PGT Innovations, Inc.

Good morning and welcome to PGT Innovation's second quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Brad West, Interim Chief Financial Officer. Please go ahead.

Thank you and good morning, everyone, and welcome to the PGT Innovations second quarter 2021 investor conference call. On 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 FCC filings related to forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2021 financial performance outlook and the potential impact of the COVID-19 pandemic on our business going forward. 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 in the company's most recent form, 10-K. Additionally, on slide three, note that we report results using non-GAAP financial measures, which we believe provide additional information to help investors compare prior and present performance. A reconciliation to the most directly comparable gap measures is included in the table attached to the earnings release and in the appendix of the slide presentation. I am joined on this morning's call by Jeff Jackson, PGT Innovation CEO and President. We will take your questions after delivering our prepared remarks. I will now hand the call over to Jeff.

Thank you, Brad, and good morning, everyone, and thank you for joining us on today's call. We continue to see impressive growth in demand during the second quarter across all our geographies, but particularly in Florida and across both our new construction and repair and remodeling channels. Put that growth in perspective. For the first half of 2021, excluding ECHO, annualized unit order entry has grown by approximately 40% versus 2019. We are a large custom window and door manufacturer. Therefore, we require a strong and experienced direct labor force to produce the quality products our customers need. Additionally, we require equipment to produce the materials and floor space to make and store finished goods. During the back half of the second quarter, we made exceptional progress in all three of these categories to upscale our business to meet the growth in customer demand. This was accomplished during a unique period in which our industry and others have faced labor shortages and supply chain problems due to the strength of the economy, combined with the worst pandemic we've seen in our lifetime. While we face our share of challenges, I'm very proud of our team members. Our employees, dealers, distributors, everyone have consistently gone above and beyond to serve our customers. The availability of vaccines has helped us on many fronts, including enabling an increasing number of employees to work safely in person in our facilities. However, we continue to monitor and prepare to respond to the potential effects of COVID variant on our business, customers, and employees. Turning to slide four, second quarter sales grew 41% versus the prior year period, establishing a new quarterly record. In our southeast business unit, sales were up 40%, including $24 million of sales contributed from our Echo Window Systems acquisition, which we acquired in February of this year. Our western business unit sales increased 44%, due in part to continued economic recovery in both Arizona and California, where orders have increased year-over-year 47% and 31% respectively for the first six months. Overall organic growth was 29%. To take advantage of growth trends in our western region, in May, we acquired CRI SoCal Inc., a California-based window and door design and installation contractor. This was a $10 million tuck-in acquisition that will enable us to better serve large commercial builders in the new construction and strengthen our position with key customers in that region. Our strong revenue growth drove a meaningful increase in gross profit during the quarter, although several factors, including the investments made in scaling up the business, contributed to higher costs negatively impacting margins. We experienced material cost and wage inflation on products that were shipped against older backlog sold before price increases have taken effect. Additionally, product mix in our legacy southeastern markets shifted slightly towards less profitable non-impact products, which represented 31% of our business in the quarter, compared to 28% in the second quarter of 2020. Some of our recent pricing actions were done to improve the profit in our non-impact sales in the southeastern business unit. Despite the challenges of the pandemic, a historically tight labor market, and supply chain disruptions, we have been able to add people, equipment, and manufacturing and warehouse space to facilitate operations at higher run rates required to meet demand growth. These actions, while necessary for long-term growth, drove higher costs in the second quarter and into our third quarter in a number of areas. First, the second quarter, we were very successful at recruiting new hires. For example, in a tight labor market in Florida, we significantly increased headcount by 600 people or 17%. However, in our custom manufacturing facilities, it can take up to six months to train a new team member to reach the level of efficiency required. Therefore, during the quarter, we incurred recruiting, training, labor, and overhead expenses without the benefit of increased production capacity that we expect will flow in the back half of 2021 and into 2022 is our new associates will enable us to ship more products to customers and continue decreasing our lead times. Second, we incurred expenses of adding a new Fort Myers production facility, which began 24-7 operations in June. This past quarter, we also continued to invest in increasing capacity at our Venice, Miami, and Tampa facilities. Third, earlier this year, we leased a new facility to increase warehouse capacity in southeast Florida. This improved our fulfillment capabilities and freed up warehouse capacity to increase production. And finally, like the first quarter, we also had labor cost inflation related to increased base wage rates and retention bonuses. In this competitive labor market, we prioritize retaining our experienced team members who have made our success possible throughout this pandemic. These initiatives were not easy and challenges remain. However, I'm very proud of the progress thus far. We are confident these steps will help us increase our output, which will allow us to decrease our lead times and put us in a better position to meet expected strong growth and demand for the remainder of this year and into 2022. Despite the short-term initial drags on margin in the second quarter, which will continue into the third quarter, these actions were necessary to meet the significant growth we see and to better serve our customers. Our previously announced price increases are beginning to take effect, and our recently added team members are already starting to make positive impacts on our lead times. We expect to see some margin improvement in Q3, although we will experience pressures similar to Q2 as our training of new team members and expansion costs continue. We anticipate a more normalized operations and margin results in fourth quarter and heading into 2022, where we will have capabilities more in line to meet the robust demand we've seen over the past 15 months. The impact of the increase in prices and shipments in the back half of 2021 allows us to increase our annual guidance range in sales to 1.1 to 1.2 billion, representing a growth of 25 to 36%. Based on the substantial investment I previously discussed, the need to increase capacity to meet this demand, this is driving a reduction in our EBITDA guidance range to $160 million to $190 million. The range continues to be wide given the uncertainties around the unique supply chain challenges, training new team members, and how our workforce continues to be affected by COVID. Turning to slide five, we have more detail on order entry. We again saw strong order entry in our southeast business unit, up 33%, driven by continued strength in both the new construction, up 57%, and the repair and remodeling market, up 21%. At Western, order entry was up 52%, as we saw continued momentum in recoveries in states like California, Arizona, and Texas. Our recent acquisitions, New South and Echo, continue to see impressive demand and growth. For the second quarter, retail sales at New South Window Solutions totaled $40 million, an increase of 36% year-over-year. ECHO achieved order entry growth of 32%. We are optimistic that we will continue to see growth into 2022 as regions within our key footprint, including Florida, Arizona, and Texas, continue to see net migration of residents from states with colder climates and higher taxes. We have made significant strides in the quarter and will continue to invest to position PGT Innovations to be able to meet this demand. Slide 6 summarizes the framework that guides our execution as we seek to create long-term value for our shareholders while servicing our customers and communities. Our first pillar is a customer-centric innovation to stay in front of changing builder and consumer preferences by bringing products to market that offer performance and value they demand. We are always looking ahead to drive future sales through customer preference insights. I previously addressed our second pillar, which is recruiting and retaining talent we need to continue growth. Across our entire organization, we have increased headcount by approximately 1,000 people in 2021. We have always placed an emphasis on being an employer of choice But during the pandemic, we've placed a greater emphasis on proactive communication to expand our team of dedicated employees with the right skill set. We work hard to maintain a safe workplace and a culture where employees know they're appreciated. In addition, this year, we have implemented a long-term incentive plan to help retention. As previously mentioned, we've been able to meaningfully increase our headcount in the past few months. Our third pillar is investing in the business to scale our operations to capture anticipated increase in long-term demand. This year, we've been especially focused on increasing manufacturing capacity and capabilities. These actions will help us meet growing demand. Critical equipment for vinyl and glass capacities, which have been delayed from COVID challenges, are beginning to arrive and will allow us to increase capacity throughout the back half and into 2022. Our fourth pillar is allocating free cash flow to achieve profitable growth through, one, investing for growth through new product development and production capacity, two, paying down debt, and three, finding the right acquisition. Now I'd like to turn the call back over to Brad to review our results in greater detail. Brad?