PGT Innovations [PGTI] Conference call transcript for 2022 q2
2022-07-26 15:29:02
Fiscal: 2022 q2
Operator: Good day, and welcome to the PGT Innovations Inc., Second Quarter 2022 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Brad West, Senior Vice President of Corporate Development and Treasurer. Please go ahead. Brad West Thank you. Good morning, and welcome to the PGT Innovations second quarter 2022 investor conference call. With me on the call today are President and CEO, Jeff Jackson and our Chief Financial Officer, John Kunz. On the Investors section of our company website, you will find the earnings press release issued earlier today as well as the slide presentation we have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website. Before we begin our prepared remarks, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the earnings press release and our SEC filings that discuss forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2022 financial performance outlook. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. Additional information on factors that could cause actual results to differ from expected results is available in the company's most recent SEC filings. Additionally, on Slide 3, note that we report results using non-GAAP financial measures, which we believe provide additional information to help investors compare prior and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation. At this time, I will now hand over the call to our company's CEO and President, Jeff Jackson. Jeff Jackson Thank you, Brad, and good morning, everyone, and thank you for joining us on today's call. Our very strong financial results was a testament to PGT innovation's value proposition and our team's ability to execute on a number of challenges over the past 12 months. These challenges included labor, capacity and supply chain constraints. However, we stayed focused on executing our long-term strategy of adding talent, effectively scaling our operations and investing our cash flow in growing markets. Let's discuss today's key messages for the quarter on Slide 4. We achieve record second quarter results as revenues of $407 million surpassed both prior year and our internal forecasts. Multiple drivers during the quarter led to these results. First, our expanded footprint placed us in growing markets. Second, our marketing strategy drove continued customer awareness of our product offerings. Third, our ability to secure materials through our supply chain kept the factories operating efficiently and forth, our ongoing efforts to increase capacity through process automation, as well as further training of our team members has improved our operational efficiency, allowing us to ship higher product volumes. I am very proud of how our PGT innovation team continues to improve, deliver strong growth and provide first-class customer service each and every day. We continue to make significant gains in margin with adjusted EBITDA margin, improving 680 basis points compared to the second quarter of 2021 and sequentially by 280 basis points versus the first quarter of 2022. These results reflect the success of our business model to grow our top line and improve our operational performance while managing inflationary pressures. Pricing actions implemented over the last several quarters have offset the majority of the inflationary pressures we have experienced. In addition, we have announced new price increases to offset the escalating costs we'll continue to face. Since the beginning of the year, our gains in operational efficiencies have reduced our lead times. This continued into Q2 with average lead times for key brands improving 40% to 50% versus prior year quarter. We also worked to control costs whenever possible through a constant focus on investing quality and manufacturing process enhancements. Additionally, our supply chain team has continued to do an outstanding job to minimize disruption, allowing us to support higher production levels, a driving force behind our improved performance over the past few quarters. These factors contributed to our strong cash flow in the quarter and allowed us to end Q2 with a cash balance of $159 million and leverage well within our targeted range. John will provide more detail, but in summary, our balance sheet strength provides the flexibility necessary to effectively allocate capital by continuing to execute our business model as we look to drive long term shareholder value through reinvestment in our business and strategic accretive acquisitions. As the first half results well exceeded our expectations and the sales and margin trends remain favourable, we are raising our full year guidance for revenue and adjusted EBITDA. While we recognize the uncertainty surrounding the microeconomic environment, our backlog manufacturing execution and margin performance gives us a high level of confidence in our revised guidance. Next on Slide 5, let's take a closer look at sales trends. Total organic growth was 29% reflecting the strength of our brand portfolio and demand in our markets. In our Southeast region, organic sales for the quarter grew 27% versus the prior year quarter, reflecting strength in our core PGT and new south brands. The migration into Florida, our largest market will continue to support demand in the coming years. The challenging market dynamics has led one of our larger competitors in the Southeast region to discontinue their aluminum product lines, allowing us to pick up market share. In addition, during the first half of the year, we signed five separate large home builders to three-year supply agreements, which further strengthens our view on near-term and long-term outlook. In our Western region, organic growth was 41% versus the prior year quarter, reflecting strength from our production builder business. This sector has outperformed for the past two years as demand to upgrade indoor, outdoor living areas remain strong. We're also seeing the benefit from our capacity expansion in Phoenix, which has allowed us to better serve the custom market demands and our recently opened showroom in San Diego, will position us well to serve the growth we are seeing in the Southern California's home and renovation markets. New South continues to perform very well with sales growth of 41% that benefited from three stores opening in 2021. We're in various stages of opening new stores in Atlanta, Dallas, Fort Worth and San Antonio for a total of 17 stores at the end of the year. Our Dallas and Fort Worth stores have signed leases and those store operators are busy training their new team members in anticipation of opening. Our Atlanta store is celebrating its official ribbon cutting on August 3. In the Florida region, we saw strong sequential order growth of 13% versus Q1 of 2022. Our PGT and New South brands drove this growth, which was balanced across both new construction and the repairing remodelling. As we shared last quarter, our governor recently signed a home hardening bill to make impact windows and doors more affordable by granting a two-year sales tax exemption for Floridians. Our focus on improving manufacturing performance and customer service has allowed us to decrease our average lead times and improve our on-time and in full metrics to meet continued strong demand. As a result, our backlog was $359 million at the end of Q2, up slightly from $356 million at the start of the year. Slide 6 summarizes our strategic and operational framework that drives profitable growth by delivering best-in-class products and services to our customers while creating a goal or an environment for our team members. Our first pillar is customer-centric innovation, which drives us to deliver products with features, performance and value demanded by our builders and our customers. We're expanding our product offerings to improve thermal performance and improve sightlines, delivering improved energy efficiency and improving indoor-outdoor living spaces. Our second pillar is investing in talent. Over the last year, we have been incredibly successful at growing our talent base with high quality team members who help us achieve our growth targets. Our third pillar is transforming our manufacturing operations to scale in line with our growth. Our operational flexibility and tenacity have well positioned us to focus on improving our manufacturing processes to reduce or prevent back orders and maintain efficient warehousing operations. Our fourth pillar is allocating our strong free cash flow to achieve profitable growth. As we seek to generate long-term value creation for our shareholders, we are always on the lookout organic and inorganic opportunities to improve our product offerings and production capabilities. That being said, as we navigate this inflationary environment, disciplined capital deployment will remain a top priority as we look for accretive opportunities to grow our business while delivering above-market results. Now I'd like to turn the call over to John to review our second quarter results in greater detail. John?
John Kunz: Thank you, Jeff. Turning to Slide 7, today, we are very pleased to report $407 million in revenue for the second quarter, a 42% increase over the prior year quarter. This increase was driven by 29% organic growth from our legacy businesses, including New South and Echo and continued growth from our recent Anlin acquisition. As Jeff mentioned, we were able to deliver strong growth again this quarter through increased volumes previously implemented pricing actions and process improvements, which have proven successful in offsetting rising costs in a volatile operating environment. In the second quarter, our sales breakdown was 57% R&R and 43% new construction. Organic R&R sales grew 28% compared to the second quarter of 2021 and organic new construction sales increased 40% due to the strength of our legacy brands. Gross profit for the second quarter was $165.1 million, a 70% increase from the prior year quarter, reflecting increased volume and pricing, partially offset by labor and material cost headwinds. Our strong Q2 results were driven by operational improvement in the Southeast, including double-digit unit growth, improvements in scrap and improved labor efficiency. Aluminium availability has improved and LME spot pricing has steadily decreased. Impacts resulting from speculation surrounding the geopolitical tensions between Russia and Ukraine have been minimal, although we continue to monitor market price as well as the primary and secondary market production conditions. Second quarter gross margin was 40.6%, 660 basis points higher than the prior year quarter, and 310 basis points higher than the first quarter of 2022, driven by price increases, manufacturing process improvements and unit growth. Earlier investments in hiring helped improved operational efficiencies across the portfolio. We believe those actions will continue to benefit our gross margins for the foreseeable future. Selling, general and administrative expenses increased 45% in the second quarter compared to their prior year, driven by the SG&A from our recent acquisitions, the expansion of our New South operations increased distribution, cost increased marketing spend and an increase in reserve for uncollectable accounts. Second quarter adjusted selling, general and administrative expenses were 25.7% or 80 basis points lower than the prior year quarter. Leverage from higher sales was partially offset by increased labor and transportation inflation, increased marketing spend and an increase in reserve for an uncollectable accounts. Adjusted EBITDA was $78.3 million, 119% higher than their prior year quarter, resulting from pricing actions to offset inflationary pressures, increase volumes and improved manufacturing performance. You will recall that our prior year quarter was significantly impacted by a drag from our expansion related to expending, due to a loss in productivity from new hires. Our tax expense in the quarter came in at 24.8% in line with our expectations. We reported adjusted net income of $40.5 million were at $0.67 per diluted share, compared to $10.7 million or $0.18 per diluted share in the second quarter of 2021, increases of 278% and 272% respectively. Now turning to our balance sheet on Slide 8, we ended the quarter with net debt of $476 million. We had total liquidity of $233 million, including a cash balance of $159 million and $74 million of unused capacity on our revolver. Our trailing 12-month run rate net debt to adjusted EBITDA was approximately 2.1 times at the end of the quarter. Slide 9 shows that we have grown EBITDA both through acquisitions inorganically, while maintaining a conservative leverage profile. Our historically conservative financial policies have allowed us to use our strong cash flows to reduce leverage after significant acquisitions. In fact, since the completion of our Anlin acquisition, we have reduced our covenant adjusted leverage metric from approximately 2.9 times to 2.0 times, placing us at the lower end of our leverage target range of two to three times. On Slide 10, we've summarized our long-term capital allocation priorities. Our first priority is to reinvest in our business, which includes allocating capital to projects that we expect will drive margin in revenue growth. For example, we have invested in strategic selling initiatives to improve efficiency and operational metrics to reduce costs. These investments will allow us to enhance our margins and to continue to grow our revenue. Our second priority is our commitment to debt reduction and maintaining a strong balance sheet. We expect to maintain a conservative leverage profile with a range of two to three times net debt to EBITDA with a preference to stay at the low end of that range. We will continue to target strategic acquisitions that are aligned with our growth priorities and are expected to grow shareholder value over the long term. We will look for opportunities that will enable us to expand into new regions, channels or products. We expect to integrate our acquisitions and deliver while carefully evaluating other possible acquisition opportunities as part of our overall strategic plan. And now, I would like to turn the call back over to Jeff.
Jeff Jackson: Thanks John. Next I'll review our outlook for the remainder of 2022 on Slide 11. With our very strong performance during the first half of the year, we are raising our guidance for the full year of 2022. We now expect net sales in the range of $1.45 billion to $1.525 billion and adjusted EBITDA in the range of $250 million to $265 million. Initial indications for the second half of this year, based on the results thus far in July are showing continued operational improvement, increased sales and strong profitability as we navigate the ongoing inflationary environment and the impact of changes in interest rates. So modeling assumptions are also included on the left side of the slide. These are unchanged from what we provided at the beginning of the year. Turning to Slide 12, in closing today, I want to review why we believe PGT innovations is in an excellent position to continue delivering on our business model and creating long-term value for our shareholders. First, we are national leader with an outstanding portfolio brands that have been made even stronger through recent acquisitions. Our products continue to gain traction, both in impact resistant and in indoor-outdoor living markets and we service geographies that are continuing to show growth in population. Second, our product portfolio is diversified, which allows us to target profitable growth in both the new construction and the R&R channels, especially in the Southeast, Texas and West Coast. While we see slowing growth rates on a national level, we are seeing continued growth from our dealers and installers within our markets that we serve. Third, increased capacity through operational improvements and capital investments help us deliver consistent margin expansion and meet growing demand. Fourth, innovation and product development provides our customers with innovative premium products to meet their changing needs. We plan to continue to invest in both R&D and talent. And finally, I will conclude by reminding you that sustainability has long been a part of our company's culture. We believe an environmental focus contributes to smarter, more effective ways of conducting business. We seek to further elevate our commitment to conducting business in a socially and environmentally responsible manner. We have long tradition of caring for the health and welfare of our team members and the communities we serve. At this time. Let me begin the Q&A. Operator?
Operator: We will now begin the question-and-answer session. Our first question will come from Judy Merrick of Truist Securities. Please go ahead.
Judy Merrick: Thank you. This is Judy calling in for Keith Hughes. I wonder if you could talk a little bit about fall in the South and Florida, you talked about some of the pull through last quarter. Is that sort of normalized and seems like there's a lot going on and did you say orders were at like 13% sequentially in the Florida or south?
John Kunz: Yeah, sure Judy. Let me take that one. Yeah. As Jeff was speaking on the call, we have seen strong order growth in the in our Southeast region. What he mentioned was we did have five new home builders that we signed up in the quarter. So we were very pleased with that. We continue to see R&R demand along with that new construction demand. So we've been very pleased with that and the other factor that's helped us along with that pricing that we report with our sales is the pricing. So pricing is actually influenced that number as well. Those are sort of the drivers that have helped us to have comfort in the numbers and the growth and the outlook for the back half of the year.
Jeff Jackson: Yeah. And I'll just add to that. Obviously our backlog basically remained the same as it was at year end, yet our lead times and on time and in full is improved dramatically. Our lead times are improved as much as 50% in some cases. Our aluminium lead times, for example, is down to four weeks, four to seven weeks, depending on the customer and the order. Our vinyl lead time is anywhere from a low of seven to a high of 15. So it just depends who's ordering and what kind of project it is. So you couple dramatically improved operational performance with a strong sales growth, the backlog basically remains the same when we hit these kind of hit these kind of numbers. In the back half, I don't think there's been this tremendous pull for it. What, we'll see in the back half, obviously we're in a somewhat of a transition period. All building products are as the market adjusts for the economics going on and interest rate changes and whatnot. But as we enter the back half, we still see strong demand. Like John had mentioned those five new builders that was all incremental. So we literally didn't have those agreements before. So we're getting incremental market share gain and volume as well as the R&R market has really stabilized and grown for us. And we've had Florida to kind of help us with that; the State of Florida passing that holiday two year sales tax holiday for impact resistant products home heartening products. So we've got a lot of good tailwinds as we finish out the year. That's why we're pretty confident in the guidance we've given.
Judy Merrick: Okay, great. And that sales tax exemption that was mostly underway in the second quarter and have you've seen that help your pricing actions in Florida as well?
Jeff Jackson: It's literally just started and we feel we'll start to see that -- we started seeing some of that benefit, but again, it's a two year program. So, we're not getting, I don't think the goal was not to have a big influx of orders across the state and overwhelm the infrastructure, the install infrastructure and so making it a two-year program that the legislature has done was incredibly smart that allows homeowners the time, to order the right product and get it installed. So we have seen some growth, just last year, I'm sorry, last week at New South, for instance, we had a $4 million order week. So, that's considered strong for New South. And so we are starting to see some benefits of that sales tax holiday, but we do think that's going to bleed out over the next 24 months. So it's going to be a good tailwind to come.
Operator: The next question comes from Phil Ng of Jefferies. Please go ahead.
UnidentifiedAnalyst: Hey guys, this is Maggie on for Phil. I guess first gross margins were really strong this quarter. Was that primarily those late 2021 price increases coming through? Or are you starting to see any areas of cost relief? And then Jeff, you mentioned a new price increase. Were you referring to demand increase or have you announced anything incremental to that?
Jeff Jackson: Yeah, so with regards to our margins, we were really pleased across the board, really want to complement our supply chain team, our operating team and supply chain team. They've done a very good job of putting us in a position to have the materials that we need to produce the products that our customers want. So it was the control with respect to the supply chain that has allowed us to realize those margins. Our operating team has done a good job with our manufacturing processes and labor. So we were very pleased from that perspective. And then our pricing obviously has kept up with the increases that we have seen from that perspective overall. And then what was the second part of your question? Oh, sorry. Demand price increases, demand price increase is the only one that we have. I don't know that we have another one scheduled in the foreseeable future. So I think that's where we are for this point in time.
John Kunz: Yeah. And I'll just comment a little bit about that margin and the strong performance there. It's literally attributed to our improved operations, a couple with realization of pricing. You got to keep in mind, we've raised our team member's pay twice over the last 12 months. So we've had a lot of increased cost, but we are realizing the pricing actions we took, I'd say over the last nine months or so. They're now obviously fully recognizing the P&L, but I don't over emphasize this, but going from on time and in full in the low thirties with PGT, our main brand to now, we're bumping 68%, heading into 70% on time and in full has been a huge factor in driving gross margin improvement; huge. And that's what in essence gives me confidence in the back half because we used to run PGT at 95% to 98% on time in full. So we've still got a good 20 plus basis points improvement in that metric. And that will drive continued gross margin improvement as we continue to perform well here at the original PGT flagship brand.
UnidentifiedAnalyst: Okay. That's really helpful and I guess going off the strength in 2Q, was there any kind of one-time tailwind we should be mindful of? I just asked because 2Q and 3Q margins are generally pretty similar, but the guide implies maybe there could be some drop-off in 3Q. So just want to flush that out.
Jeff Jackson: The only thing that I see really with respect to our Q3 guidance, when you look at it, I'll address the guidance. Our Q4 should look like Q1 to some degree, right? And so you could sort of squeeze what Q3 will look like. One of the things that we did have benefiting us and you'll see in our Q1 release next week is we had a benefit from our hedging positions in the first six months, that will actually flip. We're going to have a liability that will have to amortize in the back half of the year. So we'll have a little bit of a headwind from that perspective. Also what we're balancing as well is pricing and cost. So that dynamic will continue; right, right. So we don't expect the 19.3% margin in Q3. So those are the things, those are the dynamics that we're sort of thinking through in our guidance and that's, what's resulted in the ranges that we provided.
Operator: The next question comes from Kenneth Zener of KeyBanc Capital Markets. Please go ahead.
Christian Zyla: Good morning, everyone. This is actually Christian Zyla on for Ken Zener. Thanks for taking my questions.
Jeff Jackson: Good morning.
Christian Zyla: First question. Could you just quantify the price unit contribution in the quarter? I know last quarter it was about 13% price, 4% units. I don't know if you have that breakdown available. That'd be helpful and then secondly, oh, sure. Go ahead.
Jeff Jackson: Sorry about that. So for volume, what we said is, we're in the low double digit range for volume, unit volume increases and then the pricing is in that high teens range in that area. So that's the breakdown between volume and price.
Christian Zyla: Great. Thank you. And then understand some costs have come down, especially commodities, aluminium, etcetera, but given that other costs remain elevated, I know you said you don't anticipate any future price increases. In terms of, I guess, demand and the unit growth, do you kind of see that stabilizing? Do you see that looking more like first quarter or I guess how do you just see that going for the rest of the year?
John Kunz: Yeah, well, when I look at the full year, we will react if prices continue to change. If inflation is there, as Jeff was saying with respect to our labor inflation and things of that nature, we would implement another price increase. I guess the way I should have clarified that is saying that we don't -- I don't foresee one at this point, but, we reserve the right to obviously change that should the dynamics change going forward. And then what was the second part of your question again? Sorryâ¦
Christian Zyla: This unit volumes the rest year.
Jeff Jackson: Yeah. Oh, the rest of the year, unit volume. So unit volume will be lower than what it was in the first half of the year with pricing, where we were. So that's sort of what the revenue breakdown will be in the back half of the year.
Christian Zyla: Great. Thank you.
John Kunz: And I'll remind you, the second quarter is always our strongest quarter followed very closely by the third quarter. Fourth quarter is typically our I'd call it our least growth quarter because we have both Thanksgiving and Christmas holidays in there. And when, right now we're running almost, 55% close, close to 60% R&R. So with an heavy R&R concentration, it makes the fourth quarter comps -- it makes it tough in terms of just sales growth for the R&R business in that fourth quarter.
Christian Zyla: Great. Thank you for that color. And if I could just squeeze one more in, in terms of M&A pipeline, can you just talk a little bit about how the pipeline is looking? I know Echo and Lynn have been performing relatively well. And you discussed your priorities for any future M&A, but just if you could talk through the pipeline, how that looks. Thank you.
Jeff Jackson: Yeah. Real quick echo, you're right. That glass plant has been an incredible benefit for PGT. Quite frankly, the only thing impacting us operationally right now is still the supply chain and that's mainly coming from the glass side. So from an operational standpoint, the supply chain is shot up very nicely for us, except for again continued back ordering some door glass. But other than that, that acquisition was key. Anlin is performed incredibly well definitely above the acquisition models, we had planned. As we look to the future, right now there's probably a handful of different potential targets we're looking at, or are in the process of talking to and they are still in that window and door category in our core markets that we want to be in which are surrounded by those destination states, Florida, Texas out West Arizona, Salt Lake, California, those kind of kind of markets that we are concentrating our efforts on at this point.
Operator: The next question comes from Michael Rehaut of JPMorgan. Please go ahead.
Doug Wardlaw: Hi, good morning guys. Doug Wardlaw on for Mike. I was just wondering if you can give some, a little bit further color on the month of July and maybe if possible, break it out between the different end markets and regions.
Jeff Jackson: Well, we typically don't break it out between end markets or regions, especially, for July, but I will say this. July is strong, it's given us confidence. So when we raised our guidance that already one month into the third quarter, we're feeling very confident. July sequential to June grew double digits. So we feel good again about our coming third quarter based off that July result, but we're not at the point where we can break it out between business units for July, because we literally are still closing it.
Doug Wardlaw: Awesome. Thank you. And can you give a little bit of further insight on the current state of the supply chain, moving forward in terms of the duration of the rest of this year, do you think you'll see some sizable improvement there or is it still kind of unknown at this point?
Jeff Jackson: Again, I think the supply chain has improved for our company and I mentioned that in my opening comment. Our supply chain team has done an incredible job, our purchasing team and staying ahead of the curve on some of the demand issues and supply constrain issues but we still have, as I mentioned earlier a glass supply issue at times with our major door glass supplier that can cause disruption within the plant. We are actively doing steps to mitigate that, obviously with the addition of a glass plant last year at Echo. We're increasing the capacity there as we speak to try to offset these fluctuations we see, with the goal quite simply to be back in the 95% plus for PGT on time and in full. Other areas of concern that have popped up inter layer top constraints, can be a challenge times. But we have incredibly great relationships with our supplier there. And they have allocated us and put it us top of their priority list since we are the largest impact player and float glass supply. Float glass is limited, but we, again, we have a great relationship there with an incredible glass supply company on the float side. So we're able to get float glass. But other than that, I think supply chain is really stabilized out for us and, and has allowed us to improve here performance wise as well.
Doug Wardlaw: Awesome. Thank you guys.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to John Kunz for any closing remarks.
John Kunz: Thank you for joining us today on our second quarter earnings call. We appreciate your interest in our company and look forward to your participation on our third quarter earnings call in November. Andrea, at this time you may disconnect.
Operator: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
