PGT Innovations, Inc.
Q1 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Good morning, and welcome to the PGT Innovations First Quarter and Full Year 2021 Earnings Conference Call. . I'd now like to turn the conference over to PGT Innovations' Interim Chief Financial Officer, Brad West. Please go ahead.

[Bradley West:]

Thank you, operator. Good morning, everyone, and welcome to the PGT Innovations First Quarter 2021 Investor Conference Call. On the Investors 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 a 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 related to forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2021 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 is available in the company's most recent Form 10-K.

[Jeffrey Jackson:]

Thank you, Brad, and good morning, everyone, and thank you for joining us on today's call. 2020 was a year full of challenges and opportunities. Our core markets continued to show growth in both the repair and remodeling as well as the new construction markets. This growth has continued and, in certain aspects, accelerated in 2021. Our employees and our dealers and distributors have worked hard to service this increase in demand in an environment where, while we are all encouraged by the increased availability of vaccines, we are not yet back to normal. I continue to be extremely proud of our 3,500-plus team members for their dedication in servicing our customers over the past 15 months during these unique circumstances. Turning to Slide 4. We start off the year by posting record sales for the quarter, with 23% growth versus the first quarter of last year. We saw strong demand in both the Southeast and Western segments. Our organic growth came in at 15%. Additionally, February 3 marked 1 year since completing the acquisition of NewSouth Window Solutions. The sales contribution for the quarter for NewSouth was $34 million, driven by strong sales growth in the direct-to-consumer Florida residential R&R market and our expansion efforts outside of Florida. Integration of NewSouth into our operations has added to our record level of production capacity in a tight labor market, and we expect continued growth from NewSouth's existing retail locations and additional store expansions outside the state of Florida in 2021. Since the acquisition, we've increased capacity at NewSouth locations by 125% and we have opened 3 new showrooms. We plan to open 3 more this year, growing the footprint outside of Florida and increasing our investment in lead generation tools. As previously announced on February 1, we acquired a 75% ownership stake in Eco Enterprises, which contributed $16 million of sales in the quarter. We are excited about Eco as it accomplishes a number of strategic objectives, including providing an additional reliable source of glass and glass manufacturing capacity, diversifying our product lines into the high-growth commercial market and creating new relationships with additional residential dealers.

[Bradley West:]

Thank you, Jeff. Turning to Slide 7. We reported net sales of $271 million for the quarter, a 23% increase over the prior year quarter, which included a 53rd week. This includes 15% organic growth, in part due to substantial growth within our NewSouth business, which continues to increase orders and installations. From a channel perspective, our repair and remodel sales benefited from our last 2 acquisitions, both of which focus mainly on Florida's R&R market. In the first quarter, our sales breakdown finished at 53% R&R and 47% new construction. Organic R&R sales grew 19% during the quarter and organic new construction sales grew 10% from the strength of our legacy brands. Gross profit for the quarter was $94 million, a 16% increase, reflecting increased sales, partially offset by higher labor and materials cost. Gross margin finished at 34.7% for the quarter, a 220 basis point decrease from the prior year. This was a result of direct labor, which increased approximately 150 basis points. This was mainly due to increased wages and overtime within our operations as we continue to compete for labor in a tight market, while serving an increased demand. In our Western markets, we did continue to see labor improvement, which partially offset the impact. Second, our results for the quarter included $2.7 million of costs related to the exit of our commercial business acquired in the NewSouth acquisition. Adjusting for these charges, our gross margin would have been 35.7%. Higher input costs for wages and increased cost of materials, such as aluminum, where the current price is up 52% compared to the average cash price we saw in Q1 of 2020, are expected to continue for the remainder of the year. However, through improvements discussed already and pricing actions already taken, we expect gross margins to improve materially in the back half of 2021. Margins in the second quarter, however, will only see modest improvement due to the timing of the realization of the price increases. Selling, general and administrative expenses for the first quarter increased by $16 million compared to the prior year quarter, primarily reflecting higher selling costs as a result of increased sales, increased amortization expense related to our 2 most recent acquisitions and a $1.5 million charge related to the exit of the commercial business acquired in the NewSouth acquisition. Additionally, we made some marketing-related investments in our 3 NewSouth locations that have opened over the past 12 months. Our adjusted EBITDA was $42 million, a 7% increase versus the $39 million in the prior year quarter.

[Jeffrey Jackson:]

Thanks, Brad. I'll conclude with a summary of why I'm excited about our future and why we believe PGT Innovations creates long-term value for our shareholders. We are a national leader with strong brands, which have been further boosted by our recent acquisitions. Our products are in growing categories and in fast-growing regions in the U.S. We have a long history of providing our customers with innovative products to meet their challenging needs, and we intend to maintain our industry leadership through ongoing R&D, hiring and retaining the best talent and making the right acquisitions. Continuous improvement of our operations is how, over time, we can and have driven long-term margin expansion. Although recent challenges have surfaced as we emerged from our historic pandemic, while seeing impressive growth demands in both the new construction and repair and remodeling markets, we have shown an ability to make the improvements necessary to gain the required capacity. Lastly, we have a comprehensive strategy that we strive to execute to create long-term value for our shareholders and our customers. At this time, let me begin the Q&A. Operator?

[Operator:]

. And our first question will come from Phil Ng with Jefferies.

[Margaret Grady:]

It's Maggie on for Phil. I know the past few quarters, you've talked about some of those internal capacity constraints and supplier bottlenecks. And Jeff, it was helpful to hear you talk through the steps you're taking to improve there. But can you kind of talk about what inning you're in to bring that capacity online -- more in line with underlying demand? And what are the key opportunities you're looking at to increase throughput going forward?

[Jeffrey Jackson:]

Yes. That's a great question. Yes, I'm more of a football guy. So I'm going to say we just finished the second quarter and we're in the half time. As we -- again, order rates are incredibly strong, and our teams are literally jumping through hoops to meet demand and increase capacity. I did lay out some initiatives we've embarked on. Most recently, the expansion of our warehousing here in Venice to the East Coast when we entered into the lease on the East Coast warehouse. We're stocking that and hiring folks there and actually shipping out of that location as we speak. I think the expansion down into Fort Myers, where not only will we be able to tap an additional labor force, which labor has probably been the #1 constraint, not equipment but labor, we'll be able to attack -- attract additional labor in Fort Myers. We're going to hire probably 240, 250 people in Fort Myers, and we're going to be eventually producing all our door panels and frames in that location. And that will start to trickle in, in June. We'll actually start producing frames in June with panels coming later on. So those are some examples of capacities we've added. Trucking, to be honest with you, we purchased -- thank goodness, we purchased 10 trucks at the beginning of the year. We actually leased another 18. And we currently, just based off demand, have 50 rented. And we have one of the largest trucking fleets in the States. So trucks and trailers have been a constraint that we're attacking heavily to make sure we have that as well as the drivers. Obviously, CDL drivers are premium now. In terms of actually product -- manufacturing line capacity, it's -- our main constraint is in vinyl at this point. Our aluminum lines are good. We are expanding. That's mainly labor-related. Vinyl, we're actually adding equipment. So if you look at our Q2 here, we have ordered another glazing line. That will be our third vinyl glazing line. It will come in -- and we ordered it at the beginning of the year. It will come in, in July. So we'll have it up and running in July. I do expect to add anywhere from 200 to 250 vinyl units a day starting, say, in August. And then after that gets up and running, we're going to actually add some more equipment, Josephs, welders, that sort of thing. And those -- that equipment has already been ordered and is going to be coming in, in September time frame. So if you look end of August, beginning of September, so it will impact the fourth quarter. I think anywhere from 2 -- again, 200 to 250 more units a day. So relatively quickly over the next few months, we're going to be adding almost anywhere from 400 to 500 units of vinyl windows a day in additional capacity. A lot of this was planned, by the way, and a lot of the equipment was just sheerly delayed. We did get some equipment tied up in ports for up to 4 to 6 weeks. We would have already had, for instance, that glazing line up and running. So a lot of it is delayed, but we feel very good about the timing of that equipment arrival now. And that, coupled with all the initiatives we've had to bring on new folks into the organization, the job fairs, re-brand, both in Miami, in Hialeah, here in Venice, at Tampa, at Fort Myers and in Phoenix, we're starting to bring on a lot more labor at this point. We probably hired over 100 people the last week alone. So things are starting to improve. And as they do, we add that capacity, we think our -- obviously, our performance will improve with it.

[Margaret Grady:]

Definitely. Yes, that was really helpful. And then secondly, on gross margins, the 1Q pressure was pretty much in line with what we were expecting based on inflation headwinds, but you've got price increase coming out later this quarter. So how should we think about that flowing through? And when do you expect to be fully caught up from a price cost perspective? And what kind of incremental inflation does that assume for the rest of 2021?

[Jeffrey Jackson:]

Yes. I'll just speak in generalities and I'll get -- Brad can cover the actual detail of it. But we look at pricing just to pass along our costs. We're comfortable with the margins we make in the market. We think our customers and dealer base are comfortable with those margins as well. So the cost inputs, the headwinds we've talked about that impacted our Q1 that I mentioned is also going to impact our Q2, at least the first couple of months. We shouldn't start seeing that price impact from a positive standpoint until the last month of this quarter. It's surely because of this demand we continue to see. And that backlog, as I mentioned, we closed out Q1 at a $288 million backlog. That's excluding Eco, our new acquisition. If you include Eco, today, our backlog is $343 million. So again, orders are still coming, even though the pricing is now in effect. So some of that backlog will actually have the improved pricing in it. But well over, call it, half probably doesn't. So it's still got to work through that piece of the backlog, and that's what you'll see happen in May -- the rest of May here. And then in June, we're going to start to get into the piece of the backlog that has some embedded pricing in it. And then obviously, as we go throughout the year, the second half is going to be significantly impacted in a positive way by the pricing actions. But Brad, do you want to speak in detail?

[Bradley West:]

Yes. I would say that we have a modest improvement in gross margin in the second quarter relative to the first, maybe call it something like 50 bps. Obviously, with higher sales coming through, you also get some SG&A improvement as a percent, but we'll just stick to gross margin. And then in the back half of the year, it will probably start -- you'll get another 150 to 200. I would say that I believe, based upon just - if I model out the pricing and some of the inflationary challenges, I think Q4, that scenario will be better than Q3 by a little bit just because some of the pricing actions were taking a little bit later in the first quarter than the beginning of the first quarter. So I actually think Q4 from a price and net cost perspective will be a little bit better than even Q3. But the big jump will happen as we go from Q2 into Q3 and the pricing kicks in that Jeff just referred to.

[Operator:]

. Our next question will come from Ken Zener with KeyBanc.

[Kenneth Zener:]

Lots of demand. It's kind of whack a mole here on cost, labor capacity coming online. But it feels like despite all the new platforms you've added to the business, West, NewSouth, et cetera, you have a lot better handle on it than I think the industry saw 12 or 13 as demand was so painful to bring on new labor pod. So it's like -- obviously -- and that's a big deal, obviously. I think that's a big credit for how your operations have improved a lot. I wonder if you could maybe drill -- oh yes, all right, I got a hard question for you. Don't worry. Let's talk glass , right? You bought some capacity, you kicked out some capacity a couple of years ago. How is it different than when you were getting 15% glass increases? Just talking about that part of the business at first because that affects you all over the country, obviously. How is glass doing for the manufacturers? Just talk about that piece first, if you would.

[Jeffrey Jackson:]

Yes. Glass is, I would say, is not an issue for us at the moment. Adding that capacity has definitely helped us stay ahead of the game. The only thing, and it's going to affect a lot of folks is interlayer capacity. There have been some interlayer suppliers that have issued letters that they're going to cut capacity or cut allocations. Our main glass supplier outside of our own self, obviously, is Cardinal. I know they received a letter from Eastman who said they're going to basically reduce their capacity in laminating material to -- in the interlayer. So that kind of constraint....

[Kenneth Zener:]

We're talking -- Jeff, when you say interlayer, that's the bonding between the glass on your -- is that what you're referring to?

[Jeffrey Jackson:]

Yes, that's what makes the window intact. Basically, it's that bind. There's an interlayer between the two pieces of paint that makes it intact. So that, from an industry material standpoint, there's some capacity concerns out there. Will it impact us? I hope not. Our supply chain team has done an incredible job. We actually bought forward rolls of interlayer. Another reason, by the way, our working capital is up. But we bought forward over 100 rolls of interlayer just in case something like that happened. So right now, for instance, we think mitigated that. But internally, our glass plants are running great. We could actually produce more of our own glass if we had the labor. Right now, we're using that labor when we can to make windows. So Cardinal is obviously still one of our major suppliers. They're doing well now. Quite frankly, they struggled last year. Their performance has improved dramatically into this year. And so glass is not an issue for PGT at this point.

[Kenneth Zener:]

And then you talked about the extrusion side coming in. I mean how is that doing for -- it seems to me like the industry is so tight. Demand is high. Supplies are tight. So you're getting price, your supplier is getting price, everybody is getting priced quickly. So 2Q will be a little light, obviously, when I talked about the 3Q from 2Q. But does pricing feel quite strong? And what does that tell you about as you absorb -- pass prices on in the second half of this year? And what does that mean about FY '22? I mean because it seems like demand is going to remain unseasonably strong into 4Q. And that -- if any of your input costs roll over, it seems like there could be some real net pricing gains next year that capacity comes on, some people like yourselves could be in a very good net pricing environment. Is that something that you see potentially happening? Or does aluminum, glass, extrusion, all these things make you more cautious about that optimism?

[Jeffrey Jackson:]

Right. Ken, that's a very good insight, first of all. So there is still aluminum pricing pressures out there. Aluminum price is up, and that's obviously industry-wide. So we're going to have to tackle that into 2022. Now do I think our pricing actions we've taken will help that? Most definitely. Most definitely. And I think our pricing actions will actually benefit us eventually once they take hold. So -- but as you look into 2022 -- I do think the market is going to continue to grow. I think this year is going to remain strong. We've raised our guidance. We hope it's conservative, by the way. We do like to beat. So we've raised our guidance. And I think 2022, you're going to see a continued strength in certain markets. And Ken, it gets back to our strategic platform is to be in destination states. We want to be where people want to go to. Florida is hot. I mean I'll tell you, Arizona is growing. Texas is growing. Those are 3 of our major markets. California has reopened. And while they may have people moving out, it's like the fifth largest economy in the world. California is an incredible place to be in, and we keep expanding there and keep making headways there. So I think we're in key areas of the U.S. that will continue to see growth when the other areas actually start to plateau and level out. So I think that will benefit us along with the pricing actions we've taken. Brad, do you have anything you want to add to that?

[Bradley West:]

No. I think that covered it. And as we look forward for the back half of 2021, as we were thinking about these inflationary pressures and how it look, all that was taken into consideration. So I think Jeff covered it well.

[Kenneth Zener:]

Right. And then do you think your -- the thoughts around the back half, all the things, Brad, you just took into consideration, what does that say about -- I mean does that seem like a stable area where you'd be exiting the year into '22, all else equal? Or is there some initiatives that we might not necessarily know about? Because I mean your access to labor is a lot higher. Your margins are going to be lot higher in the back half, and demand certainly seems to be there. It seems like a good lift off point for '22.

[Jeffrey Jackson:]

Yes. I think it will be, Ken. There are obviously actions we're always doing to help drive sales and to expand our footprint profitably. And as we enter the back half of the year, there's various initiatives we've got going on here locally with production expansion capacity, CapEx investments. In our Western business unit, quite frankly, we're going to expand there as well. We've got some things in the pipe there that's going to be interesting for the investors, the market in the back half of the year that will set us up very nice for 2022. So -- but I do think we have a good platform to go off of, yes.

[Operator:]

And this will conclude the question-and-answer session. I'd like to turn the conference back over to Brad for any closing remarks.

[Bradley West:]

Thanks for joining us on today's call. And certainly, if there are further questions, don't hesitate to give me a call and we can follow up after this call. Thank you.

[Operator:]

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