PGT Innovations Inc (PGTI) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the PGT, Incorporated first quarter 2009 earnings conference call. Today's conference is being recorded.

At this time I'd like to turn the conference over to Mr. Jeff Jackson. Please go ahead, sir.

Good morning and thank you for joining us for PGT's first quarter 2009 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.

Before we begin let me remind everyone that today's conference call may contain 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 our current expectations and are subject the 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 most recently filed Form 10-K with the SEC. We undertake no obligations to publicly update or revise any forward-looking statements.

A copy of our 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 operation prepared in accordance with GAAP and pro forma information, which was quantitatively reconciled to GAAP.

Our Company uses non-GAAP measurements as key metrics for evaluating performance internally. A detailed explanation of these non-GAAP measurements can be found in our Form 8-K filed yesterday with the SEC. These non-GAAP measurements are not intended to replace the presentation of financial results in accordance with GAAP. Rather, we believe the presentation of non-GAAP measurements provides additional information to investors to facilitate the comparison of past and present performance.

For today's call, Rod will provide an overview of our performance for the first quarter, and then I'll discuss our results in more detail. After our prepared remarks we'll take your questions.

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

Thanks, Jeff, and good morning, everyone.

As I mentioned in our press release, the downward pressure on the homebuilding industry continued during the first quarter as new home construction remains at historically low levels. Housing starts in our core market were down 50% in the first quarter, compared to last year's first quarter.

In the face of this market, our sales decreased 24%. Low home prices and interest rates, plus the tax incentives for first-time homebuyers, provided some beneficial economic effects during the quarter. But continuing increases in unemployment and home foreclosures have eroded consumer confidence.

Compared to the first quarter of 2008, sales into the repair and remodeling market were down 14%, while sales into the new construction market were down 45%. As a percentage of total sales for the first quarter of 2009, R&R sales accounted for 69% and new construction sales accounted for 31% of sales, compared to the first quarter of 2008 when R&R sales accounted for 59% of sales and new construction represented 41%.

As talked about in previous calls, our plan for managing through the long housing downturn includes driving sales, particularly in out-of-state markets and growing our dominant share in our core market, Florida. We began taking orders on our new R&R targeted non-impact vinyl window line in March. The reception to the product line has exceeded our expectation, and we expect our new product line to provide geographic sales growth as we continue to focus on increasing our distribution network in targeted states outside Florida. In the first quarter of 2009, out-of-state sales, including the Florida Panhandle, were up nearly 40% compared to last year.

Together, with our joint venture partner, ASI, Limited, we signed another unitized curtain wall projected, estimated to generate $3.2 million in sales.

In total revenue, over 2009 and 2010 and with the JV, we continue to bid on numerous opportunities, both inside and outside of flooring. We think the housing market conditions in the economy will remain difficult during the rest of 2009. While the new federal stimulus package contains measures to increase homeownership and additional measures to drive the purchase of energy efficient windows and doors, it remains too early to predict the economic impact on 2009.

On a positive note, the economy began to show signs of stabilization recently as housing starts increased in April. And there have been signs of rising builder confidence. Also the decline in home values slowed and stock prices have surged since March.

Because the downturn has been so long and severe, any recovery will take time. But stabilization is the first step to a recovery.

We recently took other restructuring actions to better align costs with recent sales levels that we estimate will save $10 million annually. We are optimistic about our long-term growth, as we continue to grow sales out of Florida and to gain market share in Florida. But in the near term, we remain focused on controlling costs and conserving cash.

Comparing the first quarter of 2009 to the fourth quarter of 2008, gross margin decreased $4.6 million from the fourth quarter of 2008, due mainly to lower unit volumes in our aluminum WinGuard product line, which was down 16%, as well as our non-impact aluminum product line, which was down 15%.

SG&A costs decreased $1.2 million from the fourth quarter of 2008. Excluding restructuring costs from the first quarter of 2009, SG&A decreased $2.4 million, driven by decreases in personnel and selling and advertising costs.

Adjusted EBITDA decreased to $2 million in the first quarter of 2009 from $3 million in the fourth quarter of 2008. The decrease was driven by lower sales but partially offset by the benefit of cost-savings initiatives.

Primarily driven by restructuring costs to $3 million but also by a loss of operating leverage due to lower sales, we had a net loss of $6.7 million for the first quarter. Adjusting for the restructuring costs, our net loss was $3.7 million for the first quarter of 2009, compared to an adjusted net loss of $2.3 million for the fourth quarter of 2008.

Adjusted net loss per diluted share was $0.11 for the first quarter of this year, compared to an adjusted net loss of $0.06 for the fourth quarter of 2008. With that, I'll turn the call over to Jeff who will review the results for the quarter in greater detail.

Thanks, Rod. Let me give you more detail regarding our first quarter. We reported net sales of $41.5 million for the first quarter, a decrease of 24.3% versus prior year quarter.

As Rod mentioned, new housing starts in our core market were down 50%, with Florida single family home starts coming in at 4,654 starts for the quarter. This was the lowest number of single family home starts we have ever seen.

The first quarter decrease was mainly driven by new construction sales, down 45% versus prior year first quarter. Our WinGuard product sales led our sales, representing approximately 67% of sales for the first quarter.

Breaking down our sales drivers for the first quarter, compared to 2008's first quarter, we have WinGuard sales at $27.8 million, versus $38.8 million, down 28%. Aluminum non-impact product sales, $6.2 million versus $9.4 million, down 34%. Architectural system sales were flat at $3.3 million for both periods. Vinyl non-impact and other product sales were $4.2 million, versus $3.3 million, up 27%.

The increase in vinyl sales is due to our continued focus on increasing our distribution network and targeted states outside Florida, which contributed approximately $1 million to the increase in vinyl sales, and which has helped us reduce our concentration of sales in Florida to 60 -- 86% of the total in the first nine -- in the first quarter, versus 90% last year.

When compared to our sequential quarter, our sales decreased 16%, from $49.3 million to $41.5 million. This is in the face of sequential housing start, a decrease of 24%.

Our new construction sales decreased 26%, while sales into the R&R market decreased 11% when compared to our fourth quarter 2008.

Single family housing starts showed no signs of improvement the first quarter, averaging just 1,550 per month, compared to 1,750 in the fourth quarter of 2008.

Any recovery in the housing industry is difficult to predict, but we think the challenges we currently face will continue through our 2009 fiscal year.

Our gross margin in the first quarter was 23.8%, versus 29.3% in the first quarter of 2008, down 550 basis points. Our decrease in gross margin percentage compared to prior year quarter was driven by the impact of our decrease in sales, which reduced our margin by 100 -- by 820 basis points. A change in mix and pricing pressures, which reduced our margins by another 360 basis points, partially offset by our spending reductions from our cost-saving initiatives, which helped improve margins by 630 basis points compared to prior year.

On the material side, our average cost of aluminum was approximately $2,382 per metric ton during the first quarter, and substantially all of our needs were hedged. This compares to the first quarter 2008 average of $2,629 per metric ton.

Cash prices of aluminum at times during mid 2009 were over $3,300 per metric ton. Since the end of the third quarter of 2008 the cash price for aluminum has fallen dramatically. April 2009 the average cash price for aluminum was just $1,421 per metric ton.

As of today, we are hedged approximately 73% of our estimated needs for the rest of 2009 at an average of $2,200 per metric ton, and 46% of our estimated needs in 2010 at an average of $2,064 per metric ton.

Our selling, general and administrative expenses were $15 million, down $1.3 million compared to prior year's first quarter. Excluding restructuring cost of $1.6 million in the first quarter 2009 and $680,000 in the first quarter of 2008, selling, general and administrative expenses decreased $2.2 million, driven by lower personnel-related costs of $1.9 million, lower distribution costs of $300,000, and overall lower spending in various other categories of approximately $400,000.

Offsetting these lower costs in the quarter was an increase of $400,000 in our bad debt reserve as we added to our allowance for bad debt. This increase related to two specific customers, which we are currently working on collecting these accounts but wanted to take a more conservative view in our reserves.

Excluding the previously discussed restructuring costs, SG&A, as a percent of sales, was 32.2% in the first quarter of 2009, compared to 28.4% in prior year's first quarter, up 380 basis points. The cost savings from restructuring initiatives we've undertaken were more than offset by loss of leverage from lower sales than an increase in our bad debt reserve.

Interest expense for the first quarter was $1.6 million, compared to $2.7 million in the first quarter of 2008. The difference primarily relates to lower debt compared to our prior year, as we were able to prepay $40 million of our long-term debt via proceeds receipt from our rights offering and cash from operations and a decrease in our interest rate on our debt, from an average rate of 8.4% in the first quarter of 2008, to 6.3% in 2009. The interest rate on our bank debt is based on our new credit agreement and its tiered interest rate structure.

For the first quarter, our effective tax rate was zero, compared to an effective tax benefit of 36.6% in the first quarter of 2008.

In the fourth quarter of 2008 we provided a valuation allowance on all our deferred tax assets because their realization in this difficult economy cannot be assured. Deferred tax assets, created as a result of generating additional net operating loss period [boards] in the first quarter were equally offset by an increase in the valuation allowance. Excluding the change in valuation allowance, the effective tax rate in the first quarter of 2009 would have been a tax benefit of 38%.

Going forward, we anticipate our tax rate to range in the 38% to 39%, absent any further adjustment in the valuation allowance. As we become more profitable we will be in a good position to realize our deferred tax assets by offsetting it against future income.

Our net loss for the first quarter was $6.7 million, versus a net loss of $1.8 million in the first quarter of prior year, resulting in the net loss of $0.19 per diluted share, compared to a net loss of $0.06 per diluted share for the same period last year. Adjusting the first quarters in both 2009 and 2008 for the restructuring cost in each period, our adjusted net loss for the first quarter of 2009 was $3.7 million, or a loss of $0.11 per share, compared to last year's adjusted net loss of $780,000, or $0.02 per diluted share.

Also note that this year's first quarter adjusted net loss did not include any benefit from tax effects.

Adjusting the restructuring cost, EBITDA was $2 million, or 4.8% of sales for the first quarter, versus $5.8 million, or 10.7% of sales for the first quarter of 2008.

As additional information, first quarter 2009 depreciation and amortization total $4.1 million. A reconciliation of the adjusted net loss and adjusted EBITDA is included in our earnings release for your reference.

Turning to the balance sheet. At quarter end our networking capital, excluding cash, decreased $576,000, compared to the end of 2008. This decrease in networking capital was driven by a decrease of $250,000 in accounts receivable and a net decrease of $325,000 in other current assets.

In reviewing free cash flow for the quarter, we had an adjusted EBITDA of $2 million. We had a first quarter 2009 capital addition of $700,000, cash paid for interest of $1.4 million and an insurance recovery and a partial tax refund, which provided additional cash in the quarter of about $800,000. This resulted in operating net cash of approximately $700,000 in the first quarter.

We used an additional $1.2 million in cash for margin calls on our aluminum hedges and $2.8 million in cash related to our first quarter restructuring actions, resulting in our cash on hand at quarter end of $16.3 million, compared to $19.6 million at the end of 2008. Our net debt at the end of the quarter for 2008 was approximately $79 million.

As Rod mentioned earlier, we took restructuring actions during the first quarter, which included reductions in our workforces and changes in our healthcare benefit plan. These actions resulted in a 17% reduction in our workforce, which we estimate will result in labor savings of approximately $9 million annualized and generate annual savings of $1 million in healthcare costs.

We have implemented a temporary 16% pay reduction for all our salaried employees that went into effect at the beginning of our 2009 second quarter.

We do not take lightly impacting our employees with these types of events. We realize the difficult times we are current in in the economy, and these actions were necessary for the long-term health of the Company. We continue to believe in a long-term outlook for housing and our abilities to expand both geographically and into new markets.

Our operating strategies and long-term vision for PGT remain the same. We'll continue to be the dominant impact window and door company in Florida, be the largest market in the nation and aggressively expand outside the States.

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

Thanks, Jeff. As Jeff said, we're still in difficult market conditions that negatively affect our business and the overall economy. But, as I mentioned earlier, we see signs of economy stabilization as the government's efforts to support housing and revive lending are beginning to take hold. But it will take additional time to spur growth as the economy continues to shed jobs.

As I've previously outlined, we instituted several measures to stimulate sales as well as to reduce operating costs to counteract the current market conditions. And we'll continue to monitor these conditions closely.

The federal stimulus package is putting much needed dollars into the credit markets and has provided energy programs and tax rebates that may prove beneficial in 2009. But the continued uncertainty and negative effects on consumer confidence due to the continued rise in unemployment means the home construction industry is still facing a long recovery period.

Long term, we believe the US impact-resistant market will continue to grow and we will expand our presence in this market. Our new products in our vinyl and architectural system strains have been received well, and we continue to add new distribution.

We are actively seeking new markets in other geographic areas as well as developing new aluminum products in our flagship WinGuard product line. And we will continue to opportunistically review acquisition candidates as they arise.

During this market downturn we've been able to leverage our value proposition. We've improved our customer service and maintained our internal structure to quickly take advantage of opportunities when market conditions improve.

I thank all our employees for believing in us, committing to our strategy and outperforming our expectations.

With that, I'll conclude, and Jeff and I will be happy to answer your questions. Dana, if you would take the first question, please.

Thank you, sir. (OPERATOR INSTRUCTIONS) And we'll take our first question today from Sam Darkatsh with Raymond James.

Good morning, Rod. Good morning, Jeff.

Good morning.

Good morning, Sam.

A couple quickies here. Rod, you mentioned in your last remarks that you started to see some economic stabilization or you expect some. Was that indicative with respect to sales trends on a year-on-year basis as the quarter progressed? Did March and perhaps April look better than January and February, excluding the normal seasonal effect?

Yeah. We've talked many times about the seasonal effect. And we always -- I mean, it seems like we always see a relatively slow January as things come back from the holidays the second quarter traditionally. I mean, if you go back over our almost 30-year history, tends to be stronger than the first quarter. We're seeing those same trends again this year, so that's really not different than we've seen in almost every other year since we've been in business.

You know, it's hard to quantify, you know, things being a little bit better out there. But I don't know that we can quantify that and a lot of that is due to second quarter traditionally is a little stronger than first quarter.

But on a year-on-year basis that would account for the seasonality. So were you seeing better year on year trends, March versus January and February?

You see, I don't know if I could say I see better trends in March versus January and February. What I can say is that we're -- the phone's ringing a little bit more. The bids are a little bit more robust, but it hasn't necessarily translated into sales.

Okay. Second question. Your R&R was down 14% and I'm guessing in Florida it was down a little bit more than that. It looks like existing home sales in Florida have improved, at least in terms of units. How are you gauging market share? It looks like existing home sales are now even up on a year-on-year basis. How are you determining your performance in the marketplace?

It's an inexact science at this point, Sam. We look at -- new construction is pretty easy. We've talked about that many times. You can get starts and average number of openings per house and tell that pretty well.

The remodeling market, we look at a lot of different types of data. Some of it's big-box data, you know, how much product they're selling, how much -- how that compares to previous years. And then we hire a third party to go out and take a look at -- you know, they pull permits. They look at what's being put in. We see a little bit of additional R&R. It's always a little stronger in the impact market. It tends to get a little bit stronger as we get closer to hurricane season because it's driven by insurance and code.

But that market, because of the housing prices and the value of housing, has been impacted to a considerable amount also. So a little bit of what we're seeing is going into the field, talking to our customers, looking at the number of products going in. And then we haven't gotten all of our third-party data back in to say that, you know, this is our exact market share at this point.

Two more just clarification questions for Jeff. Jeff, what was the approximately drag on the T&L from North Carolina facility in the first quarter, and how do you expect that drag to look over the next couple quarters?

You know, we've looked at the North Carolina. And to try to look at it on a standalone is difficult, obviously, because you've got -- you have the corporate allocations we do do from here.

Considering the, you know, the allocations like we normally do, we've estimated North Carolina is probably -- on an EBITDA basis is at a loss of about $4.5 to $5 million. But again that's with allocations from corporate to it.

As we move forward, the growth we've seen has been in vinyl. I think Rod had mentioned that in his comments earlier. We are establishing new distribution networks outside the state. We do anticipate that trend to continue, and we have seen that trend elevate here as we enter into the second quarter.

So I don't -- you know, I'm feeling better about North Carolina. I don't think we've seen that -- the potential that plant has yet just because we haven't put the volume in there yet. But I do feel better than ever that that's coming.

Not trying to be too optimistic in the down market like we're in, but we are -- you know, we've got such a low base there that literally if you double the dollar amount it's a huge percentage gain. But we are starting to definitely open up some channels there.

So looking forward, you know, I expect North Carolina to ultimately be a breakeven in the, you know, $40 million, $45 million sales range coming out of that plant based off its current cost structure.

But again, as we ramp up we'll add costs. We'll try to leverage appropriately and look forward to the future of that.

Sam, just an additional point. That joint venture contract that we signed, that's coming out of our North Carolina plant also.

And last question. You mentioned, I believe, in your prepared remarks that the savings in the first quarter from restructuring was offset by your under-absorption rates from the lower volumes. Do you have a sense of the quantification of the restructuring savings? And how did that play out versus your original expectations?

Yes. I mean, if you look at 2008 when we took the major -- you know, initial major restructuring, I think we've been able to realize almost $23 million of savings during 2008 alone. If you consider, from '07 to '08, our volume decreased almost $60 million in top-line sales, and we're about a 50% contribution margin, so that would say it -- you know, we should be down in EBITDA by 50% of that, or close to $30 million.

Well, we ended up EBITDA at around $24.5 million, versus, you know, $31.6 million in 2007. So we definitely didn't see the impact of that -- you know, that decrease in sales because of our cost reductions.

If you net out what we should have been, in 2008 our EBITDA should have been closer to $2 million without those cost reductions. We came in at $24.5 million. So I feel comfortable we got a good $22 million, $23 million worth of savings in 2008.

As we go into the first quarter here, and if you roll that forward from our fourth quarter, our EBITDA, really given our sales fall -- in the fourth quarter our sales were $49 million and in the first quarter, you know, $41.5 million.

So that would imply about, you know, with a 50% contribution, about a $3.5 million EBITDA cut from the fourth quarter. Well, fourth quarter's EBITDA was $3 million. So without the cost reductions, again, this past time, we should have been closer to about a $500,000 loss on EBITDA. We came in at $2 million profit. So we have definitely seen the benefit of those January reduction.

If -- I'll remind you, everyone, we actually had two restructurings; one in January and another follow-on in March. So we've seen the benefit of the January restructuring as well as a partial benefit of that March restructuring in the $2 million we reported in the first quarter.

Yeah. The healthcare side of things that we talked about didn't take effect until Q2. So that benefit will be seen going forward, but it wasn't there for Q1.

It was $2.5 million in sequential savings. That also adjusts for any receivable write-downs or any other one-off items? That $2.5 million is a clean sequential savings rate from restructuring is what you're saying, Jeff?

Yes. That's what I'm saying. Yeah.

Okay. Thank you much.

You bet.

Thanks, Sam.

And we'll take our next question from Keith Hughes with SunTrust.

Thank you. You had talked in the prepare comments about 630 basis points improvement cost actions. Does that include the benefit from aluminum being a positive year over year?

No, Keith. The cost actions were related just to the labor savings. And other actions we got from our suppliers in terms of price cuts. If we do renegotiate contracts we do include that in cost savings initiatives. But the sheer price of drops in aluminum we do not count that in terms of our annual savings.

Can you give us any idea how much that was, year over year?

Yeah. It was -- in dollars it was a little over $300,000 quarter one last year, quarter one this year -- $321,000.

And given how you fix the price, that's basically what we're going to see every quarter for the rest of the year. Is that correct?

Pretty much. It depends on volume. Obviously the more volume you get the more cash buys we're going to be having. Unfortunately -- fortunately or unfortunately, the cash buy being at the $1,400, $1,500 level, you know, more cash buys will bring that average price down, so it could be more beneficial. But it shouldn't be any more detrimental.

What was the gross margin for WinGuard in the quarter?

It was 36%.

36%. And you had talked a minute ago about the North Carolina facility. You had a nice uptick in the vinyl non-impact in the quarter. Would those sales be coming out of North Carolina?

Yeah, coming -- the actual product shipped out of North Carolina. Those sales could actually -- most of them are out of state, but also they're in the northern part of Florida as well.

That's my question, it's being shipped out of North Carolina. So when I see increases in vinyl, non-impact would be coming out of that plant. Is that correct?

That is correct.

And final question, you talked about North Carolina being breakeven at $45 million of sales. What kind of sales level, what kind of run rate are you at right now, do you think?

Probably close to $30 million, $35 million.

Okay. That's all for me. Thank you.

All right. Thanks.

And we'll take our next question from Nishu Sood of Deutsche Bank.

Hi. It's actually Rob on for Nishu. On the 14% upsales outside of Florida, I just wanted to see -- get an idea of what percent was inside the States versus, you know, in the Caribbean and et cetera?

Well, our international sales, which we call Caribbean, was approximately $2.7 million in the quarter. Inside the state of Florida it was $35.6 million. So that can give you a kind of a dollars. And then outside the state, of course, $3.2 million to get to our total $41.5 million of sales.

Okay. And on -- I think you mentioned the CapEx was around $700,000 this quarter.

(Inaudible).

Is that a good run rate for the rest of the year? I think you had mentioned, you know, around $4 million to 4.5 million -- $4 million to $5 million previously, so it looks you're going to come in a lot under -- below that.

Yeah, we have -- it'll probably be a little higher than that as we move forward in terms of a run rate. It's going to be in that 4.5 million for the year still. That's what we were estimating.

Okay. All right that all. Thanks.

Jeff Jackson. All right. Thanks.

Thank you. And we'll take our next question from Michael Rehaut with J.P. Morgan.

Hey, guys. This is actually Ray Huang for Mike. Just wondered if you guys could drill down to the sales a little bit more. I mean, they are down, you know, 24% this quarter, versus starts down to 50%. And then last quarter they were only down 9%, versus starts at 38%. So we're just wondering if you can give any additional color on what impacted sales or the drivers. And then also, just anecdotally, what are you seeing in terms of the competitive landscape in your markets.

You know, I think when you look at the two quarters in comparison, you know, we've been pretty candid by saying we generally outperformed housing starts by 20% to 30%. And some of that's driven by the repair and remodeling market and how strong that market is.

You know, I think in both those quarters we could use that same standard and it varies from a high to a low. So you know, that's pretty consistent with how we performed, looking at housing starts.

I think I would anticipate that going forward. I -- you know, we believe strongly that we still are able to take additional market shares. So as market comes back we think that will help us out.

I think the wildcard there, again -- and we talked with Sam a little bit about it -- is that R&R market and how strong the R&R market is going to be going forward, particularly this time a year. As -- you know, it seems -- again, it seems like -- it looks like, according to the data that we get, that housing prices may not have bottomed, but the decline is definitely not near as steep now as what it was in the past. And we'll see with the money on the sidelines does as they look at those houses and attractive buys that are in place for now.

I think another thing impacting sales this quarter, more so than it did last year's quarter, was discounts. We have -- you know, I had to win larger projects. We went to having to give a higher discount in some cases to get those projects, our products into the market.

We would rather, obviously at this point, have the volume and into our plants to help with overhead absorption. We do monitor those. Obviously, we're not going to take anything that loses money. But we will use price if we have to win a larger project, especially if it hurts our competition.

You know, what we've found is a lot of the local guys try to come in bid projects low because they are hurting, and really they can't stand and lose the volume, much less the project itself. So we've taken that opportunity to go in ourselves and underbid to get the project in anticipation of driving them out of business.

Can you give a sense for what the typical discount you guys are offering on those projects then?

Let me just add a little bit more to that because I don't know that we can give you a typical discount. We have not had to go in and lower our discounts across the board in any of our customers. Our standard discounts are still in place.

But we will bid projects on one-on-one -- one-off basis, based on what we need to get the project. So it's hard to give you just a set answer that, you know, we're going to go in and bid a project at 10% less or 5% less or, you know, even a bigger number than that. We'll look at the project and we will do a cost-up basis and see what it costs us to do the project and make sure that we can pull it off and make a profit on that project.

So it depends on the type of product going in, the size of the product, the ability to manufacture it. And I would say, if you looked at across the board, it would drive a couple points and off of the discount, total discount.

Yeah. And also that -- just keep in mind to is we -- as we sign new distribution channels outside the state, we'll have to fill those channels initially with, potentially, samples. That also comes in play on top line and impacts our top line because we do the samples via, you know, a discounted product, is basically what it is. So as we sign more and more distribution that'll impact top line as well.

But if you really look -- you know, Sam had asked earlier in terms of the trend versus last year and how we saw it progress during the quarter, I'd say nothing unusual. It did increase over the months as we anticipated.

You know, as we enter into the second quarter, again, the second quarter being our stronger quarter, our average weekly has increased. It went from I'd say an average -- you can do math. On Q1 our average sales was about $3.2 million.

During the beginning of the second quarter that average is closer to $3.6 million, $3.7 million. So we have started to see the second quarter bump coming in, and we see that as being driven by that out-of-state initiative as well as Florida.

So you know, some top-line things to just think about going forward would be the discounts we are giving at times, as well as the samples as we start to expand outside the state into different markets. And the traditional trend we've seeing historically, we are seeing.

Okay. I appreciate that. I just have a quick follow-up. I guess some other building products companies have started to raise capital through the [dev] markets. I was wondering if that's something that you guys had been looking at or is that something that you would consider?

You know, at this point -- we went back to the equity market last year and did the rights offering and raised $30 million of capital.

You know, our cash has remained fairly strong. You know, I know it's down from yearend, but it's down literally because of the restructuring payout we made, $2.8 million, as well as the margin calls we've had of $1.2 million. If you take that into account, from an operational basis, we're not using cash. Minimal, if at all.

During -- the worst quarter we've had, you know, in terms of sales and performance has been this first quarter, and we basically broke even in cash. So right now, you know, we're feeling pretty good with $16 million on our balance sheet. We think that will grow.

You know, obviously, if we're thinking this is our worst quarter, we think, you know, from here on, seasonality, we'd say second quarter would be better. We think we can potentially add the cash, obviously keeping in mind our capital expenditures we're going to do and working capital needs. But we think we are okay for now in terms of going back out, it wouldn't be something we pursue at this point.

Okay, great. Thanks, guys.

And we will take our next question from Robert Kelly with Sidoti.

Robert Kelly. Good morning, guys. Thanks for taking my question.

You had alluded to a kind of a breakeven sales run rate in the past. If we now count the new round of restructuring, what do you think your new breakeven level is?

Well, in terms of EBITDA you've got to -- we've got to figure we've got to cover basically interest and taxes -- I mean, sorry, interest and depreciation. So depreciation and amortization was $4.1 million and interest was $1.4 million or $1.5 million. So that would mean, you know, we need an EBITDA of about $5.6 million to $6 million to breakeven.

The sales to generate that, we'd have to back into that based off mix, product mix and customer mix, but it would probably be in that $46 million to -- you know, I'd say $46 million range.

Okay.

$45 million to $46 million range. Again, it depends on discounts. There's so many factors right now, Robert, that affect it. But, you know, I would be comfortable with about a $46 million sales would get us to a breakeven point.

Okay. Yeah. Makes sense. And then -- and just on your debt-to-EBITDA covenant that you need to maintain, is that a net debt to adjusted EBITDA or total debt?

Well, it's actually total gross debt, so we do have cash on hand we could use to pay down debit if we had to. But we look at it in -- every quarter when we start to close the books we look at our gross debt, not taking into account our cash, and compare it to our trailing 12 months of EBITDA and assessing whether or not we're -- you know, we need to pay down cash or we think we're fine.

So at this point, I mean, do you have to go pay down debt or are you fine?

No. I mean, we closed out the first quarter, and we were comfortable. Obviously, we didn't make a debt payment during the first quarter.

Okay. Fantastic. And then just a -- maybe a point of clarification. You talked about the margin calls being a drain of cash in 1Q. Does that get worse or does that ease as we go to the back part of the year with the cash cost being so much lower than where you're hedged? I'm just not totally clear on that.

I'm sorry, Robert. Would you repeat that?

You had a -- you had the margin calls for the aluminum draining cash during the quarter. You said $1.2 million.

Yes. That will actually fluctuate. As the cash [or spot] buy for aluminum changes, we're covered at a certain percentage for '09 and 2010. So those forward contracts are, in essence, revalued everyday based off the current spot price.

So, for instance, just yesterday I -- we got wired $200,000 because aluminum actually went up, so they sent us back $200,000. And actually today I think I saw a wire for $150,000 because aluminum was up again today.

So since the quarter end I know we've actually received over $300,000 back. But that's a back and forth. That's not to say if aluminum goes down tomorrow, we may be wiring that $200,000 back to them.

So rising prices benefit your hedge?

Yeah.

Yeah.

Rising prices benefit the cash portion of the hedge, but it hurts the cash portion of the buy.

Right. Okay.

And right now with our volume, rising prices benefit us. It kind of sounds wild, but, you know, we're hedged at 96% I think it was in the first quarter. So, you know, it actually benefits us.

Okay. I just wasn't totally clear on that. Thanks, guys.

And we'll take our next question from Jim Wilson with JMP Securities.

Great. Good morning, guys.

Hey, Jim.

Good morning, Jim.

Well, I guess first question, Jeff, I was wondering the margins for WinGuard and then -- and how that compared to what it looked like for the other businesses, other business lines.

Yeah. Gross margin for WinGuard was 36%.

Okay.

And then all other was right at 9%.

Okay. So -- okay. So the commodity's been holding in. WinGuard's seeing a little bit of pressure but I guess not too bad.

Yes.

Okay.

A little bit of pressure, but, you know, again nothing unexpected in this market we're in.

Right. Okay. And then I was just wondering how much -- with the 16% pay reduction how much is labor kind of a total operating cost?

Yeah. If you look at our total expanses, labor's probably closed the 36% of our total expenses here. Material being the next highest at a close 35%, 36% as well. But labor's our highest cost.

Okay. So that can have a pretty meaningful impact near-term on some cost savings.

Yes,

Okay. All right. Great. Those were my questions. All right. Thanks a lot. Good job.

Thanks, Jim.

(OPERATOR INSTRUCTIONS) We'll go next to We will go next to Jonathan Sacks with Stonehill Capital.

Hi. Thanks very much. Can you just reiterate again the timing of the cost cuts that you made in the first quarter and what portion of the benefit of that was actually realized the first quarter?

Yeah. The first cost reductions we made was the first week of January. We had approximately $6 million in annualized savings from the first restructuring. We realized pretty much all of that benefit. So is -- you know, if you put that on a quarterly basis that's about $1.5 million we definitely saw in the first quarter because, again, we took it in the first week back from the new year.

The next restructuring was in the first week of March, and we recognized, again, another probably $4 million of people-related savings related to that, so -- $1 million being the help that Rod mentioned earlier. So probably recognized a portion of, say, $3 million, but only one month's worth of that quarter. So, again, I'd say probably $2 million in total cost savings for the new one.

Yeah. And any time that you do that, especially toward the end of the quarter, you get the disruptive effect that, you know, takes place for a week or two. So even though we see a month's worth of benefit, we don't really realize the entire month's worth of benefit that first month.

Yeah, that's true.

great. That's very helpful. Thank you. And then on -- just on the question of covenants, can you just remind me what is the -- what is your leverage covenant and does that decline? And where are you on that now?

Yeah. I mean, our covenant -- we've got several -- the one -- the leverage one is actually five times our debt, which our debt's currently at $90 million.

$90 million gross; about $79 million, I think, net.

$79 million. Yeah. So our debt -- it's five times our debt. That's the one we monitor. It's trailing EBITDA, trailing 12 months EBITDA.

And is that five times requirement, does that tighten later in the year or is that steady?

No, that's actually being locked in. When we went out and did our rights offering last year, we had, at the same time, renegotiated our bank facility. And we locked in that five times requirement through the end of the first quarter of 2010. So basically another it's locked in.

Do you know what the next step down is from that?

Yeah. I think it steps down a quarter point to 4.75, if I recall. I'd have to go look. That's actually filed in terms of it being out there available. I don't have it here with me, but I'm pretty sure it shifts down a quarter.

Yeah, it's a quarter (inaudible).

Thank you. And then just on the topic of the CapEx, you said this year's going to be around $4.5 million. I know in years prior, when the whole business was obviously running at a much higher rate, the CapEx was much higher. Can you give us a sense for what you think is sort of a sustainable, long-term CapEx? And at the current level are you sort of underspending what you need to be on a long-term basis?

You know, I'll jump in on that. There's the maintenance side of the CapEx, which is going to be in the -- you know, it's gone down a little bit, but it's going to be in the $2 million to $3 million range. So that's going to be necessary to make sure that we're just maintaining what we're doing.

As we look at any other CapEx spending, we have changed our philosophy slightly. In the past, I mean, we've been well known for rolling out new products and new product lines. New product launch is anywhere from nine months to two years, depending on the -- you know, how significant that product line is how complicated that product line is. We really haven't rolled out -- other than the R&R product that we've started on over a year ago, and it has really been well received -- we haven't rolled out new product lines as much as we've looked at opportunist product changes, driven more by large projects where we may have to spend $100,000 and maybe a few hundred thousand dollars to tweak or change a product. And then in turn it brings in a $1 million job or we get to bid a couple of different jobs or we'll pay for that project pretty quickly.

So I don't think we've been quite as aggressive on the product line side of things and that's what's brought some of our capital spending down. But we've been equally or more aggressive on the product change side of things to make sure that we're producing the right product for the market.

Yeah. And I guess I'd just add to that. As we look to the maintenance part of that, it'll all depend on the year. You know, last year we put on our roof, had to redo our roof, and that was almost $2 million just for the roof. Okay. And we're not doing that this year, so our maintenance is probably -- instead of $2 million to $3 million, it's probably closer to $1.5 million to $2 million. Again, it depends on the -- what's needed during that year. Obviously, we don't let our equipment go without its required repair and maintenance.

The other part of that is we are spending on areas that will hopefully improve efficiencies and generate returns. We do look at all of our projects in terms of a payback, whether that's system-related projects or, you know, lines to build an actual product.

And I think the last thing I'd add is as we look to sign, you know, new distribution and get into new markets, if a product is warranted in that market that we think we can make or utilize our current equipment to a certain degree but may have to add in order to increase capacity or add a new feature to, you know, a product or what have you, we will do that. You know, and as we march through the vinyl process here, we will be going out with probably more product offerings in vinyl in the future. Assuming we get the distribution and base to support that, we would be going out with more vinyl-related projects on top of what we said earlier.

Do you think a CapEx spend $4 million to $5 million, absent any surprises, is a sustainable level for the next few years if it needed to be?

Obviously if it needed to be, yes. But I think with a growing company, if we -- when this market turns around -- and like I said, as we go into new distribution territories outside this state, we'll have to come up and service those areas with new products. We will be having some CapEx. I would see us closer to the -- on the normal year, $8 million to $10 million of CapEx, which is what we said prior to all the downturn. This is what we tried to run the Company at was an $8 million to $10 million level

You know, obviously, historically we've hit $20 million before when we bought the plant in North Carolina. The year we did the IPO I think we were at $16 million. We've since brought it down.

Hey, Jonathan, when we look at our market and our geographic growth and our really dominant share that we have in the Florida market, I would not anticipate us running at $4 million in CapEx spending. There's a lot of opportunity, and we see that opportunity and we're approached with it quite a bit.

And we'll have to measure that opportunity very well. You know, obviously the market's not what it was years ago. But when we see a pretty quick payback and a pretty strong commitment, whether it's outside or inside the state, those are opportunities that we'll look at extremely closely with our Management team, with our Board, and make that type of decision.

So again, in a company -- if you look at the history of our Company, I would not anticipate, as we continue to grow market share and geographic market, staying at that level.

But to answer your question directly, if we had to stay at that level because market conditions dictate it, we could stay at that level for a few years, but I think it would damage our long-term growth.

Good answer. Thank you very much. And one -- just one last question, which is really a very basic question. What actually motivates an R&R window sale? Is that, you know, a house is damaged and someone's replacing? Is that someone that's upgrading? Is that a builder who buys a house to renovate and flip it? Is it someone who is just upgrading their own homes? A little insight would be helpful.

You could be a sales rep for us because I think you just nailed most of them.

Okay.

When you look at the WinGuard product line, our impact product line, whether it's vinyl or aluminum, it's driven a lot by code and insurance. So you've got to have a product that protects the homeowner. People understand it, particularly in hurricane-prone areas, there is a lot of knowledge and a lot of education that's gone. So that's driven a lot by education, code and insurance.

There's been some new -- the American -- the AARA, and I can't tell you what that acronym stands for accurately right now, but there's a tax rebate for putting more energy efficient -- and there's some really stringent levels that you have to meet for the energy efficiency, but you can get a tax rebate if you change your product out. And that's in effect for 2009 and 2010. And our new R&R product line -- a bunch of those products meet that, so we're seeing sales driven by tax rebates.

And then there's a comfort level. Drafty windows, old windows. You know, frost on the windows, various things; security, safety. People will change out for that product.

And then you kind of nailed that last one also. There are some houses being sold. Prices have come down quite a bit. Traditionally you'll see a lot of -- especially in the hurricane or code-driven area, you'll see window replacement, you'll see roof replacement, and then you'll see the normal things like kitchen replacements or kitchen updates and bath updates. But in a code-driven area, the structural part usually trumps the aesthetic part on the inside.

But when you say the WinGuard sales are driven by code and insurance, if it's an existing house that means they didn't have it before. So what's prompting someone to replace the windows to bring them up to new code, one of the other factors?

Yeah, a number of things. If you're in a particularly -- depending on who you're insured with and depending on the value of your house, in order to keep that insurance you might have to have it upgraded. You might have to have impact protection in place. And there are insurance companies that require that. And it's a sliding scale from the 1st of 2009 through the 1st of 2009. So it may be driven where if you want to be insured you have to put impact protection in place.

The code -- in almost every code-driven area, the code says if you replace 25% of your windows, you have to upgrade all your windows to impact resistance. SO whether that's driven by energy or structural load or impact, the codes going to drive that additional window replacement in those types of markets.

So when I talk about code and insurance driving it, there's insurance rebates for having impact protection in place. There's insurance requirements to have impact protection in place. And there's code for 25% of your windows being replaced to drive the change.

Thank you so much. I appreciate that. It was very helpful.

You're welcome.

Thanks, Jonathan.

And with no further questions I'll turn the call back over to Mr. Jackson for any additional remarks.

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

Thank you. And that concludes today's conference. Thank you for your participation.