PGT Innovations Inc (PGTI) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 PGT, Incorporated earnings conference call. My name is Tawanda. And I will be your coordinator for today. [OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Jeff Jackson, CFO. Please proceed, sir.

Thank you, and good morning ladies and gentlemen. Welcome to PGT's fourth quarter 2007 conference call. I'm Jeff Jackson, CFO of PGT. And I'm joined by Rod Hershberger, President and CEO, who will represent PGT on this morning's call. Rodney will provide an overview of the company's performance for the quarter and fiscal year 2006. And I will provide the specific details.

We'll also discuss our continued efforts to advance our value enhancing strategy, discuss our thoughts on current market trends and conditions, and then take your questions.

We welcome those of you listening via the Webcast. Before we begin, let me remind everyone who is listening that today's conference call contains statements concerning the company's future prospects, business strategies, industry trends. Such statements are considered to be forward-looking statements under the Product Securities Litigation Reform Act of 1995.

These statements are based on current expectations, which are subject to risk and uncertainty. Actual results may vary 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 with the SEC on June 27, 2006. We undertake no obligations to publicly update or revise any forward-looking statements.

If you have not seen the press release, a copy is posted on the investor relations Web site of our corporate Web site at www.pgtinc.com. Included in the press release are the unaudited consolidated balance sheets, a summary of consolidated statement of operations prepared in accordance with generally accepted accounting principles known at GAAPs, and pro forma information which was quantitatively reconciled to GAAP.

Our company uses non-GAAP measures as a key metric for evaluating performance internally. These non-GAAP measures are not intended to replace the presentation of financial statements in accordance with GAAP. Rather, we believe the presentation of earnings, excluding certain items, provide additional information to investors to facilitate the comparison of past and present performance.

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 we'll do so in the following order. First, I'll highlight our results for the fourth quarter and our 2006 fiscal year, and then provide an overview of some key strategic initiatives for 2007. Jeff will follow with a detailed review of our fourth quarter in 2006 fiscal year financials.

First, let me comment on the quarter. As I mentioned in our press release, the building industry continues to see significant deterioration in new construction starts as evidenced by a decline in new housing permits of 48% in the fourth quarter of 2006 versus the same period in 2005, while our revenues decreased 22.6% in the same period.

We were able to offset some of the decline in the industry by gaining market share through penetration of the shutter market or as we refer to it, the active impact-resistant market, and by focusing on our repair and remodeling [technical difficulty - audio drop] which was up approximately 6% over the same period last year.

For the fourth quarter, a combination of decreased volume and the rising cost of aluminum, partially offset by a favorable mix shift toward our WinGuard-branded and Architectural Systems product lines, and a decrease in SG&A spending, resulted in an adjusted net loss of $1.3 million, versus adjusted net income of $4.6 million in the prior year's quarter.

The declining revenues was drive by lower unit volumes, partially offset again by higher net price realization and product mix shift toward our WinGuard-branded and Architectural Systems product lines.

Sales of new construction and repair and remodeling, or as we'll refer to it through the rest of this conversation as R&R, accounted for 58% and 42% of our sales, respectively, compared to 69% and 31% for the same period in 2005.

We continue to invest in our marketing efforts. We increased our investment in advertising by almost two times from our 2005 level, $0.7 million versus $0.4 million, as we have funded our East Coast advertising campaign, focused primarily on Florida, the Gulf Coast and the Carolina markets.

We remain disciplined in our spending with our sales, general, and administrative expenses, which we have decreased by $5.1 million from the prior year quarter.

Pro forma diluted net loss per share was $0.05 for the fourth quarter, versus net income per share of $0.17 for the same period the prior year.

For the 2006 fiscal year, we delivered record sales of $371.6 million and record profitability. Adjusting for certain items related to the IPO and other non-recurring items, our net income was $26.3 million and pro forma earnings per diluted share was $0.94 per share versus $0.68 per share for 2005.

We continue to manage our capital structure well. Debt repayments totaled $154 million in 2006. And we recently repaid, in the first quarter of 2007, an additional $20 million.

As I mentioned before, like many building material suppliers in the industry, we are facing a challenging operating environment and expect the current market conditions to continue over the near term. The national housing market has been significantly impacted by the amount of excess inventory of homes, while in the past, the housing market has been affected by different market drivers. As a result, projecting sales is difficult.

We will try to mitigate these trends by, one, focusing on long-term growth strategy of product innovation by continuing to introduce new products and improving existing products; two, continuing to shift our product sales mix to higher-margin items, such as our WinGuard-branded and Architectural Systems product lines.

Finally, we are striving to serve the markets that have higher demand. Historically, when there have been slowdowns in new construction business, we have been able to successfully shift our sales mix toward R&R. The fundamentals for R&R activity remain good and we expect modest growth for the next few quarters.

While we continue to believe that we can outperform the overall industry by offering a superior product and unparalleled service to our customers, we are mindful that we need to reduce costs during industry downturns. However, as in the past, we view market downturns as an opportunity to gain market share from our competitors. So to that end, we have embarked on a two-pronged approach.

First of all, in order to grow market share, we've instituted several new programs over the last quarter. For instance, we've introduced new incentive programs offered to both our distributors, dealers, and the end customer.

We've increased marketing and sales efforts outside our dominant markets, including northern Florida, the Gulf Coast and the Carolinas. And finally, we've accelerated the new product rollouts and product line expansions which broaden our product offering.

Second, we are also implementing aggressive cost-reduction programs. For example, we have reduced headcount by nearly 12% since the third quarter of 2006, while introducing and training folks on three new product lines. We have also reduced overtime labor and placed stringent controls over new hiring. Discretionary spending has been highly scrutinized and reduced.

We continue to look for ways to optimize our distribution process such as introducing a new delivery container system, which increases our ability to backhaul our supplies. We have also cut our 2007 capital spending to $10 million from $15 million.

Finally, we are continually focused on improving the manufacturing process, including the completion of our new automated insulated glass line and the realignment of product lines between our two manufacturing plants.

Now, Jeff will review the results of the fourth quarter in greater detail.

Thanks, Rod. Let me give you more detail on the quarter in year-to-date numbers. As Rodney mentioned, we reported net loss for the quarter of $68.2 million, a 22.6% decrease versus prior year quarter. If you adjust our fourth quarter 2005 results by $3.9 million for the discontinuation of our NatureScape product line, our year over year decline for the quarter was 19%.

A breakdown by major category is as follows -- Our WinGuard-branded products had net sales of $43.8 million in the fourth quarter of 2006. This represented a decrease of $10.1 million or approximately 19% from the fourth quarter of 2005 sales at $53.9 million. However, as a percent of total net sales, WinGuard increased to 64% compared to 61% in the fourth quarter of 2005.

Our Architectural Systems sales were $3.9 million in the fourth quarter of 2006, which was $1.7 million higher than the $2.2 million of net sales in the fourth quarter of 2005, or a 78% increase.

Sales in our aluminum category were $17.3 million in the fourth quarter of 2006. This represented a decrease of $8.2 million or approximately 32% from the $25.5 million in the fourth quarter of 2005. For the quarter, sales in the new construction represented approximately 58% of our total sales.

Sales into the repair and remodeling market represented approximately 42% of total sales. New construction sales were down roughly 35%. And our R&R business grew approximately 6% versus the fourth quarter of 2005.

Net sales for the full year of 2006 were $371.6 million, which is an increase of 11.7% over 2005's net sales. This includes the effect of positive mix from increasing the sale of our WinGuard-branded product lines, and the effect of our 9% price increase offset by lower volume in our aluminum product lines and the discontinuation of our NatureScape product line. When excluding sales of NatureScape product line from our 2005 net sales, our year over year increase is $56 million or 17.8%.

Of the 2006 net sales, our WinGuard-branded products had net sales of $241.2 million in fiscal year 2006. This represented an increase of approximately 30% from 2005, which came in at approximately $186.2 million. WinGuard sales as a percent of sales was 65% for the fiscal year 2006 compared to 56% for 2005.

We also experienced strong growth in our Architectural Systems product line, with sales for 2006 totaling $21.8 million compared to $6.2 million in 2005.

For the year, sales into the new construction market represented approximately 59% of our total sales. Sales into the R&R market represented approximately 41% of sales. Our gross margin for the quarter was 28.8% versus 38.3% in the same period of 2005.

Gross margins were driven down during the fourth quarter as a result of declining operating leverage due to our lower overall sales volume and the impact of previously discussed aluminum cost increases of approximately $1.3 million.

For fiscal year 2006, gross margin was 38.1%, up 100 basis points, versus last year's gross margin of 37.1%. A combination of favorable mix, price increases, and improved operation efficiencies drove this improvement.

Selling general and administrative expenses were $19 million or 27.8% of net sales in the fourth quarter of 2006 versus $24.1 million or 27.4% of net sales for the same period of 2005. The absolute dollar decrease in SG&A was driven by lower amounts of accruals for performance-based compensation as well as lower requirements needed for our allowance for doubtful accounts, as a result of our improved aging profile for our accounts receivable, offset by an expense of approximately $1.2 million related to the write-down of the fair value of our Lexington property, which is currently listed for sale with a real estate broker.

We continue to invest in our brand awareness, especially in the Carolinas and Gulf Coast markets to help drive our sales volume. Total marketing investment has increased to $2.7 million in the fourth quarter compared to $1.6 million in the prior year, including approximately $700,000 spent on targeted advertising. For the full year, SG&A was 23.5% of net sales compared to 25.1% for 2005. SG&A cost in absolute terms were leveraged against our sales growth.

Interest expense for the fourth quarter was $3.1 million compared to $3.5 million for the fourth quarter of 2005. On an annualized basis, we expect our interest expense to be approximately 12 to $13 million, based on current debt levels. In 2006, we recognized the tax expense of $101,000, despite the fact we had a loss before taxes of $668,000.

This unusual negative tax rate of approximately 11.6% resulted from a change in how we recognized state tax credits in North Carolina. We are now recognizing these credits in the year in which they were made available for deduction. We previously recognized these credits in the year which they were earned. This change resulted in an unfavorable adjustment to our tax expense of approximately $400,000. Without this adjustment, our tax rate would have been approximately 37.1%.

Also due to the favorable tax impact of exercising stock options during the past year, we had a taxable loss for the year. We are anticipating that we will carry back this loss, which will likely result in a tax refund of approximately 3 to $4 million. The current expansion in our new facility in Salisbury would generate a tax credit as well, which could reduce our rate beginning in 2007 up to 200 basis points.

Application of these credits are limited by time, so actual impact on our tax rate may be different. Our tax rate will also be impacted from the benefit of the manufacturing credits related to the job creation [event].

Net loss for the quarter was approximately $2 million, versus a loss of $900,000 in the prior year comparable period. For the fourth quarter of 2006, GAAP net loss resulted in a loss of approximately $0.07 per share compared to a loss to $0.05 per share for the same period last year.

After adjusting for expenses associated with our IPO, debt repayment, and other non-recurring items, our net loss was approximately $1.3 million for the fourth quarter of 2006, versus adjusted net income of $4.6 million for the prior year quarter.

Our adjusted net loss resulted in a loss of $0.05 per pro forma diluted share compared to an adjusted net income of $0.17 per pro forma diluted share in the fourth quarter of 2005. The difference in the fourth quarter of 2006 compared to the fourth quarter of 2005 was driven by decreases in volume, declining operating leverage, and increased input costs as previously discussed.

Diluted weighted average shares outstanding for the quarter were approximately $27 million compared to $15.7 million for the same quarter last year. The higher share count was due to the company's IPO, which was completed in June.

Our full year 2006 adjusted net income was $0.94 per pro forma diluted share versus $0.68 in 2005. Assuming the IPO was completed at the beginning of the respective reporting periods, the pro forma diluted weighted average shares outstanding for 2006 was approximately $28.1 million and for 2005 is $27.5 million.

EBITDA for the fourth quarter of 2006 was $4.6 million compared to $6.4 million in the fourth quarter of 2005. On an adjusted basis, EBITDA was $5.8 million for the fourth quarter of 2006 versus $15.2 million for the fourth quarter of 2005. Adjusted EBITDA as a percent of sales was 8.5% for the fourth quarter of 2006 compared to an adjusted EBITDA of 17.2% for the prior year quarter.

The full year 2006 adjusted EBITDA was $72.7 million or 19.6% of net sales compared to $58.4 million or 17.5% of net sales for 2005. A reconciliation of the pro forma diluted shares adjusted net income and loss 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 2006, our net working capital, excluding cash, was approximately $33.4 million or 9% of 2006 net 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 with improved aging profiles, offset in part by an increase in other current assets and a decrease in our traded accounts payable.

Our 2006 capital additions were $26.8 million, of which approximately $18 million was driven by our expansion in North Carolina. Depreciation and amortization total $15.6 million for 2006. Also, as a reminder, during the first quarter of 2006, we paid $83.5 million in dividends to our shareholders of common stock and a $26.9 million cash compensatory payment to our option holders in lieu of adjusting the exercise price in connection with that dividend payment.

Our debt outstanding as of December 30, 2006 was approximately $166 million. In 2006, we repaid $154 million of long-term debt through the use of proceeds received from our IPO as well as cash generated from our operations. Our cash on hand at the year-end of 2006 was $37 million, giving us a net debt of $129 million.

As Rod mentioned earlier, we subsequently used the current cash we have on hand to pay down another $20 million on our long-term debt, bringing our debt as of this call to approximately $146 million. We will use cash to continue to pay down our debt when appropriate and continue to look for growth via acquisitions 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 the deteriorating market conditions by gaining market share in our impact-resistant products, which will allow us to grow faster than the underlying markets.

However, we think the difficult market conditions affecting our business will continue to negatively impact our operating results in year over year comparisons through the near term primarily due to the record results we have experienced in 2006. As I had previously outlined, we have instituted several measures to stimulate sales as well as to reduce operating cost to counteract some of the current market conditions.

While there's been 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 we will expand our presence in this market. We are introducing 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've had a great year, a challenging fourth quarter. And I want to thank all of our employees for their hard work and dedication. Our team remains focused on growing our company and is committed to delivering strong results for our employees, our customers and our shareholders.

With that, I'll conclude. And Jeff and I will be happy to answer your questions. Operator, take the first question please.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Keith Hughes with SunTrust Financial. Please proceed.

Thank you. If you look at your business with the poor state of the Florida housing market, how much are you doing outside of Florida now? What kind of growth rates are you seeing there? And just generally, how long is it going to take for ex-Florida business to kind of ramp up as you move to the other geographies?

Keith, internationally, we've seen a growth rate, year over year, at about 17.5%. Out of state, outside of international, out of state Florida, that growth rate's been about 18%. So we're continuing to see growth happen outside the state. Obviously as we invest in marketing initiatives in the Carolinas and Gulf Coast, we think that will continue and feel confident about our expansion plans there.

How much of the business in the fourth quarter was outside the State of Florida?

Roughly $6.5 million.

$6.5 million on a $68 million number. Is the hurdle to getting that up more -- is it the housing market in those other geographies? Is it distribution? What do you have to do to get that up?

Yes, there's actually a couple things we need to look at. Keith, this is Rod. We've recently put together a team -- not quite ready to talk about it on this call -- to really handle the vinyl, vinyl WinGuard and the out-of-state expansion. And we'll be announcing that in a short time period.

So, it is a different market. We have to attack that market a little differently than we do the Florida market. We need to make sure we have the right products. It's very common for us in a downturn like this to aggressively go after geographic expansion by two things, really: the product itself, to make sure that we have the product; and through the sales and marketing efforts in those areas. And that's exactly what we're doing in this case.

So, we think that, if you look at our traditional growth in the out-of-state market and that -- especially the code-driven market that runs along the Gulf Coast all the way up through the Carolinas and into Jersey -- that you'll see a faster growth rate as we go forward, because of some of our initiatives we're putting in place.

But it does, as you alluded to, require you to develop a vinyl product in a wider SKU pattern than you have now. Is that correct?

I don't know that it's a wider SKU pattern than we have now. We have the right product for the WinGuard product lines. We want to make sure that we've got the right product. And we'll take a look at that. So, I think I'd be commenting way too early if I said it requires us to develop a different product or new SKUs or a broader product line on SKUs. We're pretty convinced it doesn't require broader. We need to make sure it's the right product that we have there now.

All right. Thank you.

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

Good morning, Rod. Good morning, Jeff.

Good morning, Sam.

Good morning.

I understand that you'd probably be hesitant to try and call the bottom in your end markets. But did you at least begin to see some sort of stabilization of the monthly run rate? And then how should we look at things sequentially based on normal seasonality at this time of year?

Jeff.

Sam, we don't see a lot of seasonality in our business because of the markets that we serve. The coastal markets don't seem to bounce back and forth quite as much. The question about the bottom is a question that everyone asks and that we look at pretty closely. And you're exactly right. That's a really hard call.

We've kind of dug into the data a little deeper than we probably normally would. And we see certain areas of the state that are operating at a pretty strong rate. And they're really small pockets. And we see other areas that are relatively slow. And then as we move into the Gulf Coast area, some of that's driven by insurance and insurance payments. The high rise market, the commercial market in those areas seem to be strong. The single-family residential is weak.

So, commenting on the industry as a whole would be extremely difficult. Spending a little bit of time walking through different markets might get us a little bit better feel. But I'm not sure that we have that much time on a call like this. You know, there are certain markets that are fairly strong. But there's a lot of markets that are still very weak.

As far as the run rate, we do think that the run rate that we saw late in the fourth quarter and actually early here in the first quarter will continue at this pace. And we think it will pick up slightly in the second half of the year. But again, I caution that that term is slightly.

Now, when you say pick up slightly, is that on a year-on-year basis, or is that on a sequential basis?

That would be on a sequential basis, Sam. The first couple of quarters, obviously, in 2006 were very strong for us. And it will not be favorable comps. So, if you look at a sequential quarter basis, say the results of our Q4 into Q1, I think that's more reasonable to look at.

We have see, you know, over the months in the fourth quarter pretty much a stable monthly pattern in terms of our top line. So, that's continuing. We do not see, you know, any kind of an issue with that maintaining. And when Rodney mentioned picking up in the back half, granted the fourth quarter of this year will obviously be a good comp year, we're hoping. But again, it's more sequential in looking at it.

Well then, the next question is -- I hope this isn't a dumb question. Let's assume that the next few quarters that your demand is pretty similar to what you're looking at right now in terms of your run rate.

Do you expand margins, because you don't have to slash production as much, and you don't get the inefficiencies that way; and perhaps WinGuard continues to grow as a percent of sales, so you get some mixed benefit? Or do gross margins remain at current levels?

Well, the initiatives we implemented during the fourth quarter -- roughly November time frame in the fourth quarter -- we're starting to see, a benefit of that. I feel comfortable in saying that you will see the results of the fourth quarter in terms of margins, the 28%.

We've seen some cost reductions that have taken hold. Rodney mentioned, from a people side being down in headcount from our third quarter. All that's starting to flow out into the margin.

We also have to remember that the cost of aluminum is also still out there -- roughly $27.50 a metric ton today. So, as long as that bounces back and forth, we have to keep an eye obviously on that in margin. But in terms of improvement, I think you will see an improvement in margin versus the fourth quarter. I'm just not comfortable in saying how much at this point.

Okay. But the point is that even if sales are flattish sequentially, all else equal of course, we should begin to see some improvements in gross margin?

Yes.

Yes.

Okay. Next question -- in the new construction versus remodeling breakdown, I believe you said it was 58-42. Is that any meaningfully different in WinGuard versus the base aluminum business?

No, we don't really track it in detail between aluminum and WinGuard within those percentages. What we will tell you is WinGuard is more R&R-oriented, especially like during storm season. But as you know, fourth quarter wasn't really a big storm year for the company, unlike the fourth quarter of 2005. But in general, we say WinGuard is more prevalent in the R&R side.

A couple more quickies and I'll defer -- CapEx expectations, have they been ratcheted down now that the new facility is built, and there probably isn't going to be a need for additional capacity for a while? What are your expectations for '07?

Yes, I talked about that a little earlier, Sam. I think, as we've chatted before, and in previous calls, we've talked about our CapEx traditionally running in that 15 to 16 million range. I think early in the call I talked about it. And we've cut that back to 10.

And about five of that is maintenance CapEx. And then I mentioned a couple product lines that we're kicking off here in this first quarter. We wanted to make sure we had those product lines out and rolling out. So there was some CapEx spend on that.

I apologize for missing it. Two more real quick ones -- Jeff, on the receivables side, any uncollectability issues with customers based on the huge downturn?

Nothing out of the ordinary course of business. We're actually able -- our aging profile actually improved. And we were actually able to take down our bad debt somewhat in the fourth quarter, because we are collecting our receivables. So no; I mean, nothing out of the ordinary course of business.

And final question -- with respect to the acquisition pipeline, Rod, have you see multiple expectations come down a little bit -- or at least price to be paid, expectations come down a little bit in potential targets? Or how would you define or categorize the pipeline at present?

Yes, the pipelines are, I think, a little difficult right now. I haven't seen the multiples come down. I've seen people go out with pretty optimistic views as they traditionally look at trailing 12. And trailing 12 for a lot of companies may look pretty good.

And then when you look at projecting the next year's sales, it becomes a little more of a difficult scenario to try to get a good handle on what you think will happen over the next 12 months.

And I think more importantly than looking at what's going to happen over the next 12 months is adjusting or rationalizing what they bring to the table over a long period of time, because we don't want an acquisition that's going to be good for 12 months. We want an acquisition that's going to be good for five years, for 10 years, and will help us grow that market.

So, looking at those numbers now as -- I don't know that it's a lot more difficult. It's a lot different than what it was looking at numbers six months ago or a year ago.

So, putting words in your mouth, you wouldn't expect -- although you're trolling for them, you wouldn't expect an acquisition near term necessarily?

Yes, no. We say the same thing. We look at acquisitions that, either bring a product that we want to get into and don't currently have, or it expands our existing product lines -- expand to a geographic region, to an area that we want to really dominate; and that it brings along the margins that we traditionally run. And going through a downturn in the business is not a permanent downturn in margins. So we want to make sure that it's accretive when we look at acquisitions.

So a hurdle rate that we look at for acquisitions is pretty high. And I think you've seen that over time, that almost all of our growth has been organic growth. But we're always looking at opportunistic acquisitions.

Yes, Sam. One other comment on the balance sheet -- you know, one thing that we didn't mention was inventories. Inventories are down in relationship to sales as well. And like I'd mentioned to you earlier, the accounts receivable is definitely improving.

I think our overall cash position -- you know, a net debt of roughly $129 million at year-end -- our balance sheet is strong. And I think it'll help us weather this current market conditions we're going through, the downturn in the market. We definitely got a balance sheet to do that.

Thank you both.

Your next question comes from the line of [Michael Reedhart] with JP Morgan. Please proceed.

Hi, good morning, this is Jen Consoli on the line for Mike. I was hoping to get a little bit more detail on the new products, how that rollout is going to progress throughout 2007 -- maybe what your expectations are for the Multi-Story products, some of the high-end windows and doors, and also where you see the out of sales possibly going in '07 versus '06.

I can comment on three of those really specifically and maybe the last one a little more generally. We have three new product lines that we really showed and introduced at the International Builders Show in February in Orlando, which was well-attended, despite the downturn in the business.

One actually is a little bit lower-end single-hung window, that serves a market that our customers have asked for. All of our product lines have been pretty high-end. So, we don't have a complete product line that serves maybe the tract builder a little bit better. We've come out with a product line that will serve that, so that we can take a dealer or distributor and have 100% of their business.

The second product line is our Architectural Systems operable windows, hung window -- extremely well-received. We got some pretty good rave reviews. We have a considerable number of jobs bid. That product line is now available for our customers, but the bid process and job rewarding process in a multi-story unit is a little longer than in a residential unit. A lot of the jobs that we're bidding right now will happen in late 2007 or 2008. So, that pipeline becomes a little bit better for us.

And the third product is a very high-end impact-resistant sliding French door, a corner door. It does a number of different things. It's pretty unique to the coastal market, where people want the ability to open up the whole back of their house, and open up a corner, and that type of thing. And we've gotten great reviews with that.

So, the first product and the third product that I talked about will be available to our customers at the end of March. The Architectural Systems is available now. So, that's part of our capital spend and part of our training process with our employees, to make sure that we're ready to produce that. We've got some sales forecasts in place for that.

The geographic expansion that you asked about, a little tougher to talk about right now -- we put a team together that -- has really put that team together this week. And I don't think we're quite ready to go out to the market yet and talk about that team.

But we will be in the next few weeks, once everything's solidified and people are on board, and we can really candidly talk about what's happening and what our plans are there. But we will aggressively go after the out-of-state market -- single-family and some of the multi-family things.

So, can you provide any quantification as to how much you expect new products will contribute to sales in 2007?

Well, I mean it would literally be driven by several factors, obviously with the new Architectural Systems product coming online, there's no order for that -- the team that we're putting in place currently to drive our vinyl and out-of-state sales. But I think new products will generate anywhere from 25 million to $30 million in 2007.

Okay, great. And one last question -- as far as your outlook for price increases, given that aluminum still continues to be elevated, are you planning on pushing through any more cost-based price increases over the coming quarters?

Right now we don't anticipate doing that over the -- and this is a pretty short-term answer. When the market is down, as it is right now, we don't anticipate pushing price increases through. We've talked about it many times, that we are a premium-priced company.

We traditionally are able to push products -- our price increases through as costs go up. And then our margin expansion comes from productivity gains. We don't anticipate trying to push a pricing increase through now with the market going what it's doing.

I can't really comment about what we think or how the market's going to be at the end of the year. But as soon as the market normalizes, stabilizes, we'll be back on our traditional operating mode.

And obviously, the major cost input there of aluminum, we're monitoring that daily. And we will hedge, if necessary, or when we think the time is right, to cover our positions.

Okay, great. Thank you.

Your next question comes from the line of Jim Wilson with J&P Securities. Please proceed.

Well thanks, guys. Most of my questions have been answered. Just Jeff, the margins between your WinGuard premiere products and the other products -- I know you've given that in the prior quarters? Do you have that?

Yes, Jim. The overall impact of the volume impact, it really affects all of our products, but just because of fixed cost, overhead absorption basically. But if I gave it on a consistent basis, I'd say the WinGuard gross margins were up in the upper 30s, 38.5% or so. And then the normal, I guess, aluminum, all other type of products are right around 11, 11.5%.

Okay, great. And then, I know we've talked a lot about the Multi-Story product opportunities. Could you give maybe just a little more color on the type of customers you have? I think last time we talked with you, very little of that customer base was actually residential, which I found very interesting. Could you give a little more, maybe, color and perspective on what those opportunities look like by type of customer or client?

I will say just that -- so I can gather a thought -- I will say most of the Multi-Story/Architectural Systems we do is more in the R&R type of market. We're not currently into the huge high-rise condominiums. We are coming out with that product to serve a higher four up to 30 floors. But most of our business is focused on the R&R side.

Yes, if you look at that market, it's a very strong market on the lower southeast coast. The Miami market is still -- we call it cream city to a certain extent, because there's still a lot of new construction going on, although there seems to be a little softness in the condo high-rise market. And the commercial side of it kind of picks up the slack there. So, there's some drive there.

But the majority -- other than that area of the state -- the majority of the market that we see is a pretty strong R&R market. A lot of folks that are living in condos that were built 15, 20 years ago that are now, because of a couple reasons -- code-driven, insurance-driven, and just performance of the product that's there -- looking at changing out the product now.

If you look at the bid process that we have and the customers that we're dealing with, the majority of the bids that are out there are on those types of projects as opposed to the new construction projects.

Actually, we like those projects right now a lot better, because the timeline on those is a little shorter. And they vary slightly. We'll see projects like that where they change out the entire condo. And to do that, that's a longer timeline. By the time the condo association, the board, and the bidding process goes through, it may be six months to a year.

We also see condos where they have permission to change out their product. They spec a particular window. And the owners of the condos can change those out whenever they want. But some of them may do it now. Some of them may do it a year from now. But it's steady business over that time period.

So, that's kind of a snapshot of the customer that we see out there.

And Jim, just to follow up on the gross margin question too. I want to emphasize, we have not cut any kind of list price or anything like that for our products. We offer, obviously, discounts or programs in the ordinary course of business that are consistent year over year. But the declining gross margin was surely due to the declining operating leverage related to volume, and then of course the aluminum cost increase.

Okay, great. All right. Thanks a lot.

Bye, Jim.

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

Thanks guys. First question, Rod, is a question we've talked about before. As the housing downturn has progressed here -- you know, gotten a little bit worse in the fourth quarter -- have you seen an increased level of price sensitivity from consumers or builders?

And I guess particularly on the new construction side, we hear from the builders any way possible that they can to de-spec their houses, make them a little bit more affordable. And it would seem like your products might be a little bit more subject to that type of behavior, because of their premium price position.

Actually, what we see is, we think, a little bit different, almost the opposite of that. We do see some pricing pressure. Primarily the pricing pressure comes from, as we would call, the tract home builders, the guys that are building large allotments that are maybe 10 or 15 or 20 miles inland, and not quite as driven by code and having all the impact type products in.

So, when you look at our conventional aluminum or vinyl line, we'll see a little more pricing pressure on those products. But on the high-end products, the Architectural Systems and the WinGuard products that are servicing that code-drive market, we haven't seen near as much pricing pressure on those types of items.

I talked a little bit about the window that we're coming out with that will serve a little more of the tract market. We anticipate seeing some pricing pressure on a product like that. But again, we're not seeing a lot of it on the higher end.

I guess I wasn't really thinking about pricing pressure. I mean, you obviously have a great product. And it can command that pricing premium. I'm thinking more along the lines of, whereas before you might have had WinGuard in all your windows, maybe people are opting now for WinGuard just in the front and shutters in the back, or options like that that might be dampening demand for WinGuard a little bit more.

We haven't seen much of that. I think that was the process that a lot of folks in the coastal markets went through over the last few years. And after they went through 2004 and 2005, it's pretty fresh in their minds. Putting up shutters on half of their house is a pain. And it's very time-consuming. And it has to be there in order to get insurance payoffs. So, folks that opt for a WinGuard product generally opt for a WinGuard product all the way around the house.

One thing that I didn't mention earlier, when you talked about pricing and pressure -- one of the things we do see is we see a little bit more consolidation of building products, where builders like to see a supplier that offers a package.

So, they may be doing a drywall, stucco and windows; or the shell, the roof, the windows -- that type of thing. So, we're seeing a little bit of a shift in that market. And I think we've done a very good job of making sure that we're aligned with the right people to make sure that we're capturing that.

Great. Okay, and second question I guess for Jeff -- when you think about operating leverage and the impact on your gross margins, given the decline in sales, was the operating leverage, the impact on gross margin, in line with what you would have anticipated? Or was there anything that might have temporarily depressed it in the fourth quarter? And maybe if you could put it in the context of the inclusion of the additional costs from the new facility in North Carolina.

Sure, initially obviously when we look at gross margin and taking actions to adjust our cost base for volume levels, that doesn't happen month one when we first see the downturn. You have to get into a trend and react accordingly. And so, we have implemented some costing controls that Rod has discussed, that we've mentioned on the call. And we do think there's some upside to that gross margin that you saw that we reported in the fourth quarter.

So, as far as the North Carolina facility, we do have a facility up there. It's doubled in size in terms of people and production. We look at that in relation to our cost. It is a part of it -- in terms of our cost of goods sold and what we're recognizing in our fixed overhead.

And we will obviously utilize it as volume comes back. I think we've made the right decisions. I think the team we're going to put into place and the future investment we're going to make will make that apparent. And obviously, with growing out of state, as I've mentioned -- 17.5 or so percent -- we think there's a market there.

So, I think what we've done, we'll pay off. But initially, you don't get the leverage you like to see.

Yeah, Nishu. I think that's really important. We have a history of doing that as a company in downturns in the industry. And unfortunately, this is the first downturn since we've been a public company. We get very aggressive. And we look at product development, we look at geographical expansion, as just a great opportunity for us to grow market share. And it's not always the kindest thing to all of our margins, because we're going to make sure that our structure is there to handle the sales as they come back.

And we're looking at this downturn a little bit differently than we looked at other downturns, just because the drivers are different. I can't sit here and say that the way we come out of this downturn is dramatically different than other downturns. I just know that this one's not driven by high mortgage rates and unemployment. It's driven by an excess inventory of houses.

So, the ability to come out and for people to be able to afford houses is there. It's a matter of positioning ourselves correctly so that we have that additional market share as we come out. And that's what we're doing.

Okay. And just a final housekeeping question -- I think you mentioned there was some pay down of debt in January, was it? So, what's the updated debt or net debt levels -- the gross debt and cash on your balance sheet?

Yeah, we roughly paid down another $20 million of debt in mid-February of this year. And that brought our debt from $166 million down to $145.5 million roughly. And then the cash accordingly just came down.

So, I just wanted to re-emphasize we did use our cash to pay down our debt. And obviously, lower interest expense. We took, I'd say, on an annual basis, took about $1.5 million, $1.6 million or so out of our interest expense line item, because our average rate's about 8.6 or so percent.

Okay, great. Thanks, guys.

You bet.

Thanks.

[OPERATOR INSTRUCTIONS]

At this time, there are no further questions. I would now like to turn the call over to Mr. Jeff Jackson for closing remarks.

Thank you. Hearing no other questions, we'll conclude today's session. Thank you for your time. And we look forward to speaking with you all again in the next quarter. Thank you.

This concludes the presentation. You may now disconnect. And have a great day.