PGT Innovations Inc. Q1 2023 Earnings Call
Good morning, and welcome to the P. G T innovations first quarter 'twenty to 'twenty three earnings conference call.
All participants are in listen only mode.
I'd Love to turn the conference over to P. J D innovation senior Vice President of corporate development and Treasurer, Brad West. Please go ahead Sir.
Thank you.
Morning, and welcome to the <unk> innovations first quarter 2023 Investor Conference call.
With me on the call today are president and CEO , Jeff Jackson, and our interim Chief Financial Officer, and Vice President of corporate Finance Craig Henderson.
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 our 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.
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 month of <unk> results using non-GAAP financial measures, which we believe provide additional information to help investors compare performance between reporting periods.
A reconciliation to the most directly comparable GAAP measures is included in the tables in the earnings release and in the slide presentation appendix.
At this time I will now hand over the call to our company CEO and President Jeff Jackson.
Thank you Brad and good morning, everyone and thanks for joining us for today's call I'm very pleased with the start of our gear and want to thank our team members and supplier partners for executing well in a challenging dynamic environment.
Following our strong finish to 2022, we delivered a record first quarter, despite continued macroeconomic uncertainty, including higher interest rates and persistent inflation.
Turning to slide four.
Despite a slowing national economy, we were able to increase revenue 377 million.
Grow adjusted EBITDA to $70 million and expand adjusted EBITDA margins by 210 basis points compared to prior year.
The repair and remodeling channel nationally is benefiting from record home equity and homeowners deciding to stay high mortgage rates N. P. G. T is benefited from increased hurricane awareness as a result of hurricane Dorian, which made landfall in south West Florida in late September of 2022.
In both business segments, we increased our delivery performance improved our quality and reduced our lead times to dealers and deliver EBITDA margin growth versus the prior year through strong operational execution and cost containment measures.
We continued strong execution, regardless of the obstacle whether it's a major hurricane ransomware incident, our continued macroeconomic headwinds as well.
The drive to execute our strategic plan.
Next on slide five let's take a closer look at the first quarter, our sales trends and key initiatives.
In the first quarter, we generated total revenue of $377 million during the quarter.
And our southeast segment were 282 million, an increase of $10 million versus the first quarter of 2022.
Sales grew 4% versus the prior year quarter and grew 16% sequentially from the fourth quarter.
Our southeast brands have always served both the R&R and new construction market as well and our year over year growth was fueled by continued strength in the R&R market.
Orders in the South East grew 39 million or 15% from the prior year quarter driving the increase in total company order backlog.
We recently announced a new initiative rebranding, our hallmark PTT custom windows and doors.
As a leader in high performance plus technology for Windows and doors with expanded positioning to allow specialized products for energy efficiency sound reduction and security to be included and introduced into the future.
Our new Tag line, that's the freedom of P. G T <unk>.
Captures the value and simplicity, we bring to daily life.
The rebranding is about giving consumers control and peace of mind over external forces like extreme weather home security and increasing noise pollution.
Sales in our Western segment were 95 million.
An increase of $8 million versus prior year.
Out west.
Impacted by multiple storms in California, and Arizona, resulting in a reduction of construction activity early in the quarter.
Our Western segment is also a more sensitive to movement in the new construction.
With the western markets, leading the nation in declining new home construction activity.
Western segment sales were up 9% versus prior year first quarter on strong execution and low lead times.
Organic orders in the Western segment were 16% below prior year first quarter.
Our Martin.
Position, which closed in late 2022 continues to be integrated and we are aggressively pursuing sales synergies, we believe exist with a premium garage door and legacy business.
We expanded our EBITDA margin by 210 basis points, driven by strong operational execution.
<unk> actions offsetting material and wage inflation and cost containment measures and that's continued macroeconomic uncertainty.
While new construction starts and orders have declined versus prior year.
All business segments benefited from strong brands, such as P. D G eco and animals.
All have seen and are continuing to see demand growth in repair and remodeling channels.
Our focus on quality and delivery has also contributed to strong growth in our southeast region aluminum demand.
With our aluminum part one continuing to increase into the second quarter as we work to drive higher levels of throughput and recapture market share.
Our commitment to innovation, which drives us to deliver products with the features performance and value demanded by our builders and customers was highlighted by our calling partnership to evolve glass technology.
We previously announced our exclusive rights to manufacture and sell new and innovative glass products.
And triple and sweaty glass, which we are branding triple diamond and our branded diamond glass impact resistant glass.
As discussed on our last call P. D. T I will be the first manufacturer in the U S window and door market to offer thin triple insulated glass and diamond glass in patent resistant glass.
We believe that even a basic window can and should work harder and we are uniquely positioned to bring these new products to the U S consumer.
Benefits from our new glass technology, including Windows that are clear more energy efficient easier to install and impact resistance, helping make buildings more sustainable and comfortable.
Our partnership with Corning architectural technical glass to produce next generation window applications.
Leads to more sustainable energy efficient windows and doors.
Progress is underway we have placed.
Orders for new equipment to produce diamond glass for select P. D. T innovation brands later this year.
And we'll be producing triple diamond glass for other window and door manufacturers in early 2024.
Recently, we also announced our basic.
Relationship with Truth service finance for consumer financing to in our dealer channel.
We are very excited about this new program, allowing us to offer new financing options for dealers.
We believe this partnership will make replacement windows and doors more attainable for consumers with financing options that fit their specific needs.
Our order backlog was $236 million at the end of the quarter.
Slightly from the fourth quarter.
Order backlog is there a similar sorts of day and demand has remained roughly in line with our increased production capacities.
As we have previously disclosed our board unanimously approved the adoption of a large plan in response to the accumulation of pizza innovation shares by a strategic investor.
We remain committed to engaging in constructive dialogue with all of our investors and we welcome their perspectives.
We remain committed to engaging in constructive dialogue with all of our investors and we welcome their perspectives.
Also want to ensure all investors are able to realize the full long term value of the investment.
And we see fair and equal treatment, which is what the rights plan is designed to do.
We are not actively pursuing a strategic alternative at this time and are executing on our strategic plan to grow shareholder value over the long term.
As evidenced by our record 2022 results and our strong first quarter.
We're always open to explore opportunities to maximize shareholder value.
We do not believe our current trading range reflects the long term value of the company to that end, we have executed on our $250 million share repurchase program.
Now I'd like to turn the call over to Craig Henderson to review, our first quarter results in greater detail.
Correct.
Thank you Jeff.
Turning to slide six consolidated net sales were $377 million in the first quarter up 5% from the prior year first quarter the year over year increase in net sales was driven by 3% organic growth from our legacy businesses, our South East segment sales grew 4%.
From the prior year first quarter, while our western segment sales were up 9% from the prior year.
During the first quarter, our sales breakdown was 60% R&R and 40% new construction.
Organic R&R sales grew 4% compared to the first quarter of 2022, driven by the strength of our P. G T and eco brains organic new construction sales were flat to the prior year first quarter.
Gross profit was $149 million in the first quarter and rose, 11% compared to the prior year first quarter. Our first quarter results were driven by continued solid performance from our operating teams pricing actions offsetting material and wage inflation and additional cost containment measures.
Adjusted selling general and administrative expenses increased 3% in the first quarter compared to the prior year driven by increased marketing investments related to the international Builders' show.
We're pleased to have delivered adjusted EBITDA of $70 million, an increase of 18% versus the prior year first quarter.
This year over year increase was driven by operational efficiencies the impact of pricing actions offsetting material and wage inflation and to a lesser extent increased sales.
Our non-GAAP adjustments for the quarter included approximately $3 million.
Of insurance recovery gain related to the wind down of the commercial portion of our new South acquisition, partially offset by one time costs related to our aniline acquisition and executive severance costs totaling $1 7 million.
Our tax expense in the quarter came in at 24, 6%.
We reported adjusted net income of $34 million or 56 cents per diluted share compared to 25 million or <unk> 42 cents per diluted share in the first quarter of 2022.
At the end of the quarter, we had net debt of $606 million and total liquidity of 211 million.
As of the end of the first quarter, we had a trailing 12 month bank covenant net debt to adjusted EBITDA ratio of 2.2 times.
We generated operating cash flow of 24 million in the first quarter. We also invested $12 million in capital expenditures, mostly related to cost reduction and capacity expansion initiatives that will enable us to improve our profitability in 2023 and beyond during the first quarter.
We began execution of our three year $250 million share repurchase program and returned $25 6 million to shareholders through the repurchase of one 2 million shares.
Moving onto our guidance on slide eight the continued macro uncertainty well again limit our sales and EBITDA outlook to the next quarter for the second quarter, we anticipate revenue to be in the range of $380 million to $400 million.
We also anticipate adjusted EBITDA to be in the range of 70 to 75 million are strong demand trends and our continued strong operations execution, along with cost containment gives us confidence that we will be able to continue to deliver strong profits in this uncertain market.
In order to execute on our new glass operations, we expect to spend $35 million in 2023 on new equipment and facilities. This spend will be in addition to the normal 3% to 4% of sales for our run rate capital spending.
This higher level of spend will ensure that our new glass operations will launch successfully. Despite this increased investment we will continue to target leverage at two to three times EBITDA and.
And now I'd like to turn the call back to Jeff Jeff.
Thanks, Craig.
I'll conclude today with a summary of the current market conditions and while we believe P. T innovations is in an excellent position to continue creating long term value for our shareholders.
While the underlying macroeconomic uncertainties continue.
Homebuyers and homeowners appear to be adjusting to the new reality aided by moderating home prices and wage growth.
Both the new construction and repair and remodeling channels are seeing positive signs versus the fourth quarter of 2022.
Long term industry sources, including John Burns suggests that there are several macroeconomic trends that will support growth in the new construction and R&R markets over the coming years.
These trends include a growing adult population, especially millennials to drive $12 7 million new home starts to before.
Recent reports indicated that 66% of millennials plan to buy a home within the next two years.
The need for an additional 17 million housing units to meet demographic demand.
24 million homes will reach a prime remodeling years by 2027.
85% of mortgage borrowers are locked in with mortgage rates below 5%.
The average homeowner has an all time high of $361000 of equity in their homes.
The inflation reduction act introduced major changes to the federal incentives for residential energy efficiency upgrades through 'twenty 32, our new glass technology will enable homeowners to qualify for lease incentives.
Our Florida, Brian had the added 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.
Turning to slide nine.
Did you say innovation is well positioned to take advantage of these long term trends and see a greater benefit than others in our space.
Our strategy is to focus on markets, where demographics trends tend to be more favorable than the national average.
First we are a national leader with an outstanding portfolio of brands that we have strengthened over the past few years.
We're executing on our growth strategy, including expansion into adjacent building product categories to complement our existing portfolio of window and door brands.
Our products and the impact resistant and indoor outdoor living market continued to gain traction we service geographies with strong population growth.
Okay. The diversification of our product portfolio continues to expand through acquisitions and new product development.
Which further facilitate our balance portfolio growth in both the new construction and the R&R channels.
Third operational improvements and capital investments have increased our capacity, which has helped us meet our demands and deliver margin expansion.
Strong free cash flow provides options to reinvest in the business and return capital to our shareholders.
For our ongoing investments in innovation, new product development and talent helps us provide customers with innovative premium products to meet their changing needs.
Lastly, we are committed to increasing shareholder value through improving profitability and returning capital to our shareholders through our share repurchase program.
We believe P. G. T innovations is in a great position to weather the current environment and are working to build a stronger foundation for the next level of growth and continue to create long term value for our shareholders and customers.
In addition, we believe our current trading range does not properly value the long term potential shareholder value for P. D C innovation shareholders.
To that end, we are returning capital to our shareholders through the share repurchase program and we'll continue to execute on this program over the three year life of the program.
I want to thank our shareholders our team members channel partners and suppliers for their continued support at this time, let's begin the Q&A operator.
Yeah.
Yeah.
Thank you at this time well begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Just try a question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And once again, please press star and then one if you would like to ask a question.
And this morning's first question comes from Keith Hughes with <unk> Securities.
Hey, Thanks for taking my question. This is Jonathan on for Keith.
So youre guiding revenue down a bit year over year for the second quarter, but it looks like new orders, maybe on a net basis across the business were up in the first quarter could you maybe walk us through how long it takes for the new orders to flow to the top line.
Yeah. Good morning, good great question.
You know we are guiding down slightly.
And it just is very tough in this current market. That's why we're only limited in your guidance again, but you know the second quarter I'll give an example in April were actually up year over year as we close April and.
So it it usually takes depending on which business unit, you're talking about and depending on the lead time of that product anywhere from four and a low end to high end say 12 weeks.
To fully bake in different order patterns, we see across our brands.
Yes last year, Jonathan the Western business unit had a significant increase from Q1 to Q2, given the weather coming out of.
The first quarter and their backlog is reduced while we're seeing demand trends improving in the west and the demand trends in the southeast are continuing in the south east continuing very strong.
Just converting those to actual shipments is really kind of causing.
The variance there, but steady state coming out of Q1 into Q2, very solid trends and we expect to be able to continue that.
Going forward, yes.
Just tag onto that actually you know after April close we actually added $4 million to our backlog. So you know again still still very positive on the guidance on the quarter.
That's helpful. Thanks, and just as a follow up could you give us an idea maybe just in the southeast the breakout of impact resistant versus the non impact resistant windows.
Sure. So overall from a company perspective.
It's about 60 40 impact on impact would be much higher in the south east.
Perfect. Thanks, I'll turn it over.
Thanks.
Thank you.
And the next question comes from Phil <unk> with Jefferies.
Hey, guys. This is maggie on for Phil.
Good morning Megan.
Hi, I guess, starting Jeff. It was helpful for you to kind of walk through how you're thinking about long term demand drivers for the business, but just zeroing in on <unk> and 'twenty to 'twenty. Three can you talk about what you're seeing across your different end markets.
On.
You've talked about strength and R&R channels do you actually see that.
Trending positive in 2020 three and then just you know volumes and new construction and the Western segment. If you could just help us think about how those are trending this year.
Great question and yes, the R&R market, we do see signs of it training positive this year.
As we look both obviously you're hearing here in the South East mainly Florida.
That's really an incredible driver given the impact of Hurricane Ian we've had heightened awareness also given the.
Federal and the state tax credit are you know you don't have to pay sales tax for repairing your home with R&R product has been another big driver for us.
As we look out west again, the R&R market started off soft for Ameren business, but that was mainly weather related to everyone knows it California.
And.
Out west suffered a lot of rainfall and snow as well so that really slowed up January and into February for that particular brand, but March was was.
Double digit growth. So we've seen that R&R business pick up as the weather has improved so so our overall R&R business, we feel very comfortable.
Comfortable with as we look into this year and then obviously you should go into the next quarter as well in terms of new construction that.
That has its ups and downs so we've seen it.
Started going down.
The end of last year, and it kind of worried us somewhat so.
We limited our guidance as we got into the first quarter, we've seen a bump in that for certain brands, especially when they're Florida market still out west is tough new construction is definitely more of a challenge but into the Florida markets, which is a 70 plus percent of our business.
We've seen a good bump in the new construction in the first quarter and into April .
Craig you have anything you want to add I mean the.
And then the specific numbers R&R four the business was up 17% stronger in the south east versus the west and the new construction business was down seven but it was actually up eight in the in the southeast and so you really see that the west has is impacted.
That new construction given the mix of business that we have out there. So things are trending positively and I will say this given given what we've seen in both new construction and R&R, we don't see any change in our call. It historical seasonality patterns. So in other words, even though the second quarter. It did go down in terms of.
The sequential year over year.
Comparison.
We think our third quarter is going to be.
Historically, a little better than our second quarter, which are based off the patterns. We're seeing now and of course fourth quarter. Because you know you go into the Thanksgiving and Christmas holidays tends to trail off a little so we don't see any change in what you've seen historically from a performance sales performance every.
Quarter.
Okay that was all very helpful.
And then on margins.
<unk> came in ahead of your initial guide and I think that you can guide kind of implies they they hold out at a similar level can.
Can you just talk about what's driving the strength, even you know west your guidance for sales down and to kill and then how we should think about margins progressing through the year.
Yeah, Great question again first I'm incredibly proud of the team across the organization everyone's executing incredibly well every operational units performing at its peak.
The proactive cost reduction measures, we put in place in Q4 of last year, if you recall.
It was helpful. You know we saw the slowdown coming so we took we adjusted costs our cost base Accordingly, and we're leveraging that fixed cost base very well and we think we're going to continue to do that if you look into the year I think I'm pretty comfortable of saying our full year EBITDA margin percent is going up.
Be very close to what you are seeing call it eight to 17 or 18%, let's call it 18% for the year.
And that just basically means we're operating incredibly well.
You know fluctuating volumes, especially in the new construction.
Right.
And we're able to do that again, because we took cost out in the fourth quarter last year operations.
Efficiency standpoint from a direct labor standpoint from a material standpoint.
We've been able to offset the inflationary cost with prior call price increases so everything's just humming along very well execution wise, Craig you have anything yes, so Q1 <unk>.
The surprise for Q1 was really the strong execution the operations team across from delivery and their quality metrics definitely were improving much quicker than we had expected. So that really is what drove the over performance from a Q1 perspective.
And we have no reason to think that that's going to change into Q2 and Q3.
Alright, thanks, guys.
Youre welcome.
Thank you and the next question comes from Michael Rehaut with J P. Morgan.
Yeah.
Hi, guys. Good morning, Dogwood, one for Mike.
How should we think about normalized margins over the long term overtime bolstered your gross margins on SG&A.
Operating margin has stayed the same so do you anticipate any further upside the gross margins are on leverage.
Yeah, I mean, I think the first quarter is a good indicator for where gross margins will be for the full year of 2023 SG&A was a little heavier in Q1, primarily due to our participation in ibs.
So it got a little unevenness within the spend for the full year I would expect that as Jeff noted that that long term EBITDA margins. Our target has always been in the high teens, we're confident that we'll we'll be right around 18% for the full year. Yeah. I'll just add if you look at the major drive.
Or is it.
Our you know costs are.
Aluminum is pretty steady it's a it's actually you know year over year are favorable.
We don't see any change in that given the current economic environment, We're all operating in.
And then glass our next huge cost we have seen some increases in glass, but we've been able to offset those increases.
The major impact of those increases by either bringing more internal production into glass you got to remember we have two glass plants and so we can produce a lot of our own and that gives us an idea units. So we've in sourced some of that.
Offset costs as you know as well as the overall demand and makeup between impact and non impact we've seen strong demand impact and that always helps from a cost basis as well.
Alright, great. Thanks, and then I guess switching gears a little bit I appreciate the color on the shareholder rights plan.
Where are you guys are now is there any update on where the strategic investor is in terms of ownership.
Recent discussions with investors.
Just a little bit more insight on that if possible.
Yeah, obviously limited on what I.
I want to say, our can say around round that we did put in the poison.
Poison pill to make sure all shareholders benefit from you know.
Before Hudson well, what we view as a stock that's trading incredibly low.
So no update in terms of ownership, we don't think that's changed nothing is triggered.
And the the poison pill in itself so that ownership percentage.
As you know as far as we know remained the same.
And in terms of discussions yet.
Discuss I'm going to give a generic thing I didn't discuss our company with a lot of our investors. Okay and has this one reached out yes, yes, I've talked to this particular investor that's about all I can color I can comment on it at this time.
Got it thank you guys.
Thank you and the next question comes from Joe <unk> Meyer with Deutsche Bank.
Hey, good morning, everybody, thanks for taking Morningstar.
Beth.
Okay, great. So you're about six months into a having Martin in your in your company you know, it's early but any early learnings or progress on the channel synergies that you guys just.
With the acquisition not necessarily looking for a quantification, but just any initial impressions around that opportunity now that your teams are executing against it.
Yeah, I'll give a high level and I'll have Craig when I add something but you know we went into March when you. It was going to be how do you grow a small business graduate business and the goal was to not only grow them in the new construction channel, which were part of the problem.
Dominantly play was also to introduce it into the R&R channel. So we have various sales initiatives out to do that.
We have had success in getting it into a few of our dealers as well as to our into our actual more but let's call. It a big box type play.
So we have had some success.
Yeah again, it's too early to tell at this point, we laid out internally it was going to be up to a year before we had meaningful sales synergies in there.
That business we.
We do plan on also introducing it into our new self stores in Texas.
And we'll be having those grand openings for those new self stores coming up next.
Next month actually so we will have a total of five stores in Texas. So those garage doors will be available in the newsouth stores as well. So we're executing on various fronts to try to gain those sales synergies and really pull it.
All of.
New construction only and put it into the R&R channel, it's just going to take like we knew when we went into this is going to take a you know probably call. It 12 months or so to make that happen.
The integration is going to plan.
Trying to streamline the production and take out cost related to that streamlining our production, while increasing capacity right.
Greg you got anything else you want to yes, no I mean, I think the margins keep first quarter results were really impacted by some weather in the Salt Lake City area too so.
We're actively pursuing those plans and expect to see you know a lot you'll you'll hear more news about Martin in the coming quarters.
Alright, thanks for the color there guys.
Moving on to the new rosy.
And the South east upbeat it sounded like in the quarter could you just maybe break that down between what was carryover price versus volume because I would've I would've assumed do rather the window market volumes would have been down significantly in the first quarter. So impressive that you were up in sort of a high single digit range and then maybe just if theres also.
So our contribution to call out from.
Your your wins with the builders, there or any other sort of market outperformance drivers that we'd expect to sort of be sustainable as you see the rebound that you're calling out I'm not really sure.
Sure so from a from a price volume perspective from an overall company perspective unit volumes were down about 5% the price impact was plus eight to get to that plus three organic.
If you apply that back down to the to the new construction plus eight most of that is price, but unit volumes are flat on the new construction in the southeast had a lot of activity both.
Both expanding dealer relationships and moving down into the regional builders.
So a lot of positive activity and a lot of share gain actually down there in that space. So we're we're optimistic about that business in 'twenty three.
Okay.
Alright, great. Thanks, a lot for the color good luck.
Thanks, Joe.
Thank you and this concludes our question and answer session Oh, what does it kind of like Florida, Craig Henderson for any closing comments.
Thank you all for joining us and we appreciate the questions and Oh.
We look forward to connecting with you on our next call have a great day.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.