Q2 2023 PGT Innovations Inc Earnings Call
West. Please go ahead.
Thank you and good morning, and welcome to the PTT innovations second quarter 2023 Investor Conference call.
With me on the call today are president and CEO , Jeff Jackson, and our interim Chief Financial Officer, 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 the 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 that discuss forward looking statements.
Today's remarks contain forward looking statements, including statements about our 2023 financial performance outlook those.
Those statements involve risks uncertainties and other factors that could cause actual results to differ materially.
Additional information on the factors that could cause actual results to differ from expected results is available in the Companys. 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 for a company CEO and President Jeff Jackson.
Thank you Brad good morning, everyone and thanks for joining us on today's call.
Our second quarter financial results released earlier today showcase the commitment of our team members and supplier partners.
To continue executing in an ever changing macro environment.
Following record first quarter results the company delivered sequential increases in both revenue and profitability. Despite continued economic uncertainty.
Turning to slide four.
We delivered total revenue of $385 million and adjusted EBITDA of $74 million or 19, 1% in the second quarter.
We were able to deliver strong profitability in the quarter due to our continued focus on productivity and operational execution.
Our sequential revenue grew 2% driven by increases in unit volume in our adjusted EBITDA increased 5% sequentially.
The sequential growth was driven by 6% increase in repair and remodeling channels, partially offset by continued weakness in the new construction, which declined 3% sequentially.
The housing market continues to show signs of optimism with new home construction activity, partially offsetting the impact of the lock in effect on existing home sales.
We continue to maintain a normal price cost relationship and are getting near standard lead times and delivery across all our brands.
Next on slide five let's take a closer look at the second quarter, our sales trends and key initiatives.
During the quarter, we generated total revenue of $385 million sales.
Sales in our South East segment were $288 million, an increase of $6 million versus the first quarter of 2023.
Sales grew 2% sequentially and contracted 6% versus the prior year second quarter.
Our southeast brands continued to show resilience in a down market.
Our sequential revenue growth was driven by a 3% increase in R&R sales, partially offset by less than 1% decline in new construction sales.
Okay.
Versus a record prior year quarter, where the south east sales grew 27%.
R&R sales declined 1%.
And new construction sales were off 15%.
Our southeast year over year sales decline in the second quarter was primarily due to continued housing market volatility.
We recently announced the acquisition of the remaining 25% of echoing the process LLC.
We first acquired the initial 75% ownership in Echo in 2021 to accelerate growth expand margins and strengthened our supply chain by adding additional glass production capacity.
We haven't been able to leverage the glass capabilities of the echo business to vertically integrate our other brands and are excited to finalize the purchase of the remaining portion of the business.
Sales in our Western segment were $97 million, an increase of $2 million versus the first quarter of 2023.
Sales in the west grew by 2% sequentially.
Westar organic sales contracted 12% versus the prior year quarter.
Year over year comps out west were challenging due to cycling of 39% increase over organic sales in the second quarter of 2022, and the segments biased towards a slower new construction market.
We saw positive momentum in both all of our Western segment in June and July .
During the quarter, we relaunched our western series 7600, multi slide door.
This product provides extreme opening sizes, including Max panel Heights of 15 feet.
And it's available in multiple configurations.
This new product continues to provide our leading edge performance, but at much larger sizes.
Our Martin garage store acquisition, which closed in late 2022 delivered strong sequential growth.
A weather impacted first quarter.
We are actively committing resources to execute on our sales synergies plans across our western region and into our new south locations.
Martin will be launching our new Keystone <unk> in the third quarter, featuring a design using inland stamping with a minimal risk on the door face. This.
This innovative new design provides a clearer lines homeowners desire.
During the second quarter, we held grand openings for our new sales retail showrooms in Dallas Fort worth and San Antonio Texas.
These new locations offer all accustom yourself products, along with Martin garage doors.
Our Austin showroom will be opening later this year.
We are excited about the expansion of the new soft brand into major Metro markets in Texas and look forward, adding Martin garage doors to other new south locations later this year.
Throughout this volatile macro economic environment, we remain focused on controlling cost and while delivering on our value proposition to customers.
This commitment has allowed us to achieve and maintain strong profitability.
We will continue to invest in our brands, our capacities and automation and our people to outperform the competition and deliver returns for our investors both in the near and long term.
We continued our commitment to innovations which is.
Underlies everything we do.
We are proud to announce that we will be launching our first product feature diamond glass, our impact resistant glass using technology from an exclusive partnership with Corning.
In the third quarter.
Our premium <unk> brand will transition to diamond glass and will be the first received improved clarity.
Lower weight, three times scratch resistant and improved energy efficiency, while maintaining the impact resistance that customers expect from our industry leading impact brands.
I am excited to report window products, featuring Diamond glass will be available no increasing price, bringing improved performance with no increased cost to our customers.
As we scale up our operations.
At our glass facilities in Venice, we will be adding diamond glass as a premium option to our PDT branded products.
We continue to execute on our plan to deliver our thin triple insulated glass units to other window and door manufacturers in early 2024.
We remain committed to delivering products with features performance and value demanded by our builders and customers.
Our open order backlog is $247 million at the end of the quarter of $11 million from the first quarter, primarily from demand and our southeast segment.
Regarding our shareholder rights plan. The circumstances described in our March 30 press release, necessitating the implementation of the plan continue to exist.
We continue to engage in constructive dialogue with all our investors and we welcome all of their perspectives.
We are always open to opportunities to maximize shareholder value. We continue to execute on our plan to create long term value for all our shareholders, including our $250 million share repurchase program.
During the second quarter, we invested $19 8 million.
In open market transactions to repurchase our shares.
For a total of $45 4 million in share repurchases year to date.
Now I'd like to turn the call over to Craig Henderson to review, our second quarter results in greater detail Craig.
Thank you, Jeff turning to slide six consolidated net sales were $385 million in the second quarter down 5% from the prior year second quarter the year over year decrease in net sales was caused by an 8% decline from our legacy businesses.
The impact of unit volume decline was 13%, partially offset by a price impact of plus 5% primarily from price increases taken in the prior year second quarter, our southeast segment sales contracted 6% from the prior year second quarter, while our west.
<unk> segment sales were down 12% from the prior year during.
During the second quarter, our sales breakdown was 61% R&R and 39% new construction.
Organic R&R sales were down 1% compared to the second quarter of 2022, we continue to deliver strong R&R sales growth and PGP NFL, but this was offset by our other brands organic new construction sales were down 17% to the prior year second quarter.
Collecting the weakness in new home construction activity.
Gross profit was $154 million in the second quarter and declined 7% when compared to the prior year second quarter.
Our Q2 results were driven by reduced fixed cost leverage from lower volumes, partially offset by continued solid performance from our operating teams the impact of prior year pricing actions offsetting material and wage inflation and additional cost containment measures selling.
General and administrative expenses decreased 9% in the second quarter compared to the prior year driven by strong cost containment measures.
Adjusted EBITDA of $74 million.
Or 19, 1% was 6% lower than the prior year second quarter. This year over year decrease in dollars was driven by reduced fixed cost leverage from lower sales volumes. However, the continued high margin performance was the result of operational efficiencies.
And the impact of pricing actions offsetting material and wage inflation.
Our adjustments for the quarter included $2 5 million related to the closing of our Charlotte and Raleigh Durham, New showrooms.
Showrooms, which opened in 2021, we are exiting these markets to focus our investments to drive growth in other areas of the business. During this volatile macro environment in.
In addition, we adjusted our second quarter results by approximately $500000 for one time charges related to acquisitions and for cost incurred in the second quarter relating to our fourth quarter 2022 cyber incident.
Our tax expense for the quarter came in at 26, 5%.
We reported adjusted net income of 34 million or <unk> 58.
Per diluted share compared to $41 million or <unk> 67 per diluted share in the second quarter of 2022.
Turning now to our balance sheet on slide seven at the end of the second quarter, we had net debt of $640 million and total liquidity of $177 million.
As of the end of the second quarter, we had a trailing 12 month bank covenant net debt to adjusted EBITDA ratio of two four times, we generated operating cash flow of $36 million in the second quarter.
We also invested $13 million in Capex.
Mostly related to cost reduction and capacity expansion initiatives that will enable us to improve our profitability in 2023 and beyond during the second quarter. We continued execution of our three year $250 million share repurchase program and return <unk>.
$19 $8 million to shareholders through the repurchase of 777000 shares.
Moving on to our guidance on slide eight the continued macroeconomic uncertainty will again limit our sales and EBITDA outlook to the next quarter for.
For the third quarter, we anticipate revenue to be in the range of $385 million to $405 million.
We anticipate adjusted EBITDA to be within the range of 71% to $77 million for.
For the third quarter, we expect price to contribute 2% to our growth over the prior year quarter we.
We expect sales volume to increase from the second quarter, driven by a recovery in new construction.
And stability and R&R sales.
We expect our strong operations execution, along with continued cost containment will enable us to continue to deliver strong profits in this uncertain market.
We expect to spend $25 million in 2023 on our new glass operation equipment and facilities. In addition to the normal 3% to 4% of sales run rate capital spending.
This higher level of spend will ensure that our new glass operations will launch successfully. Despite this increased investment we continue to hold our target leverage at two to three times EBITDA and now I would like to turn the call back over to Jeff Jeff.
Thanks, Craig.
Ill conclude today with a summary of the current market conditions and while we believe <unk> innovations is positioned to continue to deliver above market long term growth. Despite the challenging near term demand environment.
While the underlying macroeconomic volatility continues to affect both homebuyers and homeowners.
Our repair and remodel channel is bolstered by the lock in effect of lower fixed rate mortgages, meaning homeowners are more likely to stay in their homes longer.
The record level.
We see in home equity and the increasing in age of homes means homeowners are more willing to take on long term remodeling projects to update their homes.
This lock in effect will positively impact new construction activity as well the dramatic reduction in existing home sales is helping to drive a stable recovery in the new home construction.
Long term industry sources continue to suggest 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 could be formed.
The need for an additional 17 million housing units to meet demographic demand.
$1 8 million additional homes will reach prime remodeling years through 2027.
83% of mortgage borrowers are locked in with mortgage rates below 5%.
The average homeowner has $333000 in equity in their home.
The inflation reduction act introduced major changes to the federal incentives for residential energy efficiency upgrades through 2032, our new glass technology will enable homeowners to qualify for these incentives.
Our Florida brands have the added benefit of increased hurricane awareness evolving construction standards and the enactment of the home hardening sales tax relief act on impact products.
Turning to slide nine <unk> innovations has built a solid foundation to take advantage of these long term trends and we see a greater benefit than others in our space when the economy stabilizes.
Our strategy is to focus on markets with the demographic trends is 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 are executing on our growth strategy, including expansion into adjacent building product categories to complement our existing portfolio windows and door brands.
Our products and impact resistance and indoor outdoor living markets continue to gain traction we served geographies with strong population growth.
Second the diversification of our product portfolio continues to expand through acquisitions and new product introduction.
Which further facilitates our balanced portfolio of growth in both new construction and the R&R channels.
Third operational improvements and capital investments have increased our capacities and delivered margin expansion.
Our 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 helped 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 PDT innovations is in a great position to weather the current economic 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 and.
In addition, we believe our current trading range does not properly reflect the long term potential shareholder value for PDT innovation shareholders.
And the actions, we have discussed will drive our company's value higher.
I want to thank our shareholders our team members channel partners and suppliers for their continued support.
At this time, let us to begin the Q&A operator.
We will now begin the question and answer session.
So ask a question you refreshed thoughts on when your telephone keypad.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Phil <unk> with Jefferies. You May now go ahead.
Hey, good morning.
On for Phil.
Maggie.
I guess first digging and kill the demand outlook across your end markets on it sounds like R&R has been outperforming new construction, but youre expecting a sequential improvement and.
And both of those end markets next corner.
Do you expect to see a positive.
Year over year inflection this year or is that more of a 2024 at that right now.
You mean total sales Maggie R. R.
Alright.
Yes, I guess by by end market, you talked about you're starting to see a recovery in new construction do you see that kind of inflicting positive this year.
<unk> and.
Same for R&R.
Okay.
Yes, Maggie we definitely believe that the demand profile continues to be strong from an R&R perspective.
New construction excuse me.
Ben.
Weaker just because of.
The falloff in the.
The activity from the second half of 2022, but.
But we do see early signs that it is improving so from an R&R perspective definitely will be up from a year over year perspective, new construction will be more flattish, but will be flat from a dollar perspective.
Yeah, and I will say Maggie I mean, if you look in July and I'm going to speak total not by segment. Our July order trends were already up 8%.
In the months of July of last year, I think that's why.
We really are feeling more positive in the back half of the year and that's reflected in our increased Q3 guidance.
Okay. Okay got it that's helpful.
And then in Florida, specifically, you have some secular tailwind from the recent hurricane activity.
On.
The home Hardening Act can you talk about what the consumer response of both of those have been and what's your sense of <unk>.
Contribution from those in the first half and then going and kill the balance of 2023.
Yes.
Our response to the home hardening tax relief has been very strong our dealer base has been able to take advantage of that as they are out.
Selling homes, selling windows and doors into into the homes, especially since hurricane and hit.
We did have a significant interest in that just some of our lines at calling the PTT obviously.
We see those out to our dealer base.
If you look at Florida, just last year alone, Florida had over 400000 people move into the state and that was only the fourth time in the states history has been that above 400000. So people will move moving in hurricanes are hitting and that awareness factor.
Phil you you've been through hurricane that that awareness factor plays very well for selling impact product.
So we continue to reap those benefits.
I'd say, we will see the benefits of hurricane in for at least the next 18 months.
Looking back to Irma, we saw good uplift in Irma for about a two year period.
And so if you look at Ian.
Estimate about the same timeframe in terms of a benefit sales.
Do you have anything you want accurate, yes, there are a lot of the demand that we're seeing so far is just related to hurricane awareness.
And so the repair and remodel piece of it.
Actually in the southwest, Florida region, where most of the damage happen is still inbound in the second half and potentially into the first half of next year.
Okay, Great. That's helpful. Thanks, guys.
Thank you.
Okay.
Our next question will come from Mike Rehaut with Jpmorgan.
You May now go ahead.
Hi, guys. Good morning, Doug worldwide on for Mike.
Can you guys just talk about the trends you saw in the western segment throughout the quarter, if you could get a little bit more color there and just how the reason bounce back from the weather impact in the first quarter.
And then if you could add a little bit on how you expect the region to try and move into the back half of the year Directionally.
Sure I'll speak.
High level correct could share some more numbers detail, but yes. The first part of the first half of this year.
In the first quarter being impacted by the weather by the rain.
California, all the way through.
Really impacts into two Arizona, where the snow melts and stuff. So we've really had weather related issues, but but all of those are pretty much behind us now what we've seen is a good trend in local aniline and even western stabilizing.
As we.
Come through the year itself.
And Martin our new acquisition, we've been able to set up 47, new dealers.
We're very pleased with the sales synergies were starting to at least set up and we think those benefits will be coming.
Soon in terms of top line growth, there and we actually start in Utah with Lowe's with Martin garage door.
Those in Utah, So we've got some good I would say.
Back half.
Initiatives going on out west.
Really drive what we think some some good volume now it does still is still impacted by the slowdown in new construction because western as you. All know is basically new construction and we have those agreements with various national players like toll brothers et cetera for their indoor outdoor living so that has slowed.
We do feel that again is the back half as we entered the back half year, we could see some more traction there, yes, I would say the year over year comps definitely we're seeing the weakness in new construction and that's evident.
In the western brands.
But sequentially.
Seeing improvement and we expect to see further improvement as we move into Q3 Q4.
Okay.
Got it and then I guess just.
Publishing year your acquisition your M&A strategy.
As you said you raise is looking up and <unk> been looking at single family starts which are starting to improve so with that improvement and market change. The way you guys are looking at acquisitions.
Acquisitions moving forward.
Yeah, I don't think so.
Pouring capital obviously back to shareholders for instance in the share repurchase program, we've got going on we're always.
Looking for the right fit to add to the portfolio of brands.
But.
Again, I don't think anything's changed our strategy moving forward.
Wait for the right opportunity and move if it comes available.
Alright, Thank you guys.
Again, if you have a question. Please press Star then one.
Our next question comes from Keith Hughes with Truest.
You May now go ahead.
Thank you a question on gross margin.
Solid number here in the quarter.
Like you were indicating some more good gross margins coming I guess my question is the gross margins are running far higher than they were pre COVID-19 is there anything here that would keep those margins going down assuming up solid demand environment in future years, as the scope and reach a new a new gross margin level for <unk>.
No I mean I think this is the new.
New standard from a P. GTI perspective, we've definitely grown since COVID-19 and so you're overcoming fixed costs from a incremental margin perspective, if anything it will improve slightly as demand increases announce our business increase.
Increases we have capacity out there and we're looking from a capital perspective to expand capacity where needed.
Thats not going to impact significantly the gross margin going forward. So right now we're in a good price cost relationship from a raw materials perspective, we're seeing deflation in some buckets of raw materials inflation and others, but from a balance perspective, we feel like we're in a in a great place and we'll be able to kind of main.
<unk> gross margin and expand it as we move forward.
Fixed cost leverage basically Keith I would echo what.
Craig has said and definitely agree we did have some wage pressures in the last couple of years.
Significantly increases our wage base to compensate both for inflation and just competition to keep our folks.
So thats baked in.
And we're not experiencing that currently are.
Aluminum's and check actually we have a very successful hedging program. So.
I, just don't see anything majorly impacting our gross margin that would they would say the current trends are something we can count on going forward and like Craig said as we gain more volume there's a good leverage component of that as well.
Okay. One other question you talked to Jeff about 8% order rate growth that sounds like that's company wide and how does that break out.
Hum.
East versus west.
One second I think Craig may have that detail.
Yes, so the 8% growth in the third quarter from a demand perspective is.
17% in the southeast and then still down 15% in the west.
Okay. Thank you.
Both of those are improving over Q2 in Q2 that the demand growth really.
Kind of came back really more due to the price increase that we took in the second quarter of last year kind of change the demand seasonality. So the demand numbers got a little bit.
<unk> in the second quarter, but the sequential trends are very solid and we continue to see stability and actual growth in this market, which is gives us support for the results that we're putting forth.
In Q3.
Alright, thank you.
Thanks Keith.
It appears <unk> no further questions. This concludes our question and answer session I would like to turn the conference back over to Craig Anderson for any closing remarks.
Thanks for joining us on the call today.
We.
Look forward to future conversations with you and look forward to connecting.
And next quarter in early November have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.