Matt Frankel: Hi, Fools. Welcome to Real Talk on Backstage. I am Matt Frankel, your host. I am joined by Scott Sannes, he is CFO of Janus International. They recently went public via SPAC and he is here to tell us about his business, what they do, and answer a few questions about what's going on in the self-storage real estate world. Scott, thank you so much for joining me today.
Scott Sannes: Thanks for having me, Matt.
Matt Frankel: Awesome. You are a CFO of a company called Janus International, for those of us who might be unfamiliar, I'm familiar with what you do, but for those who aren't, can you give us a quick overview of what you do?
Scott Sannes: Sure. Happy to do that, Matt. We are a genesis of leading global manufacturer and supplier of Turnkey self-storage, commercial and industrial building solutions, including roll-up and swing doors, hallway systems, relocatable storage units and facility and door automation technologies. We are the provider of choice for new construction in what we refer to as R3, which stands for replacement, remix, and renovation, which represents our aftermarket business. We are integrated throughout every phase of a project by providing solutions spanning from facility planning and design, construction, technology, and the replacement, remix, and renovation of damaged or end-of-life products.
Matt Frankel: At least around me, the self-storage industry has really been doing very well lately. I imagine you are seeing that pretty much all over. This sounds like a really interesting business. One of the reasons I personally like the self-storage business is because the economics are great. It's not a very capital heavy form of real estate as compared to say, building a hospital or an office building or anything like that. Can you briefly just walk us through the economics of the business. You're the leader in what you do, why is this an attractive business from a financial perspective?
Scott Sannes: Sure, great question. Overall, the health of the industry in our business has remained robust throughout the past year plus. We point to occupancy rates in the mid '90s, which is well above the historical norm of the mid '80s for the industry, and why that's important is that in order to return to the mid '80s level, a significant amount of new additional capacity needs to be brought online. In addition to that, the installed base of the self-storage properties consists of approximately 60 percent of facilities being greater than 20-years-old. Customers of self-storage facilities, continue to demand more modern, safe, accessible facilities. The owners are increasingly turning to us to provide that through the program. As we watch the investments, REITs, and other institutional investors are making in the sector, we expect that trend to continue and potentially accelerate, which bodes well for our business.
Matt Frankel: You just mentioned the REITs. I imagine that there are only a handful of publicly traded self-storage REITs. If I had imagined that most of them are your customers in one form or another.
Scott Sannes: That is correct.
Matt Frankel: You briefly answered this next question already, but I want to dig into it a little bit more. You mentioned the need to modernize the self-storage industry. I know there are probably a dozen self-storage facilities within three miles of my house. Most of them look like garages that were built in the 1970s. Some of them look like big modern buildings. Can you walk us through when you say modernizing the self-storage space. We don't just mean newer garages, we mean incorporating technology into them, making them what modern customers want. Can you walk us through a little bit of what that means, why it's important and why it makes it a better business.
Scott Sannes: Sure. Yeah, I can maybe address the first part of the question and then peel back the onion a little bit. You mentioned, really when self-storage started in the United States there was more of what I call the traditional drive up locations, so sprawling space with generally speaking, single-story drive-up facilities. Today, you see multilevel, climate-controlled. Obviously, just with the scarcity of land, you've seen that model change significantly and with the new model, you're able to obviously modernize the facility, if you will, and use things such as the Noke smart entry product line, which I will touch on here in a second. But basically, a couple of things are really driving that modernization. One of them is, as I alluded to earlier, the REITs and the institutional investors, that segment of the industry tends to be very ROI focused and they're going to continue to reinvest in their facilities and modernize them as they are competing for customers. In addition, as the REITs and the institutional investors continue to consolidate the marketplace, that will create tailwinds for our business in terms of the R3 opportunity or again, the aftermarket business. Again, we touched on the aging of the self-storage facilities. The useful life of our storage units without refurbishment tends to be somewhere between 25-30 years. If you imagine, as I gave you a little bit of a picture, a typical unit built 25-30 years ago, looks very different from what is being built today. Most of the owners, generally speaking, do not do major updates or overhauls until their facilities are circa 20 years older or sooner if they get consolidated up by the institutional investors. Then I think lastly, I'll just touch on our Noke smart entry product offering, which I alluded to from a modernization. That's our access control solution which enables tenants to access their self-storage units via mobile app. The interest in that product line has been bolstered by the pandemic and that we're seeing more and more demand for contactless business transactions.
Matt Frankel: I'd imagine something like the Noke system would add value from an ROI standpoint as well. I know, for example, in the apartment industry that if you add smart home technology to a building, it makes it more valuable rent wise. I would imagine the same thing could be said for the Noke system to the point where it would pay for itself for months.
Scott Sannes: Great point. We're seeing again with the ROI-driven section of the self-storage industry, which tends to be the REITs and the institutional investors that they are getting that ROI computation if you will, and you're absolutely right. It changes by facility and by dynamics, but we're seeing the owner-operator unable to charge incremental rental rates for having the smart unit. We're also seeing commercial insurance savings because there's security features with the Noke smart entry product line as well. Then in addition to that, you are also seeing some of the individuals employ dynamic pricing models in that they have the ability now to access and access to data, telling them how many times individuals are accessing self-storage facilities and maybe just quick case in point. It's estimated that about 20 percent of self-storage tenants are commercial tenants, which tend to create a significant amount of wear and tear on a facility. Now with the access to the data, how many times somebody is accessing the unit on a daily basis through the mobile app. They're able to utilize that and again, with the high occupancy rates that exist today and the ability to continue to drive up pricing we're seeing some owner-operators raise rates for those commercial tenants. If they are able to get the incremental revenue, great. If they vacate, they will still be able to probably drive up the rental rate and get less wear and tear on their facility, so there's a lot of levers that an owner-operator can pull. Into your point, we are seeing sometime the payback being less than a year depending on the facility.
Matt Frankel: You mentioned a little while ago that, I think you said industry-wide occupancies are in the '90s right now, historically they were in the mid '80s. It seems like that would be a perfect environment for organic growth in your business. But I was looking at some of your materials and you've been very acquisition heavy in the past? I want to say 11 acquisitions since 2013. What's your growth strategy in the near-term as that the market starts to find equilibrium and on a more long-term perspective?
Scott Sannes: Great question, Matt. Several levers there for us to grow. You touched on over the past two decades, we have consistently expanded our product offerings to the self-storage industry, while also diversifying product and solution offerings into the commercial, industrial and, markets. Over just the past five years, we've doubled our business. We expect to replicate that growth rate in the future. We have a very strong position in self-storage and a leading position with our customers and all of our business segments. We feel that our market position, along with our innovation and integrated approach can put us on a path to continue to take market share. An important part of our story is innovation as we just touched on. We're taking several steps to combine our best-in-class self-storage offerings with new and innovative technologies to redefine the total self-storage experience. One of the largest innovations and biggest growth opportunities is that of our Noke smart entry product line that we've just touched on. For us, that's a multibillion-dollar opportunity. We're very excited about the potential opportunity that that product brings to the business. You mentioned M&A activity as well. In August, we announced the strategic acquisition of DBCI, a manufacturer of steel roll-up doors and building products for both the commercial and self-storage industries from Cornerstone building brands.
The acquisition broadens our customer set to now include DBCI's core general contractor, and distributor base. It provides us an opportunity to deliver more comprehensive value-added solutions to them. We're very excited about what the future growth potential of the DBCI business presents for Janus. A couple of other key levers for us, we're continually focused on growing our content per square foot within the self-storage industry. We have a track record of consistent growth here and we're focused on continuing to grow our wallet share with our existing customer base. I think another key growth platform for the business is the commercial market opportunity. We believe that it presents significant opportunity for growth, especially when you consider our current estimated market share is approximately five percent. We're continuing to focus on our strategic growth plans there to grab market share. We expect to continue to leverage our excellent customer service to further penetrate the large addressable markets. Largely are three, the aforementioned Noke access control. We already touched upon the industry and market fundamentals with the high occupancy rates and the aging installed base, which also continue to create tailwinds for the business. I think maybe lastly, we intend as you mentioned and alluded to the significant contract record of M&A activity. We continue to intend to build upon our strong track record of identifying, executing, and integrating acquisitions to support our strategic growth. Focusing on diversifying into attractive adjacencies. Continue to expand our geographic footprint and continue to support our technology innovation to better service for our customers.
Matt Frankel: I know you're one of the leaders in your space, but you said you have a five percent market share a minute ago. That leads me to believe that these are very fragmented industry. Where does everyone get your self-storage properties if it's not from you guys?
Scott Sannes: Apologies for the confusion there. That five percent is on the commercial sales channel of our business, our market share in the self-storage industry would be over 50 percent.
Matt Frankel: I thought so. I thought we had a whole new growth lever to go up there. [laughs].
Scott Sannes: No.
Matt Frankel: I know you've started to branch out from self-storage into other types of commercial buildings. How big of an opportunity do you see this, I know self-storage is really your bread and butter. Do you see it staying that way? Or do you see it really branching out a lot more?
Scott Sannes: Great question. I think a couple of things there. Again, as we've touched on with high occupancy rates well into the mid-90s, there's a significant need for new capacity. That can come from both Greenfield development like we have historically seen, or increasingly today from a combination of refurbishments and repurposing of existing facilities. Internally we refer to those as both conversions and expansions. The growth of e-commerce somewhat accelerated by the pandemic has had upward pressure on warehousing needs, which has resulted in a lot of big-box retail, space becoming available. Those facilities, in many cases, are ideal for repurposing or converting into self-storage capacity. We're there to help those owner-operators, developers with that side of the offering. The sales process is similar to what we have done for years, partnering with the owner of the facility and creating the solution that they need. Again, it's not a secret that the reeds as well as the institutional investors have been particularly active in the self-storage industry. Again, that creates additional tailwinds for us on further our three opportunities and in addition to the conversion and expansion opportunity within the self-storage marketplace that these big-box retailers coming online provide. It also creates tailwinds for our commercial business in that as they shift that brick-and-mortar from retail space to more warehousing and distribution. Again, that is creating tailwinds for our commercial business. As we've previously just clarified, today, we have a circa five percent market share. There's a tremendous amount of runway for future growth on the commercial side of the business as well.
Matt Frankel: So we've, so far focused on the good. Now let's talk about something not so good. If you've tried to buy anything recently, you know there's supply-chain issues virtually everywhere. I had a contractor recently tell me that the steel industry is backed up by four months right now [laughs] if I wanted something for my house. How much is that affecting your business? How much of a short-term headwind do you see that?
Scott Sannes: Great question. It's obviously affecting everyone today. Supply-chain issues are obviously a significant concern for the business. Our teams are working together efficiently and effectively to execute as again, effectively as possible in these unprecedented times. The company has taken actions to offset the inflationary effect through both commercial and cost containment initiatives. We do expect to see continued benefits of these actions build in the second half of '21 and into the first half of '22. I would say one thing that has benefited the business is a few years ago, we really put a primary focus on identifying any of our sole-sourced components. We worked hard at identifying and qualifying secondary and tertiary suppliers. That exercise has proven invaluable again, based on these unprecedented times with not only the raw material inflation but also the capacity constraints that you've alluded to. It just gives us a few more levers to potentially pull because we're not handcuffed to one supplier. But in many, many cases we've got alternative qualified sources.
Matt Frankel: Janus has been around for a while, correct? How long has your company has been established before?
Scott Sannes: We were established in early in 2002.
Matt Frankel: You said you have over 50 percent share of your core market. Janus recently went public. You went public this year through a SPAC which shouldn't come as a big surprise, it's 2021 after all. But you strike me as a relatively mature company to choose the SPAC route A lot of early-stage companies are going public through SPAC right now, not too many market-leading mature businesses, if you will, not that you're mature in the sense that you don't have a lot of room to grow, but you're a leader. Why did Janus choose the SPAC route to go public? I'm sure there's a reason, but it just doesn't seem like you're the typical SPAC IPO.
Scott Sannes: No, it's a great question, Matt. There's a couple of items I can address there. Going public has been part of the long-term vision for Janus and our business model has always focused on growth. We've maintained an organic compounded annual growth rate of circa 10 percent since 2016, and with M&A activity, we've nearly doubled our business since that time. But maybe to directly answer your question, we elected to go public via SPAC because in Juniper, we found the optimal partner to help grow our business. The company was highly familiar with the building product industry through its management's long and distinguished career at Honeywell. Similarly, Juniper had evaluated several companies and determined that Janus was potential as a market-leading technology and solutions provider to the self-storage commercial industrial markets with strong financials, compelling growth trends, and a loyal and diversified customer and employee base provided a great investment opportunity that paired well with its founder strengths. Also, as a public company, we plan to continue investing in technology innovation, expanding our geographic footprint, for example, our highly accretive M&A program has enabled Janus to become a first-mover in self-storage smart access control technology via acquisition of Noke, it's allowed us to expand into adjacencies like exterior building solutions, commercial roll-up steel doors, and to continue to grow our international footprint.
Matt Frankel: Another thing that usually comes from the SPAC IPO, just to follow-up on that is capital. SPACs are usually providing a nice capital infusion and I'm not sure the exact figure. I want to say it was in the $350 million ballpark that came from your SPAC deal. How do you plan on leveraging that capital to achieve all those growth levers you were saying. Like, what's the growth priority right now with that?
Scott Sannes: It's a great question. I think the way that I would describe that is we're going to maintain a balanced approach to capital allocation. The proceeds that you mentioned, it went to basically delevering the business at the time of taking the company public and then in modest payout to the existing shareholders as well. But again, we're going to be prudent, we consider ourselves to be a high-growth business. Our primary focus is going to continue to be to have GDP plus growth rates on an annual basis. In order to do that, we're going to be aggressive with capital deployment via CapEx, strategic growth initiatives, as well as M&A activity. Our business also generates a significant amount of free cash flow, and so we're confident despite all those investments that will still be able to consistently delever the business overtime as well.
Matt Frankel: Excellent. Just a few more, what about the self-storage industry in general? I know we've talked a little bit about how right now occupancies are in the '90s historically in the mid '80s. It seems like an industry that has a lot of ups and downs in terms of supply and demand. I know a few years ago there was a lot of oversupply issues in a lot of key markets like it had just been built out a little too fast. What are your general thoughts on the current state of the self-storage industry? I know you mentioned that right now supply is a little behind demand, in terms if there's a little too much demand in the market it could support more inventory. How long do you think it will take to kind of equilibrate, I guess this would be the way to say it. Just what are your thoughts in terms of general supply and demand? You see it like it's a big cycle or do you see it stabilizing for a while?
Scott Sannes: Great question. You are correct. If you go back through time, I think what happened right before the '08, '09 recession was you had a significant amount of capacity being brought online but at the same time you had occupancy rates actually declining. The market got to a point of a little bit of overcapacity. Then you had the recession hit, and then I would say that you had self-storage owner operators, especially the REITs go on public records saying that probably the biggest mistake they made in their career, at least during the recessionary times was not to continue to invest in new capacity because they could have done it for a lot less than what they were doing it for several years later. But if you look at all the fundamentals today, low cost of capital, you've got high occupancy rates, you've got rents at a near all-time highs. The fundamentals of the self-storage industry are all tremendous. We believe that right now that those fundamentals are looking strong into the foreseeable future. We feel like there's a pretty good runway here for growth over the next several years for the business.
Matt Frankel: What do you see as the biggest challenges to your business going forward? Is it maintaining the growth? Because you mentioned you've been a growth company since the beginning. Do you see growth as being your biggest challenge? Do you see expanding into new verticals going forward as a big challenge? I don't want to say most concerned with, but what do you see as the biggest challenges and biggest opportunities right now?
Scott Sannes: Challenges, I would say for me that's an easy one, it's what we talked about earlier. You've got just unprecedented times in terms of both inflation and capacity in supply constraints in terms of raw material. We touched on the raw material, what we didn't touch on is labor and logistics. We're seeing similar things there with unprecedented inflation especially on the labor front, just the limited capacity or availability of labor in the current marketplace. All three of those continue to present some headwinds to the business. We're focused on those each and every day. Happy with the team's performance to-date again in each one of those segments. But it is something that we're watching closely and continuing to monitor. I think on a challenge that would be my comment. As far as opportunities, I think we touched on a lot of them. When I address the growth, we're super excited about the Noke smart entry platform, from access control technology, what that affords the business in terms of growth potential. The commercial opportunity is tremendous for the business with only circa five percent market share. You've got the DBCI acquisition. We're very bullish on what that brings to the business and the growth opportunities that, that presents, and just some of the other recent or even past M&A activity in terms of our Betco business unit and the building components in growing that business geographically. The ASTA business unit we bought several years ago and the commercialization of the rolling steel product line again, to go take market share in an extremely large total addressable market again, which we have a very low market share today. From our perspective, there's just a ton of levers. We're very excited about what the future holds and we just need to go out and execute and continue to grow the business as we have in the past.
Matt Frankel: Excellent. Last thing and we've talked about the self-storage REITs often on this show. One thing I think investors need to know about your business is, you don't care which of the REITs win. You partner with a lot of them, they're your customer. You are more at play on the industry instead of competing against a bunch of other players in this space, which is an interesting dynamic from my perspective anyway. I'll give you the last word. Is there anything you would want people to know about your company? Because I feel like a lot of viewers are not familiar with what you do. I'll give you the last word on it.
Scott Sannes: Yeah. I appreciate that, Matt. I think what I would probably just like to leave everybody with this. From the discussion today, excuse me, Janus obviously does supply the marketplace with products and services. But I think we don't really view ourselves as a, I say, as a manufacturing company despite the fact that we're manufacturing products. We consider ourselves to be a solution provider. That is why we command the margin profile that we command. We have the cash flow profile that we demand or command, I'm sorry. Because again, customers come to us and know that we will be able to come up with a solution for them whether they are new to the industry, whether they're a veteran to the industry. We have very longstanding relationships with customers that they know that we will execute, we will get the job done, we'll get the job done on time, and they can rely rely on us and the expertise that we bring to help them maximize their return on their investment.
Matt Frankel: Excellent. Scott, thank you so much for joining us today and we hope to talk to you again very soon.
Scott Sannes: Sounds great. Thanks for having us. Thanks for having me, Matt.