PGT Innovations, Inc. (NYSE:PGTI) Q4 2022 Earnings Call Transcript

PGT Innovations, Inc. (NYSE:PGTI) Q4 2022 Earnings Call Transcript February 22, 2023

Operator: Good morning and welcome to PGT Innovations Fourth Quarter 2022 earnings call. All participants will be in listen-only mode. . Please note that this event is being recorded. I’d now like to turn the call over to Mr. Brad West, Senior Vice President of Corporate Development. Please go ahead.

Brad West: Thank you. Good morning and welcome to the PGT Innovations fourth quarter and full year 2022 investor conference call. With me on the call today our President and CEO, Jeff Jackson, and our Chief Financial Officer, John Kunz. On the Investor Relations section of our company website, you’ll find the earnings press release issued earlier today, as well as a 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 prepare remarks, please direct your attention to the disclosure statement on Slide two 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 2023 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 on the company’s most recent SEC filings. Additionally, on Slide three, 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 and the earnings release and in the slide presentation appendix. At this time, I will now hand over the call to our company CEO and President, Jeff Jackson.

Jeff Jackson: Thank you, Brad. Good morning, everyone, and thanks for joining us on today’s call. I’d like to begin by thanking each and every team member for their contributions to what turned out to be a record year for PGT Innovations. Despite the challenges we face, which included both a category four hurricane and a subsequent ransomware attack. We overcame and delivered record revenue and EBITDA for the full year. Our growth is a result of our steady effort to improve PGT Innovations through our strategic and operational framework of profitable growth, as we continue to create long-term value for our shareholders, while serving our customers and communities. We hit the ground running in 2022, despite inflationary pressures on materials, labor cost, supply chain challenges, hurricanes, ransomware attacks, and a slowing economy due to high interest rates.

We were able to increase revenue to $1.49 billion. Grow adjusted EBITDA to $254 million and expand our adjusted EBITDA margins by 240 basis points compared to 2021. We also expanded our product portfolio with the addition of Martin Garage Doors. Martin has allowed us to expand into an adjacent building products category, add premium garage doors to our product portfolio, broaden our geographic footprint and brand presence while creating cross selling opportunities for both companies. We are still in the early stages of integrating Martin business and remain optimistic about the opportunities, the acquisition brings to PGT Innovations in the coming years. Next on Slide five, let’s take a closer look at the fourth quarter, our sales trends and key messages.

Despite the challenges presented by Hurricane Ian, and the ransomware attack, we generated total revenue of $341 million during the quarter. As we mentioned on our third quarter call. Both events limited our ability to generate revenue during the fourth quarter. Thus organic growth was 5% for the quarter. Sales in our southeast region were impacted by both events, leading to sales of 243 million during the quarter, an increase of 5 million versus the prior year quarter. However, our focus on costs. labor efficiencies, lead times, service and quality allowed us to reduce our backlog from the third quarter even though we had sequential increases in orders in the southeast region. These improvements position us to be the supplier of choice for our customers going into 2023, allowing us to execute one of our strategic initiatives of recapturing market share.

Operationally, the suddenness of each event did not allow our operating teams to immediately adjust our cost structure to match the operating capacities at our plants. This resulted in unfavorable decremental margins during the quarter. However, for the month of December, our Vince operations had fully recovered and are currently at operating rates better than they were prior to the storm. While the ransomware attack did temporarily disrupt our Southeast Florida operations. Our Business Technology Services team did a fantastic job in restoring our systems and getting us back up and running, averting any need to make any ransomware payment. Organic sales in the Western Region increased by 10 million or 15% with strong growth coming from each core market.

The investments we made in production capacity has allowed us to increase our throughput by 30% since December 2021, restoring our lead times primarily to the 4-to-10-week range. Western Window Systems now has the capacity to produce over 5 million of products each week, with the addition of our recently acquired manufacturing space. Both launch of our Western Window business custom and production builders grew in the quarter and full year. Additionally, we are expecting to see increased share in the premium indoor-outdoor market with the launch of our newest 300 series minimalist sliding glass door. This product was introduced at the international builder show earlier this month, and the initial reactions have been extremely encouraging. The expansion initiatives at Anlin are in an early stage of implementation.

These initiatives will enable us to increase our production capacity, expand our product portfolio, and allow us to increase our focus in the southwest region or in our vinyl markets. Our resulted Anlin came in above our acquisition model expectations. We were able to leverage our price, cost portfolio at our Western business unit with increased sales resulted in higher segment EBITDA margins compared to the prior year quarter. Our commitment to innovation which drives us to deliver products with features, performance and value demanded by our builders and customers was highlighted during the quarter with the launch of two new innovative glass products. Our thin triple insulated glass unit and our diamond glass impact resistant glass units.

PGT Innovations will be the first manufacturer in the U.S. window indoor market to offer such products. Additionally, we will be the exclusive supplier of impact resistant windows and doors featuring diamond glass for the use in residential and mixed use buildings in the U.S. Diamond glass provides greater clarity, more scratch resistance and up to 45% lighter than the standard impact product and thus easier to install. All these benefits come with the same design pressure and impact ratings as our current products. Thin triple glass provides improved performance to meet the tightening North America energy standards known as ENERGY STAR Version 7. It meets the Inflation Reduction Act requirements for a homeowner to obtain incentives without the need for frame, hardware or installation rework.

And they have a significant weight and cost advantage to other emerging technologies. Our backlog was 235 million at the end of the year, including 5 million related to Martin down from 356 million at the start of the year. We received organic orders of 291 million of products during the fourth quarter, down from 307 million in the prior year quarter. This reduction in backlog is due to our improved operational performance and the realization of the investments we’ve been making in our business. Now I’d like to turn the call over to John Kunz to review the fourth quarter results in greater detail, John.

John Kunz: Thank you, Jeff. Moving on to Slide six. We were very pleased to have achieved 341 million of sales in the fourth quarter despite the impact Hurricane Ian and the ransomware attack had on our business. The year-over-year increase in net sales was driven by 5% organic growth from our legacy businesses and revenue from our recent Anlin and Martin acquisitions. Our Western segment grew 15% organically, while our southeast segment had a 2% organic growth despite the interruptions. In the fourth quarter, our sales breakdown was 58%, R&R and 42% new construction. Organic R&R sales grew 1% compared to the fourth quarter of 2021. The strength of our legacy brands helped increase organic new construction sales by 12%. Gross profit rose 12% to 121 million for the fourth quarter of 2022 compared to the prior year quarter.

Our fourth quarter results were driven by continued solid performance from our operating teams. Adjusted selling, general and administrative expenses increased 60% in the fourth quarter, compared to the prior year, driven by SG&A from our recent acquisitions, the expansion of our new staff operations, increased labor and distribution costs and an increase in marketing investment. Adjusted EBITDA was 48.2 million flat with the prior year quarter resulting from increased sales offset by the inefficiencies experienced, resulting from the two aforementioned disruptive events. Our adjustments for the quarter included approximately 8 million of expense associated with product rationalization of our WinDoor brand. In an effort to improve throughput and profitability and reduce underutilized assets, we elected to discontinue certain product lines within our WinDoor portfolio.

Additionally, we will adjust for certain expenses related to costs associated with the acquisition of Martin garage doors and the related refinancing of our credit facility. The remaining costs related to Hurricane Ian, the ransomware attack and costs associated with our restructuring. Our tax expense in the quarter came in at 26.4%, bringing our full year tax expense to 24.9% in line with our full year assumptions. We reported adjusted net income of 16.1 million or $0.27 per diluted share, compared to 18.8 million or $0.31 cents per diluted share in the fourth quarter of 2021. Turning now to our balance sheet on Slide seven. At the end of the fourth quarter, we had net debt of $585 million, including a cash balance of $67 million. As we mentioned on our third quarter call, we had entered into a new five year 250 million revolving credit facility in October, which was used along with cash on hand to fund the Martin acquisition.

The new facility allowed us to extend maturities while enhancing the company’s liquidity. As of year-end, we had a trailing 12-month bank covenants net debt to adjusted EBITDA ratio of 2.2x. We had another year of solid free cash flow performance as we generated 151 million in free cash flow for the year, an increase of 121 million versus our prior year. This impressive free cash flow performance provides the backdrop in funding for our capital allocation priorities, including our share repurchase program and future strategic acquisitions. Looking ahead to 2023, we would expect capital expenditures to be within 3% to 4% of sales, first quarter interest expense to be within 8 million to 9 million, depreciation and amortization to be around 15 million, and our tax rate to be 24% to 26%.

And with that, I would like to turn the call back over to Jeff. Jeff?

Jeff Jackson: Thanks, John. Next, I would like to speak about our recently announced 3-year $250 million share repurchase program authorized by our Board. While building products stocks have come under pressure from the rising interest rate environment and uncertainty around the economy. We do not believe our current stock price reflects the long-term value of our company. We would agree that near term operating environment is cloudy by the Feds action to raise interest rates, making the full year outlook a bit murky, but long-term we remain very bullish about the outlook of our company. Industry sources including John Burns suggest that there are several macroeconomic trends that will support growth in new construction and R&R markets over the coming years.

These trends include the need for an additional 17 million housing units to meet demand. 24 million homes will reach prime remodeling years by 2027, 87% of mortgage borrowers are locked in with mortgage rates below 5%. The average homeowner has an all-time high of 348,000 in equity for their homes. Our Florida brands have an additional benefit of increased hurricane awareness, evolving construction standards, and the enactment of the home hardening sales tax relief on impact products over the next two years. These trends coupled with our strategy of being in markets where the demographics tend to be more favorable than the national averages, suggests we should see more of a benefit than others in our space. Additionally, our performance historically during recent contractions has been better than that of our peers.

As the leader in impact resistant windows and doors would expect to grow share while looking for ways to penetrate new markets. As an example, we’re very pleased to have recently received our first $500,000 order for impact resistant products NOI. The commitment to a 250 million share repurchase program will modestly impact our long-term capital allocation priorities. We will use our cash flow from operations to fund the program. And we expect to continue to operate within the stated leverage of two to three times net debt to EBITDA. We expect that our commitment to the share repurchase program would not have an impact on our ability to reinvest capital in our business, or for that matter for assessing the right strategic acquisition. We will continue to make investments in capital equipment such as Advanced Manufacturing and automation that will allow us to meet or exceed our customers quality and delivery expectations.

Moving on to our 2023 outlook. Our recent reports have moved more positive. Industry experts are calling for a national retraction in both new construction and R&R markets during 2023. Additionally, the current interest rate actions by the Fed are limiting our visibility into the end market beyond the first quarter. At this time, we’re going to limit ourselves and EBITDA outlook to the first quarter, and we will provide more clarity for the remaining quarters as the economy starts to settle down. Despite the challenges presented by the higher interest rate environment, we expect to deliver another solid first quarter. We expect our revenue for the first quarter to be in the range of 370 million to 390 million, supporting these sales levels was a pickup in orders in November, December and January in the southeast region, which exceeded prior year levels.

We anticipate adjusted EBITDA to be in the range of 60 million to 64 million historically not allow us to effectively leverage the fixed cost structure of our business. Additionally, the first quarter will include increased advertising and marketing expenses and costs associated with our participation in the international builder show, whereas we did not participate in that show last year. The incremental impact of those additional expenses will be approximately $5 million over prior year’s first quarter. In closing today, let me reiterate why we believe PGT Innovations is in an excellent position to continue creating long-term value for our shareholders. First, we are a national leader for an outstanding portfolio brands that we have strengthened over the past few years.

We are executing our growth strategy, including expanding into adjacent building product categories to complement our existing portfolio of window indoor brands. Our products and 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 from acquisition and new product introduction, which further facilitates profitable growth in both the new construction and R&R challenge. Third, operational improvements in capital investments have increased our capacities, which helps us meet demand and deliver margin expansion. Strong free cash flow provides options to reinvest in the business and return capital to our shareholders.

Fourth, our ongoing investments in innovation, new product development, and talent help us provide customers with innovative premium products to meet their changing needs. Our products help protect both property and lives. And we will not compromise our commitment to conducting business in a socially responsible manner. Lastly, as evidenced by our recently announced share repurchase program, we are committed to increasing shareholder value. While our results were impacted by Hurricane Ian and ransomware attack during the quarter, we have never been more bullish on the long-term outlook for the company. I want to thank our shareholders, team members, channel partners and suppliers for the continued support. At this time, let me begin the Q&A.

Operator?

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Q&A Session

Operator: Thank you. We’ll now begin the question-and-answer session. . First question will be from Mr. Keith Hughes of Truist. Please go ahead.

Keith Hughes: On the first quarter guide, could you talk about what kind of organic number that would represent within there, if you could kind of at least talk about southeast versus west?

John Kunz: Sure, Keith. I can do that for you. If you look at the prior year, we came in top-line around 358 or thereabout 359, you have to add the Martin acquisition in there as well. So you have a few million call it, 10 million, 15 million for the Anlin acquisition number. And then, you have price impact. So that price impact can be anywhere recall it 8%, 10%. And then the volume, we’re expecting a decline overall. So our anticipation is that we’ll have a volume decline. That’s how we get up to call it the 370 to 390 range. I mean, that’s the expectation as far as where we are. Between regions, I would say, the Western is seeing a little bit more softness overall than the southeast region. And I don’t want to get more specific than that. I think that’s granular enough, I think for the expectations that we’re putting on our guide.

Jeff Jackson: Keith, I would just add to that. That’s what makes it hard to predict. If you look at like I said in my comments, if you look at the last few months, our order entry in the southeast, which is almost 75% of our business is up 21%. So we’re feeling pretty good at this point where we set and it just, if you look out in the entire year, it makes it more cloudy given what we’re seeing.

Keith Hughes: There comes my second question, Jeff, on the order growth. Can you talk more, what products, what raises them? It’s just a really surprising number given the kind of the landscape?

Jeff Jackson: Yes. No, it’s a combination. Like I mentioned this in the southeast. So let’s call it Florida, mainly in our PGT brands, CGI brands, eco brands, New South brands, is what we’re seeing it. And it’s — we think it’s several reasons. One, Hurricane awareness, obviously, we had a hurricane come through category four hit us. So there’s a lot of awareness out in the market now. And we’re getting a lot of inquiries and a lot of hits on order or online web sites regarding that. The actual New South stores in the path of the storm there, upper lower 30% in terms of volume increases. So where the storm hit is even more. So there’s awareness. And then, secondly, as I mentioned, in the last quarter’s call, the state of Florida passed this home hardening tax credit for R&R purchases.

So anything that you want to harden your home with, i.e., impact windows and doors. We work with the state of Florida, Governor Ron DeSantis and the CFO, Jimmy Patronus, to make sure those could be tax free for the individual for the next five years. And we’ve heard great feedback from our dealer base. And people we talked to around that. And then, if you think about our lead times have improved dramatically, quite frankly, our operations here at PGT are on time and in full is running into upper 80s, compared to last year it was in the 50s. So we’re starting to gain back some share quite frankly we lost because of performance. Obviously, people rather go with the impact leader in that brand, it creates a lot more weight, a lot more options in the market, but we had to perform and we fix that operational performance issue.

So we’re starting to actively gain back share that we had lost at the end of 2020 and 2021.

Operator: Thank you. Our next question from Phil Ng of Jefferies. Please go ahead.

Jeff Jackson: Phil, you might be on mute.