Q3 2023 Janus International Group Inc Earnings Call
Hello, and welcome to the Janus International third quarter 2023 earnings Conference call. Currently all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference you May Press Star then.
Zero on your telephone keypad as a reminder, this conference is being recorded I would now like to turn the call over to your host Mr. John Rolling Vice President of Investor Relations F. P. N E and M&A. Thank you you may begin Mr. Rolling.
Thank you operator, and thank you all for joining our third quarter 2023 earnings conference call.
We hope that you have seen our earnings release issued this morning. Please note that we have also posted a presentation in support of this call, which can be found in the investors section of our website at Janice I N T L Dot com.
As a reminder, today's conference call May include forward looking statements regarding the company's future plans and prospects.
These statements are based on our current expectations.
And we undertake no duty to update them.
It is important to note that the company's actual results.
Differ materially from those anticipated sector.
Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission and we encourage you to review those factors carefully.
In addition.
We will be discussing or providing certain non-GAAP financial measures today.
<unk> adjusted EBITDA adjusted EBITDA margins, adjusted net income and adjusted EPS.
Please see our earnings release.
Five or less consolidation of these non-GAAP measures to their most directly comparable GAAP measures.
I'm joined today by our Chief Executive Officer, Randy Jackson.
Who will provide an overview of the business and give an operations update and.
And our Chief Financial Officer, and Sam Wong, who will continue with a discussion of our financial results and outlook before we open up the call for your questions.
At this point I'll turn the call over to Ray.
Thank you John good morning, everyone.
Our record financial results in the third quarter built on the foundation established since we became a public company almost two and a half years ago.
We continued to deliver solid top line growth profitability and rapid deleveraging, while generating strong cash flows that position us to execute our disciplined capital allocation strategy.
Our results through the first nine months position us well to deliver another year of outstanding performance across the platform.
The fundamentals that drive our customers and our industry remain resilient against the backdrop of.
Economic and geopolitical uncertainty.
Storage occupancy rates remain above mid cycle levels driving demand for new capacity from facility owners.
Our backlog and visibility into our end markets gives us confidence to once again raise our outlook for the year and positions us to achieve our longer term goals.
Our revenue growth and margin I would like to thank all of our employees without whom our success wouldn't be possible.
Now turning to some specific thoughts around the quarter Jamie.
Janus as record third quarter operational and financial results included solid year over year gains in revenues significant margin improvement.
Other deleveraging and strong cash generation.
The fundamentals inherent throughout the industry that fuel investment decisions by our customers to add much needed capacity are happening both through new construction as well as conversions and expansions.
Over the last two quarters the trend has favorite new construction.
Prior to that RFP was the greater benefactor of customer spending driven in part by the availability of unused brick and mortar retail space or repurposing.
Demand drivers for our business remains strong and our comprehensive platform of self storage solutions means that while customer buying patterns may ebb and flow between new construction and our three.
We are there for our customers with comparable economics for both project types.
Our note. These smart <unk> system had another strong quarter as we continue to ramp up our capabilities and expand our market penetration.
We ended third quarter of approximately 255000 of total installed units, representing approximately 11% growth for the second quarter.
Over 50% growth from the end of 2022.
During the quarter, we announced an anticipated expansion as a major weeks install base for our gnocchi screen digital access to over 400 additional facilities.
Gnocchi screening is the latest in the lineup of award winning Smart security products and the Gnocchi Smart entry product line in both the number of exciting design features like a customizable full graphic display screen Wi Fi and Bluetooth connectivity and all in one design that combines the controller and the key pad in a single device.
<unk>.
The day, they are partnered with us to bring Nokia Smart technology and digital access to approximately 700 facilities.
And subsequent to quarter end, we announced the complete backend migration of Nokia Amazon Web services, allowing us to leverage AWS industrial Iot AI and security capabilities.
By running on AWS, we have inquiries nokia's availability and global reach.
<unk> real time over the air device management and improve the owner operator and end user experience.
Our suite of remote access technologies headlined by gnocchi represent.
First our industry has to offer and we continue to be excited by both the accelerated adoption and its use in the future. It has in store.
Now shifting to the financial highlights for the quarter.
We delivered consolidated revenue of 281 billion, an increase of approximately six 7% as compared to the same period last year.
That's entirely organic new construction was the driver for the games up 43%, which more than offset archery and commercial another being one nine and $11 one lower respectively.
Our adjusted EBITDA of $76 2 million came in approximately 24% higher than Q3, 2022, which represents an adjusted EBITDA margin of 27, 2% an improvement of 310 basis points year over year.
During the quarter commercial actions favorable mix and productivity initiatives more than offset higher costs. We continue to experience in many parts of our business, particularly labor and logistics.
Our company continues to be a positive cash flow generator over the past 12 months through the end of the third quarter, our free cash flow conversion of adjusted net income was 117%.
We expect cash conversion to remain solid over time, putting us in a position to focus on maintaining a secure balance sheet. While also preserving the firepower to preserve value.
Enhancing M&A opportunities as we identify them.
With regard to the balance sheet I'm extremely proud that we were able to reduce our net leverage this quarter by another 30 basis points, putting us at one eight times net debt to trailing 12 month adjusted EBITDA at quarter end.
Now below our target range of two to three times.
This represents deleveraging of a turn and a half in just the last 12 months, a testament to our continued execution and sound business fundamentals.
Before I hand, it over to Ann So I'd like to update you once again about our progress towards our longer term objectives laid out in our Q4 2022 earnings call.
The topline growth for the first nine months of the year puts 2023 on track to exceed our long term average target range of 46% organic revenue growth.
Our EBITDA margins for the third quarter and the nine months of 2023 positions us well towards achieving results well within our long term average target range of 25% to 27%.
Our strong conversion of adjusted net income to free cash flow in the first nine months of 2023 sets us up well against our long term average target conversion range of 75% to 100%.
As I mentioned earlier, our net leverage is already below our target range.
Our end markets remains strong and resilient and we continue to look at ways to leverage our leadership position to capture additional share and create long term value for all stakeholders.
With that I will turn the call over to Anna <unk> for an overview of the financials and our updated outlook for the full year.
Thanks, Amy and good morning, everyone in the third quarter revenue of $281 million was up six 7% compared to the prior year quarter new.
New construction led the way, while our three and commercial and other were lower versus the prior year quarter.
We continue to show a good mix of diversity and stability from our offerings as evidenced by our consistent revenue growth led by new construction in recent quarters.
While we may see significant outperformance in a given segment during the quarter based on timing of projects revenues continue to be well balanced across our three sales channels over 24 months period.
Now diving deeper into the sales channels. Our overall strength in accord came primarily from new construction, which was up 43% year over year.
The improvement was a result of the combined impact of commercial actions taken in 2021, and the early 2022 to offset inflationary pressures on many of our key inputs as well as volume growth.
Our <unk> segment was one 9% lower in the quarter, primarily due to the timing of projects as well as the strong third quarter of 2022.
<unk> storage segments of this continue to produce roughly two thirds of our revenues as they have consistently for the past two years fluctuations between new construction of our three are expected throughout the year based on the timing of project.
To date <unk> is up nine 6%.
In commercial another we were up against difficult comparison to a particularly strong 2022 quarter, which resulted in a year over year decline of 11, 1% as.
As markets continue to normalize we've seen shifts in demand for certain product lines, which were at an all time high during the last couple of years. Our products are used in a broad range of end markets, including hotels warehouses pharmacies, Google and many others. We see continued potential for increased share gains in commercial and other is.
Well as margin improvement over time.
Adjusted EBIT of $76 2 million was up 24% compared to the year ago quarter. The combination of solid demand commercial actions and cost savings initiatives continues to help offset increases in labor as we work to scale the business for continued growth, including additional operational investments in our Milky Smart entry system.
Adjusted EBITDA margin for the quarter was 27, 2% an increase of roughly 310 basis points from the year ago quarter.
Higher revenues and favorable mix shift more than offset higher costs for labor as well as SG&A.
As a reminder, our margin profile for new construction of our three is roughly similar.
Russia and other salesman is typically somewhat lower.
Due to the relative out performance in new construction will two or three in commercial in the quarter, the resulting favorable mix shift helped drive over our higher margins. In addition, during the quarter, we saw particularly strong contribution from silver our highest margin work in new construction and there are three due to the nature and timing of certain projects, we expect the revenue mix through.
To more normalized levels over time, consistent with our longer term margin outlook.
For the third quarter of 2023, we produced adjusted net income of $39 million, which was up 23% from third quarter 2022, adjusted diluted earnings per share of <unk> 27, compared to <unk> 22 in the year ago quarter.
We had another solid quarter of cash flow generation.
Third quarter cash from operating activities was approximately $49 9 million and free cash flow was approximately $46 million.
This adds to a multi year trend of strong conversion of adjusted net income to free cash flow, representing a trailing 12 month free cash flow conversion of 117% of adjusted net income.
The strong conversion of operating cash flow to free cash flow also highlights the capex late in each of our business.
We have begun a period of incremental growth Capex in Europe and on the West coast to expand production capacity as we add to our suite of offerings, which is expected to continue over the next year.
Year to date results and outlook for the remainder of the year positioning us to deliver on our target of 75% to 100% free cash flow conversion for the full year.
We continue to focus on initiatives to improve working capital and strengthened our metrics.
From a balance sheet perspective during the third quarter, we paid down $35 million of debt using cash on hand, and refinance their first lien term loan facility supported by a syndicate of leading National Bank.
We have a floating rate debt has not changed from the previous facility. Despite deterioration in the credit marks a clear indication of the strength in our business model. We ended the quarter with $625 million of total debt $109 7 million of cash and equivalents and a net leverage of one eight times net debt to adjusted trailing 12.
<unk> EBITDA down from three three times at the end of 2022 and two one times at the end of second quarter of this year.
Now turning to our 2023 outlook based on our third quarter and year to date results continued strong backlog and current visibility of end markets. We are pleased to once again raise our full year 2023 outlook for revenue and adjusted EBITDA.
We now expect revenue to be in the range of 1.08 to 1.09 billion, a six 4% increase at the midpoint compared to full year 2022 results driven primarily by a combination of commercial actions and volume related organic growth.
We expect growth in 2023 to reflect the strong underlying fundamentals, we see across all three sales channels.
We are raising our expectations for adjusted EBITDA to be in the range of $280 million to $290 million.
Representing a 25, 6% increase at the midpoint versus our full year 2022 results.
Overall, we expect our full year results reflect a solid year of margin improvement in our business as we pursue our long term objectives to deliver average adjusted EBITDA margin in the range of 25% to 27%.
Into 2024, we expect to continue growing and delivering attractive margins and cash flow consistent with our long term framework. Thank you I will now turn the call back to Randy for closing remarks.
Thank you again anthem.
Our results for the quarter exceeded our expectations.
Looking at the balance of the year, our backlog remains strong and we expect the fundamentals of our end markets and our best in class suite of offerings to continue to deliver robust revenues improved EBITDA margins and strong cash flow generation.
I'd like to once again, thank the entire Janus team for their unwavering focus and relentless execution as we continue to build long term value for all of our stakeholders.
Thank you again for joining US operator, we can now open up the lines for Q&A. Please.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
<unk> tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Your first question comes from.
Brad Hewitt with Wolfe Research. Please go ahead.
Hi, Thanks, Good morning, everyone. Good morning, Brad.
So I'm curious if you could talk about how backlog is trending and kind of what your pipeline looks like for 2024, and maybe any thoughts on the framework for revenue growth next year relative to your 4% to 6% long term target.
Yeah, I'll speak to the <unk>.
I'll speak to the backlog and pipeline, we don't give the detail as you know.
But it remains strong both.
New construction in our three and that speaks to the backlog and pipeline.
So nothing has changed over the quarter.
The strength in both.
And we haven't provided 2024 guidance yet at this point in time I think the best to look at is our learned tune framework. At this point is kind of how we're seeing it right now.
And then also how should we think about your willingness to kind of lever up above the two to three times target range. If the right strategic deal comes along.
Yes, so I'll speak to the M&A and some you can cover the leverage part, but no look where Uber focused on M&A right now as you know we have a long history of finding assets.
And returning outsized growth to shareholders there so.
Terms of pricing.
There is a little bit of give currently.
In the marketplace and there is a diverse group of targets that we're focused on.
And then in terms of the leverage like we said before I don't think we've changed our focus is that it's a real big strategic deal that makes sense for the company.
Would lever up to the higher end of the guidance range that we had and if we went above that and we would have a good strong plan to actually bring it back down in a pretty quick.
Period of time at this point anything as you saw the numbers were in a great position our leverage ratio was actually below our guided range. So I think it would take a meaningful deal to actually bring us above that.
Thank you.
Well next question Daniel Moore with CJS Securities. Please go ahead.
Thank you good morning, and thanks for taking the questions.
Starting obviously with new construction.
Which continues to show really strong.
<unk> strengths.
What are you seeing from your customers that are perhaps not reflected in the capex spending and plans we've seen from the larger public self storage players.
They remain healthy, but not necessarily indicative of these types of growth figure. So is it share gains is it more aggressive deployment from small and mid sized customers any color you might have to be really helpful.
Yeah, Great question look you know that.
The REIT sector is a small portion of our revenue we represent the entire industry in terms of.
Growth in this sector, but.
I think if you listen to some of the calls they are still.
One in particular as mentioned, they're going to flex our balance sheet in terms of bringing on capacity or three spending is a is a hot topic.
And we will continue to accelerate.
Self storage new construction is a long game I mean, if you hit pause on it right now youre going to pay for it in a year or two so.
The conversations we're having is the.
The resiliency and the market is indicative of.
The metrics that Youre seeing and also the investment that our customers are putting into the space.
Yes, I think Dan what I'd add is that as you know in their new century, it's nine to 12 months for any project get through that backlog. So theres, obviously some timing.
Here's what some people might see what theyre happening there, but as a reminder, I think if we look at our rights in our.
Institutional.
The customers they are well capitalized well funded and even our regular customers set.
If they take advantage of our <unk> solution. They have an upper advantage in terms of ROI because that helps them improve their running.
Running costs. So I think there is a blend of both that is still happening in keeping the industry strong for us.
Very helpful and then Nokia obviously, it was great to see the one large customer accelerate.
The screen rollout.
What are you seeing in.
Obviously, it's a crystal ball question, but when might we see a little bit more of a snowball effect with the larger folks.
Maybe pushing one another on conversion. So are you seeing any increased dialogues from others as a result of that CAGR.
One or two great. Great question I think what you are seeing a lot is no can coming up even more so because theres a big pressure on what do you do with costs. Our customers. Obviously labor costs is there number one number two cost in any one of their facilities and allow them or looking at solutions that will help them reduce debt costs and obviously as you said in the Paas.
As nokia's debt one solution that really helps them reduce the need for the amount of labor in their site. So a lot of discussion on that and I think there is.
What I would tell you in this past, where even more discussion about hey, how do we leverage that solution to actually get those savings.
All right last one I'll jump out, but obviously.
With the work on the leverage and the cash generation.
Youre in a lot more position of strength and flexibility I appreciate the color on M&A anything else from a capital allocation perspective.
Given the valuation of your own shares is that something you might consider in a significant way as well.
Yes, I think everything's on the table that we've always said I think.
I want to re stress M&A as a priority for us I think like we said earlier deals are starting to.
Come with a bit more realistic expectations on pricing so hopefully.
We will see some more come down through the pipeline that we have and hopefully we can actually execute it's one of those things, where we know that we do a great job of executing once we find the right targets, so hopefully that will happen.
Okay, I'll jump back with follow ups. Thanks again.
Thanks, Matt next question.
Jeff Hammond with Keybanc capital markets. Please go ahead.
Hey, Good morning, everyone. This is David Tarantino on for Jeff Hey.
Hey, David.
Maybe start on the margins it looks like the guidance implies a little bit of step back in <unk> and it sounds like there is some unusually strong mix in self storage is it.
This kind of just compliance rolls off into <unk> and then maybe beyond that can you maybe talk about the sustainability of kind of east gross margin levels in particular going into next year.
Yeah, Great question I think there is a small rollout we had said that prior quarter had very favorable mix. We saw still seeing some of that favorable mix and like you said between higher self storage growth. There I think for a long term sustainability one of the things. We've really said is that we're always looking at productivity constantly opportune.
And they are still there are two factories that we're working on putting in place are not up to up yet and once those to go up we will get further productivity. So I think theres definitely more sustained productivity to help the continued margin improvement.
Okay, great. Thank you and then maybe just to put a finer point on the new construction and our three new construction was surprisingly strong in our three tick a little bit of a modest step back seems like this might have just been timing, maybe how should we think about this for the rest of 2023 and into 'twenty four.
Yeah, Yeah, it's definitely timing if you look at our customers obviously, they do both types of trades is generally they can be doing new construction of our three at the same time in.
Sometimes just timing dictates that they want to new construction then.
Earlier, so thats kind of all we're seeing right now.
The other way we look at it is just looking at the total customer spend with us.
As you blend the two you can see it's very strong and robust in the self storage side.
Great and maybe if I could sneak one more in could you give us a little bit of color on commercial obviously declined against what was really strong compares maybe how should we be thinking about this going forward.
And I think what we had said in priority is still the same thing.
It will continue through the end of the year definitely strong comparable to last year, but also we said that we had just some really strong.
Park segments of that commercial business.
That was just really shrunk back to a normal type of growth number. So once we get past that strong apparel that we had.
By the end of Q4, we it should be back to a more normal kind of growth rate in that in the commercial business.
Great. Thanks, guys.
Thanks.
The next question Stanley Elliott with Stifel. Please go ahead.
Hey, guys. This is Andrew <unk> on for Stanley. Thank you for taking my question.
Sure Andrew.
On the services revenue posted nice growth in the quarter and year to date I was wondering if that's driven by existing services offerings or are you expanding into adjacent services and also do you have any thoughts on how this business performs if we wanted to see product sales slow.
Alright, just a comment on the services piece like we said Youre looking at the split between products and services, how we account for it and it's just a bit of time and like we said another course, sometimes youll see the service piece be stronger than the products piece in general we sell a full solution to our customers. So again, sometimes time.
Dictate what happens for sometimes you'll see the product piece and one quarter strongly either but in general overall between the two especially on the self storage still fairly strong for both.
As to your question about kind of what happens if there is slowdown a generally again would happened to both at the same time right because it's a full solution.
Offering and again right now based on the backlog based on our policy, we still see it fairly strong in.
For both but you may see a split between how much is in.
Our three versus new construction as well as timing on when its going to be in service or the products.
And then on.
On the fourth quarter Guide I was wondering if you could expand a little bit more on.
Your outlook for Incrementals.
In the fourth quarter, and then I guess in the next year or two and where are you still seeing inflation and do you foresee the need for additional commercial actions into next year.
Sure Yeah, we haven't provided guidance for next year, but I'll give you a little color. If you look at what we're seeing for inflation. Obviously steel is our biggest component driver that we use in maybe attracts feel because of this shift until now it was going down but if you look at the last couple.
A couple of weeks has gone back up the other way.
I would tell you that I wish I could forecast it.
Better than anyone else, but it is what it is as commodity so I think the key thing is we have the levers that we need to do from a commercial action if it sustains one way or the other way I think right now if you look at where the latest says it's actually going back to almost the kind of average it.
Kind of a high point, so we're not past there yet so I think it's just.
<unk>.
Costs were going to continue to watch and then.
Have the appropriate action, if we need to be somewhere at Citi.
Thank you.
Next question Andrew.
John Lovallo with UBS. Please go ahead.
Hey, guys. Good morning. This is actually Spencer Kaufman on for John Thank you for that question and nice results.
And our first question Hey, handsome.
Overall sales were up 7% in the quarter.
Trying to kind of tie that your comments on steel pricing coming in for most of the year and then getting a little bit more volatile last few weeks.
Yes, I think again, it's been volatile, but if you look at the average where steel is that even with the most recent announcement with steel price increases it's still kind of if you did an average you're still about the average where we did our last commercial action. So at this point again, not saying that we wouldn't do the action if we need to but right now if you looked at that <unk>.
Hey, where we price it is probably matching kind of where our cost is coming in.
Right now on average.
And in terms of kind of what you saw on volume. It's a mix if you look at the overall.
A lot of the growth is still pricing, but if you look at it split between commercial and the self storage side, yes. There is a decent amount of volume that we're seeing in the self storage side.
Okay that makes sense I think.
<unk> talked about it in your competitor coming to Nokia's market fairly recently can you just give us an update on how youre seeing that and then the dynamics in that business.
Still I think it's still early to say because I think theres definitely competitors in there but.
At least from our view of the market and what we've seen so far we havent seen anyone close to kind of.
I will see the amount of deals that influent implementations, we're putting in right now and I think it's good to have another challenge are out there I think if you look at our Milky solution, while we offer there, let's just say there'll be more offerings coming out of that business that we're doing because of what we've learned with the initial solutions that we've had out there.
And constantly looking at how to improve and add more value added offerings to our customers, yes, one more thing.
New entrants just right off the bat or generations behind where we stand today, we've been at this for several years.
<unk> integrated into our customers are learning a lot adapting to their actual needs.
We continue to bring out new products.
The AWS.
The partnership was extremely beneficial and we're starting to see that with the productivity and the solution So and keep in mind, we integrate this with our.
Doors doors and hallways. So we're the number one provider in this space.
And it's just going to be difficult for competitors to kind of match that value proposition.
Right. Okay. That's super helpful and if I can just squeeze one more in here.
Any thoughts as to where industry capacity utilization is right now versus that target 5%.
Yeah, I think it's in the mid to lower <unk> right now depending on we haven't heard.
All of the Reits report yet but.
I think the ones that have reported are around mid to low 90%.
Thanks, guys.
<unk>.
There are no further questions I would like to turn the floor over to Rami for closing remarks.
Alright. Thank you everyone for joining us today, we appreciate your support of Janus International and look forward to updating you on our progress have a great day.
This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
Yeah.