Q2 2022 PGT Innovations Inc Earnings Call
[music].
Good morning, and welcome to P. G T innovations second quarter 2022 earnings conference call.
All participants are in listen only mode.
Today's call is being recorded.
I'd now like to turn the conference over to P. J T innovation senior Vice President of corporate development and Treasurer, Brad West. Please go ahead.
Thank you good morning, and welcome to the <unk> innovations second quarter 2022, Investor Conference call with.
With me on the call today are president and CEO , Jeff Jackson, and our Chief Financial Officer, John codes.
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 on 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 in the earnings press release, and our SEC filings discuss forward looking statements.
Today's remarks contain forward looking statements, including statements about our 2022 financial performance outlook those.
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 attached to the earnings release and the slide presentation appendix.
At this time I will now hand over the call for a company CEO and President 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 P. G T innovations 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.
Adding talent effect effectively scaling our operations and investing our cash flow and growing markets.
Let's discuss today's key messages for the quarter on slide four.
We achieved record second quarter results as revenues of 407 million surpassed both prior year and our internal forecast.
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 for 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'm very proud of how our P. J T 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.
And sequentially by 280 basis points versus the first quarter of 2022.
These results reflect the success of our business model to grow our topline 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 will 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 in 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 favorable we are raising our full year guidance for revenue and adjusted EBITDA.
While we recognize the uncertainty surrounding the macro it economic environment our backlog.
Manufacturing execution and margin performance gives us a high level of confidence in our revised guidance.
Next on slide five 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 <unk> in 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 homebuilders 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.
Selecting strength from our production builder business.
This sector outperformed for the past two years as demand to upgrade indoor outdoor living areas remained strong.
We are also seeing the benefit from our capacity expansion in Phoenix, which has allowed us to better serve the custom market demands in our recently opened showroom and San Diego will position us well to serve the growth we're seeing in the southern California's home and renovation markets.
New sales 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 in those store operators are busy training their new team members in anticipation of opening.
Our Atlanta store is celebrating his official ribbon cutting on August 3rd.
In the Florida region, we saw strong sequential order growth of 13% versus Q1 of 2022.
R. P G T and yourself brands drove this growth, which was balanced across both new construction and repair and remodel.
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 fluid ends.
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 six 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 oriented environment for our team members.
Our first pillar is customer centric innovation, which drives us to deliver products with features performance in value demanded by our builders and our customers.
We're expanding our product offerings to improve thermal performance and improved 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 helped 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 a little look out 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 .
Thank you, Jeff turning to slide seven today.
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 a 29% organic growth from our legacy businesses, including new South and Echo and continued growth from our recent <unk>.
Inland 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 cost 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, 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.
Aluminum availability has improved in LNG spot pricing has steadily decreased impact, resulting from speculations surrounding the geopolitical tensions between Russia, and Ukraine had been minimal although we continue to monitor market price as well as the primary and secondary market production conditions.
Second quarter gross margin was 46% 660 basis points higher than the prior year quarter, and 310 basis points higher in the first quarter of 2022, driven by price increases manufacturing process improvements and unit growth.
Earlier investments in hiring help 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 the prior year driven by the SG&A from our recent acquisitions.
The expansion of our new South operations increased distribution costs incurred.
Increased.
Increased marketing spend and an increase in reserve for uncollectible 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 our reserve for uncollectible accounts.
Adjusted EBITDA was $78 3 million or 119% higher than the prior year quarter, resulting from pricing actions to offset inflationary pressures.
<unk> volumes and improved manufacturing performance Youll recall that our prior year quarter was significantly impacted by a drag from our expansion related to spending 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 or <unk> 67 per diluted share compared to $10 7 million or 18 <unk>.
<unk> per diluted share in the second quarter of 2021 increases of 278% and 272% respectively.
Now turning to our balance sheet on slide eight we ended the quarter with net debt of $476 million.
We had total liquidity of 202 hundred $33 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 two one times at the end of the quarter.
Slide nine 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 a significant acquisition in fact since the completion of our analyst acquisition, we have reduced our covenant adjusted leverage metric from approximately two nine times to two 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 and revenue growth. For example, we have invested in strategic selling initiatives to improve efficiency and operational met.
Tricks to reduce costs. These.
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.
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 de lever 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.
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.
2152, 5 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.
Some 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.
In closing today I want to review why we believe <unk> innovations is in an excellent position to continue delivering on our business model and creating long term value for our shareholders.
First we are a national leader with an outstanding portfolio of brands that have been made even stronger through recent acquisitions.
Our products continue to gain traction both in impact resistant and an 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 helped 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.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the key.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
And our first question will come from Judy Merrick of Truest Securities. Please go ahead.
Hi. Thank you this is J D calling in for.
Keith Hughes.
I guess I Wonder if you could talk a little bit about.
All in the South in Florida, you talked about some of the pull through last year.
Is that sort of normalized and it seems like there's a lot going on did you say.
Orders were up 13% sequentially.
Okay.
Alright.
Yes, sure let me take that one.
As Jeff was speaking on the call we have seen strong order growth in the.
Southeast region. What you mentioned was we did have five new homebuilders 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 any other factor that has helped us along.
With that pricing that we that we report with our sales.
Is the pricing so pricing is actually influence that.
That number as well those are the sort of the drivers that helped us to have comfort in the numbers and the growth and the outlook.
For the back half of the year and.
I would just add to that obviously our backlog basically remained the same as it was at year end you had our lead times and on time and in full has improved dramatically.
Lead times are improved as much as 50% in some cases, our aluminum lead times. For example is down to four weeks four to seven weeks, depending on the customer and order.
Our vinyl lead time is anywhere from a low of seven to a high of 15. So it just depends.
Who's already and what kind of project. It is so you couple dramatically improved operational performance with.
With a strong sales growth in the backlog basically remains the same we hit these kind of it as kind of numbers.
In the back half.
I don't think Theres been this tremendous pull forward.
We'll see in the back half obviously, we're in a somewhat of a transition period, all building products or as the as the market adjusts for the economics going on in interest rate changes and whatnot, but as we enter the back half we still see strong.
Demand.
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 growing for us.
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 <unk> products. So we've got a lot of good tailwind as we finish out the year. That's why we're pretty confident in the guidance we've given.
Okay, great and that sales tax exemption that was that mostly underway in the second quarter and if you've seen that help.
Your pricing actions in Florida.
It's literally just started and.
We feel we will start to see that we started seeing some of that benefit but again, it's a two year program.
We're not getting I don't think the goal was not have a big influx of orders across the state and overwhelm the infrastructure the installed infrastructure and so making that a two year program.
That the legislature has done was incredibly smart.
That allows homeowners at the time.
Order, the right product and get it installed so we have seen some growth.
Last year I'm, sorry last week at New South for instance, we had a $4 million orderly. 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 is going to be a good tailwind to come.
Okay great.
The next question comes from Phil <unk> of Jefferies. Please go ahead.
Hey, guys. This is maggie on for Phil.
I guess first gross margins were really strong this quarter was that primarily the 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 are you referring to the may increase or.
Have you announced anything incremental to that.
Yes.
So with regards to our margins.
We were really pleased across the board.
What do you want to complement our supply chain team, our operating team and supply chain.
They've done a very good job of putting us in a position to have materials that we need to.
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're very pleased from that perspective, and then our pricing obviously has kept up with the increases that we have seen.
From that perspective.
Yeah.
Overall.
And then what was the second part of your question I'm sorry.
Price increases after the May price increase.
It is the only one that we have I don't know that we have another one scheduled.
And in the foreseeable future. So I think thats, where we are for.
At this point in time, yes, and I'll, just comment a little bit about that margin.
And the strong performance there.
It's literally attributed to our improved operations are coupled with realization of pricing.
Keep in mind, we've raised our.
Team members 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 would say over the last nine months or so theyre now obviously fully.
Recognizing the P&L, but I don't want overemphasize this but.
Going from an on time and in full in the low thirties with PTT, our main brand to now work.
Newer bump in 68 head into 70% on time and in full has been a huge factor in driving gross margin improvement huge.
And that's what gives me confidence in the back half.
Because we used to run <unk>, 95% to 98% on time in full so we still got a good 'twenty.
<unk> Bay.
Basis points improvement.
That <unk>.
A metric and that will drive continued gross margin improvement as we continue to perform well here at the original PTT flagship brand.
Okay, that's really helpful and I guess going off the strength and to kill.
Was there any kind of one time tailwind we should be mindful of.
I just asked.
<unk> margins are generally pretty similar.
But the guide implies maybe there could be some drop off.
<unk>, so just wanted to flesh that out.
The only thing that I see really with respect to our Q3 guidance. When you look at it I'll address the guidance over our Q4 should look like Q1 to some degree right and so you can sort of squeeze where Q3 will look like one of the things that we did have benefiting us and youll see in our Q1, we released it next week is we had a benefit from our hedging position.
<unk> in the first six months.
<unk>, 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 as pricing and cost so that dynamic will continue so we don't.
Expect a 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.
Okay, great. Thank you very much.
The next question comes from Ken Zenner of Keybanc capital markets. Please go ahead.
Good morning, everyone. This is actually Krishna zillow on for Ken Zinger, Thanks for taking my questions.
Good morning, Christian good morning, good morning.
First question could you just quantify the pricing unit contribution in the quarter I know last quarter. It was about 13% priced 4% units.
If you have that breakdown available that'd be helpful.
Secondly.
Sure got it.
Alright, sorry about that.
So from 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.
These range in that area. So that's the breakout between volume and price.
Great. Thank you and then understand some costs have come down, especially commodities aluminum et cetera.
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 in <unk> and <unk>.
Gross 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.
Yes.
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.
Price increases 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, sorry.
This unit volumes thrust here.
Yes.
Okay.
So 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.
That will be in the back half of the year.
Great. Thank you.
Mind, you the second quarter is always our strongest quarter, followed very closely by the third quarter.
Fourth quarter is typically are.
I'd call it are leased.
Growth quarter, because we have both Thanksgiving and Christmas holidays in there.
Right now we're running almost <unk>.
<unk> closed close to 60% R&R, so within our heavy R&R concentration it makes it a fourth quarter comp.
Comps it makes it tough in terms of just.
Sales growth.
For the R&R business in that fourth quarter.
Great. Thank you for the 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 aniline had been performing relatively well and.
Can you discuss your priorities for any future M&A, but just if you could talk through the pipeline how that looks.
Yes, real quick EKO Youre right that glass plant has been an incredible benefit.
For PDT.
But 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 short up very nicely for us except for again continued back order and some door glass, but other than that.
Acquisition It was key.
Ameren has 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 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.
<unk>.
Which are surrounded by those destination States, Florida, Texas out West, Arizona Salt Lake.
California, those kind of markets.
We are concentrating our efforts on at this point.
The next question comes from Michael Rehaut of Jpmorgan. Please go ahead.
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 possible break it out between the different end markets and regions.
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 when we raised our guidance that already one month into the third quarter, we're feeling very confident.
July sequential to do group.
Double digits so.
We feel good again about the about our coming third quarter based off that July results, but we're not at the point, where we can break it out between business units for July because we literally are still still closing it.
Awesome. Thank you and can you give a little bit further insight.
Current state of the supply chain moving forward in terms of the duration of the rest of this year do you think you will see some sizable improvement they are still kind of unknown.
No not at this point.
Again, I think I think the supply chain has improved for our company and I mentioned that in my opening comments our supply.
Chain team.
Team has done an incredible job our purchasing team and staying ahead of the curve on some of the demand issues and supply constraint issues.
But we still have as I mentioned earlier, our 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 our 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 percent for PGE on time and in full.
<unk>.
Other areas of concern that have popped up.
Interlayer top constraints.
It can be a challenge at times.
But we have incredibly great relationships with our supplier there and they have allocated to us and put us top of their priority list.
Since we are the largest impact player and <unk>.
Foot less supply flow glass is limited, but we again, we have a great relationship there with the incredible glass supply company on the float side, So we're able to get flow glass.
But other than that I think supply chain is really stable stabilized out for us and has allowed us to improve your performance wise as well.
Awesome. Thank you guys you.
You bet.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to John Chen for any closing remarks.
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.
Okay.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
[music].