Q4 2022 PGT Innovations Inc Earnings Call
Good morning, and welcome.
P. G T innovations fourth quarter 2022 earnings call.
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After todays presentation, there will be an opportunity to ask questions. Please note that this event is being recorded.
So I would like to turn the call over to Mr. Brad West Senior Vice President of corporate development. Please go ahead.
Thank you good morning.
And welcome to the <unk> innovations fourth quarter and full year 2022 Investor Conference call.
With me on the call today are our president and CEO , Jeff Jackson.
And our Chief Financial Officer, John Cooper.
On the Investor Relations 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.
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 two of the presentation as well as the disclaimers included in the earnings press release, and SEC filings 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 in 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 in the earnings release and in the slide presentation Appendix at this time I will now hand over the call to accompany CEO and President 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 <unk> innovation.
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 <unk> 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 material 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 gorilla.
Adjusted EBITDA of $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.
And premium garage doors to our product portfolio.
Broaden our geographic footprint and brand presence.
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 <unk> 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 eliminate our ability to generate revenue during the fourth quarter, thus organically.
<unk> 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 cost.
<unk> efficiencies lead times.
<unk> and quality.
<unk> 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 Venice 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 south East, 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 four 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 lines 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 Builders' show earlier this month and the initial reactions have been extremely encouraging.
The expansion initiatives that aniline 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 R&R vinyl markets.
All results at Enlink 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 are thin triple insulated glass unit and our diamond glass impact resistant glass units.
Yes.
<unk> innovations will be the first manufacturer in the U S window and door market to offer such products.
Additionally, we will be the exclusive supplier of impact resistant windows and doors, featuring diamond glass for the Houston 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 of these benefits come with the same design pressure and impact ratings as our current products.
Okay and triple glass.
<unk> improved performance to meet the tightening North America any standards known as energy Star version seven.
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 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.
Now I'd like to turn the call over to John <unk> to review the second quarter results in greater detail John .
Thank you, Jeff moving on to slide six.
We were very pleased to have achieved $341 million sales in the fourth quarter. Despite the impact hurricane Ian and the ransomware attack had on our business.
Year over year increase in net sales was driven by a 5% organic growth from our legacy businesses and revenue from our recent aniline and Martin acquisitions.
Our Washington 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.
Fourth quarter results were driven by continued solid performance from our operating teams.
Adjusted selling general and administrative expenses increased 16% in the fourth quarter compared to the prior year driven by SG&A from our recent acquisitions and the expansion of our new staff operations.
<unk> 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 of <unk>.
Set by the inefficiencies experienced resulting from the two ASLAN mentioned disruptive events.
Our adjustments for the quarter included approximately $8 million of expense associated with product rationalization product rationalization of our window our brand.
In an effort to improve throughput and profitability and reduce underutilized assets, we elected to discontinue certain product lines within our window our 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.
Ladies and a hurricane in 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 <unk> 27 per diluted share compared to $18 8 million or 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 covenant net debt to adjusted EBITDA ratio of two two times.
We had another year of solid free cash flow performance as we generated $151 million and 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 eight 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.
Thanks, John .
Next I would like to speak about our recently announced three year $250 million share repurchase program authorized by our board.
While building product starts 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 clouded by the fed's 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 suggests that there are several macroeconomic trends that will support growth in new construction and R&R market 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 remodel in years by 2027 80.
87% of mortgage borrowers are locked in with mortgage rates below 5%.
The average homeowner has an all time high of 348000 and equity.
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 a recent contractions has been better than that of our peers.
As the leader in impact resistant windows and doors, we would expect to grow share while looking for ways to penetrate new markets.
As an example, we were very pleased to have recently received our first $500000 order for impact resistant products in Hawaii.
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 would 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.
While 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 our sales 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 with 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% to $64 million.
Historically due to the seasonality nature of our business sales in the first quarter a bit lower than sales in the second and third quarters.
The lower sales levels do 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 Builders' show.
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 while we believe <unk> innovations is in an excellent position to continue creating long term value for our shareholders.
First we are a national leader with an outstanding portfolio of 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 and door brands.
Our products and impact resistant and indoor outdoor living market and continued to gain traction.
We served geographies with strong population growth.
Second the diversification of our product portfolio continues to expand through acquisition and new product introduction.
Which further facilitate profitable growth in both the new construction and R&R challenges.
Third operational improvements and 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 to 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 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 Dorian and the 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 their continued support.
At this time, let me begin the Q&A operator.
Thank you.
A question and answer session Task of course, you May Press Star then one on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys.
I will draw your question. Please press Star then two.
It was time Apollo momentarily to assemble our roster.
Yeah.
First question from Mr. Keith Hughes Suntrust. Please go ahead.
Thank you on the first quarter guide could you talk about what kind of organic a number that would represent within there.
And at least talk about it south east versus versus west.
Sure Keith.
For Ya.
If you look at the prior year, we came in topline around $3 58, or thereabouts 359, you have to add the.
The Martin acquisition in there as well so you have a few million dollars call. It.
$10 million to $15 million for the Aniline acquisition number and then you have price impact so.
That price impact can be.
Recall at <unk>, 10% and then the volume we're expecting a decline overall so we're our anticipation is that we'll have a volume decline that's how we get up to call. It the $3 70 to 390 range I mean, that's the expectation as far as where we are.
Between regions I would say.
The western has seen a little bit more.
Softness overall then.
In the southeast region.
And I don't want to get more specific than that I think that that's granular enough I think.
The expectations that were putting in our guidance, yes, Keith 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 not we're feeling pretty good right at this point, what we said and just if you can look out in the entire year. It makes it more cloudy given what we're seeing that that comes to my second question, Jeff around that the the order growth can be.
You talked more what what products what regions I mean, it's just really surprising number given the kind of the landscape.
No.
It's a combination.
Like I mentioned this in the southeast so let's call it Florida.
Mainly.
In our PTT brands CGI brands Echo brands, New South brands is where we're seeing it.
And as we think is several reasons one hurricane awareness, obviously, we had a hurricane come through category four hit us. So theres a lot of awareness out in the market now and we're getting a lot of.
Inquiries and a lot of hits on order our online web site.
Sites regarding that.
The store the actual new south stores in the path of the storm there upper lower 30% in terms of volume increases so who are the storm hit us 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 Ie impact windows and doors.
We work with the state of Florida.
I'm going to run to Santos and the CFO , Jimmy Petronas to make sure those can be tax free for the individual and we will for the next two years and we've heard great feedback from that from our dealer base and people we've talked to around that and then if you think about our lead times have improved dramatically.
Quite frankly, our operations here at <unk> are on time and in full is running in.
Upper eighties.
Compared to last year. It was in the fifties. So we're starting to gain back some share quite frankly, we lost because of the performance obviously people rather go with impact leader.
Brand I'm curious a lot more weight a lot more options in the market, but we had to perform and we fixed that operational performance issues. So we're starting to actively gain back share that we had lost at the end of 2020 in 2021.
Okay. Thank you.
Beth.
Thank you. Our next question will be from Phil Mike Oh Jefferies. Please go ahead.
So you might be on mute.
Okay.
Thank you as we wait for Mr. Knight to give barack let's go to Mr. Michael Rehaut JP Morgan.
Hi, Good morning, guys broke boardwalk on for Mike.
Just one question last quarter, you guys talked about how you haven't been approached on price.
From builders I'm, just wondering if that has changed.
As we gain more insight on the softer demand drop or I guess anticipated demand drop and if so how does it kind of been in line with your expectations would be just a little bit more color on that in total.
Yeah, I'll speak to it.
In total <unk>.
There will be no.
We have been approached one off yes, but maybe five or 10% of our volume.
So in total we haven't give pricing and.
And we were not getting pressured well we've been simply asked by our builders to do is deliver on time in full and as long as we can do that and hold price actually a couple of builders taxes just to hold pricing.
Where their supplier of choice so as of now on the new construction side have not received any.
The material impact on giving in pricing.
Got it thanks, and you talked about recently with the recently approved the accelerated share repurchase how strategic acquisition was one potential method views.
In this environment I'm just curious on you know what's your current criteria in looking for the right acquisition and what does that pipeline look like right now yes.
Yes.
Good question that $250 million share repurchase program I think makes them. It makes it clear statement, we think our stock is undervalued and.
We put a program in place a plan in place that plan will literally kick off and start buying shares Monday.
And.
We think we're way on value. So we're going to buy as much we can in the market that allow based off our trading volumes.
That's going to be first priority.
And as I look at other acquisitions.
I wouldn't I would look for a different call it product portfolio type like say.
Clad or would we don't have that in our portfolio I would look at geographic diversity and maybe.
So more Midwest locations, we hadn't looked at before.
Those are the top criteria I would look at and margin of course, but I'll be clear that our priority is as our stock at this point.
And then any.
Significant acquisition that would meet those criteria.
Got it thank you guys.
Beth.
Thank you again, if you'd like to ask a question. Please press Star then one.
Okay.
Our next question will be from Mr. Phil <unk> of Jefferies. Please go ahead.
Hey, guys can you hear me now yeah, we can hear you sorry, yes, okay. Okay.
<unk> on for Phil.
I guess first and I'm sorry, if I missed this earlier I just hopped on the call.
Could you talk about on.
Looking at 2020 three the outlook.
What are the biggest uncertainties or swing factors for your end market demand in.
Yeah.
I would need to happen to give you more confidence and providing our full year outlook.
Yes sure Matt.
One of the reasons why we elected to only gave Q1 guidance was really just the change in sentiment over the last 90 days when we started looking at.
Our plan for 2023, and what our expectations were.
The expectations were dramatically different call. It in the December timeframe from what they were in early January and then to what they are today.
So really what we would look to see is just some stability. So we can have confidence that we understand the dynamics driving the end markets a little bit better.
Then what we do today I think as the year progresses as we get into Q2.
As we move into the April may timeframe.
That may exist in at that time, we may be able to give you full year guidance for the remaining year guidance.
For that but what we would like to see is some stability in the markets and just not so much movement in.
And opinion by various <unk>.
Gnostic haters out there as far as what's happening with the economy and in each of our end markets. The.
New construction market would be in the R&R market whatever it may be just some more stability in that that will give us more confidence as far as.
How to forecast the remainder of the year and remember too where you have to think about from our end as we have different scenarios and different planning actions should the economy turn one way versus continue to be stable versus being more robust right. So we have to be pretty agile on our on our feet and what I would suggest and what I think is what we have said.
Long term as we expect this business to be an upper teen EBITDA margin business going forward.
So that would be the expectation that we would continue to maintain this business to be that upper upper teens EBITDA margin business.
And now I would just add we've already been flexible in terms of cost reduction initiatives. We started that at the end of the fourth quarter. When we saw some order pattern changes.
To date, we've had reductions in force of 100, roughly 147 people and attrition of another 100, so were down about 240 people.
Uh huh.
Over the last call it three months so.
We're watching our costs, we're only investing where there is a great return and we definitely feel strong about holding upper teen margins over the coming year.
Okay got it yeah, but that definitely makes sense.
And then I guess looking out for kill the operational headwinds from.
The hurricane disruption and the ransomware issue on the the ultimate impact on revenues were lower than you had initially forecasted can you just talk about how those dynamics dynamics played out in the corner and if theres any expected carryover impact into 2023.
Yeah, so the dynamics in the quarter were.
For each of those we lost order entry for a period of time and for us to recover and get back up.
The hurricane specifically disrupt our production and our ability to produce so that was one where we lost that revenue.
That had to be.
Up to the degree that we could the ransomware attack, we basically shut us down from an order entry perspective, so we werent able to recover the good news is.
We've made dramatic changes in our operating team here in the South East region did a wonderful job in GAAP as Jeff said got back to rates, where we were prior to the storm. So we're making that back up.
With respect to order entry, we are back online and we're moving forward from that perspective.
So there is no.
Continuing effect from either of those they're both related to the quarter and our expectation is that as we move into Q1.
As long as we continue to just leverage as Jeff said from an operational perspective from an on time in full and I think that we're going to continue to see.
<unk>.
Dealer base that is pleased with our performance and continue to.
We will continue to be the supplier of choice.
Okay, great. Thanks, so much.
Sure.
Thank you.
A question and answer session I would like to turn the call back over to management for closing remarks.
Thank you. We appreciate your participation today on our fourth quarter and full year 2022 earnings call.
Look forward to your continued participation and support of the company and we will talk to you again on our first quarter 2023 earnings call in May. Thank you again.
Thank you. The conference has now concluded. Thank you for attending today's presentation you may now disconnect.