PGT Innovations Inc (PGTI) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2007 PGT Incorporated Earnings Conference Call. My name is Lauren and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

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

Thank you, and good morning, ladies and gentlemen. Welcome to PGT's First Quarter 2007 Conference Call. I am Jeff Jackson, CFO and I am 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 I will discuss the financial results in more detail. We will also discuss our continued efforts to advance our strategy, as well as take your questions.

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 and industry trends. Such statements are considered to be forward-looking statements under the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations, which are subject to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements because of certain risk factors. Please refer to yesterday's press release and our annual report on Form 10-K filed with the SEC on March 21st of 2007. We undertake no obligation to publicly update or revise any forward-looking statements.

A copy of the press release is posted on our Investor Relations section of our website 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 GAAP and pro forma information which was quantitatively reconciled to GAAP.

Our company uses non-GAAP measures as key metrics for evaluating performance internally. A detailed explanation of these non-GAAP measures can be found in our Form 8-K filed with the SEC yesterday. 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 provides additional information to investors in helping compare past and present operations.

With that, let me turn the call over to Rod Hershberger, our CEO. Rod?

Thank you, Jeff, and good morning, everyone. We have a number of items to share this morning. First, I'll highlight our results for the first quarter of 2007, and then provide an update to some of our key strategic initiatives for the year. Then Jeff will follow with a detailed review of our financials for the first quarter of 2007. After my closing comments, we'll take your questions.

As I mentioned in our press release, the building industry continues to see significant deterioration in new construction as evidenced by a decline in new housing permits of 52% in the first quarter of 2007, versus the same period in 2006, while our revenues decreased only 24.6% in the same period. The decline in revenues was driven by lower unit volumes partially offset by higher net price realization and products mix shift toward our WinGuard and Architectural Systems product line.

We also were able to offset some of the decline in the industry by gaining market share through penetrating the shutter market or as we refer to it, the active impact resistant market and by shifting mix to the repair and remodeling market. Sales of new construction and repair and remodeling accounted for 53% and 47% of our sales respectively, compared to 63% and 37% respectively for the same period in 2006.

We continue to invest in our marketing efforts. Our marketing expense was $2.8 million for the first quarter of 2007, versus $2.6 million in the same period of 2006. We believe it is important to invest in this area during periods of cyclical downturns in order for us to achieve our goal of increasing market share. We remain disciplined in our spending with our sales, general, and administrative expenses, which we decreased by $1.6 million from the prior year quarter.

For the first quarter, a combination of decreased volume and the rising cost of aluminum partially offset by favorable mix shift toward our WinGuard and Architectural Systems product lines, and judicious SG&A spending, resulted in net income of $0.8 million, versus adjusted net income of $6.7 million in the prior year's quarter. Our net income per share was $0.03 for the first quarter, versus an adjusted net income per pro forma of $0.24 for the same period in the prior year.

We continued to manage our capital structure well. Optional debt repayments totaled $20 million in the first quarter of 2007, and our cash balance was $17.6 million at March 31, 2007. During the last call, we outlined our plan for managing through the housing downturn and we still believe this is the right strategy given the current market conditions. As a reminder, this plan includes generating sales through increasing market share, geographic expansion and introducing new products and decreasing our costs while conserving capital.

You will note as Jeff walks through our financial results in more detail, that we have done a great job executing on our strategy in a very difficult operating environment. I am proud of our efforts to generate sales and of our ability to carefully manage our cost structure.

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

Thank you, Rod. Let me give you more detail on the quarterly results. We reported net sales of $72.7 million for the first quarter of 2007, a decrease of 24.6% versus the same quarter in 2006. This decrease was driven by our new construction sales decline of 37% as we continue to weather the impact of the declining housing market, with starts estimated at a decline of 52% in our core market.

Our repair and remodeling sales declined only 4%. For the quarter, sales into the new construction market represented approximately 53% of our total sales, sales into the repair and remodeling market represented approximately 47% of our total sales.

Comparing the fourth quarter -- comparing to our sequential quarter, the fourth quarter of 2006, our sales increased by approximately 6.6%. This increase was mainly driven by our WinGuard brand, up $4.3 million from the fourth quarter of 2006.

A breakdown of our sales by major categories as follows. Our WinGuard branded products had net sales of $48.1 million in the first quarter of 2007. This represented a decrease of $11.9 million or 20% from the first quarter of 2006 sales number of $60 million. However, as a percent of total net sales, WinGuard increased to 66% compared to 62% in the first quarter of 2006.

Our Architectural Systems sales were $4.7 million in the first quarter of 2007, which was $800,000 lower than the $5.5 million of net sales in the first quarter of 2006. When we compare sequential quarters, Q4, our Architectural Systems sales actually increased by approximately $800,000. Our sales in our Aluminum category were $15.6 million in the first quarter of 2007.

This represented a decrease of $9.9 million or 39% from $25.5 million in the first quarter of 2006. Our Aluminum product line is more closely tied to the new construction market. When compared to the fourth quarter of 2006, Aluminum sales were down only $1.7 million.

Our gross margin for the quarter was 34.1% versus 37.1% in the same period of 2006. Gross margins were driven down during the first quarter primarily as a result of our overall lower sales volume and the negative impact of aluminum cost increases of approximately $2.4 million. When compared to Q4 2006, our gross margin significantly improved by 5.3 percentage points or $5.1 million. This improvement was driven by cost improvement actions such as reduction in our direct labor and various overhead costs, also improved product mix.

Selling, general and administrative expenses were $20.2 million or 27.9% of net sales in the first quarter of 2007, versus $21.9 million or 22.7% of net sales in the same period of 2006. The absolute dollar decrease in SG&A was driven by lower commissions and distribution cost associated with lower overall sales volume, partially offset by increased costs associated with being a public company.

We continue to invest in our brand awareness, especially in the Carolinas and Gulf Coast markets to help drive our volume. Total marketing investment increased to $2.8 million in the first quarter, compared to $2.6 million in the prior year. This includes approximately $900,000 in targeted marketing advertising, such as launches in Florida to support the R&R market. When compared to our fourth quarter of 2006, SG&A as a percent of sales was consistent at 27.9%.

Interest expense for the first quarter was $3.1 million, compared to $10.4 million in the first quarter of 2006. The difference primarily relates to non-recurring charges incurred in the first quarter of 2006, associated with our February 2006 debt refinancing, as well as higher debt outstanding in Q1 of 2006 of approximately $320 million, versus our current debt levels of approximately $145 million. On an annualized basis, we expect our interest expense to be approximately $12 million based off our current debt levels.

Our effective tax rate for the first quarter of 2007 was 36.9% compared to 38.8% for the same period in 2006. The more favorable rate is mainly attributable to an increase in the amount of manufacturing reduction expected in 2007 associated with the Job Creation Act.

Net income for the quarter came in at $800,000 profit, versus a loss of $14.1 million in the same period last year. For the first quarter of 2007, GAAP net income resulted in earnings of $0.03 per share, compared to a loss of $0.89 per share in the same period last year. In prior year's first quarter, we had various non-recurring items associated with our IPO and debt repayment.

After adjusting for these items, our adjusted net income for the first quarter of 2006 was $6.7 million or $0.24 per pro forma diluted share. Diluted weighted shares outstanding for the quarter were approximately 28.4 million, compared to 15.7 million in the same quarter last year. The higher share count was mainly due to the company's IPO, which was completed in June of 2006. Assuming the IPO was completed at the beginning of 2006, the pro forma diluted weighted average shares outstanding for the first quarter of '06 was 27.8 million.

EBITDA for the first quarter of 2007 was $8.3 million, compared to a loss of $8.8 million for the first quarter of 2006. On an adjusted basis, our first quarter 2006 EBITDA was $18.5 million. EBITDA as a percent of sales was 11.5% for the first quarter 2007, compared to an adjusted EBITDA of 19.2% for the prior year first quarter. A reconciliation of the pro forma diluted shares, Q1 2006 adjusted net income and adjusted EBITDA that I've just described has been included in our earnings press release for your reference.

Now, I'll turn to the balance sheet. At March 31, 2006, our net working capital excluding cash was $39.7 million or 11.4% of trailing 12-month sales. This compares to $36.5 million or 9.8% for the year ended 2006. Days sales outstanding decreased from 46 days to 41. Capital additions for the first quarter of 2007 were 20 -- were $2.2 million. Depreciation and amortization totaled $3.9 million for the first quarter of '07.

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 in lieu of adjusting exercise prices.

Our debt outstanding as of March 31, 2007 was approximately $145 million. In the first quarter of 2007, we made a $20 million optional prepayment on our long term debt. Our cash on hand at March 31, 2007 was $17.6 million, giving us a net debt position of approximately $128 million. We will use our cash flow to continue to pay down debt when appropriate and 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 the difficult macroeconomic conditions affecting our business will continue to negatively impact our operating results and year-over-year comparisons through the near term, primarily due to the record results we experienced in 2006.

As I outlined earlier, we instituted several measures to stimulate sales as well as to reduce operating costs to counteract the current market conditions. While there has been a decline in the housing market, we believe that the US impact resistant market will continue to grow over the long term and we will expand our presence in this market.

We have introduced several new products, which will help drive our traditional organic growth. In addition, we continue to manage our cost structure and conservatively deploy capital based on customer demand. I believe that we have the right strategy and the right people in place to not only effectively manage through the current market downturn, but also to quickly take advantage of opportunities as market conditions improve.

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

Thank you.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Michael Rehaut with JPMorgan.

Hi, good morning, it's Jen Consoli on the line for Mike.

Hey Jen, how are you?

Good, how are you?

Good.

Just wanted to get a couple -- an update on a couple of initiatives that you talked about on the last conference call, specifically you talked about a committee in which the goal was to expand into other markets like the Carolinas and the Gulf Coast. And you also talked about two new product lines, the lower priced single hung window and the higher-end sliding glass door and some new multi-story products. And I was wondering if you could give us an update on how those were progressing?

Yes, actually all of those items are progressing very well. I'll touch the new products first. All the new products are live, production equipment is in place and we are actually manufacturing product and have orders in house for all of the product lines that you talked about.

Our single hung window, our lower-end single hung window that we talked about is being manufactured in North Carolina. We were just up there a week or so ago and it is rolling along nicely. We have some pretty significant bids out and some nice orders in house for the other product lines.

Our team, to go to the first part of the question that I am answering second, our team that we put in place which is really focused on driving geographic growth along the Carolinas and Gulf Coast area, is basically all in place. There might be a small piece missing there yet as we design new product. We are aggressively going after that market.

We are aggressively designing some new product. Our vinyl impact product, it is focused more on the vinyl end than it is on the aluminum end. Our vinyl impact product will not see hardly any changes. Our vinyl product itself, we'll make some changes to so we can expand that market. But all of the products -- all of the product introductions and the geographic growth are coming along either as planned or maybe slightly ahead of schedule.

Okay, great. And can you give us an idea of what you expect to get in terms of sales for these new products in 2007? Particularly for the multi-story product?

Yes, I can comment. On the first quarter, we had right under $1 million in sales related to new products, and that was pretty scattered from our aluminum all the way down to our vinyl products. So it was right at $1 million in the first quarter. And I think we commented on last -- the last call, we thought our projection for the year was closer to roughly $20 million in new products.

I think we're still going to track to probably a little lower than that, I am thinking closer to $15 million in new products for the year, mainly because even though we are on track internally, there is some external forces in terms of getting permits and getting our products certified that were delayed or we have experienced some delays on that end. But we have bid, like Rod said, actively bid those projects and we will be pushing it forward.

Yes, just a comment, Jen, those products, the roll-out of those products were all in the March-April timeframe. So they are just recently hit the market.

Okay, great. And then one last one if I could sneak one in, given the improvement in the gross margins and the stabilization in aluminum prices, what are you looking for in terms of gross margin throughout the remainder of the year? Should we look for some type of sequential improvement?

There are -- there is two things that the company is actively managing or trying to work through in terms of gross margin now. And that is volume, obviously with an absorption for the fixed cost basis. The other is aluminum prices. I checked this morning, aluminum was roughly 2,800 a metric ton. Those will be the two factors, in my opinion, that impact gross margin going forward.

We've done the initiatives in terms of cost reductions that I mentioned earlier, taking cost out of our system. I don't see -- I don't see any more coming out per se. I think we are in good shape and in very well positioned to take advantage of the market once it does turn around. So I would -- borrowing [Nick's], I would look to this quarter as a good gauge in terms of what to expect in the next couple of quarters. Again, absent volume and aluminum prices, those are the two big factors.

Okay, great, thanks so much.

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

This is actually [Jeff] calling for Sam. Good morning.

Hey, Jeff.

First off, congratulations on what was really an outstanding quarter considering your environment. My first question was, you mentioned pricing contributed in the quarter. Could you give us the number there that helped?

Yes, pricing quarter over -- first quarter of '06, we had implemented roughly a 9% price increase, if you guys will recall. And the impact of that -- net impact, because again we ran promotions this past first quarter of '07 to stimulate volume, especially in the R&R area, the net impact of pricing is close to about 5, $5.5 million of upside associated with pricing.

Okay. And then you also talked about mix contributing positively. Was there anything going on other than a shift to WinGuard out of -- other than WinGuard taking additional share, was there anything positive in mix?

No, I would say just two comments. WinGuard went from 64% (multiple speakers)

Through last year to 66 this year.

Yes, I was talking fourth quarter though. In the fourth quarter of last year, the mix was roughly 64% of WinGuard and it went up to 66%. So we are seeing a good shift in mix for WinGuard. And I would say even our -- WinGuard is 39 different product lines. It is a very broad category. I would say the sales in this particular quarter within WinGuard -- that product line -- was a higher mix of sales, just within WinGuard itself. So that might have had a little bit of positive benefit as well.

Yes, we see the benefit of that as we go to the R&R. The R&R market is a little stronger WinGuard than the new construction market also. And you saw the shift towards more R&R as the new construction side is slowing down.

Okay. Next question, can you give us at least a description of how business progressed through the quarter? Did you notice any discernible strengthening or weakening as we got towards the end of the quarter?

No, I don't know that we could really tell any difference as we went through the quarter. The first quarter, the first week or two always start out a little slow because of the holidays. And then we saw a pretty steady quarter as far as orders go. We saw -- in some of our out-of-state markets, we saw maybe a little more bid activity toward the end of the quarter. But that doesn't necessarily mean -- it doesn't necessarily mean anything different is happening.

Part of it is probably due to some of the new products that we rolled out. But we've seen -- I think we commented last quarter that we thought when it dropped off in the fourth quarter, that we thought it would stabilize at about that level and you saw a slight increase in volume. But we see it fairly stable at that level.

Yes, I would say if you look at it, just kind of what was our weekly sales run rate, you can do the math real simple. We had to average about $5.5 million or so a week to hit our $72 million in top line plus or minus $100,000 a week over the quarter. I would say more plus in the last part of the month than not, so was it up $100,000 or $150,000 or $200,000 in the last month? Sure. But again, it was pretty, pretty consistent.

Okay, that was my last question. Congratulations again.

Thanks, Jeff.

Thank you.

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

Thanks, good morning guys.

Good morning, Nishu.

I first wanted to talk about SG&A. I understand it was down more than $1 million from a year ago. I was a little bit surprised it wasn't more level with what you saw in the fourth quarter, especially when you consider that in the fourth quarter, you had that write-down I think of the Lexington property. So can you just talk a little bit about what were the trends? I would imagine with laying off I think 15% of your workforce reduction, et cetera would have driven a little bit more downside in SG&A?

Right. I guess, first off I want to correct that we did not have a layoff. We just through attrition we were able to reduce our workforce. So we knew -- we don't lay off here at PGT and we've never had one. So just as a side note on that.

In terms of the SG&A, it did I guess what increased about $1.2 million, $1.3 million sequential quarter. That was mainly driven by a couple of things. At the end of the year, during our fourth quarter when we were doing our year-end audit process, we were able to relieve the accounts receivable reserve, by roughly $400,000, due to our improved collection efforts on the AR side. So we had that credit hitting us that was of positive nature in the fourth quarter, as well as the incentive plan.

We got into the fourth quarter and our incentive plan is based off basically three targets -- our sales, our EPS and our return on invested capital. We were tracking to two of those three targets when we entered the fourth quarter and accrued accordingly. And by the time we closed the quarter, we were tracking to one of them. So we actually ended up not recording any equity incentive in the fourth quarter and actually reversing a couple hundred thousand dollars worth.

In the first quarter, that's not the case. We actually recorded almost right at $800,000 in an annual-type incentive plan that obviously if we hit our targets, we'll pay out at the end of the year. If we don't, we will adjust accordingly. So those are some of the ins and outs of that. We also had some marketing expenses in the first quarter that hit us.

Typically, the first quarter we always have the International Builders Show. It is a very big event for the company. That can be up to $0.5 million or so in cost that is not in the fourth quarter. We kick off the television advertising campaign at the end of the quarter so we had advertising that wasn't there in the fourth quarter that was in the first quarter. So there is ins and outs, but overall it was just a heavier SG&A quarter, nothing in terms of cost cuts or control that we did wrong, other than timing on some of the marketing side.

So the way we should look at it probably is that the fourth quarter was depressed by a couple of one-time things. So we shouldn't expect those things to continue.

That is exactly right.

Right.

Okay, great. And next question, on your acquisition strategy, Ron, I know that's something you have talked about since you came public, I was just wondering if you could give us an update as to how that's progressing? Are you actually looking at transactions right now or is it pretty quiet? What types of valuations are you seeing and how are you thinking about acquisitions through this cyclical downturn?

I think we continue to think about acquisitions in almost the same vein. We probably take a little harder look at it right now. As I have mentioned in the past, our margins trend to run pretty high and generally higher than most folks in the building products -- building products industry. So we, as we look at the ability to bring someone in, we want to make sure that they have some pretty high margins also.

And then we look at their products and markets served, geographic markets served or products that we don't have and would like to get into or that make sense for us. So it is a pretty high hurdle. I would comment that we probably take a look at or at least phone call, interviews and some paperwork, we take a look at a few companies a week. It doesn't go a lot further than that a lot of times, but we'll consistently look at other companies.

Okay, great. Just a final quick question. Following up on something that someone asked earlier, you mentioned the promotions, particularly on the repair and remodeling side. Can you just talk a little bit more about those, what the form of those was and perhaps if you have some sense of how much extra in terms of sales you might have generated from those? Also and when they started as well?

Yes, the promotions that we are running are the traditional -- I say traditional promotions that we run every year. There is not a lot of new promotions out there. We do for the repair and remodeling side, since that is driven in our Southern market a lot by when folks are down here, which tend to be the wintertime and getting into the spring, we run some custom up -- no custom up charge or waive some custom up charges for the repair and remodeling market to really kick that off. And that is -- we have been doing that for five or six years. So we did that again.

We ran a little more print ads in trade -- print ads in trade publications this year than in some other years, especially as we are expanding geographically. We are well known in the Louisiana or the Gulf Coast market and that is really due to some of the advertising that we put there or focused on there. So that is some of the promotions and trade ads that we run.

Great, thanks a lot.

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

Oh, thanks. Good morning guys.

Morning, Jim.

I was wondering, I don't think I heard it, did you give or could you give the gross margins by your product category?

No, we didn't really discuss that, Jim. Good question. Q1 gross margins for the WinGuard product category came in right at 45%. For the other, and I am lumping multi-story, aluminum, vinyl, all the other came in at roughly 13%, 14%.

Okay.

And two, you have got to keep in mind, we make a lot of that -- all that is made in the same plants either in North Carolina or here in Florida. So there is an allocation piece in that. So any time volume goes down, all of them will come down to a certain degree the same. But if volume is off on a particular line, we do track that as well, so.

Okay, all right. In any new major, let's say, I don't know, no major relationships that either were established or in the works with major builders or developers or even larger distributors or retail arrangements, anything you can comment on that is percolating or in place?

I think we always have things in the works, so that is an interesting question. But nothing at this point we would want to comment on. It would be probably too premature on the ones that we know are in the works.

And any sense that -- are you having more builders come to you, even as potential preferred provider directly, as they get a lot more focused on their own cost structure and their own purchasing relationships?

No. They -- we haven't got any pressures in terms of looking to be -- to in essence, service people direct. That hasn't been a pressure. Again, it is not the way the Florida market is built. It is built through that distribution system and we are very successful at executing through that with our relationships we do have with our dealers and distributors. So really no pressure to go direct or anything like that.

Hey Jim, I will just make one little comment about the relationship question also. We talked last time about the team we were putting in place for geographic expansion. And from a leadership of that team and from the sales point and maybe the technical leadership on that team, that is in place and all those folks come from other organizations that were heavily involved in either vinyl windows or vinyl impact windows from various organizations.

They would bring relationships that, because it is so new, I don't think we'd be -- we really aren't qualified to talk about it yet. But I don't want to act like they are not there.

Okay, all right, good. Thanks, guys. Good job.

Thanks, Jim

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

Hi, good morning. It's actually Mike. I was able to jump on here. How are you?

Hi, Mike. Good, how are you?

Good. I was just wondering if you could give us an update. I know Jen had asked a question before about states outside of Florida. But just where we are with some of the key states like the Carolinas or Alabama, Mississippi in terms of how they are coming along on their codes and where you are in those markets in terms of helping the process along or with your involvement there?

And when you came out last year, you talked about market size potentials from some of those markets and just wanted to know what your thoughts are in terms of your competence in those incremental geographies to serve?

Long term, Mike, I think we are very confident about those markets and what they are and where they go. I think those markets are seeing the same type of pressures that the entire market is seeing. But I think we will be able to overcome some of those pressures because we are not the major player in those markets yet. So any market share we gain there is kind of incremental sales for us.

The team that we talked about on the question just before this that we put in place really is focused on those markets. There is two people in place along the lower East Coast in Virginia and North Carolina, South Carolina, Georgia market and one person in place in the Gulf Coast market. And we are seeing some sales, we are seeing some orders from those markets. But again, they have been in place now for -- I think the person that's been here the longest is slightly over a month and the others have been a few weeks.

So we are optimistic because we are seeing some things. We are seeing some bidding and we are seeing some orders coming in. I don't know that we are ready to talk about what we think it is going to mean for the remainder of the year. But as we develop the product and really the distribution base for those markets, we are very confident about what we will be able to do in those markets over the next couple of years.

And would you say that those markets, the Carolinas and Georgia, are further ahead of the Alabama, Mississippi, the Katrina -- closer to the Katrina disaster areas?

I think if you asked me that question every day, I would probably give you a different answer every day. It is really a dynamic market. We see changes that surprise us and we are really closely aligned. We've got folks that are meeting with the states directly and directors of disaster preparation and also some of the legislatures to give expert testimony.

And even though we are that closely in line with it and probably closer than anybody else in the industry, we still get surprised and they have been good surprises. We have not seen anyone weaken code yet. I don't think it is going to happen as we get closer to hurricane season. I think we actually see that get stronger.

We have seen a lot of discussion about what needs to be in place and what can't be in place. So I think we are going to see the code get stronger. We've seen movement that way, Georgia, South Carolina and the Gulf Coast areas all have different types of code criteria in place that will change the dynamics in some cases, some this year, a little and some a lot. So it's kind of hard to talk about because it is so dynamic.

Okay. And any major hurdles that you see coming up in the next couple quarters in terms of codes getting passed?

No. The major hurdle I think is always making sure that we can kind of rally the industry to make sure that there is enough product there that we can fill the needs of the state. I think that is always the state's concern is, we obviously feel very strong that we can fulfill any need that any state has for impact-resistant product.

States get a little concerned about having a monopoly and they want to make sure that there is a list of suppliers that can supply all the needs for those states. In that case, where we talk about being the leader in the industry, we actually need some other folks that can supply product so the state's pass codes and feel like there is a fair playing field.

Okay, just last question on this. What do you have as a percent for the first quarter in terms of percent of sales in Florida versus non-Florida and if you in particular can kind of break out the international segments?

Yes, our Florida sales in the first quarter were 92%, which was consistent with 2006's first quarter, roughly $67 million. International sales were right at $4 million, and out-of-state was approximately $1.8 million in sales.

Okay, thank you, very much.

You're welcome.

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

Hi, this is Judy Merrick for Keith Hughes.

Hey, Judy.

In the last couple quarters, you guys talked a lot about gaining market share despite the difficult environment. So I was just wondering, have you seen anyone exiting the business, particularly given how tough Florida is?

I don't know that we've seen people completely exit the business. We see -- earlier we were asked about acquisition. We see a few more people talking about merging or potentially marrying up with somebody. We see people cutting back and the service is getting a little bit worse. So but as far as large companies, smaller companies exiting, the smaller geographic companies, I think they are struggling quite a bit. But I don't know that we've seen them completely exit yet.

Okay, great. Thank you.

You bet.

Your next question comes from the line of Fred Taylor with MJX Asset Management.

Yes, I think most of mine are answered. But could you talk to working capital? I know we just have the December and March balance sheets in front of us and I don't have the March '06. But I would have thought with the sales decline that working capital would have actually produced cash? And maybe it did, year-on-year, but I just don't see it. And would you expect working capital to produce cash as we go through the year if sales continue lower than the previous year?

Yes, as I had mentioned, our working capital actually probably increased a little bit in terms of where we were. I don't necessarily expect it to produce cash only because we really carry a minimal amount of inventory. It is roughly two weeks at any given time. And accounts receivable, we've improved the efforts there, taking obviously DSO down as we have.

So that's been a benefit. But given timing of payables, et cetera, that is really between that and maybe an extra day's worth of inventory, that is really what fluctuates our working capital. The requirements are pretty much the same.

Is this a seasonal peak? I assume -- and again, I don't have that in front of me, December '06 -- fourth quarter '06 sales were significantly below first quarter '07 sales? Or sequentially, first quarter is up?

Yes, sequentially we are up by roughly a little over 6%, 6.6%. But it is not -- it is not seasonal. During the fourth quarter, however, I will say this, that we do have the holidays. You have Thanksgiving, you have Christmas. And so can it be a few million dollars less on average? The answer is yes. But we do not -- being 92% of our business is here in Florida, there is really not a great time, it is pretty much builder weather the entire year. So there is not a seasonal factor that we deal with.

Yes, Fred, not that it makes a big difference, but we did introduce three new products in this first quarter or toward the end of the first quarter and as Jeff said, we don't carry a lot of inventory. But the three new products were not just like three new windows. Two of them were really kind of product lines that carried three or four different products in that product line and setting up for that, getting the inventory in place for that did take up a little bit of that cash also.

Right, so by definition, new products probably are longer than two weeks just because of the start-up and get it running.

Yes, yes. We bring in the inventory and get it all set up and it is a little longer than that.

Okay. That's all I had. Thank you.

You are welcome.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Tim McCardle with Credit Suisse.

Actually, it is Evan Ratner. Good morning, guys.

Hey Evan, how are you doing?

All right. One housekeeping item. CapEx expectations for the year, if you could just--?

Yes, we roughly spent so far in the quarter $2.2 million of capital. We had previously had an estimate out there of $15 million to $16 million range. But we've since, given the industry the current market dynamics, we scaled that back. And we are probably closer into that $10 million to $12 million range right now.

Okay. Can you talk about the commercial opportunity if you think there is the opportunity, how you guys look at that? I know when I went down there last, you guys were, I think starting up some a new line? Can you maybe talk just on the commercial side?

Yes, we see -- the commercial side is an interesting -- it is an interesting market. It seems to fluctuate between -- we kind of version it high-end residential or high-rise residential, which is the condo market. And we actually see that market slowing down and I am not going to say dramatically or not dramatically, it is slowing down.

But because it has been so robust for such a long period of time, the commercial office building market and especially in the Southeast, seems to be under built right now and we see a little more demand for that.

So we are seeing a little bit of a shift toward maybe an operable window that will go in a condo high-rise to a fixed window storefront-type things that go in the commercial office side of things. We see and we classify under commercial the schools and educational facilities in Florida and also along the coastal regions that we serve, we see some demand for that. And that is kind of a good uptick there.

Okay. On the competition side, we've heard some of the other bigger, more traditional windows guys sort of dabbling is how I like to term it on the impact side. Can you maybe comment on that? Is that affecting you in any way?

I think the people that are dabbling in it or that you hear that are dabbling in it are the same folks that were dabbling in it in the late 1990s and they are still doing about the same thing.

I think we've commented a number of times that our main competition in our markets are from the small regional players that mainly have some relationships or a builder relationship in a region and we'll compete with somebody in Fort Myers, somebody different in Tampa, somebody different in Charlotte, that type of thing. The national players, it is such a small -- and we hear this from a number of them, that it is such a small portion of their market that it is a little tougher for them to really go full bore into that market like we do.

Okay.

And I think, especially given where we are at in the market in terms of the housing situation, I don't think we are going to see a lot of people jumping in right now. People are going to, if anything I think, pull back a little. And of course that just advantages us to take share.

Got it, okay. Very good. Thank you, guys.

Your next question comes from the line of Christopher Swann with GMT Capital.

Yes, hi. Thanks for taking my questions. My first question is, what do you think on a normalized basis is the new housing starts in Florida? If you run through a bubble period here and now are slower, what do you think the normalized growth rate is?

You know what? There is no way I can -- there is no way I can -- if I knew that question, I probably wouldn't be running a window company. It is kind of like the -- I mean, we hear people talk all the time about when we actually hit the trough and when it starts picking back up and what the inventory is doing. And I am not qualified to sit here and talk about subprime and what it does to the market and when people are going to come back.

What I do know is if you look at the demographics of the Florida market, there is still a lot of people moving to the South. There is still a lot of people moving to the coastline. We still see the numbers averaging about 1,000 people a day net moving into the Florida market. We know there is an over inventory of houses. We know that there is mortgage rate issues. I am not qualified to say when the market stops. We are prepared for this to be a tough year and headwind throughout the year, it would be great if it wasn't a full year, but I don't know that I am qualified to sit and talk about that.

Okay, and I guess a follow-up question and I might get the same answer, is in the refurbishment market or the renovation market, what do you think is normalized growth there or how do you view that market and think about the differences between that market growth versus new home construction?

I actually think that market is a little more stable. I think -- it is getting some pressure because of all the talk about housing and consumer confidence with how much money should they put in their house and will it actually go up in value? And I think that is the decision point.

But as far as doing the R&R portion, we see that driven a lot in the markets that we serve by code, by insurance and then just by knowledge of what happens a month from now or a little over -- probably about a month from now when hurricane season starts. You have to protect your place. So I think that is a little different market than the new construction market because folks still need to make sure that they have a safe place to live in.

Okay, and then just one quick follow-up. When you think about forecasting your -- the company's growth, what is the data set that you all look at for proxy as to whether you are growing with the market or taking share? Do you look at permits, starts, what's kind of the data that you all look at internally?

Permits, starts, closes, I mean, we look at a lot of different numbers and try to make sure that we understand what the market is telling us. I think the most important thing we look at is we've got sales reps in the field, quite a few of them in-state and out-of-state. We talk to distributors, we talk to dealers, we talk to builders and we get, I think, more data, more accurate data, more accurate information in all those relationships that we have developed for the last 27 years to make sure that we understand what is happening in the market.

Okay, thank you.

This concludes our question-and-answer session. I'll now turn the call back over to Mr. Jackson for closing remarks.

Thanks for joining us today for the call. We'll conclude today's session. If you have any questions, feel free to call me, or Rod, and we look forward to speaking with everyone again next quarter. Thank you.

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