Good morning, everyone. My name is Maggie Miller. I am one of Philip Ng's associates here at Jefferies, and we are thrilled to have Janus International here today. We have Anselm Wong, the CFO, and I am going to fire away with some questions, but we will open it up at the end if there are any questions from the audience. Just raise your hand. Anselm, I do not know if you want to give a quick intro.
Sure. Janus International. We are the largest provider of self-storage materials for the self-storage industry. We also have a commercial business, and we also have technology in our access control business, which is the largest access control provider in the self-storage industry. Very proud in terms of how that business has progressed into being the market leader in up to half a million connected devices.
All right. I guess to start off, it has been kind of a choppy backdrop this year. Can you provide some color on what your customers have been telling you and how your orders and backlogs have progressed July and August? Maybe if you could talk about if you have seen any uptick in cancellations or project delays.
Sure. Not much has really changed. I cannot comment to July and August, but if you look at the first half of this year and into current what we are seeing, it is pretty much the similar market. Very choppy. I think everyone knows interest rates have not really moved the right way. People are not moving in terms of mobility around housing. What we are seeing where the customer is, the people that have money, which is the large institutions, the REITs, certain large mom-and-pop guys, they are still business as usual, running their playbook, waiting for the market return, but also still building or as well as refurbishing sites. The smaller customers are really just been sitting on the sidelines for a while now, and they have not really come back in. I think everyone is waiting for that sign.
If you look at some of our bigger customers that are public, a lot of the feedback they have given is they are seeing a little stability in the rental rates in what they are seeing. Everyone is just hoping, "Hey, when is the next big move in terms of seeing people moving again?" Which is one of the biggest drivers for self-storage.
In terms of project cancellations or delays, no real shift?
Yeah, no real shift. I think what we are seeing is just more delays in terms of how long it takes to do a project. I think one of our newer businesses, Kiwi II Construction, that we have that does the full building, what we are seeing is just consistently just people taking longer to develop properties. I think one of the things we are seeing is just lease-up taking a bit longer than normal in terms of when a brand-new facility comes being brought on, it takes a bit longer to get leased up. So really not change and really not cancellations. I think generally in self-storage, especially for our business, where we are in this cycle is once they determine it is a good site, it is generally a good site.
People usually will hold onto that site and eventually develop it, and that is one of the good things about us having the visibility of the backlog, seeing some of these sites where they are. It is that they will not get canceled. Eventually, someone will develop it because they have picked a site, they have done a lot of background work to determine if it is going to be a good site or not.
Okay. Makes sense. Under the current liquidity backdrop, can you talk more about your visibility between the non-institutional client side versus institutional clients?
Sure. I think the institutional ones have not had a big issue in terms of liquidity and getting funds to develop properties. I think the bigger issue more in general is with steel prices going up recently, if you've tracked steel, is the cost to build a facility going to hunt in terms of their model? I think the larger guys who have access to capital at better rates than the smaller guys, they're still in the money in terms of a lot of their property developments that they work on. I think for the smaller guys that are non-issues, don't have access to capital at favorable rates, they find it harder to make their projects hunt in terms of returns. I think one of the things we're trying to do to improve that despite the market, look, the market's the market, is offer solutions to help them.
Nokē, which is one of our technology solution, is helping a lot. If you go on our website, you'll see one of our large customers has a use case in terms of how Nokē's helped them reduce their theft, reduce their labor cost to make a lot of more projects hunt because you're reducing your ongoing costs. One of the things we want to do is just continue. Look, the market is going to be where it is. How can we actually help our customers actually improve their returns by reducing the running costs?
Okay, great. R3 has been pretty solid the last few quarters. Can you talk about what is driving that growth and how you're thinking about the outlook for the back half of this year?
Sure. R3 has been a great improvement year-over-year. One of the big things we're seeing in a market that we're in is the large guys getting bigger. What you see in the public, you'll see the big REITs acquire some of the smaller guys or very large guy, but there's always acquisitions going on, and I think in this market, if you're not going to be able to build as much due to the market we're in, one of the things you do is acquire a lot of your competitors. You're seeing a lot of the competition being acquired. It could be large ones where you saw Public Storage acquire National Storage Affiliates as well as their Canada location. What you also see is smaller guys are buying up onesie-twosie guys as well, and every time there's an acquisition, that's an opportunity for R3.
One of the things that you always do when you acquire is rebranding. You want to rebrand it to your brand so that you keep that theme in terms of what your company is, as well as just reducing your SEO costs. You don't want to do two, three different brands. You want to do one brand. I think the other thing is they take a look at the occupancy rates. One of the quick wins for acquisitions when they do it, generally, if you look at the public rates, you'll see their occupancy rates are low 90%s in terms of how well they manage their facilities. If you were to do that same metric to a smaller operator, you'd see it be meaningfully lower.
One of the big levers they do in terms of their model when they acquire is that they look at, "Hey, what can I do to improve the occupancy rates of the target that we just acquired?" One of the few levers is the R3 bucket that we help them with is, "Hey, do you have the right number of units? Do you have the unit mix?" Which is one of the critical things that determines occupancy. If there's big demand for 10x 10s versus a 5x 5, then we'll come in and help them reconfigure the facility to offer larger units. That's kind of what we're seeing a lot, is that with these acquisitions, they're coming in to say, "Hey, look, I'm going to buy these targets now while the market's not great.
I'm going to go in and actually improve the occupancy of it by either reconfiguring, rebranding, adding more units of facility if they're at capacity." That's what's helped the R3 bucket in terms of growth, because we're seeing a lot of acquisitions underneath the covers in our industry.
On that acquisition work, are you seeing that level of activity sustained? Is there still a good runway for that type of acquisition activity?
Yeah, definitely. I think if the market stays where it is, you are going to continue to see more acquisitions. I think that is one of the levers for the well-capitalized storage operators that they are doing, they are pulling right now. Makes total sense for them because if you look at typical them at low 90%s, they are acquiring targets that are 80% or 70% or 60% even occupancy rates. You move that metric to even 10% or 20%, that is a huge improvement in terms of ROI in those sites. Each of them has their different playbook that they run.
But I think you are going to continue to see more and more, I think most of the large customers that are public have said that, is that they are still going to be really active in terms of acquisition, to continue to take targets off at well-returned prices that they can see in terms of adding their playbook to improve the numbers that they are acquiring.
Okay. Janus has recently made a pretty sizable acquisition in Kiwi II Construction, that is a new adjacency for you. Could you walk us through the strategic rationale and value creation opportunity-
Sure
with Kiwi II Construction?
Yeah. One of the big things our CEO, Ramey Jackson, has always stressed is how do I add more content? One of the things that we had traditionally done is we are known for our door hallway, obviously access control. We had a small business called BETCO that does the building. So not just the door hallway, but does the building. But they were very specific in terms of geography. They only did the Southeast, and they only did generally single story to maybe two story. Kiwi brings the portfolio to us to do multi-story. So their strategic competitive advantage is that they are the experts in, call it complex multi-story buildings. There are not many builders that can build for California. So if you are in the California area, one of the big issues is seismic, earthquakes.
They have actually developed their building model so that it can sustain in those regions, and that is why anyone who generally builds there uses them for those type of buildings. They have also built a lot recently in Florida. So one of the key things it did for us is that we could add more content to structures that we could not build. We did not have the expertise to build those complex structures. We also did not have geography in terms of the West Coast or Florida. So this, with our BETCO business, just allowed us to actually expand geography, but also expand the type of building we could sell.
If you think of larger REIT or institutional customers, it is always easier to go to one supplier to say, "Do everything for me." That was one of the things that initiated it for us, is that a lot of our customers say, "Hey, look, this market is consolidating. I want to deal with one supplier that I can trust, especially that is going to be around." One of the things you always worry about this market is that if you go to a smaller supplier, are they going to be around with the liquidity issues out there? And obviously, Janus has done well in terms of cash flow running our business and managing our P&L and our balance sheet.
One of the things that strategically made sense is, "Hey, let's acquire the expertise so that we can offer more to our existing customers so that we can actually build for them." Just so you guys know, because we only had the smaller, single story, two story, we really didn't build a lot for the large institution. If you look at what's being built today, more of them are multi-story because of real estate and complex buildings, and this gives us that capability.
Okay, great. It sounds really exciting. But results have been a little softer out of the gates. Could you talk about what's driving that and the visibility you have on that side of the business with backlogs or-
Sure.
bidding activity?
The good thing is that when we acquired that company, we did a thorough look at their backlog. Everything's been consistent. We haven't seen any cancellations. What we have seen is our end customers that we're building for taking a longer time to ramp up. Once you launch facilities, there's usually a three to six month rental period where you ramp up, and then you continue with your plan to expand and build other buildings. We're seeing a bit slower ramp-up timing, and that's what's delayed a lot of the projects that are in the pipeline that we need to build.
Our customer direct feedback, we asked them, "Hey, what's happening there?" They said, "Look, those sites we have, we already picked, but we need to get these other rented up before we actually give you the go sign to continue with the other projects we do that we have in the pipeline." That's caused a little softness in what we originally forecasted for. I think it's still good that sign that they're still not canceling the projects and they're still moving forward. It's just delaying a bit to get the rental up. I think the other piece that we're seeing it is much larger than a regular business. If you think a door hallway job, even a larger size facility, you rarely get to about $1 million, maybe even $1.2 million. These are buildings, so you've got a full building plus a door hallway.
The size of projects are anywhere $3 million-$6 million. So much larger projects. If we just get one project push out, that's a meaningful dollar amount that gets moved out. So you get a couple, you got the size, much larger size. Unfortunately, for us, we've never had those size of businesses, and that's really caused a bit of tougher kind of predicting if there's some delays on some of them that unfortunately moves out some of the projects.
Okay, makes sense. Your international business has been performing pretty well. Seeing decent growth there. What's driving the strength, and what initiatives do you have in place there to keep driving growth?
Sure. The market there is a little better than the U.S., not much better. But I would tell you the biggest things that we've done there to take share is really listen to our customers is one of the things that, it sounds so basic, but one of the things our new leader there that he's been in place now probably about almost two years, is he really just took a look at what we were building and providing to our customers and said, "Look, is there something that I can do differently to encourage you guys to buy from us?" And one of the things was change the door design.
One of the big things is our business in international is mainly in the U.K. originally and Australia, which has a specific door, specific paint system, which is a very high quality, very expensive, very environmentally friendly door. Whereas you go in other parts of Europe that don't have that requirement makes it less favorable from a purchase price, and we weren't selling to those other regions. We adjusted the door to say, "Hey, look, we can build the type of door you want. If you want a different paint system, different steel to support what you need in your market that's affordable." That's what he did. He really adjusted the portfolio product line to suit those other markets. The other thing that he did really well is, if you look at Nokē Smart Entry System, part of the Nokē story's been international.
He's done a great job of having Nokē go on with every door sale. I think Europe's been a bit more open to technology versus the U.S. So he's been able to attach Nokē to almost every sale that he does. That's, I think, what's helped him really outgrow some of our competitors. It's not that there's not competitors there, but I think, again, if you sit back as a customer, you want a company that's going to be around, especially if you're running the access control system for them. You can't have a small guy that just goes out of business, and then you're stuck. The system doesn't work anymore. I think he's been able to really upsell the technology, the quality, the fact that we're a well-run company that will be around to support you in the immediate future and the long term as well.
Great. I guess while we're on the subject of Nokē, you recently hit the 500,000 threshold on Nokē. Remind us kind of the financial impact that Nokē has on your business and when you see it being a more meaningful needle mover for EBITDA growth in the future.
Sure. Thank you. No, it's exciting milestone. One of the things when I first joined this company, I joined it because the access. I love technology, and one of the things that we were not doing well was we were not at scale, number one, but also we had a lot of, I would call it quality issues with the early instances of Nokē Smart Entry System. It's taken a long time to fix some of those quality issues, get better product, but also fix what's in the field. At the same time, growing the connected devices. As you know, with any type of subscription software business, you have to hit to scale before you start making money.
We were having meaningful drag on EBITDA from our Nokē Smart Entry System business, even though it's a small business. I've been through this twice in my career, and I think this finally got us to a point where the overall Nokē business, meaning hardware plus software, gets to about a break-even level. Now what we're hoping for is as we continue adding scale to the Nokē business, it starts generating positive EBITDA for the business. One of the things that it's not an exact science. I don't want everyone to say, "Hey, every dollar after 500,000 is positive." In general, it'll be that way. I think there will always be some fluctuations, but I think we're happy about it because we finally reached that scale.
What that allows us for is spread the cost of the overhead for the software engineers, for the communication costs, AWS costs, et cetera, across all the portfolio to allow us to be more profitable. The exciting thing about it is there's a trade show this week that's on. Some of our newer products are coming out. One of the things we want to do is with Nokē was that beyond just the basic access control was add more accessories and sensors to the solution. One of the big things that we're seeing in demand, once you get to this scale level, you get more customers asking for other accessories, meaning, "Hey, you guys provide the access control, which is great, and motion sensor, but I want to know the temperature of the stuff that I'm sitting in my unit. I want to know the humidity.
I want to visually see it." Part of the products we're going to launch will have the capabilities to add more accessories and sensors to the solution to make it almost like a mini security system within each self-storage unit. That's where the demand is going, and that's where, again, we're not sitting back. Even in this market, as more commercial customers use self-storage, you're getting more commercial demand for a more robust security system. That's what we're excited about is that now after getting through all the issues we had in the past and getting to breakeven, getting to scale, now we can start offering more accessories, more use cases to help our customers improve what they're offering. Because when we offer these things, the self-storage operator can sell it at a markup to their customers as well. That's where the demand is coming.
If you think about it, if you are a commercial customer, just think of the use cases that if you're holding sensitive inventory, you want to have visibility on it, either from a temperature point of view or a humidity point of view, even from a visual point of view. That's what we're launching, a lot of more accessories to go with it to help the customers. Then one of the things that we're working on is data analytics. We've always talked about, hey, once you get to a scale point, you have a lot of data metrics that you're capturing. One of the most key metrics that our customers want is if you could give early indication to when someone's going to move out, that would be huge in terms of data point.
And if you think about metrics, with AI now, you can take all the data sets that we have, look at your portfolio and see who is moving out, then go backwards and look at the data set to see, hey, why did this guy move out? What were the key metrics that we are measuring that show that, hey, why did they move out early? So there is a lot of work with the data set now that we have got really large-scale data that we can use to help our customers. That is one of the demands that we are hearing that customers would want is that that would be a good indication because then you can send in your sales team, "Hey, we can offer you a discount to stay longer," or whatever other levers that they have there.
So it is exciting to finally get to scale where you can finally use the data set that we have been generating.
Sounds really interesting. Where are you seeing adoption pick up most for Nokē Smart Entry System? Are there any areas, different customer groups where you are seeing more pushback, and how are you getting past that?
Sure. Yeah, with anything, I think cost or price is always going to be an issue. What we are seeing is that the well-funded, call it middle to large mom-and-pop guys, they are taking advantage of it, and I think we are excited about it. Again, we have a number of customers that are sizable in that mom-and-pop area that have been taking advantage of it, that see the savings. They are the proof points for us that this system works is that they are showing basically one of our customers showing zero theft after Nokē is installed, then also saving on the labor.
If you think about it, we don't talk about it a lot, but theft does happen there, and if you can actually reduce that to practically nothing, you're saving not just on the theft, but you're saving on the damage that was caused, so you don't have to replace a door or what other gate was damaged there. So it's been a huge impact there. I think that set of customers is really taking advantage. When they do make the decision, they do an all decision. It's not like, "Let me do one site here." It's all my sites that I have and all my future sites that we're doing. So that's why we're so excited about seeing the expansion of Nokē in terms of some of these customer sets.
I think eventually everyone knows, look, I think it's just a matter of time when electronic lock will be the standard for self-storage. I just don't see any situation, if you ask anyone in the industry, they'll all say the same thing is that I don't see it long-term where it's still going to be lock and key, which is the majority of it out there right now. I think your demographics are changing where no one carries a physical key anymore. If you think about it, you don't carry a key for your car, you don't carry a key for this. Why should you carry a key for self-storage? So now you can use your phone or your watch to open your lock. That's where the future is going there.
I think that one of the things exciting for us about it is that as this expands, not just the use cases I talked about, there's other industries that the Nokē technology can be applied to that we're working on as well. I think the main thing is we wanted to focus on self-storage first, but it's exciting that you can apply that technology to other industries as well.
Cool. You've seen some kind of divergent trends between your rolling steel door business and commercial sheet doors. Maybe if you could talk about what's driving each of those and what your outlook is on the commercial side.
Sure. If you look at our commercial business, the majority of our commercial is our commercial sheet door, and a commercial sheet door is very similar to a self-storage door. The only difference is it may have wind clips for wind rating, or it might have felt to make the roll-up a bit smoother. So it's a bit more robust door. Unfortunately, that market really we sold through distribution, so we don't have insight in terms of the end customer. But our feedback in terms of understanding what happened in the past couple of quarters in terms of that demand, we're seeing that metal building structure. So think about pre-engineered metal buildings that people buy that use for a mini warehouse or a small factory.
That part of the market's really shrunken in terms of demand in the current market right now, and that commercial sheet door went into a lot of those prefabricated metal buildings. Unfortunately, we saw a lot of downturn on that piece. We're still seeing the same thing, recently there. So I think that piece is what's impacting commercial sheet doors. On the other side, rolling steel doors, which is way more robust, heavier gauge steel, some have motor operators. That part of our business, which we're a small share of, is actually growing still. I think what's happened is we've actually taken a more offensive approach where we're getting more specified in architects, but we're also actually putting technology. So we've got a performance series door that runs at the peak, meaning it runs faster than most similar performance series doors.
So a lot of customers are coming to us and say, "Hey, we're offering a more competitive door that performs a lot better than a lot of our competitors." Even though we're a small supplier in rolling steel, that's really helped drive a lot of the growth in the rolling steel piece, and it'll still be a growth driver. I think, one of the things that we would like long term is to, just like we add technology from a Nokē Smart Entry System in self-storage, it'd be great to continue to look at technology adding to the rolling steel side of the commercial business.
All right. You touched on this earlier, but we've seen a lot of inflation in steel. Could you remind us how you approach your steel purchases-
Sure.
and how far hedged you are?
Yeah, sure. The way we buy our steel is we have a strong relationship with the steel mills as well as the service centers in between. The whole process usually is when we put an order in, it is usually about six to seven months, by the time we put an order in, when we get the steel. That gives us the leeway to see how steel cost is going before it hits our P&L, so we can manage commercial actions if we need to, if the steel has been going up as obviously it has been. It gives a little insight there. I think the other thing that it does for us is also help some of our customers in terms of telling them, giving the heads up, "Hey, we are starting to see this coming here. This is eventually going to hit.
Please be aware, obviously, we are going to be adjusting prices if we need to, based on where the steel is going." I think that visibility and that buying program allows us to give us that extra head start to see what is happening there. I think the other thing that I think people, where I think if you remember the last time steel went crazy like this was during, just around the pandemic, and obviously at that time, supply, demand was crazy back then. I think it was easier to pass through price at that point in time. I think for us now, in a tougher market right now, we are trying to do the best where we are trying to manage. We have to pass through what we need to pass through to make sure we maintain our margins.
I think the other thing we are trying to do is look at how do we adjust the product line to better support the customers. What I mean by that is that we have a large product line, so we are trying to say, "Hey, look, just like we did in Europe where we adjusted the product line, we have got to take a look at in our North America, what do we do the same thing to help our customers?" Saying, "Hey, look, maybe we are over spec here. Let us look at different doors that we can sell you and different other wall panels, et cetera, that meet the same needs for what you need," being aware of where steel price is going.
Okay. On that point, you are forecasting an uptick in margins in the back half of this year in a weaker demand backdrop. What are some of the self-help levers you have to drive margins, in addition to pricing?
Sure. Yeah. One of the things that we always want to do is say, "Look, I cannot control the market, but we can control a lot of variables internally for our business." One of the things we pride ourselves is really constantly looking at our footprint, where the demand is, where the volume is, and what we can do to actually improve it. Some of the things we have done publicly is we have really right-sized and consolidated some of our operational footprint to match the demand. That means not necessarily closing factor, but looking at adjusting, hey, if we had three shifts, maybe it is one shift now. If there is two factories in similar locations, let us go down to one, which is what we did in Houston.
We have really taken a look at operationally what we can do to say, "Hey, look, if the demand is going to be here for a while, let us really adjust our footprint so that we get to optimize the cost we have." We are also, at the same time, looking at opportunities to expand elsewhere as well, where there is demand. But one of the things we pride ourselves is really constantly looking at our footprint, optimizing it. It does not just apply for the factory, it applies to the back office as well. I think obviously if you have less demand, you start looking at every role. You look at, hey, how many SMEs do you need, how many procurement people need, et cetera, as you go through the entire organization. It is always an ongoing thing for us in terms of what we are looking at.
If you look at the second half, what you are seeing is a lot of the actions that we were planning end of last year rolling into this year, finally getting implemented and then seeing the results of that, in addition to pricing. But it is really maintaining optimizations of our footprint to match demand that is out there.
Okay, great. Could you walk us through capital allocation priorities, currently and talk about the pipeline for M&A
Sure.
going forward?
Yeah. One of the things like we've always prided, look, M&A, I wish I could always predict time. We can never do that. I think we always have a pipeline where we're looking at. I would say obviously we just did Kiwi II Construction I think right now it's tough to see anything that's sizable that would be meaningful. But I think one of the two levers we have is we're mindful of our leverage ratio. We're mindful of where the stock price is. Obviously, we feel it's way undervalued right now, and obviously you would expect us to pull the levers on both those two things in terms of stock buyback as well as debt reduction, as well. I think we've been smart about it. The great thing about our business is we generate strong cash flow.
It's been consistent throughout the, when we were growing, really fast as well as now in this market. We just manage our cash very well. So we, fortunately, are able to leverage and use that cash for those two key levers right now.
Okay, great. I guess kind of wrapping up my questions, if you could give us an update on what you're seeing from a competitive landscape standpoint. With tariffs and the choppy demand backdrop, I am guessing some of your smaller competitors are struggling more than you. Has there been share gain opportunities, or are you seeing an increase in M&A opportunities for some of your smaller competitors?
No, it is a great question. I think in an environment where we have the scale advantage, better processing, better pricing in a lot of our supply chain, we have been able to use that as an advantage. What we are seeing out there is you are starting to see what we kind of thought probably started probably about a year to 18 months ago, is that our smaller competitors are starting to struggle even more than we are. I think that unfortunately, obviously, when you are a smaller competitor to us, you do not have the buying programs we have. You do not have the efficiency in terms of how we have operated our business model.
You are starting to see a lot of them shrink, cut back even more than we are cutting back, as well as to the point where some of them are, I would say, tougher to make their business from a cash flow point of view. We are starting to see that happen now. That does drive opportunity for us to go back to their customers and similar customers as well to say, "Hey, we are going to be around. Janus has been a company that has been around a long time. We are well-capitalized.
We are here to help finish projects that maybe your other supplier is not going to be able to finish for you in this environment," as well as being able to look at them as a target. I think at this point, it would be tough to say whether or not they would be a key acquisition target.
I think for us, we look at all our acquisitions through a fine lens where there is certain metrics, hurdle rates they have to pass, strategic for us as well. I would say we are always looking into those ones as well, but we do not just opportunistically buy unless it is going to meet some of our internal metrics.
Okay, great. We have a couple minutes left if there's anything from the audience. Right here.
Thank you. Can you just speak to your commercial business? How integrated is it to your other business lines, and how do you think about that in terms of market share, high versus low, et cetera?
Sure. Yeah. Our commercial sheet door, like I said earlier, is very similar to our self-storage business. From an operational point, it's fully integrated, so we build them in the same plants. We have a COE model where we have certain regions that build all our products. Each factory can build all our products. That's why we can take advantage if demand goes up or down between both business and optimize there. Rolling steel is a bit different, where we do build in two of the three factories. It's getting there. Our model is to eventually build rolling steel in all of them as well, so that we can optimize there. From a commercial point of view, they are separate because you're hitting different customer sets, not self-storage.
You're hitting, it could be warehousing, or you could be hitting a hotel that you're selling the product to. But I think operationally, that's one of the advantages that we have, is that we can actually consolidate because they're in the same factories.
All right. Anything else? Well, thank you so much for being here, and thank you all for being here.
Yes, thank you, everyone.