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spk03: 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.
spk01: 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.
spk02: 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?
spk01: Thank you, Jeff. Turning to slide seven. We reported net sales of $286 million for the quarter, a 41% increase over the prior year quarter. This includes 29% organic growth from all of our legacy businesses, including substantial growth within our New South business, which continues to increase orders and installations. From a channel perspective, our repair and remodel sales benefited from our last two acquisitions, both of which focus mainly on Florida's R&R markets. In the second quarter, our sales breakdown finished at 56% R&R and 44% new construction. Organic R&R sales grew 26% during the quarter, and organic new construction sales grew 32% from the strength of our legacy brands. Gross profit for the quarter was $97 million, a 30% increase, reflecting the increased sales partially offset by the items Jeff previously discussed. Second quarter gross margin was 34.0%, a 270 basis point decrease from the prior year quarter. The decline was impacted by an increase in direct labor expense, mainly caused by the increased headcount and corresponding training costs, and increased wage rates and overtime within our operations as we continue to compete for labor in the tight market. In our western markets, we continue to see labor improvements, which partially offset this impact. Inflationary pressure on materials also impacted our margins negatively during the quarter. This was mainly a result of the cost of aluminum, which from a cash perspective was up 61% in Q2 compared to prior year. We were hedged at only a 12% increase for 64% of our needs during the quarter, which mitigated this impact. Going forward, we are hedged at similar amounts for 70% of our needs for the remainder of 2021. Through the initiatives discussed by Jeff and pricing actions already taken, we expect gross margins to improve approximately 50 basis points in Q3 and further improve in Q4 as price increases and further efficiencies take hold. Selling, general, and administrative expenses for the second quarter increased by 40% compared to the prior year quarter, primarily reflecting higher selling costs as a result of increased sales and increased amortization expenses. related to recent acquisitions. We did also see an increase in distribution costs as we work to expand our Southeastern operations, which will begin to normalize as efficiencies are gained. Additionally, we made some marketing-related investments in our three New South locations that have opened over the past 12 months. Our adjusted EBITDA was $36 million, a 3% increase versus the $35 million in the prior year quarter. Our effective tax rate for the quarter came in at 20.3%, lower than our normal expected full year modeling assumption of 25% due to certain discrete tax benefits realized during the quarter. We reported adjusted net income of 10.7 million or 18 cents per diluted share in the second quarter of 2021, compared to 12.5 million or 21 cents per diluted share in the second quarter of 2020. Turning now to our balance sheet on slide eight. We ended the quarter with net debt of $431 million. Our only significant near-term debt maturity is our term loan of $54 million due in late 2022. As the quarter ended, we had total liquidity of $123 million, including a cash balance of $48 million and $75 million of unused capacity on a revolver. We finished the quarter with net debt to trailing 12-month adjusted EBITDA ratio of approximately 2.7 times. Next, on slide 9, we have updated our historical net debt and leverage ratio to highlight our progress towards deleveraging following the completion of acquisitions, as well as show our track record. On slide 10, I would like to discuss PGT Innovation's anticipated capital allocation priorities. Our first priority is to find internal investment opportunities and projects We expect to increase capacity, drive margin growth by reducing expenses or by increasing revenues through product enhancements. Another important priority is our commitment to maintaining a strong balance sheet and conservative capital structure by paying down debt after acquisitions. Our goal generally is to maintain a conservative leverage profile within a target range of two to three times net debt EBITDA absent any large acquisitions. Finally, we use capital for strategic acquisitions that are expected to be accretive and generate strong returns over the long term. We look for opportunities that would allow us to expand into new regions, channels, or products such as CRI, or that would give us access to technologies, enhanced manufacturing, or supply chain capabilities such as ECHO. We will continue to carefully evaluate other possible acquisition opportunities as part of our overall strategic plan. And now, I would like to turn the call back over to Jeff for some closing comments. Jeff?
spk02: Thanks, Brad. I'll conclude today with a summary of why I'm excited about our future and why I believe PGT Innovations creates long-term value for our shareholders. We are a national leader with strong brands, which have been further boosted by recent acquisitions. Our products are in growing categories and in the fastest-growing regions in the U.S., We have a long history of providing our customers with innovative products to meet their changing needs and intend to maintain our industry leadership through ongoing R&D, hiring, and retaining the best talent and making the right acquisitions. Continuous improvement of our operations is how over time we can drive long-term margin expansion. Although recent challenges have surfaced as we emerge from a historical pandemic and experience record demand growth, In the second quarter, we took many steps to make improvements necessary to gain this required capacity. Lastly, we have a comprehensive strategy that we are striving to execute to create long-term value for our shareholders and customers. At this time, let me begin the Q&A. Operator?
spk03: Well, now I'll begin the question and answer session. To ask a question, you may press star and then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. This time we'll pause momentarily to assemble the roster. First question comes from Phil Nagg of Jefferies. Please go ahead.
spk00: Good morning, Jeff and Brad. This is John Dunn again on for Phil. I just wanted to start by asking about some of your cost and inefficiencies. Given the price increases flowing through, offset by some of these lingering costs that you outlined, when do you think the EBITDA margins will inflect positively on a year-over-year basis? And can you also quantify the cost and inefficiencies that you experience in 2Q?
spk01: Yeah, so I'm going to answer your second question first. We experience year-over-year decline in margin of 270 BIPs A large portion of that was the direct labor inefficiency that Jeff referred to, just as we hired quite a few employees to help get us up to the capacity that we need. That was probably, from a year-over-year perspective, 200 to 230 bps of difference. We will start to see that improve in the back half of the year, but like Jeff mentioned, there is a six-month training window, so it will take some time. But we're starting to see some of that already, and we're starting to increase our output already. So we feel confident in the path we're taking there. On the pricing side, we kind of got the pricing that we were expecting in Q2. So kind of the miss, if you will, was getting the extra labor cost. But the pricing did come in pretty good, and we expect an additional probably 100 bits of pricing in Q3, and then even more pricing in Q4. Year over year, margins in Q4 are going to be very favorable because Q4 of 2020 was one of our, you know, was still in the COVID period for the most part. So our Q4 this year is going to be pretty strong year over year. But ultimately, you know, you still have what we have for the entire guidance range for EBITDA. I think that's a pretty good reflection of where we think margins are going to come in for the back end.
spk00: Excellent. And then just one more. Have you seen any impact on demand and operations with COVID in cases spiking in Florida. And similarly, have you had any material availability issues related to either COVID or transportation bottlenecks?
spk02: Yeah, I think this latest bout of, you know, COVID impact, we have, I'd say, about roughly 50 people right now out related to COVIDness. You know, the issue is it affects a certain line. So if one person goes out on a line and Or in a warehouse, for instance, that whole group is generally impacted and is out. That's probably the biggest operational impact because then we have to cover for that group. In terms of the supply chain challenges, yeah, we are still facing supply chain challenges. You know, Cardinal, our major glass supplier, just this morning were 1,400 units on back order or short. And that impacts us. You know, quite frankly, we have to reschedule those 1,400 units because we were scheduled to build them. So we are still having, you know, material impacts that are hurting us. But what I want to make sure I point out, you know, we began the second quarter actually, you know, okay, we made a strategic decision to add 600 people, you know, in basically a two-month period. So if you look at April, our April EBITDA margins were fine. They were in the mid, you know, teens, call it 15-ish percent. But when we added all those individuals and we opened up Fort Myers, and once we got fully spun up our warehouse on the East Coast, all those investments are there to help capacity. We've got to drive more capacity into our system so we can, quite frankly, bring down our lead times and better serve our customers, because we did see that significant increase in demand. You put that on top of COVID, it does create its share of challenges. Internally, you know, we went back, we're going to go back to wearing masks as a mandatory in our facilities here in Florida. Again, out of abundance of precaution for our folks, we want to keep them safe as possible. And we still have all our COVID procedures in place, cleaning, sanitizing, social distancing, working from home, all that's still, you know, on the forefront for our folks. Excellent. Thank you very much. I'll turn it over. Thanks.
spk03: Thank you. The next question is from Ken Zenner of KeyBank. Please go ahead. Good morning, everybody. Good morning, Ken.
spk04: Hi, Ken. You guys have expanded your footprint enormously if we look at today's current housing demand relative to housing demand inflecting at the end of the great financial crisis or whatever you want to call it. You know, and with the industry window industry in general, I think had same, some of the same issues, right? Cause windows are, you know, they're highly variable cost in terms of you need those teams of people. Um, Jeff, you just kind of highlighted, obviously if one person goes down, it takes out a team in terms of the COVID. Um, could you maybe give us some context to the 600 people you hired? Cause your footprint is a lot wider. Um, you know, you're in Southern Florida, you're in Arizona. Can you give us a perspective about how that 600 labor pool addition compares perhaps to the expansion last cycle when we kind of had the same, I don't want to say growing pains, but just staffing up issues, just to put it in context, because you obviously did recover as those costs and people came online.
spk02: Right. Ken, that's a very good question. And And again, that's where we kind of get our six-month estimate on training folks because that last cycle, I think it was back in 2013 when the housing market kind of took off from its downturn period. Yeah, we did. We had to staff up again because of demand. It took about six months, but folks were trained, and we were hitting our margins again. If I compare the two, it's probably the size and scale now versus then. Then we were coming off a base of sales of call it $175 million, and now we're coming off a much bigger growth percent off of an even bigger base. So CGI, for instance, they've been a stellar facility in terms of performance. The team here has done a phenomenal job. But their orders are up 90 plus percent. So it's just hard to scale up that kind of order growth efficiently. And that's what you've seen. We are very successful at adding those 600 people. I'm very proud of the team and the efforts that took place to do that. But like I said, it come at a cost. We made that decision, and I think it's the right one long term because, again, those team members will get efficient. They will become part of the PGT family, and they will be productive.
spk04: Thank you very much. And then it sounds, obviously, you talked about that, the 300 basis point margin pressure, two-thirds of that plus is labor. So with the pricing going through, it sounds, I mean, obviously, if you're backlog from class manufacturers it's hard for you to meet your demand would you say or quantify perhaps lost sales due to lack of material coming through the supply chain to you is that something that yeah how do you consider that I don't know if we can quantify it here you know beyond
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