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spk08: 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 like to now turn the call over to your host, Mr. John Rolwing. Vice President of Investor Relations and FP&A. Thank you. You may begin, Mr. Rowling.
spk01: Thank you, Operator, and thank you all for joining our first 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 janiceintl.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 may differ materially from those anticipated. 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, including adjusted EBITDA, adjusted EBITDA margins, adjusted net income, and adjusted EPS. Please see our earnings release and filings for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measure. I'm joined today by our Chief Executive Officer, Ramey Jackson, who will provide an overview of our business and give an operations update, and our Chief Financial Officer, Ansemong, 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 Randy.
spk09: Thank you, John.
spk02: Good morning, everyone. Building on our record financial and operational momentum achieved in 2022, We delivered another quarter of outstanding results to start 2023, notable considering the first quarter is typically our softest of the year. Customer demand continues to be robust as the long-term bullish fundamentals we see across our end markets remain largely insulated from the broader macroeconomic uncertainty. Our customers, in particular in self-storage, are enjoying high demand and strong business fundamentals that should drive a sustained period of investment in facilities and our best in class products and solutions are well positioned to help them achieve their goals. Once again, I would like to thank all of our employees without whom our continued strong performance and success wouldn't be possible. Now turning to some specific thoughts around the quarter, Janice once again produced outstanding operational and financial results that included solid year-over-year gains in revenues, strong margin improvement, further deleveraging, and solid cash generation. We've told you repeatedly how fundamentals inherent throughout the industry are fueling investment decisions by our customers to add much-needed capacity through either new construction or conversions and expansions. and that our margin profile is similar regardless of the path they take. The particular strength this quarter from R3 continues the recent trend of new capacity coming via conversions and expansions. Nokia had another strong quarter. As we continue to ramp up our capabilities and expand our market penetration, as we discussed on our fourth quarter call, at year end there were approximately 100 26,000 total installed units, and during the first quarter, we grew to 204,000 total installed units. Our remote access control technologies, particularly Nokia, represent the best our industry has to offer, and we're excited by both the accelerating adoption of its use and the future it has in store. Now, shifting to the financial highlights for the quarter. we delivered consolidated revenues of $251.9 billion, an increase of nearly 10% as compared to the same period last year. This growth comes across all sales channels, with particular strength in our R3 segment that was up 26.9% year-over-year, as well as low single-digit increases in both new construction and commercial. Our adjusted EBITDA of 61.2 million came in at 37% higher than Q1 2022, which represents an adjusted EBITDA margin of 24.3%, an improvement of 480 basis points year over year. During the quarter, productivity initiatives and commercial actions more than offset higher costs we continue to experience in many parts of our business, particularly labor and logistics. Our company continues to generate strong cash flows, which Anselm will discuss in further detail shortly. Over the past 12 months through the end of the first quarter, our free cash flow conversion of adjusted net income was 88%. We expect cash conversion to remain solid over time, putting us in a strong position to focus on maintaining a robust balance sheet while also being flexible to respond to value-enhancing M&A opportunities, as we identify them. Speaking of the balance sheet, our net leverage remains a key focus for our board and our management team. I'm extremely proud that we were able to reduce our net leverage this quarter by nearly a half a turn, putting us at 2.4 times net debt to trailing 12-month adjusted EBITDA at quarter end and well within our target range of two to three times. Solid execution, strong underlying fundamentals, and prudent uses of cash put us in this enviable position today, allowing us to run the business with a healthy balance sheet while being able to analyze both organic and inorganic growth opportunities. Before I hand it over to Anselm, I'd like to talk about our progress towards our long-term objectives laid out on our last earnings call. We are driving towards achieving all these targets by expanding our industry-leading positions in our end markets, growing Nokia adoption with our self-storage customers, driving efficiencies across the platform, and executing value-accretive M&A. With respect to our stated long-term goals, our top-line growth to start the year, which is all organic at this point as DBCI and ACT were acquired in 2021, positions us well to achieve our full-year target range of 4% to 6% organic revenue growth. Our EBITDA margins of 24.3%, which were up dramatically year over year, are trending well towards our long-term target range of 25 to 27%. Our strong conversion of adjusted net income to free cash flow to start the year sets us up to achieve our target conversion range of 75 to 100% for full year. And as I mentioned earlier, our net leverage is comfortably inside our target range. Our end markets remain strong and resilient, and we look to leverage our leadership position to capture additional share and create long-term value for all of our stakeholders. With that, I'll turn the call over to Ansem for an overview of the financials and our updated outlook for the full year.
spk04: Thanks, Ramey, and good morning, everyone. In the first quarter, revenue of $251.9 million was up 9.8% compared to the prior year quarter. driven by solid demand in all three of our sales channels. R3 led the way and was up 26.9%, while new construction and commercial and other were both around 2% to 3% higher versus the prior year quarter. The diversity and stability of our offerings is particularly evident when you look at our revenue mix for the quarter, which was almost perfectly split into thirds across our three sales channels. The impressive growth from our R3 segment in the quarter continues to be bolstered by new capacity additions in the form of conversions and expansion. Our customers' focus on adding new capacity remains weighted towards our R3 offerings as opposed to greenfield new construction sites, driven by the availability of idle brick-and-mortar retail capacity to our customers. In new construction, growth was slower than in the previous year as first quarter 2022 was positively impacted by pent-up demand that occurred during pandemic-impacted 2021. In the first quarter, we continue to see construction time elongate as permitting and other delays persist. In commercial and other, growth is starting to normalize compared to a very strong first quarter of 2022, which included benefits from commercial actions and market share gains. Our products are used in broad range of end markets, including hotels, warehouses, pharmacies, schools, and many others. We see continued potential for growth in commercial and other. Adjusted EBITDA of $61.2 million was up 37% compared to the year-ago quarter. The combination of solid demand, commercial actions, and cost-saving initiatives continues to help offset increases in labor as we work to scale the business for continued growth, including additional investments in NOKI, driving us closer to the margin profile we view as more representative of our business. Adjusted EBITDA margin for the quarter was 24.3%. an increase of 480 basis points from the year-ago quarter. Our contracts today are going for a design with flexibility to accommodate moves in our input costs by design eliminating prolonged lag in the cost recovery in times of high inflationary impact. For the first quarter of 2023, we produced adjusted net income of $26.4 million, which was up 31.6% from first quarter of 2022. Adjusted diluted earnings per share of 18 cents compares to 14 cents in the year-ago quarter. We had another solid quarter of cash flow generation. First quarter cash from operating activities was approximately $50.2 million, and free cash flow was approximately $44.2 million. This adds to our multi-year trend of strong conversion of adjusted net income to free cash flow, representing a trailing 12-month free cash flow conversion of 88% of adjusted net income. We continue to focus on initiatives to improve working capital and strengthen our metrics. From a balance sheet perspective, we close the quarter with $658.4 million of total debt, $69.6 million of cash and equivalents, and a net leverage of 2.4 times net debt to adjusted trailing 12-month EBITDA, down from 2.8 times at the end of 2022. Our performance demonstrates our ability to de-leverage quickly. and we remain focused on maintaining our leverage within our target range of 2.0 to 3.0 times. Interest expense in the first quarter was $16 million. During the quarter, we paid down $50 million of our first lien term loan facility using cash on hand, which should help us partially offset the adverse impacts of rising rates in 2023. We were pleased to see that our credit rating was upgraded at Moody's two weeks ago, reflective of the strong efforts we have made. Now turning to our 2023 outlook, Based on our solid first quarter results, continuous strong backlog, and current visibility of end markets, we are raising our full year 2023 outlook for revenue and adjusted EBITDA. We now expect revenue to be in the range of $1.06 to $1.08 billion, a 5% increase at the midpoint compared to our full year 2022 results, driven primarily by a combination of commercial actions and volume-related organic growth. We expect growth in 2023 to 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 253 to 278 million, representing a 17% increase at the midpoint versus our full year 2022 results. Given the strength in our margins in the first quarter, we expect the second half margin to be balanced with the first half margin. We expect full year results to reflect a solid year of margin improvement in our business as we pursue our long-term objective to deliver healthy adjusted EBITDA margins in a range of 25% to 27% over the next several years. Thank you. I will now turn the call back to Ramey for closing remarks.
spk02: Great. Thank you again, Anselm. We executed well in the first quarter, setting the table to deliver on our increased full-year outlet while advancing our plans to achieve our longer-term objectives. We are in the early innings of what we believe is a strong multi-year demand environment, one that should drive record revenues, improve EBITDA margins, and strong cash flow generation, all while maintaining a more conservative balance sheet. The continued strength in our results is directly attributable to the outstanding execution by our team and the fundamentals in our end markets. I expect we will build on this momentum across 2023 as we drive towards another record year. Thank you again for joining us. Operator, we can now open up the lines for Q&A, please.
spk08: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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.
spk09: One moment, please, while we poll for questions. Thank you.
spk08: Our first question comes from Daniel Moore with CJS Securities. Please proceed with your question.
spk07: Thank you, Ramey, Anselm, John. Good morning. Thanks for taking the questions. Morning, Dan. Morning, Dan. Start with, you've described your visibility as being, you know, a year or even significantly more in advance. And last quarter, I think you said the dashboard was very positive. Just talk about, you know, to what extent that visibility remains intact, at least through the remainder of fiscal 23 and into 24. And, you know, how would you describe the order pipeline across R3 as well as new construction and commercial versus maybe three or six months ago?
spk02: Yeah, good question, Dan. So nothing's changed from quarter to quarter. Our pipeline backlog remain robust. All of our indicators indicate, you know, strong momentum, not only in kind of new construction, but also R3 pipeline. So nothing's changed from that capacity.
spk07: Helpful. Really healthy sequential growth in Nokia placements. Just updates us on the traction, you know, and testing for Nokia, particularly among the larger REITs. And I think Carrier recently entered the market with a competing product. You know, is that a good sign or a concern from your perspective?
spk02: Yeah, I think the – You know, we've always said it's too good of an opportunity for others not to enter the market, and I think it kind of validifies what we're doing at Nokia. As you know, Dan, we've been at this for a while. We have a lot of the first mover kind of aches and pains from growing and building it out. As you know, also, we're the leader in kind of doors and hallways, and we're able to integrate that product into our manufacturing process. So there's There's certainly a heavy moat around that segment, but we couldn't be more bullish there moving forward. Our orders continue to accelerate in terms of customer adoption. We're seeing more of it becoming a standard to certain customers. going from a test phase to kind of full portfolio adoption. So we're very happy with that progress. And, you know, as we mentioned on the last call, we've added kind of bench strength to that segment. And so we're really pleased where we are from a scalability perspective and also customer care. So we're happy with where we are there.
spk07: I'll sneak in the last one. Just thinking about the combination of extra space and life storage, do you foresee any near-term disruptions in terms of their CapEx plans? And probably more importantly, looking out to 24 and beyond, is there anything you can tell us about the potential opportunity in terms of rebranding, signage, et cetera? Thanks.
spk02: Yeah. Look, both... Both REITs are very good customers and have been for a very long time. They both have different models in terms of how they add capacity and how they go to market with refurbishment. We're in a really good spot to help them kind of integrate those two businesses together. I think they're on record kind of speaking to the allocation of dollars from a rebranding perspective. I don't know where they are with that. But what I can tell you is we're certainly in a good spot to really help them accelerate that integration.
spk07: All right, I'll jump back with any follow-ups.
spk09: Thank you.
spk02: Thanks, Dan. Thanks, Dan.
spk08: Thank you. Our next question is from Stanley Elliott with Stifel. Please proceed with your question.
spk05: Good morning, everyone. Thank you for the question. Starting off, could you repeat what you said about the margin progression, first half versus second half? I think I know what you said, but just to make sure.
spk04: Yeah, if you look at the margin statement, we had originally guided that the second half would be stronger than the first half, and you saw how our first quarter went much stronger coming in. So what we're looking at is that still the second half will be stronger, but it'll be closer to the first half, and it's good news for us. It's driven by our commercial actions and our costs coming down faster than we thought, which is, again, good news for us from a margin point of view.
spk05: You guys have done a really nice job of kind of working on the commercial side of the organization, given the volatility in steel. Started to see steel move up again here most recently. How should we think about the ability to kind of offset some of those costs, you know, when we start thinking about things, you know, six months, a year out, et cetera?
spk04: Yeah, I think, as you know, Stanley, we actually had previously revised all our contracts to give us the flexibility to adjust price when costs like steel move in that direction. So I think the definite ability to do it is there. I think at the same time, we want to be smart about being competitive in all the deals that are out there. And I think the redoing of the contracts is just allowed that flexibility to do what we need to do.
spk05: Great. And then lastly for me, you know, on Nokia, a nice sequential pickup. What are you learning from your customers there? You know, in the past, I guess you've talked about maybe potential add-ons for other products, other services down the road. Does that seem to be something that is of interest to them? Or, you know, was it more just kind of making sure we have the lock system in place and rolling that out as a kind of more industry standard?
spk02: Yeah, that opportunity still exists. But what I can say is we're uber-focused on the product line that we have, helping customers integrate and understand the operational benefits of the system. And then from there, it's more of an education on data, right? We've yet to really take advantage of the amount of data that results in this technology rollout. And I think there's a tremendous amount of opportunity, a lot of upside on the pricing side from a data perspective. So we're kind of staying tight where we are with deployment, but there's certainly opportunities as we move forward to expand kind of content.
spk05: And I guess one last quick one. Are you having any problems or seeing anything on the supply chain side that would keep you from continuing to accelerate the Nokia orders?
spk02: Yeah, kudos to the procurement team. We've done a really good job in securing all of the equipment that we need for manufacturing. So we're in a good spot there as well.
spk05: Perfect. Thanks, guys. Best of luck. Thanks, Danny.
spk08: Thank you. Our next question is from Jeff Hamad with KeyBank. Please proceed with your question.
spk06: Hey, good morning, everyone. Morning, Jeff. Morning. So maybe just I want to go back on, you know, it sounds like your backlog and, you know, pipeline visibility is still very good. Clearly a lot of concerns around tightening lending standards. I'm just wondering, one, if you're seeing any of that anywhere and maybe just speak to customer segmentation between, you know, the larger institutional and public REITs versus maybe the smaller organizations.
spk02: Great question. Look, as you know, we kind of break those up into institutional and non-institutional. There's no question around cost of capital, interest rates, things of that nature. But quite frankly, Jeff, we're not seeing that on our dashboard. You know, we feel like, you know, certainly in our backlog, we verify funding in our backlog so we're comfortable with those projects moving forward. And then on the pipeline side, there's just a tremendous amount of new opportunity coming in, and I think it's a testament to the end market. I think self-storage has proven to be resilient. I think lenders understand the asset class better. So, yeah, I mean, we're cautiously optimistic, notwithstanding the noise around what's going on with interest rates and lending and things of that nature. But as it relates to today and what we can see a year and advanced, we're very optimistic.
spk06: Okay, great. That's good to hear. Just for the commercial business, maybe level set us on the growth rate kind of decelerating. Is that just simply comps, or are you starting to see that warehouse market start to normalize? And just maybe... I know there was some share pickup and how you're thinking about kind of stability of that share game.
spk02: Yeah, look, that segment had a good quarter, and there's no questions it's difficult comps, right? There was a tremendous amount of spend and availability from our perspective. We were able to manufacture where others weren't able to get product out in time. So we picked up a lot of new customers, and as I've said kind of previously, the opportunity for our business is to try to maintain that share as much as possible. There's no question that we'll lose some of those top accounts, but at the same time, that's our opportunity is just to maintain the service model and our ability to get product out as quickly as possible and service our customers. So that's really it. We don't really focus on the end market because As you know, that's more of an R&R. That's where we found our sweet spot with a lot of the replacement work that has less to do with architectural specifications and more to do about service and on-time delivery. And that's kind of where we're focusing.
spk06: Okay, great. And then just a housekeeping item, just maybe level set us on how you're thinking about gap interest expense for the year.
spk04: Yeah, if you looked at what we had in Q1, you saw the amount was approximately about $16 million. of interest expense. You saw the pay down about $50 million. So if you do the math, you'd see a slight adjustment down for the other quarters. Our expectation is that, you know, like everyone else, is another quarter of rate increase there, and maybe it's a halting there. But, again, can't predict the future there. But if you do the math there, it should be in and around that same Q1 number you saw a little lower than that.
spk06: Okay. Thanks, guys. Thank you.
spk04: Thanks.
spk08: Thank you. Our next question comes from John Lovallo with UBS. Please proceed with your question.
spk00: Hey, guys. Good morning. This is actually Spencer Kaufman on for John. Thank you for the questions. The first one, if we just take a look at your updated revenue and EBITDA guidance for the year, how should we think about the puts and takes versus your prior expectations? Are you essentially just taking the one QB and leaving your prior assumptions for the second through fourth quarter unchanged? Has anything gotten better or worse since mid-March?
spk04: Yeah, I think we just saw the Q1 beat we got there, and I think, yeah, it essentially worked. seeing the rest of the balance of the year still pretty good. And like we said, our visibility in the backlog helps us confirm that. So we've kind of raised for what the beat in Q1 was.
spk00: Okay, that makes sense. And, you know, to the extent that interest rates settle lower as we move through the year and existing home sales potentially re-accelerate, I mean, would you expect demand for self-storage to benefit from that? How should we think about that?
spk02: Yeah, look, I'd, That's hard to say, but keep in mind it's an event-based business. You know, it thrives off of events, regardless if it's new housing, interest rate, things of that nature. So hard to answer that question specifically, but we'll point you to the kind of drivers of self-storage.
spk00: Okay. And last one, if I could sneak this in. You know, for the outlook on EBITDA margins for the full year, it would imply about 24.8%. Can you just discuss the path to how you expect to get there and, you know, on follow-up to that, do you expect that the one key gross margin of 39.7% will be the low for the year? How should we think about that piece? Thanks.
spk04: I think the way I would think about it is that, like we've already discussed, is that we should still see some drivers in terms of cost improvement going into the second half that will benefit. The first half, we said, is driven by still a lot of pricing. that's helping us there, and then we'll get volume in the back half. I think from a margin rate point of view, our expectation is that it will be in and around that rate you saw for Q1 with probably some improvement due to the cost benefits we're seeing going into the second half.
spk09: Okay, got it. Thank you, guys. Good luck. Thanks.
spk08: Thank you.
spk09: As a reminder, please press star 1 to ask a question at this time.
spk08: Thank you. Our next question comes from Colin Rose with StoicPoint. Please proceed with your question.
spk09: Hey, guys. Good morning. Good morning.
spk03: Congrats on a strong start to the year. I guess the question was, you know, you have continued to beat and raise past expectations. I think you get about 10 questions per call about the state of the industry and can you say it's strong and market demand is stable? It looks like you guys will be either at or below your leverage target, low end of your leverage target by the end of this year at this pace. And yet the stock doesn't really react. Nobody seems to care. It trades at a pretty healthy free cash yield and probably a pretty serious discount to the average buildings product company and probably a serious discount to the higher quality buildings product companies with margins and returns like this. So I'm curious on a capital allocation, how you guys factor that in and think about the trade-offs of the M&A strategy, which I think you've been consistent about and has been successful, versus buying back your own stock at these levels, given what seems to be a pretty material discount for the quality of this business and the stability of the numbers that you guys continue to put up.
spk02: Yeah, thanks for the question. There's a lot to unpack there, certainly, and agree with your sentiments around share price and comps. And I'll just kind of leave that there. And as it relates to capital deployment, yes, we are, you know, deleveraging in a meaningful way. This business generates a lot of cash, and in terms of allocation, that's something that that we're certainly working with our board of directors, super focused on our options, but that puts us in a really good spot, not only from paying down debt or buybacks or also M&A, and you know that's part of our DNA. That's certainly something that we're always looking at. Anselm, do you have anything to add?
spk04: Yeah, no, I think Remy's right. We're constantly looking at it. I think you're right. You kind of do the forward-looking forecast. We're in the leverage ratio. It puts us in a much even better place than we're at even currently for this quarter. I think at the same time, I just have a reminder, just from a cash flow point of view, we have some key investments in production in our factories in our West Coast as well as in Europe to actually improve capacity for us there. So there is some use of the cash there that it's the right thing for us to grow the business. And we'll continue to look at MA, like Rami said, is that it's just, as you know, it's a tough market for deals out there right now. But it doesn't mean we're not still looking.
spk03: Yeah, appreciate that. Well, there's one company for sale every day that you could buy. So I would encourage you to consider that in the range of options. But congrats again on a great start to the year. Thanks. Thank you.
spk08: There are no further questions at this time. I would like to turn the floor back over to Ramey Jackson for closing comments.
spk02: Okay, great. 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.
spk08: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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