Q1 2023 PGT Innovations Inc Earnings Call

Participants

Bradley R. West; SVP of Corporate Development; PGT Innovations, Inc.

Craig Henderson; Interim CFO; PGT Innovations, Inc.

Jeffrey T. Jackson; President, CEO & Director; PGT Innovations, Inc.

Douglas Samuel Wardlaw; Equity Research Analyst; JPMorgan Chase & Co.

Jonathan Bettenhausen

Joseph David Ahlersmeyer; Research Analyst; Deutsche Bank AG, Research Division

Margaret Eileen Grady; Equity Associate; Jefferies LLC, Research Division

Presentation

Operator

Good morning, and welcome to the PGT Innovations First Quarter 2023 Earnings Conference Call. (Operator Instructions) I'd like to turn the conference over to PGT Innovations' Senior Vice President of Corporate Development and Treasurer, Brad West. Please go ahead, sir.

Bradley R. West

Thank you. Good morning, and welcome to the PGT Innovations' First Quarter 2023 Investor Conference Call.
With me on the call today are our President and CEO, Jeff Jackson; and our Interim Chief Financial Officer and Vice President of Corporate Finance; 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 2 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 in the company's most recent SEC filings.
Additionally on Slide 3, 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 GAAP 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's CEO and President, Jeff Jackson.

Jeffrey T. Jackson

Thank you, Brad, and good morning, everyone. And thanks for joining us for today's call. I'm very pleased with the start of our year and want to thank our team members and supplier partners for executing well in a challenging, dynamic environment. Following our strong finish to 2022, we delivered a record first quarter despite continued macroeconomic uncertainty, including higher interest rates and persistent inflation.
Turning to Slide 4. Despite a slowing national economy, we were able to increase revenue to $377 million, grow adjusted EBITDA to $7 million and expand adjusted EBITDA margins by 210 basis points compared to prior year.
Our repair and remodeling channels proved strong in the first quarter, and we expect that trend to continue into the second quarter based on our current order backlog and continued strong demand trends in the second quarter. The repair and remodeling channel nationally is benefiting from record home equity and homeowners deciding to stay amidst high mortgage rates, and PGTI has benefited from increased hurricane awareness as a result of Hurricane Ian, which made landfall in Southwest Florida in late September of 2022.
In both business segments, we increased our delivery performance, improved our quality and reduced our lead times to dealers and delivered EBITDA margin growth versus the prior year through strong operational execution and cost containment measures. We continue to show strong execution regardless of the obstacle, whether it's a major hurricane, a ransomware incident or continued macroeconomic headwinds as we drive to execute our strategic plan.
Next on Slide 5. Let's take a closer look at the first quarter, our sales trends and key initiatives. In the first quarter, we generated total revenue of $377 million during the quarter. Sales in our Southeast segment were $282 million, an increase of $10 million versus the first quarter of 2022. Sales grew 4% versus the prior year quarter and grew 16% sequentially from the fourth quarter.
Our Southeast brands have always served both the R&R and new construction markets well, and our year-over-year growth was fueled by continued strength in the R&R markets. Orders in the Southeast grew $39 million or 15% from the prior year quarter, driving the increase in total company order backlog.
We recently announced a new initiative, rebranding our hallmark PGT Custom Windows and Doors. As a leader in high-performance glass technology for windows and doors, we have expanded positioning to allow specialized products for energy efficiency, sound reduction and security to be included and introduced into the future.
Our new tagline, [best of freedom] of PGT, captures the value and simplicity we bring to daily life. The rebranding is about giving consumers control and peace of mind over external forces like extreme weather, home security and increasing noise pollution.
Sales in our Western segment were $95 million, an increase of $8 million versus prior year. Out West, we were impacted by multiple storms in California and Arizona, resulting in a reduction of construction activity early in the quarter. Our Western sentiment is also more sensitive to movements in new construction with the Western markets leading the nation in declining new home construction activity. Western segment sales were up 9% versus prior year first quarter on strong execution and low lead times.
Organic orders in the Western segment were 16% below prior year first quarter. Our Martin acquisition, which closed in late 2022, continues to be integrated, and we are aggressively pursuing sales synergies we believe exist with the premium garage door and legacy business. We expanded our EBITDA margins by 210 basis points, driven by strong operational execution, pricing actions offsetting material and wage inflation and cost containment measures amidst continued macroeconomic uncertainty.
While new construction starts and orders have declined versus prior year, both business segments benefited from strong brands such as PGT, Eco and Anlin that all have seen and are continuing to see demand growth in repair and remodeling channels.
Our focus on quality and delivery has also contributed to strong growth in our Southeast region aluminum demand, with our aluminum pipeline continuing to increase into the second quarter, as we work to drive higher levels of throughput and recapture market share. Our commitment to innovation, which drives us to deliver products with the features, performance and value demanded by our builders and customers, was highlighted by our important partnership to evolve glass technology. We previously announced our exclusive right to manufacture and sell new and innovative glass products. Thin triple insulated glass, which we are branding Triple Diamond and our branded diamond glass impact-resistant glass.
As discussed on our last call, PGTI will be the first manufacturer in the U.S. window and door market to offer thin triple insulated glass and diamond blast impact-resistant glass units. We believe that even a basic window can and should work harder, and we are uniquely positioned to bring these new products to the U.S. consumer. Benefits from our new glass technology include windows that are clear, more energy efficient, easier to install and impact resistant, helping make buildings more sustainable and comfortable.
Our partnership with Corning Architectural Technical Glass to produce next-generation window applications leads to more sustainable, energy-efficient windows and doors. Progress is underway. We have placed orders for new equipment to produce diamond glass for select PGT Innovations brands later this year, and we'll be producing triple diamond glass for other window and door manufacturers in early 2024. Recently, we also announced our exclusive relationship with Truist Service Finance for consumer financing in our dealer channel. We are very excited about this new program, allowing us to offer new financing options for our dealers. We believe this partnership will make replacement windows and doors more attainable for consumers with financing options that fit their specific needs.
Our order backlog was $236 million at the end of the quarter, up slightly from the fourth quarter. Order backlog is of similar size to date as demand has remained roughly in line with our increased production capacities. As we have previously disclosed, our Board unanimously approved the adoption of a rights plan in response to the accumulation of PGT Innovations shares by a strategic investor.
We remain committed to engaging in constructive dialogue with all our investors, and we welcome their perspectives. We also want to ensure all investors are able to realize the full long-term value of their investment and receive fair and equal treatment, which is what the rights plan is designed to do.
We are not actively pursuing a strategic alternative at this time and are executing on our strategic plan to grow shareholder value over the long term as evidenced by our record 2022 results and our strong first quarter. We are always open to explore opportunities to maximize shareholder value. We do not believe our current trading range reflects the long-term value of the company. To that end, we have executed on our $250 million share repurchase program.
Now I'd like to turn the call over to Craig Henderson to review our first quarter results in greater detail. Craig?

Craig Henderson

Thank you, Jeff. Turning to Slide 6. Consolidated net sales were $377 million in the first quarter, up 5% from the prior year first quarter. The year-over-year increase in net sales was driven by 3% organic growth from our legacy businesses. Our Southeast segment sales grew 4% from the prior year first quarter, while our Western segment sales were up 9% from the prior year. During the first quarter, our sales breakdown was 60% R&R and 40% new construction.
Organic R&R sales grew 4% compared to the first quarter of 2022, driven by the strength of our PGT and Echo brands. Organic new construction sales were flat to the prior year first quarter. Gross profit was $149 million in the first quarter and rose 11% compared to the prior year first quarter.
Our first quarter results were driven by continued solid performance from our operating teams, pricing actions offsetting material and wage inflation and additional cost containment measures. Adjusted selling, general and administrative expenses increased 3% in the first quarter compared to the prior year, driven by increased marketing investments related to the International Builders' Show.
We're pleased to have delivered adjusted EBITDA of $70 million, an increase of 18% versus the prior year first quarter. This year-over-year increase was driven by operational efficiencies, the impact of pricing actions offsetting material and wage inflation and, to a lesser extent, increased sales.
Our non-GAAP adjustments for the quarter included approximately $3 million of insurance recovery gain related to the wind down of the commercial portion of our NewSouth acquisition, partially offset by onetime costs related to our Anlin acquisition and executive severance costs totaling $1.7 million. Our tax expense in the quarter came in at 24.6%. We reported adjusted net income of $34 million or $0.56 per diluted share compared to $25 million or $0.42 per diluted share in the first quarter of 2022.
Turning now to our balance sheet on Slide 7. At the end of the quarter, we had net debt of $606 million and total liquidity of $211 million. As of the end of the first quarter, we had a trailing 12-month bank covenant net debt to adjusted EBITDA ratio of 2.2x. We generated operating cash flow of $24 million in the first quarter. We also invested $12 million in capital expenditures, mostly related to cost reduction and capacity expansion initiatives that will enable us to improve our profitability in 2023 and beyond. During the first quarter, we began execution of our 3-year $250 million share repurchase program and returned $25.6 million to shareholders through the repurchase of 1.2 million shares.
Moving on to our guidance on Slide 8. The continued macro uncertainty will again limit our sales and EBITDA outlook to the next quarter. For the second quarter, we anticipate revenue to be in the range of $380 million to $400 million. We also anticipate adjusted EBITDA to be in the range of $70 million to $75 million. Our strong demand trends and our continued strong operations execution, along with cost containment, gives us confidence that we will be able to continue to deliver strong profits in this uncertain market.
In order to execute on our new glass operations, we expect to spend $35 million in 2023 on new equipment and facilities. This spend will be in addition to the normal 3% to 4% of sales for our run rate capital spending. This higher level of spend will ensure that our new glass operations were launched successfully. Despite this increased investment, we will continue to target leverage at 2 to 3x EBITDA.
And now I would like to turn the call back to Jeff. Jeff?

Jeffrey T. Jackson

Thanks, Craig. I'll conclude today with a summary of the current market conditions, and while we believe PGT Innovations is in an excellent position to continue creating long-term value for our shareholders.
While the underlying macroeconomic uncertainties continue, home buyers and homeowners appear to be adjusting to the new reality aided by moderating home prices and wage growth. Both the new construction and repair and remodeling channels are seeing positive signs versus the fourth quarter of 2022. Long term, industry sources including John Burns, suggest that there are several macroeconomic trends that will support growth in the new construction and R&R markets over the coming years. These trends include a growing adult population, especially millennials, to drive 12.7 million new home starts to be formed.
Recent reports indicated that 66% of millennials plan to buy a home within the next 2 years. The need for an additional 17 million housing units to meet demographic demand, 24 million homes will reach prime remodeling years by 2027. 85% of mortgage borrowers are locked in with mortgage rates below 5%. The average homeowner has an all-time high of $361,000 in equity in their homes.
The Inflation Reduction Act introduced major changes to the federal incentives for residential energy-efficient upgrades through 2032. Our new glass technology will enable homeowners to qualify for these incentives. Our Florida brands have the added benefit of increased hurricane awareness, evolving construction standards and the enactment of the home hardening sales tax relief on impact products over the next 2 years.
Turning to Slide 9. PGT Innovations is well positioned to take advantage of this long-term trends and see a greater benefit than others in our space. 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 in the adjacent building product categories to complement our existing portfolio of window and door brands.
Our products and impact-resistant and indoor/outdoor living markets continue to gain traction. We service geographies with strong population growth. Second, the diversification of our product portfolio continues to expand through acquisitions and new product development, which further facilitates a balanced portfolio growth in both the new construction and the R&R channels.
Third, operational improvements in capital investments have increased our capacity, which has helped us meet our demands and deliver margin expansion. 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.
Lastly, we are committed to increasing shareholder value through improved profitability and returning capital to our shareholders through our share repurchase program. We believe PGT Innovations is in a great position to weather the current environment and are working to build a stronger foundation for the next level of growth and continue to create long-term value for our shareholders and customers. In addition, we believe our current trading range does not properly value the long-term potential shareholder value for PGT Innovations' shareholders.
To that end, we are returning capital to our shareholders through the share repurchase program, and we'll continue to execute on this program over the 3-year life of the program. I want to thank our shareholders, our team members, channel partners and suppliers for their continued support.
At this time, let's begin the Q&A. Operator?

Question and Answer Session

Operator

(Operator Instructions) And this morning's first question comes from Keith Hughes with Truist Securities.

Jonathan Bettenhausen

This is Jonathan Bettenhausen on for Keith. So you're guiding revenue down a bit year-over-year for the second quarter, but it looks like new orders maybe on a net basis across the business were up in the first quarter. Could you maybe walk us through how long it takes for the new orders to flow to the top line?

Jeffrey T. Jackson

Yes, great question. We are guiding down slightly, and it's just -- it's very tough in this current market. That's why we're only limiting our guidance again in the second quarter.
I'll give you an example. In April, we're actually up year-over-year as we closed April. And so it usually takes, depending on which business unit you're talking about. And depending on the lead time of that product, anywhere from 4 at a low end to a high end of, say, 12 weeks to fully bake in different order patterns we see across our brands.

Craig Henderson

Yes. And last year, Jonathan, the Western business unit had a significant increase from Q1 to Q2, given the weather coming out of the first quarter. Their backlog is reduced. While we're seeing demand trends improving in the West and the demand trends in the Southeast are continuing -- in the Southeast continuing very strong, just converting those to actual shipments is really kind of causing the variance there. But steady state coming out of Q1 into Q2, very solid trends, and we expect to be able to continue that going forward.

Jeffrey T. Jackson

Yes. And I'll just tag on to that. Actually, after April's close, we actually added $4 million to our backlog. So again, still very positive on our guidance in the quarter.

Jonathan Bettenhausen

That's helpful. And just as a follow-up, can you give us an idea maybe just in the Southeast, the breakout of impact-resistant versus the nonimpact-resistant windows?

Craig Henderson

Sure. Overall, from a company perspective, it's about 60-40 impact, nonimpact. It'd be much higher in the Southeast.

Operator

And the next question comes from Phil Ng with Jefferies.

Margaret Eileen Grady

This is Maggie on for Phil. I guess starting, Jeff, it was helpful for you to kind of walk through how you're thinking about long-term demand drivers for the business, but just zeroing in on 2Q and 2023. Can you talk about what you're seeing across your different end markets?
You've talked about strength in R&R channels. Do you actually see that trending positive in 2023? And then just volumes in new construction and the Western segment, if you could just help us think about how those are trending this year.

Jeffrey T. Jackson

Great question. And yes, the R&R market, we do see signs of it trending positive this year. As we look both, obviously, here in the Southeast, mainly Florida, that's really an incredible driver. Given the impact of Hurricane Ian, we've had heightened awareness.
Also, given the federal -- the state tax credit, you don't have to pay sales tax for repairing their home with R&R product has been another big driver for us. As we look out West, again, the R&R market started off soft for our Anlin business, but that was mainly weather related. Everyone knows that California and the out West suffered a lot of rainfall and snow as well.
So that really slowed up January and into February for that particular brand. But March was double-digit growth. So we've seen that R&R business pick up as the weather has improved. So our overall R&R business, we feel very confident, comfortable with as we look into this year. And then obviously, if we go into the next quarter as well.
In terms of new construction, that has its ups and downs. So we've seen -- it started going down at the end of last year and it kind of worried us somewhat, so we limited our guidance. As we got into the first quarter, we've seen a bump in that for certain brands, especially within the Florida market. Still out West is tough. New construction is definitely more of a challenge. But into the Florida market, which is 70-plus percent of our business, we've seen a good bump in the new construction in the first quarter and into April. Craig, do you have anything you want to add?

Craig Henderson

Yes. No. I mean the specific numbers, R&R for the business was up 17%, stronger in the Southeast versus the West and the new construction business was down 7%, but it was actually up 8% in the Southeast.
And so you really see that the West is impacted by that new construction given the mix of business that we have out there. So things are trending positively.

Jeffrey T. Jackson

And I will say this, given what we've seen in both new construction and R&R, we don't see any change in our, call it, historical seasonality or patterns. So in other words, even though the second quarter did go down in terms of sequential year-over-year comparison, we think our third quarter is going to be historically a little better than our second quarter, which we know based off the patterns we're seeing now.
And of course, fourth quarter because you go into the Thanksgiving and Christmas holidays, tends to trail off a little. So we don't see any change in what you've seen historically from a performance -- sales performance every quarter.

Margaret Eileen Grady

Okay. That was all really helpful. And then on margins, 1Q came in ahead of your initial guide. And I think the 2Q guide kind of implies they hold up at a similar level.
Can you just talk about what's driving the strength even with your guidance for sales down in 2Q? And then how we should think about margins progressing through the year?

Jeffrey T. Jackson

Yes. Great question again. First, I'm incredibly proud of the team across the organization. Everyone is executing incredibly well. Every operational unit is performing at its peak. The proactive cost reduction measures we put in place in Q4 of last year, if you recall, was helpful.
We saw the slowdown coming, so we adjusted cost, our cost base accordingly, and we're leveraging that fixed cost base very well. And we think we're going to continue to do that. If you look into the year, I think I'm pretty comfortable of saying our full year EBITDA margin percent is going to be very close to what you're seeing, call it, 17%, 18%, you can call it 18% for the year.
And that just basically means we're operating incredibly well of fluctuating volumes, especially in the new construction segment. And we're able to do that again because we took cost out in the fourth quarter last year, operations from an efficiency standpoint, from a direct labor standpoint, from an even material standpoint, we've been able to offset the inflationary cost with prior price increases. So everything is just humming along very well executional-wise. Craig, do you have anything?

Craig Henderson

Yes. No. So Q1, the surprise for Q1 was really the strong execution, the operations team across from delivery and their quality metrics. Definitely, we're improving much quicker than we had expected. So that really is what drove the overperformance from a Q1 perspective. And we have no reason to think that, that's going to change into Q2 and Q3.

Operator

And the next question comes from Michael Rehaut with JPMorgan.

Douglas Samuel Wardlaw

Doug Wardlaw on for Mike. How should we think about normalized margins over the long term? Over time, both your gross margins and SG&A have risen, but operating margin has about stayed the same. So do you anticipate any further upside to gross margins or on leverage to SG&A?

Craig Henderson

Yes. And I think the first quarter is a good indicator for where gross margins will be for the full year of 2023. SG&A was a little heavier in Q1, primarily due to our participation in IBS, and so it got a little unevenness within the spend for the full year.
I would expect that, as Jeff noted, that long-term EBITDA margins, our target has always been in the high teens. We're confident that we'll be right around 18% for the full year.

Jeffrey T. Jackson

Yes. I'll just add. If you look at the major drivers of our cost, aluminum is pretty steady. It's actually year-over-year favorable. So we don't see any change in that given the current economic environment we're all operating in.
And then glass, our next huge cost. We have seen some increases in glass but we've been able to offset those increases, the major impact of those increases by either bringing more internal production into glass. You got to remember, we have 2 glass plants and so we can produce a lot of our own impact units and IG units.
So we've insourced some of that to help offset cost as well as the overall demand and makeup between impact and nonimpact. We've seen strong demand in impact, and that always helps from a cost basis as well.

Douglas Samuel Wardlaw

Right. Great. And then I guess, switching gears a little bit. I appreciate the color on the shareholder rights plan. Just in terms of where you guys are now, is there any update on where the strategic investor is in terms of ownership? Have you had any recent discussions with the investor? And just a little bit more insight on that, if possible.

Jeffrey T. Jackson

Yes. Obviously, limited on what I want to say or can say around that. We did put in the poison pill to make sure all shareholders benefit from our performance and what we view as stock that's trading incredibly low.
So no update in terms of ownership. We don't think that's changed. Nothing's triggered in the poison pill in itself. So that ownership percentage, as far as we know, remain the same. And in terms of discussions, I mean, I discussed -- I'm going to give it to (inaudible) statement. I haven't discussed our company with a lot of our investors, okay? And has this one reached out? Yes, I've talked to this particular investor. That's about all color I can comment on it at this time.

Operator

And the next question comes from Joe Ahlersmeyer with Deutsche Bank.

Joseph David Ahlersmeyer

So you're about 6 months into having Martin in your company. I know it's early, but any early learnings or progress on the channel synergies that you guys discussed at the acquisition? Not necessarily looking for a quantification, but just any initial impressions around that opportunity now that your teams are executing against it.

Jeffrey T. Jackson

Yes. I'll give a high level. I don't know if Craig will want to add something. But we went into Martin, we knew it was going to be how do you grow a small business, grassroot business. And the goal was to not only grow them in the new construction channel, which is where it come or they dominantly play, it was also to introduce it to the R&R channel. So we have various sales initiatives out to do that.
We have had success in getting it into a few of our dealers as well as into an actual -- more of a, let's call it, a big box-type play. So we have had some success. Again, it's too early to tell at this point. We laid out internally, it was going to be up to a year before we had meaningful sales synergies in that business.
We do plan on also introducing it into our NewSouth stores in Texas, and we'll be having those grand openings for those NewSouth stores coming up, I think, next month, actually. So we'll have a total of 5 stores in Texas. Those garage doors will be available in the NewSouth stores as well.
So we're executing on various fronts to try to gain those sales synergies and really put out of new construction only and put it into that R&R channel. It's just going to take like we knew when we went into this, it's going to take probably, call it, 12 months or so to make that happen.
The integration is going to plan. We're trying to streamline the production and take out costs related to that streamlining of production while increasing capacity. Craig, do you have anything else you want to add?

Craig Henderson

Yes. No. I mean I think that Martin's first quarter results were really impacted by some weather in the Salt Lake City area, too. So we're actively pursuing those plans and expect to see a lot. You'll hear more news about Martin in the coming quarters.

Joseph David Ahlersmeyer

All right. Then just moving on to the new resi exposure in the Southeast, up 8%, it sounded like in the quarter. Could you just maybe break that down between what was carryover price versus volume? Because I would have assumed new resi window market volumes would have been down significantly in the first quarter.
So impressive that you were up in sort of the high single-digit range. And then maybe just if there's also a contribution to call out from your wins with the builders there or any other sort of market outperformance drivers that we'd expect to sort of be sustainable as you see the rebound that you're calling out in the release here.

Craig Henderson

Sure. No. So from a price volume perspective, from an overall company perspective, unit volumes were down about 5%. The price impact was plus 8% to get to that plus 3% organic.
So if you apply that back down to the new construction plus 8%, most of that is price, but unit volumes are flat and the new construction in the Southeast have a lot of activity, both expanding dealer relationships and moving down into the regional builders. And so a lot of positive activity and a lot of share gain actually down there in that space. So we're optimistic about that business in '23.

Operator

And this concludes the question-and-answer session. I would like to turn the floor to Craig Henderson for any closing comments.

Craig Henderson

Thank you all for joining us, and we appreciate the questions, and we look forward to connecting with you on our next call. Have a great day.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.