PGT Innovations Inc (PGTI) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2006 PGT, Incorporated Conference Call.

[OPERATOR INSTRUCTIONS]

I would now like to turn the presentation over to your host for today's call, Mr. Jeff Jackson, CFO. Please proceed, sir.

Thank you. Thank you, good morning, ladies and gentlemen. Welcome to PGT's Third Quarter 2006 Conference Call. I'm Jeff Jackson, CFO of PGT and I'm joined today by Rod Hershberger, President and CEO. We will represent PGT on this morning's call. Rod will provide an overview of the company's performance for the quarter and year-to-date and I'll provide the specific details. We'll then discuss our continuing efforts to advance our value-enhancing strategy, then we'll take your questions. We welcome those of you listening via the web cast.

Before we begin, let me remind everyone who is listening that today's 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 risks and uncertainty. Actual results may vary from those contained in the forward-looking statements because of certain factors such as those listed in yesterday's press release and in our prospectus filed with the SEC on June 27 of this year. We undertake no obligations to publicly update or revise any of the forward-looking statements.

If you have not seen the press release, a copy is posted on the Investor Relations section of our corporate website at www.pgtinc.com. Included in the press release are the unaudited consolidated balance sheets, a summary of the consolidated statement of operations prepared in accordance with generally accepted accounting principles, also known as GAAP, and pro forma information which is quantitatively reconciled to GAAP. Our company uses these non-GAAP measures as key metrics for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial statements resulting in accordance with 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 the call over to Rod Hershberger. Rod?

Thanks, Jeff, and good morning everyone. We have a number of items to share this morning and will do so in the following order. First, I'll highlight our results for the third quarter and nine months year-to-date and then I'll provide an overview of some of our key strategic initiatives for the balance of 2006. Jeff will follow with a detailed review of our third quarter and year-to-date financials.

First, let me comment on the quarter. We delivered strong results in the third quarter despite a significant slow down in the Florida housing market. Our performance shows the continued momentum behind our business and support for our penetration of the shutter market, or as we refer to it, the "active impact resistant market." For the third quarter, combination of continued top line sales growth, improved sales next to higher margin products and solid cost control leveraged across the business resulted in an adjusted net income of $8 million, a 51.4% increase over the prior year's quarter.

We saw sales grow by 12.9% for the third quarter. This was driven by higher net price realization and product mix shift to our WinGuard branded impact-resistant window and door line. Despite a decrease of new construction starts in Florida, we continued to see increased penetration of our impact-resistant products in the market in the third quarter. Sales growth of our WinGuard branded product of $12.9 million or 24.6% has clearly benefited from our market leading position, strong brand awareness, building code expertise and our reputation for outstanding customer service and quality which we have built over the past 26 years.

We continue to gain market share in the growing U.S. impact-resistant market by leveraging those competitive strengths and we have installed over 1.5 million WinGuard units to date. We also continue to see strong growth in the multi-story and high-rise market with our architectural system product which grew by $5 million to $6.3 in the quarter. We are particularly excited about this line of products as we have already exceeded our sales projection for the year and believe there is significant opportunity in this market. We have recently introduced several new products under this line as we continue our drive into this market.

Our 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 in the multi-story high-rise market with our architectural system products. Our other premium made-to-order non-impact window and door products are slightly down from the prior year's quarter as we continue our strategy to shift our product mix to higher margin products including WinGuard branded products and architectural system products serving the multi-story market; however, we believe that our non-impact products are core to our business as many of our customers look to us to provide a full product offering.

Our marketing investment has been effectively deployed. We have increased our investment in advertising by more than two times our 2005 level, $1.3 million versus $0.5 million as we kicked off our East Coast advertising campaign consisting of primarily television and print ads in July of this year. 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 percentage of net sales, SG&A in the third quarter decreased 160 basis points from the third quarter of 2005. Our operating margin increased to 16.8% of net sales versus 4.9% last year driven by a combination of our gross margin improvement of 270 basis points and leverage on our SG&A spending.

Pro forma diluted EPS, earnings per share, of $0.28 per share for the third quarter increased by 47.4% versus the same period prior year.

For the first nine months of 2006, net sales have increased by 24%. Despite higher input costs in our North Carolina plant expansion, we have been able to deliver record profitability from operations. Adjusting for certain items related to the IPO, our net income for the first nine months was a record $27.6 million and pro forma earnings per diluted share was $0.99 per share versus $0.51 per share for the same period of a prior year.

We continue to manage our capital structure well. Debt repayments totaled $154 million in the third quarter as a result of applying the proceeds from our IPO as well as cash generated from operations. As I mentioned before, we saw a significant slowdown in the Florida housing market during the third quarter and we expect this slowdown to continue.

Historically over the long term, we have been able to sustain or grow our business during these cyclical downturns; however, like many building material suppliers in the industry, we'll be faced with a challenging operating environment over the next several quarters due to the quick decline in the national housing market. Specifically, new housing permits in the state of Florida decreased 48% in the third quarter compared to the prior year. As a result, projecting sales in this kind of environment is difficult.

We will mitigate these trends by first of all focusing on our long term growth strategy of product innovation. For example, we will continue to add new products including the recent introductions of our vinyl double hung and vinyl French door products in both WinGuard and non-impact resistant line and our new architectural window and door systems for the multi-story high-rise market.

Two, continuing our shift to our product sales mix to higher margin items. The continued mixed shift toward our WinGuard and multi-story architectural system product lines and new product innovation should help us maintain healthy gross margin percentages.

Additionally, we are striving to serve the markets that have higher demand. Historically, when there have been slowdowns in new construction businesses, we have been able to successfully shift our sales mix toward repair and replacement business, or "R&R." The fundamentals for the R&R activity remain good and we expect modest growth for the next few quarters. We continue to see a shift within our distribution base to more repair and replacement business, or R&R. The majority of R&R projects use our WinGuard products as customers continue to replace or repair windows and doors with our impact-resistant products versus standard windows and shutters.

Finally, we generate strong cash flow and will continue to look for acquisition candidates that expand our geographic reach and/or our product offering.

Now Jeff will review the results for the third quarter in greater detail.

Thanks, Rod. Let me give you some more details on the quarter and the year-to-date numbers. As Rod mentioned, and as many of you have learned from our earnings release, we reported net sales of $98.3 million for the third quarter of 2006, a 12.9% increase over the prior year quarter. If you adjust our 2005 results for the discontinuation of NatureScape product line of approximately $5 million, our year-over-year growth was 19.7%.

Our WinGuard branded products led this growth for the quarter, representing 67% of net sales compared to the third quarter of 2005's percentage of 60%. Our volume growth in WinGuard was 24.6% compared to the third quarter of 2005.

Our gross was also positively impacted by the effects of a 9% price increase in March 2006. In addition, our sales mix benefited from strong sales into the multi-story market. Multi-story sales were $6.3 million versus $1.3 million for the prior year quarter. Sales in our other product lines of $26.5 million were down versus the prior year's quarter of $33.2 million. This was mainly due to the discontinuation of our NatureScape business, sales totaling approximately $5 million and our aluminum and vinyl lines being off approximately $1.8 million.

For the quarter, sales into the new construction market represented approximately 58% of our total sales. Sales in the R&R market represented approximately 42% of sales. This compares to year-end 2005's percentages for the new construction of 67% and R&R of 33%. We expect this shift we see to continue between new construction and R&R as our dealers and distributors continue to focus their efforts on the R&R market.

Year-to-date, our revenue growth stands at 24%. This includes the effect of the positive price increases and the positive mix of our WinGuard product line. We also experienced strong sales in our architectural systems product lines with sales in the first nine months of 2006 totaling $17.9 million compared to the same period last year of $4 million.

Our gross margin increased for the quarter to 39.9%, an increase of 270 basis points above the 2005 third quarter gross margin of 37.2%. Margin expansion was largely due to price increases, product mix and improved manufacturing efficiencies during the quarter. Our WinGuard and multi-story products represent approximately 73% of our total sales for the quarter and generated average gross margins of 46% and 38%, respectively.

On a year-to-date basis, gross margin is 40.2%, up 370 basis points versus last year's gross margin of 36.5%. Our WinGuard products represented 65% of our sales for the first nine months of 2006 compared to 54% of sales for the same period last year. For the first nine months, price increases, favorable mix shifts and operating efficiencies have helped us offset the impact of rising input costs; however, the fourth quarter will be negatively impacted by increased costs of our aluminum as we rolled off the last of our forward contract this past October. That amount is estimated to be approximately $1.5 to $1.7 million, depending on purchases.

We will continue to manage this commodity cost increase by working with our current suppliers to reduce costs as well as monitoring the market for an opportune time to cover our future needs.

Selling, general and administrative expenses were $22.7 million in the third quarter of 2006 versus $21.5 million in the third quarter of 2005. As a percent of sales, SG&A was 23.1% for the quarter versus 24.7% for the third quarter of 2005, an improvement of 160 basis points. The absolute dollar increase in SG&A was driven by increases in our advertising expenses of approximately $800,000 and, in our general administrative expenses of $600,000, costs such as additional accounting, legal, insurance, compliance and other expenses to support our growth and the requirements of being a public company.

We continue to invest in our brand awareness to help drive our volume growth as we launched our first out-of-state TV advertising campaign in the Carolina and Gulf Coast markets. Total marketing investment has increased to $2.8 million in the third quarter compared to $1.7 million in the prior year, including the $1.3 million spent on targeted advertising.

On a year-to-date basis, SG&A is 22.5% of net sales compared to 24.3% for the comparable period last year. SG&A costs in absolute terms were leveraged against our sales growth. Interest expense for the third quarter was $7.8 million compared to $4 million in the third quarter of 2005. Interest expense includes non-recurring charges of $4.3 million in the third quarter of 2006 and approximately $450,000 in the third quarter of 2005. These charges related to pre-payment penalties and the write-off of unamortized debt issuance costs in connection with the repayment of debt in the respective periods.

During the quarter, we repaid $154 million of long term debt through the use of proceeds received from our IPO as well as cash generated from operations. On an annualized basis, we expect our interest expense to be approximately $14 to $15 million, based off current debt levels now that we have worked our way through the non-recurring charges.

The effective tax rate for the quarter was 39%. This compares to an effective rate of 33.2% in the third quarter of 2005. 2005's tax rate included tax credits related to our previous Lexington, North Carolina, expansion. The current expansion, the new Salisbury facility, will also generate tax credits which could reduce our rate beginning in 2007 up to 200 basis points. Application of those credits are limited by time and income so the actual impact on our tax rate may be different. Our tax rate will also benefit from the Manufacturing Jobs Creation Act.

Net income for the quarter was $5.1 million, an increase of $4.9 million over last year's net income of $200,000 as our increased sales and expanded gross margin were leveraged through the declining SG&A spending as a percent of sales I just described. On a per share basis, GAAP net income represented $0.18 per diluted share compared to $0.01 per diluted share for the same period last year. Adjusting for expenses associated with the IPO and debt repayment, our net income was $8 million for the third quarter of 2006 versus $5.3 million in the prior year quarter, a 51.4% increase. Our adjusted EPS of $0.28 per pro forma diluted share compared to an adjusted $0.19 per pro forma diluted share, an increase of 47.4% over the prior year.

Diluted weighted average outstanding shares for the quarter were approximately $27.7 million compared to $17.2 million for the same quarter last year. The higher count was due to the company's IPO which was completed in June. Assuming the IPO had been completed at the beginning of the respective reporting period, the pro forma diluted weighted average shares outstanding for the third quarter and the nine months ended September, 2006 was approximately $28 million and for 2005, $27.4 million.

EBITDA for the third quarter of 2006 was $20 million compared to $8.3 million for the third quarter of 2005, an increase of 140.3%. On an adjusted basis, EBITDA would remain the same for the third quarter of 2006; however, adjusted EBITDA for the third quarter of 2005 would be approximately $16.2 million.

Adjusted EBITDA as a percent of sales was 20.3% for the third quarter of 2006, compared to an adjusted EBITDA of 18.6% for the prior year quarter. For the first nine months of 2006, our adjusted EBITDA was $67 million, or 22% of net sales, compared to $43.2 million, or 18% of net sales for the same period of last year.

A reconciliation of the adjusted pro forma diluted shares, adjusted net income and adjusted EBITDA that I've just described has been included in our earnings release for your reference.

Now let me turn to the balance sheet. At the end of the quarter, our net working capital, excluding cash, was $40 million or 10.2% of trailing 12-month sales. This compares to $42.5 million or 12.8% for the year ended 2005. The primary drivers for this improvement include a decrease in our day sales outstanding, leveraging our inventory with sales growth, offset in part by an increase in other current assets and a decrease in accounts payable. Our pro forma return on net assets on an annualized basis increased to 32% for the first nine months of 2006, up significantly from the same period last year.

Now I'll cover a few additional items relating mainly to cash flow. At the end of the quarter, year-to-date capital additions were $24.2 million which includes $5.4 million of capital spending related to the third quarter. This was driven by our plant expansion in North Carolina. For the full year, we continue to expect total CapEx to be approximately $30 million. We expect to have our new North Carolina plant fully operational in the fourth quarter of 2006 and from a plant footprint perspective, this will support our sales growth well into the future. We have invested significantly in 2006; however, going forward, our CapEx is expected to be in the $15 to $17 million range on an annual basis including maintenance spends.

Depreciation and amortization totaled $11.5 million for the first nine months. We expect full year D&A to be in the $16 million range. Also, as a reminder, during the first quarter of 2006, we paid $83.5 million in dividends to our shareholders of common stock, and $26.9 million in cash compensatory payments to our option holders. Over time, our policies for future dividends will be decided by our Board of Directors with input from management.

Our debt outstanding as of September 30, 2006, was approximately $166 million. During the quarter, we applied the proceeds received from our IPO as well as cash on hand generated from operations and the proceeds of approximately $17 million received from the exercise of the underwriters' over allotment to pay down our debt. Our cash on hand at the end of third quarter 2006 is $28.5 million. We will use our cash flow to continue to pay down debt when appropriate and to continue to look for growth via acquisition when the right opportunity presents itself. With that, let me turn the call back over to Rod.

Thanks, Jeff. We believe that we can mitigate some of the deteriorating market conditions by gaining market share in our impact-resistant products which will allow us to grow faster than our underlying market; however, we think the difficult market condition is affecting our business will negatively impact our operating results and year-over-year comparisons through at least mid-2007, primarily due to the strong results we have experienced over the past several quarters.

While we have seen a decline in the housing market and increases in commodity prices such as aluminum, we believe that the U.S. impact resistant market will continue to grow over the long term and expect our presence to expand in this market. We plan to introduce several new products which will help drive our traditional organic growth while in addition, we will opportunistically review acquisition candidates as they come up. In summary, we are pleased with our third quarter and year-to-date results and I want to thank all of our employees for their hard work and dedication. Our team has remained focused on growing our company and delivering strong results for employees, customers and stockholders.

With that, I'll conclude and Jeff and I will be happy to answer your questions.

Operator, first question.

Thank you. [OPERATOR INSTRUCTIONS] Your first question will come from the line of Sam Darkatsh with Raymond James. Please proceed.

Can you hear me okay?

Yes, Sam.

Okay, excellent. WinGuard sales in the third quarter, looks like they're up about 23% or so year-on-year. Do you anticipate that sort of sales growth being maintained or moderating slightly as you go into the winter months. See if you could give us a little bit of color, not specific growth rates, but just generally speaking directionally?

As we look into, not so much just the winter months, but the fourth quarter, we're comparing against 2005 where we came off of a really active hurricane year and Wilma, which actually hit in the fourth quarter, so there was some repair work done and huge awareness. Fourth quarter of 2005 was a bit of an anomaly, not extremely strange, but it was a very strong quarter, so compared year-over-year, we think, matching up to last year's fourth quarter from a WinGuard perspective, might be a little difficult. However, looking at sales growth year-over-year, we expect to continue WinGuard sales growth. It's a primary driver, we're strong in the market, people are still putting in WinGuard product in lieu of shutters and they're taking out windows and putting them in so we expect growth there.

And remind me, you had some one-off cost issues in the fourth quarter of last year as well. Could you remind us of what some of those might have been?

Yes, in the fourth quarter of last year, Sam, we wrote off our NatureScape trademark. If you recall, that was approximately $7.2 million. We also had some one-time fees associated with exit cost of the refinancing in the NatureScape business in general was about $1 million.

On an operating basis, though, I thought you had some manufacturing issues that were subsequently resolved though as well.

Operational efficiency, we're definitely improved. We've taken our lead WinGuard and reduced that dramatically since the end of the year so as far as operational efficiencies improvements, there definitely is some cost benefit year-over-year in that.

Some of the improvements, Sam, are also driven from the effects of a storm like Wilma coming through which came ashore on our coastline just south of us, crossed the state. We were down for a day or two with Wilma coming through and then our customers were fairly dramatically impacted by the storm. And we were sitting on a pretty large inventory of product that we had anticipated delivering to them Monday, Tuesday, Wednesday after the storm hit and we did deliver all of that product before the end of the year but there was storage fees and inefficiencies that were created by items like that.

Two other questions and I'll defer to others. Rod, your mentioning looking at potential acquisitions. The types of businesses you're looking at, would they be trying to enhance branding or would it be for additional capacity or to be regional players where perhaps states that you're not involved in? Help us with respect to the strategy of what you might be looking at incrementally.

Probably not a great answer but it's kind of "yes" to all of the above, Sam. We always look at things that go into adjacent markets or adjacent areas. Geographically, if we can hit an area that we're not at, that makes a lot of sense. From a product standpoint, we can develop product and we've proven over the years that we can develop product really fast and really efficient; however, it's still a little bit quicker to possibly buy some high end products if you can do that. So we look at it through a geographic and products standpoint and make sure that it makes sense.

It's difficult sometimes because in the window and door industry, traditional margins aren't anywhere close to what we've run and we've maintained those margins over a long period of time so we have to make sure that as we're looking at an acquisition candidate that they're either accretive or that they don't dilute our margins to much.

And it would make sense to acquire someone rather than to do it yourself in many markets, you think, because of existing relationships with the customers and existing capacity online?

Yes, as we look at different markets, certain markets are driven more by commodity-type items. Some markets are driven more by relationships. And we have to understand those markets very well and make sure that if it's a market driven primarily by strong relationships, it makes more sense to do an acquisition than to have those relationships in place. Again, if all the other items match our goals.

With respect to the rise in aluminum costs and also potential sales price hikes that at least you decided to do the last couple of years, would you anticipate raising prices again to offset aluminum, aluminum inflation for next year, or would you expect maybe to perhaps pick up some market share if some of your competitors have more of an aluminum exposure than you guys or how are you looking at sales price hikes or selling prices in the coming year?

I think you actually asked a couple of questions and I'll try to hit them all there, Sam. Price hikes for the upcoming year early in the year, because it is a little bit of a slowing market we wouldn't anticipate putting a price hike in place for the first part of the year.

You did reference gain, a market share gain, and that's definitely happening. We're seeing market share gain when you look at new housing starts and you look at the market that we served and then you look at what happened in that market and what our sales growth has been. We're definitely gaining market share and we can leverage that market share, especially as things come back. The dynamics in the market are still extremely strong. Folks are moving to the coastline, they're moving to the sunshine states, they like the water, there's still a lot of people moving in.

We've got to get through this housing glut. There's a lot of houses built and speculated and as we work our way through that housing glut, everything comes back very strong. And while that's happening, we see the remodeling market being very strong. So as we gain some of that market share and we look into next year, aluminum, we don't anticipate aluminum coming back to some of the, as we say, historic levels of maybe two or three years ago. We also don't see aluminum staying at the level that it's at right now. It's an extremely high level but it's not really supported by the dynamics in the market.

So the $1.5 to $1.7 million negative impact in the fourth quarter from the aluminum, I call it a hedge [rolling off], you would expect that to continue in the first half of next year? That sort of run rate, based on the fact that you wouldn't anticipate raising prices?

We don't necessarily anticipate raising prices in the first half. Obviously, that run rate is an estimate and what we'll do, like I mentioned earlier, we're currently working with our vendors, our suppliers to negotiate pricing as well as obviously shifts in mix helping off margin wise, to help offset that impact. Selling more WinGuards, selling more multi-story, to help offset that. But as far as dollars, it depends on our purchases but at today's prices we're looking at an impact we're going to deal with until such time.

Last question, I promise. The installation of windows occurs far earlier than many other building materials. They go into a home, so I'm guessing you're seeing the teeth of the housing turndown now versus a lot of your peers have yet to see it because they get installed late in the home, but as you see it, would that then mean that you would, in theory, see a recovery if and when it happens, early as well or because of the mix with the repair/ remodeling, it makes it a moot point. I'm just trying to get a sense of how important that dynamic is that you get installed early in a home.

That is. You very accurately captured that. We do get installed fairly early in the home. That product has to be in so you can dry out the house before you can start doing drywall and some of the other things that you would do in a house. So it goes fairly early in that construction cycle so we, traditionally, as things come back, we see it a little bit earlier than a lot of other building products companies, but the shift to, the mixed shift to repair and remodeling also goes strong. So we don't see the new construction market mainly as clearly as some other folks do that are tied strictly to that new construction market although we do come back pretty strongly and pretty early on when that market comes back.

Thank you folks.

Thank you.

Thanks.

Your next question comes from the line of Nishu Sood with Deutsche Bank. Please proceed.

Thanks. Good morning, guys.

Good morning, Nishu.

Good morning, Nishu.

Now when you were answering Sam's questions earlier, you mentioned that the fourth quarter WinGuard sales would be a tougher comparison than the third quarter. If I have my numbers correct, WinGuard sales were about, I think about $54 million, just up slightly from the third quarter, so are you talking about maybe a seasonal impact that you would have normally expected the fourth quarter to be weaker than the third quarter but because of the hurricanes, it stayed level?

Yes, a little bit. I just wanted to caution a little bit. We're going to continue growing sales. We're confident about that. But last year was a little bit of an anomaly. We don't see a lot of slowdown in the market traditionally in the fourth quarter until right around the holidays and then you've got a couple of weeks where not much happens so that usually affects the fourth quarter and because of the impact of storms and Wilma and things like that last year, we didn't see that traditional slowdown as we got to the holiday.

Okay. And another thing, on the rate of the WinGuard sales. I know that some people are probably going to be concerned with the slow down and the rate of growth from, what was it, 75% I think last quarter. It's a mid-20s that we're talking about in the third quarter. I know that the Florida housing market has slowed but it was pretty bad in the second quarter as well. So maybe can you help people understand? Are there other factors here that are holding the growth rate back for WinGuard? Was the rate of growth in the first half unsustainable? Is the penetration rate of impact-resistant windows slowing? What are some of the other factors that you're seeing out there that can help people understand what drove the slow down and the rate of growth?

Well we actually think the penetration rate of impact-resistant products is not slowing; however, new construction starts is slowing. The first half of the year, if you look at the first quarter, in particular, housing starts, at least there's a lot of third party data out there, but housing starts as we looked at it in the first quarter, were not significantly down. In fact, we have a lot of data that shows they were up by 5 or 6% in the first quarter.

We talked to Sam a little bit about the timing on windows going into a house so as those starts come, the windows go in and we saw that ability of folks to try to finish their houses because everyone was projecting this big slow down in the new construction market and there was a lot of desire among builders and folks building houses to finish their houses and either get them on the market or wrap them up so they wouldn't be doing some new construction. And we saw that. We saw a lot more push for finishing houses as opposed to starting new houses and rolling contractors over to the new house. So I think that drove the first quarter and the first half a little stronger than it traditionally would and the second quarter was an extremely strong quarter for us. A little above forecast and above projections for us.

Okay. So now speaking of the homebuilders. Are you seeing any pressure from them in terms of pricing. Obviously the builders are having an extraordinarily tough time down in Florida and are looking for any way possible to reduce their construction costs. So are you seeing them either a) come back to you and then ask for significant price reductions, of b) are you seeing them perhaps opt for second tier providers of impact-resistant product because, obviously, your product is priced at a premium?

No, the answer to both of those is, I suppose, a qualified "no." We're really not seeing push back on pricing. We're seeing a little bit of concern on our conventional product but not on our WinGuard product. Our WinGuard's product's premium and the service provided- I think builders still understand very well that the ability to get a complete product on time and short lead times actually is less costly than waiting on a window or waiting on any product in that house that slows down that construction cycle for a week or two weeks or three weeks.

So, again, it's a cost comparison versus a price comparison and I think the consumer's much more educated now than they were even five or 10 years ago and they're able to analyze those costs and say "Here's the total cost of my project." And we found that working real well.

We really haven't seen a lot of push back on costs. We have seen builders concerned about the cost of building their house and actually talk a little bit more about, and there's an argument among builders and we've seen them do it both ways, whether it's cheaper to put in an conventional window and a shutter and up sell to WinGuard and get a premium for it, or to make WinGuard a standard and build that into the price of their house and just make sure that folks have what they feel is the best solution for that house.

I don't know that we've seen a big change from which way builders to it yet but we do have conversations with them about whether it's better to up sell or offer it as a standard.

Okay, that's it for me. Thanks.

Thanks.

Your next question is from the line of Michael Rehaut with JP Morgan. Please proceed.

Hi, thanks, good morning.

Hi, Michael.

I was wondering if you could go into a couple of the areas of growth that you talked about and, in particular, the multi-story line, and obviously it nice increase year-over-year but what do you see in terms of the $6 million quarterly rate, if you see that continuing vis-a-vis any visibility from new contracts?

Yes, the multi-story product we sell is mainly R&R related, repair and remodeling. And it's just been strong for us. It's exceeded our expectations year-to-date with sales of approximately $18 million. We don't see that necessary through trailing off. We still see a strong demand in that market for the R&R side and we expect to continue to see that trend in the future.

And what do you do for that in full year '06 or, I'm sorry, year-to-date '06?

We've done approximately $18 million year-to-date '06.

And if you could give us an update on your efforts outside of Florida. You mentioned stepped up advertising in North Carolina. How do you see growth in that market and perhaps also the Katrina-related markets, Mississippi, Alabama. What do you see for growth there in terms of '06 sales, roughly in '06 sales? '07 sales?

Yes. Mainly I'll address the markets kind of a state at a time and then in general. South Carolina market which has had code in place and enforced for, probably better enforced than any other state for a longer period of time. Really started enforcing it pretty well in 2005. We're seeing a lot more demand, a lot more acceptance of product and WinGuard product in that market.

And, again I can back up and talk a little bit about how code drives and how it gets enforced. But in the Florida market, which is kind of the basis for impact-resistance products, after code's adopted and enforced, it takes, we see about two years, and then even after that code is being enforced, the acceptance and understanding of how that impact product works takes a little bit longer. That's happening in the Carolinas so we expect some pretty good growth out of especially South Carolina, a little more coastline, a little more code-driven area. We're seeing some demand in North Carolina, again, driven by those same factors, understanding code.

Along the Gulf Coast area, tremendous interest. I don't want to categorize it yet as being tremendous sales or potential for tremendous sales, but the rebuilding portion of the Gulf Coast is going relatively slow. And I think we've all followed the, a little bit of a nightmarish effect for the consumer there with getting insurance dollars, whether it was caused by windborne debris or whether it was caused by flood and what did your insurance cover? And there's lawsuits out there so I don't know that we need to comment a lot on what's happening there other than there's not a lot of insurance money available in that area yet.

But we see that in the future and we tend to look a year or two or three into the future and we see that over the next few years as being a very strong market and it will rebuild. There's tremendous attraction to live close to water, even though there's been a number of hurricanes over the last few years, but there's still that tremendous attraction to live close to water and it's a perfect spot to do that in.

And I guess in general, out-of-state sales, just as a point of reference, for the year-to-date we've had approximately $10.5 million in out-of-state sales versus last year's $8.5 so we're- we think we're making some headway there as we establish that footprint. We see that continuing to grow.

You know, Mike, one of the other places that we don't talk quite as much about and you all don't ask too many question about, is the international market, and we are some pretty good growth in the international market as we're opening up some new areas there. We've gotten a number of orders out of the Central American market, Nicaragua, Costa Rica, places like that. The Caribbean, of course, in harm's way and even though it doesn't have code-driven building, in many areas they are kind of following Dade County or Broward County's lead and we're seeing a pretty good mix shift to WinGuard product in that market also. And that market's going pretty good. It looks like that market's going to end up in that, some where in the $19 to $20 million for the year.

And what was, how does that compare against '05?

Well, year-to-date our international sales is approximately $12.5 million so we're expecting obviously a stronger fourth quarter. Last year it was approximately $10.5 so we're up about 20% through the first nine months.

Okay. In terms of, you know, the hurricane season not being as strong this year as it was last year, do you see any less sense of urgency among consumers? People can sometimes be quick to forget or, so how is the demand kind of continuing to follow through on the repair & model side, if hurricane season may have lessened the immediate awareness or necessity?

I don't think it's lessened the awareness. After we went through 2004 and 2005, 2005 especially with just an unprecedented number of storms and then 2004 in our served market, the Florida market really, where there was four direct hits, that doesn't go away quickly. I've lived here a long time. Trust me, after you go through one storm, that doesn't go away. You remember that for a long time. You tell your grandkids stories about stuff like that.

So I think, as we look at, if you look at history repeating itself, after Andrew went through in '92, an entirely new code was written for the state of Florida, we really didn't have significant storms until we got threatened in 2001 and 2002, but we really got hit in 2004 and I would have to say by 2003 and '04, folks were starting to say, you know, maybe the code might be a little too strong, and it was 12 years after the last storm had hit. And then the storms hit and everyone said "Wow, this worked really well." The code is really great, it worked really well.

So the difference between now and then is a new code went in place that we helped write that drove different building construction that really hadn't been tested. Now a new code is in place that has been tested and there's no ability to go out there and say we're not quite sure what happens when a storm hits.

Will this actually protect us? We have the empirical data that says it will protect us. So we don't see the awareness going down at all. You know, possibly six or seven years from now if there are no storms, we'll have this conversation again, but we're kind of thankful that the disruptive factor of the storms didn't hit us this year.

Okay. Fair enough. And just a last question, going back to the multi-story for a moment. You mentioned that perhaps you're going to do in the $24 million range if you get another $6 million in the fourth quarter. In terms of growth for '07, do you see that still coming more from the repair and model market and what type of growth would you be looking for off of that mid-$20 million type of base?

I'll answer the repair & remodeling market question first. What we see, as we look forward, the repair & modeling market is, as I say, more of an instant market. By the time a condo or a building decides to change our their windows, it's not always, but generally a condo association or building that says that we're going to replace all of our windows and they do it a couple of different ways but generally one of two ways and that is it's all funded, the money's in place and we're going to change out all the windows and we're going to do it in Florida time and we're just going to fly through this project and get it done or they require the condo owners over a period of three to four years to replace the windows and, again, it's funded, it's authorized by the condo association and they've replaced the windows. So that, on repair and remodeling, we see the immediate sales once you bid that project. You know, a project that's bid today may start getting sales next week.

On the new construction side, because of the cycle involved, by the time you get involved in bidding a project till it actually comes out of the ground and they have a need for windows, it could be six months, but it probably is going to be closer to a year to a year and a half so driving the sale, we see both driving the sale. We see a more immediate impact from the repair & remodeling side and a little longer term sustained growth from the new construction side. So we feel like we'll see both. [Technical Difficulty]

And I guess this is to follow up on that, is what I was getting at was that given the slowdown in new construction and the potential that that would also affect a lot of the high rises and earlier we had talked about WCI being a source of demand for some of its high rises but that company has dramatically scaled back its growth plans. I would think that it's going to be more the repair & remodel that would drive any type of growth next year and so that's really what I was getting at and, given, if that really is the case, what type of growth you might see in '07 off of the, again, let's say the $24 million dollar base in '06.

Yes, that's probably a little harder question to answer because I think everyone's real familiar and I'm not WCI so I can't really comment on what they do but I think everyone's pretty familiar with their towers and their slowdown which is a market we haven't really serviced hardly at all. We do sell products to WCI in the residential construction, single family, so we don't see an effect from, say a WCI tower.

We do know there's pretty significant condo construction going on, especially in Southeast Florida but we all agree that market over time is affected by this same slowdown and won't be driven quite as rigorously as what it is right now. The repair & remodeling market, however, is very strong. There is a lot of condos that are there and if they're going to maintain those, and again, it depends a little bit on the high rise condos, you're going to see a lot of repair and remodeling, changing out windows in those.

We do see still a considerable line of growth, and we call it multi-story and high-rise. And we call it that for a reason because there's a lot of four story to 6 story buildings going up that are still funded, still there, and they're still going up and the timeline on those buildings is not near as long as it is for what's traditionally called a "tower" or a "high rise" building that might be 30 stories or more. So that market will be fairly strong also. But the penetration into the repair & remodeling market is, I think, in the condo market is actually picking up speed.

Thank you.

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

Thanks. Good morning, guys. I think most of my questions have been answered, but Jeff, is there any difference in the margins you get on the multi-story properties compared to other parts of the WinGuard business?

Yes, WinGuard margins will average anywhere in the 45 to 50% range. I think for the third quarter, our WinGuard margin averaged $46.4. Multi story is typically in the $40 range, anywhere from high 30 to $38, to 42 range. For the quarter we were at $38 for multi-story, so there is difference in margin, but obviously the multi-story margin is much more attractive than the standard aluminum margins which, you know, fall into that 23-24% range.

Okay, and just to be clear, because I think the growth numbers have bounced back and forth as it relates to WinGuard and multi-story. Now when you noted the $71.8 million and the 33% growth in the release you were referring to WinGuard plus multi-story, not just WinGuard alone?

That's true. That is correct.

And is the multi-story pretty much, although it's a wind resistant, hurricane resistant product, it's just not branded WinGuard? Is that basically the difference?

No there's several differences. Multi-story may be or may not be impact related. You have both. You can have both impact and non-impact within the multi-story so that's why it's not necessarily branded WinGuard. Multi-story is really driven by wind loads and the higher you go up, the stronger the window has to be to withstand the wind versus an impact. These are impact resistant type products. So we see a combination of both those type products going into that market. In Miami, Dade and Broward County it's impact code driven. So as we think over time other counties will probably go that route as well. So we try not to lump those all into the WinGuard brand.

And just a final question. Any thoughts on any hedging strategies you might deploy going forward now that your prior hedges have rolled off?

I don't know if there's a different strategy. One of the things that we always do Mike, is we have the good to cancel orders out at really at all times with our aluminum buys. And we're always looking at the market and we'll vary those prices a little bit but they're there 24 hours a day so that when the market dips we do our buys. And make sure that we cover, and depending on the price of the aluminum, we'll determine how much we buy at a time.

Yes, I think everyone we've talked to is in agreement. The fundamentals don't support the current price, aluminum's at. So we feel, and we're not the only ones. Talking to others in the industry. We feel that will ultimately we come down.

That makes sense. Okay, thanks.

Your next question will come from the line of [Keith Hughes] with Robinson Humphries. Please proceed.

Yes, I just wanted to clarify. A second ago you talked about a WinGuard margin, I believe, of 46.4% in the quarter. Was that correct?

Yes, Keith.

Then that's on the $71.8 million in revenue?

No, that's on $65 million in --

And what would that--

$71.8 included the multi-story revenue of $6.3.

What would be the total margin there? What do the two include?

Well the blended margin is still about 46%, again, because multi-story is only $6 million of that total.

Yes, okay. That's all my questions, thank you.

Thank you, Keith.

Oh, one final one. I did forget. In terms of your marketing efforts in North Carolina, are we really just at the beginning of this? Is that fair to say?

Yes, and just to clarify, it's not just North Carolina, it's up the East coast, but primarily the Carolinas and around to the Gulf Coast also. And yes, it is early on in the marketing cycle.

And the real focus there is is it initially the distributor community or is it to the actual end-use customers or contractors or -- how do we do this?

Now, it probably bears saying when we go into a market like that, we always go in and talk to the code officials first and we've done that over the last few years so they understand the code and how to inspect for code. Then we talk to the distributor side, or the industry side. We talk to builders and we talk to distributors and make sure they understand the product, the code and what's happening. And then when we go in with an advertising campaign, it's really focused a little more toward the end-user so we can start educating the end user and in markets like that, it's not, we don't just emphasize the impact resistance of the product. Obviously, that's a strong point but we talk about sound transmittance, safety, UV protection, all those types of things also so they really understand what they're buying.

Okay, thank you.

Thanks, Keith.

Your next question will come from the line of Ryan Watson with Stanfield. Please proceed.

Hi. You threw out a number, $1.5 to $1.7 million due to the roll of aluminum costs that 's going to hurt your margin. Can you just to into that a little bit more. Is that a year-over-year effect?

No that would be the effect of our uncovered position for the month, so November, December - that's the fourth quarter effect.

And October as well, or just two months.

Just really two months. We were covered. We had a Ford contract for covering a little over 80% of our purchases in October.

Okay. What is your annual aluminum spend, then, roughly? What was it? I guess I'm trying to establish some sense of relatively here.

It's in the neighbor of $40 million+ depending on, again, purchases and volume.

Okay. And how much were the hedges below market?

We're not going to -- we basically entered into these contracts last year. Around October . We've never commented on the exact contract dollar amounts or the value of those so we're not going to do that here.

Okay. If you look at last October time frame, and get a good average of what we're priced at. Okay. And the $40 million, then is that with the hedges in place? So it would go up above that in '07?

Yes.

Yes, okay, great. Oh, another question, sorry. What was your cash flow from operations for the first nine months, and I missed the CapEx as well.

The CapEx year-to-date was a little over $24 million and in the quarter it was $5.4 million. Cash flow from operations was roughly $24 million. We'll file that in our 10-Q. Obviously when we do that because it will say cash flow from ops of $24.5 million.

For the quarter or, for the quarter?

No, cash flow is a year-to-date.

Is a year-to-date, okay. And then normalize CapEx and then we'll go down to $16 million, roughly, in the out years because you had a boost in CapEx this year?

Yes, that's exactly right. We expect annualized type capital spend to be in that $15 million.

And looking at your leverage, I mean, you're in the low, I don't know, maybe two times, I don't know how people will calculate it, but when you said paying down debt, I mean, is there a point at which you become under leveraged?

Oh yes, we want to stay in that two times leverage. Yes, you're exactly right, and as we continue to generate cash, there could be a point when we have to make a decision on what to do with it versus paying down debt. But right now, we analyze that, make the appropriate decisions based off of debt and also as Rod had mentioned, any potential acquisition targets, we'll deploy our cash appropriately.

Okay. And what do you look at -- I don't know if this was touched on but what do you look at for multiple acquisitions, like generally in EBIT and EBITDA multiple?

It would depend on the acquisition, to be honest with you.

That's a tough one to answer because are you talking about trailing 12 or looking forward. There's a whole bunch of different ways to look at it. Potential market, potential product, development costs, you know those types of things, small, large: I don't know that there's a particular number out there. What we do look at is making sure that we don't get diluted and it doesn't affect our operating margin.

Yes, Okay. What have you guys calculated leverage at? What do you look at as your LTM and your LTM/EBITDA. Do you have a calculation for that?

Right now, our target two- and we're right in that range.

Okay. I just wanted to make sure my calc was right. Okay, thanks a lot. Okay, thank you very much.

You bet. Thank you, Ryan.

And due to the time restraints I would now like to turn the call back over to Jeff Jackson for closing remarks.

I see that we're out of time so we'll conclude today's session. Thank you for your time today and we look forward to speaking with you all again in February. Rod and I will also be available for calls, obviously, over the day. Thank you.

Ladies and gentlemen, this concludes your presentation. Have a great day.