PGT Innovations, Inc. (NYSE:PGTI) Q2 2023 Earnings Call Transcript
PGT Innovations, Inc. (NYSE:PGTI) Q2 2023 Earnings Call Transcript August 5, 2023 Operator: Good morning, and welcome to PGT Innovations' Second Quarter 2023 Earnings Conference Call. All participants are in listen-only mode. I'd now like to turn the conference over to PGT Innovations' Senior Vice President of Corporate Development and Treasurer, Brad West. Please go ahead. Brad West: Thank you and good morning. Welcome to the PGT Innovations' second quarter 2023 investor conference call. With me on the call today are President and CEO, Jeff Jackson; and our Interim Chief Financial Officer, Craig Henderson. On the Investor Relations section of our company website, you will find an 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.
Photo by Jed Owen on Unsplash Today's remarks contain forward-looking statements including statements about our 2023 financial performance outlook. Those statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. Additional information on the 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 performance between reporting periods. A reconciliation to the most directly comparable GAAP measures is included in the tables in the earnings release and in the slide presentation appendix. At this time, I will now hand over the call to our company's CEO and President, Jeff Jackson. Jeff Jackson: Thank you, Brad. Good morning, everyone, and thanks for joining us on today's call. Our second quarter financial results released earlier today showcased the commitment of our team members and supplier partners to continue executing in an ever-changing macro environment. Following record first quarter results, the company delivered sequential increases in both revenue and profitability despite continued economic uncertainty. Turning to Slide 4, we delivered total revenue of $385 million and adjusted EBITDA of $74 million or 19.1% in the second quarter. We were able to deliver strong profitability in the quarter due to our continued focus on productivity and operational execution. Our sequential revenue grew 2% driven by increases in unit volume and our adjusted EBITDA increased 5% sequentially. The sequential growth was driven by 6% increase in repair and remodeling channels, partially offset by continued weakness in the new construction, which declined 3% sequentially. The housing market continues to show signs of optimism with new home construction activity partially offsetting the impact of the lock in effect on existing home sales. We continue to maintain a normal price-cost relationship and are getting near-standard lead times and delivery across all our brands. Next on Slide 5, let's take a closer look at the second quarter, our sales trends, and key initiatives. During the quarter, we generated total revenue of $385 million. Sales in our Southeast segment were $288 million, an increase of $6 million versus the first quarter of 2023. Sales grew 2% sequentially and contracted 6% versus the prior year second quarter. Our Southeast brands continue to show resilience in a down market. Our sequential revenue growth was driven by a 3% increase in R&R sales, partially offset by less than 1% decline in new construction sales. This is a record prior-year quarter where the Southeast sales grew 27%, R&R sales declined 1% and new construction sales were off 15%. Our Southeast year-over-year sales decline in the second quarter was primarily due to continued housing market volatility. We recently announced the acquisition of the remaining 25% of Eco Enterprises, LLC. We first acquired the initial 75% ownership in Eco in 2021 to accelerate growth, expand margins, and strengthen our supply chain by adding additional glass production capacity. We've been able to leverage the glass capabilities of the Eco business to vertically integrate our other brands and are excited to finalize the purchase of the remaining portion of the business. Sales in our Western segment were $97 million, an increase of $2 million versus the first quarter of 2023. Sales in the West grew by 2% sequentially. Western organic sales contracted 12% versus the prior-year quarter. The year-over-year comps southwest were challenging due to cycling a 39% increase over organic sales in the second quarter of 2022, and the segment's bias towards a slower new construction market. We saw positive momentum in both all our Western segments in June and July. During the quarter, we relaunched our Western Series 7600 Multi-Slide Door. This product provides extreme opening sizes including max panel heights of 15 feet and is available in multiple configurations. This new product continues to provide our leading-edge performance but at much larger sizes. Our Martin Garage Doors acquisition, which closed in late 2022 delivered strong sequential growth off a weather-impacted first quarter. We're actively committing resources to execute on our sales synergies planned across our Western region and into our NewSouth locations. Martin, we'll be launching our new Keystone pan door in the third quarter, featuring a design using in-lane stamping with a minimal rib on the door face. This innovative new design provides a clear lines that homeowners desire. During the second quarter, we held grand openings for our NewSouth retail showrooms in Dallas. Fort Worth, and San Antonio, Texas. These new locations offer all our custom NewSouth products along with Martin Garage Doors. Our Austin showroom will be opening later this year. We're excited about the expansion of the NewSouth brand into the major metro markets in Texas and look forward to adding Martin Garage Doors to other NewSouth locations later this year. Throughout this volatile macroeconomic environment, we remain focused on controlling costs and while delivering on our value proposition to customers. This commitment has allowed us to achieve and maintain strong profitability. We will continue to invest in our brands, our capacities, and automations, and our people to outperform the competition and deliver returns for our investors, both in the near and long term. We continued our commitment to innovations, which is -- underlies everything we do. We are proud to announce that we will be launching our first product to feature Diamond Glass, our impact-resistant glass using technology from our exclusive partnership with Corning in the third quarter. Our premium WinDoor brand will transition to Diamond Glass and would be the first to receive improved clarity, lower weight, 3x scratch resistance, and improved energy efficiency while maintaining the impact resistance that customers expect from our industry-leading impact brands. I'm excited to report WinDoor products featuring Diamond Glass will be available no increase in price, bringing improved performance with no increased costs to our customers. As we scale up our operations at our glass facilities in Venice, we will be adding Diamond Glass as a premium to our PGT branded products. We continue to execute on our plan to deliver our thin triple insulated glass units to other window and door manufacturers in early 2024. We remain committed to delivering products with features performance and value demanded by our builders and customers. Our open order backlog is $247 million at the end of the quarter, up $11 million from the first quarter, primarily from demand in our Southeast segment. Regarding our shareholder rights plan, the circumstances described in our March 30th press release necessitating the implementation of the plan continue to exist. We continue to engage in constructive dialogue with all our investors and we welcome all their perspectives. We're always open to opportunities to maximize shareholder value. We continue to execute on our plan to create long-term value for all our shareholders including our $250 million share repurchase program. During the second quarter, we invested $19.8 million in open market transactions to repurchase our shares for a total of $45.4 million in share repurchases year-to-date. Now I'd like to turn the call over to Craig Henderson to review our second quarter results in greater detail. Craig? Craig Henderson: Thank you, Jeff. Turning to Slide 6, consolidated net sales were $385 million in the second quarter, down 5% from the prior year second quarter. The year-over-year decrease in net sales was caused by an 8% decline from our legacy businesses. The impact of unit volume decline was 13%, partially offset by a price impact of plus 5% primarily from price increases taken in the prior year second quarter. Our Southeast segment sales contracted 6% from the prior year's second quarter while our Western segment sales were down 12% from the prior year. During the second quarter, our sales breakdown was 61% R&R and 39% new construction. Organic R&R sales were down 1% compared to the second quarter of 2022. We continue to deliver strong R&R sales growth in PGT and Eco, but this was offset by our other brands. Organic new construction sales were down 17% to the prior year's second quarter reflecting the weakness in new home construction activity. Gross profit was $154 million in the second quarter and declined 7% when compared to the prior year second quarter. Our Q2 results were driven by reduced fixed cost leverage from lower volumes, partially offset by continued solid performance from our operating teams. The impact of prior-year pricing actions offsetting material and wage inflation and additional cost containment measures. Selling, general and administrative expenses decreased 9% in the second quarter compared to the prior year, driven by strong cost containment measures. Adjusted EBITDA of $74 million or 19.1% were 6% lower than the prior year second quarter. This year-over-year decrease in dollars was driven by reduced fixed cost leverage from lower sales volumes. However, the continued high margin performance was a result of operational efficiencies and the impact of pricing actions offsetting material and wage inflation. Our adjustments for the quarter included $2.5 million related to the closing of our Charlotte and Raleigh-Durham NewSouth showrooms, which opened in 2021. We are exiting these markets to focus our investments to drive growth in other areas of the business during this volatile macro environment. In addition, we adjusted our second quarter results by approximately $500,000 for one-time charges related to acquisitions and for costs incurred in the second quarter relating to our fourth quarter 2022 cyber incident. Our tax expense for the quarter came in at 26.5%. We reported adjusted net income of $34 million or $0.58 per diluted share compared to $41 million or $0.67 per diluted share in the second quarter of 2022. Turning now to our balance sheet on Slide 7, at the end of the second quarter, we had net debt of $640 million and total liquidity of $177 million. As of the end of the second quarter, we had a trailing 12 month bank covenant net debt to adjusted EBITDA ratio of 2.4x. We generated operating cash flow of $36 million in the second quarter. We also invested $13 million in CapEx, mostly related to cost reduction, and capacity expansion initiatives that will enable us to improve our profitability in 2023 and beyond. During the second quarter, we continued execution of our three year, $250 million share repurchase program and returned $19.8 million to shareholders through the repurchase of 777,000 shares. Moving on to our guidance on Slide 8, the continued macroeconomic uncertainty will again limit our sales and EBITDA outlook to the next quarter. For the third quarter, we anticipate revenue to be in the range of $385 million to $405 million. We anticipate adjusted EBITDA to be within the range of $71 million to $77 million. For the third quarter, we expect price to contribute 2% to our growth over the prior year quarter. We expect sales volumes to increase from the second quarter driven by a recovery in new construction and stability in R&R sales. We expect our strong operations execution along with continued cost containment will enable us to continue to deliver strong profits in this uncertain market. We expect to spend $25 million in 2023 on our new glass operation equipment and facilities, in addition to the normal 3% to 4% of sales run rate capital spending. This higher level of spend will ensure that our new glass operations were launched successfully. Despite this increased investment, we continue to hold our target leverage at 2x to 3x EBITDA. And now I would like to turn the call back over to Jeff. Jeff? Jeff Jackson: Thanks, Craig. I'll conclude today with a summary of the current market conditions and while we believe PGT Innovations is positioned to continue to deliver above-market long-term growth despite the challenging near-term demand environment. While the underlying macroeconomic volatility continues to affect both home buyers and homeowners, our repair and remodeling channel is bolstered by the lock-in effect of lower fixed-rate mortgages. Meaning homeowners are more likely to stay in their homes longer. The record level we see in home equity and increasing in age of homes means homeowners are more willing to take on long-term remodeling projects to update their homes. This lock-in effect will positively impact new construction activity as well the dramatic reduction in existing home sales are helping to drive a stable recovery in the new home construction. Long-term industry sources continue to suggest that there are several macroeconomic trends that will support growth in the new construction and R&R markets over the coming years. These trends include a growing adult population especially millennials to drive 12.7 million new home to be formed, the need for an additional 17 million housing units to meet demographic demand, 1.8 million additional homes will reach prime remodeling years through 2027, 83% of mortgage borrowers are locked in with mortgage rates below 5%, the average homeowner has $333,000 in equity in their home. The Inflation Reduction Act introduced major changes to the federal incentives for residential energy efficient upgrades through 2032. Our new glass technology will enable homeowners to qualify for these incentives. Our Florida brands have the added benefit of increased hurricane awareness, evolving construction standards and the enactment of the Home Hardening Sales Tax Relief Act on impact products. Turning to Slide 9. PGT Innovations has built a solid foundation to take advantage of these long-term trends and we see a greater benefit than others in our space when the economy stabilizes. Our strategy is to focus on markets where the demographic trends is more favorable than the national average. First, we're a national leader with an outstanding portfolio of brands that we have strengthened over the past few years. We're executing on our growth strategy, including expansion into adjacent building product categories to complement our existing portfolio of Window and Door brands. Our products in impact-resistant and indoor-outdoor living markets continue to gain traction. We serve geographies with strong population growth. Second, the diversification of our product portfolio continues to expand through acquisitions and new product introductions, which further facilitates a balanced portfolio growth in both new construction and the R&R channels. Third, operational improvements in capital investments have increased our capacities and delivered margin expansion. Our strong free cash flow provides options to reinvest in the business and return capital to our shareholders. Four, our ongoing investments in innovation, new product development, and talent help us provide customers with innovative premium products to meet their changing needs. Lastly, we're committed to increasing shareholder value through improving profitability and returning capital to our shareholders through our share repurchase program. We believe PGT Innovations is in a great position to weather the current economic environment and are working to build a stronger foundation for the next level of growth and continue to create long-term value for our shareholders and customers. In addition, we believe our current trading range does not properly reflect the long-term potential shareholder value for PGT Innovations' shareholders. And the actions we have discussed will drive our company's value higher. I want to thank our shareholders, our team members, channel partners and suppliers for their continued support. At this time let us begin the Q&A. Operator? See also Wall Street Analysts Are Bullish on These 10 Stocks with Increasing Price Targets and Per Capita Cheese Consumption by Country: Top 25.
Q&A Session
Operator: [Operator Instructions] Our first question will come from Phil Ng with Jefferies. You may now go ahead. Margaret Grady: Hi, good morning. It's Maggie on for Phil. JeffJackson: Hi, Maggie. Margaret Grady: I guess first digging into the demand outlook across your end markets. It sounds like R&R has been outperforming new construction, but you're expecting a sequential improvement in both of those end markets next quarter. Do you expect to see a positive year-over-year inflection this year or is that more of a 2024 event right now. JeffJackson: You mean in total sales Maggie or just-- Margaret Grady: Yes, I guess, by end market. You talked about, you're starting to see a recovery in new construction. Do you see that kind of inflecting positive this year and same for R&R. Craig Henderson: Yes. Maggie, we definitely believe that the demand profile continues to be strong from an R&R perspective. New construction, excuse me -- has been weaker, just because of the fall-off in the activity from the second half of 2022. But we do see early signs that it is improving. So, from an R&R perspective definitely will be up from a year-over-year perspective, new construction will be more flattish, but will be flat from a dollar perspective. JeffJackson: Yes, and I will say Maggie, I mean if you look in July I'm going to speak total not by segment. Our July order trends were already up 8% in the month of July over the last year. I think that's why we really are feeling more positive in the back half of the year that's reflected in our increased Q3 guidance. Margaret Grady: Okay. Okay, got it. That's helpful. And then in Florida specifically, you have some secular tailwinds from the recent hurricane activity as well as the Home Hardening Act. Can you talk about what the consumer response to both of those have been. And what's your sense of contribution from those in the first half and then going into the balance of 2023. JeffJackson: Yes, I mean, the response to the Home Hardening Tax Relief has been very strong. Our dealer base has been able to take advantage of that as they're out selling windows and doors into the homes. Especially since Hurricane Ian hit, we did have a significant interest in that just on our lines at call into the PGT obviously we see those out to our dealer base. If you look at Florida just last year alone Florida had over 400,000 people moving into the state. And that was only the fourth time in the state's history has been above 400,000. So people have moving in, hurricanes are hitting and that awareness factor until you've been through hurricane awareness factor plays very well for selling impact product. So we continue to reap those benefits. I'd say we'll see the benefits of Hurricane Ian from at least the next 18 months. Looking back to Irma, we saw good uplift in Irma for about a two-year period. And so if you look at, Ian, I would estimate that about the same timeframe in terms of a benefit in sales. You have anything you want to add, Craig. Craig Henderson: Yes, a lot of the demand that we're seeing so far is still just related to hurricane awareness. And so the repair and remodel piece of it, especially in Southwest Florida region where most of the damage happens is still inbound in the second half and potentially into the first half of next year. Margaret Grady: Okay, great. That's helpful. Thanks, guys. JeffJackson: Thank you. Operator: Our next question will come from Mike Rehaut with JPMorgan. You may now go ahead. Douglas Wardlaw: Hi guys, good morning. Doug Wardlaw on for Mike. Can you guys talk about the trends you saw in the Western segment throughout the quarter, if you could get a little bit more color there. And just how the region bounce back from the weather impact in the first quarter. And then if you could add a little bit on how you expect the region to trend moving into the back half of the year directionally. JeffJackson: Sure, I'll speak high level and Craig can share some more numbers details. But yes, the first part of the -- first half of this year, obviously, the first quarter being impacted by the weather by the rain, California, all the way through really impacts into Arizona with the snow melts and stuff. So we've really had weather-related issues. But, all those are pretty much behind us now. What we've seen is a good trend in both Anlin and even Western stabilizing, as we come through the year itself. In Martin, our new acquisition, we've been able to set up seven new dealers. We're very pleased with the sales synergies we're starting to at least set up and we think there's benefits will be coming soon in terms of top line growth there. And we actually start in Utah with Lowe's -- with the Martin Garage Doors having at Lowe's in Utah. So we've got some good I would say back half initiatives going on out West that will really drive what we think some good volume. Now, it does still is still impacted by the slowdown in new construction because Western as you all know is basically new construction and we have those agreements with various national players like Toll Brothers et cetera for their indoor-outdoor living. So that has slowed, but we do feel that again is that back half as we enter the back half here, we could see some more traction there. Craig Henderson: Yes, I would say the year-over-year comps, definitely we're seeing the weakness in new construction, and that's evident in the Western brands, but sequentially seeing improvement and we expect to see further improvement as we move into Q3, Q4. Douglas Wardlaw: Got it. And then I guess just refreshing your acquisition, your M&A strategy, as you said new resi is looking up and we've been looking at single family starts, which are starting to improve. So does that improvement that end market change the way you guys are looking at acquisitions moving forward.
JeffJackson: Yes, I don't think so. We're deploying capital obviously back to shareholders, for instance, in the share repurchase program we've got going on. We're always looking for the right fit to add to the portfolio of brands. But again, I don't think anything's necessarily changed our strategy moving forward. We wait for the right opportunity and move if it comes available. Douglas Wardlaw: Great. Thank you, guys. Operator: [Operator Instructions] Our next question comes from Keith Hughes with Truist. You may now go ahead. Keith Hughes: Thank you. Question on gross margin, solid number here in the quarter, and like you're indicating some more gross margins coming. I guess my question is the gross margins are running a far higher than they were pre-COVID, is there anything here that would keep those margins going down, assuming a solid demand environment in future years. Have we reached a new gross margin level for PGTI. Craig Henderson: No, I mean, I think this is the new standard from a PGTI perspective. We've definitely grown since COVID and so you're overcoming fixed cost and from a incremental margin perspective if anything it will little improved slightly as demand increases. And as our business we have capacity out there and we're looking from a capital perspective to expand capacity where needed. That's not going to impact significantly the gross margin going forward. So right now we're in a good price cost relationship from a raw materials perspective. We're seeing deflation in some buckets of raw materials, inflation in others, but from a balance perspective, we feel like we're in a great place and we'll be able to kind of maintain that gross margin and expand it as we move forward. JeffJackson: With fixed cost leverage basically, Keith, I would echo what Craig has said and definitely agree. We did have some wage pressures in the last couple of years. We've significantly increased our wage base to compensate both for inflation and just competition to keep our folks. So that's baked in and we're not experiencing that currently, aluminum in the check. Actually we have a very successful hedging program. So I just don't see anything majorly impacting our gross margin, that would say the current trends aren't something we can count on going forward. And like Craig said is we getting more volume there is a good leverage component to that as well. Keith Hughes: Okay. One other question you talked, Jeff, about 8% I believe order rate growth that sounds like that's company-wide, how does that breakout East versus West. JeffJackson: One second, I think Craig may have that detail. Craig Henderson: Yes. So, the 8% growth in the third quarter from a demand perspective, is 17% in the Southeast and then still down 15% in the West. Keith Hughes: Okay. Thank you. Craig Henderson: Both of those are improving over Q2. In Q2 the demand growth really kind of came back really more due to the price increase that we took in the second quarter of last year. Kind of changed the demand seasonality some the demand numbers, got a little bit sideways In the second quarter, but the sequential trends are very solid and we continue to see stability and actual growth in this market, which is gives us support for the results that we're putting forth in Q3. Keith Hughes: All right, thank you. JeffJackson: Thanks, Keith. Operator: It appears there are no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Craig Henderson for any closing remarks. Craig Henderson: Thanks for joining us on the call today. We look forward to future conversations with you and look forward to connecting next quarter in early November. Have a great day. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
