 million or 17%, all while growing sales, 14.5% and increasing our on-time shipping performance to our 80 customers from 65% percent to 95%.

As a result, we're gaining market share in the building products markets as Tim referenced earlier with a combination of our increased levels of service and better pricing alignment derived from 80/20 projects, we regained the trust from our legacy customers across our business portfolio.

Our next step is to drive organic growth in new product development through trade focused selling and marketing strategies. We'll be spending more time with our customers to fully understand their value proposition and pain points and use that knowledge to develop innovative products that reduce that pain ultimately delivering more value.

Our goal is to grow market share with our existing products or to enter new markets by developing innovative products with our existing manufacturing capabilities. A great example of this approach is the way RBI used their existing expertise of attaching glass to metal to expand from their whole historic greenhouse market to the solar racking market. We'll have focused projects launching across our businesses throughout the year.

This leads me to our next pillar innovation where we focus on products with patent protection developed internally or through acquired product lines. Innovative products now represent 7% of our sales up from 5% in 2017 and 4% in 2014.

In our residential product segment, our express locker continues to gain momentum. In 2017, we almost doubled the number of installed systems meeting our target for installations in total and strengthening our position as the market leader.

With the recent acquisition of Package Concierge, we're targeting new types of properties and expect to continue to grow our solutions that supply safe and secured storage for the multifamily residential and commercial building market.

In our Industrial segment, our perimeter security solution continues to gain traction and is expected to contribute to top-line growth in 2018. Our goal is to capitalize on the increasing demand for solutions that protect high value physical assets and we expect this product will accelerate to turn over industrial and infrastructure segments towards improved profitability.

In our renewable energy and conservation segment, our solar tracking solution is an exciting new disruptive technology that allows us to participate in a larger great adjacent space relative to our fixed tilt solution. We closed 2017 with a handful of installation and our work continues to meet all industry expectations and standards as set out by our customers.

As Tim referenced earlier, we believe this solution in combination with RBIs unique value proposition, will allow us to navigate any impact of the new tariffs. We placed ourselves in an excellent position to generate a higher rate of return from investments in innovation than ever before. This provides us with the ability to be patient with our acquisition strategy and only execute on the most attractive targets.

Portfolio management is our next pillar where we focus on evaluating product lines, customers and end markets to best allocate leadership time and resources to the highest potential platforms and businesses. We view portfolio management as a continuous process that will remain an important part of our strategy as we look to improve Gibraltar's long-term financial performance. Currently we are supporting all of the businesses in our portfolio today.

Our fourth pillar is growth through acquisitions, which we consider an important part of Gibraltar's transformation. Our improved and more sustainable operating income allows us to consider larger targets in our executive leadership team continues to invest a large portion of time and energy in the prospecting vetting process. But as I just referenced, we have the luxury of only making an acquisition, gets us to right one that will contribute long-term sustainable value to Gibraltar and its shareholders.

We continue to search for M&A prospects and attractive end markets with unique value propositions supported by patented products or technologies. Our target markets for M&A continue to be post and parcel solutions, residential building products, perimeter security and infrastructure, renewable energy and conservation.

Please turn to Slide 11, continued progress. Since we launched our four-pillar value creation strategy at the end of 2014, we've made tremendous progress both operationally and financially. Our GAAP EPS has significantly increased and we have greatly narrowed the delta between GAAP EPS and non-GAAP EPS.

In portfolio management and acquisitions, we're now tied to more attractive markets then increase our ability to sustain top and bottom-line growth. And as a result we can generate value for our shareholders through both organic growth and as well as M&A. Three years ago our balance sheet was limited and we were very close to breakeven levels. Today we generate healthy cash flow and have negative net leverage; we now offer our shareholders a more predictable rate of return on invested capital.

This leads me to Slide 12, 2018 guidance. We enter 2018 with continued optimism about the year ahead. We plan to drive sustainable organic growth through the acceleration of new product development initiatives, the implementation of new 80/20 simplification projects and seek value added acquisitions and attractive end markets.

At the end of the year, we expect once again to have generated increased profits at a higher rate of return with more efficient use of capital. Our guidance reflects our current knowledge of various items that could impact the markets we serve including the tariff on PV panels and modules that Tim discussed along with the continued volatility of material costs.

For full year 2018, we expect sales in excess of a $1 billion. We expect GAAP EPS between $1.75 and $1.87 per diluted share up from $1.56 on a GAAP basis excluding the $0.39 impact of tax reform or between $1.96 to $2.08 on an adjusted basis compared with $1.71.

For the first quarter 2018, we expect revenues between $213 million and $220 million up from Q1 2017. And we expect consolidated GAAP EPS between $0.20 and $0.25 per diluted share or between $0.23 and $0.28 on an adjusted basis. These amounts reflect the benefit we expect from the recently enacted tax reform as Tim described earlier.

With 2017 benefit from our 2018 expected tax rate, GAAP and adjusted EPS for the full year of 2017 would have been $1.74 and $1.88 and first quarter GAAP and adjusted EPS would have been $0.14 and $0.21 respectfully.

In closing with another successful execution of our four-pillar strategy, we now have a platform for sustainable growth build up on a portfolio and target markets that have a significantly greater ongoing upside potential. We look forward to another year of continued success and building long-term value for our shareholders and thank our customers and all members of the Gibraltar team for their ongoing commitment and contributions.

At this point, we'll open the call up for any questions that you may have.

[Operator]

Thank you. And now will be conducting a question-and-answer session. [Operator Instructions]

Our first question is coming from Daniel Moore from CJS Securities. Please proceed with your question.

[Daniel Moore, CJS Securities]

Good morning. Thanks for taking the question.

[Frank Heard, Chief Executive Officer]

Good morning, Dan. How are you doing?

[Daniel Moore, CJS Securities]

Good Frank. Tim wanted to start with the outlook for growth guidance implies kind of low to mid single digit growth for 2018. I guess when do you expect that to be fairly even throughout the year or start out a little lighter in the first half? And then two, any color maybe not to the basis point, but just sort of a directionally differentials in terms of your expected growth rates in the different segments? And a quick follow-up.

[Tim Murphy, Chief Financial Officer]

Dan, I would say that the growth probably follows our normal seasonal pattern. So you'd expect second through third quarter, fourth quarter to be obviously higher than the first. And so far across the segments they're all in that range.

[Daniel Moore, CJS Securities]

Got it. So no major outliers there and so typical seasonality in terms of actual revenue dollars as it relates to the rest of the year?

[Frank Heard, Chief Executive Officer]

Correct. Yes, Dan. I think 2018 will be the first year were prior year 2017 will be pretty solid reference point because we really do not have any onetime events that have to be normalized out. So I think first quarter to first quarter [indiscernible] and will be pretty comparable periods and we don't expect any great shifting and seasonality even what we saw in 2017 by and large.

So what we've shown in modest single-digit growth slowly improving over the course of time through the balance of the year is about what we expect.

[Daniel Moore, CJS Securities]

Got it. Shifting gears maybe to just update us Frank and your efforts both internally and via M&A in terms of gaining traction and perimeter security. Remind us how large that market opportunity is and at this stage how confident you are and getting a more meaningful foothold?

[Frank Heard, Chief Executive Officer]

I will start and I will let Tim talk maybe a little bit around sort of rolling backlog and pipeline. But certainly the market opportunity is about a $2 billion market. We've seen innovative products within that segment that drive higher margin profile. And you see that in some of the business that participate in it that high rates of return in terms of the businesses with manageable balance sheets in terms of the balance between fixed assets and intangibles.

So it's an attractive market. We do not do a material amount of business in the States today, but as I've said before, we already have assets in the manufacturing aspect of the [indiscernible] U.S. business that can be leveraged that are under utilized and we develop products and technologies that in the security side around barrier fencing, both conductive and non-conductive, that we think are new and different than what's in the market today and with local manufacturing competing against some imports. We think we can gain meaningful share and that's beginning to manifest itself.

Just a fencing show a week or -- week and a half ago with the new and dedicated team around these products. With the end users actually participating in shows and we've got some really positive reactions and that's starting to Tim show up in our pipeline going into the New Year.

[Tim Murphy, Chief Financial Officer]

Yes. So when we started this time last year, there was very little other than the bids that were in front of us, our sales are really just starting to come together and market to this space. And so now that we're year farther along I mean sort of open bids to that funnel is significantly greater. And whenever that funnel is greater and work past through goes up proportionately. So backlog is up pretty significantly year-over-year for the security products. And we know that funnel of projects continues to sort of fill. So we are encouraged, but it's still early days.

[Frank Heard, Chief Executive Officer]

But I think to conclude on that, Dan, we've now done just over a year's worth of research and development work and product and organizing teams and developing a way to market. We validated the market is $2 billion and we think there's adjacent products that make it larger. We've got a brand that needs to exist in this space. We've rebuilt. We're building under that brand. And what we're bringing to the market and to directly to users and large property owners is really we're starting to see evidence that it's really resonating with them.

And to Tim's point the pipeline's growing and we're starting to win some of those jobs on a test basis to validate that we can deliver on the supply chain side. And we see 2018, if we started it at crawl stage, or crawl, walk, run, we were not going to be running yet But, we're certainly going to get up on our feet and start to walk. And we think it's going to start to become material and has had long-term material opportunity to contribute to Gibraltar's growth profitably in a profitable way.

[Daniel Moore, CJS Securities]

Perfect. And lastly and I'll jump back. Parcel and postal with Package Concierge's what is that pro forma percentage of revenue and I won't use the baseball analogy. But how do you -- how is that business gaining traction? Are we accelerating, decelerating, steady solid growth, how do you sort of view the marketplace there in 2018 and beyond?

[Tim Murphy, Chief Financial Officer]

So it's nominal to revenue rate. It seems very small but growing at a pace significantly faster with expectations in line with our expectations that -- well that's a market that is sort of brand new and there's a lot of demand. So, we have very high growth rates, expectations and they've been delivering pretty high growth rates.

[Daniel Moore, CJS Securities]

Got it. Thank you, again for the color.

[Tim Murphy, Chief Financial Officer]

Sure.

[Operator]

Thank you. Our next question today is coming from Ken Zener from KeyBanc Capital Markets. Your line is now live.

[Ken Zener, KeyBanc Capital Markets]

Good morning gentlemen.

[Frank Heard, Chief Executive Officer]

Good morning, Ken.

[Ken Zener, KeyBanc Capital Markets]

In solar I believe in this -- could you talk us through the cadence of the seasonality of the business now that we're through 2017 which has impacted obviously in part by the tariffs? Can you just -- you see if the tariffs -- the new tariffs are going impact the seasonality of the business in terms of the top-line realizing you guys only have 90 days visibility. And could you talk to the cadence of the margins that we'll see in that business because last year, I think we are running roughly 8% in the front half, call 2012, 2013 in the back half just so we can understand the revenue cadence and the margin traction.

[Frank Heard, Chief Executive Officer]

I'll start and I'll let Tim jump in on both topics. Yes. I think that relative seasonality of our participation in the solar market is in my view from a long-term perspective hasn't normalized yet because when we entered it in partway through 2015, we had the on and off throughout the investment tax credits coming in and out. In my view skewed the normal kind of distribution histogram of the building season.

And at the end of the day, in continental United States whether you're building a house, or you're building a solar rack you still can't do it in the winter time to the same degree you can do it in the summer time. So one could argue that we're missing completely normalizes out with all these onetime issues of investment tax credits being brought in and then threatened to be taken off, which has created to some degree shifting of demand.

And again to some degree what's the tariff going to be for X per six months versus what it actually became potentially shifted demand a little bit. My view is eventually that's going to normalize out over time to a normal building season as tariffs come off over the next 3, 4 years and as the investment tax credit becomes less of an incentive over a similar period of time.

So that what to me is our long-term view of it. I think what we're going to see -- what we saw in 2017, what we will really see 2018, it's our belief at this point in time is that we believe we're going to see a similar cadence in revenue distribution throughout the year and quarters is what we -- in 2018 is what we saw in 2017. And then that will obviously flow through and have a similar kind of impact from a leverage perspective just on volume to the operating income and margins.

So now I think that -- I think the one issue in this is, if you buy into that theory one could argue then maybe at some point what came into the fourth quarter had happened at some point in the future have to come out in the first. We don't see evidence of that. The reason we're sticking to the same cadence in 2018 and 2017 is, in terms of bidding activity, in terms of booked orders, pipeline, our first quarter is actually not down, not the same, but it's up versus prior year.

So if there's something in the future we don't quite understand yet. It's not in -- to your earlier point, it's not in our 120 day window yet. That would suggest it's going to be different. So Tim I don't know if you want to add something to that.

[Tim Murphy, Chief Financial Officer]

No. I think that was -- I think that was pretty comprehensive.

[Ken Zener, KeyBanc Capital Markets]

Thank you, gentlemen.

[Frank Heard, Chief Executive Officer]

He isn't normally that generous Ken.

[Ken Zener, KeyBanc Capital Markets]

Oh, I appreciate it. Thank you.

[Frank Heard, Chief Executive Officer]

You are welcome.

[Operator]

Thank you. Our next question today is coming from Walter Liptak from Seaport Global Securities. Your line is now live.

[Walter Liptak, Seaport Global Securities]

Hi. Thanks. Good morning guys.

[Frank Heard, Chief Executive Officer]

Good morning, Walter. How are you doing?

[Walter Liptak, Seaport Global Securities]

Won't ask at a high level, just looking at the guidance page, it looks like you're guiding 2018 operating profits up $4 million to $10 million or 4% to 10%. And I wonder if you could just help us think about volume leverage 80/20 benefits? And then, maybe the good things -- the positive things and then maybe some of the things that are headwinds price cost -- other costs that might be rolling through because that kind of operating profit growth rate looks a little bit low to me given that 2% to 4% revenue guide.

[Frank Heard, Chief Executive Officer]

Yes. Just I'm going to open up and let Tim jump in on the segment basis. I think like others, I think probably the one thing that stretches across all businesses that are in our portfolio is, we'll be ultimately the outcome of any impact on steel costs through tariff activities that President may or may not take.

We think that we've captured all those variables within our various businesses and we've demonstrated to ourselves that we have an ability to recapture price and our people are positioning themselves for that. No different than any of our competitors because just about everything in industrial product is going to be affected by this. And at the end of the day, we think it's a positive thing for our business long-term but it's certainly going to be something that we'll have to navigate, as those decisions are made.

I think that is probably the underlying aspect of our -- maybe if there's a view that we're being somewhat conservative in terms of year-over-year operating income that's probably the underlying aspect to it. I think the rest of the -- other part of your question, I would I would say that we have more pluses than negatives in terms of concerns on a segmented basis once you get past the raw material input issues. We think that we're better positioned than we were three years ago to grow share profitably than we were in the past.

So, Tim?

[Tim Murphy, Chief Financial Officer]

Walter, I think about it, as Frank mentioned, so there's -- we've got uncertainty around material cost that certainly the market material cost is up. So pricing with customers to line of security of costs. We've got some carry over 80/20, I would say most of the low hanging fruit has been harvested so there's some carryover to that. We've got some work this year around in line in MRD and we will do the work this year where we reline or rearrange our factory floors, but most of the benefit to that really doesn't come until much in the latter half of the year after that work is completed. So I think that we took into account sort of everything going on in the marketplace and our guidance together.

[Frank Heard, Chief Executive Officer]

Yes. And I think the other positive thing we see is that we inherited the existing products, existing customers and I think three years into this the organic side of our growth organizations related to new product development and pursuing new routes to markets either with existing products or with new product has really -- is really starting to gain some traction and we expect some material contributions over and above what we had in the past whether it be in the perimeter security area or in the tracker's space or in the ventilations space the parcel delivery space.

There are new products and new revenue opportunities at higher levels of margins. Two years ago, to be quite honest we didn't have a lot and we weren't working on a lot. Today, we have many projects and we think that some of them are going to have a material impact on our financial results beginning in 2018 and going forward. So any time you're doing something, if you stand still long enough eventually you shrink and I think you have to be doing something new to counteract that. And I think we've got that going on organically now that we didn't have in the past. But, that's something I think is important in the absence of M&A, I think we can grow from an innovation.

[Walter Liptak, Seaport Global Securities]

If you have some of that organic revenue growth from new products in the 2% to 4%?

[Tim Murphy, Chief Financial Officer]

Yes.

[Frank Heard, Chief Executive Officer]

We do.

[Walter Liptak, Seaport Global Securities]

Maybe, if you could break out for us in the 2% to 4% what's price, what's market, what's organic initiatives from R&D?

[Tim Murphy, Chief Financial Officer]

It's a blend in that 2% to 4% and it's a little bit different to each business. There are some CLS, PLS where we trim our product lines a little bit and continue to go through that project. So, it's early in the year to break 2% to 4% into five segments.

[Walter Liptak, Seaport Global Securities]

Okay. Fair enough. Going back to the -- so it sounds like the first question, if steel cost is raw material, inflation that you are being conservative on and can you quantify the millions of dollars. Like what was the negative impact that's in the guidance?

[Tim Murphy, Chief Financial Officer]

I don't know that we have necessarily a lot of negative impact. I think if you just look from -- there's uncertainty around steel and aluminum what's going to happen in the next 45 days with 232. There is uncertainty now in some of the end markets around the cold memo, so what that can do to American marijuana opportunities in the short-term. So given just general that our initial view of the [indiscernible] is that shouldn't have much of an impact, but like Frank mentioned, is that going to -- some of the fourth quarter activity you saw activity that we will see later this year. We don't believe so today but we weren't going to look cautious.

[Frank Heard, Chief Executive Officer]

I think specifically to the raw material import, assuming the same unit volume growing year-over-year. Our process is -- we kind of listen and do a lot of research around what we think may be the number and that we run that whether it's on resins or steel or aluminum through the businesses on an annualized basis and then try to break it out on a quarterly basis in terms of when would it take effect. Once it takes effect on our -- not on the raw materials side if it gets announced when will it take a fact on our supply chain side. How much inventory do we have? When will the time price increases in some channels we have fixed contracts for 90 to 120 days. Some are tied to any variance of raw material plus or minus 5% percent or 3% there's an automatic others are negotiated.

So we kind of go through that process pick a number that we think is real, pick a timing that we think is real in those. And then we look at our expectation is always not only to recover price, but make sure our customers remain competitive in this scenario. We think everybody has land at the same place but unfortunately our calendar year is January to December. So on an annualized basis we may get there but we get maybe over 2 calendar years. So we didn't count the back end of the recovery that doesn't fit into the current calendar year a little bit in order to be conservative that's where our natural hedges on raw material inputs. It's about timing and it's about recovery in terms of the actual dollars versus our various customers. So…

[Walter Liptak, Seaport Global Securities]

Okay. All right. Fair enough. Thanks guys.

[Frank Heard, Chief Executive Officer]

Yes.

[Operator]

Thank you. [Operator Instructions] Our next question is coming from Brad Meikle from AMPACT Research. Your line is now live.

[Brad Meikle, AMPACT Research]

Hi. Good morning.

[Frank Heard, Chief Executive Officer]

Good morning, Brad.

[Brad Meikle, AMPACT Research]

Just to clarify on the steel side of things, so steel is up I guess 25% in the hard-rolled coils since November. So are you -- looks like you're assuming some of the impact of that in Q1? And what's the assumption on steel costs toward the second half of the year.

[Tim Murphy, Chief Financial Officer]

We had steel costs pretty flat and we see that Brad moving -- we can look at forecast coming down and we've been looking at other forecasts that would suggest flat to increasing and it is somewhat dependent on tariff and then what actions we can take to offset.

[Frank Heard, Chief Executive Officer]

Yes. I think our supply chain people across corporate and across the board do a pretty good job in this area historically and generally whatever took place in prior year were a full value for that today going forward. And I think they forecast it out. I think the unknown part for this year becomes if there is a special ruling that drives newly unique change in raw material prices as it relates to steel that's two thirds of our cost of goods sold in terms of purchasing.

We know that's a tough one to forecast as to where that's going to land, but we think we're not behind the curve right now relative to the ramp up prior year. We're actually pretty current. So unless we get surprised, I think we're in good shape from a forecasting perspective relative to our guidance.

[Brad Meikle, AMPACT Research]

What you said flat Tim, is your assumption flat versus the middle of 2017 or so I would imagine you had two or three months of steel inventory and the 25% increase we've seen really mostly since the beginning of this year has -- probably hasn't flowed through in terms of impact to your P&L.

[Frank Heard, Chief Executive Officer]

Actually Brad, if you look at our inventories dropping 33% through the 80/20 process. When I started here in 2014, we averaged somewhere between penny and a business born in six months inventory.

We're pretty current. So we're not living off low steel raw material imports today.

[Brad Meikle, AMPACT Research]

So you're assuming the current spot prices for your annual guidance or is that -- so you're assuming the spot comes back down?

[Tim Murphy, Chief Financial Officer]

We're assuming a relatively elevated price of steel in our guidance. As we looked at pricing in the last -- to your point four months that's certainly reflected in our guidance.

[Brad Meikle, AMPACT Research]

What is relatively elevated meaning like 10% or?

[Tim Murphy, Chief Financial Officer]

I think you quoted a 25% increase in the last four months in steel. I mean we're looking at the same market being steel cost and reflecting that in our guidance.

[Brad Meikle, AMPACT Research]

Okay. Thanks. And on the renewables business what was the breakdown, can you give us a little color on the split between greenhouses and solar and how many megawatts did you say in 2017. And what is your assumption on the solar business in terms of price change for this year because obviously the 201 case has impacted developers to the tune of $0.10 or $0.15 a watt an increase in module costs.

So are you seeing that translate into pricing pressure on the fixed tilt and how much tracking these factors up this year?

[Tim Murphy, Chief Financial Officer]

Let me start with the fourth quarter. We're normally about two-thirds and one-third greenhouse and there is probably a little bit more than that in solar for both businesses had pretty strong demand. That was one piece of your question, Brad. There was another piece on the fourth quarter, is that?

[Frank Heard, Chief Executive Officer]

Brad one of the things I would say is that we report the consolidated segment and we don't talk specifics about the financial or share perspectives within the segments for obvious competitive reasons and get various stakeholders on the call. And we don't want to become our own worst enemy in terms of creating competitive pressures for the businesses that we participate in.

But I think Tim can give us some commentary and color around the solar aspect of the business because to your point the tariff issue yellow is a unique circumstance and I think it's up to us to explain why we think we can navigate through that to some of your questions over the course of 2018.

So with that in mind, we'll do the best we can to provide a little bit information, but we are going to -- and we're going to limit ourselves a little bit just to ensure we don't put our operational people in a tougher spot.

[Brad Meikle, AMPACT Research]

Okay.

[Tim Murphy, Chief Financial Officer]

So, I think, Brad, look the market remains competitive that benefits we have in the segment of the market we serve is that we offer more than just another racks, we have one of the value proposition to offer our customers with that smaller end of the market. And competitive pricing environment, it always is, we pin what we know today into our forecasts. I take each job is -- it's separately bid. So there's not a list price and there's not a price we don't disclose, watts or price per watt that we install for competitive purposes. But I would generally say that our forecast for flex -- so increased that given in the space through 2018.

[Frank Heard, Chief Executive Officer]

Yes. And I think the other aspect is, is that we compete in both on the fixed tilt and now on small bases, smaller scale community solar where our value proposition of design engineer manufacture install is much more meaningful to those types of skilled jobs than some of the larger scale fixed tilt and the larger scale tractor.

So the impact of pricing around panels and tariffs is also to our customers less of a sensitive issue because it's not as great a percentage of the cost of the work and the type of pricing that they get. So all that being translated back into -- we've gone back to our business unit, we sat with some of our largest customers on the development side.

They remain confident, they remain busy and that's translated into bid activity in a book of business for 2018 in the first quarter going forward in 2018 that is up over the same period of 2017. So now if we were in large scale tracker I would assume based on third party independent research around some of the puts and takes on the tariffs that that's more meaningful there and will probably have a bigger short-term impact in terms of year-over-year activity than maybe what we're seeing.

So we've taken all that and we taken it all the down to the customer level to try to validate some of the work our people are doing in that segment and we think we've incorporated that in our current guidance.

[Brad Meikle, AMPACT Research]

Okay. Just to summarize, so you're guiding the solar revenues essentially flat year-on-year in 2018 and if that's the case, I'd asked on the last conference call about your expectation for the fixed tilt market. And I think my estimates down 40%, 50% this year and I think yours was a bit higher. So are you just gaining market share, and could you give us a little color on your customer concentration in the renewables business. What percentage of your business is your largest customer and how many 10% customers do you have there?

[Frank Heard, Chief Executive Officer]

Brad, we are not going to give that type of competitive information down to the customer names and addresses. But I think we do buy into the pieces. Our view is where we participate 10 megawatts and under with an average of about two we stated that before that continues to be our trend. And what we've also done in the context of understanding of what we do in fixed tilt in terms of the potential power output, the cost to build the system, the operating cost and when we compare that to our tracker system and when we compare that to may other competitive trackers systems we think we've got something unique and different even though we're not going up against those larger scale companies and the large scale projects.

The market aspect we do see a slow migration from fixed tilt to tracker but we don't see it as the market overall, but we don't see it within that community solar space. The math we look at with our developing partners, it's very side specific. Where it is geographically relative to Sun, where it is relative to wind lows and snow lows. Determine the value of what you can get out for the value -- for that cost you put into develop it and the ongoing maintenance costs. And there isn't natural in small scale community solar, there isn't a natural default to tracker.

In a larger scale, we understand that we buy into that theory, but we don't in the area of the market we participate in and not our customers we do business with who serve. So that translates into -- early solid bid activity and a rising backlog of business going forward for 2018 that doesn't translate into a 40% drop in our core business. We don't see it. We don't see it because we don't think we participate in that related space.

[Brad Meikle, AMPACT Research]

Thank you. This last question is at a higher level. It looks like the annual guidance is roughly in line with where the street was at and then the first quarter is light. Can you just help us understand how the -- what your assumptions are for -- why it's back-end loaded and is it assuming that steel comes back down or what is the nature of that. Thanks for the answers.

[Frank Heard, Chief Executive Officer]

Thanks Brad.

[Tim Murphy, Chief Financial Officer]

Yes, Brad, it is just the normal seasonality of our business if you look at all three segments; the Residential Products Division; the Residential Construction. the Solar Renewables as either a solar project or a building a greenhouse in the season for both of those peaks in the second half of the year. So we're just normal seasonal fluctuations and then industrial infrastructure probably more -- the infrastructure side you've got bridges don't get built as much in the first quarter as the rest of year just kind of weather.

[Brad Meikle, AMPACT Research]

But there is also to my understanding there's no material changes from what took place in 2017 that we're forecasting in 2018 from a trend perspective.

[Frank Heard, Chief Executive Officer]

Normal, seasonal.

[Brad Meikle, AMPACT Research]

So, there is nothing on the top line demand by quarter-to-quarter or segment-to-segment that is different. And there's no material cost changes that affect any particular quarter more than others. So I think we're aligned with prior year and I don't think we're too far out from original guidance, consensus guidance either for a great team. But to validate that again, but thank you, appreciate it.

[Operator]

Thank you. Our next question is coming from Daniel Moore from CJS Securities. Please proceed with your follow-up.

[Daniel Moore, CJS Securities]

Just a quick housekeeping. What is the 28% affected books rate? What is the cash tax rate look like for 2018?

[Tim Murphy, Chief Financial Officer]

It will be lower than that for a few reasons, so it will depend a little bit on when fixed assets get placed in service right because we get to take a 100% deduction on those. The repatriation tax which is I think is about a little over 3 million. It's basically pay over eight years, so really no impact from that. So I think the biggest swing between cash taxes and book expense would be depreciation and when we place fixed assets and service.

[Daniel Moore, CJS Securities]

Got it. Okay. Thank you.

[Operator]

Thank you. We reached the end of our question-and-answer session. I would like to turn the floor back over to Mr. Heard, for any further or closing comments.

[Frank Heard, Chief Executive Officer]

Well, thank you everyone for joining us today. And we look forward to talking to you next quarter. That concludes our call.

[Operator]

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.