Yahoo Finance PGT Innovations, Inc. (NYSE:PGTI) Q3 2023 Earnings Call Transcript
PGT Innovations, Inc. (NYSE:PGTI) Q3 2023 Earnings Call Transcript November 4, 2023
Operator: Good morning, and welcome to PGT Innovation’s Third Quarter 2023 Earnings Call. [Operator Instructions] I would now like to turn the conference over to PGT Innovation’s Senior Vice President of Corporate Development, Brad West. Please go ahead.
Brad West: 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 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 and 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 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’s CEO and President, Jeff Jack.
Jeff Jackson: 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 removes 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 showcased 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 remain 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 4. 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 in 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 5, 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 more flat sequentially. Organic order demand out West declined 4% versus the prior year quarter, an 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 minimal 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 16. 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 homeowner’s desire. We are already seeing order growth from the launch of the Martin Garage Door in our Texas NewSouth markets. We look forward to launching Martin Garage Doors and other NewSouth markets as well as in our East Coast distribution network. For our NewSouth 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 sub-products along with the Martin Garage doors.
During the third quarter, we began production of our latest innovation, Diamond Glass, our laminated ultra-light glass technology featuring Corning architectural technical glass. This innovation provides homeowners with improved clarity, lower weight, 3x 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 the standard offering are available today, and we will be adding Diamond Glass to 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 began 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. Craig?
Craig Henderson: Thank you, Jeff. Turning to Slide 6, 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 of 12% experienced in the second quarter. Gross profit was $162 million in the third quarter an 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 or 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 $0.66 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 2.2x. 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 3-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 on Slide 8. For the fourth quarter, we anticipate revenue to be in the range of $325 million to $350 million.
We anticipate adjusted EBITDA to be within the range of $51 million 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 2x EBITDA range.
And now, I would like to turn the call back over to Jeff.
Jeff Jackson: 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 homebuyers 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 9. PGT Innovations has built a solid foundation to take advantage of these long-term trends, and we’ll 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 and 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 program.
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 macroeconomic environment, we remain focused on disciplined 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?
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