PGT Innovations, Inc.
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good morning, and welcome to PGT Innovation's Fourth Quarter and Full-Year 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note today's event is being recorded. I would now like to turn the conference over to PGT Innovation's Interim Chief Financial Officer, Brad West. Please go ahead, sir.

[Brad West:]

Thank you and good morning. And welcome to PGT Innovation’s fourth quarter and year-end 2020 investor conference call. On the Investors section of the company's website, you will find the earnings press release with our fourth quarter and full-year 2020 results 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.

[Jeff Jackson:]

Thank you, Brad, and good morning everyone, and thank you for joining us on today's call. I'm very proud of what our team at PGT Innovations accomplished in 2020 despite unprecedented challenges caused by the COVID-19 pandemic. Our solid fourth quarter results topped off an extraordinary year for 2020. We grew both organically taking market share, and by key acquisitions. We ended our year with a record sales number of $883 million and adjusted EBITDA of $150 million, driving our net leverage to 2.1. We accomplished all of this, while keeping the safety of our over 3,000 team members at the forefront of our action. I'm humbled by their dedication to continue to deliver quality products and service to our dealer partners. Turning to Slide 4, I will begin with key highlights for the quarter. We achieved strong sales growth, illustrating the strength and demand in the markets we currently serve and our ability to service that demand. We continued our history of innovation in product designs and investing in advertising and marketing initiatives. We did all this while maintaining our focus on protecting the health and safety of our employees and their families, our customers and our communities. Last month, we completed the purchase of a 75% ownership stake in ECO Enterprises, which will help us achieve our strategic objectives as we look forward to continued profitable growth. We financed this transaction in an attractive rate of capital while well within our targeted leverage ratios. We achieved solid fourth quarter and full-year results despite the impact of the pandemic, a strong demand for our products continued through year-end and into 2021.

[Brad West:]

Thank you, Jeff. Turning to Slide 7. For the quarter we reported net sales of $222 million. To break this down further, sales rose 16% versus the prior-year quarter in our Legacy Southeast business unit, primarily consisting of Florida and our Western business unit sales decreased 11% versus the prior-year due to pandemic-related market softness in California, and the sales lift from several large commercial projects in the fourth quarter 2019. However, exiting the quarter, we saw a year-over-year growth in Western's orders and we have seen that growth trend continue into 2021. Looking at fourth quarter sales by channel, in Repair & Remodel, we saw sales growth of 14% year-over-year excluding NewSouth and we expect continued sales growth in the R&R channel in the first half of 2021. In the new construction channel, organic sales for the fourth quarter were 7% higher than the prior-year period. This was largely driven by Legacy Florida sales where Q4 sales were up 16% as compared to the year-ago period, due in part to our improved sales and marketing strategy. Selling, general and administrative expenses for the fourth quarter increased by roughly $16 million compared to the prior-year quarter primarily reflecting the addition of NewSouth SG&A following its acquisition on February 1, 2020. Excluding NewSouth, SG&A improved by 10 basis points versus the prior-year as leverage from sales growth more than offset incremental investments in advertising and marketing.

[Operator:]

Thank you. We'll now begin the question-and-answer session. . Today's first question comes from Phillip Ng with Jefferies. Please go ahead.

[Maggie Grady:]

Hey, guys, good morning. This is Maggie on for Phil.

[Jeff Jackson:]

Hey, Maggie. Good morning.

[Maggie Grady:]

Yes, I just wanted to just start on the full-year guide, I guess backing out ECO and a month or so of NewSouth and getting to kind of that mid high single-digit organic growth. Can you talk about the different assumptions baked in there between the segments and maybe the end-markets?

[Jeff Jackson:]

Sure, yes and that's -- that math makes sense. Really, if you look at Western, which is experiencing strong organic growth, as I'd mentioned in my comment year-to-date up 17% so far. And also, PGT, we're definitely up here at our Local Venice facility in our Florida based brands, our backlog actually has increased to $250 million as of today. So, we're experiencing strong organic growth. Now, that mix is probably more slated to the R&R I mean to the new construction market, which can have some margin impact to a certain degree. But if you look across our brands, we do see that upward -- mid -- upward growth that you suggest if you back out the acquisitions, and we're pretty comfortable with what we've seen so far.

[Maggie Grady:]

Okay. And just to clarify that 17% growth, you mentioned in Western, is that order rates or sales?

[Brad West:]

That's order rate at this point. But like Jeff mentioned, the backlog is strong across all of our portfolio of brands NewSouth included. So, our confidence in that growth comes from very strong demand.

[Maggie Grady:]

Great, great. And then the past few quarters, you talked about some of those bottlenecks extending lead time. And, that's definitely been a topic of discussion across the industry. But how are you thinking about the timing of some of those labor and material bottlenecks, easing and getting back to more normalized lead time?

[Jeff Jackson:]

Well as you look across our organization, we continue to have that ebb and flow from COVID impact our operational efficiencies. We continue to do what's right on the lines doing the social distancing spreading out and that's limited our capacities to a certain degree. But demand, like Brad said, demand is up strong 30% year-over-year so far this year, and that we see that trend kind of continuing. So those COVID is presented challenges here, PGT has also presented challenges at our suppliers. Supplier performance in Q4 was similar to that of Q3, I'm hoping that's going to improve in Q1, we've already seen some glass supply improvements in Q1, they have some way to go, but definitely have made an improvement in their trend. But many of our critical suppliers continue to site labor constraints, surging demand across the industry as the main factor of their slow to delivery are their performance to us. And we've even had some allocated capacities. So what we're doing to kind of combat that, if you will, if you look at like glass, for instance, glass is about 40% of our direct material spend. We brought on ECO and we think the glass capacity, we're adding internally via vertical integration is going to help eliminate some of our needs there. And if you look at, say aluminum, which is about call it 30% of direct materials, we've added some additional extruders, we've onboarded some additional extruders to try to make up any allocation issues and any shortfalls there. So, we're looking across our supply chain to add onboard more support to it. And obviously, we're looking and as we've demonstrated at vertical integration, to try to shore up some of our other needs in that supply chain itself. So we feel that we'll have benefit, definitely as we move into 2021.

[Brad West:]

Yes. And I would add that generally speaking, we're making a lot of adjustments, as we try to navigate this COVID situation. But I would also add to the fact that just generally speaking, we feel the demand is increasing for products in Florida for impact-resistant products, a lot of these things are just general long-term increases in capacity to support what we think will be continued growth, including adding some vinyl manufacturing capacity, because vinyl growth has been very, very strong for us. So, these are all things that we're doing to be able to keep up with the demand.

[Maggie Grady:]

Got it. Thanks, guys and congrats on a good quarter.

[Jeff Jackson:]

Thank you.

[Operator:]

Your next question today comes from Josh Wilson at Raymond James. Please go ahead.

[Josh Wilson:]

First on the topic of the backlog, could you give us a sense of where your lead time stand today versus last quarter and versus what you would call normal?

[Jeff Jackson:]

Yes, that's going to change based-off location. Western is normal lead times, they're two weeks for their corporate builder program. And their custom is anywhere from six to 10, depending on the product ordered. So Western is actually from operational standpoint in line. It's really the lead times have extended here in the Venice location and mainly just because of the sheer demand, we onboarded a lot of new corporate builders. And as I mentioned, we signed up The Villages, which is a significant win for us. And so as a result, we've, Brad alluded to earlier, we're adding -- currently adding vinyl capacity. We've got equipment on order, there's been some extended lead times on that equipment, quite frankly, as you know, the industry in general experiencing that. But we do have plans in place to increase capacity, especially on our vinyl lines. But we're literally going to move our onsite warehouse for those of you who have been at PGT, we store all our finished goods here in the center of the manufacturing facility, we're going to turn that into production space. And you'll see that change happen over the next I'd say call it two quarters, as we extend our warehousing. We'll have a warehouse on the East Coast by April and we'll start shipping finished goods directly from the line into that warehouse and we'll take that warehouse space and we're going to start adding capacity. So those are some of the things we're doing to improve those lead times. But lead times here in Venice, I would say again depending on what bucket you're in and we have corporate builders, we have the R&R buckets in different categories even among those buckets. But in general, our lead times are anywhere from seven to 10 weeks for the corporate builder and the R&R side can be 15, up to 20 depending on what you're looking at in location and product. So we're -- like I said, we're not comfortable with those lead times backlogs is now $250 million. But we're shipping out more product than we ever have out of this facility. And we've got actions in place to continue that ramp-up as we see demand continuing to stay strong.

[Josh Wilson:]

Got it. And there's a variety of crosscurrents in terms of cost per installation and bringing in the acquisitions. So could you give us a sense of what you're assuming for gross margin year-on-year as the year progresses, how much it may be up or down year-on-year in each of the quarters?

[Brad West:]

Yes, so Josh, great point there. We had a price increase of the beginning of the year, roughly 7% to 9%. But because of the lead times that Jeff just mentioned, most of those price increases will not start positively affecting our margins until we get to basically the middle of the second quarter and to the back half of the year. So we're expecting to see some margin pressure in the first quarter as we navigate these changes. Year-over-year, we'll probably be down a good amount, even potentially 200 bps on gross margin. I think we'll make that up in SG&A. So our EBITDA percent will probably be pretty close to in line on the fourth quarter but down year-over-year. The rest of the year, we'll see gross margin improve as the price increase kicks in. And as these changes that Jeff talked about start to kick into place and that's how we get to the guidance for the full-year.

[Jeff Jackson:]

Yes, I’ll just add to that, add to that. We're comfortable in knowing our EBITDA margins are going to improve year-over-year. We've already -- we've got action plans in place, and we can see that coming. What we have is a cost that we had offset by the price increase, quite frankly. And that pricing, like Brad said, starts roughly in June of this year. Wage inflation, wage pressures we put in a substantial increase in wages during the fourth quarter, we're probably going to even have some more of that in the first quarter of this year as we find the labor market and try to add talent, tenured talent. We feel that the operational efficiencies we've achieved in the past is based off a tenured workforce. And we've been able to deliver substantial improvements in gross margin in the past, we will get back to that, we got to get a stabilized workforce for the demand we're seeing. And that puts pressure on wages. But we'll be able to cover those like Brad said in pricing later on in the year.

[Operator:]

Our next question today comes from Keith Hughes with Truist. Please go ahead.

[Keith Hughes:]

Thank you. Just want to talk about the acquisition that you just closed on, but I know they have a commercial initiative, just talk about how big their business set is, and what sort of the plan to get that ramped up?

[Jeff Jackson:]

Yes, Keith the commercial side is not a very big component of ECO at this time. They have a lot of products that are actually approved and developing it currently and then a lot of products that are currently waiting for approval. So the pipeline of potential robust portfolio in the commercial side is there. We've signed a couple of large jobs, quite frankly over the last several weeks. And we do expect good growth in the Commercial -- Multifamily Commercial segment with ECO. But the sales of ECO, we bought in 2020, small, very small and material piece was commercial is mostly residential is a different dealer network. As we said, it's a very incremental dealer network to our current one that that ECO sell to -- sales through. And so the big upside for 2021 in your win is to launch all these products and start landing some good commercial jobs. I think we're in great shape to do.

[Keith Hughes:]

Okay. And just your outlook on mix, for the year is it given how strong demand is at this point, are you seeing a shift, let me ask you this way, you've seen in other businesses, you shift towards the lower end, sort of housing, that's really not your market per se, what is your perspective on mix?

[Jeff Jackson:]

Well, okay, I'm with Brad, he'll give you the detail numbers; I'm going to give you what's happening. What we're seeing here, especially in Florida is we're seeing both markets come to a peak. R&R is up 14% for us; new construction is up 16%. And the Florida market itself isn't up that much. So we're taking share, and which is a great problem, opportunity, I should say to have. So that mix has been skewed more towards new construction at this point. But as we add capacities to our facility here, as I said earlier, those capacities will be more dedicated to our R&R business. So I think you see that that mix shift during 2021 back to more R&R, more even between R&R and new construction. But right now, yes, new construction has been more of the dominant growth and more of the dominant mix as we speak.

[Brad West:]

For the full-year of 2020, new construction was 46% and R&R was 54%. So we've seen as high as 60% R&R and periods in the past, we've seen 50

[Operator:]

And our next question today comes from Michael Rehaut with J.P. Morgan. Please go ahead.

[Maggie Wellborn:]

Hi, this is Maggie on for Mike.

[Brad West:]

Hi, Maggie.

[Maggie Wellborn:]

First question is on NewSouth, obviously, you saw continued, pretty strong order growth in Forkhill. I was wondering if you could give us an idea of how the three new stores that you opened in 2020 are performing versus the existing stores. And also, as you look to 2021, what is the timing on the three additional stores that you're planning on opening?

[Brad West:]

Yes, Maggie, when basically when NewSouth opens up a store, I'd say there's probably roughly a year of getting the marketing in place, getting the sales force in place, and really kind of establishing a presence in that space. So I'll answer the second part of your question first. The timing of the new stores in 2021 are basically probably one in the second quarter, one in the third quarter, one in the fourth something like that. I would not expect to see any meaningful increase in the sales, for those stores this year, just because they will be in their first year. For the stores that opened last year, we had some good results as we got towards the back half of the year, as you would expect. Some of the stores were affected a little bit by obviously COVID had it's -- has it's impact on new stores ability to open robustly but our store in Pensacola started seeing some nice demand towards the end of the year, our store in Charleston, which was the first opened saw some really nice demand in the end of the year. And then Houston was the last store to open-up is starting to see some nice momentum here in the first quarter of this year. So I guess I would argue that, the NewSouth growth that we saw in 2020 was obviously mostly from the Legacy stores. In the Florida stores, we saw very strong meaningful growth across the original stores. And we started seeing some momentum in the new stores in 2020. And I think we'll see even more in 2021 from those stores.

[Maggie Wellborn:]

Okay, thank you. And second, another question on ECO. As you think about its growth, could you talk about the potential to expand ECO through the rest of your Southeastern footprint, maybe outside of just the Southern Florida market where it's stronger right now and the other end markets kind of throughout the rest of your footprint?

[Jeff Jackson:]

Yes, I mean, we look at ECO in several different ways. One, the commercial side of the business. We've got to develop that more obviously, I mentioned the various products that that are going to be coming out, some already out, some in the pipeline. And we've got to develop relationships both from install as well. So that whole piece can be leveraged outside of Southern Florida. We plan on leveraging the commercial side of the business over the entire state. And we're currently actually bidding projects or in the process of bidding projects in Northern Florida for instance. On the residential side, that's going to probably remain at Southern Florida, South Florida residential window, just because of the dealer basis sold through. And there's a lot of growth potential within that dealer base in the population that that serves. And then on the glass side, I mean that's going to be incredible for us in terms of shoring up supply there on the impact market and on the IG insulating glass side as well, so we kind of view ECO on three different buckets. Probably to your question, the most leverageable out, statewide would definitely be the commercial. And we think ultimately, we can take the commercial outside of the State of Florida.

[Operator:]

. Today's next question comes from Ken Zener with KeyBanc. Please go ahead.

[Ken Zener:]

A lot of stuff going on. What strikes me just is ECO Glass and locking glass capacity, vertical integration, it just brings me back a few years and glass was a big part of your strategy in terms of how you communicated around gross margin, you got the costs inflation, you got the glass cost down, your gross margin would go up? Is this so small I shouldn't worry about it in terms of the ECO Glass; is that the kind of a side comment? Or is this really between the two large glass suppliers, is it's really what you see as, as needed given where that high fixed cost business has supply today?

[Jeff Jackson:]

Ken, great question, I'd say maybe a little bit of both. If you look at the actual adding of this capacity, it's going to be significant for us, especially on the impact side of the equation. We were severely strained with impact-glass. I don't want to underestimate that for the nine months in 2020. I mean, it was tough. And so to have that ability in house to do that yourself, if needed is an incredible asset. Now, if you recall the reason we sold some of our glass equipment back in 2000 --

[Brad West:]

2017.

[Jeff Jackson:]

2017, we did that because we needed production capacity, we needed production labor, okay, we're still running glass factory here in Venice, is in Miami, and Miami is just a different labor market. So they're, in their production labor, because their glass labor is not as big of an issue. So we view it both geographically strategic as well as long-term benefit to margins.

[Ken Zener:]

Fascinating, like squeezing a balloon here. Can you maybe talk about, I mean to the extent you feel comfortable, like what type of capacity within the larger perspective, this can help you framing that. There really was an interesting dialogue or narrative in the past so that you're jumping back in, given a wider production footprint where there's more labor capacity. I mean, it all makes sense. But is it like 10%, 20% or -- you don't need to get an answer to that I mean give us a sense of the material input costs or capacity?

[Jeff Jackson:]

It's probably in terms of added capacity it's probably up to -- up our capacity by 50% where we will be able to basically service CGI out of that facility, the majority of CGI, CGIC are storefront operations, as well as ECO, now ECO is growing. We incorporate growth; we'll next quarter we're going to give more color around ECO. But I can assure you we're seeing similar trends that we've quoted here for PGT. So ECO is growing. So and this is not what we're in business to do, but they also sell glass to other parties. So that's the piece of it as well --

[Ken Zener:]

Your margins will come out of that.

[Jeff Jackson:]

We've had to utilize.

[Ken Zener:]

Great. Extruder, my memory was, there -- this also gets and I apologize to kind of go into these bigger pictures amid all the good execution you're doing but it's I think it's kind of tactic strategic in the sense that you're a much larger company now. Extruding, you guys when you redid your whole vinyl, you've switched over to I believe to a solo supplier on that extrusion that you're buying on your now unique profiles. I heard the word extrusion a couple of times. Could you expand on that? It sounds like when you were saying lines, I wasn't sure. You haven't bought extruders. Have you and what are we seeing in terms of the extrusion profiles? Is there any issue, capacity pricing issues that you'd like to talk to?

[Jeff Jackson:]

No, I'll speak in general, Brad will comment. We haven't bought any vertically integrated in the extrusion. There's basically two types, right aluminum and vinyl. It's where we get our profile. So what we've done because aluminum got squeezed during this whole COVID thing, we've onboarded some more suppliers. It's just as simple as that. We've increased our base of supply options, which is a good thing, okay. Vinyl, we don't use this one. We've never just used one. Now we do have a majority relationship with a particular vinyl extruder. But Western has a vinyl extruder that they use. NewSouth had one -- has one, we have one, we mean the PGT Legacy brands has one. So we have multiple options on the vinyl side as well.

[Brad West:]

Yes, just to add, Ken. When I said earlier that we're adding additional vinyl manufacturing capacity, I was referring to capacity to make vinyl windows not extruded capacity.

[Ken Zener:]

Yes, would have been like, interesting. West, out West, the initiatives you've taken to get into R&R, which is a huge untapped market for you out there. Not untapped but large upside. Has in 2020 you faced right production Windows which were not stocked, but highly efficient versus more custom. Could you talk about the initiatives that given COVID to grow that business? I know you guys talked about opening some storefronts, as well as where we're on the production transformation of Phoenix to handle production windows versus more customized R&R stuff? Thank you very much.

[Jeff Jackson:]

Well, I'll speak in general about some growth initiatives and I'll let Brad comment on income, return around margins and whatnot, which has been incredible. In terms of growing the business, we're trying to expand the R&R presence within our Western brand. And historically, Western has been a new construction platform, having multiple national contracts with Toll Brothers and in the like. We're going to expand on that national contract by adding a full product offering as a means to have the whole house package. We've also opened up Sky Walls, which is a retail store concept targeted to the R&R market, again targeting to expand an R&R market. We opened up our first store in Anaheim, we opened up our second store in San Diego, and as California has these restrictions come onboard again the business, those stores are starting to experiencing some good traction. So those are a couple of initiatives that we have going on from a growth sales standpoint. You want to comment on turnaround?

[Brad West:]

Yes. So Western really started making some major improvements in their focus and basically on their manufacturing, labor and distribution, and basically how they got the product to their customers and all of that. And what we really saw is over the course of the year, they started making quite a bit of large improvements on their gross margins and EBITDA flow and increasing the fourth quarter alone, the Western business was up 400 Bps in direct labor and distribution costs compared to where they were fourth quarter of last year. So the Western team did a fantastic job, and has made obviously pretty material impact on PGTI as well by doing that. So we're excited about what they're able to do going forward. And obviously it means they now have the base in which to grow as they get more demand and things start to recover and return out West, they're in a great position to handle that growth.

[Operator:]

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

[Brad West:]

Thanks, everyone for joining us on our call today and we look forward to talking to you next quarter. Take care.

[Operator:]

Thank you, sir. We thank you all for attending today's presentation. You may now disconnect your lines. Have a wonderful day.