Janus International Group, Inc. (NYSE:JBI) Q3 2023 Earnings Call Transcript

Janus International Group, Inc. (NYSE:JBI) Q3 2023 Earnings Call Transcript November 6, 2023

Janus International Group, Inc. beats earnings expectations. Reported EPS is $0.27, expectations were $0.24.

Operator: Hello, and welcome to the Janus International Third Quarter 2023 Earnings Conference Call. Currently, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to your host, Mr. John Rohlwing, Vice President of Investor Relations, FP&A and M&A. Thank you. You may begin, Mr. Rohlwing.

John Rohlwing: Thank you, operator, and thank you all for joining our third quarter 2023 earnings conference call. We hope that you have seen our earnings release issued this morning. Please note that we have also posted a presentation in support of this call, which can be found in the Investors section of our website at janusintl.com. As a reminder, today’s conference call may include forward-looking statements regarding the company’s future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. It is important to note that the company’s actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company’s latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully.

In addition, we will be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margins, adjusted net income and adjusted EPS. Please see our earnings release and filings for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures. I’m joined today by our Chief Executive Officer, Ramey Jackson, who will provide an overview of the business and give an operations update, and our Chief Financial Officer, Anselm Wong, who will continue with a discussion of our financial results and outlook, before we open up the call for your questions. At this point, I will turn the call over to Ramey.

Ramey Jackson: Thank you, John. Good morning, everyone. Our record financial results in the third quarter built on the foundation established since we became a public company almost two-and-a-half years ago. We continue to deliver solid top-line growth, profitability and rapid deleveraging while generating strong cash flows that position us to execute our disciplined capital allocation strategy. Our results through the first nine months position us well to deliver another year of outstanding performance across the platform. The fundamentals that drive our customers and our industry remain resilient against a backdrop of economic and geopolitical uncertainty. Self-storage occupancy rates remain above mid-cycle levels, driving demand for new capacity from facility owners.

Our backlog and visibility into our end markets gives us confidence to once again raise our outlook for the year and positions us to achieve our longer-term goals for revenue growth and margins. I would like to thank all of our employees, without whom our success wouldn’t be possible. Now turning to some specific thoughts around the quarter. Janus’ record third quarter operational and financial results included solid year-over-year gains in revenues, significant margin improvement, further deleveraging and strong cash generation. The fundamentals inherent throughout the industry that fuel investment decisions by our customers to add much needed capacity are happening both through new construction as well as conversions and expansions. Over the last two quarters, the trend has favored new construction.

Prior to that, R3 was the greater benefactor of customer spending, driven in part by the availability of unused brick and motor retail space or repurposing. Demand drivers for our business remain strong, and our comprehensive platform of self-storage solutions means that while customer buying patterns may ebb and flow between new construction and R3, we are there for our customers with comparable economics for both project types. Our Nokē Smart Entry system had another strong order as we continue to ramp up our capabilities and expand our market penetration. We ended third quarter of approximately 255,000 total installed units, representing approximately 11% growth from the second quarter and over 50% growth from the end of 2022. During the quarter, we announced an anticipated expansion of a major REITS installed base for our Nokē Screen digital access to over 400 additional facilities.

Nokē Screen is the latest in the line of award-winning smart security products in the Nokē Smart Entry product line and boasts a number of exciting design features, like a customizable full-graphic display screen, WiFi and Bluetooth connectivity, and all-in-one design that combines the controller and the keypad in a single device. To date, they have partnered with us to bring Nokē Smart technology and digital access to approximately 700 facilities. And subsequent to quarter-end, we announced the complete back-end migration of Nokē to Amazon Web Services, allowing us to leverage AWS, industrial IoT, AI and security capabilities. By running on AWS, we have increased Nokē’s availability and global reach, enabling real-time over-the-air device management and improve the owner-operator and end user experience.

Our suite of remote access technologies headlined by Nokē represent the best our industry has to offer, and we continue to be excited about both the accelerated adoption and its use in the future it has in store. Now shifting to financial highlights for the quarter. We delivered consolidated revenue of $280.1 million, an increase of approximately 6.7% as compared to the same period last year, that’s entirely organic. New construction was the driver for the gains, up 40.3%, which more than offset R3 and commercial and other being 1.9% and 11.1% lower, respectively. Our adjusted EBITDA of $76.2 million came in approximately 20.4% higher than Q3 2022, which represents an adjusted EBITDA margin of 27.2%, an improvement of 310 basis points year-over-year.

During the quarter, commercial actions, favorable mix and productivity initiatives more than offset higher costs we continue to experience in many parts of our business, particularly labor and logistics. Our company continues to be a positive cash flow generator. Over the past 12 months through the end of the third quarter, our free cash flow conversion of adjusted net income was 117%. We expect cash conversion to remain solid over time, putting us in a position to focus on maintaining a secure balance sheet while also preserving the firepower to preserve value, enhancing M&A opportunities as we identify them. With regard to the balance sheet, I’m extremely proud that we were able to reduce our net leverage this quarter by another 30 basis points, putting us at 1.8 times net debt to trailing 12-month adjusted EBITDA at quarter-end, now below our target range of 2 times to 3 times.

This represents deleveraging of 1.5 turns in just the last 12 months, a testament to our continued execution and sound business fundamentals. Before I hand it over to Anselm, I’d like to update you once again about our progress towards our longer-term objectives laid out in our Q4 2022 earnings call. The top-line growth for the first nine months of the year puts 2023 on track to exceed our long-term average target range of 4% to 6% organic revenue growth. Our EBITDA margins for the third quarter and the nine months of 2023 positions us well towards achieving results well within our long-term average target range of 25% to 27%. Our strong conversion of adjusted net income to free cash flow in the first nine months of 2023 sets us up well against our long-term average target conversion range of 75% to 100%.

As I mentioned earlier, our net leverage is already below our target range. Our end markets remain strong and resilient, and we continue to look at ways to leverage our leadership position to capture additional share and create long-term value for all stakeholders. With that, I’ll turn the call over to Anselm for an overview of the financials and our updated outlook for the full year.

Anselm Wong: Thanks, Ramey, and good morning, everyone. In the third quarter, revenue of $280.1 million was up 6.7% compared to the prior-year quarter. New construction led the way, while R3 and commercial and other were lower versus the prior-year quarter. We continue to show a good mix of diversity and stability from our offerings as evidenced by our consistent revenue growth, led by new construction in recent quarters. While we may see significant outperformance in a given segment during the quarter based on timing of projects, revenues continue to be well-balanced across our free sales channels over a 24-month period. Now, diving deeper into the sales channels. Our overall strength in the quarter came primarily from new construction, which was up 40.3% year-over-year.

The improvement was a result of the combined impact of commercial actions taken in 2021 and early 2022 to offset inflationary pressures on many of our key inputs as well as volume growth. Our R3 segment was 1.9% lower in the quarter, primarily due to the timing of projects as well as a strong third quarter of 2022. The self-storage segments of the business continue to produce roughly two-thirds of our revenues, as they have consistently for the past few years. Fluctuations between construction and R3 are expected throughout the year based on the timing of projects. Year-to-date, R3 is up 9.6%. In commercial and other, we were up against difficult comparison to a particularly strong 2022 quarter, which resulted in a year-over-year decline of 11.1%.

As markets continue to normalize, we have seen shifts in demand for certain product lines, which were at an all-time high during the last couple of years. Our products are used in a broad range of end markets, including hotels, warehouses, pharmacies, fuels and many others. We see continued potential for increased share gains in commercial and other as well as margin improvement over time. Adjusted EBITDA of $76.2 million was up 20.4% compared to the year-ago quarter. The combination of solid demand, commercial actions and cost savings initiatives continues to help offset increases in labor as we work to scale the business for continued growth, including additional operational investments in our Nokē Smart Entry systems. Adjusted EBITDA margin for the quarter was 27.2%, an increase of roughly 310 basis points from the year-ago quarter.

Higher revenues and favorable mix shift more than offset higher costs for labor as well as SG&A. As a reminder, our margin profile for new construction and R3 is roughly similar, while our commercial and other sales channel is typically somewhat lower. Due to the relative outperformance in new construction relative to R3 and commercial in the quarter, the resulting favorable mix shift helped drive over our higher margin. In addition, during the quarter, we saw a particularly strong contribution from some of our highest-margin work in new construction and R3 due to the nature and timing of certain projects. We expect the revenue mix to revert to more normalized levels over time, consistent with our longer-term margin outlook. For the third quarter of 2023, we produced adjusted net income of $39 million, which was up 20.3% from third quarter 2022, adjusted diluted earnings per share of $0.27 compared to $0.22 in the year-ago quarter.

We had another solid quarter of cash flow generation. Third quarter cash from operating activities was approximately $49.9 million, and free cash flow was approximately $46 million. This adds to our multiyear trend of strong conversion of adjusted net income to free cash flow, representing a trailing 12-months free cash flow conversion of 117% of adjusted net income. The strong conversion of operating cash flow to free cash flow also highlights the CapEx-light nature of our businesses. We have begun a period of incremental growth CapEx in Europe and on the West Coast to expand production capacity as we add to our suite of offerings, which is expected to continue over the next year. Year-to-date results and outlook for the remainder of the year position us to deliver on our target of 75% to 100% free cash flow conversion for the full year.

We continue to focus on initiatives to improve working capital and strengthen our metrics. From a balance sheet perspective, during the third quarter, we paid down $35 million of debt using cash on hand and refinanced our first-lien term loan facility, supported by a syndicate of leading national banks. We have a floating rate that has not changed from the previous facility despite deterioration in the credit market, a clear indication of the strength in our business model. We ended the quarter with $625 million of total debt, $109.7 million of cash and equivalents, and a net leverage of 1.8 times net debt to adjusted trailing 12-months EBITDA, down from 3.3 times at the end of 2022 and 2.1 times at the end of second quarter of this year. Now, turning to our 2023 outlook.

Based on our third quarter and year-to-date results, continued strong backlog and current visibility of end markets, we are pleased to once again raise our full-year 2023 outlook for revenue and adjusted EBITDA. We now expect revenue to be in the range of $1.08 billion to $1.09 billion, a 6.4% increase at the midpoint compared to our full-year 2022 results, driven primarily by a combination of commercial actions and volume-related organic growth. We expect growth in 2023 to reflect the strong underlying fundamentals we see across all three sales channels. We are raising our expectations for adjusted EBITDA to be in the range of $280 million to $290 million, representing a 25.6% increase at the midpoint versus our full-year 2022 results. Overall, we expect our full-year results to reflect a solid year of margin improvement in our business as we pursue our long-term objectives to deliver average adjusted EBITDA margin in the range of 25% to 27%.

Into 2024, we expect to continue growing and delivering attractive margins and cash flow, consistent with our long-term framework. Thank you. I will now turn the call back to Ramey for closing remarks.

Ramey Jackson: Great. Thank you again, Anselm. Our results for the quarter exceeded our expectations. Looking at the balance of the year, our backlog remains strong and we expect the fundamentals of our end markets and our best-in-class suite of offerings to continue to deliver robust revenues, improved EBITDA margins and strong cash flow generation. I’d like to once again thank the entire Janus team for their unwavering focus and relentless execution as we continue to build long-term value for all of our stakeholders. Thank you again for joining us. Operator, we can now open up the lines for Q&A, please.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Your first question comes from Brad Hewitt with Wolfe Research. Please go ahead.

Brad Hewitt: Hi. Thanks. Good morning, everyone.

Ramey Jackson: Good morning, Brad.

Brad Hewitt: So, I’m curious if you could talk about how backlog is trending and kind of what your pipeline looks like for 2024? And maybe any thoughts on the framework for revenue growth next year relative to your 4% to 6% long-term target?

Ramey Jackson: Yeah, I’ll speak to the backlog and pipeline. We don’t give the detail, as you know, but it remains strong, both new construction and R3, and that speaks to the backlog and pipeline. So, nothing has changed over the quarter, but strength in both.

Anselm Wong: Yeah. And Brad, we haven’t provided 2024 guidance yet at this point in time. I think the best to look at is our learn to framework at this point is kind of how we’re seeing it right now.

Brad Hewitt: Okay. That’s helpful. And then, in terms of the M&A landscape, just curious whether sellers have kind of lowered their asking prices enough that you’re looking to start being more active in deploying capital through acquisitions near term? And also, how should we think about your willingness to kind of lever up above the 2 times to 3 times target range if the right strategic deal comes along?

Ramey Jackson: Yeah. So, I’ll speak to the M&A. Anselm, you can cover the leverage part. But no, look, we’re uber-focused on M&A right now. As you know, we have a long history of finding assets and returning outsized growth to shareholders there. So, in terms of pricing, there is a little bit of give currently in the marketplace, and there’s a diverse group of targets that we’re focused on.

Anselm Wong: Yeah. And in terms of leverage, like we said before, I don’t think we’ve changed our focus to that. If it’s a real big strategic deal that makes sense for the company, we would lever up to the higher end of the guidance range that we had. And if we went above, then we would have a good strong plan to actually bring it back down in a pretty quick period of time. At this point, I think, as you saw the numbers, we’re in a great position. Our leverage ratio is actually below our guided range. So, I think it would take a meaningful deal to actually bring us above that.

Brad Hewitt: Thank you.

Operator: Thank you. Next question, Daniel Moore with CJS Securities. Please go ahead.

Daniel Moore: Thank you. Good morning, and thanks for taking the questions. I mean, starting obviously with new construction, which continues to show really strong significant strength. What are you seeing from your customers that are as perhaps not reflected in the CapEx spending and plans we’ve seen from the larger public self-storage players? I mean, they remain healthy, but not necessarily indicative of these types of growth figures. So, is it share gains? Is it more aggressive deployment from small, mid-sized customers? Any color you might have would be really helpful.

Ramey Jackson: Yeah, great question. Look, the REIT sector is a small portion of our revenue. We represent the entire industry in terms of growth in the sector. But I think if you listen to some of the calls, there’s still — one in particular mentioned they’re going to flex their balance sheet in terms of bringing on capacity. R3 spending is a hot topic and will continue to accelerate. But look, self-storage, new construction is a long game. I mean, if you hit pause on it right now, you’re going to pay for it in a year or two. So, the conversations we’re having is the resiliency in the market is indicative of the metrics that you’re seeing and also the investment that our cuts are putting into the space.