PGT Innovations, Inc. (NYSE:PGTI) Q3 2022 Earnings Call Transcript

PGT Innovations, Inc. (NYSE:PGTI) Q3 2022 Earnings Call Transcript November 11, 2022

Operator: Good morning and welcome to PGT Innovation’s Third Quarter 2022 Earnings Conference Call. I’d now like to turn the conference over to PGT Innovations Senior Vice President of Corporate Development and Treasurer, Brad West. Please go ahead.

Brad West: Thank you. Good morning, and welcome to the PGT Innovations third quarter 2022 investor conference call. With me on the call today are President and CEO, Jeff Jackson; and our Chief Financial Officer, John Kunz. 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 2022 financial performance outlook. These 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 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.

Jeff Jackson: Thank you, Brad. Good morning, everyone, and thanks for joining us today. Our third quarter was a unique quarter for PGT Innovations. It was a quarter filled with courage, remarkable strength and solid results. As most of you are aware, Hurricane Ian, a dangerous high-end Category 4 storm hit the coast of Southwest Florida on September 28 with 125-mile for wind speeds and a 16-foot storm surge, Ian plowed a path of destruction through our state and was among the most powerful storms ever to hit the coast of Florida. What we witnessed in the days after the storm has been amazing. First, courage. The storm made landfall in the heart of where a majority of our Venice and Fort Myers team members live. The devastating winds and rainfall and flooding impacted approximately 2,000 of our team members from Fort Myers, Punta Gorda and Northport.

Some team members lost homes, many were without power and water for weeks. Second, remarkable strength and commitment. Immediately after the hurricane, PGT Innovations mobilized to check on our team members, welfare and safety. We distributed generators, tarps, chainsaws, flashlights, water and other essentials to our affected team members. We also had many of our partners, suppliers and customers provide an outpouring of support as a result of the damage caused by Hurricane Ian, and we also would like to express gratitude for them as well. Third, results, we closed our West Florida facility on Tuesday, the 27th in September and did not reopen until Monday, October 3. While our facilities did not sustain any meaningful physical damage from the hurricane, we experienced limited ability to produce at our facilities as our team members could not safely travel to work due to the flooding and road closures from down power lines and trees as well as focusing on repairing their own homes.

We made the decision to continue to pay our team members during those days, even though our facilities were closed. When we reopened our facilities on October 3, we realized that we will not be able to return to normal production schedules as many of our employees still could not make it to work safely. During the first week, we only operated one shift with team members that were able to travel safely to work. Productivity was less than what we would otherwise expect as we had make shift teams manning our various production lines. As the affected communities gradually started to recover, many of our team members were able to begin to return to work. During the month of October, we were able to increase the number of shifts and gradually improve on our production from the first week of the month.

And last but very important, codes, work. In the aftermath of this extremely dangerous storm, we had no reported impact failures. homes built to Florida building codes survived and many homes built prior to Florida building codes were unfortunately destroyed. We have various footage and testimony of the devastation. In review, it is apparent that PGT Innovations products help home survive this devastating storm with very little or no damage. Moving on to our third quarter results, I am very pleased to announce we delivered another strong quarter despite the challenges we faced. Looking at our key messages for the quarter on Slide 4, net sales for the quarter grew 28% as we continue to see strength across our key markets. We achieved organic growth of 17%, while Anlin contributed $35 million.

While I’m pleased with our third quarter results, it is important to note that Hurricane Ian caused us to close our West Florida facilities, limiting our ability to manufacture and ship product from those locations during the last week of the quarter. We estimate the facility closures impacted production and shipments by approximately $12 million during the quarter. Also during the quarter, we continued to gain in profitability. Adjusted EBITDA margins improved 320 basis points compared to a year ago quarter. Prior to the hurricane, we were able to reduce our average lead time for key brands by 50% versus the prior year quarter. Additionally, over the last several quarters, we successfully implemented price increases to offset inflationary pressures.

We will continue to pursue pricing actions where we face escalating costs. Our supply chain team has continued to do an outstanding job to minimize disruptions and support production levels, which has helped us drive improved performance over the past few quarters. Strong sales and margin continued to produce solid cash flow, ending the quarter with $219 million in cash, which enables us to make investments to improve our operations and pursue strategic acquisitions such as Martin Door, which we completed in October. While we continue to address the challenges presented by the hurricane, we have not lost sight of the macroeconomic environment, rising interest rates, a slowdown in new home sales and the uncertainty facing the U.S. economy are all things that are impacting our customers and partners.

We have not lost sight of these indicators and decided to proactively take actions to reduce our indirect and overhead costs during the fourth quarter. We believe these actions will allow us to further streamline our operations and protect our margins while seamlessly continuing to serve our customers. After Hurricane Irma in 2017, we did see an increase in demand for our products and would expect the effects of Ian to favorably impact awareness when it comes to purchasing our products. While it is still too early to quantify the impacts of Hurricane Ian, any increase in demand will certainly help offset softening that we would expect to see from the slowdown in the economy. For example, in October, we are seeing strong demand in our new South markets in the path of the storm.

We are optimistic that this trend in our direct-to-consumer channel will translate into momentum for our dealer channels over the coming quarters as well. Next, Slide 5 provides details about our Martin acquisition, which supports our framework for profitable growth by expanding our geographic footprint in the Western U.S. and entering an adjacent building product category. Martin has an 85-year history as a well-known high-quality, fully customizable premium overhead garage doors, serving both the commercial and residential end markets. This transaction was our first move to an adjacent building products category to complement our existing portfolio of windows and door brands. Martin creates cross-selling opportunities for existing brands within our Western division and helps us to capitalize on opportunities within the dealer, distributor, builder and direct-to-consumer channels across the country.

The expansion of this product category supports PGT Innovation’s strategic criteria by expanding into building product categories adjacent to the window indoor market, adding premium overhead garage doors to our product portfolio, our geographic footprint and presence in the high-growth region, adding another strong brand name to the PGT Innovations portfolio and creating cross-selling opportunities and a strong cultural fit across both companies. The garage door entry market aligns extremely well with our product portfolio. Additionally, Martin’s focus on exceptional quality, safety and innovation is very much in line with the priorities found across all our PGT Innovation brands, making it a great fit for both organizations. Market demand for Martin’s garage doors and its efficiency in producing custom products has allowed it to generate EBITDA margins in excess of 30% and strong cash flow conversion.

Martin will operate under PGT Innovations Western business unit. The integration process is already underway and is going smoothly. Next, on Slide 6, let’s take a closer look at sales trends that are guiding our outlook. Total organic growth was 17%, reflecting the strength of our brand portfolio and demand in our markets. In the Southeast region, organic sales grew 13% from the prior year quarter. We are seeing a dip in demand related to the hurricane as production builders across Southwest Florida are challenged with the repairs to their ready for sale and in-process homes. This dip is consistent with prior storms as communities are focused on repairing damages to infrastructure and builders are focused on repair and recovery. Long term, these storms impact awareness, which we expect to drive demand for our premium storm-resistant windows and doors.

Especially in the Fort Myers area, the destruction caused by the flooding will promote the replacement of older homes with new homes that will be required to meet new building codes, resulting in higher levels of storm protection. During the quarter, we secured exclusive agreements with 8 new communities, which will continue to help offset any macroeconomic weakness. In our Western region, organic growth was 38% versus the prior year quarter, reflecting strength in our production builder business. This sector outperformed our expectations for the past 2 years due to an ongoing strong demand to upgrade indoor outdoor living areas. We’re also seeing the benefit from our capacity expansion in our Phoenix facility, which has allowed us to better serve the custom market.

We recently opened a showroom in San Diego, which positions us well to serve the growing Southern California home and renovation markets. And lastly, EnLink continues to outperform our acquisition targets. Our backlog was $282 million at the end of the third quarter, down from $356 million at the start of the year. The reduction in backlog is primarily due to the strong operational performance of our core PGT business as we are fully recognizing the impacts of our 2021 investments. Ending backlog is also impacted by approximately $12 million of deferred sales at the end of the third quarter related to Hurricane Ian. Slide 7 summarizes the strategic and operational framework that drives our profitable growth. Our first pillar is customer-centric innovation, which drives us to deliver products with features, performance and value demanded by our builders and customers.

We’re expanding our product offering to improve thermal performance, architectural sightlines, energy efficiency and indoor outdoor living spaces. Our second pillar is investing in talent. Over the last year, we have been incredibly pleased with the caliber of both our new hires and experienced talent and their success in helping our company achieve our growth targets. We recently welcomed the 173 talented Martin team members to PGT Innovations. Our third pillar is transforming our manufacturing operations to scale in line with our growth. Our operational flexibility, improving our manufacturing processes to reduce or prevent back orders and maintaining efficient warehouse operations. Our 78,000 square foot expansion at our Western Window facility is producing new windows and offers improved lead times for our Western customers as a prime example.

The fourth pillar is allocating strong free cash flow to achieve profitable growth. We are always on the lookout for unique opportunities to improve our product offerings and production capabilities. The Martin acquisition is just one example. Recognizing that we continue to face an uncertain economic environment, we will remain extremely disciplined as we consider opportunities to deploy capital to profitably grow our business. Now I’d like to turn the call over to John Kunz to review our third quarter results in greater detail. John

John Kunz: Thank you, Jeff. Moving on to Slide 8. We were very pleased to have achieved $386 million of sales in the third quarter despite the impact of Hurricane Ian had on our sales. The year-over-year increase in net sales was driven by 17% organic growth from our legacy business and continued growth from our recent Alent acquisition. Our Western segment grew 38% organically, while our Southeast segment had 13% organic growth. In the third quarter, our sales breakdown was 58% R&R and 42% new construction. Organic R&R sales grew 7% compared to the third quarter of 2021. The strength of our legacy brands helped increase organic new construction sales by 37%. Adjusted gross profit rose 45% to $151 million for the third quarter of 2022 compared to the third quarter of 2021.

our third quarter results were driven by continued solid performance from our Western operations, operational improvements in the Southeast, improvements in scrap, improved labor efficiency and pricing actions, which outpaced material and wage inflation. LME spot pricing for aluminum has steadily decreased during the year. On October 1, net hedging liability of $3.4 million will be recognized in the fourth quarter. We are also assessing our 2023 aluminum requirements and may add to our hedge position in the coming quarter. Third quarter adjusted gross margin was 39.1%, 440 basis points higher than the prior year quarter, driven by price increases, manufacturing process improvements and labor efficiencies. Adjusted selling, general and administrative expenses increased 26% in the third quarter compared to the prior year, driven by the SG&A from our recent acquisitions, the expansion of our new South operations and increased labor and distribution costs and an increase in marketing spend.

Third quarter adjusted selling, general and administrative expenses were 25.8%, roughly in line with the prior year quarter. Adjusted EBITDA was $68 million, 58% higher than the prior year quarter, primarily resulting from pricing actions to offset inflationary pressures and improved manufacturing performance. Our tax expense in the quarter came in at 24.8%, in line with our full year assumptions. We reported adjusted net income of $33.2 million or $0.55 per diluted share compared to $15.8 million or $0.26 per diluted share in the third quarter of 2021. Turning now to our balance sheet on Slide 9. At the end of the third quarter, we had net debt of $416 million, including a cash balance of $219 million. On October 14, we entered into a new 5-year $250 million revolving credit facility.

We use this facility along with cash on hand to fund the Martin acquisition. The new facility allows us to extend maturities while enhancing the company’s liquidity. On a third quarter pro forma basis, after considering the effects of the acquisition, we had a trailing 12-month bank covenant net debt to adjusted EBITDA ratio of 2.2x at the end of the third quarter. For the quarter ended October 1, our trailing 12-month net debt to adjusted EBITDA ratio was approximately 1.6x. Slide 10 shows our EBITDA growth over the past several years. This growth has been realized organically and through acquisitions, all while maintaining a conservative leverage profile. Our expectation is to continue to grow while maintaining a conservative financial position by using our strong cash flows to reduce leverage after acquisition.

Since completion of our Anlin acquisition and based on the pro forma metrics for Mark, we continue to be within our long-term leverage target range of 2 to 3x. On Slide 11, you will see a summary of our long-term capital allocation priorities. Our first priority is to reinvest in our business, which includes allocating capital for innovative and compelling projects that we expect will drive margin and revenue growth. For example, investments in advanced manufacturing and automation over the past few years are now enabling us to enjoy higher run rates and a lower cost structure. We expect these investments will allow us to continue to enhance both margins and revenue. Our second priority is to reduce debt and maintain a strong balance sheet.

We expect to maintain a conservative leverage profile within a range of 2x to 3x net debt to EBITDA, although our preferences to stay at the low end of that range, reducing leverage after acquisitions will remain a capital allocation priority. We will continue to be extremely disciplined about future strategic acquisitions. As we did with the Martin transaction, we will look for opportunities that would enable us to expand into new regions, channels or products that are aligned with our growth priorities and that we expect to grow shareholder value over the long-term. We also note that we have about $25 million available under our authorized share repurchase program, and we continue to believe that PGT is an attractive investment. And now I would like to turn the call back over to Jeff.

Jeff?

Jeff Jackson: Thanks, John. The final point I’d like to mention before we get to our guidance is that on November 5, we detected a ransomware infection that impacted portions of our network and caused disruptions to our daily operations. Upon detecting the security event, the company took immediate steps designed to contain the incident and implemented our business continuity plan to restore and support continued operations. We also notified appropriate law enforcement authorities and are working closely with cybersecurity experts and legal counsel. The incident primarily impacted our West Florida facilities, limiting our ability to operate. We have been successful in getting the majority of our operations back online and expect all of our operations to be back up and running by Monday.

While we are still in the early stages of our investigation, we believe we had limited the impact of this incident. Next, I’d like to review our outlook for 2022 on Slide 12. The guidance we provided in July did not contemplate the impacts of the hurricane or the cybersecurity incident on our Florida operations. While our third quarter was noteworthy, our fourth quarter will be impacted by the inefficiencies in our Florida operations caused by these two events. As such, we anticipate revenue for the full year to be in the range of $1.46 billion to $1.49 billion. This guidance projects $30 million to $40 million of additional sales will be deferred into the first quarter of 2023. Due in part to the events on our Southwest Florida operations somewhat offset by the $13 million in sales from our Martin acquisition.

We anticipate adjusted EBITDA to be in the range of $245 million to $255 million. The revised EBITDA range is due to operational inefficiencies mentioned earlier, the deferral of sales from Hurricane Ian and the cybersecurity incident, partially offset by the incremental profit from the strong EBITDA margins of our Martin acquisition. We plan to share our thoughts on our 2023 outlook on our year-end earnings call in February. Turning to Slide 13. In closing today, let me remind everyone why we believe PGT Innovations is in an excellent position to continue to create long-term value for our shareholders. First, we are a national leader with an outstanding portfolio of brands that we have strengthened through acquisitions. We are executing on our growth strategy, including expansion into high-margin 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, which further facilitates profitable growth in both the new construction and the R&R channels. Third, operational improvements and capital investments have increased our capacities, which helps us meet demand and deliver consistent margin expansion. Strong free cash flow gives us more options to best meet our growth needs. Fourth, our ongoing investment in innovation, new product development and talent helps us provide customers with innovative premium product to meet their changing needs. And as Q3 has shown, our products help protect both property and lives.

Lastly, we hold a long tradition of caring for the health and welfare of our team members and the communities we serve. We continue to contribute to the relief efforts to help our team members impacted by Hurricane Ian and will not compromise our commitment to conducting business in a socially responsible manner. While our third quarter results and full year outlook are impacted by Hurricane Ian, the PGT team is healthy and strong and on our way to a full recovery. I want to thank our shareholders, team members, channel partners and suppliers for their continued support. At this time, let me begin the call the Q&A with the operator. Operator?

Q&A Session

Operator: Our first question will come from Joe Alex Meyer with Deutsche Bank. Please go ahead.

Unidentified Analyst: Hey, good morning, everybody. Thanks for the questions.

Jeff Jackson: Good morning, Joe.

John Kunz: Good morning, Joe.

Unidentified Analyst: Yes. I was wondering if you could just start maybe by talking about what you’re seeing in the new residential channel, about 40% of your business. I mean, we are hearing that the market is down, of course, but we’re hearing as well that you’re winning business. And you talked also about the psychological tailwinds from these storms. I’m wondering if that’s increased penetration in the channel. Maybe just kind of talk about all those things together, what you’re seeing currently?

Jeff Jackson: Sure. I’ll touch on some highlights here, and John can give some actual color on order patterns. Joe, that’s a great question. We have seen, and we’ve won some new communities, as I mentioned in my prepared remarks, that’s helped offset, quite frankly, somewhat of a slowdown from the new construction order channel. But we continue to, we feel, gain share that we, quite frankly, due to supply chain issues back in 2021, we lost. And so we’ve been regaining that share this year, and that’s shown in our operations. So we continue to believe that the markets we serve. We’re targeted in growth markets, Florida, Texas, Arizona. Those markets, while impacted, obviously, by somewhat of a slowdown are not near as impacted as the rest of the regions.

So what we’re seeing is continued strong performance in our new construction. We are working off a backlog, quite frankly, a robust backlog that from an operational standpoint, before the hurricane, our operations were hitting numbers that we end hit in 18 months in terms of performance. So we’re operating great, working off of the backlog, winning some additional communities, winning back some market share in the new construction channel. And all that realizing that the order patterns are slowing down. I read the same reports everybody else reads from all the builders, homebuilders, public homebuilders. And some of that is getting seen through our order patterns. Johnny.

John Kunz: I think Jeff, I think you said it well. I mean, I think you covered it in your prepared remarks, you mentioned in highlighting the fact that we are have opportunities with eight new home building sites. So that will obviously offset the softness that we see in the general economy. Jeff mentioned also as well, we see that potential slowdown. But the offset to that will be the order patterns from the hurricane. He mentioned as well on the R&R side, where we would expect to see a pickup. The hurricane does change behavior and does change thought processes. So we would expect that. And then don’t forget as well, you have the sales tax initiative, which should help further compel the decision-making process when it comes to R&R decisions or new home decisions with respect to Windows.

So that will all be helpful. So we’re going to give you more color on that in February when we have our fourth quarter call. We need to iron out all the ebbs and flows of the dynamics, but we will be prepared in February to give you more color on it as a whole.

Jeff Jackson: Yes. And I’d also just add to that, Joe. That’s a good point. In the path of the storm like I mentioned in my prepared remarks, our new sale stores saw order growth of 40% plus month-over-month, so sequential month. So the awareness factor, I don’t want to underplay, we saw the same thing in 2017, and that awareness factor stretched over about a good 18 months to 24-month period. So we do expect that drive that for the folks that hadn’t experienced that kind of hurricane before to drive R&R within the Florida market. And then we will also touch on what we’ve done out West to kind of combat a slowdown. Last year, we bought to CRI, which is an install business, basically one of our dealers in Southern California.

We’re expanding that model. We’re about to open we’ve already opened up. We’re about to actually physically open up a location in our Arizona market. So we will be, for instance, with Toll Brothers, we will be installing their products as well like we do in Southern Cal. So we’ve got some natural offsets in some markets we hadn’t been in, if you will, that will help also offset slowing construction.

Unidentified Analyst: That’s really encouraging. And I appreciate all the detail there. if we could talk maybe about the acquisition, the Martin acquisition. It looks like some really great products here. Like you said, this is an adjacency. And I have two questions really around that. I was hoping maybe you could just go into a little more detail on the cross-selling opportunities, what that looks like. If it’s maybe specific to one channel where we’d see greater synergies, I’m thinking maybe the builder channel where you’re already winning bids on certain products that you’ve got already? Or are you maybe gaining distribution for your existing products by putting them alongside the doors? And then just more broadly, as you’re thinking about the concentric circles around your core product, what other categories might fit into this framework where you feel like there is enough overlap to cover synergies, but they are different enough that it’s impactful to growth.

Jeff Jackson: Sure. That’s a great question. First of all, Martin, incredible acquisition. We do openings. We have our own garage door, impact garage door in our . As a matter of fact, we’ve introduced this past year, and we’ve taken orders on that garage door. But if it’s an opening, we think we can fill it. And it’s a very good adjacent for us to get into high mid-30s EBITDA margin. So we’re very excited to bring that portfolio, that brand into the PGT Innovations family. And they are also known for their quality. Even within the garage industry, everybody knows Martin garage doors for their quality of their product and their delivery. They have incredibly tight delivery lead times. So historically, Martin has been an R&R channel play.

And what we want to do is bring it into that new construction play, just like you said, we do plan on and have already reached out some of our contracts that we currently have with new home builders, new construction home builders and have had very positive feedback and scheduled meetings. In the R&R side, too, for the big box, we’ve actually they have actually reached out to us regarding potentially getting the garage door into some of those locations and those relationships as well. So we see it as a play not only continuing to expand their R&R presence but also into the new construction market. For New South, it is going to be an incredible opportunity to put a garage door into a showroom. And while somebody is in that home, making the window sale, also making a garage door sale, it just aligns incredibly well.

So we do plan on putting the garage door display into all 17 of our new South stores eventually impact obviously in the Florida regions, but in the non-impact regions such as Atlanta or the Carolinas, it will be just the standard garage doors. So, so far, it’s been the integration has been smooth, very smooth. The results have been online, and the interest in our €“ from our €“ I would say, our customers, both new construction and R&R side has been heightened. So, we see it as a great opportunity to continue to expand in to a great market with high margins.

John Kunz: Yes. I would say the only €“ you had mentioned the other categories that would fit into the framework. I think Jeff said it well. I just want to make sure we address that part of the question and openings. Jeff mentioned openings, and we think openings fit what we do, our strategy, our strategic approach with respect to Martin, it’s custom as well. We are a custom manufacturer. So, you have all those opportunities and those synergies, along with what Jeff mentioned.

Jeff Jackson: I can give you a perfect picture, if you will, the CEO of Martin, Scott, he €“ when I first met him, he has in his house, Western Window Systems, windows and sliding glass doors and a Martin garage door. So, he showed us the picture and they just complement each other incredibly well. So, we think it has a very strong sales pitch to the end market.

Unidentified Analyst: That’s great color. Thanks again guys and stay safe.

Jeff Jackson: Thanks you.

Operator: Our next question will come from Phil Ng with Jefferies. Please go ahead.

Phil Ng: Hey guys. Jeff, kudos to the team, it’s quite admirable what you guys are doing with your employees in light of the hurricane. So, kudos to the team on that front.

Jeff Jackson: Thank you, Phil.

Phil Ng: Yes. I guess big picture on the potential lift from Hurricane Ian, if I remember correctly back in 2018 post-Irma, organic sales were up about 20%, at least a part of that was that uplift. How do you kind of size Ian and how do you see that kind of ramping up? Appreciating there is a long tail. And then more importantly, do you have the bandwidth to meet that demand? I know you guys have certainly invested in recent years in terms of freeing up capacity. So, I just wanted some color on how you think about that opportunity.

Jeff Jackson: Yes. It’s a great question. Yes. I would say, if I am comparing Ian to Irma, Irma was a storm that didn’t have a path. First, it was the East Coast, then it was Central, then it was the West Coast. So, it impacted in a lot of floorings evacuated. I think the number was around 6 million people evacuated in that hurricane. Ian, however, had a path. And this path it was devastating. When it hit Fort Myers area, Northport, Port Charlotte as a Category 4 storm, the winds of Ian, again, the storm is one of the biggest storms to ever hit Florida. The eye of the Ian, for example, was bigger than Hurricane Charley back in 2005, when Hurricane Charley went through that same area. So, the magnitude of that storm and the devastation impact, I think shown much more than the hurricane we had in 2017.

And you can see that just in the Fort Myers area itself from the footage. So, we think it will drive more code awareness, maybe even a more stronger adoption of codes inland as you move into Florida. Again, this hurricane actually marched all the way through the center of the state, and there was flooding in the center of the State of Florida. So, I think the wind speeds there. We are also still at 100 miles per hour plus in cities like Myakka and places that you would think would be safe. So, I think, again, the devastation that this storm brought was seen more as targeted into that area and then also the flooding that occurred afterwards. So, I do contrast those two as both of them were horrible events impacting lives and property. I would just say the last one was probably the most severe in terms of its magnitude of winds and flooding.

And in terms of awareness and potential market lift for this, yes, I think definitely, since these storms are heading inland. I think more and more people who are not even required to put in an impact product are looking to put in impact products. And I think that will drive the State of Florida, Florida Building Commission potentially to look at this and maybe make those impact zones even larger where products are required. And I think that’s going to be a good thing because, again, it protects property, homes, lives and also with the insurance issues Florida has. Again, if you got to impact protect home built to codes, it survived. If you go and look at these homes, I would say 95% of them survived. And given the insurance initiatives that are going on in the State of Florida, I think a big push on code will line up very well with that as well.

So, awareness from that end is definitely there. John, do you want to

John Kunz: Yes. No, I think you hit it well. I mean the only other point I would highlight is Jeff mentioned, we have New South operations or New South retail stores and the orders are up meaningfully in those retail stores. On our distribution side, it usually takes a little longer for us to recognize those orders. But our expectation is we would expect to see a lift. Now, you quoted with the number of 20%, I am not prepared at this point to say whether it’s 20% or less or more, whatever it may be. But the New South stores have seen favorable order entry with respect to the post sales after the hurricane.

Jeff Jackson: And I will address the second part of the question, the capacity and our ability to meet that demand. And I will give kudos to my operational team in Florida. I will be honest with you, that team has done an incredible job recovering from the effects of supply chain on COVID, hiring folks, everything, for this hurricane rocking through Florida rolling through for Florida. Our on-time in full had approached back up into the 80s. And this is compared to 18 months ago, it was in 30s and we couldn’t get people, and we had to hire this, be hiring late. Well now, not only have we hired folks, we have trained them. Our direct labor is at where it was in our peak when we hit our 2018 numbers and so in €˜19. So, our direct labor is back in line, our retentions improved 25%.

Our turnover rates are between 25% in the last 12 months. So, we are keeping our folks. They are getting trained. We have an incredible workforce and they are delivering. So, our efficiencies are up. The capacity in our vinyl plant alone for vinyl and PGT alone is up 20% year-over-year. And that’s not due to necessarily physical expansion. That’s more line alignment, some technology, but better efficiencies in production and shipping. So, the team has done an outstanding job in increasing its ability to meet that demand. In the future, we are going to be investing in more vinyl capacity. We have the premium impact-resistant vinyl line. Everybody wants PGT WinGuard vinyl. And so we are expanding that capacity as we speak, and we will be over the next 12 months.

Again, keeping in mind, we are coming into a recession potentially here in 2023. And orders can slow, interest rates are up, all that stuff is kind of the headwinds we are going into. But with that said, we are going to still expand our vinyl capacity just because of the sheer demand we received. And so if you look in the next 12 months, we should be able to easily extend our vinyl capacity by 35%, 40%. And that’s kind of the what’s on the board, the operational board target.

Phil Ng: Got it. That’s great color. And then, Jeff, earlier you mentioned orders were slowing down a little bit. Was that in reference to the new builder side of things? Are you seeing it pretty broadly across all your markets, R&R as well? And then some building products companies, this recent quarters have called out destock in their channel from the channel partners or even contractors, builders, how do you kind of size up that risk?

Jeff Jackson: Yes. No, we saw it. We have seen a softening in orders across even in the R&R channels. We attributed some of that R&R, especially to the election kind of cycle. People kind of stop spending. You can’t advertise as much on TV because it’s too expensive, that kind of thing. And also, again, as interest rates rise, I think the equity markets are impacted. I think people take stock and think about bigger projects. One incredibly good thing is the aging stock at homes in the U.S. is there. I mean there is a home boom in the late 1990s, early 2000s, and those homes are 20-years-old, 20-plus-years-old. And as those homes age, the products we serve, garage doors, for example, windows and doors, roofs, which we don’t do.

But those are kind of the three high spots that you look at replacing after about a 20-year, 25-year period. So, I think we have got a natural tailwind with the aging stock of homes. And I think also, obviously, as the amount of new construction homes go down and people maybe not going into the new construction as much, they are staying in their current homes, they will fix up those homes. And so that’s a natural kind of tailwind for us as well. Again, 60% of our business roughly, approximately is R&R. So, we do play heavily in that. But we have seen, again, softening across the channels in probably every market, I would say, from Florida, Texas to Arizona. Market data, now some of our initiatives in those markets, we still gain share. For instance, permits were down in Arizona, but we have gained share.

Permits were down in California, third quarter-over-third quarter, but we gained share. So, we actually grew. So, we have got, again, what we have got some good initiatives that we can fight the decrease in permits and potentially decrease in housing. We have got some good initiatives that we think can help offset some of that.

Phil Ng: Thanks a lot.

Operator: Our next question will come from Michael Rehaut with JPMorgan. Please go ahead.

Doug Wardlaw: Hi. Good morning guys. Doug Wardlaw on for Mike. I just want to know with current software and the new residential market, had any builders started to approach you on pricing? And if so, do you anticipate any giveback on pricing next year due to the softer demand drop €“ backdrop anticipated?

Jeff Jackson: It’s a great question. I have read about that. The answer is no. We haven’t been approached for pricing yet. I am not saying it won’t happen, but it can happen and traditionally been something we have served up, by the way. We think we offer products, our impact lines are unique. Not everybody has that. Now our garage door is high and unique. Our Western Window is top of the line. Indoor outdoor living is unique with the different features it offers. And we are even at the IBS show in January, even going to debut a 12-foot tall thin profile Western Window into our living door. It’s going to be phenomenal. I think it’s going to be a huge success. When you offer innovative products, you don’t have to do them in pricing as much.

And so I am not saying we are new to it, I am saying we haven’t heard from it. And our plans are to hold our line as best as we can on that. And if anything, if costs continue to escalate, take pricing if we need to in the future. We look to maintain our margins through pricing, not necessarily improve it. We look to improve our margins through operational efficiencies and attacking market share and fixed cost leverage, so.

Doug Wardlaw: Great. Very helpful. And then secondly, given that you are executing a lot of strategic growth with various products and segments that you just talked about, can you give us a sense on how you think about market growth? For example, markets are down 15% next year, how would you anticipate your sales performing in that environment?

John Kunz: Yes. So, I think, Jeff, in his prepared remarks addressed a lot of that. We see it €“ we looked at the macroeconomic indicators that are out there. Jeff talked about extensively about the new initiatives. We talked about the residential side, new construction, the eight new communities that we had. So, we certainly see that softness, and we would expect that our initiatives will offset some of that. And like I have said in my remarks, too, we will come out with more color in February. We are going to address that more completely in February for you.

Doug Wardlaw: Great. Thank you, guys.

Jeff Jackson: Thank you.

Operator: Our next question will come from Judy Merrick with Truist Securities. Please go ahead.

Judy Merrick: Thanks. This is Judy on for Keith Hughes. And just kind of clarifying earlier question, in the West, it looks like you had very positive growth in the third quarter. Has the pace of business slowed down there? Has it just been different to different markets, or is it kind of the share gain that you are also seeing kind of helped out there.

John Kunz: So we are €“ sorry, what was that?

Judy Merrick: Some markets, it’s very different performance by different states, or is it also kind of the share gain that’s helping you on the feasibility in the Western region?

John Kunz: Yes. The Western region has done a very good job. And as Jeff mentioned, with respect to it, we track a lot of the macroeconomic indicators out there to see how we are performing versus the market and permits is one of them. And we have seen a contraction in permits, which is what everyone would expect in light of the rising interest rates, but our performance has actually improved or exceeded that. We have seen overall growth. So, those are the initiatives that we are undertaking and which imply as well that we are gaining share overall. So, we do see those macroeconomic indicators. Those are all things that all other analysts and investors look at. We see them as well. We are trying to take initiatives to offset that macroeconomic weakness in our top line.

Judy Merrick: Okay. Great. Thank you.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kunz for any closing remarks.

John Kunz: Yes. I would like to thank you for joining us on our third quarter investor earnings presentation. We appreciate your interest in the company and look forward to talking to you again in February when we discuss our fourth quarter and full year results. Thank you again. Bye-bye.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.