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

Thank you, operator, and thank you all for joining our third quarter 2023 earnings conference call. We hope that you have seen our earnings release issued this morning. Please note that we have also posted a presentation in support of this call, which can be found in the Investors section of our website at janusintl.com. As a reminder, today's conference call may include forward-looking statements regarding the company's future plans and prospects. These statements are based on our current expectations, and we undertake no duty to update them. It is important to note that the company's actual results may differ materially from those anticipated. Factors that could cause actual results to differ from anticipated results are contained in the company's latest earnings release and periodic filings with the Securities and Exchange Commission, and we encourage you to review those factors carefully. In addition, we will be discussing or providing certain non-GAAP financial measures today, including adjusted EBITDA, adjusted EBITDA margins, adjusted net income and adjusted EPS. Please see our earnings release and filings for a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures. I'm joined today by our Chief Executive Officer, Ramey Jackson, who will provide an overview of the business and give an operations update, and our Chief Financial Officer, Anselm Wong, who will continue with a discussion of our financial results and outlook, before we open up the call for your questions. At this point, I will turn the call over to Ramey.

Thank you, John. Good morning, everyone. Our record financial results in the third quarter built on the foundation established since we became a public company almost two-and-a-half years ago. We continue to deliver solid top-line growth, profitability and rapid deleveraging while generating strong cash flows that position us to execute our disciplined capital allocation strategy. Our results through the first nine months position us well to deliver another year of outstanding performance across the platform. The fundamentals that drive our customers and our industry remain resilient against a backdrop of economic and geopolitical uncertainty. Self-storage occupancy rates remain above mid-cycle levels, driving demand for new capacity from facility owners. Our backlog and visibility into our end markets gives us confidence to once again raise our outlook for the year and positions us to achieve our longer-term goals for revenue growth and margins. I would like to thank all of our employees, without whom our success wouldn't be possible. Now turning to some specific thoughts around the quarter. Janus' record third quarter operational and financial results included solid year-over-year gains in revenues, significant margin improvement, further deleveraging and strong cash generation. The fundamentals inherent throughout the industry that fuel investment decisions by our customers to add much needed capacity are happening both through new construction as well as conversions and expansions. Over the last two quarters, the trend has favored new construction. Prior to that, R3 was the greater benefactor of customer spending, driven in part by the availability of unused brick and motor retail space or repurposing. Demand drivers for our business remain strong, and our comprehensive platform of self-storage solutions means that while customer buying patterns may ebb and flow between new construction and R3, we are there for our customers with comparable economics for both project types. Our…

Thanks, Ramey, and good morning, everyone. In the third quarter, revenue of $280.1 million was up 6.7% compared to the prior-year quarter. New construction led the way, while R3 and commercial and other were lower versus the prior-year quarter. We continue to show a good mix of diversity and stability from our offerings as evidenced by our consistent revenue growth, led by new construction in recent quarters. While we may see significant outperformance in a given segment during the quarter based on timing of projects, revenues continue to be well-balanced across our free sales channels over a 24-month period. Now, diving deeper into the sales channels. Our overall strength in the quarter came primarily from new construction, which was up 40.3% year-over-year. The improvement was a result of the combined impact of commercial actions taken in 2021 and early 2022 to offset inflationary pressures on many of our key inputs as well as volume growth. Our R3 segment was 1.9% lower in the quarter, primarily due to the timing of projects as well as a strong third quarter of 2022. The self-storage segments of the business continue to produce roughly two-thirds of our revenues, as they have consistently for the past few years. Fluctuations between construction and R3 are expected throughout the year based on the timing of projects. Year-to-date, R3 is up 9.6%. In commercial and other, we were up against difficult comparison to a particularly strong 2022 quarter, which resulted in a year-over-year decline of 11.1%. As markets continue to normalize, we have seen shifts in demand for certain product lines, which were at an all-time high during the last couple of years. Our products are used in a broad range of end markets, including hotels, warehouses, pharmacies, fuels and many others. We see continued potential for increased…

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

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

Hi. Thanks. Good morning, everyone.

Good morning, Brad.

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

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

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

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

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

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

Thank you.

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

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

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

Yeah. I think, Dan, what I'd add is that, as you know, in our new construction business, it's nine to 12 months for any project to get through that backlog. So, there's obviously some timing in terms of what some people might say what's happening there. But as a reminder, I think if we look at our REITs and our institutional customers, they're well-capitalized or well-funded. And even our regular customer set, if they take advantage of our Nokē solution, they have an upper advantage in terms of ROI, because it helps them improve their running costs. So, I think there's a blend of both that is still happening and keeping the industry strong for us.

Very helpful. And then, Nokē, obviously, it was great to see the one large customer accelerate, the Screen rollout. What are you seeing in -- obviously, it's a crystal ball question, but might we see a little bit more of a snowball effect with the larger folks maybe pushing one another on conversions? Are you seeing any increased dialogues from others as a result of that one or two?

Great question. I think what you're seeing a lot is Nokē coming up even more or so, because there's a big pressure on what do you do with costs? Our customers, obviously, labor costs is their number one, number two cost in any one of their facilities, and a lot of them are looking at solutions that will help them reduce that cost. And obviously, as you said in the past, Nokē is that one solution that really helps them reduce the need for the amount of labor in their site. So, a lot of discussion on that. And I think there's -- what I would tell you, in this past, even more discussion about, hey, how do we leverage that solution to actually get those savings.

All right. Last one, I'll jump out. But obviously, with the work on the leverage and the cash generation, you're in a lot more position of strength and flexibility. I appreciate the color on M&A. Anything else from a capital allocation perspective? Given the valuation of your own shares, is that something you might consider in a significant way as well?

I think everything is on the table like we've always said. I think I want to restress, M&A is a priority for us. I think, like we said earlier, deals are starting to come with a bit more realistic expectations on pricings. So hopefully, we'll see some more come down through the pipeline that we have. And hopefully, we can actually execute. It's one of those things where we know that we do a great job of executing once we find the right target. So hopefully, that will happen.

Okay. I'll jump back if there are any follow-ups. Thanks again.

Thanks, Dan.

Thank, Dan.

Next question, Jeff Hammond with KeyBanc Capital Markets. Please go ahead.

Hey, good morning, everyone. This is David Tarantino on for Jeff.

Hey, David.

Hey, David.

Maybe on -- I'll start on the margins. It looks like the guidance applies a little bit of step back in 4Q, and it sounds like there was some unusually strong mix in self-storage. Is it this kind of just implying this rolls off into 4Q? And then, maybe on that, can you maybe talk about the sustainability of kind of these gross margin levels in particular going into next year?

Yeah, great question. I think there's a small roll off. We had said that prior quarter, we had very favorable mix. We saw, still seeing some of that favorable mix, and like you said, between higher self-storage growth there. I think for a long-term sustainability, one of the things we've already said is that we're always looking at productivity, constantly opportunities, and they are still there. Our two factories that we're working on putting in place are not up yet. And once those two go up, we'll get further productivity. So, I think there's definitely more sustained productivity to help continue margin improvement.

Okay. Great. Thank you. And then maybe just to put a finer point on the new construction and R3, I mean new construction was surprisingly strong and R3 took a little bit of a modest step back. It seems like this might have just been timing. Maybe how should we think about this for the rest of 2023 and into '24?

Yeah, it's definitely timing. If you look at our customers, obviously, they do both types of transits generally. They could be doing new construction and R3 at the same time. And sometimes just timing dictates that they want the new construction done earlier. So that's kind of all we're seeing right now. If I -- the other way we look at it is just looking at the total customer spend with us. And as you blend the two, you can see it's very strong and robust in the self-storage side.

Great. And maybe if I could sneak one more in. Could you give us a little bit of color on commercial? Obviously, it declined against what was really strong compares. Maybe how should we be thinking about this going forward?

Yeah. I think what we had said in prior, it's still the same thing. It will continue through the end of the year. Definitely strong comparables last year. But also, we said that we had some really strong segments of that commercial business that was just really strong. It's back to a normal type of growth number. So once we get past that strong compare that we had by the end of Q4, it should be back to a more normal kind of growth rate in the commercial business.

Great. Thanks, guys.

Thank you.

Next question, Stanley Elliott with Stifel. Please go ahead.

Hey, guys. This is Andrew Maser on for Stanley. Thank you for taking my question.

Hey, Andrew.

On the services revenue, you all posted nice growth in the quarter and year-to-date. I was wondering if that's driven by like existing services offerings, or are you expanding into adjacent services? And also, do you have any thoughts on how this business performs if we were to see product sales slow?

All right. Just a comment on the services piece, like we said, you're looking at the split between products and services, how we account for it. And it's just a bit of timing like we said in other [quarters] (ph), sometimes you'll see the service piece be stronger than the products piece. In general, we sell a full solution to our customers. So again, sometimes timing dictates what happens for some time, you'll see the product piece in one quarter strong than the other. But in general, overall, between the two, especially in the self-storage, still fairly strong for both. As to your question about kind of what happens if there's slow down, it generally, again, would happen to both at the same time, right, because it's a full solution offering. And again, right now, based on the backlog, based on the [indiscernible], we still see it fairly strong for both. But you may see a split between how much is in R3 versus new construction, as well as timing on when it's going to be in service or the products.

And then, on the fourth quarter guide, I was wondering if you could expand a little bit more on your outlook for incrementals in the fourth quarter, and I guess, in the next year or two? And where are you still seeing inflation? And do you foresee the need for additional commercial actions into next year? Thanks.

Sure. Yeah. We haven't provided guidance for next year, but I'll give you a little color. If you look at what we're seeing for inflation, obviously, steel is our biggest component driver that we use. And if you track steel beginning this year until now, it was going down. But if you look at the last couple of weeks, it's coming back up the other way. I would tell you that I wish I could forecast it better than anyone else, but it is what it is, commodity. So I think the key thing is we have the levers that we need to do from a commercial action if it sustains one way other way. I think right now, if you look at where the latest is, it's actually going back to almost the kind of average at the kind of high point. So, we're not past there yet. So, I think it's just -- it's costs we're going to have to continue to watch and then have the appropriate action if we need to based on where it's sitting.

Thank you.

Next question, John Lovallo with UBS. Please go ahead.

Hey, guys, good morning. This is actually Spencer Kaufman on for John. Thank you for the question and nice results.

Hey, Spencer.

Maybe my first question -- hey, Anselm, overall sales were up 7% in the quarter. Is it fair to assume that this is mostly volume? And how are you guys thinking about pricing actions over the next quarter or two? I'm trying to kind of tie back your comments around steel pricing coming in for most of the year and then getting a little bit more volatile in the last few weeks.

Yeah. I think, again, it's been volatile, but if you look at the average where steel is at, even with the more recent announcement of steel price increases, it's still kind of -- if you did an average, you're still about the average where we did our last commercial actions. So, at this point, again, not saying that we wouldn't do an action if we need to, but right now if you looked at that, you'd assume, hey, where we price it is probably matching kind of where our cost is coming in, right now on average. And in terms of kind of what you saw in volume, it's a mix. If you look at the overall, a lot of the growth is still pricing. But if you look at it split between commercial and the self-storage side, yes, there's a decent amount of volume that we're seeing on the self-storage side.

Okay. That makes sense. I think you talked about a newer competitor coming into Nokē's market fairly recently. Can you just give us an update on how you're seeing the competitive dynamics in that business?

Still I think it's still early to say, because I think, there's definitely competitors in there. But just to -- at least from our view of the market and what we've seen so far, we haven't seen anyone or close to kind of, obviously, the amount of deals and implementations we're putting in right now. And I think it's good to have another challenger out there. I think if you look at our Nokē solution what we offer there, let's just say there'll be more offerings coming out of that since that we're doing because of what we've learned with the initial solutions that we've had out there, and constantly looking at how to improve and add more value-added offerings to our customers.

Yeah, one more thing. The new entrants, just right off the bat are generations behind where we stand today. We've been at this for several years, very integrated into our customers, are learning a lot, adapting to their actual needs. We continue to bring out new products. The AWS partnership was extremely beneficial, and we're starting to see that with the productivity in the solution. And keep in mind, we integrate this with our doors and hallways. So we're the number one provider in the space. And it's just going to be difficult for competitors to kind of match that value proposition.

Right. Okay. That's super helpful. If I could just squeeze one more in here. Any thoughts as to where industry capacity utilization is right now versus a target 85%?

Yeah. I think it's in the mid to lower 90%s right now, depending on -- we haven't heard all of the REITs report yet, but I think the ones that have reported are around mid to low 90%.

Thanks, guys.

Thank you.

There are no further questions. I would like the floor over to Ramey for closing remarks.

All right. Thank you, everyone, for joining us today. We appreciate your support of Janus International and look forward to updating you on our progress. Have a great day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.