PGT Innovations Inc (PGTI) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter and Year-to-Date PGT Earnings Conference Call. My name is Jeremy and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

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

Thank you, Jeremy. Good morning everyone. Welcome to PGT's Third Quarter 2007 Conference Call. I'm Jeff Jackson, CFO 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 third quarter and year-to-date, and then I'll discuss our results in more detail. We'll also discuss our recently announced restructuring cost savings initiatives and our thoughts on the housing market then we'll 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 industries 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 and are subject to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements. Please refer to yesterday's press release and our Annual Report filed on Form 10-K with the SEC on March 21, 2007 for more information. We undertake no obligation to publicly update or revise any forward-looking statements.

A copy of the press release 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 and statements 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 yesterday. These non-GAAP measures are not intended to replace the presentation of financial results 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 few items to share this morning. First, I'll highlight our results for the third quarter and year-to-date and then provide an update of some of our key strategic initiatives for the remainder of 2007 including the recently announced restructuring. Jeff will follow with a detailed review of our financials for the third quarter and year-to-date.

As I mentioned in our press release, the building industry in which we operate continues to see significant deterioration in new constructions starts as evidenced by a decline in new housing permits of 53% in the third quarter of 2007 versus the same period in 2006. Our revenues decreased 26.5% over the same period due mainly to lower unit volumes, particularly in our aluminum WinGuard product line which was down 26% as well as our non-impact aluminum product line which was down 45%.

As we progressed through the quarter, the housing construction downturn intensified as we experienced a 29% decrease in housing starts compared to the second quarter of 2007, showing further evidence that the market had not yet hit bottom. Compared to the second quarter of 2007, our revenues decreased 9.4% mainly to lower unit volumes in our aluminum WinGuard product line which was down 8% as well as our non-impact aluminum product line which was down 14%. We were able to offset some of the decline in the industry by focusing on our repair and remodeling business, or as we refer to it R&R.

Compared to the third quarter of 2006, sales of R&R were essentially flat this past quarter and down only 6% compared to the second quarter of 2007. It's also important to note that as a percentage of the total sales for the quarter, R&R sales accounted for 58% versus 42% for new construction. This is quite a switch from the third quarter last year when new construction represented 58% of total sales.

For the third quarter, a combination of decreased volume and the higher cost of aluminum partially offset by a favorable mix shift toward our WinGuard branded and architectural systems products lines, and a decrease in SG&A spending resulted in a net income of $1.1 million, versus adjusted net income of $8 million in the prior year's quarter.

We continue to invest in our marketing efforts. Our marketing expense was $2.2 million for the third quarter of 2007, versus $2.8 million in the same period a year ago. The spending in the third quarter was focused on our R&R markets with an increase in consumer promotions and advertising coop allowance with distributors.

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 have decreased by $4.2 million from the prior year quarter. However, as a percent of sales, SG&A increased to 25.5% compared to 23.1% in the prior year quarter due to lost leverage of fixed-costs within our SG&A.

Net income per diluted share was $0.04 for the quarter, compared to $0.18 for the third quarter of 2006. Adjusted net income per pro forma diluted share was $0.04 for the third quarter, versus $0.28 for the same period in the prior year. Year-to-date 2007 new housing permits in our primary markets were down 49%, while our net sales were down 26%. Adjusted net income year-to-date was $5.2 million or $0.18 per pro forma diluted share, compared to $27.6 million or $0.99 for the same period of 2006.

As mentioned in previous calls, our plan for managing through the housing downturn includes generating incremental sales and increasing market share through the introduction of new products and expanding into new markets, while focusing on improving operational efficiencies, decreasing operating costs and conserving capital.

On the sales side, we have seen increased sales in our vinyl window and doors which are up 20% for the first nine months compared to the same period in 2006. We remain on track to launch our new vinyl portfolio in the first quarter of 2008.

Our new products in the architectural systems line will generate an estimated $1.6 million in sales by the end of the year, and sales into our repair and remodeling market have remained flat year-over-year despite the downturn in the market. We feel we have the right strategy in place to maintain our market leadership within the impact market and drive growth into adjacent areas in 2008 and beyond.

On the cost side. Last week, we announced a restructuring in cost saving initiative. Our restructuring impacted our indirect our overhead workforce which was reduced approximately 17%. Including other non-people costs, our total expected annual savings for this restructuring will be in excess of $16 million.

We have had to make some difficult adjustments during this downturn. However, we feel the actions we have taken including both our sales initiatives and realigning our organizational structure will help provide financial strength and ensure long term success.

With that, I will turn the call back over to Jeff who will review the results for the quarter and year-to-date in greater detail.

Thanks, Rod. Let me give you more detail on the quarter and the year-to-day numbers. We reported net sales of $72.7 million for the third quarter of 2007, a decrease of 26.5% versus the prior year quarter. This decrease was driven by our new construction sales down 47% versus the prior year as we continue to weather the impact of the decline in new housing starts down approximately 53% in our core markets. This decline was somewhat mitigated by a stable R&R market.

As Rod had mentioned for the quarter, our sales into the R&R market represented 58% of total sales. We also experienced a favorable mix with WinGuard products representing 69% of total sales for the quarter versus 67% in the third quarter of 2006. This favorable shift in product mix is consistent with higher R&R sales as impact products are the product of choice in that market. We believe this gives us an advantage during these challenging market conditions.

Net sales drivers during the third quarter versus prior year third quarter are as follows; WinGuard Impact sales were $50.1 million, versus $65.5 million. Aluminum non-impact sales were $13 million, versus $23.8 million. Architectural system sales were $4.1 million, versus $6.3 million. Vinyl non-impact and other product sales were $5 million, versus $2.7 million.

When compared to our sequential quarter our sales declined 9.4%. This was driven by an intensified decline in our core new house new home construction market which was down 29% versus the second quarter of 2007. This decline occurred at a faster pace starting in mid-August as new home starts saw its lowest level in more than a decade. The decline intensified in the half -- in the last half of the quarter as mortgage lenders tightened standards for giving loans in response to increased default rates.

Net sales year-to-date for 2007 were $224.6 million, which is a decrease of 26% compared to 2006 year-to-date net sales. As I mentioned before, the decrease in revenue is driven by the downturn in the housing market with starts down in our core markets 49% in the first nine months offset partially by a stable R&R market performance.

Overall mix improved over prior year with WinGuard products representing 68% of our total sales for the first nine months, compared to 65% for the same period in 2006. Within R&R market, WinGuard sales have increased approximately 4% over prior year.

Our gross margin for the quarter was 31.9% versus 39.9% in the same period of 2006. Gross margins were down approximately 800 basis points during the third quarter versus prior year quarter; 400 basis points related to the de-leveraging of fixed-costs within our operations and approximately 330 basis points for the adverse impact of aluminum cost increases.

Based on the hedges we had in place in the third quarter of 2006, our average cost per metric ton of aluminum was approximately $1,800 a metric ton, this compares to the third quarter of 2007's average of $2,460 a metric ton. Year-to-date, 2007 gross margin was 34.2% compared to 40.2% for the same period in 2006. Again, this reduction was driven by decreased operating leverage caused by lower sales volume and the increase in aluminum costs.

Our SG&A, selling, general and administrative expenses were $18.4 million, down $4.2 million compared to the prior year third quarter, driven by lower distribution costs related to our lower sales volume, as well as lower bonus base incentive accruals. As a percent of sales, SG&A costs increased to 25.5% compared to 23.1% in the prior year quarter as certain fixed costs did not decrease in line with sales.

For example, salaries and benefits were down approximately $400,000 or 4% from the third quarter of 2006, versus our sales decline of 26.5%. Also, we incurred incremental costs related to SOX 404 compliance of approximately $400,000 in the third quarter of 2007. We also continued to invest in our brand awareness especially in the Carolina and Gulf Coast markets to help drive volume growth.

Year-to-date, SG&A expense was 26.9% of net sales, compared to 22.5% for the same period of 2006. Total marketing investment to date of $7.2 million was down only $500,000 from prior year or approximately 6% versus our year-to-date sales decline of 26%. Interest expense for the third quarter was $2.8 million, compared to $7.8 million in the third quarter of 2006.

This difference relates to non-recurring charges recorded in the third quarter of 2006 associated with the repayment of our long term debt with the proceeds from the IPO. On an annualized basis, we expect interest expense to be approximately $11 million based off our current debt levels.

In the third quarter of 2007 our effective tax rate was 34.6%. This is lower than the 39% in the third quarter of 2006, due mainly to an increase in our manufacturing deductions related to the Job Creations Act. Net income for the quarter was $1.1 million, versus $5.1 million in the prior year period, resulting in net income of $0.04 per diluted share compared to net income of $0.18 per diluted share for the same period last year.

After adjusting third quarter of 2006, for items such as the expense associated with our 2006 IPO and our debt repayment, our adjusted net income was $8 million for the third quarter of 2006 or $0.28 per pro forma diluted share. Our year-to-date adjusted net income of $0.18 per pro forma diluted share, versus $0.99 for the same period in 2006. I'll encourage everyone to review the reconciliation attached to the earnings release for further details.

EBITDA was $8.4 million or 11.7% of sales for the third quarter of 2007, versus $20 million or 20.3% of sales for the third quarter of 2006. Year-to-date adjusted EBITDA was $28.7 million, compared to $67 million in the same period of 2006. A reconciliation of the adjusted pro forma diluted shares, adjusted net income and adjusted EBITDA that I've just discussed has been included in our earnings release for your reference.

Now turning to the balance sheet. As of September 29, 2007, our net working capital excluding cash was $32.4 million or approximately 10% of our trailing 12-month sales, this compares to $36.5 million or 9.8% for the year ended 2006. This reduction in net working capital was principally driven by a decrease in other current assets related to a tax refund received in the third quarter of 2007 of approximately $3 million.

This refund was a carry back of our taxable losses in 2006 generated from stock option expense -- exercises in the first half of that year. A reduction of $1.2 million in our inventory also helped drive this. The reduction in inventory was driven by raw material -- by decreases in our raw materials.

Accounts receivable are down slightly from year-end off a higher sales base with DSOs decreasing from 46 to 37 days. Our year-to-date capital additions were $7.9 million. We have approximately $2 million more in capital spending for the remainder of the year. This will bring our total of 2007 capital expenditure to approximately $10 million.

Year-to-date depreciation and amortization totaled $11.8 million. We will continue to prioritize our cash flow in evaluating its uses for organic expansion, acquisitions and continuing to pay down debt when appropriate.

Solid cash management continues to be a focus as we paid an additional $10.5 million down on our long term debt during the quarter bringing the total year-to-date repayments to $35.5 million. Our cash on hand as of September 29, 2007 was approximately $20 million giving us a net debt of approximately $110 million at quarter end.

Finally, as Rod had mentioned, and we disclosed in last week's press release, given the continued decline in the housing starts and the effects on our current performance we restructured our operations to better align our expenses with our current sales trends.

This restructuring affected 17% of our indirect workforce or approximately 170 people in a combination of both overhead and SG&A areas. We estimate the reduction combined with other cost control initiatives will result in an excess of $16 million in annualized savings at our current sales levels.

The other operational cost savings includes items such as a reduction in supplies, contract labor, marketing and freight costs. Approximately 60% of these savings will benefit cost of goods sold as a reduction in manufacturing overhead, and the remaining 40% will benefit our SG&A line items. We do not -- we do expect a portion of these savings to have a favorable impact on the fourth quarter.

However, this will be offset by an estimated restructuring charge of between $2 million and $2.5 million related primarily to severance costs for the affected employees. We feel this reduction in force was necessary to properly align our sales with our current sales trends as we better position ourselves to execute our strategy of gaining market share and increasing value to customers and shareholders over the long term.

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

Thanks, Jeff. We are still in difficult market conditions that negatively effect our business, and will continue to impact our operating results and year-over-year comparisons through the next -- through the near term primarily due to record results we experienced in 2006.

As I previously outlined, we instituted several measures to stimulate sales, as well as to reduce our operating costs to counteract the current market conditions. Well while there has been a decline in the housing market, 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 have recently introduced several new products which will help drive our traditional organic growth. While in addition, we will opportunistically review acquisition candidates as they come up. I believe 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.

I'd like to thank all our folks for their dedication, commitment and flexibility as we navigate through these difficult market conditions. With that, I'll conclude and Jeff and I will be happy to answer your questions.

Operator, if you can prepare the first question, please.

Certainly.

(OPERATOR INSTRUCTIONS)

And sir, your first question comes from the line of Sam Darkatsh of Raymond James. You may proceed.

Yes. This is actually [Jeff] calling in for Sam. Sam wasn't able to make the call. Good morning, gentlemen.

Good morning, Jeff.

Good morning, Jeff.

It sounded like in your prepared statement you said about $4 million of the 7 million -- that $4 million of the gross margin sequentially was caused by lower volume?

Yes. Just a little over $4 million was caused by the volume or de-leveraging if you will.

Okay. That still feels like a lot of leverage on a $7 million sequential sales decline. I guess my question is given the new cost structure following the restructuring, how shall we look at cost leverage going forward? In other words, what percentage of your cost of goods sold is going to be fixed versus variable after the restructuring?

Well, obviously in terms of our cost of goods sold all the materials is variable. The direct labor portion we view as semi-fixed. We did not and do not plan on taking any action associated with reducing the actual direct labor headcount. Those are the people that actually produce the windows. We will manage the shifts accordingly, but we will not reduce headcount so we view that as semi-fixed as well. That represents oh I'd say about 11% of our cost as a percent of sales.

The other portion -- the overhead portion is where we really attacked in terms of reducing costs, and the amounts we took out of there will probably leave us in decent shape in terms of the remaining fixed costs being really things like depreciation and amortization and property taxes. I mean, there's some things that are just still embedded in there that we will not be able to touch.

As a percent of the total it's going to vary based on volume, and the reason that number is so big is the margins that WinGuard carries. WinGuard even though it did well in terms of mix it was down during the quarter 24% I think. So the margins that WinGuard carry of 42% if you take that out of the equation you're going to have an impact of roughly what I said 5 to -- $5 million or so in terms of volume absorption issues.

Okay. Let's see. In terms of -- in terms of CapEx for next year, I'm guessing that going to be under D&A.

Oh yes. Right now, we're currently in the process of doing our budgets, but in terms of guidance on our CapEx number it will be somewhere south of $10 million. All that's being gathered in, and Rod and I are actually scheduled to review it this month, but it will be south of $10 million.

And you expect D&A to be somewhere just over that I assume?

Yes. Well D&A through the first nine months was $11.8 million. So yes, D&A is going to be close to $14 million annually -- $15 million.

Okay. And then assuming Florida housing continues to decline -- I don't know call it 20% range next year, would you expect working capital will be a source of cash?

Ah, yes. I mean working capital is going to be a source, obviously this year we better managed the inventory levels. We better managed our receivables. The one thing we really hadn't touched on or pulled any levers on are the payables side. We're still trying to be good vendors, but we like to get paid so we're still paying our people and taking advantage of discounts.

So I think there's still some leverage there to pull in terms of working capital. But yes, I would not expect working capital to be a drain next year. It may be flat; flat to being a source.

Okay. I just have a couple of more questions then I'll defer. In terms of the restructuring savings, it sounds like some of that is -- it's going to be based on volume and maybe we'd have to come back if things were to turn around. How much of the savings overall do you view as permanent [of] and how are you defining permanent?

Well I -- you are correct. So some of that roughly 16 plus million of savings is variable or volume sensitive -- I would say a majority of it however is not. Up to $12 million or so, I would say is permanent in nature in that we have literally went through our support departments; manufacturing overhead, sales, marketing, accounting, IT et cetera.

We went through all our support departments and basically reorganized how we do business. How we support our customers. I don't see that -- I see that as actually benefiting us as we come out of this to be a better run leaner organization and we'll be able to leverage that reorganization coming out of this.

The piece that would be more volume sensitive are things that we're going to do in terms of like cutting supplies, cutting marketing. When volume starts coming back we're going to obviously probably tick up on some of those costs. But if I had to look at the 16 in terms of what's permanent or what we'll manage to -- to make permanent, I would say at least 12 million of that.

Okay. And understanding -- I understand you don't give guidance. I guess the question is if Florida housing continues to decline -- let's say housing is down 20% next year, where is your confidence that you can continue to manage costs? And I guess I'd say, where is your confidence that you could remain profitable [next year] if housing were to decline [20%]?

Well I -- that's probably a little bit of a difficult question to answer Jeff. If housing starts are down 20%. I think we've got to factor in what the commercial market does and how we serve that market. What the high-rise market does; schools, storefronts that type of thing, and then balance that against some of our new product introductions that really serve the out of state market very well also that really fall into incremental sales.

I think when you look back, and although history doesn't mean that the future's going to be the same, I think you've seen that we've managed downturns in the market I think extremely well and remained maybe not as profitable as what everyone would like to see, but remained profitable. I think the confidence level going forward is that we can continue to do that, but we'll look at all the markets that are out there and how we serve those markets and make sure that our customer gets taken care of, our employees get taken care of, and that we do the right things for our shareholders.

Okay. And then just last question. You mentioned in your remarks that you would entertain the idea of acquisitions as a use of cash flow, and given obviously I'm assuming a lot of your competitors are really struggling right now. Have you gone out and looked at that and maybe looked at [depressed] assets and that kind of thing?

Yes. That's a part of the market that we look at all the time and we're somewhat fortunate in that we've been here a long time and we're pretty well known and we've got some pretty good relationships with some of our competition, so it's a portion of the market that we're always looking at.

I think it's difficult because we've been in this downturn now for a period of time and we went through the first part of the downturn when everyone was looking at what happened in '04, '05 and part of '06, and thinking that that was going to come back real quick and so their value was pretty high.

And now I think people are looking into the future, and no one can predict the future but a little more concerned with what happens in the market, and getting a little more realistic maybe with valuations. So it's something we'll continue to look at -- fairly aggressively look at and make sure that it's the right fit, that there's a cultural fit, product line fit and we have to make sure it's the right fit.

Thank you.

And your next question comes from the line of Michael Rehaut of JPMorgan. Go ahead.

Hi. This is Jen Consoli on the line for Mike.

Hi, Jen.

Hi. How are you?

Good.

Just a quick clarification on -- on the last conference call you had mentioned I believe about that you were accepting about 10 million contribution from new products and in the prepared remarks I know you said the architectural system would launch would be about 1.6 million, I believe. I just wanted to see if that 10 million and that 1.6 million is that apples-to-apples, or are you just scaling back because of the downturn?

Kind of a combination. One is, it's not apples-to-apples. That's a piece of the architectural systems new product is a piece of the total new product platform. The 10 million related to our total kind of new product platform which was several items. There's a high-end door. There's architectural systems. There was some vinyl products that came out.

The total new product sales year-to-date is around $4 million. We were expecting annually -- we were expecting 10. I do not -- I don't have a comment on where we're going to come out for the year, but we've hit roughly $4 million through the first nine months of new product sales.

Okay. And then as far as the launch of the new vinyl line that's coming out in North Carolina, you said you were on track. I believe in the last call you said that was on target for a February launch. Is that still what you're looking for? And in terms of incremental marketing costs, have you already started to absorb those, or is that going to be more of a 4Q type of event?

We've -- the first part of the question is the really big splash for the launch is going to be at the International Builders Show in February, so the product line will be ready before that time, but February is correct. As far as the marketing dollars and how that effects it, we started spending those already. We already set up some distribution base and we talked to a lot of folks, and so a lot of that is -- that's been rolling through as the year went on.

Yes. As we sign new distributors associated with that new product in anticipation of that launch, we will spend marketing related dollars. And obviously, we've invested already in the sales support infrastructure in North Carolina hiring sales reps and a project leader for that initiative.

Okay. And last one was on the aluminum costs, I just want to make sure I heard this correctly, you said that your average cost was it 2460 per metric ton this quarter versus 1800 in 3Q last year?

Yes, that's correct.

Okay.

3Q last year just to remind everyone on the call, we were actually hedged a portion through the quarter. Actually, all of the quarter -- 80% hedged through the entire quarter at relatively favorable hedges. The actual market price in Q3 of last year that's relatively in line -- it's probably a $100 maybe $200 difference at the most a metric ton in terms of outside the hedge impact.

Okay. Thank you.

You're welcome.

Thanks, Jen.

And your next question is from the line of Jim Wilson with JMP Securities. You may proceed.

Great, thanks. Good morning, guys.

Hi, Jim.

I was wondering Jeff could I get the margins between the units WinGuard and other?

Yes. WinGuard margins this quarter were roughly 42% gross margins and all other which includes our -- obviously our non-impact aluminum and vinyl as well as some architectural system sales in that mix as well. All other was 10%.

Okay. So WinGuard is holding up quite well?

Yes, it is.

And how much multi-family business did you do in the quarter?

Right at $4 million of architectural system sales, but multi-families that's kind of a different question

Yes, that's a little bit misleading Jim. Multi-family for us is anything that's got two or more families in it and that doesn't necessarily take architectural systems. There's a lot of townhomes and two and three-story buildings that since we don't sell direct to the builder we sell that through a distributor we probably don't track that quite as well to give you a really good figure on

Okay. But the [formulaic] really reflects kind of -- mostly high-rise, I guess right?

Stuff that is more than four-stories.

Right. Okay. And any thoughts on how that looks for a future business relative to their potential outlook for the conventional housing business? Is there more of a backlog for you, or anything of note?

It's kind of forward looking. I don't know that there's more of note looking at that market. Just a general thought on that market is, the residential high-rise market is definitely getting more pressure than it had before. I mean it was a pretty robust market for a long period of time.

The commercial side of that market which is office buildings, maybe you referred to schools and that type of thing still is relatively strong, but I don't know that I could give you an accurate feeling for how that's going to look over the next year or two years.

Okay. And then just final question. What were -- what was the sales volume outside of Florida for the quarter?

We were -- 91% of our sales were within Florida.

91. Okay, great. Okay. Thanks a lot.

And your next question comes from the line of Rob Hansen from Deutsche Bank. You may proceed.

Hey, guys. It seems like some of the builders are trying to push out their receivables, but your higher receivables turnover pretty much indicate otherwise. Can you tell us what you've been seeing, and how you've been able to improve your receivables performance?

Yes. I think what we've been seeing -- we have a very close relationship with most of our dealers and distributors, and that's not to say we haven't had people call up and want to extend terms. We do work with them when that happens to the best of our ability, but we have been very successful at collecting.

Some of our collections actually COD at the dealers choice. So with that said, from a national homebuilders standpoint, we are seeing -- are feeling pressure. I mean they're wanting greater terms. We're lucky in the sense that that's not a big portion of our business right now.

The R&R market really is driving it -- our business and those are -- people like myself if I replace my windows I'm going to pay my contractor when it's done and he's going to obviously pay PGT. So I think it helps the fact that we have 58% of our business is in the R&R market in terms of those collections. The new construction side -- out of that new construction the big national players they do -- like I said they are wanting extended terms but that's relatively a short -- a small piece of our business.

Okay. And I'm just looking at the inventory turnover and it's improved considerably throughout 2007 as well. I was just wondering if you could give a little color around this?

Yes. We had a concerted effort, again in terms of trying to manage our cash flow, had a concerted effort in reducing our raw materials. We worked hand in hand with our supplier base, and in terms of just in time type delivery. And we've been able to take like I said in my remarks, about 1.2 million out of our raw materials.

That coupled with of course our finished goods, we are a custom made to order shop so we do not carry finished goods, and I think we've gotten even leaner on that end in terms of our turnaround and our lead times, so our finished goods have went down.

All right, thanks.

You're welcome.

And your next question is from the line of John Sykes with Nomura. Go ahead.

Yes, hi. Can you walk me through that margin -- EBITDA margin compression again? What I'm trying to do is just get a better understanding of how much of that was higher aluminum cost and how much of that was just the sales volume going down and the operating leverage working in reverse for you because of that?

Well the -- just kind of taking it from a gross margin standpoint and I'm assuming you're looking at quarter three last year, versus quarter three this year?

Exactly.

Yes. If you just look at the year-over-year quarter comparison in terms of the gross margin, our gross margins this year obviously at 23 million, last year, we were at roughly 39 million. The volume share deleveraging piece of that I would estimate it close to 13 million.

Okay.

And then the other components there's going to be a combination of mix, improving in margins and then of course overall cost increase. And I don't want to -- the cost increase from the raw material side, the aluminum was definitely the driver of that and it was the impact of the hedges rolling off when you look at quarter-over-quarter.

But we also, obviously like every company we've experienced increases in fuel costs, we've been able to mitigate that somewhat by producing more glass internally, so actually our cost of glass year-over-year has went down. So my 330 basis point estimate was trying to consider all those factors in to play.

But [inside[ the components of that -- with the fixed cost components of that -- what is that? Is that just a plant fixed costs, is that what --? In other words, that operating leverage component, what makes that up? I'm just trying to --

No, you're right. It's the plant component. It's a fixed cost. We also have North Carolina that's fully operational this year.

Right.

Last year, we actually go it online in October of last year roughly fully online by the end of October. So, you do have some -- you do have some higher fixed costs this year coming through in that margin.

Okay. And the cost savings. How much of that is coming from the headcount reduction?

Roughly, $10 million.

Okay. The permanent costs that you're taking out how much of that will flow to a cash flow? I'm trying to get a better handle as to what we could expect from kind of a free cash flow perspective.

Until I see it unfold because there--

It's too hard.

There are moving components of that in terms of renegotiating contracts et cetera. What I have seen based off the past few quarters, with our EBITDA at -- where we came in at this quarter our free cash flow was roughly in the neighborhood of $2 million.

Okay.

Okay, based off our EBITDA this quarter. Now that's not to say it's going to stay the same, because obviously the components of that are working capital changes and CapEx, but assuming an average CapEx spend I think that's pretty safe.

So you're expecting you'll be free cash flow positive for at least through the period that you can -- at least from what you can see right now I guess, right?

Year-to-date we are through the first three quarters, yes.

Do you -- I mean are you anticipating any covenant -- financial covenant issues, or any draws on the revolver or anything?

No, not really. We have a revolver out there. We have available 25 million under that revolver, and we also have cash at quarter end of roughly 20 million [talking] 45 million, 50 million in liquidity, which we're -- we feel very comfortable with. And we like all companies have covenant restrictions within our bank debt agreement that we monitor and if they even get close we take the appropriate action. So right now in looking at those covenants, I think we're in good shape.

Okay. And can you just -- I missed that number, but the renovation and remodeling percentage of the business now, what did you say that was? That was what 54% and 46% new home. Is that right?

No, it's 58% and 42%. 58% are R&R [renovation and remodel].

Okay. All right great. Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS)

And your next question is from the line of Christopher Swann, GMT Capital. You may proceed.

Hey, good morning. Thanks for taking the call.

Hey, Chris.

Hi, Chris.

Quick question. You may have already said this. What was cash flow from operations for the quarter?

Cash flow from ops for the -- I commented on free cash flow. Cash flow from ops -- hang on a second. It was roughly -- it's 20 million year-to-date. So -- I don't have the quarter number in front of me here. It's 20 million for the first nine months.

Okay. Okay, I'll just back it out there. And then following up on the covenant question. The debt payments you've been making recently are those required under your debt covenants, or what's been the driver of those debt payments, just a reduction of interest expense?

Yes. Just using our -- I mean you're exactly right. I mean we have cash on hand and we'll either use it to pay down debt as appropriate, or if an acquisition comes up we'll acquire.

But they haven't been required thus far?

No. The pay downs?

Yes.

No. They're all optional.

Okay. Okay. And what are the trigger points for the debt covenants as far as when you would be required to make payments or not?

Well I don't have it in my -- the payment schedule in my head right off. I know we're not -- because we've optionally paid so much, we're not required to make a payment necessarily for the next year, and there are various trigger points in terms of the actual covenants themselves from a leverage covenant, debt to EBITDA to CapEx covenants to interest coverage covenants.

So I don't -- again I've looked at all the covenants based off our current performance and feel we're in good shape.

Okay. So you're close to any of those trigger points at this point?

Not as of the end of the quarter. No.

Okay. Thank you very much.

Okay. Thank you, very much.

You bet.

And at this time, there are no further questions in the queue.

Okay, thank you. Thank you for your time in joining us today. We look forward to speaking to you all again next quarter. If you have any questions you can call me directly and I'll be happy to discuss. Thank you.

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude the presentation. You may now disconnect. Have a wonderful day.