PGT Innovations Inc (PGTI) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT Report 2007 Fourth Quarter and Fiscal Year Results Conference Call. My name is Katie and I'll be your coordinator for today. At this time, all participants will be in a listen-only mode. After the speaker remarks, you will be invited to participate in a question and answer session towards the end of this call.

(OPERATOR INSTRUCTIONS)

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

Good morning, and thank you for joining us for PGT's Fourth Quarter and Fiscal Year 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 fourth quarter and the year, and then I'll discuss our results in more detail, and then we'll both 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 2006 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 yesterday's 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 has been 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 presentation of financial statements in accordance with GAAP, rather we believe the presentation of earnings excluding certain items provides additional information for the investor to facilitate the comparison of past and present operations.

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

Thanks, Jeff, and good morning, everyone. We have a number of items to share this morning. First, I'll highlight our results for the fourth quarter and the year, and then provide an update of some of our key strategic initiatives for 2008. Jeff will follow with a detailed review of our financials for the fourth quarter and for the year.

As I mentioned in our press release, the building industry in which we operate continues to see significant deterioration in new construction starts as evidenced by a decline in new housing permits of 53% in the fourth quarter of 2007 versus the same period in 2006.

Our revenues decreased 20.4% over the same period, due mainly to lower unit volumes particularly in our WinGuard product line which was down 16%, as well as our non-impact aluminum product line which was down 37%. As we progressed through the quarter, the housing construction downturn intensified as we experienced a 28% decrease in housing starts compared to third quarter of 2007, showing further evidence that the market has not yet hit bottom.

Compared to the third quarter of 2007, our revenues decreased 24.7% due mainly to lower unit volumes in our aluminum WinGuard product line which was down 26%, as well as our non-impact aluminum product line which was down 21%. 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 fourth quarter of 2006, sales of R&R were up 8% this past quarter. It is also important to note that as a percentage of the total sales for the quarter, R&R sales accounted for 57% compared to 43% for new construction. This is quite a switch from the fourth quarter last year when new construction represented 58% of total sales.

For the fourth quarter a combination of decreased volume and a $2.4 million charge related to restructuring activities initiated in October, resulted in a net loss of $4 million, versus a net loss $2 million in the prior year's quarter. Adjusting for the effects of charges in each period, there was an adjusted net loss of $2.6 million in the fourth quarter of 2007, versus a $1.3 million adjusted net loss in the 2006 fourth quarter.

We continue to invest in our marketing efforts. Our marketing expense was $2.1 million in the fourth quarter of 2007, versus $2.8 million in the same period a year ago. Focus on spending in the fourth quarter was on our R&R markets including advertising co-op 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 the market share.

We remain disciplined in our spending with our sales, general and administrative expenses which we have decreased by $1.6 million from the prior year quarter. However, as a percent of sales, SG&A increased to 30% compared to 26.2% in the prior year quarter, due to loss leverage of fixed costs within our SG&A.

Net loss per diluted share was $0.15 for the quarter, compared to $0.07 for the fourth quarter of 2006. Adjusted net loss per diluted share was $0.09 for the fourth quarter, versus $0.05 for the same period in the prior year.

For 2007, new housing activity both starts and permits in our primary markets were down approximately 49%, while our net sales were down 25.1%. Adjusted net income for the year was $2.6 million or $0.09 per pro forma diluted share, compared to $26.3 million or $0.94 for 2006.

As mentioned in previous calls, our plan for managing through the housing downturn includes increasing market share and generating incremental sales 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've seen increased sales in our vinyl window and doors, which finished up 18% for the year compared to 2006. Recently, at the International Builder's Show our newly introduced non-impact vinyl windows and doors were well received, and are expected to drive additional sales in 2008 and beyond.

Our new products in the architectural systems line generated sales of $1.6 million in 2007, and are also expected to generate additional sales in 2008. Sales into our repair and remodeling markets 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, in October we took actions to restructure our operations. We estimated at that time that our total expected annual savings for that restructuring would be approximately [$16 million]. We began to see benefits of those actions in the fourth quarter, and we expect to continue to see the benefit throughout 2008.

However, more challenges are yet to come as the housing market continues to correct and economic conditions soften. Even though we have consistently outperformed the housing market, we have had to make some difficult adjustments during this downturn. As the downturn continues, we will monitor closely the market situation and take additional action as required.

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

Thank you, Rod. Let me give more detail in the quarter and the full year number. We reported net sales of $54.3 million for the fourth quarter of 2007, a decrease of 20.4% versus prior year quarter. Generating sales in this challenging market continues to be difficult. Our decrease was driven by our new construction sales down 41% versus prior year.

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 our sales into the R&R market. As Rod had mentioned, our sales into the R&R market represented 57% of our fourth quarter sales, and were up in dollars $2.3 million over prior year quarter.

We also experienced a favorable mix with our WinGuard products represented 68% of our total sales for the quarter, versus 64% in prior year's fourth quarter. With our sales being generated from both new construction and R&R markets, we are in a better position to leverage our distribution network, and outperform this housing downturn in our core market on a top line basis by 32%.

Net sales drivers during the fourth quarter versus prior year fourth quarter were as follows. WinGuard impact sales were $37.2 million, versus $43.9 million, down 15%. Aluminum non-impact products were $10.2 million versus $16.3 million, down 37%.

Architectural system sales were $3.1 million, versus $3.9 million, down approximately 20% and vinyl non-impact in our Eze-Breeze product sales were $3.8 million, versus $3.3 million, up about 13%. When compared to our sequential quarter, our sales declined 24.7%. This was driven by an intensified decline in the core and new home construction market which we operate in, down 28% versus the third quarter of 2007.

Net sales for the full year were $278.4 million, which is a decrease of 25.1% compared to 2006. As I mentioned before, the decrease in revenue was driven by the downturn in new housing market with starts down in our core markets 49% for the year, partially offset by our stable R&R market performance.

Overall mix improved over prior year, with WinGuard products representing 68% of our total sales, compared to 65% for the same period in 2006. Our gross margin for the quarter was 27.1% versus 28.8% in the same period 2006. We recorded approximately $700,000 in restructuring charges in the cost of goods sold line item during this quarter.

Adjusting gross profit for this charge would result in an operational gross margin of approximately 28.3%. Gross margins were driven down 50 basis points during the fourth quarter versus prior year quarter, related to our -- de-leveraging of our fixed cost base within our operations, and for the adverse impact of aluminum cost increases.

Our average cost per metric ton of aluminum was approximately 2,600 a metric ton compared to the fourth quarter of 2006 average of 2,200 a metric ton. These increases were offset somewhat by mix improvements, as well as overall spending reductions.

2007's gross margin, 32.7% compared to 38.1% for 2006. Again, this reduction in gross margin was driven by decreased operating leverage caused by our lower sales volume -- sales being down $93 million for the year, and increased aluminum costs. Adjusting for the restructuring charge I mentioned earlier, our operational gross margin for the year was 32.9%.

Our sales, general and administrative expenses were $16.3 million, down $1.6 million when compared to the fourth quarter of prior year, driven mainly by lower costs related to our lower sales volumes, and the reduction of certain costs related to actions taken during the quarter.

When compared to the sequential quarter Q3, SG&A was down approximately $2.1 million. This was driven mainly by reduction in incentive base accruals of approximately $1.4 million. Also during the quarter, we adjusted our warranty reserve by $500,000 to take into account our reduction in sales. For the year, SG&A was 27.1% of sales, compared to 23.2% for 2006.

Total marketing investment for the year was $9.8 million, which was down $600,000 or 6% from 2006, versus our sales decline of 25.1%. Interest expense for the fourth quarter was $2.7 million, compared to $3.1 million for the fourth quarter of 2006.

The difference primarily relates to lower debt levels, as a result of our optional debt pay downs in the first three quarters of 2007. During 2007, we paid down a total of $35.5 million on our long-term debt. On an annualized basis, we expect interest expense to be approximately $11 million based on current debt levels.

For the year our effective tax rate was 42.3%. This is higher than anticipated during the year, due to lower than expected manufacturing deductions related to the Jobs Creations Act which is a function of taxable income. As a reminder, our 2006 rate was a negative 11.6% resulting from a change in how we accounted for the North Carolina tax credit at that time. Going forward, we anticipate our tax rate to be in the range of 37% to 38%.

Net loss for the fourth quarter was $4 million, versus $2 million lost in the same period last year, resulting in a net loss of $0.15 per diluted share, compared to a net loss of $0.07 per diluted share for the same period last year. After adjusting both quarters for items such as impairment and restructuring charges, our adjusted net loss was $2.6 million for the fourth quarter or a $0.09 per pro forma diluted share, compared to a loss of $1.3 million or $0.05 per pro forma diluted share in the same period of 2006.

Our 2007 adjusted net income was $0.09 per pro forma diluted share, versus $0.94 in 2006. I would encourage everyone to review the reconciliation attached to the earnings release for further details.

Adjusted EBITDA was $3 million or 5.5% of sales for the fourth quarter of 2007, versus $5.8 million or 8.5% of sales for the fourth quarter of 2006. 2007s adjusted EBITDA was $31.7 million, compared to $72.7 million for the same period in 2006. A reconciliation of the adjusted pro forma diluted shares, adjusted net income and adjusted EBITDA that I just described has been included in our earnings release for your reference.

Now turning to the balance sheet. As of December 29th, our net working capital excluding cash was $25.4 million or 9.1% of our 2007 sales. This compares to 35.3% or 9.5% for the year ended 2006. This reduction in net working capital was driven by a decrease in our other current assets related to a tax refund received in the third quarter of 2007 of approximately $3 million; a reduction of approximately $2 million in our inventory, driven by lower raw materials; a reduction in accounts receivable of approximately $4.3 million, with our DSOs decreasing from 46 days at the end of last year, to 37 days at the end of 2007.

Our 2007 capital additions were $10.5 million, and our 2007 depreciation and amortization totaled $16 million. We will continue to prioritize our cash in evaluating its use for organic expansion, acquisitions, or to continue to pay down our debt when appropriate. Our cash on hand at the end of the year was approximately $19.5 million, giving us a net debt of approximately $110.5 million.

At this time, I'd like to give you a brief update on the status of the restructuring actions taken during the fourth quarter, which resulted in approximately $2.4 million charge taken during the quarter, related mainly to severance costs [effective] for the related employees. As a reminder, the restructuring is expected to yield approximately $16 million in annualized savings both in people savings, where 17% of our indirect workforce was reduced, and operational savings in items such as materials, supplies and freight costs.

During the back half of the fourth quarter, we realized approximately $1 million in savings, related to the reduction of indirect labor and related benefits. These savings were approximately $500 million each, across both our cost of good sold line items and our SG&A categories.

Going forward, we anticipate labor and benefit savings from the restructuring to be approximately $2.5 million to $3 million each quarter in 2008. The remaining savings comes from other areas. And at this time, I'll give you a brief update on a couple of items.

Material costs. We are aggressively renegotiating new contracts with vendors with the goal of a $3 million annual savings. These savings will mostly start in the second quarter, with full year estimated impact in the second half of 2008.

Freight costs. We are increasing the amount of backhauls of our materials to reduce both our outside freight costs and surcharges, with the goal of an annual $1 million in savings. We took these actions in order to be a stronger, leaner and more efficient force while weathering the significant downturn in the market.

With conditions still weakening in our core markets, we expect to continue facing challenging times ahead, and as such, we will closely monitor the housing market and our sales order patterns, taking additional action as required as we focus on our operational cost structure and growing our top line.

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

Thanks, Jeff. We're still in difficult market conditions that negatively affect our business. As I have previously outlined, we've instituted several measures to stimulate sales, as well as to reduce operating costs to counteract the current market conditions, and will continue to monitor those conditions closely and take further action if necessary.

Long-term, we believe that the U.S. impact resistant market will continue to grow and we will expand our presence in this market. Our new products in our vinyl and architectural systems streams have been received well and are meeting expectations, and we will continue to 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.

With that, I'll conclude and Jeff and I will be happy to answer your questions. At this time, I'll turn it over to the Operator for the first question. Operator?

(OPERATOR INSTRUCTIONS)

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

Thanks. Good morning, guys.

Good morning, Nishu.

Good morning, Nishu.

The first question I wanted to ask was on the seasonality issue. Looking over your quarterly sales patterns '03, '04, '05 it's fairly level sales from the third quarter to the fourth quarter. I know last year you've mentioned that we might see some more seasonality. This is now the second year in a row we've seen a pretty significant drop from the third quarter to the fourth quarter in terms of sales.

So, I was just hoping you could help us understand what's different now, obviously in respect to the housing correction? But, how should we understand the seasonality? How should we expect it to kind of go going forward?

You know Nishu, I think there's probably two parts to that answer. First of all, the downturn in the market is changing market conditions fairly dramatically and what we saw in 2006 and 2007 is a lot of projects that were on the drawing boards, or a lot of projects that folks were talking about getting started. And as they hit Q4, they really just pushed them off because there's such a slowdown in the market, and no one is real sure if they can sell that product once it's back on the market.

So, I think we've seen kind of a difference in the market -- in the entire market we serve with a lot more caution as far as starts. I don't think it's caused by seasonality. I mean we -- as you look into this year, I would anticipate -- we don't think it's going to pickup this year. I would anticipate maybe that same kind of yield as we go forward in this year, but even in Q1 we still see those same projects getting pushed back and it's really not caused by seasonality.

So, I think it's a function of the market and the slowdown, and every time there's bad news people really jump on that bad news and just withdraw a little bit more. And we can talk about some of the subprime issues and those types of things that hit a little harder as we got toward the end of last year and affected it.

Going forward, and I know we don't give guidance, but going forward as we enter the vinyl market which is a market that is stronger outside the state of Florida than in the state of Florida at least at the present time, we would expect to see a little more seasonality in that portion of the market than we've traditionally seen in our core aluminum, aluminum WinGuard and vinyl WinGuard market that really serves the coastline area.

So, I would think looking out for the next -- this year I think is a little bit of a wildcard with the downturn, but as we go forward next year and the year after we'll see from our vinyl portion of the business a little more seasonality.

Got it.

I guess the only thing I'll add to that Nishu, is given the significant changes -- sequential quarter we've seen this year -- 28%, 29% changes in downturns in the market between quarters, it's just so hard to tell seasonality in that mix. Fourth quarter will be a little slower for the Company.

You have Thanksgiving and you've got Christmas in there, and from both an R&R standpoint it's not the time that people are going to be refurbishing their house around the holidays. So, there is somewhat of a slowdown even in Florida. Not much, not material, but it's been masked by the significant sequential quarter downturn in starts.

Yes. We didn't see the tourist influx late last year like we traditionally do in the fall. It's here now, but folks didn't come back quite as early in the year as what they traditionally did.

Got it. And second question was more of a long-term question. Rod, if you look at the last 18 months you've had two fairly substantial product expansions or rollouts in the multi-storied architectural system, and now the vinyl. You obviously got some good reactions last week at the builders show. Looking out let's say three to five years, Rod, which of those two is going to be a bigger sales contributor in your plans or your views for the Company?

I think vinyl overall will be a bigger contributor to our sales plan and I'll balance it a little bit, Nishu, because vinyl is going to be a little more consistent contributor to the sales plan. It's going to -- it's a little broader based. It's going to grow out of state. It's going to make us more than -- we've been viewed a little bit as a Florida window company, but it's really going to move the market outside the state of Florida, and it will be a very steady business for us.

And the response we got at the show, and even before the show as we were starting to show the product has really been great. We fully understand that we're not going to reap the benefits of that until people start building houses, or ramp up their R&R portion of the market. I will balance that though with the architectural series. I don't think we'll see quite the same steady flow that we will from vinyl.

What we see in the architectural series is we see big jobs. We'll see a little bit more backlog in those jobs, and we may go two or three weeks or a month and not see much activity and all of a sudden have a $5 million, $10 million backlog with a big job that's coming in with a pretty long range plan. So it will be a little bit bumpier with architectural series.

And then vinyl, obviously it's the product of choice out there, the framing material of choice in the window markets. So, I think that's going to drive it a little stronger.

Okay. I let others ask questions. Thanks a lot.

Your next question comes from the line of Keith Hughes from Robinson & Humphrey. Please proceed.

Thank you. Jeff, could you just give us an update of where you are in your credit facility at this point in terms of borrowings and covenants and things of that nature?

Yes. At year end we had approximately gross debt of about 130 million, and then we had about 5 million of calls against our line. It's not actually debt borrowed but just --

[Credit]

So probably I'd look at a gross of about 135, and all the covenants associated with that debt et cetera are tested on a quarterly basis. We have various covenants; [trailing 12] EBITDA; CapEx; interest covered ratios. All that's available in terms of the debt. The agreement itself has been filed with the SEC, so that's out there for you all to look at. But we do look at it quarterly, and obviously at year end we looked at it, and we were in compliance.

Well, how much availability do you have in the revolver?

30 -- 25 million.

25 million.

And we've got five against it.

Okay. And in terms of your aluminum price you referred to the amount earlier. Are you primarily floating right now or do you have some hedged?

We have a portion hedged. Right now, we have about 40% of our anticipated needs hedged through August 2008 at [26.50] levels, a metric ton. Right now, the cash buy is 28 -- [28.12] this morning. So, for the portion that's not hedged we're basically paying cash for that (inaudible).

Okay. And the vinyl product launched at the show last week, when will we realistically start seeing revenues come in from that?

Well, we should start seeing them in March. I mean we've already had -- talking to Doug Cross who leads that effort for the Company, we had some great sales leads from that show and we've already starting getting some orders. So, we should see that first appear in March with full force coming in the second quarter, third quarter as that distribution network establish itself and the product gets out in the market.

All right, thank you.

Just for a little bit of background there, Keith. We've manufactured 700 or 800 various samples off the line. We've done beta houses. We know that things are ready to run so that lines up. We're really planning on kicking it off full board manufacturing like first week -- first, second week in March.

And then Rod, I assume you're going to the market with this, with the same quality and quick turn aspect you're known for in your impact resistant windows. Is that correct?

Probably a little bit quicker turn, and definitely a high quality. We position this product in the upper -- if you look at good, better, best this -- best might be that six-inch European style window so it's not that, but it would be very close to the upper -- the better to the best range.

All right, thank you.

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

Good morning, Rod. Good morning, Jeff.

Hi, Sam. How you doing?

I'm fine. We keep dancing around this. The vinyl business. Rod, how would define success from a sales volume perspective either in '08, and then looking out a couple of years? How would you define a successful initiative?

I'm not going sit here and quote numbers. It might make it easier if I did actually, and we obviously have some pretty aggressive internal numbers that we'd be looking at. I think, I would define success early on, and I think that's a really critical part early on. We've gotten great response from the folks we showed it to.

We have a number of fairly large distributors that are -- maybe I'm exaggerating a bit, but kind of chomping at the bit to get their first orders in place and get them out in the field. So, initial success is being able to hit all the targets.

There's always a couple of bugs to work through when you start manufacturing in bulk and shipping it out the door, and one of our fear factors is the response we've gotten is going to strain our lines. So, success early on is being able to hit all the targets from a manufacturing point of view.

And then, we measure success more -- not so much in just pure dollars, but in how much market share we can gain, and how soon we can take that market share. So success for me is going to be measured in hitting some fairly significant market share targets that we have out there outside the state of Florida. We have a very dominant market share in Florida, I think, most folks are aware of it.

And the impact market in that 70% range we're not going to hit that in the vinyl market, but we do have some pretty good measures of how do we take market share. Because we know if we have that market share as the market turns and comes back we'll be in a great position then to really drive some incremental sales.

And, Sam, I think I would add just a little bit too that. I mean if you looked at 2007 our vinyl sales -- non-impact vinyl sales were minimal, approximately $3 million. So success is going to be defined percentage wise is going to be huge.

Dollar wise, it's going to be in future years in the $30 million, $40 million, $50 million range as we get this thing out in the market and we leverage that -- the distribution system we're trying to setup outside the state. So, it's going to become a significant part of our business as we look out into '09, '10 and on.

Yes, I think Jeff said it well, Sam. We don't design new products to hit -- our new product lines to hit 5 or $10 million in sales in a few years. It's not worthwhile doing that to us.

So if we were to look at the gross -- likely gross margins on vinyl and once you get a critical mass area I mean it's not going to be [WinGuard-esc] I'm guessing in the high 30s or low-40s, but would we be looking at something north of 30% on a gross margin line for vinyl?

No. I'd say upper 20s to 30, right in that area depending on mass obviously.

Got you. Second question. I know you don't give guidance, and in this environment maybe be tough too if you tried, but looking at free cash flow, Jeff, in '08, do you suspect that you'll be free cash flow positive? And, if so, how bad would business have to get for you to turn free cash flow negative?

You know, Sam, in terms of 2007 we were free cash flow positive roughly $20 million, and obviously we use that free cash flow to pay down our debt. We paid down over $35.5 million on our debt. If you recall at the beginning of the year we started out with a cash balance of $35 million.

We basically used 15 of that plus our free cash flow of 20, to pay down 35.5 million of our debt. I don't have any comments on 2008s free cash flow. It's way too early in the year here -- February to even comment on that.

Would do monitor it. It's closely tied to our EBITDA, obviously at a $3 million EBITDA I would say you have other factors in that such as working capital needs. But oscillating that aside, at $3 million assuming no working capital (inaudible), we're probably neutral; free cash flow neutral. So we want to be north of that over the long term, but again I'm not going to comment on 2008s free cash flow estimates.

And your 3 million -- I mean, right now it would be even though, Rod, you suggested that you're in a bit of a seasonal -- and you're not as seasonal perhaps as people might think or at least you're not seeing it that, at least intuitively were in the low water mark of the season, and the $3 million EBITDA run rate is where you're looking at currently with the incremental savings for a quarterly run rate?

Well, yes and no, and I'll explain that a little bit more. If you looked at the Q4, $54 million in sales, and our $3 million adjusted EBITDA. Okay? We had a couple -- as I mentioned in my comments, we had a couple of fourth quarter adjustments.

We do start warranty reserve by $500,000 to take into account the lower sales, and we did not make an incentive plan that we had been accruing for and that was about 1.4 million. So that's almost $2 million in kind of adjustments impacting that result. So, if you looked at [cheerly] run rate of $54 million you're probably close to $1 million of EBITDA for the fourth quarter -- operational EBITDA I guess I would say.

Of that 1 million that was basically our cost savings we implemented. We achieved about $1 million worth of benefits from those savings mainly in December, some in November, but obviously all of December. And, we would look to achieve cost savings of as I mentioned earlier, anywhere from $3 million to $4 million so on a $54 million run rate just keep that in mind. You've got to take into account cost savings and really operationally where we were before.

That's what I'm getting at. I mean, you had a $3 million adjusted EBITDA in Q4. You take $2 million out for the accrual reversal. That leaves you with $1 million, but in Q1 you're going to get an additional $2 million in incremental restructuring savings that you didn't pickup in Q4. So your run rate right now in Q1 assuming sales are flat sequentially is about $3 million EBITDA. Is that the way to look at it?

Yes. I think that's -- Yes, that's the way to look at it with that Q4, $54 million --

Right. So if you keep at a $54 million sales pace on a quarterly basis for 2008 you'd be running at that $3 million EBITDA rate essentially and free cash flow neutral, and we're seeing here at the low watermark of the season. Is that -- I mean who knows what happens with the housing market, but at least from seasonal perspective we're looking at the -- at off peak.

I would agree with that. Yes, that's correct.

Yes, and you hit it very well, Sam. We have to watch the housing market also.

Right. Last question. Help me understand, Jeff, how you test for goodwill impairment, because the goodwill you have on the books as I recall didn't come from you acquiring a business. It came from JLL acquiring you, so how does the accounting standards work when you test for impairment when it really wasn't your goodwill per se?

Well, there's a couple of methods you look at when testing for goodwill impairment. You look at the enterprise value of the company and compare it to market cap. Obviously now with our stock trading at $4 that's not a good method to look at it, plus it's a very tightly controlled company with 60% basically controlled by JLL and management. So, we don't look at it in terms of market cap.

What we do do is a kind of a discounted cash flow method to try to calculate and make sure we can still recover that goodwill. We test that annually. We test it at year end. And E&Y our auditors have looked at that test and have signed off on it. There's not an issue there. That test is obviously based off forecast into the future -- what we think 2008, 2009, et cetera all the way out through 2015 really, there's a terminal value in there, is going to be in terms of both sales and margins. So - it's subject to estimates just like other sensitive areas are within accounting, but I think we take a conservative approach at that and make those estimates. Review them with our auditors, and we're fine right now with our goodwill balance.

Thank you very much.

Thanks, Sam.

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

Thanks. Good morning, guys.

Hey, Jim. How are you?

Good. I guess, Jeff, actually I was first wondering about if I could get the margins by product line WinGuard and then the others.

The only margins we've got really for this quarter in terms of what we're willing to give out was WinGuard. WinGuard came in at 36.5% gross margin. All other which you're talking basically driven by our aluminum business. All other margins were roughly 7%.

Okay. Actually, there's some seasonality there. It wasn't a lot -- it wasn't terribly different seasonality from what you saw I guess last year was it really?

I don't think we can attribute much of that to seasonality. We really see it from a slowdown in the housing market. We were driven -- even in 2006 with a bit of a slowdown in Q4 which is fairly unusual. I mean, we'll see it a little bit slower, but not to the effect that we saw in 2006 and '07.

That's when the market really started dropping off, and even though starts had dropped off or prime had dropped off before that there's a lag between starting a house and putting windows in it and it's toward the back half , so that's when it really affected us and then in 2007 it just was that continual drop.

It had dropped quite a bit at the beginning of the year. It stabilized and then as the subprime hit and a rash of foreclosures in late Q3 and Q4 we saw the permits and starts drop off fairly dramatically again so I think that's really what drove it more than the

Okay. And is there any amount of that you contribute to impact from aluminum pricing or is it still just really volume that's the key driver?

Definitely volume is the key driver, but a piece of that is aluminum - related, but volume is overwhelmingly the driver.

All right. Okay. And just final thing. What was your sales volume outside of Florida for the quarter?

We were 90 -- for the quarter we were 89% sales within the state of Florida. For they year, we ended being right at 91% within Florida.

Okay. All right, great. Thanks.

Thanks, Jim.

Thanks.

Your next question comes from the line of [John Sykes] from [Nomura]. Please proceed.

Yes, hi. Good morning.

Good morning.

I think you mentioned interest expense for the coming year. Did you say 11 million? Was that correct or were you talking about historically for selling?

No. I'm talking about for the up and coming year our debt doesn't change keeping the 130 gross debt. We're roughly paying about 8.4% on that debt. Again, it's LIBOR plus 300 basis points--

Right.

So with that you get about 11 million of interest expense and then I have some amortization of deferred issuance costs in there that I would add to that as well but right at 11 million.

The reason I asked because LIBOR is around 3%, but what did you fix what about 50% of the term loan of that?

Well, at year end I was fixed 47% of the term loan, but those have actually rolled off as of February so that's changing but year end it was 47% of fixed.

Okay. So you're doing like three month rolls now right?

I've got it staggered. I've got two different rolls I'll look at. One is a smaller kind of tranche -- a potential paydown at a month increments and the other one is a three month roll.

Okay. Okay. Well I just -- it seemed a little high just given where LIBOR has trended.

Yes, and no doubt it could again. I'm only basing it off of what we see, or we've seen last year and the beginning of this year but if LIBOR keeps trending where its at and we -- it's our goal to continue to use our cash to pay down debt and free cash flow do generate. So I don't think it's going to be south of that number.

This year in terms of CapEx can you guys comment a little bit on what you're planning on spending?

In 2008?

Yes.

Well I think -- our range is going to be a little bit wider range than we're use to giving, because I think market conditions will dictate a lot of that, but we have certain maintenance CapEx we do do. I think it can be as low as 5 million and as high as 10 million, but again, it's going to be somewhere in that range probably to the lower unless we see a turnaround in the market.

Okay. And cash taxes for this year. I'm assuming that should be neutral right or if anything they'd have a refund or a benefit?

Well, I think we're going -- it could be a potential refund. If you look out into the future our cash taxes we are amortizing our intangibles which for tax purposes creates a difference there that we have to pay cash taxes on. So, it depends on obviously the results of the Company. But yes for your purposes you can plan it neutral.

Let's just say -- the reason I'm asking this I'm trying to get an idea of how you will be free cash flow neutral. Just what the components of that are going to be?

Yes. When I look at obviously working capital and any changes or needs there are sources --

Right.

As you are aware of -- CapEx. And again the reason I don't -- I can't give you a firm number there is we are going to be -- use our cash flow wisely and if results don't dictate or don't support our spending 10 million we're not. We're going to spend 5 million, so you've got to take into account CapEx, and obviously cash paid for interest, which to your point it should be something south of 11 million.

Well, I just -- it sounds like with the cash that you have on hand the -- obviously that 25 million will probably get somewhat tighter as the year progresses if things don't improve, but even with the cash on hand it sounds like from a liquidity perspective you should be able to manage through this year. Is that a fair thing to say without really drawing on the revolver?

Well right now as of year end our liquidity was -- obviously the revolver. The [un-pulled] revolver at 25 million plus our cash on hand at 20-ish. This has been a very challenging market. It continues to be challenging and it appears to be weakening so I don't know. I think -- I have no comment on 2008. I think at the end of the year we did have plenty of liquidity. I think we do now, but again, I can't comment on what 2008 is going to bring this early in the game.

Okay. All right, thank a lot. I appreciate it.

Thanks, John.

At this time, I'm showing you have no further questions. I would like to now turn the call back over to Mr. Jeff Jackson for closing remarks.

Thank you. Thank you for joining us today, everyone. We look forward to speaking with you again next quarter. If you have any further questions, please feel free to give me a call. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you many now disconnect.