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spk05: Innovations, fourth quarter, 2022 earnings call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the call over to Mr. Brad West, Senior Vice President of Corporate Development.
spk02: Please go ahead. Thank you. Good morning and welcome to the PGT Innovations fourth quarter and full year 2022 investor conference call. With me on the call today are our president and CEO, Jeff Jackson, and our chief financial officer, John Coons. On the investor relations 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 2023 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 we report results using non-GAAP financial measures, which we believe provide additional information to help investors compare performance between reporting periods. A reconciliation to the most directly comparable gap measures is included in the tables in the earnings release and in the slide presentation appendix. At this time, I will now hand over the call to our company CEO and President, Jeff Jackson.
spk04: Thank you, Brad. Good morning, everyone, and thanks for joining us on today's call. I'd like to begin by thanking each and every team member for their contributions to what turned out to be a record year for PGT Innovations. Despite the challenges we face, which included both a Category 4 hurricane and a subsequent ransomware attack, we overcame and delivered record revenue in EBITDA for the full year. Our growth is a result of our steady effort to improve PGT Innovations through our strategic and operational framework of profitable growth as we continue to create long-term value for our shareholders while serving our customers and communities. We hit the ground running in 2022. Despite inflationary pressures on materials, labor costs, supply chain challenges, hurricanes, ransomware attacks, and a slowing economy due to high interest rates, we were able to increase revenue to $1.49 billion, grow adjusted EBITDA to $254 million, and expand our adjusted EBITDA margins by 240 basis points compared to 2021. We also expanded our product portfolio with the addition of Martin Garage Doors. Martin has allowed us to expand into an adjacent building products category, add premium garage doors to our product portfolio, broaden our geographic footprint and brand presence, while creating cross-selling opportunities for both companies. We are still in the early stages of integrating Martin Business and remain optimistic about the opportunities the acquisition brings to PGT Innovations in the coming years. Next, on slide five, let's take a closer look at the fourth quarter, our sales trends, and key messages. Despite the challenges presented by Hurricane Ian and the ransomware attack, we generated total revenue of $341 million during the quarter. As we mentioned on our third quarter call, both events limited our ability to generate revenue during the fourth quarter. Thus, organic growth was 5% for the quarter. Sales in our southeast region were impacted by both events, leading to sales of $243 million during the quarter and increase of $5 million versus the prior year quarter. However, our focus on cost, labor efficiencies, lead times, service, and quality allowed us to reduce our backlog from the third quarter, even though we had sequential increases in orders in the Southeast region. These improvements positioned us to be the supplier of choice for our customers going into 2023. allowing us to execute one of our strategic initiatives of recapturing market share. Operationally, the suddenness of each event did not allow our operating teams to immediately adjust our cost structure to match the operating capacities at our plants. This resulted in unfavorable, detrimental margins during the quarter. However, for the month of December, our Venice operations had fully recovered and are currently at operating rates better than they were prior to the storm. While the ransomware attack did temporarily disrupt our southeast Florida operations, our business technology services team did a fantastic job in restoring our systems and getting us back up and running, averting any need to make any ransomware payment. Organic sales in the western region increased by 10 million, or 15%. with strong growth coming from each core market. The investments we made in production capacity has allowed us to increase our throughput by 30% since December 2021, restoring our lead times primarily to the four to 10 week range. Western Window Systems now has the capacity to produce over 5 million of products each week with the addition of our recently acquired manufacturing space. Both lines of our Western Window business custom and production builders grew in the quarter and full year. Additionally, we are expecting to see increased share in the premium indoor outdoor market with the launch of our newest 300 series minimalist sliding glass door. This product was introduced at the International Builder Show earlier this month, and the initial reactions have been extremely encouraging. The expansion initiatives at Anilin are in an early stage of implementation, these initiatives will enable us to increase our production capacity, expand our product portfolio, and allow us to increase our focus in the Southwest Region R&R vinyl markets. All results at Emlyn came in above our acquisition model expectations. We were able to leverage our price-cost portfolio at our Western Business Unit with increased sales resulted in higher segment EBITDA margins compared to the prior year quarter. Our commitment to innovation, which drives us to deliver products with features, performance, and value demanded by our builders and customers, was highlighted during the quarter with the launch of two new innovative glass products, our thin triple insulated glass unit and our diamond glass impact resistant glass units. PGT Innovations will be the first manufacturer in the U.S. window and door market to offer such products. Additionally, we will be the exclusive supplier of impact resistant windows and doors featuring Diamond Glass for the use in residential and mixed use buildings in the U.S. Diamond Glass provides greater clarity, more scratch resistance, and up to 45% lighter than the standard impact product and thus easier to install. All these benefits come with the same design pressure and impact ratings as our current products. Fin Triple Glass provides improved performance to meet the tightening North America energy standards known as Energy Star version 7. It meets the Inflation Reduction Act requirements for a homeowner to obtain incentives without the need for frame, hardware, or installation rework. and they have a significant weight and cost advantage to other emerging technologies. Our backlog was $235 million at the end of the year, including $5 million related to Martin, down from $356 million at the start of the year. We received organic orders of $291 million of products during the fourth quarter, down from $307 million in the prior year quarter. This reduction in backlog is due to our improved operational performance and the realization of the investments we've been making in our business. Now, I'd like to turn the call over to John Kuntz to review the second quarter results in greater detail. John?
spk03: Thank you, Jeff. Moving on to slide six. We were very pleased to have achieved 341 million sales in the fourth quarter, despite the impact Hurricane Ian and the ransomware attack had on our business. The year-over-year increase in next sales was driven by 5% organic growth from our legacy businesses and revenue from our recent Anlin and Martin acquisitions. Our Western segment grew 15% organically, while our Southeast segment had a 2% organic growth despite the interruption. In the fourth quarter, our sales breakdown was 58% R&R and 42% new construction. Organic R&R sales grew 1% compared to the fourth quarter of 2021. The strength of our legacy brands helped increase organic new construction sales by 12%. Gross profit rose 12% to $121 million for the fourth quarter of 2022 compared to the prior year quarter. Our fourth quarter results were driven by continued solid performance from our operating teams. Adjusted selling, general, and administrative expenses increased 16% in the fourth quarter compared to the prior year, driven by SG&A from our recent acquisitions, the expansion of our New South operations, increased labor and distribution costs, and an increase in marketing investments. Adjusted EBITDA was $48.2 million, flat with the prior year quarter, resulting from increased sales offset by the inefficiencies experienced resulting from the two aforementioned disruptive events. Our adjustments for the quarter included approximately $8 million of expense associated with product rationalization of our Windor brand. In an effort to improve throughput and profitability and reduce underutilized assets, we elected to discontinue certain product lines within our wind door portfolio. Additionally, we will adjust for certain expenses related to costs associated with the acquisition of Martin garage doors and the related refinancing of our credit facility. The remaining costs related to Hurricane Ian, the ransomware attack, and costs associated with our restructuring. Our tax expense in the quarter came in at 26.4%, bringing our full-year tax expense to 24.9%, in line with our full-year assumptions. We reported adjusted net income of $16.1 million, or $0.27 per diluted share, compared to $18.8 million, or $0.31 per diluted share, in the fourth quarter of 2021. Turning now to our balance sheet on slide seven. At the end of the fourth quarter, we had net debt of $585 million, including a cash balance of $67 million. As we mentioned on our third quarter call, we had entered into a new five year, 250 million revolving credit facility in October, which was used along with cash on hand to fund the Martin acquisition. The new facility allowed us to extend maturities while enhancing the company's liquidity. As of year end, we had a trailing 12-month bank covenant net debt to adjusted EBITDA ratio of 2.2 times. We had another year of solid free cash flow performance as we generated $151 million in free cash flow for the year, an increase of $121 million versus our prior year. This impressive free cash flow performance provides the backdrop in funding for our capital allocation priorities including our share repurchase program and future strategic acquisitions. Looking ahead to 2023, we would expect capital expenditures to be within 3% to 4% of sales, first quarter interest expense to be within $8 million to $9 million, depreciation and amortization to be around $15 million, and our tax rate to be 24% to 26%. And with that, I would like to turn the call back over to Jeff. Jeff?
spk04: Thanks, John. Next, I would like to speak about our recently announced three-year $250 million share repurchase program authorized by our board. While building product stocks have come under pressure from the rising interest rate environment and uncertainty around the economy, we do not believe our current stock price reflects the long-term value of our company. We would agree that near-term operating environment is cloudy by the Fed's action, to raise interest rates, making the full-year outlook a bit murky. But long-term, we remain very bullish about the outlook of our company. Industry sources, including John Burns, suggest that there are several macroeconomic trends that will support growth in new construction and R&R markets over the coming years. These trends include the need for an additional 17 million housing units to meet demand, 24 million homes will reach prime remodeling years by 2027. 87% of mortgage borrowers are locked in with mortgage rates below 5%. The average homeowner has an all-time high of $348,000 in equity for their homes. Our Florida brands have an additional benefit of increased hurricane awareness, evolving construction standards, and the enactment of the home hardening sales tax relief on impact products over the next two years. These trends, coupled with our strategy of being in markets where the demographics tend to be more favorable than the national averages, suggest we should see more of a benefit than others in our space. Additionally, our performance historically during recent contractions has been better than that of our peers. As the leader in impact-resistant windows and doors, we would expect to grow share while looking for ways to penetrate new markets. As an example, we were very pleased to have recently received our first $500,000 order for impact-resistant products in Hawaii. The commitment to a $250 million share repurchase program will modestly impact our long-term capital allocation priorities. We will use our cash flow from operations to fund the program and would expect to continue to operate within the stated leverage of two to three times net debt to EBITDA. We expect that our commitment to the share repurchase program would not have an impact on our ability to reinvest capital in our business, or for that matter, for assessing the right strategic acquisition. We will continue to make investments in capital equipment, such as advanced manufacturing and automation, that will allow us to meet or exceed our customers' quality and delivery expectations. Moving on to our 2023 outlook. While recent reports have moved more positive, industry experts are calling for a national retraction in both new construction and R&R markets during 2023. Additionally, the current interest rate actions by the Fed are limiting our visibility into the end market beyond the first quarter. At this time, we're going to limit our sales in EBITDA outlook to the first quarter, and we'll provide more clarity for the remaining quarters as the economy starts to settle down. Despite the challenges presented by the higher interest rate environment, we expect to deliver another solid first quarter. We expect our revenue for the first quarter to be in the range of $370 to $390 million. Supporting these sales levels was a pickup in orders in November, December, and January in the Southeast region, which exceeded prior year levels. We anticipate adjusted EBITDA to be in the range of 60 to 64 million. Historically, due to the seasonality nature of our business, sales in the first quarter are a bit lower than sales in the second and third quarters. The lower sales levels do not allow us to effectively leverage the fixed cost structure of our business. Additionally, the first quarter will include increased advertising and marketing expenses and costs associated with our participation in the International Builders Show, whereas we did not participate in that show last year. The incremental impact of those additional expenses will be approximately $5 million over prior year's first quarter. In closing today, let me reiterate why we believe PGT Innovations is in an excellent position to continue creating long-term value for our shareholders. First, we are a national leader with an outstanding portfolio of brands that we have strengthened over the past few years. We are executing our growth strategy, including expanding into adjacent building product categories to complement our existing portfolio of window-and-door brands. Our products in impact-resistant and indoor-outdoor living markets continue to gain traction. We serve geographies with strong population growth. Second, the diversification of our product portfolio continues to expand through acquisition and new product introduction, which further facilitates profitable growth in both the new construction and R&R channels. Third, operational improvements and capital investments have increased our capacities which helps us meet demand and deliver margin expansion. Strong free cash flow provides options to reinvest in the business and return capital to our shareholders. Fourth, our ongoing investment in innovation, new product development, and talent help us provide customers with innovative premium products to meet their changing needs. Our products help protect both property and lives, and we will not compromise our commitment to conducting business in a socially responsible manner. Lastly, as evidenced by our recently announced share repurchase program, we are committed to increasing shareholder value. While our results were impacted by Hurricane Ian and the ransomware attack during the quarter, we have never been more bullish on the long-term outlook for the company. I want to thank our shareholders team members, channel partners, and suppliers for the continued support. At this time, let me begin the Q&A.
spk05: Operator? Thank you. Well, I'll begin the question and answer session. To ask a question, you may press star 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 2. This time, I'll pause momentarily to assemble a roster. First question will be from Mr. Keith Hughes at Truist. Please go ahead.
spk01: Thank you. On the first quarter, Guy, could you talk about what kind of organic number that would represent within there, and if you could kind of at least talk about it, southeast versus west?
spk03: Sure, Keith. I can do that for you. You know, if you look at the prior year, we came in top line around 358 or there about 359. You have to add the... the Martin acquisition in there as well. So you have a few million call it, you know, 10, 15 million for the Anlan acquisition number, and then you have price impact. So, you know, that price impact can be, anywhere we'll call it 8%, 10%. And then the volume, we're expecting a decline overall. So our anticipation is that we'll have a volume decline. That's how we get up to call it the 370 to 390 range. I mean, that's the expectation as far as where we are. Between regions, I would say the western is seeing a little bit more overall than the southeast region, and I don't want to get more specific than that. I think that's granular enough, I think, for the expectations that we're putting in our guide.
spk04: Keith, I would just add to that. That's what makes it hard to predict. If you look at, like I said in my comments, if you look at the last few months, our order entry in the southeast, which is almost 75% of our business, is up 21%. So we're feeling pretty good right at this point where we sit. And if you look out in the entire year, it makes it more cloudy, given what we're seeing.
spk01: That comes to my second question, Jeff, on the order growth. Can you talk more? What products, what regions? I mean, it's just a really surprising number, given kind of the landscape.
spk04: Yeah, no, it's... You know, it's a combination. Like I mentioned, it's in the southeast. So, you know, let's call it Florida mainly in our PGT brands, CGI brands, Echo brands, New South brands is where we're seeing it. And we think it's several reasons. One, hurricane awareness. Obviously, we had a hurricane come through. Category 4 hit us. So there's a lot of awareness out in the market now, and we're getting a lot of inquiries and a lot of hits on order or online web. sites regarding that. The stores, the actual New South stores in the path of the storm, they're, you know, upper, lower 30% in terms of volume increases. So where the storm hit is even more. So there's awareness. And then secondly, as I mentioned in the last quarters call, you know, the state of Florida passed this home hardening tax credit for R&R purchases. So Anything that you want to harden your home with, i.e., impact windows and doors, we work with the state of Florida, the governor, Ron DeSantis, and the CFO, Jimmy Petronas, to make sure those could be tax-free for the individual for the next two years. And we've heard great feedback from that from our dealer base and people we've talked to around that. And then if you think about our lead times have improved dramatically, you know, quite frankly, our operations here at PGT are on time and in full is running in the upper 80s. Compared to last year, it was in the, you know, 50s. So we're starting to gain back some share, quite frankly, we lost because of performance. Obviously, people had rather go with Impact Leader and that brand. It carries a lot more weight, a lot more options in the market. But we had to perform, and we fixed that operational performance issue. So we're starting to actively gain back share that we had lost at the end of 2020 and 2021. Okay.
spk01: Thank you.
spk04: You bet.
spk05: Thank you. Our next question will be from Phil Naig. Oh, Jeffrey, please go ahead.
spk03: Bill, you might be on mute.
spk05: Thank you. As we wait for Mr. Nye to get back, let's go to Mr. Michael Riho, JP Morgan.
spk06: Hi, good morning, guys. Doug Morgan on for Mike. Just a quick question. Last quarter, you guys talked about how you haven't been approached on price. from builders. I'm just wondering if that has changed, you know, as we gain more insight on, you know, the softer demand drop or, I guess, anticipated demand drop. And if so, has it kind of been in line with your expectations would be, or just a little bit more color on that in total?
spk04: Yeah, I'll speak to it. In total, the answer would be no. Have we been approached one-off? Yes, but maybe 5% or 10% of our volume. So in total, we haven't given pricing and we're not getting pressured. What we've been simply asked by our builders to do is deliver on time and in full. And as long as we can do that and hold price, actually a couple of builders access just to hold pricing, we're their supplier of choice. So as of now, on the new construction side, I've not received any material impact on giving in pricing.
spk06: Thanks. And you talked about recently with the recently improved accelerated share repurchase, how strategic acquisition was one potential method of use. In this environment, I'm just curious on, you know, what's your current criteria and looking for the right acquisition and what does that pipeline look like right now?
spk04: Yeah, good question. That $250 million share repurchase program, I think, makes a clear statement. We think our stock's undervalued. And, you know, we put a program in place, a plan in place. That plan will literally kick off and start buying shares Monday. And, you know, we think we're way undervalued, so we're going to buy, you know, as much as we can in the market that allow based off our trading volumes. That's going to be first priority. And as I look at other acquisitions, you know, I would look for a different, call it product portfolio type, like, say, clad or wood, we don't have that in our portfolio. I would look at geographic diversity and maybe, you know, some more Midwest locations we hadn't looked at before. Those are the top criteria I would look at and margin, of course. But I'll be clear that our priority is our stock at this point, absent any, you know, significant acquisition that would meet those criteria.
spk06: Got it. Thank you, guys.
spk04: You bet.
spk05: Thank you. Again, if you'd like to ask a question, please press star and then. Our next question will be for Mr. Phil Nick of Jefferies. Please go ahead.
spk00: Hey, guys. Can you hear me now?
spk04: Yeah, we can hear you. Sorry, yeah.
spk00: Okay. Okay. It's Maggie on for Phil. I guess first, and sorry if I missed this earlier, I just hopped on the call. But could you talk about, you know, looking at 2023, the outlook, you know, what are the biggest uncertainties or swing factors for your end market demand? And, you know, what would need to happen to give you more confidence in providing a full year outlook?
spk03: Yeah, sure, Maggie. You know, one of the reasons why we've elected only gives you one guidance. was really just the change in sediment over the last 90 days. When we started looking at, you know, our plan for 2023 and what our expectations were, the expectations were dramatically different, call it in the December timeframe, from what they were in early January and then to what they are today. So really what we would look to see is just some stability so we can have confidence that we understand the dynamics driving the end markets a little bit better than what we do today. I think as the year progresses, as we get into Q2, you know, as we move into the April-May timeframe, that may exist. And at that time, we may be able to give you full-year guidance or the remaining year guidance uh for that but what we would like to see is some stability in the markets and just not so much movement in uh in opinion by various you know prognosticators out there as far as what's happening with the economy and in each of our end markets be it the new construction market being the r r market whatever it may be uh just some more stability in that that'll give us more confidence as far as uh You know how to forecast the remainder of the year and remember to we have to think about from our end is we have different scenarios and different planning actions. Should the economy turn one way versus continue to be stable versus being more robust right, so we have to be pretty agile on our on our feet and what I would suggest, and what I think is. What we have said long term is we expect this business to be an upper-teens EBITDA margin business going forward. So that would be the expectation is that we would continue to maintain this business to be that upper-teens EBITDA margin business.
spk04: And I would just add, we've already been flexible in terms of cost reduction initiatives. We started that at the end of the fourth quarter when we saw some order pattern changes. To date, we've had reduction in force of roughly 147 people and attrition of another 100. So we're down about 240 people over the last, call it, three months. So we're watching our costs. We're only investing where there's a great return. And we definitely feel strong about holding upper team margins over the coming year.
spk00: OK, got it. Yeah, that definitely makes sense. And then I guess looking at 4Q, the operational headwinds from the hurricane disruption and the ransomware issue, the ultimate impact on revenues were lower than you had initially forecasted. Can you just talk about how those dynamics played out in the quarter and if there's any expected carryover impact into 2023?
spk03: Yeah, so the dynamics in the quarter were, you know, for each of those, we lost order entry for a period of time. And for us to recover and get back up, the hurricane specifically disrupted our production and our ability to produce. So that was one where we lost that revenue. And, you know, that had to be made up to the degree that we could. The ransomware attack would basically shut us down from an order entry perspective. So we weren't able to recover. The good news is, you know, we've made dramatic changes. Our operating team here in the Southeast region did a wonderful job and got, as Jeff said, got back to rates, you know, where we were prior to the storm. So we're making that back up. You know, with respect to order entry, we are back online and we're moving forward from that perspective. So, you know, there's no, you know, continuing effect from either of those. They were both related to the quarter, and our expectation is that as we move into Q1, as long as we continue to deliver, as Jeff said, from an operational perspective, from an on-time and full, I think that we're going to continue to see a dealer base that is pleased with our performance and we will continue to be the supplier of choice.
spk00: Okay, great. Thanks so much. Sure.
spk03: Thank you.
spk05: This concludes our question and answer session. I'd like to turn the call back over to management for closing remarks. Thank you.
spk03: We appreciate your participation today on our fourth quarter and full year 2022 earnings call. We look forward to your continued participation and support of the company, and we will talk to you again on our first quarter 2023 earnings call in May. Thank you again.
spk05: Thank you. Conference is now concluded. Thank you for attending today's presentation. You may now
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