Q1 2021 PGT Innovations Inc Earnings Call
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Good morning, and welcome to the P. G T innovations first quarter and full year 2021 earnings conference call. All participants will be in a listen only mode and I'd now like to turn the conference over the P. G T innovations interim Chief Financial Officer, Brad West. Please go ahead.
Thank you operator, good morning, everyone and welcome to the <unk> innovations first quarter 2021 Investor Conference call on.
And the investors section of our company website, you'll find the earnings press release issued earlier today as well as the slide presentation, we have posted to accompany today's discussion.
Webcast is being recorded and will be available for replay and the company's website.
Before we begin our prepared remarks, please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimers included and the earnings press release, and our SEC filings related to forward looking statements.
Today's remarks contain forward looking statements, including statements about our 2021 and 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 is available and the company's most recent form 10-K.
Additionally on slide three you should also note that we report results using non-GAAP financial measures, which we believe provide additional information for investors to help facilitate comparison of prior and present performance.
Reconciliations of the most directly comparable GAAP measures is included in the tables attached to the earnings release and.
And in the appendix of the slide presentation.
I am joined on this mornings call by Jeff Jackson, PDT innovations CEO and president after our prepared remarks, we will take your questions I will now hand, the call over to Jeff for opening remarks.
Thank you Brad and good morning, everyone and thank you for joining us on today's call.
2020 was a year of full of challenges and opportunities our core markets continue to show growth and both the repair and remodeling as well as the new construction markets.
This growth has continued and in certain aspects of accelerated in 2021.
Our employees and our dealers and distributors have worked hard to services increase and demand in an environment, where while we are all encouraged by the increase the availability of vaccines, we are not yet and back to normal.
I continue to be extremely proud of our 3500 plus team members for their dedication and servicing our customers over the past 15 months during these unique circumstances.
Turning to slide four.
We start off of the year by posting record sales for the quarter with the 23% growth versus the first quarter of last year, we saw strong demand and both the southeast and western segments.
Our organic growth came in at 15%.
Additionally February 3rd marked one year since completing the acquisition of new south of window solutions.
The sales contribution for the quarter for new sales was $34 million driven by strong sales growth and the direct to consumer, Florida residential R&R market and.
And our expansion efforts outside of Florida.
Integration of new sales into our operations has added to our record level of production capacity and a tight labor market and.
And we expect continued growth from new sales of existing retail locations and additional store expansions outside of the state of Florida in 2021.
Since the acquisition, we've increased capacity at new sales locations by 125%.
And we have opened three new showrooms we.
We plan to open three more of this year growing the footprint outside of Florida, and increasing our investment and lead generation tools.
As previously announced on February one, we acquired a 75% ownership stake and echo window process, which.
<unk> contributed $16 million of sales in the quarter.
We are excited about echo as it accomplishes a number of strategic objectives, including providing an additional reliable source of glass and glass manufacturing capacity.
Diversifying our product lines into the high growth commercial market and creating new relationships with additional residential dealers.
As we discussed over the past few earnings calls, we have put substantial efforts behind identifying and implementing operational improvements across the manufacturing processes at our western business unit.
We have seen steady improvement and material costs direct labor and distribution costs. These.
These improvements generated a 70 basis point increase and consolidated gross margin for the quarter.
While we strive for continuous improvement and our manufacturing operations, we are seeing cost pressures on a number of fronts.
Increasing consumer demand and the need for restocking across all sectors of the economy has continued to cause the labor constraints. These pressures have resulted and wage inflation as employers compete to attract and keep employees.
This certainly affects us all and we will incur a higher direct labor and overhead costs as we work to ramp up the production to meet increased sales demand.
Additionally, I have seen inflation and material cost, including glass and extrusion, which are major components of our products.
Given the impact of all of these factors our adjusted EBITDA margin of 15, 6% decreased 230 basis points versus prior year quarter.
To offset our increased cost structure, we have and enacted a number of price increases throughout the quarter.
And as price increases take effect, we expect to see our margin and improved throughout the later half of the year.
The margins will also improve as capacity is increasing and our plans, allowing us to deliver higher sales and reduce our backlog.
Next I would like to give an update of what we're seeing and incoming customer orders and how our backlog is developing.
Our total backlog at the end of the first quarter, excluding new cell and echo.
Has increased to 288 million.
And has since grown to an all time high of $343 million as of today.
This is driven by longer lead times for most of our products as our operations teams work to meet rising demand and in an environment, where labor is tight and all of our manufacturing locations as well as for our key suppliers star.
The strong order entry and our southeast business unit the 34%.
Driven by continued strength and the new construction market of 56% and repair and remodeling market up 25%.
And strong order entry at our Western business unit, as recoveries, and Arizona, and California pick up steam.
Within our two most recent acquisitions, we have seen impressive demand growth for the first quarter retail sales orders and new south window solutions totaled $35 million and increase of 42% year over year.
Echo is off to an incredible start with order entry up 69%.
To meet growing sales demand and improved lead times to better meet customers' needs. We continue to focus on increasing production capacity.
And our Florida based operations.
While we continue to do everything and our power timber of both employee health and safety is our top priority.
Some of the actions we've taken include increasing starting wages, adding stay bonuses as well as sign on bonuses.
Signing a lease and southeast, Florida to increased warehouse capacity, which will begin to favorably impact our operations and Q2.
Signing a lease for a new facility expanding our manufacturing capacity and Fort Myers, Florida, which we are currently staffing and will favorably impact our operations and Q3.
We have made capital investments to increase our vinyl window of capacity by 20% and Q2 as well as frame capacity for our slot and glass doors by 30% and Q3.
Additional steps are being taken and increased vinyl window of capacity by another 20% and Q4.
These increases and capacity will be reflected in our results as we go through the back half of 2021.
And we will help us to accommodate the strong organic sales growth, we have seen in Florida and return of the current robust backlog to normal levels later this year.
Turning to slide six as we look ahead into 2021, there is no change and our framework for profitable growth as we execute our strategic long term value creation for shareholders, while servicing our customers and communities.
Our first pillar is to maintain our focus on consumer centric innovation.
We strive to stay in front of challenging and changing builder and consumer preferences by bringing products to market that offer both performance and value our customers demand.
Our marketing strategies have enabled us to gain insight into the demand that is driving our sales and the R&R market capturing more leads as consumers are spending more time and their homes.
We will continue to evolve our innovative strategies and the overall economy improves further.
Our second pillar of attracting and retaining talent and it's been on the front and center and all businesses faced a very tight labor market and the U S.
We have always placed an emphasis on being an employer of choice, but we have had to go even further to build out our team of dedicated employees with the right skill sets.
We work hard to maintain a safe workplace and our culture, where employees no. They are appreciated and we've recently implemented of long term incentive program to help retention.
Our third pillar is investing and the business to increase manufacturing capacity and capabilities, we strive to continually improve operations to increase output lower cost and improve quality.
Which will help us meet growing demand.
I have highlighted our efforts to enhance efficiencies and our western window systems facility to lower costs, while maintaining high quality standards. Additionally, we are continuing to deploy PGD innovations best practices and other systems across operations at new cell and Echo.
Our fourth pillar is the allocation of free cash flow to achieve profitable growth through investing for growth through new product development and production capacity.
Paying down debt.
Or are the right strategic acquisitions.
All of the end goal of driving shareholder value consistent with our past execution.
Now I'd like to turn the call over to Brad to review the results in greater detail Brad.
Thank you Jeff.
Turning to slide seven we reported net sales of $271 million for the quarter, a 23% increase over the prior year quarter, which included a 50 <unk> week.
This includes 15% organic growth and part due to substantial growth within the new South business, which continues to increase orders and installations.
From a channel perspective, our repair and remodel sales benefited from our last two acquisitions, both of which focus mainly on Florida is the R&R market and the first quarter our sales breakdown.
Finished at 53% R&R and 47% new construction.
Our organic R&R sales grew 19% during the quarter.
And organic new construction sales grew 10% from the strength of our legacy brands.
Gross profit for the quarter was $94 million, a 16% increase reflecting increased sales, partially offset by higher labor and materials cost.
Gross margin finished at 34, 7% for the quarter, a 220 basis point decrease from the prior year.
This was the result of direct labor, which increased approximately 150 basis points. This was mainly due to the increased wages and overtime within our operations as we continue to compete for labor and a tight market, while serving the and increased demand.
And our western markets. We did continue to see labor improvement was partially offset the impact.
Second our results for the quarter included $2 7 million of costs related to the exit of our commercial business acquired and the new South acquisition adjusting for these charges. Our gross margin would have been 35, 7%.
Higher input costs for wages and increased cost of materials, such as aluminum where the current price is up 52% compared to the average cash price. We saw in Q1 of 2020 are expected to continue for the remainder of the year. However to improvements discussed already and pricing actions already taken we expect gross margins.
And to improve materially and the back half of 2021.
Margins and the second quarter Harbor policy and modest improvement due to the timing of the realization of the price increases.
Selling general and administrative expenses for the first quarter increased by $16 million compared to the prior year quarter, primarily reflecting higher selling costs. As a result of increased sales and increased amortization expense related to our two most recent acquisitions.
And a $1 $5 million charge related to the exit of the commercial business acquired and the new South acquisition.
Additionally, we made the marketing related investments and our three new staffed locations that have opened over the past 12 months.
Our adjusted EBITDA was $42 million, a 7% and increase versus the $39 million and the prior year quarter.
Our effective tax rate for the quarter came in at 24% roughly in line with our full year modeling assumptions of 25%.
We reported adjusted net income of $16 5 million or 27 per diluted share and the first quarter 2021, compared to $16 4 million or <unk> 28 per diluted share and the first quarter of 2020.
Turning now to our balance sheet.
We ended the quarter with net debt of $420 million, our only significant near term debt maturity is our term loan of $54 million due in late 2022.
As of year, and we had total liquidity of $133 $2 million, including the cash balance of $59 million.
And $74 2 million of unused capacity on our revolver.
As a result of the increased debt related to the EKO acquisition. We finished the quarter with net debt to trailing 12 month adjusted EBITDA ratio of approximately two six times.
Next on slide nine we have updated our historical net debt and leverage ratio to highlight our progress towards deleveraging following the completion of acquisitions as well as show our track record.
On slide 10, I would like to discuss PTT innovations anticipated capital allocation priorities.
Our first priority is to find internal investment opportunities and projects, we expect to increase capacity drive margin growth by reducing expenses or by increasing revenue through product enhancements.
Another important priority is our commitment to maintaining a strong balance sheet and conservative capital structure by paying down debt and acquisitions.
Our goal of generally to maintain a conservative leverage profile within the targeted range of two point out of three times net debt to EBITDA absent any large acquisitions.
Finally, we use capital for strategic acquisitions that are expected to be accretive generate strong returns over the long term.
And we look for opportunities that would allow us to expand into new regions channels or products, such as new style.
Or that would give us access to the technologies enhanced manufacturing our supply chain capabilities such as echo.
We will continue to carefully evaluate other possible acquisition opportunities as part of our overall strategic plan.
Moving on to Slide 11, we are raising our full year 2021 guidance ranges, which includes contributions of echo from the partial period. After the transaction closed on February one 2021.
This increased guidance reflects the stronger demand and related EBITDA dollars, albeit with the flow impacted by a few months delay and pricing impact as a result of longer lead times as well as previously discussed operational challenges and our Venice facility.
Our new sales guidance range as of.
And one point of 5 billion to 1.15 billion, representing full year growth of 19% to 27%.
And our adjusted EBITDA, our guidance range of 175 million to $200 million, representing full year growth of 17% to 33% reflects the higher sales and expected margin pressures that will continue into the second quarter longer than initially anticipated.
For your reference we have included additional modeling assumptions and the left hand column that are embedded in our 2020 one guidance estimates and then can assist with your calculation of our estimated results.
There are no changes to what we shared with you last quarter.
We have taken many pricing actions recently on top of one's taken at the beginning of the year. These.
These actions reflect higher input cost of materials labor and fuel as well as the continued unprecedented demand we are seeing particularly in our Florida markets.
These increases will likely result in modest margin improvement and Q2 with higher improvement and Q3 and Q4 as they begin to be realized and now I would like to turn the call back over to Jeff for some closing thoughts Jeff.
Thanks, Brad and I will conclude with the summary of why I am excited about our future and why we believe <unk> innovations creates long term value for our shareholders.
We're a national leader with strong brands, which have been further boosted by our recent acquisitions our products are in growing categories, and and fast growing regions and the U S. We have a long history of providing our customers with innovative products to meet their challenging needs and we intend to maintain our industry leadership.
Ship through ongoing R&D hiring and retaining the best talent and making the right acquisitions.
Continuous improvement of our operations is how over time, we can and have driven long term margin expansion. Although recent challenges have surfaced as we emerged from our historic pandemic.
And while seeing impressive growth demands and both the new construction and repair and remodeling markets.
We have shown an ability to make the improvements necessary to gain the required capacity.
Lastly, we have a comprehensive strategy that we strive to execute and create long term value for our shareholders and our customers.
At this time, let me began the Q&A operator.
Thank you and we will now be.
Again, the question and answer session.
Ask the question you May Press Star, then one and you touched and fit.
And if youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two and.
And at this time, we will pause momentarily to assemble the roster.
Okay.
And our first question will come from filling with Jefferies. Please go ahead.
Hey, guys good morning, Maggie on for Phil.
Good morning, and Meg.
Hi.
I know the past few quarters, you talked about some of those internal capacity constraints and supplier of bottlenecks and Jeff. It was helpful to hear you talk through the steps Youre, taking chung from there, but can you kind of talk about what inning, you are and to bring that capacity online.
Fine.
And more in line with underlying demand and what are the key opportunities youre looking at to increase throughput.
The forward.
Yes. It is of great question.
More of a.
Football Guy so I'm going to say, we just finished the second quarter and and we're in the half.
And we.
And again order rates are incredibly strong.
And our teams are literally jumping through hoops to to.
To meet demand and increased capacity.
Lay out some initiatives we have embarked on.
And most recently the expansion of our warehousing here and Venice to the East coast. When we entered into the lease on the East Coast warehouse.
We are stocking that and hiring folks there and actually shipping out of that location as we speak.
And I think the expansion down in the Fort Myers, where not only will we be able to tap and additional labor force, which labour has probably been the number one constraint not equipment, but labor.
I'll be able to attack.
Track, the additional labor and Port Myers, we're going to hire probably 240 250 people.
And Fort Myers, and we're going to be eventually producing all of our door panels and frames in that location and that will start to trickle in and June will actually start producing frames and June with panels coming later on.
So those are some examples of.
Capacity as we've added trucking.
And to be honest, we purchased thank goodness repurchase 10 trucks at the beginning of the year.
We actually leased another 18 and we currently just based off the man have shifted and rented and we have one of the largest one of the largest trucking fleets and the state so true.
Trucks and trailers have been of constraint that we're attacking heavily.
To make sure we have that and as well as the drivers obviously CDL drivers of our premium now.
In terms of actually.
To.
Factoring line capacity.
Our main constraint is and vinyl at this point our aluminum lines are good.
We are expanding the debt mainly labor related <unk>.
Final, we're actually adding equipment. So if you look at our Q Q2.
Here, we have ordered another.
Other glazing line that will be our third and vinyl glazing line it'll come in and we ordered and being at the beginning of the year. It will come in and July. So we will have and up and running and July I do expect to add anywhere from two to 250 vinyl units a day starting say in August.
And then after that gets up and running we're going to actually add some more fabbing equivalents Josephs welders.
And that sort of thing and those that equipment has already been ordered and is going to be coming in and September timeframe. So if.
If you look and of August of getting of September So it'll impact the fourth quarter I think anywhere from two to again to the 250 more units a day.
So rental relatively quickly over the next few months, we're going to we're going to be adding almost anywhere from four to 500 units of vinyl windows of day and additional capacity a lot of this was planned by the way and a lot of the equipment was the Shirley delayed and.
And we did get some equipment tied up and porch for updating of four to six weeks of.
We would have already had for instance debt glazing lineup and the money.
So a lot of it's the way, but we feel very good about the timing of that equipment arrival now and.
And that coupled with all of the initiatives, we've had to bring on new folks into the organization all of the job fairs for the brand both in Miami.
And higher Leah.
Here in Venice at Tampa, and Fort Myers, and and Phoenix.
We're starting to bring on a lot more labor at this point.
Probably hired over 100 people the last week alone.
No.
The things are starting to starting to improve and as they do we have the capacity we think our obviously our performance will improve with it.
Definitely yes that was the stones.
Really helpful.
And then secondly on gross margins on.
But the one and two pressure of us pretty much in line with what we were expecting and based on inflation headwinds, but you've got the price increase coming out later this quarter. So how should we think about that flowing through and and when do you expect to be fully caught up.
A price cost perspective and.
And what kind of incremental inflation does that and does.
Does that assume for.
And for the rest of 2021, yes.
Yeah, all the speaking in generalities and they will get.
Brad and couple of the actual detail of it but.
Look at pricing just to pass along our cost we're comfortable with the margins we make in the.
And the market.
Thank our customers and dealer base are comfortable of those margins as well so the cost inputs.
And the headwinds we've talked about and impacted our Q1 that I mentioned is also going to impact our Q2 and leased the first couple of months, we shouldnt start seeing net price impact from a positive standpoint until the last month of this quarter.
It's surely because of the demand we continue to see.
And that backlog and as I mentioned, we closed out Q1 at $288 million backlog and that's excluding echo.
Our new acquisition.
The include Echo today, our backlog is $343 million. So so again.
Orders are still come and even though the pricing is now in effect.
So some of that backlog will actually have the improved pricing and it but well over call. It half probably does it so it still got to work through that piece of the backlog and that's what you'll see happen in may.
And the rest of May here and then in June we're going to start to get into the piece of the backlog that has embedded some embedded pricing in it and then obviously as we as we go throughout the year and the second half is going to be significantly impacted and in a positive way.
By the pricing actions, but Brad you want to speak in detail.
I would say that.
We have a modest improvement in gross margin and the second quarter relative to the first maybe call. It something like 50 bps, obviously with the higher sales coming through you also get some SG&A.
The improvement as a percent, but we'll just stick to gross margin and then in the back half of the year.
It'll probably start you'll get another 150 to 200 I would say that I believe based upon just the if I model out the pricing and some of the inflationary challenges I think Q4 debt scenario will be better than Q3 by a little bit just because some of the pricing actions were taken a little bit later in the first part of it.
And the beginning of the first quarter. So I actually think Q4 from the from a.
Price and net cost perspective will be a little bit better than even Q3, but the big jump will happen as we go from Q2 into Q3 and the pricing kicks in that Jeff just repurchase.
Great very helpful. Thanks, guys.
Thank you.
And once again and if you'd like to ask a question. Please press Star then one.
Our next question will come from Ken Sena with Keybanc. Please go ahead.
Good morning, everybody Hey, Ken.
Oh.
Lots of demand.
It's kind of whack a mole here.
On cost.
Labor capacity coming online.
But it feels like you know.
Despite all of the new platforms, you've added to the business west.
New south of et cetera, and you have a lot better handle on it that and I think the industry.
Sorry.
Well over 13 is.
Demand was so painful the bring on new.
The Labour Party.
And obviously that the big deal obviously I think that's the big credit for how your operations have improved.
So I think if you kind of maybe drill Oh, yeah yeah.
Alright, I got hard questions, where you don't worry.
Yes.
Let's talk glass right you bought some capacity you kicked out some capacity of couple of years ago. How is it different than when you were getting 15% glass increases.
Talking about that part of the business at first because that affects you all over the country all of this week.
Alright.
From the manufacturers just talk about that piece of the first if you would.
And glasses and I would say is not an issue for us at the moment.
Adding that capacity is definitely definitely helped us.
Stay ahead of the game.
The only thing and it's going to affect a lot of folks is inner layer capacity there have been some interlayer suppliers that and issued letters debt.
That they're going to cut capacity our code of allocations our main.
Glass supplier outside of our own and self obviously as Cardinal I know they received a letter from from Eastman, who said theyre going to.
Basically the reduced their capacity and laminating material to them and the inner layer. So so that kind of constrained and we're talking to Jeff would you say other layer that's the bonding between the glass on your.
Yes. Thank you.
And that's what makes the window impact basically of stat is debt volume does that and internet here between the two pieces of pain that makes it impact so that from an industry materials standpoint.
And there is some capacity concerns out there.
The impact us I hope not our supply chain team has done an incredible job, we actually bought forward roles of inner layer and another reason is by the way of working capital is up but we bought forward.
Over 100 roles of Interlayer, just in case, something like that happened. So so right now for instance, we think and mitigated debt, but internally our glass plants are running great.
We could actually produce more of our own glass, if we had the labor.
Right now we're using that labor when we can to make windows. So Cardinal is obviously still one of our major suppliers.
And they're doing well now quite frankly, the struggle last year their performance has improved dramatically.
And of this year and.
So the glass is not not an issue for the PTT at this point.
And then you talked about.
And the extrusion side coming in I mean, how is that doing for it.
It seems to me like you know the industry. So tight demand high supply of lines are tight so you're getting price and your suppliers getting price of everybody's getting price quickly. So <unk> will be a little light.
Obviously.
And I talked about the <unk> lift from <unk>, but the pricing field is.
You know quite strong and and what does that tell you about as you absorb past prices on and the second half of this year and.
And what does that mean about FY 'twenty two I think of it seems like demand is going to remain.
Unseasonably strong in the fourth Q and that if any of your input costs rollover. It seems like there could be some real net pricing gains next year that.
The capacity comes on.
Some people like yourselves could be and a very good net pricing environment is that something that.
You see potentially happening or it is aluminum and glass extrusion all of these things make you.
The more cautious about that optimism right, Ken and that's very good insight first of all so.
There is still aluminum pricing pressures out there of aluminum price is up.
And that's that's that's obviously industry wide. So so we're going to have the tackle that into 2022 now do I think our pricing actions, we've taken will help that most definitely.
And most definitely and I think our pricing actions will actually benefit us eventually once they've taken take.
Take hold and so but but as you look into 2022 I do think the market is going to continue and grow I think this year is going to remain strong.
We've raised our guidance, we hope is conservative by the way.
We do like the beat so we've raised our guidance and.
I think 2022 youre going to see of continued.
Strength in certain markets and Canada gets back to our strategic platform has to be and destination states, we want to be where people want and Florida is hot.
The Arizona is growing Texas is growing those are the three of our major markets California's reopened and why.
They may have people moving out of.
And like the fifth largest economy and the in the world California's incredible place to be in and we keep expanding there and keep making headway. There. So I think we're in key areas of the U S debt, we will continue to see growth when the other areas actually start to plateau and.
Level out so I think that will benefit us along with the pricing actions. We can read and you haven't seen you will end of that no I think that I think I've covered it and.
As we look forward for the back half of 2021, as we were thinking about these inflationary pressures and how it look all of that was taken into consideration. So I think Jeff covered it well.
Right and then do you think your the thoughts around the back half all of the things right and you just took into consideration what does that say about I mean does that seem like a stable area, where you'd be exiting the year into 'twenty two.
And it's equal or is there some initiatives that.
And we might not necessarily know about because I mean, you're you access the labor is a lot higher your margins are going to be a lot higher of the back half and demand certainly seems to be there. It seems like a good lift off point for 'twenty two so yes.
Yes.
But I think it will begin and there are obviously actions, we're always doing to help drive sales and to expand our footprint profitably.
And as we enter the back half of the year Theres various initiatives, we've got going on here locally with production expansion capacity Capex investment.
And our western business unit quite frankly, we're going to expand there as well.
And some things and the pipe there that's going to be interesting for the for the investors the market and the back half of the year of that will set us up very nicely for 2022, so but I do think we have a good platform to go off of it yes.
Thank you.
Thanks, Dan.
And this will conclude the question and answer session I would like to turn the conference back over to Brad for any closing remarks.
Thanks for joining us on today's call and certainly if there are further questions don't hesitate to give me a call and we can follow up after this call. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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