Q3 2023 PGT Innovations Inc Earnings Call
Good morning, and welcome to P. G T innovations third quarter 2023 earnings call. All participants are in listen only mode. I would now like to turn the conference over to P. G. T innovations senior Vice President of corporate development, Brad West. Please go ahead.
Good morning, and welcome to the PGP innovations third quarter 2023 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 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 2020 financial performance outlook.
These statements involve risks uncertainties and other factors that could cause actual results to differ materially.
Initial information on factors that could cause actual results 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 weren't available is included in the tables in the earnings release and in the slide presentation appendix at.
At this time I will now hand over the call up our company CEO and President Jeff Jackson. Thank you Brad.
Good morning, everyone and thanks for joining us today.
Before we get into our quarterly earnings results I want to acknowledge the recent transaction or emerging market speculations in the media we.
We are not going to comment on those rumors today and are focused on presenting our strong earnings results.
We continue to engage in constructive dialogue with all of our investors and we welcome their perspectives.
We are always open to opportunities to maximize shareholder value.
With that let me get to today's earnings results.
Our third quarter financial results released earlier today showcase our ability to meet the growing demand for our products in this current dynamic market conditions, we're operating in.
Our balanced exposure to both new construction and repair and remodeling channels.
Is there a structural advantage that enables our team to consistently deliver record sales and solid profit over the past year.
Our third quarter financial results are strong evidence that demand for our premium products remained strong and that the entire team is executing on all cylinders.
Our team members are at the heart of our continued success and in recognition of their efforts, we announced during the third quarter Special Grant of 395000 shares of restricted stock to those team members, who do not participate in the company's long term incentive plan.
Turning to slide four we delivered total revenue of $400 million and adjusted EBITDA of 78 million or 19, 6% in the third quarter.
We were able to deliver strong profitability in the quarter due to our continued focus on productivity and operational execution.
Our year over year revenue growth of 4% and our adjusted EBITDA increase was 15% versus the prior year third quarter.
And year over year sales growth was driven by an 11% increase in the repair and remodeling channels, partially offset by continued weakness in new construction, which declined 7%.
The strong demand for our products continues despite the impact of high interest rate on current housing market conditions.
We continue to maintain a normal price cost relationship.
Our industry, leading lead times and quality service and value proposition are helping us drive increased market penetration across our brands and geographies.
Next on slide five let's take a closer look at the third quarter, our sales trends and key initiatives.
Sales in our South East segment were a record $303 million, an increase of 5% versus the prior year third quarter and also 5% sequentially.
Our South Beach results show the power of our brands in both the new construction and repair and remodeling channels.
Our year over year revenue growth was driven by a 5% increase in R&R sales and a 6% increase in new construction sales.
The prior year quarter was impacted by Hurricane Union were 12 million in sales were deferred into the fourth quarter of 2022.
Order demand in the South east increased 16% versus the prior year quarter <unk>.
Including double digit order unit volume growth.
Sales in our Western segment were $97 million down 1% versus the prior year quarter.
Western organic sales contracted 9% versus the prior year quarter and more flat sequentially.
Organic order demand out west declined 4% versus the prior year quarter.
An improvement from the 20% year over year decline seen in the second quarter.
Driven primarily by improvements in the new construction demand.
During the quarter, our western window system series 300, minimalist multi slot door was awarded an editor's pick.
From the architect newspapers as part of their 2023 best of products Awards.
We will be showcasing this product along with other premium products in our western window systems architectural design studio in Santa Monica, California set to open on November 16th.
This innovative studio will provide a location for architects builders and dealers.
Hands on experience without premium products. It will also provide an opportunity to collaborate with our product experts to help design the bed.
<unk> premium indoor outdoor living spaces and industry for any custom project.
Our Martin garage door acquisition, which closed late in 2022 launched our new Keystone Pandora in the third quarter.
Featuring an innovative new design, they provide cleaner lines that homeowners desire.
We are already seeing order growth from the lunch at a Martin garage door in our Texas, new soft markets.
We look forward to launching Martin garage doors, and other than yourself markets as well as in our east coast distribution network.
For a new sell direct to consumer brand, we are executing our Texas takeover initiative.
Texans across the Austin, Dallas, Fort Worth Houston, and San Antonio Metro areas now have the opportunity to experience the value of custom factory direct new shelf product along with the Martin garage doors.
Okay.
During the third quarter, we began production of our latest innovation diamond glass or laminated Ultra light glass technology, featuring Corning architectural technical glass.
This innovation provides homeowners with improved clarity lower weight three times scratch resistance and improved energy efficiency, while maintaining impact resistance that customers expect from our industry leading impact brands.
Window or products, featuring diamond glass as a standard offering are available today, and we will be adding diamond glass as a premium option to our P. G T branded products.
I'm excited to announce that our first then tripled glass fabrication facility will be in Prince George County, Virginia.
We appreciate the support of state and local leadership and look forward to being a trusted community Park <unk>.
Equipment installation testing and local team member hiring began in the third quarter and production is scheduled to begin in the first quarter of 2024.
Now I'd like to turn the call over to Craig Henderson to review, our third quarter results in greater detail correct.
Thank you, Jeff turning to slide six consolidated net sales were 400 million in the third quarter up 4% from the prior year third quarter the year over year increase in net sales was driven by a 1% organic increase from our legacy business unit volume decline was 1%.
Partially offset by a 2% price impact from price increases taken in the prior year, our South East segment sales grew 5% from the prior year third quarter, while our western sales segment were down 1% from the prior year.
During the third quarter, our sales breakdown was 63% R&R and 37% new construction R&R sales were up 11% compared to the third quarter of 2022.
We delivered strong R&R sales growth as demand for our products continues across all geographies, new construction sales were down 7% versus the prior year third quarter, new construction activity reflects improvement from a year over year decline, 12% experienced in the second.
Quarter.
Gross profit was 162 million in the third quarter and increased 8% compared to the prior year third quarter. Our Q3 results were driven by continued solid performance from our operating teams the impact of prior year pricing actions offsetting material and wage inflation.
And additional cost management discipline.
Partially offset by reduced fixed cost leverage from lower volumes.
General and administrative expenses were 102 million a decrease of 1% in the third quarter compared to the prior year driven by strong cost management discipline, partially offset by increased marketing investment.
Adjusted EBITDA of 78 million or an EBITDA margin of 19, 6% was 15% higher than the prior year third quarter. This year over year increase in percent was driven mainly by operational efficiencies and the impact of pricing actions.
Yeah.
Our favorable non-GAAP adjustments for the quarter.
Related to the 800000 dollar adjustment.
For the closing of our Charlotte.
And Raleigh, Durham, North Carolina showrooms.
This adjustment offset a portion of the $2 5 million dollar charge taken during Q2.
Our tax expense for the quarter came in at 25, 9%.
We reported adjusted net income of $39 million or 66 cents per diluted share compared to $30 million or 55 cents per diluted share in the third quarter of 2022.
Turning now to our balance sheet on slide seven at the end of the third quarter, we had net debt of $602 million and total liquidity of $214 million.
As of the end of the third 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 $80 million in the third quarter. This strong performance.
Enabled us to reduce our revolver borrowings by 39 million.
In addition, we continued execution of our three year $250 million share repurchase program and returned nearly 30 million to shareholders through the repurchase of 1 million shares.
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.
Moving on to our guidance on slide eight for the fourth quarter, we anticipate revenue to be in the range of $325 million to $350 million, we anticipate adjusted EBITDA to be within the range of 51 to $57.
For the fourth quarter, we expect sales volume to decrease seasonally from our third quarter year over year unit volumes are expected to contract versus an E&S effect in Q4, given the uncertainty created by the recent increases in interest rates, we expect strong operations execution.
Along with continued cost discipline.
It will enable us to continue to deliver strong results in this uncertain market.
We expect to spend $15 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 spending.
Sure that our new glass operations will launch successfully.
Spike this increased investment.
We continue to hold our target leverage in the low two times EBITDA range.
And now I would like to turn the call back over to Jeff.
Thanks, Craig.
I'll conclude today's call with a summary of why we believe UGG innovation is in an excellent position to continue to deliver above market long term growth. Despite the challenging near term demand environment.
We recognize that the current housing market is being constrained by affordability challenges.
The current conditions have added to the pent up need for additional housing.
We expect that once interest rates start increasing.
And returned to normal levels. This pent up demand will provide significant tailwind for our business.
While affordability for new homes has gotten better with various incentives being offered by builders conditions continue to affect new homebuyers and homeowners in the near term.
Our repair and remodeling channel is boosted by the lock in effect of lower fixed rate mortgages, meaning homeowners are likely to stay in their current homes longer.
The record level of home equity.
And the increase in age of housing stock I mean, these homeowners will be more willing to take on large remodeling projects to update their homes once interest rates stabilize.
This lock in effect continues to positively impact the new construction activity as well as.
The dramatic reduction in existing home sales is helping drive a more stable recovery in new home construction.
Longer term industry sources continue to suggest that there are several macroeconomic <unk>.
And that will affect the growth in new construction and R&R markets over the coming years.
Turning to slide nine.
P. G. T innovations has built a solid foundation to take advantage at least long term trends and we will see a greater benefit than others in our space when the economy stabilizes.
Our strategy is to focus on markets, where demographic trends tend to be more favorable than the national average.
First we are national leader with an outstanding portfolio of brands that we have strengthened over the past few years.
We were executing on our growth strategy, including expansion into adjacent building product categories to complement our existing portfolio of premium window door and garage door brands.
Our products and impact resistance and indoor outdoor living market continued to gain traction.
We served geographies with strong population growth.
Okay. The diversification of our product portfolio continues to expand through acquisitions and new product introductions.
Which further facilitate balanced portfolio growth in both the new construction and R&R channels.
Third operational improvements and capital investments have increased our capacity and delivered margin expansion.
Our 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 help us provide customers with innovative premium products to meet their changing needs and expand our customer base with new technologies, such as our diamond glass and thin tripled glass.
Lastly, we are committed to increasing shareholder value through our robust profitability and returning capital to our shareholders through our share repurchase program.
We believe pizza innovation is in a great position to weather the current environment and are working to build a stronger foundation for our next level of growth and continue to create long term value for our shareholders and customers.
Throughout this volatile macroeconomic environment, we remain focused on disciplined cost management, while delivering on our value proposition to our customers.
This commitment has allowed us to achieve and maintain strong profitability. We will continue to invest in our brands, our capacity and automation and in our people to outperform the competition and deliver returns for our investors both in the near and long term.
We remain committed to delivering products with features performance and value demanded by our builders and customers.
We continue to execute our plans to create long term value for our shareholders, including the $250 million share repurchase program.
During the third quarter, we invested nearly $30 million in open market transactions to repurchase our shares for a total of $75 million in share repurchases to date.
In addition, we believe that our current trading range does not properly reflect the long term potential for shareholder value for P generalization shareholders.
And all of the actions, we just discussed will drive shareholder value higher.
I want to thank all of our team members for their dedication and belief in our company at this time, let me begin the Q&A operator.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
Our first question comes from Keith Hughes from Truest. Please go ahead.
Oh, thank you.
Brooks I think you said it was up 16% southeast double digit volume it was pretty impressive I'm a little surprised the earnings actually the revenue guidance is now stronger kind of flat at the midpoint you talk about what kind of offsets youre going to see it sounds like the south east.
Yeah, Keith Keith I'll speak a little bit and then Craig you can add some details, but basically the you know the fourth quarter. We did have that push from last year's hurricane into the fourth quarter. So in terms of sequential growth is going to be you know a challenge there was $12 million pushed from Q3 of last year into Q4.
Due to hurricane Ian but if you look at the full year, you know again full year guidance with our fourth quarter guidance. We just gave you know we're going to basically be flat for the year.
And a half last year call it a billion and a half this year and that's in the face of new construction being down 22% and R&R down eight. So we're like we're executing we're gaining market share and even more importantly, we're leveraging our EBITDA. Our EBITDA last year was 253. This year is gonna be plus $20 million it it'll be 275 ish.
So quite frankly, well everything's clicking right and we're performing incredibly well and gaining share despite the housing.
Right.
Evidence things are going well here I guess.
The question is with the new facility in Virginia.
The the triple thin glass.
Do you have any sort of feel or do you sort of whether that would tell you what what kind of revenue you can get out of a facility I assume that facility by the way. It goes to other third party manufacturers that why did you kind of you.
You're going to get.
Yeah. It does third party manufacturers as well as you know internal needs, we will be putting at the thin triple a solution in our aniline products for instance, it would make it the most energy efficient vinyl window in the market.
And that's on the slate and also third party sells both finished units and raw glass. We actually also signed a distribution agreement are about three weeks ago.
With Corning and <unk>, we were able to also sell raw fusion drawing glass to other glass manufacturers like the big Big guys from Cardinal Guardians old castles of the world.
Actively trying to pursue those relationships, we do have a potential customer for the full unit glass to drop it dropped before paint into <unk>.
And we also have a potential distributor a maker of that glass it wouldn't be selling a fusion drunk last two nothing signed at this point, but are definitely are are in heavy discussions are the facility slated to be operational at the end of the first quarter of next year, we're going to do a ribbon cutting yeah. Obviously this year.
Okay. Thank you.
You bet.
The next question comes from Michael Rehaut from J P. Morgan. Please go ahead.
Hi, guys good morning, Doug Wardlaw for Mike.
So you guys said organic.
Increased by 1% driven by 2% from price and that was partially offset by volume. So can you just add a little bit more color or detail on what you saw from the market regarding price. This past quarter and you know how you can see that potentially evolving moving into next year.
Yeah, I know pricing has been stable, Doug and we we don't see any pressure to to reduce reduce prices, where where we believe that we have pricing power in and there's still strong demand within the <unk> geographies that we serve them, we see western segments recovering.
As new construction continues to heal them in the southeast remains strong so there's not a lot of talk on from a price protection perspective.
Got it and I'm like you just said you know the Western region is more tied to new construction in the last quarter. There was a bit of optimism that it would improve and I guess big picture basis would you say that improvement sequentially met your standards and you know moving forward you know how are you guys thinking.
But the residential particularly in the western region moving into the early parts of 24.
Yeah from a from a western perspective organic growth on a demand side grew 5% sequentially and while it's taken a little longer to see some of the activity flow through to our business. There's always a lag between the increase in starts we are optimistic that that business will grow in the fourth.
Quarter, and then into the next year, Yeah, we have several initiatives going whether it's our cri installation arm that that we are heavily involved in with with some builders to install a product that's growing and also again innovation with a thin triples, once we get that in our aniline products.
We really think that's going to help differentiate ourselves in the marketplace and gained share there as well. So we're actually very optimistic about you know the west and what we have going there.
Got it thank you guys.
You bet.
Again, if you have a question. Please press Star then one.
Next question comes from Joe <unk> Meyer from Deutsche Bank. Please go ahead.
Hey, everybody congrats on the results and thanks for taking my question.
Thanks, Joe Thanks, Joe.
Yeah to your point about you know growth in a tough environment I'm just thinking about next year, all the things that could potentially go right for you.
And I'm just looking at consensus EBITDA against your updated range really just up 4% next year and I'm. Just wondering how you kind of look at that in the backdrop of stable R&R potentially much stronger new construction are all the things that youre doing to outgrow those market growth rates are just seems a little bit.
Like theres potential to that.
Yeah definitely we see upside next year I mean, if you look at the stable environment, there, where we're going into in 'twenty. Four in spite of the higher interest rates, we have consistently been able to outperform the national averages due to our footprint and due to the penetration of both impact resistant products in the South east.
And indoor outdoor in out of the West and so we see no reason why that's not going to continue and where well be able to deliver strong results next year, Yeah, and we do plan on next year actually announcing guidance for next year at least we've seen definitely a stabilization in this.
Market, we're operating in with ever increasing rates, we've seen a good stabilization of order growth and patterns that we feel we've got a good handle on 2024. So we you know our next call we'll be announcing that that guidance from our end and we do expect growth.
For the full year, you'll be giving the guidance, that's what you're saying, yes, yes, okay cool and then just thinking about the capital you've allocated to buybacks is it right to think that in the context of your comments there.
This is more of a reflection of your view on the valuation of your stock.
Relative to those expectations for profits or is it a lack of M&A opportunity just having enough capital that you can.
Do the internal investments that you wanted to do.
And so as we look to kind of understand how much more you could do on the buybacks what is sort of a price in your mind for where it starts to be more attractive to pull back on the buybacks.
Yeah, we we really balance that with opportunities M&A has opportunity still despite the interest rate environment. We're operating in a we're actively talking to two different companies now are but in terms of our choice on share buyback look we our stock is trading below where it should trade at.
Board firmly believes that and that's why we allocated $250 million to buy back stock and our share repurchase program. So and we may able to execute to a total of 75 million to date, and we think a we will be executing more buybacks.
So I'm not comfortable in color and commentary on the price. We look at I think that that fluctuate based off our need of caching and other opportunities, but we definitely think are returning capital to shareholders via the form of share buybacks right now is a great opportunity for us.
Yeah, and I would say that the business is still generating a lot of free cash flow and so we're going to put that to use and we believe that the returning capital to shareholders. This is a great use of that of those excess funds.
Excellent thanks, a lot everyone.
Thank you.
This concludes the question and answer session I would like to turn the conference back over to Craig Henderson for any closing remarks.
Yeah.
Thank you for joining today's call. We appreciate your continued support to P. G. T innovations and we look forward to connecting with you soon at upcoming Investor conferences, and well looking forward to discussing our full year results in our 'twenty 'twenty four guidance in February.
So much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
[music].
Yeah.
Hum.
[music].
Yeah.
[music].
Yeah.
[music].