Janus International Group, Inc. (JBI) Earnings Call Transcript & Summary

Welcome back, everyone, and thanks for joining us today. My name is John Lovallo, and I'm the senior U.S. homebuilding and building products analyst here at UBS. And we are very excited to have Janus International with us today. We have Ramey Jackson, the CEO; and Scott Sannes, CFO. So guys, thanks very much for joining us.

Thanks, John.

We'll start maybe at a bit of a higher level and maybe work our way in. But if we think about self-storage demand right now on both the sort of R3 and on the new construction side, how would you guys characterize it?

The best it's been in a generation in terms of the dynamics. I think when you look at a few of the indicators that we watch, utilization rates are at an all-time high. I think the companies that are listed in their recent earnings call, pretty much indicated that they're at circa 95% capacity. So that's a tremendous kind of tailwind for us. I think the sweet spot from a utilization perspective is 85%. So we think about that as a $220 million additional square feet of capacity that needs to come online. So I know it sounds kind of strange with the world feeling like it's melting around us right now, but our end markets are very robust. I think when you look at self-storage as a business, you can go back and look at how it's performed in economic times, and it's always been very resilient so -- and then as it relates to the commercial side of the business, commercial warehousing is pretty much the end market there. And we are a very kind of small percent of wallet shares in that business. So I see a tremendous amount of runway in that space just because of market share. I feel like there's a tremendous amount of customers to gain in the next few years before being exposed to the end market.

Okay. Helpful. And just because some folks are new to the story. Maybe you could just give us a brief summary of how you compete in both the new construction and on the R&R side?

Yes, great question. So the best way to describe, John, is at our kind of core, we're a service-related value proposition. That's our go-to-market strategy. Yes, we manufacture doors and building components. But at the end of the day, we're a solutions provider. So our go-to-market strategy with -- on the new construction side and R3 is really direct with the customer. So we're helping in the -- during the design phase of the project, which could be a year or 2 in advance of any construction. So our touch points are very early. So we're providing a lot of this value upfront for free. And when it comes time for the construction process, we're there to assist with kind of building out the construction team, working with the architects, lining up the installation, which is a very important part of the value chain, right? So we're kind of at the very end of the project. We're in the way of that facility generating revenue. It's mission critical. We understand that, and we've built out the infrastructure from a project management kind of field services perspective to satisfy that. So that's on the new construction side, R3. We're working with the largest players from a CapEx perspective, helping them build out their budgets for renovations, door replacements, technology upgrades. And then the most recent kind of trend that we're seeing is there's a tremendous amount of big box retail that I believe is e-commerce affected, and our customers are converting those into self-storage. We call those conversions. They fall in our R3 bucket. What's great about that, John, is it takes our content per square foot from a new construction perspective, from $8 up to about $20 per square foot. So that's a big win from an industry shift perspective for the business.

That's really helpful. Okay. And when we think about R3 versus new construction, is it fair to say that the R3 component would be more resilient during slowing? Or are they both equally resilient?

That's a great question. Look -- and I think it's very important during these times. But again, I point to the way the industry has behaved regardless of economic times, even downturns or robust cycle, so to speak. Self-storage was pandemic darling. I think if you look at the recession in '08 and '09, it performed. It was one of the better performing asset classes. So regardless of kind of economic times, self-storage has been resilient. And I think it's based on the fact that it's an event-based business so death, divorce, downsizing, think about what the pandemic did, people moving out of urban areas, moving to suburbia, back in. So it triggers events. So R3, is it -- is it more resilient? I don't know how to answer that. What I can say is the industry is aging. 60% of the facilities are over 20 years old. And so I think that provides a meaningful opportunity for us being a service provider. And in terms of how kind of our customers spend dollars, I think it's more opportunistic. What's the quickest way to bring on capacity, from just a capacity addition perspective, given that we're at 95% occupancy rate.

Okay. That's great. And if we think about, I mean I think there's a view out there that your business is very tied to housing, which it's not. Can you just talk about what are the big drivers?

There are events really to put it in simplistic terms. They are truly events that happen in our lives. Housing is certainly an event that happens. But there -- when one event triggers, there's always another event that's happening as well. So it's an interesting end market that has its own drivers. They're very unique to self-storage. And I think the performance of the assets kind of speak for themselves.

And how do interest rates impact demand?

Impact demand. So that's a great question as well. I think there's more of an impact on kind of the noninstitutional customer base, that are utilizing kind of local banks or regional banks. But what we've seen in the past, call it, 5 to 10 years, is a tremendous amount of institutional capital that's being invested into the space. Some of the largest private equity, KKR, Blackstone, a lot of those funds are in the space. So I think it's a little different in that, of course, interest rates impact institutional capital, but a little less than it would be a so-called bank. And then I'll kind of point to the public REITs, which are extremely active in kind of acquisitions, M&A, kind of industry consolidation. Whenever that happens, that's revenue for this business. So we're going to go in and kind of rebrand, renovate, remix, do all the R things that we do in the business. So yes, I mean, I think interest rates matter, but I think we're in a unique industry that there's a tremendous amount of institutional capital and then the REITs have their own kind of play in markets like this.

Makes sense. In terms of labor intensity in the business, can you maybe talk to that and also to just raw materials and what you're seeing out there today?

Yes. I'll kind of start, and Scott, if you want to kind of add to this. Yes, look, it's -- we're certainly not immune to what's going on there. From a supply chain perspective, I feel like we're on the other side of the kind of accelerated issue as it pertains to our business. The labor aspect is meaningful and that there's just a shortage of human beings that want to come to work and want to stay at work and the ones that do it seems like you have to pay a lot more for them. It is what it is, and we're certainly adapting to that and incentivizing and our HR team has been very proactive, but in the markets that we are -- we're kind of an employer of choice, and so we're unique in that situation there. And then what I'll say kind of counter to that before I turn it over to Scott is the labor shortage has really created the demand and self-storage for our technology. So our customers are dealing with the same things that we're dealing and so when you're dealing with human element, it kind of looks -- makes individuals, makes business owners, make managers look for automation. And that's really where that Noke smart entry system comes in from an operational perspective in self-storage. And I know we'll get to that later, but I needed to articulate that. So Scott, if you wanted to.

Yes, I think you did a great job on the labor. Just switching to the raw materials, as you mentioned, so about 60% of our raw materials are made up of steel coil. And there's been pretty significant volatility in the steel coil pricing. So we saw it peak kind of Q4 of last year. We saw it come down pretty significantly in Q1. And then spike back up pretty significantly in April due to the Ukraine Russia war. And now we're seeing a little stabilization, maybe a slight decline of late. But then the other 40% of our raw materials are made up of other components, steel intensive products, springs, axles, you've got paint, got lumber, but the vast majority of those, we're still seeing pretty significant inflationary pressures on that portion. So you got to look at kind of both pieces, but we're monitoring it closely, working hard with our suppliers, but we are still seeing inflationary pressures there.

And one of the things that you and I spoke about -- before we started was pricing and the ability to push prices through. I mean how are you guys feeling about the continued ability to do that?

Yes. Look, it's been the conversations, no one likes a price increase. No one likes inflation. But everyone understands it in these economic times. So the conversations are not easy. They're always tough, but at the same time, it is what it is. It's where we are from an economic perspective. So yes.

Okay. Makes sense. You touched on earlier, capacity utilization, you mentioned 95%, sweet spot being 85%. You have to bring capacity on -- remind me because I missed it, how much capacity it is? And what is the time frame that you think that...

Yes, it's 220 million square feet is the way that we look at that. And time frame, as quickly as possible. I think that's why you're seeing acceleration in the conversion kind of avenue in terms of bringing capacity online. These are existing structures. They're in great locations. We can go -- we're basically doing everything on the inside of the facility and we can go in and complete the project in a shorter amount of time than Greenfield. So I see that being a continued driver. I think big box retail will continue to be affected by e-commerce. I think -- so there will be tremendous amount of inventory or kind of commercial space that's in idle. And so we'll see. I mean it's more of how quick can we get it out there, but it's going to take years to bring that type of capacity online.

Any concern, just -- I mean, obviously, if there's concern about the economic cycle, but any concern that you're bringing capacity on. Understanding it's going to take time, but during maybe a peak in the economy?

Again, we play in a space that's really not -- that drives in life-changing events. And so regardless of that, the only time I've ever seen this business slowdown was in when capital stopped in 2008, right? And I think that's indicative of pretty much everything on the globe at that point in time. But even kind of peaks and valleys from an economic perspective, [ sands ] capital drying up, this business really thrives. The end market really thrives. So -- so I think we're in a unique position. The R3 side of the business is more meaningful. It represents about 68% of our backlog and so even if there are kind of pauses to new construction, I think the end market is so good that they'll continue to invest in kind of renovation. And bringing things up to standards. There's a lot of new supply, very sophisticated facilities that are in the marketplace that operators have to compete with.

That's helpful. Okay. And then we'll jump to international for a minute. It's about 10% of revenue. Where is the opportunity there? And how does sort of the international market differ from what we see here domestically?

Yes, good question. So the way that we view the international market, so we have operations in kind of Europe and also Australasia. And we feel like those are 10 to 15 years behind the states. We're in those markets because we basically followed customers, a lot of kind of U.S. investment in those markets. So we remain very positive on the outlook. We feel like we're there at a very early stage. So that's a good thing. I think the technology opportunity seems to be robust. There's a quicker adoption to the access control offering that we have. And keep in mind, we're only in self-storage in these markets. We're not in the commercial industrial space. So that's really what we talk about in terms of expansion and either organically or through M&A is the commercial piece that we're very familiar with. We've been in the space for 2 decades and understand that business model. So there's some -- a lot of growth opportunities on the commercial side. And also, we just feel like we're in a kind of a very early innings of expansion on the self-storage side, along with technology opportunity.

And has there been any demand impact from Russia, Ukraine, any spillover?

So first of all, we don't have operations in those 2 countries. We're extremely focused on it. There's a kind of a component to steel that comes out of those 2 countries that has impacted us and from a price perspective, but outside of that, we haven't been affected by the unfortunate war.

Yes, sure, exactly. In terms of volume or demand, no, it's more on the continued raw material inflation side of the equation with what Ramey was saying, the pig iron out of Ukraine and Russia, I think 60% of the world's supply came out of those 2 countries, and so it's creating a little havoc at the moment.

How about the shutdowns in China, in Shanghai and Beijing, any material sourcing affected there?

No.

Let's talk about Noke because I think that's a pretty exciting -- exciting opportunity. Give us just a brief overlay of what it is, and then we'll get into some of the...

Yes. So Noke today is an app-based Bluetooth kind of access control solution for self-storage. We are a, well, I mean. [Audio Gap] Our commercial settings or even the way that we operate vehicles so it's pretty common technology in other industries, but new to self-storage. And we invested in a company a few years ago called Noke which is a Salt Lake City based company. It was a startup and have integrated it into kind of the hardware and the manufacturing processes as it relates to doors, so it's fully integrated into our manufacturing process. So I'll kind of pause there and we can go deeper.

Sure. Where is the adoption rate today. Where can it go?

Adoption rate is small. It's a small part of our revenue. We had our best quarter last quarter. The way that we look at it is there are 22 million doors in the industry. And so that's over a $5 billion opportunity. And we kind of break it down and look at it with a 1% kind of adoption rate and have forecasted that out over 3 years, and we're comfortable with those estimates. We're not giving revenue to the Street at this point in time. We certainly will, once it becomes more meaningful. But at the end of the day, it's picking up a lot of steam. I think when you look at the pandemic, it put technology at center stage from a contactless perspective. And so that was a tailwind. And then the labor issue that I mentioned, general labor issue that our customers are going through as well. So it's really accelerated the need for technology and specifically technology that will help an operator minimize their operating cost and maximize their operating efficiency.

Okay. So it sounds like you certainly have first mover advantage here. From a technology standpoint, though, what is the moat around this? I mean, what would stop others from getting in?

Look, I know for certain, we'll have competition. It's too big of an opportunity and I get that asked a lot in terms of why aren't the big guys in it? What I can tell you is part of our kind of Board makeup agendas or former Honeywell executives that kind of grew up in the space and executed at a very high level and kind of automation and technology. And what they'll tell you is self-storage just flew under their radar. And so I would say that that's probably true for the other big kind of large industrial technology companies as well. But there's no question we'll have competition. But the way I look at it is we're a first mover. When you look at our market share in the space, 80% institutional market share, that gives us an overall about 50% market share in the entire space. We have 2 decades and more, actually, of performance and trust with our customers. It's integrated into our door. We've gone through years of working with the third-party -- kind of third-party management software companies from an integration perspective. So we're integrated with most, if not all the large players in this space, and that takes a lot of time in relationships and trust. So I just feel like we're in a great spot to take the lead. We are in the lead, but continue and to drive up to the adoption rates that we feel like we can get to in the long term.

Makes sense. I mean is there any risk that like a ring or some of the technology similar to that, our competitors similar to that could step in?

Sure. Yes. But it's not going to be the same solution. It's not going to integrate with the management software. It's not going to provide the amount of data. It's certainly not going to provide the security that the Noke product. But keep in mind, this product will change over time. We're at the very early innings of it. We'll continue to build out kind of the hardware and software features as the industry adapts and we adapt. And so yes, this is just a very early innings. I think we're on kind of Gen 3 in terms of the hardware solution, and we continue to add a lot of software offerings so...

Okay. Helpful. Let's talk about the financials for a moment. There's not a tremendous amount of historical data, but you guys did hit 25%, 26% adjusted EBITDA margins. What's kind of the path back to there, if that's the right number to go to?

Yes. No, great question. I'd say if you look at the -- our recent updated guidance we provided, right, there's a meaningful step-up in margin profile in the second half of the year, probably around, call it, 24% type adjusted EBITDA margins as we're exiting the 2022 year. And I would say if you keep in mind the historical numbers did not have public company costs. So if you really just take the historical numbers back of public company costs and our run rate in, call it, Q4 of 2022, we're in, call it, in the ballpark, maybe within 50 basis points of that number. And then we're going to continue to work on productivity improvements. There's still additional synergies from the DBCI acquisition that will not have a full run rate in '22 into '23. We'll continue to get operational leverage as we continue to have the volume growth. So we're comfortable that in the midterm, we should be able to get back to those EBITDA -- historical EBITDA levels.

And what type of revenue growth does that imply to get to those margins? What's a good trend rate to think about?

Yes. I mean it's a great question. I mean the operating leverages, to me, is a small part of what is needed there. I think it's more on the synergies, things like that so -- and obviously, we haven't really provided guidance on future growth rates.

Okay. No. That's helpful. Let's talk about capital allocation. How do you guys see that this year as we move forward.

Yes, I think the best way to kind of answer that is we'll continue to maintain a balanced approach for the short to midterm right now. We're focused on continuing to fund CapEx -- continuing to fund strategic growth initiatives and then largely working on delevering the business. I think we've mentioned historically, we're a little over 4x kind of right now where at the end of Q1 our goal is 2.5 to 3.5x. And if you look at our guidance that we've provided, we believe by the end of this year, we'll be kind of at the high end or near the high end of that range. So just obviously, the business has an exceptional cash flow profile, and it offers us the ability to delever the business pretty quickly. That said, M&A has been a kind of a core competency and a strategic focus for the business. We're continuing to review M&A activities. But right now, I think our primary focus is delevering. But if a highly strategic and accretive opportunity presented itself, we would -- presented itself, we would obviously take a serious look at that and figure out a way to make that happen and get it closed out.

And what would a deal look like if you were to do it now? Is it more on the technology side? Is it more on building out capacity? How should we think about that?

I think the answer is kind of all of the above. If you look at -- we've got a pretty robust pipeline of M&A opportunities today. We've got a director of business development, corporate development that focuses solely on kind of fostering that pipeline. Ramey and I are intimately involved in meetings with him on a regular basis and helping kind of drive strategy or direction there. But I would say, again, it's really any and all of the above. We're going to look to obviously be strategic. We want it to be accretive. Obviously, we like acquisitions that have good free cash flow profile similar to our business, but whether that's an opportunity to grow the international business, whether that's an opportunity to bolt on to the technology side, whether that's additional content per square foot on the self-storage side, for us, we're looking at kind of anything and everything. Obviously, the commercial side, to continue to build that out. So it's -- we're kind of fairly open-minded there and anything that, again, adds value for our shareholders is something we will strongly consider.

Perfect. If we think about just sort of the strength of the industry right now, how are seller expectations? Are multiples out there on the higher side that folks would be looking for?

Yes. I mean it really -- again, it really varies pretty substantially depending on the end market. I mean, clearly, the technology side is always going to demand a higher multiple than some of the other maybe end markets that we participate in. We're just -- again, we're being really thoughtful, careful. I think our view on this is, with the inflationary pressures and some of the difficulties in certain end markets, we feel that there may be some opportunities coming up here in the near term that could present some interesting M&A targets and opportunities for the business.

Okay. Makes sense. Given that you guys are a newer company to the public space, what do you think, I mean it's been a challenging market for everyone, but what do you think the market is missing with your stock? What do you think is the story that you really want to get out there and say, hey, this is what you guys should be focused on?

I'll start.

Yes.

Look, I think it's easy to look at this business from 30,000 feet and say yes, it's a products company. Yes, they make doors. They're self-storage or whatever. But like I mentioned at the beginning, at our core, we are a solutions provider. We're very unique in our go-to-market strategy. It's one of the reasons we've gained the market share and the trust of the customers that we have and positioned ourselves to be mission-critical and be valued the way that we are and to drive the type of margins that we are. We're not -- we don't bid on projects. We're not just to make the door and drop it off. Whatever we make, we want to manufacture. We want to install. We want to help be on the front end of that to design and consult. We want to be there through -- throughout the entire kind of life cycle. And that's what this business is and that's how we go to market, and that's what we continue to build on. And I think that's very unique. And so from my perspective, I think that's very -- that's a key component of our success. That results in a lot of the results that Scott speaks of on the financial side, whether it's cash flow and margins and things of that nature. So it's important that investors and people understand that.

Yes. And then again, in our coverage universe, specifically, it doesn't fit quite well in anything else that we cover. So I guess the question is, when you think about comps, when you think about valuation, I mean what are the right ones to look at? And why.

That's a great question. I'll let you tackle that one, Scott.

Yes. Great question. I think we struggle with that a little bit as well, right? If you look at our leading position in the self-storage market as well as, albeit, a relatively small market share on the commercial side, still, from our perspective, leading positions there. There really isn't any great, great comp. I think we kind of look at it internally. There is no other public company that you can just point to and say this is a true peer group comp for JBI. If you look at -- as Ramey just kind of alluded to, right, if you look at our growth rate, if you look at our free cash flow profile, if you look at our relatively low CapEx requirements, the margin profile, it's -- again, there isn't really -- sorry, and then on the industrial market, the buildings product market, it's really hard to find a true comp. So what we are in the process of doing is we're trying to build out a peer group set, if you will, and then we plan to kind of share that with the marketplace and help kind of guide them too. Here is the reason why we think these are the best peers in the class, whether it's because of their free cash flow profile, because of their above GDP plus-plus growth opportunities, whether it's their high adjusted EBITDA margins. And so we're working on kind of building that peer set out, and we'll be sharing that with the market, hopefully, in the near term.

Do you want to give us a little teaser?

I'd prefer to hold off and we'll share that shortly.

Okay. That's fair. And given that there is not another company like you in this industry, and margins and returns are very good. What's keeping competition from coming in? I mean what would it take for someone else to come in and sort of roll up the market or kind of try to copy what you guys are doing?

Great question. I think, look, I think if you look at our history and how we got here, there's something to say about pretty much living in the industry, our entire careers, developing very important relationships and growing with our customers and being on the front end of innovation and helping them grow. We're truly a trusted partner, and we didn't get here overnight, and it's hard to replicate. From a manufacturing perspective, yes, it wouldn't be hard at all to get into the business. But to operate in the capacity with the value proposition, the way that we do take is many years. Again, we're celebrating our 20th year in business this year. So not to say it couldn't be done, but it would take a long time to get anywhere close to where we are today.

Yes. That makes sense. What about just your footprint today? Where do you -- ideally, are there other markets that you want to be in that you're not in? Or how do you see that sort of evolving both domestically and internationally?

Yes, great question. I think from a North American perspective, the self-storage side, I feel like we're in a good shape. We acquired our largest competitor recently, DBCI, and so that came with an existing footprint. And so we're kind of utilizing -- strategically utilizing some of that space to grow geographically, also consolidating some. But I think when you look at geographic expansion on the commercial industrial side, it's meaningful. You have a lot of discussion about what the next step is there from manufacturing perspective. And then, as I mentioned, kind of in our European business and Australasia business, it's strictly self-storage and it's very easy for us to shift into commercial. So there's a lot of expansion opportunities, geographic expansion opportunities on the self -- I'm sorry, the commercial industrial side, organically and inorganically.

And if we think about the self-storage component internationally versus domestically, it might be kind of a silly question, but are there different uses that people have for the storage? I mean if we look at different markets? Or is it generally these life events that are...

It's life events. I think Americans [ were ] orders. We hold on to stuff. I think it's a cultural thing. I think when you look at the Japanese market, they've really accelerated their adoption and usage and understanding of self-storage. And it's really -- it's a cultural thing. And I think it takes time. I think there's a commercial component to it, about 20% of self-storage users are commercial, whether that's a trade spin or landscape or whatever or even e-commerce or pharmaceutical, a lot of those industries kind of utilize or use that for warehousing. So -- but on the residential side, kind of consumer-driven resi, I think it's more cultural. And I think the pandemic brought self-storage a lot of new customers. And if you know anything about storage and you look back, it's super sticky. So I don't expect the kind of penetration rates to decrease after the pandemic-related increase.

All right. Well, I think that was a great summary of your business. We appreciate both your time, Scott and Ramey. Thanks again for coming.

Thanks for having us.

Thanks, John.