PGT Innovations Inc (PGTI) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 PGT, Incorporate Earnings Conference Call. My name is Lauren, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Jeff Jackson, CFO.

Thank you, and good morning ladies and gentlemen. Welcome to PGTs second quarter conference call. Rod Hershberger, President and CEO and I will represent PGT on this morning's call. Rod will provide an overview of the Company's performance for the quarter and the first half, and I will provide the specific details. We'll then discuss our continued efforts to advance our value enhancing strategy and we'll take your questions. We welcome those of you listening on the webcast.

Be we begin, let me remind everyone who is listening, that today's conference call contains statements concerning the Company's future prospects, business strategies and industry trends. Such statements are considered to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations which are subject to risk and uncertainty. Actual results may differ materially from those contained in the forward-looking statements. Because of certain risk factors such as those listed in yesterday's press release, and in our prospectus filed online the SEC on June 24th of this year, we undertake no obligation to publicly update or revise any forward-looking statements.

If you have not seen the press release a copy is posted in the investor relations section of our corporate website, at www.pgtinc.com. Included in the press release are the unaudited consolidated balance sheets, and Summary of Consolidated Statement of Operations prepared in accordance with GAAP. We also included pro forma information in yesterday's press release, which was also quantitatively reconciled to GAAP. As we said in the press release, our Company uses non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial results according to GAAP, rather we believe the presentation of earnings excluding certain items provides additional information to investors to facilitate the comparison of past and present operations.

With that, let me turn it over to Rod Hershberger. Rod?

Thanks, Jim, and good morning. We have a number of exciting items to share this morning and we'll do so in the following order. First, I'll highlight our results for the second quarter and first half, and then provide an overview of key strategic initiatives for the balance of 2006. Jeff will follow-up with a detailed review of our first half and second quarter financials.

Second quarter was a very busy quarter for our Company. We successfully completed our IPO. We started bringing our new production facility in North Carolina into operations. We've moved a number of production lines into the facility doing so with no lost production days and we grew our employee base to meet our strong sales growth. On top of that, we delivered record operating results for the quarter. We had an outstanding second quarter and first half results. Our performance clearly shows the continued momentum behind our business and support for our penetration of the shudder market or as we refer to it, the active impact resistant market.

For the second quarter a combination of record top line sales growth and solid cost control leveraged across the business resulted in $10 million in net income the highest quarterly level in the Company's history. Sales growth of 39% for the second quarter was driven by higher net price realization and product mix shift to our WinGuard branded impact resistant window and door line. Despite a leveling off of new construction starts, we continue to see increased penetration of the impact resistant market.

Our second quarter sales growth in our WinGuard branded product of 31 million or 77% has clearly benefited from our market leader position. Strong brand awareness, building code expertise, and our reputation for outstanding customer service and quality which we have built over the past 25 years. We have gained, and continue to gain market share in the rapidly growing U.S. impact resistant market, by leveraging these competitive strengths.

We also continue to see strong growth in our other premium made to order, non-impact window and door products, and our Multi-Story products which grew collectively by 16% in the quarter versus the year ago period. That excludes sales related to our discontinued NatureScape product line. This growth was driven primarily by our Multi-Story products. In Multi-Story we're gaining momentum as current year-to-date sales have exceeded our projection for the year. We are particularly excited about our new products scheduled to come online in the fourth quarter of 2006.

The above results further support our strategy of using new products and product innovations to gain market share in adjacent markets. We lead with innovation in the residential impact market and are confident we can do the same within the Multi-Story market. Our marketing investment has been effectively deployed. We focused advertising in our Florida market as the current hurricane season began. We are also on track with our East Coast advertising campaign which was launched in July.

Given the increase in size and scale of our business, we remain disciplined in our spending with our sales, general and administrative expenses. As a percent of net sales, SG&A in the second quarter declined to 21.9% versus 23.6% in the second quarter of 2005. Regarding profitability for the quarter. The balance was strong top line growth and better leverage across the business delivered 161% increase in income from operations in the second quarter.

Our cross-trained and talented employee base, particularly our direct labor handled the increased sale and the North Carolina plant transition while lowering levels of overtime compared to our second quarter of 2005. Driven by a combination of gross margins of 829 basis points and leverage on our SG&A spending our operating margin increased to 21.5% of net sales versus 11.4% last year. Pro forma earnings per diluted share of $0.47 for the second quarter increased by 236% versus the prior year.

For the first half of 2006, our performance has significantly exceeded our expectations. Net sales have increased by 30% despite higher input costs and the startup of our North Carolina plant expansion we've been able to deliver record profitability from operations. Adjusting for certain items related to the IPO and recapitalization our net income for the first half was a record 19.8 million, and pro forma earnings per diluted share was $0.71, up 122% versus the prior year period.

As we turn to the second half of 2006, we continue to manage our capital structure well. In addition to applying IPO proceeds to our debt, we paid an additional 22 million of debt as a result of strong operations. Our advertising programs, trade education and consumer awareness efforts are off to a good start. We have seen and continue to see a shift within our distribution base to more of repair and replacement business R&R. The majority of R&R projects use our WinGuard products as consumers continue to replace or repair windows and door with our impact resistant products versus standard windows and shudders.

We also see incremental growth opportunities as we expand those relationships with a select number of national homebuilders. In the second half we'll build upon this momentum as we expand distribution of our existing items, and add new products including the recent introduction of our vinyl double hung and vinyl French door products, in both our WinGuard and non-impact resistant line, and bring additional innovation to the Multi-Story market. Combination of continue mix shift to our WinGuard non-impact resistant product line, and new product innovation should position us well for the second half.

Now, Jeff will review the results for the second quarter and first half in greater detail.

Thank you, Rod. Let me take you through some more details of the quarter and year-to-date numbers. As Rod had mentioned, and as also as you may have learned from our press release, Q2 was an excellent quarter for our Company. We recognize revenue in the quarter and reported net sales of 108.7 million a 39% increase over the same period last year.

WinGuard leading our growth represented 66% of net sales for the second quarter of 2006. That is a significant increase compared to the second quarter of 2005s percentage or 52%. Our volume in WinGuard was up 53% compared to the second quarter of 2005. Our growth is also impacted by strong cost realization as we began to realize the effects of a 9% price increase in March of 2006. We also experienced strong sales growth in our Multi-Story product line contributing significantly to this volume growth. We shipped approximately 10,000 units in the quarter compared to 2,000 last year. The second quarter the split between sales and a new construction and repair and remodeling markets were approximately 58% and 42% respectively.

Year-to-date, our revenue growth stands at 30.1%. This includes the effect of both volume increases in our WinGuard impact line and the effect of price increases that I discussed. When we adjust for the impact of our NatureScape product discontinuation our year-to-day revenue growth was 37.8% in the first half of 2000 versus the first half of 2005. We also experienced strong sales in our Multi-Story product line for the first half with sales totaling 11.6 million, compared to the same period last year sales up 2.6 million.

We realized significant increase in our gross margin as well. Gross margin for the quarter was 43.3%, an increase of 829 basis points above the 2005 gross margin of 35.1. This increase largely due to product mix, the effect of price increases and improved manufacturing efficiencies compared to last quarter. Our WinGuard products represent approximately 66% of total sales for the quarter and generated an average gross margin of 49%. Our increased advertising has helped drive our volume as awareness of the benefits of our impact resistant products over the conventional shudders is at an all time high.

On a year-to-date basis, gross margin has reported 40.1%, up by 413 basis points versus last year's half gross margin of 36.3. Our WinGuard products represented 64% of total sales for the first half of 2006 compared to 51% of sales in the same period last year. For the first half operational efficiencies, mix shift and price increases have helped offset the rising input costs.

Turning to the SG&A portion. SG&A for the company was 23.8 million in the second quarter of 2006 versus 18.5 million in the second quarter of 2005. As a percent of sales, SG&A was 21.9% for the quarter, versus 23.6% in the second quarter of 2005, 174 basis point improvement. Absolute dollar increase in SG was driven by increases in indirect labor and benefits, totaling approximately $3 million; cost increases needed and necessary to support our growth as we invest in our infrastructure going forward.

In addition, we had an increase in our marketing expenses of approximately 800,000 primarily in advertising, and in an increase in our general and administrative expenses of approximately 500,000. Costs such as additional accounting, legal, insurance, and other expenses to support our growth, and the requirements of being a public company. On a year-to-date basis, SG&A has reported its 22.3% of net sales compared to 24.1 for the comparable period last year. SG&A costs in absolute terms were leveraged against our strong sales growth.

Interest expense for the quarter was $7.3 million compared to 3.2 million in the second quarter of 2005. Reflecting the impact of increased borrowing related to our February recapitalization, borrowings which have subsequently been paid down by 137 million through the use of proceeds received from the IPO of 115 million as well as cash generated from our operations of 22 million. As noted in the press release Tuesday, the underwriters exercised their over allotment to purchase approximately 1.3 million shares of our stock generating approximately 17 million in additional proceeds.

We will use these proceeds to further reduce our debt. We estimate our debt after paying down will be approximately $166 million. The effective tax rate for the quarter was 38.8%. This compares to an effective tax rate for 2005 of 33.2%. The 2005 second quarter rate included tax credits related to our previously Lexington, North Carolina expansion. The current expansion into our New Salisbury facility will also generate tax credits which could reduce our rate beginning in 2007, up to 200 basis points annually.

Application of those credits are limited by time and income so the actual impact may differ. Our tax rate will also benefit for the manufacturing tax credits related to the job creation impact. We had a record net income as Rod had mentioned, $10 million increasing by nearly 169% over last year's net income of 3.7 million. As our strong top line and expanded margins were leveraged through the declining SG&A as a percent of sales I just described.

On a per share basis, GAAP net income increased to $0.55 per diluted share, compared to $0.22 per diluted share in the same period last year, 150% increase. Diluted weighted average shares outstanding for the quarter were 18.2 million, compared to 17.2 million for the same quarter last year. The higher share count was due mainly to the company's IPO which was completed in June of this year.

Assuming the IPO was completed at the beginning of the respective reporting period the pro forma diluted weighted average shares outstanding for both the second quarter and first half of 2006 was 27.9 million and for 2005 was 27.4 million. Adjusting for items related to the IPO and a recapitalization net income for 2006 for the second quarter was 13 million or $0.47 per pro forma diluted share compared to an adjusted net income for the second quarter of 2005 of 3.8 million or $0.14 per pro forma diluted share. That's an increase of 236% over prior year.

From an EBITDA perspective another measurement that management uses to measure performance. EBITDA for the second quarter of 2006 was 27.4 million, compared to 12.5 million for the second quarter of 2005 an increase of 119%. On an adjusted basis, EBITDA was 28.4 million for the second quarter of 2006 and EBITDA margins was 26.1 compared to an adjusted EBITDA for the second quarter of 2005 of 12.8, and an EBITDA margin of 16.3. For the first half adjusted EBITDA was 47 million or 22.9% of net sales, compared to 27 million or 17.1% of net sales for the same period last year.

A reconciliation of the adjustments I've just described including the pro forma diluted shares, the adjusted net income, and adjusted EBITDA, is included in the earnings release for your reference. To recap the six months 2006, net sales increased 30.1% with WinGuard accounting for 64% of sales, up from prior years first half 51% of sales. WinGuard volume increased 43% over prior year. Gross margin was 40.4% versus 36.3 last year, up 413 basis points. SG&A declined 183 basis points as a percent of sales coming in at 22.3% versus 24.1% last year.

With marketing up over prior year about 1.2 million as we continue to invest in our brand. Adjusted EBITDA increased 74% and margin increased to 22.9% of sales from prior year 17.1. Adjusted net income was 19.8 million an increase of 127%. Our pro forma shares were 27.9 million and pro forma EPS diluted was $0.71, an increase of 122%. Now, let me turn to the balance sheet and go over a few items there. At the end of the second quarter our net working capital, excluding cash and the current portion of long term debt, was 39.8 million or 10.5% of our trailing 12-month sales, compared to 42.5 million or 12.8% for the year ended 2005.

Primary drivers of our improvement include; a decrease in our day sales outstanding, leveraging our inventory with our sales growth, and an increase in our accounts payable. Our pro forma return on net assets on an annualized basis increased 46% for the first half of 2006, up significantly over the same period last year. From a cash flow perspective the company continues to generate strong cash flow. I want to cover a few items that helped to drive that.

At the end of the second quarter year-to-date total capital additions including capitalized software were 18.6 million. This was driven by our previously discussed plan expansion in North Carolina. For the full year we continue to expect CapEx to be approximately $30 million. We expect to have the new North Carolina plant fully operational by the fourth quarter of 2006 and expect from a plant footprint perspective it will support our sales growth well into the future.

We have invested significantly in 2006. However, on an annualized basis, our CapEx is expected to range in the 15 to $17 million area. Depreciation and amortization totaled 7.6 million for the first six months. We expect full year D&A to come in at approximately 16 million. Also, as a reminder, during the first quarter we paid 83.5 million in dividends to our shareholders of common stock and 26.9 million in cash compensatory payments to our auction holders. Overtime, our policy for future dividends will be decided by a Board of Directors with input from management.

Our debt outstanding as of July 1st, 2006 was approximately 320 million. Subsequently, we have applied the proceeds of our IPO as well as our cash generated from operations against this debt paying it down to 183 million. With additional proceeds of approximately 17 million received from the underwriters exercise over the allotment we expect to further pay down debt.

With that, let me turn the call back over to Rod. Rod?

Thanks, Jeff. Our business has performed strongly over past several quarters and the strategies we have in place are designed to help us continue to build the capabilities required to carry a momentum into the future. We remain very optimistic about the remainder of this year and beyond. While we are seeing a challenging housing market, an increases in commodity prices such as aluminum we believe the U.S. impact resistant market will continue to grow and our presence in that market to expand. We plan to introduce several new products in the second half of 2006 helping to drive our traditional organic growth.

While in addition, we will opportunistically review acquisition candidates as they come up. In summary, we are very pleased with our first half and second quarter results and I want to thank all of our employees for their hard work and dedication during this exciting and busy period in our début as a public company. Our team has remained focused on growing our company and delivering outstanding results for our employees, customers, and shareholders.

With that, I'll conclude and we'll be happy to answer your questions. Operator, you're welcome to take questions.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Gregg Schoenleber with Deutsche Bank.

Hi there guys. Good morning.

Good morning.

Congratulations on an excellent quarter out of the box. Just a few questions. Rod, you had mentioned that you saw a shift from active to passive. Is there any way you guys can quantify that in the quarter of how much sales was affected, people switching to passive from active? And also in terms of WinGuard mix, in [2Q] you said it was about 66% of sales. Where do you see that theoretically going for the balance of the year? Maybe, where do you see it peaking out down the road?

Thanks Gregg. As far as the shift from active to passive, I don't know that I can quantify that for the first half or the second quarter. We continue to see remodeling R&R pickup and more demand, and this pent up demand building has been very strong for the past year. So that pent up demand is driving a little bit more beyond our market, but as far as quantifying that exact number what the shift is, I think I'd be premature if I tried to do that.

As far as WinGuard mix long term, it's hard to predict what it would do this year. Long term, we still believe that the WinGuard window or an impact resistant window is a much better alternative. It requires no activity whatsoever when a storm is threatening. And we think that product mix and the penetration of that market becomes in the 95 to 100 range. We think that's going to take time. That's not going to happen overnight, but over the period of the next few years as folks really understand it's an educational process to make sure people understand how windows work compared with shudders.

We've talked a lot with folks about the windows relatively new product. It's been in the market for about 10 years. Shudders have been around for 70, 80 years. It's a educational process to make sure folks understand how windows work and how they can be protected, as well as they could be with a shudder in place. So it will take some time but we still believe that the market penetration will be in that upper 90 range.

Okay, thanks. And one more if I may. You mentioned the fourth quarter of this year, you Multi-Story product. Do you have any idea or estimates on what that could potentially grow to? I know right now it's a very small percentage of sales. I mean do you look at that segment and see where potentially you could get to by '07?

Yes Gregg, this is Jeff. It is a small percent of sales and it's definitely one of our growth strategies going forward as you know. Current first half results in sales in Multi-Story is 11.6 million versus last year's first half of 2.6 so we're definitely penetrating that market. We've had solid increases in our Series 800 Multi-Story product and intro into the market and the new line which we'll be ready to take orders in the fourth quarter will only add to that. We do expect that top line as far as market revenue from Multi-Story to reach in the $25 million range for this year.

Okay, that's great guys. Congratulations again. Thanks.

You're welcome.

Thanks, Gregg.

Your next question comes from the line of Michael Rehaut with JPMC.

Hi, good morning. How are you guys?

Good. Hey, Michael.

Just a few questions here. The gross margins [inaudible] great increase year over year and you mentioned the drivers, I was wondering if you could if possible kind of prioritize those drivers into what were the bigger components of the 820 [bid rise] and what do you see sustainable in terms of the second half of the year?

Obviously, the main driver is the volume increase in our WinGuard product line, Michael. That product has definitely increased as a percent of sales as I discussed earlier, as well as a benefit to the price increase across all our product lines. But if I had to breakdown our drivers of gross margins, I would say roughly half of it was due to volume and the other half being price/mix, offset by some cost increases embedded in that first half margin. We're not immune to those cost increases.

We have historically passed those along to our customer base, but we did have some cost increases in the first half that helped drive down margins somewhat. But in the back half, we feel obviously the biggest driver on our call is being the aluminum side. We will be rolling off some aluminum hedges in the back forth quarter, and there is some softness there, some issues that we're dealing with as far as coverage.

Based [on] today's prices, that impact could be up to a million and a half to $2 million hit to our gross margin. But again, we definitely we think we can continue to overcome that with aggressive management of our price program as well as improving the product mix to mitigate that any back ball in the back half . Does that get at your question?

Yes, that's very helpful. Just to make sure I understand. When you talk about volume you're more talking about manufacturing efficiencies. When you take out volume and out talk about the higher volume for WinGuard, I think about that in terms of positive mix. So is that the right way you're kind of talking about it?

Trying to quantify and mix within WinGuard is tough. The actual units shipped in WinGuard was up almost 43% so that's just on a unit basis, and obviously they carry a much stronger gross margin, the average margin for the quarter being at 49%. So I agree with you it's kind of hard to separate those two, but we did have some good manufacturing efficiencies come through the quarter, especially versus prior year when we were still struggling from what were the effects of the hurricane season. This year's manufacturing efficiencies in general have improved.

Okay and in terms of the WinGuard growth as well up 78%, is it possible -- you talked about 16% growth of several products including Multi-Story. I just wanted to try and understand what was kind of the core WinGuard growth versus new WinGuard products? I don't know if you're able to break that out.

As far as new products, no we didn't. In general, we had new products that were introduced at the end of last year, that have a positive impact. And roughly the positive impact for the quarter was approximately $10 million, but we haven't broke that out between say a WinGuard products versus our aluminum window products.

Okay, and what did the 16% number represent?

That 16% number is growth in everything outside of WinGuard. The Multi-Story, the aluminum window and door, the vinyl, that's the aggregate growth of those other product lines, absent the impact of NatureScape. As you recall, NatureScape we discontinued that product line, and that impact was approximately $18 million on our net sales. So we factored that out, and on an apples-to-apples basis the other products grew 16% which is what Rod mentioned in his comments.

And the multi-story is in the WinGuard category though?

No. Multi-Story is still in other.

Oh it is. Okay.

We separate, and keep WinGuard separate because that's more of our branded products.

Okay, great.

Just one more comment. If you think about it, we're cycling approximately 23 million of discontinued product sales. Approximately 18 million of NatureScape, and about 5 million of a [Binning] product line that we discontinued as well. So on an annualized basis, '05 versus '06, we're overcoming about a 23 million hit on top line as far as discontinued products. And so when we look at it apples-to-apples we like to adjust for that to get a true growth rate. I mean despite that, we're still growing 39% and that's why I wanted to make sure that you guys knew that on an apples-to-apples basis it's even higher.

Okay, that's great. And one last question, and I'll get back in the queue I guess. But on the new construction breakout that is very helpful given the estimated 58% for the quarter. Do you have an idea what that was for the first quarter?

We disclosed it year-end. It was roughly 6139 for 2005. So we're seeing a steady switch between new construction and R&R through the year. I don't have the first quarter on hand right at this moment, but it has been steadily improving or switching since the end of the year.

Okay. So the 61 is for the full year of '05?

Yes. I think it was 6139 with the split for 2005--

That was 2005 split, 6931.

What is that? You said two different numbers there?

6139. That's 2005 new construction R&R split.

Okay. I thought Rod said 69 for a second. All right, thank you.

You bet. Thanks, Mike.

You next question comes from the line of Keith Hughes with SunTrust.

Thank you. Had a couple of questions. The gross margin in the other category, did it improve year over year and helped you out a little bit here in the quarter?

Yes as far as everything outside of WinGuard --

Out of WinGuard, yes.

Obviously, the Multi-Story carries a higher margin than our traditional window as well, and with the increase in volume in sales mix in the Multi-Story, it definitely helped the other category of gross margin.

Within the Multi-Story product, is the prime competitor there an electric shudder, or who are you facing there?

In the Multi-Story product it depends -- geographically it's a little different. If you want the name of a primary competitor it's RC Aluminum or someone like that in the Miami area, and the northern market it's pretty much split up between a number of different competitors. People seem to serve the regional market pretty closely.

I mean in terms of the type of product. Are they just not impact resistant or are they a manual shudder, an electric shudder? Who's the main competitor there? What type of products?

It's a pretty long answer, and I'll try to make it short. As you go up on floors it's code drive, and some areas of the country primarily the southeast require impact resistant product regardless of the floor you're on, and it's driven by windows because folks don't like trying to put shudders on and risking not having the electric work and being able to put their shudder down, because it has to be electrically driven on the outside of the building when you're up real high. So windows are required in those areas -- impact resistant windows.

In other areas of the country they're primarily the only one -- south Florida that require impact resistant. In other areas of the country it's driven a little more by customer demand. Some folks want impact resistant when their on the coast. Some would like to have it but it's not driven by code so they don't do it but it's not shudders. It's primarily other manufacturers that are putting product in those places.

Okay. And final question, Jeff, what was the gross margin of WinGuard in the first quarter?

It was approximately 46 -- first quarter?

Yes, correct.

Approximately 46%.

46. And would we expect some seasonality in that business as you move into the building renovation season? Is that why it moved up?

No. It could be product mix within the WinGuard line. It just depends what you sell within the WinGuard product line as far as mix. It's really not seasonal driven.

For the year something in the high 40s. Is that a realistic number?

For WinGuard?

Correct.

Yes.

All right, thank you.

You bet.

Your next question comes from the line of Jim Wilson with JMP Securities.

Good morning, guys.

Good morning, Jim.

I guess first question -- you gave I think overall mix for the quarter of new construction, versus repair and remodeling of 5842. Do you have it for WinGuard itself for that product line that mix?

No, Jim. We don't track in that detail and we don't feel comfortable in giving out that split.

Okay, I'm just wondering. All right other two. Again, if I could fly back into the margins in the non-WinGuard part of the business. Do you have it handy? I can always calculate myself.

Well just to comment on your first question still. As far as the mix in WinGuard and new construction in R&R, we typically see a heavier sell in the R&R for WinGuard products because again typically people aren't taking out a standard window and putting in a standard window plus a shudder. They're switching out for WinGuard products in R&R. It's definitely heavier skewed towards the impact products.

Right that makes sense and that's good in today's environment. So then the margins for your non-WinGuard products, how do they look year-over-year?

Really don't have that quantified Jim, with me right now. I can get that and we can discuss that offline.

Okay, that's fine. And then the filing would just be on your SG&A expenses that relates to RC -- step up a little bit more marketing given hurricane season and everything. Could you give a little thought as to what you think the SG&A line might look like, and the general costs you expect to see at least the rest of the year?

Well we've planned as far as the SG&A the marketing step up. We did plan that. We have an increase related to our advertising campaign for the East Coast which has kicked off actually July last month, so that's really one of the major drivers as well as obviously investing in our infrastructure as we continue to grow and support the top line. As a percent or an estimate, I don't really feel comfortable giving that at this point, since we are newly public and out of the gate. We feel there's costs out there we've accounted for, but I'd like to have a full year under my belt before we start estimating those costs.

Okay, fair enough. All right very good. Good job.

Thank you.

Thanks, Jim.

Your next question comes from the line Sam Darkatsh with Raymond James.

Hi , Sam.

Hey, Sam.

A couple of quick questions, and I apologize if one or two of these questions were already asked. I came onboard about mid-way through. Jeff, by my math the gross margin in aluminum business jumped fairly meaningfully on a year-over-year basis. Am I missing something or is there a couple of reasons for that?

No, I mean it's the price increase. The impact of the 9% price increase. We started to feel that effect in the last quarter, or excuse me last month of the first quarter, so we had a full quarter of that in our aluminum business. That's what you're seeing.

So, I mean it might have jumped as much as 10 points on a year-over-year basis?

Yes -- 9.

I guess what you're saying is after October, that would then moderate back to prior levels. Is that how we should look at it once the hedge rolls over?

Yes.

Okay.

I would actually say it wouldn't go all the way back to prior levels. A lot of that was driven by price increase, and the effect of aluminum costs, but there was also manufacturing efficiencies built-in that we experienced in the earlier half of this year to, and that will continue to flow through and probably improve a little bit more as we hit the end of the year. But the major effect is the material costs.

So have you announced price increases for next year as of yet, due to the new prices of aluminum?

We have not. We are working hard right now with our suppliers and with -- how we hedge aluminum and making sure that we cover those costs, or we'll prepared to rollout a price increase. We promise our customers a 30-day notice on a price increase.

I'm just trying to get a sense of the normalized gross margin level in the aluminum business based on all the moving parts. Should we figure 5, 10 point below current levels, or will next year's pricing largely offset do you think the increase from the higher aluminum prices?

Yes, I think Sam from a guidance standpoint we're not ready to try to predict what the aluminum market is going to do. We obviously watch it daily, and we try to actively manage that cost, but it has been very volatile this year, and we'll continue to monitor that and cover [it] when appropriately. But as we demonstrated historically, we've been able to pass any type of costs increases we can't manage ourselves. We've been able to pass those along to our customers, and we'll continue to expect to do so.

Okay, next question. It looks like, again if my math holds, that sales in the company excluding WinGuard were down for the quarter. Do you expect that to perhaps accelerate a little bit as the housing slowdown begins to pickup, or continues to pickup, or were there on off items in there that may have adversely impacted the growth rate of the non-WinGuard business?

I think we talked about that at the beginning of the conversation, Sam. Excluding NatureScape sales of our other products were up 16% and that takes into account about 5 or $6 million of product that was also discontinued, that's not calculated in it. So we had a fairly healthy increase in our non-impact resistant products in the first half of the year.

Got you. I apologize for missing that. Third question. Are there milestones that we should be looking at for the North Carolina, and facility integration that are significant and important, to make sure that runs along smoothly?

The transition into the new plant in North Carolina is moving extremely well. As I think - as you're aware, we had a two-story plant in Lexington one entire floor that has been moved into Salisbury already. No lost production days while we were moving that. So we've got a couple of production lines to move, and we don't anticipate losing any production days with that. We've actually been delayed slightly with some of our new glass processing facilities, due to just about a month delay in a [tampering] line, a little bit of a delay in running all the electric power we need to that plant to power up the autoclave and tampering lines and that type of thing. So we still anticipate being fully moved in by fourth quarter of 2006.

Supply chain issues at all?

No supply chain issues whatsoever on that. It's working real well.

Okay. Any updates with respect to states outside of the state of Florida adopting code? Any recent updates that you can provide in terms of recent adoptions from other states?

At the risk of missing it slightly the only state that I feel really comfortable talking about is Mississippi really pushing hard and legislature saying we're going to adopt a code. We're not sure what date it's actually going to be effective but as far as adopting we know that's happening. I think about the only other state that we're really looking and yet it doesn't have any ICC or IRC code in place is Delaware.

And last question, but it's related. Sales outside the State of Florida versus inside of the State of Florida any meaningful change or mix shift as of yet, or would that be more related once the new facility is up and running and/or other states adopting code?

Kind of the mix of that Sam, for the first half. Roughly 92% of our sales changed within the state of Florida and 8% from outside the state. Again, we're cycling -- and I don't know if you heard on the line, but we are cycling some discontinued products. Those discontinued were mainly outside the state, the NatureScape sales, so we are cycling through that. I think we closed out 2005 at an 88/12, 88% in Florida, 12% out. So right now we are at about a 92 inside Florida and an 8% outside the State of Florida.

And the 88/12 is the apples-to-apples, with the exclusion of NatureScape?

I think that was in total, so I'd have to look at it apples-to-apples for 2005.

Okay. So I guess the point there is, I guess if I'm reading this, as generally speaking sales outside the state of Florida are growing roughly in line with inside the state at present?

Sales outside the state of Florida have grown roughly -- a little smaller than Florida, they've grown at a clip of about 20%. Inside the state, we've been gaining traction as we penetrate of the active market, and inside the state we're up to almost 43% sales growth. So, we will continue to expand up the East Coast. The advertising campaigns have kicked off in July, and we do expect demand to increase as we march up the state. And again, that's an opportunity -- where we are in Florida it's our goal to be outside of Florida, and we think there's a market there that we can take and we're ready for it.

Thank you, gentlemen. Keep executing.

Thanks, Sam.

Your next question comes from the line of Omar Hafez with JCK Partners.

Hi guys. Can you hear me?

Yes. Go ahead, Omar.

Great results ,and congrats on the IPO. One of my questions has already been answered and I have two more. I guess if you could help me understand what's different this year in terms of quarterly or seasonal mix, and what historically do you see in terms of percentage of revenues and/or earnings on a quarterly basis, or if you don't have that detail maybe on a first half, second half basis? And then I have one more question.

Repeat your question ,Omar.

Sure. What proportion of sales and earnings do you get on a -- in a typical year what percentage of sales do you get on a quarter by quarter basis? Are you seeing -- obviously it's a seasonal business. Are you getting, call it 75% of sales in your first half? Is it 50% of sales? How do you look at that split and is it the same on an earnings basis? I assume it should be, I just want to understand a little bit better if there's a typical sort of percentage proportion that you would see on an annual basis.

As far as seasonality Omar, we don't see seasonality. We have one month out of the year that is slightly slower by maybe a couple of million dollars than other months and that's January. As folks come off of the holidays, we see the first couple of weeks a little bit slower ramp up. No one wants their house worked on, it seems over the holidays. But we don't see seasonality the rest of the year. We traditionally see most quarters being within a couple of million dollars of each other, and that's been traditional over the last 10 to 15 years. So as a percent of revenue coming, one quarter or another quarter or half versus half, we don't really see a change in that and the margins continue the same in those quarters.

Okay, great that's helpful. And then one other question, just sort of a soft question. You've talked about building code. I know that's the big driver, but I was reading recently about a number of insurance companies and their sort of policies and discounts on policies if you have impact resistant insulation whether they be commercial or residential. I wonder what sort of efforts do you have, in terms of speaking with the insurance companies marketing to them specifically, or are they already basically all the same, in terms of having lower rates or better policies available to those who have installed your products?

We work pretty closely with insurance agencies, and we talk about that a lot of times when we're talking about our code driven efforts, and don't specifically say insurance companies are involved and they are, and it's probably just a misspeak by us because it's pretty common for us. We have a couple of folks that they do is work with code officials, industry officials, those types of things as far as the experts at writing code and developing code and making sure that we're testifying as to what works and what doesn't work and we're doing that with the insurance industry. So it's a very good group one on one relationship that we're doing with the insurance industry out there.

We think of course that rates should be even better, but it's not our call, but we know that when folks have impact resistant windows in they're protected, whether they're at their house or not and they don't have to do anything to it. They don't have to worry about putting it up and putting it up correctly. It's already there. It's code driven. It's a code driven product and it's a code driven installation, and we know the product is going to hold up, so we'd like to see it in greater discounts. And we'll continue working on that, but of course that's no guarantee of anything.

Great, thanks guy.

Thank you.

Your next question comes from the line of Gregg Schoenleber of Deutsche Bank.

Hi guys. I just had one follow-up question. I don't know if you could provide this at all. The trends in backlog. I know it doesn't give a long visibility, but can you talk about current trends in terms of backlog maybe compared to last year at this time?

We don't talk about backlog a lot, because you're right it doesn't give us a sense at all of what's happening out there. Our lead times are extremely short, and actually our goal and this sounds strange, but our goal is to have a relatively small backlog because that reflects a very good lead time with our customers. We want to make sure that our customers can order products and have them delivered in as few as a couple of days and maybe in some of the more sophisticated products out in two or three weeks. So our backlog should never reflect more than about two or three weeks worth of business and we see it consistently doing that so it's driven more by lead time and not what we see in the market and we're really seeing that for 25 years now.

And Gregg like I mentioned earlier we have been executing better from an operations standpoint in driving those lead times down.

Yes, our lead times are shorter now than they were three months ago or five months ago. So our backlog has gone down pretty much in parallel with our lead times. So it's still a good strong backlog.

Okay, thanks guys.

Your next question is a follow-up from the line of Michael Rehaut with JPMC.

Again for anyone else that's listening. Just a couple of questions on the add backs that you talked about I guess earlier during the road show. We had initially a higher number on a full year basis for the debt refinancing. I was just curious. Is the 4.6 that you identified in the press release, is that what you expect to be the full year in terms of the debt refinancing costs?

Yes. I mean that's the write-off of the amortization of the issuance costs. That was the number.

Right, and so there's no incremental number associated with charges of paying down debt earlier anything like that?

No.

Okay. And also the interest add back. I was surprised that your still kind of putting back only a 2 million expense in the first quarter to get you to like an 8.4 million number, whereas the add back for the second quarter is more like 3.9. Why wouldn't you just make everything apples-to-apples, as things were done at the beginning of the year ; you try and make that interest expense on a pro forma closer to the 3.4 million that you're effectively saying is for the second quarter?

That's actually what we did Michael, and we can go through the calculations offline. But what we did was, take the entire 320 in debt back to the beginning of the year, the IPO proceeds back to the beginning of the year, and try to access the impact based off our interest rates each month -- January through the end of the second quarter. So that is what that's doing. I can only speculate the difference you're seeing there maybe the full year -- the full impact of the second quarter, versus the February recap happening mid first quarter, but we have done that.

We'll get that off line then. And the tax rate, you said you can see a 200 [inaudible] improvement, but you're just not sure of the timing of that. Is that correct?

A lot of it's driven by the North Carolina incentives, which we negotiated. We have to make those incentives around a million and a half to two million. Again, depending on the amount of expansion, the number of employees, it's tied to different trigger points. And the most credits you can take in any given year is roughly 25% of what you estimate. So, that impact will come over the next three to four years, as we ramp up in North Carolina, as well as the Job Creations Act, the impact of that as well. So on an annual ongoing basis, I think our tax rate could be as low as 200 or so basis points.

Okay, great. And then just lastly, the advertising and marketing that you talked about ramping up throughout the year. I was wondering if you could give us the total number that you spent in '05, and what you expect an '06 number to be?

Total spent for the first half in '05 was roughly $2 million, related to marketing. For the first half, we're at 4.4 already this year. So we have increased our advertising -- I'm sorry Michael I ready you a wrong number. The total advertising is approximately -- versus last year was $638,000, and this year for the second quarter we spent 2 million, so that's roughly a million four or so increase. And again, we're estimating for the year say at about 2% sales, if you wanted an estimate on it for the year.

Okay great. That's all I've got. Thanks.

You bet. Thanks.

Sir, there are no further questions in the queue. I'll now turn the call back over to management for closing remarks.

[We're hearing] no more questions. We'll conclude today's session. I want to thank everyone for joining us for our first conference call, and earnings release announcement as a public company, and Rod and I will be available to take any questions if you have any feel free to call. Thanks.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.