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spk03: Good morning and welcome to PGT Innovation's third quarter 2023 earnings call. All participants are in listen-only mode. I'd now like to turn the conference over to PGT Innovation's Senior Vice President of Corporate Development, Brad West. Please go ahead.
spk05: Thank you. Good morning and welcome to the PGT Innovation's third quarter 2023 conference call. With me on the call today are President and CEO Jeff Jackson and our Interim Chief Financial Officer Craig Henderson. On the investor relations section of our company website, you will 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. Initial information on factors that could cause actual results to differ from expected results is available in the company's most recent SEC file. Additionally, on slide three, note that we report results using non-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, when available, 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.
spk06: Thank you, Brad. Good morning, everyone, and thanks for joining us today. Before we get into our quarterly earnings results, I want to acknowledge the recent transaction rumors, and market speculations in the media. We are not going to comment on those rumors today and are focused on presenting our strong earnings results. We continue to engage in constructive dialogue with all our investors, and we welcome their perspectives. We are always open to opportunities to maximize shareholder value. With that, let me get to today's earnings results. Our third quarter financial results released earlier today showcase our ability to meet the growing demand for our products in this current dynamic market conditions we are operating in. Our balanced exposure to both new construction and repair and remodeling channels is a structural advantage that enables our team to consistently deliver record sales and solid profits over the past year. Our third quarter financial results are strong evidence that demand for our premium products remains strong. and that the entire team is executing on all cylinders. Our team members are at the heart of our continued success, and in recognition of their efforts, we announced during the third quarter a special grant of 395,000 shares of restricted stock to those team members who do not participate in the company's long-term incentive plan. Turning to slide four, we delivered total revenue of $400 million and adjusted EBITDA of $78 million or 19.6% in the third quarter. We were able to deliver strong profitability in the quarter due to our continued focus on productivity and operational execution. Our year-over-year revenue growth of 4% and our adjusted EBITDA increase was 15% versus the prior year third quarter. The year-over-year sales growth was driven by an 11% increase in the repair and remodeling channels, partially offset by continued weakness in new construction, which declined 7%. The strong demand for our products continues, despite the impact of high interest rates on current housing market conditions. We continue to maintain a normal price-cost relationship, and our industry-leading lead times, quality, service, and value proposition are helping us drive increased market penetration across our brands and geographies. Next, on slide five, let's take a closer look at the third quarter, our sales trends, and key initiatives. Sales in our southeast segment were a record $303 million, an increase of 5% versus the prior year third quarter, and also 5% sequentially. Our Southeast results show the power of our brands in both the new construction and repair and remodeling channels. Our year-over-year revenue growth was driven by a 5% increase in R&R sales and a 6% increase in new construction sales. The prior year quarter was impacted by Hurricane Ian, where $12 million in sales were deferred into the fourth quarter of 2022. Order demand in the Southeast increased 16%, versus the prior year quarter, including double-digit order unit volume growth. Sales at our western segment were $97 million, down 1% versus the prior year quarter. Western organic sales contracted 9% versus the prior year quarter and were flat sequentially. Organic order demand out west declined 4% versus the prior year quarter. and improvement from the 20% year-over-year decline seen in the second quarter, driven primarily by improvements in the new construction demand. During the quarter, our Western Window System Series 300 minimalist multi-slide door was awarded an Editor's Pick from the Architect Newspapers as part of their 2023 Best of Products Awards. We will be showcasing this product along with other premium products in our Western Window Systems Architectural Design Studio in Santa Monica, California, set to open on November 16th. This innovative studio will provide a location for architects, builders, and dealers for a hands-on experience with our premium products. It will also provide an opportunity to collaborate with our product experts to help design the best premium indoor-outdoor living spaces in the industry for any custom project. Our Martin garage door acquisition, which closed late in 2022, launched our new keystone pan door in the third quarter, featuring an innovative new design that provides cleaner lines that homeowners desire. We are already seeing order growth from the launch of the Martin garage door in our Texas New South markets. We look forward to launching Martin garage doors in other New South markets as well as in our East Coast distribution network. For our New South direct-to-consumer brand, we are executing our Texas Takeover initiative. Texans across the Austin, Dallas, Fort Worth, Houston, and San Antonio metro areas now have the opportunity to experience the value of custom factory-direct New South products along with the Martin garage doors. During the third quarter, we began production of our latest innovation, Diamond Glass, our laminated ultralight glass technology featuring Corning architectural technical glass. This innovation provides homeowners with improved clarity, lower weight, three-time scratch resistant, and improved energy efficiency while maintaining impact resistance that customers expect from our industry-leading impact brands. Windoor products featuring Diamond Glass as standard offering are available today, and we will be adding Diamond Glass as a premium option to our PGT branded products soon. I'm excited to announce that our first thin triple glass fabrication facility will be in Prince George County, Virginia. We appreciate the support of state and local leadership and look forward to being a trusted community partner. Equipment installation, testing, and local team member hiring begin in the third quarter, and production is scheduled to begin in the first quarter of 2024. Now I'd like to turn the call over to Craig Henderson to review our third quarter results in greater detail.
spk03: Craig?
spk04: Thank you, Jeff. Turning to slide six, consolidated net sales were $400 million in the third quarter, up 4% from the prior year third quarter. The year-over-year increase in net sales was driven by a 1% organic increase from our legacy business. Unit volume decline was 1%, partially offset by a 2% price impact from price increases taken in the prior year. Our southeast segment sales grew 5% from the prior year third quarter, while our western sales segment were down 1% from the prior year. During the third quarter, Our sales breakdown was 63% R&R and 37% new construction. R&R sales were up 11% compared to the third quarter of 2022. We delivered strong R&R sales growth as demand for our products continues across all geographies. New construction sales were down 7% versus the prior year third quarter. New construction activity reflects improvement from a year-over-year decline 12% experienced in the second quarter. Gross profit was $162 million in the third quarter and increased 8% compared to the prior year third quarter. Our Q3 results were driven by continued solid performance from our operating teams, the impact of prior year pricing actions offsetting material and wage inflation, and additional cost management discipline partially offset by reduced fixed cost leverage from lower volumes. Selling general and administrative expenses were $102 million, a decrease of 1% in the third quarter compared to the prior year, driven by strong cost management discipline partially offset by increased marketing investment. Adjusted EBITDA of $78 million an EBITDA margin of 19.6% was 15% higher than the prior year third quarter. This year-over-year increase in percent was driven mainly by operational efficiencies and the impact of pricing actions. Our favorable non-GAAP adjustments for the quarter related to an $800,000 adjustment for the closing of our Charlotte and Raleigh-Durham, North Carolina showrooms. This adjustment offset a portion of the $2.5 million charge taken during Q2. Our tax expense for the quarter came in at 25.9%. We reported adjusted net income of $39 million, or 66 cents per diluted share, compared to $30 million, or $0.55 per diluted share, in the third quarter of 2022. Turning now to our balance sheet on slide 7, at the end of the third quarter, we had net debt of $602 million and total liquidity of $214 million. As of the end of the third quarter, we had a trailing 12-month bank covenant net debt to adjusted EBITDA ratio of 2.2 times. We generated operating cash flow of $80 million in the third quarter. This strong performance enabled us to reduce our revolver borrowings by $39 million. In addition, we continued execution of our three-year $250 million share repurchase program and returned nearly $30 million to shareholders through the repurchase of 1 million shares. We also invested $13 million in CapEx mostly related to cost reduction and capacity expansion initiatives that will enable us to improve our profitability in 2023 and beyond. Moving on to our guidance in slide eight, for the fourth quarter, we anticipate revenue to be in the range of $325 to $350 million. We anticipate adjusted EBITDA to be within the range of $51 to $57 million. For the fourth quarter, We expect sales volume to decrease seasonally from our third quarter. Year-over-year unit volumes are expected to contract versus an ineffective Q4 given the uncertainty created by the recent increases in interest rates. We expect strong operations execution along with continued cost discipline will enable us to continue to deliver strong results in this uncertain market. We expect to spend $15 million in 2023 on our new glass operation equipment and facilities, in addition to the normal 3% to 4% of sales run rate capital spending. This higher level of the spending will ensure that our new glass operations will launch successfully. Despite this increased investment, we continue to hold our target leverage in the low two times EBITDA rate. And now I would like to turn the call back over to Jeff.
spk06: Thanks, Craig. I'll conclude today's call with a summary of why we believe PGT Innovations is in an excellent position to continue to deliver above-market long-term growth despite the challenging near-term demand environment. We recognize that the current housing market is being constrained by affordability challenges. The current conditions have added to the pent-up need for additional housing. We expect that once interest rates stop increasing and return to normal levels, this pent-up demand will provide significant tailwinds for our business. While affordability for new homes has gotten better with the various incentives being offered by builders, conditions continue to affect new home buyers and homeowners in the near term. Our repair and remodeling channel is boosted by the lock-in effect of lower fixed rate mortgages, meaning homeowners are likely to stay in their current homes longer. The record level of home equity and the increase in age of housing stock means these homeowners will be more willing to take on large remodeling projects to update their homes once interest rates stabilize. This lock-in effect continues to positively impact the new construction activity, as well as the dramatic reduction in existing home sales is helping drive a more stable recovery in new home construction. Longer term, industry sources continue to suggest that there are several macroeconomic trends that will affect growth in new construction and R&R markets over the coming years. Turning to slide nine. PGC Innovations has built a solid foundation to take advantage of these long-term trends and will see a greater benefit than others in our space when the economy stabilizes. Our strategy is to focus on markets where demographic trends tend to be more favorable than the national average. First, we are a national leader with an outstanding portfolio of brands that we have strengthened over the past few years. We are executing on our growth strategy, including expansion into adjacent building product categories to complement our existing portfolio of premium window, door, and garage door brands. Our products and 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 acquisitions and new product introductions. which further facilitates balanced portfolio growth in both the new construction and R&R channels. Third, operational improvements in capital investments have increased our capacity and delivered margin expansion. Our strong free cash flow provides options to reinvest in the business and return capital to our shareholders. Fourth, our ongoing investments in innovation, New product development and talent help us provide customers with innovative premium products to meet their changing needs and expand our customer base with new technologies such as our diamond glass and thin triple glass. Lastly, we are committed to increasing shareholder value through our robust profitability and returning capital to our shareholders through our share repurchase programs. We believe PGT Innovations is in a great position to weather the current environment and are working to build a stronger foundation for our next level of growth and continue to create long-term value for our shareholders and customers. Throughout this volatile microeconomic environment, we remain focused on discipline cost management while delivering on our value proposition to our customers. This commitment has allowed us to achieve and maintain strong profitability. We will continue to invest in our brands, our capacity, and automation and in our people to outperform the competition and deliver returns for our investors, both in the near and long term. We remain committed to delivering products with the features, performance, and value demanded by our builders and customers. We continue to execute our plans to create long-term value for our shareholders, including the $250 million share repurchase program. During the third quarter, we invested nearly $30 million in open market transactions to repurchase our shares for a total of $75 million in share repurchases to date. In addition, we believe that our current trading range does not properly reflect the long-term potential for shareholder value for PGT Innovation shareholders. And all the actions we've just discussed will drive shareholder value higher. I want to thank all of our team members for their dedication and belief in our company. At this time, let me begin the Q&A. Operator?
spk03: Thank you. We will now 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. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Keith Hughes from Truist. Please go ahead.
spk01: Thank you. The order growth, I think you said it was up 16% in the southeast, double-digit volume. It's pretty impressive. I'm a little surprised the revenue guidance is not stronger, kind of flat at the midpoint. Can you talk about what kind of offsets you're going to see if it sounds like the southeast is keeping up?
spk06: Yeah, Keith, I'll speak a little bit, and then Craig, you can add some details. But Basically, you know, the fourth quarter, we did have that push from last year's hurricane into the fourth quarter. So in terms of sequential growth, it's going to be, you know, a challenge. There was $12 million push from Q3 of last year into Q4 due to Hurricane Ian. But if you look at the full year, you know, again, the four-year guidance with our fourth quarter guidance we just gave, you know, we're going to basically be flat for the year. You know, we were a billion and a half last year. Call it a billion and a half this year. And that's in the face of new construction being down 22% and R&R down 8%. So we're executing. We're gaining market share. And even more importantly, we're leveraging our EBITDA. Our EBITDA last year was $253. This year is going to be plus $20 million. It'll be $275-ish. So quite frankly, everything's clicking right, and we're performing incredibly well in gaining share despite the housing crisis.
spk01: Right. Evidence things are going well here. I guess the other question is with the new facility in Virginia on the triple pane glass, do you have any sort of feel or any sort of orders that would tell you what kind of revenue you could get out of the facility? I assume that facility, by the way, goes to other third-party manufacturers. Is that right? Any kind of view on what kind of orders you're going to get?
spk06: Yeah, it does third-party manufacturers as well as internal needs. We will be putting the thin triple solution in our Anwen products, for instance. It will make it the most energy-efficient vinyl window on the market. That's on the slate. Also, third-party sales, both finished units and raw glass. We actually also signed a distribution agreement about three weeks ago with Corning. We were able to also sell raw fusion-drawn glass to other glass companies. manufacturers like the big guys from Cardinal, Guardians, Old Castles of the World. And we're actively trying to pursue those relationships. We do have a potential customer for the full unit glass to drop it, drop a full pane into. And we also have a potential distributor, a maker of that glass that we'll be selling fusion drum glass to. Nothing signed at this point. but definitely are in heavy discussions. The facility is slated to be operational at the end of the first quarter of next year. We're going to do a ribbon-cutting, obviously, this year. Okay, thank you. You bet.
spk03: The next question comes from Michael Rahout from J.P. Morgan. Please go ahead.
spk00: Hi, guys. Good morning. Doug Ward-Long for Mike. So you guys said organic sales. increased by 1%, driven by 2% from price, and that was partially offset by volume. So can you just add a little bit more color or detail on what you saw from the market regarding price this past quarter and how you can see that potentially evolving moving into next year?
spk04: Yeah, no, price has been stable, Doug, and we don't see any pressure to reduce prices. We believe that we have pricing power and there's still strong demand within the geographies that we serve. We see Western segments recovering as new construction continues to heal, and the Southeast remains strong. So there's not a lot of talk from a price concession perspective.
spk00: Got it. And like you just said, you know, the Western region is more tied to new construction. And last quarter, there was a bit of optimism that it would improve and I guess on a big picture basis, would you say that improvement sequentially met your standards? And, you know, moving forward, you know, how are you guys thinking about new residential, particularly in that western region moving into the early parts of 24?
spk04: Yeah, from a western perspective, organic growth on a demand side grew 5% sequentially. And while it's taken a little longer to see some of the activity flow through, to our business. There's always a lag between the increase in starts. We are optimistic that that business will grow in the fourth quarter and then into the next year.
spk06: Yeah, we have several initiatives going, whether it's our CRI installation arm that we are heavily involved in with some builders to install our product that's growing. And also, again, innovation with the thin triples, once we get that in our aniline product we really think that's going to help differentiate ourselves in the marketplace and gain share there as well. So we're actually very optimistic about the West and what we have going there. Got it. Thank you, guys.
spk03: You bet. Again, if you have a question, please press star, then 1. Our next question comes from Joe Alsmeyer from Deutsche Bank. Please go ahead.
spk02: Hey, everybody. Congrats on the results, and thanks for taking my question. Thanks, Joe. Thanks, Joe. Yeah, to your point about, you know, growth in a tough environment, I'm just thinking about next year, all the things that could potentially go right for you. And I'm just looking at consensus EBITDA against your updated range, really just up 4% next year. And I'm just wondering how you kind of look at that in the backdrop of stable R and R, potentially much stronger new construction, all the things that you're doing to outgrow those market growth rates just seems a little bit like there's potential to that.
spk04: Yeah, definitely. We see upside next year. I mean, if you look at the stable environment that we're going into in 24, in spite of the higher interest rates, we have consistently been able to outperform the national averages due to our footprint and due to the penetration of both impact-resistant products in the southeast and indoor-outdoor out of the west. And so we see no reason why that's not going to continue, and we'll be able to deliver strong results next year.
spk06: Yeah, and we do plan on next year actually announcing guidance for next year. We've seen definitely a stabilization in this market we're operating in with ever-increasing rates. We've seen a good stabilization of water growth and patterns that we feel we've got a good handle on 2024. So our next call, we'll be announcing that guidance from our end, and we do expect growth.
spk02: For the full year, you'll be giving the guidance, is what you're saying?
spk06: Yes, yes.
spk02: Okay, cool. And then just thinking about the capital you've allocated to buybacks, is it right to think then in the context of your comments there that this is more of a reflection of your view on the valuation of your stock relative to those expectations for profits? Or is it a lack of M&A opportunity, just having enough capital that you can do the internal investments that you wanted to do? And so as we look to kind of understand how much more you could do on the buybacks, what is sort of a price in your mind for where it starts to be more attractive to pull back on the buybacks?
spk06: Yeah, we really balance that with opportunities. M&A has opportunities still, despite the interest rate environment we're operating in. We're actively talking to two different companies now. But in terms of our choice on share buyback, look, our stock is traded below what it should trade. Our board firmly believes that. And that's why we allocated $250 million to buy back stock in our share repurchase program. And we've been able to execute a total of $75 million to date. And we think we'll be executing more buybacks. So I'm not comfortable in commenting on the price we look at. I think that fluctuates based off our need of cash and other opportunities. But we definitely think returning capital to shareholders via the form of share buybacks right now is a great opportunity for us.
spk04: Yeah, and I would say that the business is still generating a lot of free cash flow, and so we're going to put that to use. And we believe that returning capital to shareholders is a great use of that, of those excess funds.
spk02: Excellent. Thanks a lot, everyone.
spk03: Thank you. This concludes the question and answer session. I would like to turn the conference back over to Craig Henderson for any closing remarks.
spk04: Thank you for joining today's call. We appreciate your continued support to PGT Innovations, and we look forward to connecting with you soon at upcoming investor conferences. And we're looking forward to discussing our full year results and our 2024 guidance in February. Thanks so much.
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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