PGT Innovations : Transcript

PGT Innovations Inc.

Second Quarter 2022 Earnings Call

Tuesday, July, 26th, 2022

CORPORATE PARTICIPANTS

Brad West - Senior Vice President of Corporate Development Jeff Jackson - President and CEO

John Kunz - CFO

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PRESENTATION

Operator: Good morning and welcome to PGT Innovations second quarter 2022 earnings conference call. All participants are in listen-only mode. Today's call is being recorded. I'd now like to turn the conference over to PGT Innovations senior vice president of corporate development and treasurer, Brad West. Please go ahead.

Brad West: Thank you. Good morning. And welcome to the PGT Innovations second quarter 2022 investor conference call. With me on the call today, our president and CEO, Jeff Jackson, and our chief financial officer, John Kunz. In the investor 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 that discuss forward looking statements.

Today's remarks contain forward-looking statements, including statements about our 2022 financial performance outlook. Those statements involve risks, uncertainties, and other factors that could cause actual results to differ materially. Additional information on factors that could cause actual results to differ from expected results is available on the company's most recent SEC filings.

Additionally, on slide three, note that report results using non-gaap financial measures, which we believe provide additional information to help investors compare performance between reporting periods. Our reconciliation to the most directly comparable gaap measures is included in the tables attached to the earnings release and the slide presentation appendix. At this time, I will now hand over the call to our company CEO and president, Jeff Jackson.

Jeff Jackson: Thank you, Brad. And good morning, everyone. And thank you for joining us on today's call. Our very strong financial results was a Testament to PGT Innovation's value proposition and our team's ability to execute on a number of challenges over the past 12 months. These challenges included labor, capacity and supply chain constraints. However, we stayed focused on executing our long-term strategy of adding talent, effectively scaling our operations and investing our cash flow in growing markets. Let's discuss today's key messages for the quarter on slide four. We achieved record second quarter results as revenues of $407 million surpassed both prior year and our internal forecast. Multiple drivers during the quarter led to these results.

First, our expanded footprint placed us in growing markets. Second, our marketing strategy drove continued customer awareness of our product offerings. Third, our ability to secure materials through our supply chain kept the factories operating efficiently, and fourth, our ongoing efforts to increase capacity through process automation, as well as further training of our team members has improved our operational efficiency, allowing us to ship higher product volumes. I am very proud of how our PGT Innovation team continues to improve, deliver strong growth and provide first class customer service each and every day. We continue to make significant gains in margin with adjusted EBITDA margin improving 680 basis points compared to the second quarter of 2021, and sequentially by 280 basis points versus the first quarter of 2022. These results reflect the success of our business model to grow our top line and improve our operational performance while managing inflationary pressures.

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Pricing actions implemented over the last several quarters have offset the majority of the inflationary pressures we have experienced. In addition, we have announced new price increases to offset the escalating costs will continue to face. Since the beginning of the year, our gains and operational efficiencies have reduced our lead times. This continued into Q2 with average lead times for key brands improving 40 to 50% versus prior year quarter. We also worked to control costs whenever possible, through a constant focus on investing quality and manufacturing process enhancements. Additionally, our supply chain team has continued to do an outstanding job to minimize disruption, allowing us to support higher production levels, a driving force behind our improved performance over the past few quarters.

These factors contributed to our strong cash flow in the quarter and allowed us in Q2 with a cash balance of $159 million and leverage well within our targeted range. John will provide more detail, but in summary, our balance sheet strength provides the flexibility necessary to effectively allocate capital by continuing to execute our business model as we look to drive long-term shareholder value through reinvestment in our business and strategic accretive acquisitions. As the first half results well exceeded our expectations and the sales and margin trends remain favorable, we are raising our full year guidance for revenue and adjusted EBITDA. While we recognize the uncertainty surrounding the micro economic environment, our backlog manufacturing execution and margin performance gives us a high level of confidence in our revised guidance.

Next on slide five, let's take a closer look at sales trends. Total organic growth was 29%, reflecting the strength of our brand portfolio and demand in our markets. In our Southeast region, organic sales for the quarter grew 27% versus the prior year quarter reflecting strength in our core PGT and new south brands. The migration into Florida, our largest market, will continue to support demand in the coming years. The challenging market dynamics has led one of our larger competitors in the Southeast region to discontinue their aluminum product lines, allowing us to pick up market share. In addition, during the first half of the year, we signed five separate large home builders to three-year supply agreements, which further strengthens our view on near term and long-term outlook.

In our Western region, organic growth was 41% versus a prior year quarter reflecting strength from our production builder business. This sector has outperformed for the past two years as demand to upgrade indoor/outdoor living areas remain strong. We're also seeing the benefit from our capacity expansion in Phoenix, which has allowed us to better serve the custom market demands. And our recently opened showroom in San Diego will position us well to serve the growth we are seeing in the Southern California's home and renovation markets. New south continues to perform very well with sales growth of 41% that benefited from three stores opening in 2021. We're in various stages of opening new stores in Atlanta, Dallas, Fort Worth, and San Antonio for a total of 17 stores. At the end of the year, our Dallas and Fort Worth stores have signed leases. And those store operators are busy training their new team members and anticipation of opening. Our Atlanta store is celebrating its official ribbon cutting on August 3rd.

In the Florida region, we saw strong sequential order growth of 13% versus Q1 of 2022. Our PGT and new south brands drove this growth, which was balanced across both new construction and repairing remodeling. As we shared last quarter, our governor recently signed a home hardening bill to make impact windows and doors more affordable by granting a two-year sales tax exemption for Floridians. Our focus on improving manufacturing performance and customer service has allowed us to decrease our average lead times and improve our on time and in full metrics to meet continued strong demand. As a result, our

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backlog was $359 million at the end of Q2, up slightly from $356 million at the start of the year.

Slide six summarizes our strategic and operational framework that drives profitable growth by delivering best in class products and services to our customers while creating a goal or an environment for our team members. Our first pillar is customer centric innovation, which drives us to deliver products with features, performance, and value demanded by our builders and our customers. We're expanding our product offerings to improve thermal performance and improved sightlines delivering improved energy efficiency and improving indoor/outdoor living spaces.

Our second pillar is investing in talent. Over the last year, we have been incredibly successful at growing our talent base with high quality team members who help us achieve our growth targets. Our third pillar is transforming our manufacturing operations to scale in line with our growth. Our operational flexibility and tenacity have well positioned us to focus on improving our manufacturing processes to reduce or prevent back orders and maintain efficient warehousing operations. Our fourth pillar is allocating our strong free cash flow to achieve profitable growth. As we seek to generate long-term value creation for our shareholders, we are always on the lookout for organic and inorganic opportunities to improve our product offerings and production capabilities.

That being said, as we navigate this inflationary environment, discipline capital deployment will remain a top priority as we look for creative opportunities to grow our business while delivering above market results. Now I'd like to turn the call over to John to review our second quarter results in greater detail. John?

John Kunz: Thank you, Jeff. Turning to slide seven today, we are very pleased to report $407 million in revenue for the second quarter, a 42% increase over the prior year quarter. This increase was driven by 29% organic growth from our legacy businesses, including new south and echo and continued growth from our recent AC inland acquisition. As Jeff mentioned, we were able to deliver strong growth again this quarter through increased volumes previously implemented pricing actions and process improvements, which have proven successful in offsetting rising costs in a volatile operating environment. In the second quarter, our sales breakdown was 57% R&R and 43% new construction, organic R&R sales grew 28% compared to the second quarter of 2021 and organic new construction sales increased 40% due to the strength of our legacy brands.

Gross profit for the second quarter was $165.1 million, a 70% increase from the prior year quarter, reflecting increased volume and pricing, partially offset by labor and material cost headwinds. Our strong Q2 results were driven by operational improvement in the Southeast, including double digit unit growth, improvements in scrap and improved labor efficiency. Aluminum availability has improved and LME spot pricing has steadily decreased. Impact resulting from speculation surrounding the geopolitical tensions between Russia and Ukraine have been minimal, although we continue to monitor market price as well as the primary and secondary market production conditions.

Second quarter gross margin was 40.6%, 660 basis points higher than the prior year quarter, and 310 basis points higher than the first quarter of 2022 driven by price increases, manufacturing process improvements and unit growth. Earlier investments in hiring helped improved operational efficiencies across the portfolio. We believe those actions will continue to benefit our gross margins for the foreseeable future selling general and administrative expenses increased 45% in the second quarter compared to their prior year. Driven by the

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SGNA from our recent acquisitions, the expansion of our new south operations increased distribution cost, increased marketing spend and an increased in reserve for uncollectable accounts.

Second quarter adjusted selling general and administrative expenses were 25.7% or 80 basis points lower than the prior year quarter. Leverage from higher sales was partially offset by increased labor and transportation inflation, increased marketing spend in an increase in a reserve for uncollectable accounts. Adjusted EBITDA was $78.3 million, 119% higher than their prior year quarter, resulting from pricing actions to offset inflationary pressures, increased volumes and improved manufacturing performance. You will recall that our prior year quarter was significantly impacted by a drag from our expansion related to expending, due to a loss in productivity from new hires.

Our tax expense in the quarter came in at 24.8%, in line with our expectations. We reported adjusted net income of $40.5 million or a 67 cents per diluted share compared to $10.7 million or 18 cents per diluted share in the second quarter of 2021. Increases of 278% and 272% respectively. Now turning to our balance sheet on slide eight, we ended the quarter with net debt of $476 million. We had total liquidity of $233 million, including a cash balance of $169 million and $74 million of unused capacity on our revolver. Our trailing 12 month run rate net debt to adjusted EBITDA was approximately 2.1 times at the end of the quarter. Slide nine shows that we have grown EBITDA both through acquisitions inorganically while maintaining a conservative leverage profile.

Our historically conservative financial policies have allowed us to use our strong cash flows to reduce leverage after significant acquisitions. In fact, since the completion of our inlet[?] acquisition, we have reduced our covenant adjusted leverage metric from approximately 2.99 to 2.0 times, placing us at the lower end of our leverage target range of two to three times. On slide 10, we've summarized our long-term capital allocation priorities. Our first priority is to reinvest in our business, which includes allocating capital to projects that we expect will drive margin in revenue growth. For example, we have invested in strategic selling initiatives to improve efficiency and operational metrics to reduce costs. These investments will allow us to enhance our margins and to continue to grow our revenue.

Our second priority is our commitment to debt reduction and maintaining a strong balance sheet. We expect to maintain a conservative leverage profile with a range of two to three times net debt to EBITDA with a preference to stay at the low end of that range. We will continue to target strategic acquisitions that are aligned with our growth priorities and are expected to grow shareholder value. Over the long-term, we will look for opportunities that will enable us to expand into new regions, channels or products we expect to integrate our acquisitions and Deever while carefully evaluating other possible acquisition opportunities as part of our overall strategic plan. And now I would like to turn the call back over to Jeff.

Jeff Jackson: Thanks, John. Next, I'll review our outlook for the remainder of 2022 on slide

11. With our very strong performance during the first half of the year, we are raising our guidance for the full year of 2022. We now expect net sales in the range of $1.45 billion to $1.525 billion and adjusted EBITDA in the range of $250 million to $265 million. Initial indications for the second half of this year, based on the results thus far in July, are showing continued operational improvement, increased sales and strong profitability as we navigate the ongoing inflationary environment and the impact of changes in interest rates. So, modeling assumptions are also included on the left side of the slide. These are unchanged from what we provided at the beginning of the year.