Janus International Group Q1 2024 Earnings Call Transcript

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May 9, 2024

There are 8 speakers on the call.

Operator

Hello, and welcome to Janus International Group First Quarter 2024 Earnings Conference Call. Currently, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the call over to Ms.

Operator

Sarah Maciak, Senior Director, Investor Relations of Janus. Thank you, Ms. Maciak. You may begin.

Speaker 1

Thank you, operator, and thank you all for joining our earnings conference call. I am joined today by our Chief Executive Officer, Rami Jackson and our Chief Financial Officer, Ansem Wong. 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 janisintl.com. Before we begin, I would like to remind you that today's call may include forward looking statements.

Speaker 1

Any statements made describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions are forward looking statements. Please note that the company's actual results may differ from those anticipated by such forward looking statements for a variety of reasons, many of which are beyond our control. Please see our recent filings with the Securities and Exchange Commission, which identify the principal risks and uncertainties that could affect our business, prospects and future results. We assume no obligation to update publicly any forward looking statements and any forward looking statement made by us during this call is based only on information currently available to us and speaks only as of the date when it is made. In addition, we will be discussing or providing certain non GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted EPS.

Speaker 1

Please see our release and filings for a reconciliation of these non GAAP measures to their most directly comparable GAAP measure. On today's call, Raimi will provide an overview of our business. Anselm will continue with a discussion of our financial results and 2024 guidance before Rami shares some closing thoughts and we open up the call for your questions. At this point, I will turn the call over to Rami.

Speaker 2

Thank you, Sarah. The Q1 was a busy one at Janus as we built upon the momentum established in 2023 to deliver a solid start to the year, one that was in line with our expectations. As always, everything we do at Janus is a team effort and I'd like to thank our employees for their continued hard work, dedication and professionalism as they show every day. We delivered financial results consistent with our expectations in the Q1, including adjusted EBITDA that was up 8.3% on a 1% increase in revenue. Our record of strong cash generation continued as we delivered free cash flow in the quarter of $24,000,000 with a trailing 12 month free cash conversion of adjusted net income rate over 120%.

Speaker 2

This drove net leverage at the end of the Q1 to another record low since going public of 1.5 times, down 1.1 times year over year and below our stated long term target range of 2 to 3 times. Our sustained strong cash flow generation put us in a position to be very active in our capital allocation activities and we have been. During the Q1, we repurchased over 1,000,000 shares and subsequent to the quarter end we made both a voluntary pay down of 21 point $9,000,000 and repriced our 1st lien term loan. We continue to explore M and A opportunities focusing on key areas of self storage, commercial, technology and services. Our largest business is providing comprehensive solutions in self storage, which consists of 2 sales channels, new construction and restore, rebuild, replace or R3.

Speaker 2

Combined self storage makes up roughly 2 thirds of our revenue and even higher percentage of our EBITDA with similar margin profile across these two sales channels. And while we report specifics for each channel along with our commercial and other segments, the discussion of total self storage helps to smooth out the quarterly noise across the 2 segments given the lumpiness of project timing. For the Q1 of 2024 on a combined basis, total self storage was up 11%, driven by new construction. Industry fundamentals continue to favor investment in self storage capacity, which over the last several quarters has focused on greenfield sites. Our commercial and other sales channel was down 19.2% in the Q1 compared to the year ago period.

Speaker 2

The results reflected a continued decline in demand for certain product lines. We continue to innovate and broaden our reach to various end markets in order to access untapped potential on the commercial side. Despite the year over year top line decline, we are very excited about our opportunities there as well as the potential we see to improve margins. Nokie, our innovative suite of remote access solutions, had another strong quarter, during which we increased the number of installed units to 300,000 from 276,000 at year end 2023, representing a sequential growth of 8.7%. In early April, we announced the newest addition to our Nokia Smart Entry product lineup, the Nokia Ion, an inside the door magnetic hardwired smart fits inside the door and is compatible with a cloud native software portal and pairs with our customer friendly mobile app for ease of access.

Speaker 2

ION represents the next step in the expansion of capabilities of Nokie to drive accelerated adoption across our customers' portfolios. In summary, we are excited about our start of 2024 as we look to build on our momentum. We look forward to working to expand our strong market position to capture additional share and create long term value for all of our stakeholders in 2024 and beyond. With that, I'll turn the call over to Anselm for further overview of our results along with updates to our 2024 guidance. Anselm?

Speaker 3

Thanks, Rami, and good morning, everyone. As Rami stated, we are off to a good start to the year as our Q1 results included top line growth, margin expansion and strong cash generation, allowing us to make substantial progress on our balanced capital allocation program. Now let me dive deeper into the numbers. In the Q1, consolidated revenue of $254,500,000 was 1% higher as compared to the prior year quarter as strength in total self storage more than offset a decline in our commercial and other sales channel. Together, our self storage business was up 11% for the quarter.

Speaker 3

Within self storage, new construction continued its momentum with growth in the quarter of 40.2% as customers continue to add new greenfield capacity. R3 was up 17.3% for the quarter as a result of a decline in retail to storage conversion activity compared to the prior year. Total self storage growth was entirely driven by North America, partly offset by a decline in international. Our commercial and other segment saw a 19.2% decline in the Q1 driven by continued shifts in demand for certain product lines. 1st quarter adjusted EBITDA of $66,300,000 was up 8.3% compared to the year ago quarter.

Speaker 3

This solid performance produced an adjusted EBITDA margin of 26.1%, up 180 basis points from the prior year period. This improvement in profitability is a result of a positive impact of geographic segment and sales channel mix and declines in material costs, partially offset by increased operating costs as the business scales for continued growth. With regard to the margin benefit from geographic segment mix, over 90% of our revenue are sourced from North America, which has a higher margin profile than our international business. During the Q1, international saw revenues down 31.9%. The primary driver of the steep decline was our largest international market upgrade in entering a recession and the corresponding impact on project launch decisions.

Speaker 3

We are encouraged that projects are not being canceled, but rather put on hold as the underlying fundamentals that make self storage attractive in that market persists. Due to the international businesses lower margin profile, this contributed to the favorable mix and the company's overall adjusted EBITDA margin improvement. For the Q1, we produced adjusted net income of $31,100,000 a 17.8% year over year improvement and adjusted diluted earnings per share of $0.21 Adjusted net income was impacted in the quarter by drivers already covered including the higher revenue and favorable segment sales channel mix. We generated cash from operating activities of $28,600,000 continuing to demonstrate the robust cash generation profile of the business. Capital expenditures for the quarter were $4,600,000 down from $6,100,000 in the Q1 of 2023.

Speaker 3

Our free cash flow profile reflects the strength of our financial results and the resilience of our business. For the Q1, we generated free cash flow of $24,000,000 On a trailing 12 month basis, this represented a free cash flow conversion of adjusted income of 123%. We finished the quarter with $303,000,000 of total liquidity, including $178,400,000 of cash on the balance sheet. Our total outstanding long term debt at quarter end was $606,400,000 and our net leverage was 1.5 times. This is an improvement of 1.1 times versus the year ago period and 0.1 times sequentially.

Speaker 3

On the strength of our balance sheet business model, improved governance and resolution of all material weaknesses, in March we received a credit rating upgrade from S and P to B plus from B with a positive outlook. And in April, Moody's upgrade our credit rating to BA3 from B1 and revised their outlook to positive. The combination of strong liquidity, continued cash generation and balance sheet strength puts us in a position to pursue M and A targets, execute against our $100,000,000 repurchase program to address our long term debt. During the Q1, we repurchased 1 point 0 2,000,000 shares for $15,300,000 including commissions and excise taxes. And subsequent to the quarter, we made both a volunteer prepayment of $21,900,000 and repriced our 1st lien term loan, which reduced our interest rate by 50 basis points from Silver Plus 300 plus CSA to Silver Plus 250.

Speaker 3

Now moving to our 2024 guidance. Based on Q1 results and the visibility we have into our end markets, we are reiterating our guidance for revenues and adjusted EBITDA. Specifically, we continue to expect revenue to be in the range of $1,092,000,000 to $1,125,000,000 representing organic growth of 4% at the midpoint versus 2023. We expect adjusted EBITDA to be in the range of $286,000,000 to $310,000,000 At the midpoint, this represents a 4.3% increase versus prior year and reflects an adjusted EBITDA margin at the midpoint of 26.9%. We expect total sub storage to continue to grow throughout the year.

Speaker 3

In commercial and other, we expect a return to growth in the back half of the year. In our international segment, we expect the back half of the year to be stronger than the front half as market conditions normalize and ramp up our operations at our new Poland facility. We mentioned on our last call that we expect a return to normal seasonality in 2024 where the second and third quarter comprise a larger portion of revenues compared to the 1st and fourth quarter and that remains the case. Thank you. I will now turn the call over to Rami for his closing remarks.

Speaker 3

Rami?

Speaker 2

Thank you again, Anselm. The hard work we have done and the momentum we have built are paying off as we had a solid start to the year while also executing capital allocation on multiple fronts. Our long term objectives remain intact and based on the reiterated guidance Anselm just laid out, we expect 2024 to feature another year of strong performance. We are the industry leader in self storage solutions with differentiated offerings, ever improving capabilities to help our customers address the undersupply of self storage capacity prevalent today. Those best in class offerings have allowed us to deliver strong organic and acquired top line growth, improved EBITDA margins and outstanding cash generation.

Speaker 2

We continue to have the expertise in dry powder on our balance sheet to pursue and execute accretive shareholder value enhancing opportunities. I look forward to continuing our positive momentum in 2024 and beyond as we intend to drive long term value creation for all of our stakeholders. Thank you again for joining us. Operator, we can now open up the lines for Q and A,

Operator

Our first question is from Jeff Hammond with KeyBanc Capital Markets. Please proceed.

Speaker 4

Hey, good morning guys.

Speaker 2

Hey, Jeff. How are you? Hey, Jeff. Yes, just

Speaker 4

want to hit on kind of how you're seeing the backlog and line. Clearly, new construction was really strong. Wondering if that drew down backlog or if there was any pull forward there?

Speaker 2

Yeah. Great question. Nothing's changed there. When you talk about new construction, self storage backlog, pipeline remains strong, backlog remains strong and we're very optimistic.

Speaker 4

Okay, great. And then commercial, I'm just wondering is this kind of lingering that the shed and carport piece of the business comping tough comps or is there something more meaningful going on? And just maybe how to think about within the 4% mid point revenue growth guide, what you're thinking for commercial on a full year basis?

Speaker 2

Yes. I'll let Anselm talk about the guide. But look I think it's a continuation of the segment around Carports and Sheds. As you know, we do not have the visibility into the commercial kind of channel because of our go to market strategy. But we do feel like there's a softness in general in that sector in addition to those segment lines.

Speaker 2

But if Anselm, you want to talk about that? Yes.

Speaker 3

I think the visibility is still not there, Jeff. And I think the way I look at it from the guide point of view is that you've seen the strength of the self storage and stability there. If we still see some softness there, I think there will be enough storage strength to kind of offset that piece as you see in Q1. But right now, it's still uncertain there because their visibility is low there. But I would see if I break down the details below like Remy said, an upward shed still seems a bit softer, but the rolling steel in the other parts seem to be holding there.

Speaker 3

So it's just a matter of getting through that piece.

Speaker 2

Yeah. And just last thing for me, we're still bullish in that segment. We're going to continue to execute our plan. We've got a great plan to continue to grow and be in the right spot when there is an uptick in that macro. We talked about some of the initiatives about geographic expansion and then also product enhancement.

Speaker 2

So we're I feel like we're in a good spot and we'll continue to be continue to build that line out.

Speaker 4

And then maybe just speak last one speak to our 3 dynamics. I know I think you were saying kind of conversions have kind of abated a little bit, but you have certainly the consolidation dynamic that's playing through. Just what do you see in there?

Speaker 3

Yes. I think if you look at that 3, Jeff, I think we're still seeing that there's not many opportunities for the conversions, but no different than the prior quarters that we've been talking. And that's why you see the strength in the new constructions that we still have to meet the demand there. I think in terms of the consolidations that we're starting to see slowly some of the orders coming from that. Again, we had mentioned that there is a little slowness in terms of that starting because of some of the integration issues that some of our customers are just working through that we're helping them with.

Speaker 3

So it's more just timing that we're seeing still there. But I think we're starting to see some of those orders trickle in now.

Speaker 4

Great. I'll pass it on.

Speaker 2

Thanks, Jeff.

Operator

Our next question is from Daniel Moore with CJS Securities. Please proceed.

Speaker 5

Yes. Thank you. Good morning, Raimi. Good morning, Ansel. Thanks for taking the questions.

Speaker 3

Good morning, Daniel. Obviously, as you tend

Speaker 5

to think about new construction and R3 work interchangeably within self storage. That said, 40% growth jumps off the table in terms of new construction. So just talk about where that growth is coming from? Are there specific geographies that are expanding faster? And do we expect new construction to continue to outpace R3 for the remainder of the year?

Speaker 5

Thanks.

Speaker 2

Yes, great question. And I'm glad you brought that up. I mean as you know we're agnostic in terms of how our customers add supply. But it's a continuation of some of those secondary, tertiary markets that remain robust. Obviously, the new construction topic over 1.5 years has been been in terms of 3rd party data, it's totally different than what we've been printing.

Speaker 2

So I understand the concern, but from our visibility and listening to our customers, there's a lot of markets that are still undersupplied. And that's where you're seeing our growth. And notwithstanding elevated construction cost and obviously cost of capital, self storage is a long term business. And so what's happening today is the end market is still strong in certain areas and they're investing in the long term future of the asset. Again, just a continuation of the markets that are undersupplied that kind of go under the radar.

Speaker 5

Helped. And on the margin front, obviously, remain impressive in light of kind of a mixed macro environment and appreciate all the color on the geographic and product mix and how that plays in. Just how should we think about the cadence of margins as we look to Q2 versus Q1? I know Q2, Q3 seasonally a little bit stronger and as well as kind of the cadence for the remainder of the year. What's in the confines of that 27 ish percent guide at the midpoint?

Speaker 5

Thank you.

Speaker 3

Yes. No, Dan, that's how to think about it. Like you said, we always have to step up in Q2 because our volume is larger in Q2, Q3, so we get the benefit there. I think one of the things we always talk about is that we're always looking at opportunities for productivity as well. So our factories are always looking for opportunities.

Speaker 3

Our Poland factory in Europe is just finally getting up to speed with the last piece of equipment that's installed there. So I think we're still bullish on terms of looking at margin improvement for the business.

Speaker 5

Got it. And then just in terms of capital allocation, obviously well below your leverage targets and buying back stock with a lot of capacity left. Just you can talk about the pipeline and maybe kind of level of dialogues around M and A, how that's the bid ask spreads and whether you're seeing more opportunity that could come to fruition in the next 12, 18 months?

Speaker 3

Yes. Still a lot of opportunities out there. I think we're excited about all the different areas that we're looking for from an M and A point of view. I don't think much has changed in terms of what the opportunity is out there. There is opportunities.

Speaker 3

I think there's just a balance of ones that are priced reasonably for an acquisition versus some that are still asking for a higher multiple. But I think there's still a lot of opportunities that we're seeing in all the different areas that we've been looking for there. And then I think just in general from a capital allocation, you're right, we just we're doing great in terms of generating the cash and just gives us the flexibility to be opportunistic when we need to be.

Speaker 5

All right. I'll jump back with any follow ups. Thank you again.

Speaker 2

Thanks, Dan. Thanks, Dan.

Operator

Our next question is from John Lovallo with UBS. Please proceed.

Speaker 6

Hey, good morning guys. This is actually Matt Johnson on for John. I appreciate you taking my questions. I know you guys kind of touched on this already. Just to put a finer point on it, I think at the midpoint of your full year outlook, you have sales of 4%.

Speaker 6

How are you guys thinking about new construction R3 versus commercial on

Speaker 7

a full year basis within that? Yes.

Speaker 3

I think that's why we kind of started showing the storage together. I think again we're agnostic between how it goes in either one. At least that from a high low right now what we see in the immediate thing is new construction is going to stay fairly strong from what we can tell from the backlog. And then I think from an R3 point of view, it's really still that leveling off of the conversion opportunities out there. And we're still hopeful that that will come back in terms of opportunity there.

Speaker 3

But again, overall, we just feel that there's still that strength and stability in that storage piece. And just

Speaker 2

on the conversion piece and I think we're on record saying this, it's more about normalization than it is anything else because of the pandemic created permitting issues and occupancy rates in the high 90s mid to high 90s. I mean capacity needed to come online quickly as possible and that was just the quickest way operators could bring capacity online. But in terms of what we're seeing, it's really just coming back to normalization. And so we feel good about it, just not at those kind of pandemic levels.

Speaker 6

Got it. Thanks for that. And then just if I could touch on input costs a little bit. I think steel prices are down pretty meaningfully year to date. So just how are you guys thinking about the dynamics between price cost through the rest of this year?

Speaker 3

Yes. Steel is actually we've been following it. It's down from beginning, but it's more stabilized in terms of kind of looking at how it's been year over year. So the good thing about it is that it's always going to be volatile, but it's actually a bit more stable. So I think that just creates a better environment where there's not a lot of price that we have to do because anytime you have to do price, it's not that we won't do, we have the ability to do it, but it's always a tougher one to bring through there.

Speaker 3

So I think if it holds in kind of the area where it is right now, I think it will be a bit more stable market for us from that point of view. Got

Speaker 7

it. Thank you. Thank you.

Operator

Our next question is from Brad Hewitt with Wolfe Research. Please proceed.

Speaker 7

Hey, good morning guys. Thanks for taking my questions.

Speaker 2

Good morning, Brad.

Speaker 7

So curious to hear what you guys are seeing from a backlog perspective, maybe how has that trended recently and how far does your visibility extend this year, particularly on new construction? I think some of the public REITs have kind of talked down on the new development side of things, but just curious what you're seeing from a backlog and pipeline perspective?

Speaker 3

Sure. Yes. No, like Rami said earlier, the backlog is still holding there. And I think what we're seeing is that the tertiary markets is where a lot of the build is. And if you look at a lot of the I would say the mom and pop segment are the ones that are building in those areas.

Speaker 3

And that's where we're seeing strength there that it's still opportunity. And it is a long cycle business. It's not something that these guys look at and say, hey, just the rate here and let's stop now. I think they're looking for the long term and just recent new orders in the pipeline that we've been looking at are just a reflection of that that we've seen. Like, Raymond and I have been kind of reviewing some of those and they're still those operators are still looking for the long cycle and say, hey, this is a good return for us long term.

Speaker 3

The rates might be a bit high now, but I think they don't just look at the current peak. So I think that's kind of where we're seeing the backlog in pipeline hold up.

Speaker 2

Yes. And just to remind you, the REITs and kind of institutional, the customer base that we view as institutional represents about 30 percent of the market. And so our visibility, considering our market share is really reflective of the entire market in the Americas. So we feel like that's kind of perhaps where the disconnect is as well.

Speaker 7

Okay, great. That's helpful. And then maybe in terms of Nokia, just curious what you guys are expecting this year from a revenue perspective? And how do you think about the timing of potential acceleration there on the top line?

Speaker 2

Yes. Look, I couldn't be more proud of that team. We get 300,000 connected devices and we continue to innovate. We're listening to our customers. The latest release around ION, super proud, very optimistic.

Speaker 2

It gives us more flexibility on pricing. It gives us more flexibility on the offering in terms of what our customers actually need. And so, yes, we're very optimistic. We've got great feedback. We continue to refine.

Speaker 2

We continue to get better on stability. We continue just honestly to innovate there. So, super bullish in terms of an inflection point. I can't really predict that, but we're doing all the right things in terms of customer engagement and just refining the offering to set it up to really accelerate adoption.

Speaker 3

And so

Speaker 2

you got anything else?

Speaker 3

Yes. And we don't as you know Brad, we don't disclose the no key piece of it. But I think what Ramey said is we're bullish on terms of opportunity with the new product. We're in the middle of beta testing that product and hopefully we'll have launch later in the year for that product because it just brings a lot of more optionality to our customers and a more stable product just because it is hardwired versus a battery powered product.

Speaker 7

Great. Thanks guys.

Speaker 2

Thanks Brad. Thanks Brad.

Operator

Our next question is a follow-up from Daniel Moore with CJS. Please proceed.

Speaker 5

Thank you again. Yes, we couldn't let the call go without a Nokie question. So since that was covered, I'll go one step deeper. Just obviously, the Ion lower cost from an entry level perspective, Any differential in terms of the recurring revenue potential versus no Q1? And what are your expectations for take?

Speaker 5

I know it's early, but do you think this could be as big or bigger or faster growth relative to no Q1 as we move forward? Trying to get a sense for how you think about the relative opportunities there. Thanks.

Speaker 3

Yes. It opens up a lot of optionality. So at this point in time, the recurring is still the same that either one NOK1 versus NOK1 Ion. But what the NOK1 allows for is just a bit of optionality because a lot of the feature set on the Nokia 1 are optional on the Nokia I On, which makes it a bit more option. It's a line to different segments because some of our customers might not want all the features.

Speaker 3

So this allows them to get the base features and add on as they please. And what it also offers is even if they install the base model, they can actually add the different features after the fact, which is what we like about building this new product for our customers.

Speaker 5

All right. Thank you again.

Speaker 2

Thanks, Dan.

Operator

We have reached the end of our Q and A session. I would like to turn the conference back over to Raimi for closing remarks.

Speaker 2

Yes. Thank you everyone for joining us today. We like to remind you of our annual meeting of shareholders coming up on June 24. We encourage you to vote your shares and look forward to your feedback. We appreciate your support of Janus International and look forward to updating you on our progress again in the future.

Speaker 2

Have a great day.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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