PGT Innovations Inc (PGTI) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to PGT's First Quarter 2011 Earnings Conference Call. At this time participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will given at that time.

(Operator Instructions)

As a reminder this conference is being recorded. I would now like to introduce Mr. Brad West, from Corporate Controller. You may begin.

Good morning and thank you for joining us for PGT's first quarter 2011 conference call. I am Brad West, Corporate Controller and I am joined by Rod Hershberger, President and CEO and Jeff Jackson, Executive Vice President and CFO. Rod and Jeff will represent PGT on this morning's call.

Before we begin let 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 to risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements.

Please refer to the press release, our most recent Form 10-K, and other documents followed with the SEC. We undertake no obligation 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 operations prepared in accordance with GAAP, and adjusted 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 May 5, with the SEC. These non-GAAP measurements are not intended to replace the presentation of financial results in accordance with GAAP. Rather, we believe these non-GAAP measurements provide additional information for 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 Jeff will discuss our results in more detail. After their prepared remarks, they will take your questions. With that, let me turn the call over to Rod Hershberger. Rod?

Thanks Brad, and good afternoon everyone. I am pleased to report that we began 2011 with growth in our Florida market. Sales increased $2.6 million or 7.9% compared to prior years. WinGuard increased by $1.6 million or 6.8% with vinyl WinGuard sales up $1.3 million or 43.2% at our new PremierVue line of high end vinyl impact products contributing $500,000 in additional sales. Our vinyl non-impact product, SpectraGuard, performed well with an increase in sales of $700,000. This growth in our Florida market was largely driven by efforts concentrated from our change in market strategy.

At the end of 2010, we decided to focus our resources on our core Florida market, and with these results it appears our strategy change is well underway. The growth in Florida sales is largely offset by a decrease in our out-of-state sales of $1.9 million or 32.3%. Driven by a decrease in vinyl sales of $1.1 million and curtain wall revenue down $500,000. In addition. international sales decreased $600,000 for the quarter. We are addressing this increase in international sales by adding additional resources to further expand our presence. We continue to believe there is a strong international market for both our impact and non-impact products.

We also experienced inconsistent economic and housing recovery with January and February sales lower than prior year, but we are encouraged to see margin sales increase over prior year. Excluding curtain wall revenues, sales in the first quarter were slightly up, 1.6% led by an increase into the new construction markets which increased 15% over a year ago. Sales into the R&R market decreased 3% as compared to first quarter 2010. As a percentage of total sales for the first quarter of 2011, R&R sales accounted for 74% and new construction sales accounted for 26% of sales.

Comparing our first quarter to the prior year first quarter, our adjusted gross margin was 25.8% versus a gross margin of 27.9% in 2010. Adjusted gross margin decreased due to an increase in the cost of aluminum which is up 6% over prior year, an increase in other materials including glass, start of costs associated with our new vinyl door, and PremierVue, and temporary operating inefficiencies related to our plant consolidation. SG&A costs adjusted for the 2011 consolidation charges increased $600,000, due mainly to an increase in selling and marketing expenses of $600,000 and a $500,000 increase in non-cash stock compensation expense. Partially offsetting these increases was a decrease in depreciation expense of $300,000. Driven by our consolidation charges of $2.6 million, we recorded a net loss of $5.8 million for the first quarter of 2011.

Our adjusted net loss was $3.2 million compared, to a net loss of $2.1 million in the first quarter of 2010. Adjusted EBITDA was $1.5 million in the first quarter of 2011, which is down from adjusted EBITDA of $3.4 million from prior year. The decrease in adjusted EBITDA was driven mainly by an increase from the cost of materials, temporary operating inefficiencies related to our plant consolidation, as well as the increase in selling, marketing, and stock compensation expenses just described. With our core market, total housing starts were down 8%. Multifamily starts were up 68%, family starts decreased 21% compared to a year ago. Market conditions remain difficult, and are not expected to turnaround significantly in 2011.

During the fourth quarter of 2010, we announced the decision to consolidate our North Carolina operations into our Florida facility. The consolidation, while disruptive in the short term, will enhance our long-term competitiveness and improve efficiencies. During the first quarter, we filled approximately 250 new positions and have retained new hires at a 90% rate. We will continue to fill positions throughout this year as we complete our consolidation. Transitioning to a centralized location will optimize our manufacturing capacity and logistics, positioning PGT to be a stronger Company, with focus on growing our share within our core wind borne debris marketing areas. With that, I will turn the call over to Jeff who will review the results for the quarter in greater detail.

Thank you, Rod. We are encouraged by the growth in our Florida market, with sales up 7.9% or $2.6 million for Florida. However, offsetting this increase, was decreases in our out of state sales of $1.9 million and international sales of $600,000.

Now let me give you more detail regarding our quarter. We reported net sales of $40.6 million, flat with prior years quarter. Another encouraging note, was sales in the new construction market up 15%. Driven by our WinGuard products with sales into this market of $1.5 million. Sales into the R&R market which represented 74% of our total sales, were down 3%. In total, our WinGuard impact products, both aluminum and vinyl, continue to lead our sales representing approximately 64% of sales for the first quarter.

Total impact product sales which included our WinGuard, PremierVue and architectural systems product lines represented approximately 70% of our sales in the first quarter of 2011, as compared to 67% in the prior year. Florida sales represented 87% of total sales in the first quarter, and 81% of total sales in the first quarter of 2010. Our $2.6 million increase in Florida sales was driven by our vinyl products, including increases in sales of vinyl WinGuard of $1.3 million, non-impact vinyl of $700,000 and PremierVue of $500,000. We have increased vinyl sales into the Florida market by $5 million or 44%, which shows our commitment to sell into a changing Florida market. This includes growth in vinyl sales into the Southeast Florida market, historically an aluminum market of $700,000, or 181% increase.

Once our consolidation efforts are complete, our refocused sales strategy should yield promising results as we expand into our core market. Breaking down our sales drivers for the first quarter compared to 2010's first quarter. We have WinGuard sales of $25.9 million versus $25.1 million, up 3%. PremierVue sales were $1.1 million versus $600,000 in the first quarter of 2010. Aluminum non-impact product sales were $5.6 million versus $5.9 million, down 5%. Architectural system sales were $1.2 million versus $1.9 million, down 32%. And vinyl non-impact and other product sales were $6.4 million versus $6.6 million, down 3%.

Our adjusted gross margin for the first quarter was 25.8% versus gross margin of 27.9% in the first quarter of 2010. Our decrease in gross margin percentage of 210 basis points was driven by an increase in our cost of materials which reduced margins by 160 basis points, and operating inefficiencies related to our plant consolidation, which reduced margins by 50 basis points. Our vinyl non-impact margins are improving as we focus on the Florida market where dealer direct sales are more prevalent and as we consolidate our support structure.

We will continue to work on various initiatives to improve our vinyl impact and non-impact margins including reviewing design, improving labor efficiencies, and reducing costs. Our average cost of aluminum was approximately $2364 for per metric ton during the first quarter. Comprised of spot purchases averaging $2434 per metric ton, for approximately 70% of our needs and hedge purchases, averaging $2196 per metric ton for 30% of our needs. This compares to the first quarter 2010's average of $2070 per metric ton.

As of today, we are hedged at approximately 60% of our estimated needs for the remainder of 2011 at an average of $2406 per metric ton. This includes zero cost collars for 25% of our needs for the second half of 2011. These collars represent a ceiling at $2700 per metric ton and a floor at $2300 per metric ton. Should prices remain within these ranges, these collars would have no effect. Cash price of today is approximately $2600 per metric ton. Our selling, general and administrative expenses were $12.5 million, up $600,000 when excluding consolidation charges from our first quarter of 2011.

Driving this increase was $600,000 increase in selling and marketing expenses, an increase in non-cash stock compensation expense of approximately $500,000 and going forward we anticipate non-cash stock compensation expense to be $1.2 million for the remainder of 2011. Offsetting these increases, we had lower depreciation expense of $300,000 and lower spending in other various categories of approximately $200,000. Excluding consolidation charges and non-cash stock compensation expense, SG&A as a percent of sales increased to 29.3% of sales versus 29.2% in 2010. Interest expense was $1.1 million compared to $1.5 million in the first quarter of 2010. The decrease primarily relates to lower debt, compared to prior year, as we paid $18 million in pre-payments in the last 12 months.

At the end of Q1, the interest rate on our bank debt was 6.75%, based off our credit agreement and its tiered interest rate structure. In the fourth quarter of 2010 we announced the consolidation of our Florida operations -- of our operations into our Florida facility. At this time I'm pleased to report that the consolidation remains on schedule, and is expected to be completed by the end of the second quarter. In the first quarter, we recorded approximately $2.6 million in consolidation charges, related to employee severance costs, and consolidation related expenses. We will continue to record consolidation charges throughout the second quarter of 2011. We currently anticipate incurring between $6 million and $6.5 million in total cash and consolidation charges. Our estimated savings from the consolidation will range from $6 million to $7 million annually of which we estimate we will recognize $3 million in our fiscal year 2011.

During the first quarter of 2011 and 2010, we did not record any tax expense or benefits. We have an effective tax rate of 0% due to the full valuation allowance that we applied to our deferred tax assets. We also expect 0% for the entire year, due to the fact that we do not anticipate generating enough taxable income to exceed our current net operating loss carry forwards. As we become more profitable, we will be in a good position to realize our deferred tax asset by offsetting future income.

We had a net loss in the first quarter of $5.8 million or $0.11 per diluted share, versus a net loss of $2.1 million or $0.05 per diluted share in the first quarter of our prior year. The net loss in the first quarter of 2011 includes $2.6 million in consolidation charges. Adjusting for the consolidation charges, there was an adjusted net loss of $0.06 per diluted share in the first quarter of 2011. Adjusted EBITDA was $1.5 million in the first quarter versus EBITDA of $3.4 million for the first quarter of 2010.

The 2011 EBITDA was adjusted for the consolidation charges of $2.6 million. The decrease in EBITDA $1.9 million is due mainly to the previously mentioned $600,000 in selling and marketing expenses, and the increase in non-cash stock compensation expense of approximately $500,000, as well as increased material prices of approximately $600,000, and labor inefficiencies related to the consolidation. As additional information our first quarter depreciation and amortization totaled $3.5 million. A reconciliation of the net income and EBITDA is included in our earnings release for your reference.

Turning to our balance sheet. At quarter end our net working capital excluding cash increased by $4.2 million compared to the end of the fourth quarter. DSOs decreased to 40 days during the quarter. In reviewing free cash flow for the first quarter, we had an adjusted EBITDA excluding our non-cash stock compensation expense of $2.1 million, capital additions of $800,000, cash paid for interest of $900,000, cash paid for consolidation expenses of $3.1 million . And we used $4.2 million in working capital mainly related to bonus payments previously accrued for, and our increase in accounts receivable.

In addition we received $600,000 from the Sarasota County to facilitate our consolidation. And we used $200,000 related mainly to initial margin placements, resulting in cash on hand of $15.5 million at the end of the first quarter. The funds received from Sarasota County, will be recognized over five years in accordance with the performance period in the agreement. Our net debt and corresponding leverage ratio at the end of the first quarter of 2011 was approximately $34.5 million or 2.2 times. This compares to net debt of $28 million at the end of last year.

You may have noticed that our long term loan is now classified as current on our balance sheet. This is due to the fact that the term loan is due within one year, on February 14, 2012. We are currently in the process of refinancing the loan and we expect we will be successful although no assurance can be made in that regard. It appears that 2011 will continue the long slow recovery. With the tax to credit expiration, commercial softness, vacant housing inventory and the remaining uncertainties surrounding our economy, we are off to a sluggish start in 2011. Medium housing prices are now back to 2001 levels, approximately 18% of homes in Florida are vacant. Foreclosures are expected to hit an all-time high in 2011 before dipping and dropping into 2012 and permits continue to remain low.

2011 represents a year of transition for our Company. As we refocus our resources on a core market of Florida and the Coastal areas from the mid-Atlantic to Texas, and consolidate our North Carolina operations. These actions which will allow us to better serve our customers needs within these markets, are not without pain. We are trying to minimize the impact of this consolidation of our customer but are highly aware it is felt. We are in a solid position to continue to lead our core market of impact windows and doors and to lead our market in this increasing usage of energy-efficient vinyl products. This is a result of the dedication of our employee to maintain exceptional customer service and to think strategically, as well as the loyalty of our customer base during this time. With that, let me turn the call back over to Rod. Rod?

Thanks, Jed. The increase in our Florida sales during the first quarter of 2011 reflects our continued focus on serving markets which have the greatest potential to drive long-term profitable growth. Long-term, we believe that the impact resistance and energy-efficient vinyl market will grow, and we will expand our presence in this market. During this market downturn, we've expanded our product lines and adjusted our internal structure to quickly take advantage of opportunities as market conditions improve. During the first half of 2011, we are moving our product lines from Salisbury facility to Venice.

Our employees have worked around the clock to keep the move on schedule and to ensure the long-term success of our Company, and commitment to our customers. I'd like to extend a special thanks to those teams. I believe we have the right market focus, the right strategy to serve our customers, and the right people in place to grow our Company. I thank all our employees and our customers for continuing to believe in us, commit to our strategy and outperform our expectations. With that, I'll conclude, and Jeff and I would be happy to answer your questions. Mary if you could get the first question, please.

Thank you.

(Operator Instructions)

Our first question comes from Sam Darkatsh from Raymond James.

Jeff, Brad, good afternoon.

Hey, Sam.

Three quick questions. It looks like your non Florida sales now are running at about $5 million quarterly run rate. What would you anticipate that run rate be -- would be at year-end once everything is -- is fully cycled through?

When we initially looked at pulling out of those markets we were anticipating walking away from potentially $10 million in out-of-state sales. We are tracking -- I would say we are tracking to that anticipation. It has been faster and been slower. What we have seen is a obviously a bigger impact, or pickup rather in our Florida vinyl sales than anticipated. But, in terms of pulling out of the out-of-state markets, it is going right to that $10 million or so.

Okay, so it shouldn't deteriorate further sequentially from here. It would just go on normal seasonality from the $5 million run rate in Q1?

Yes. It would probably be normal seasonality.

Just a reminder, Sam, Q2 and Q3 for that market is typically a little bit larger than Q1. And that gets skewed a little bit by some of the product mix that we serve in that market but typically Q2 and Q3 are a little bit larger. We are seeing a pretty good uptick though in our impact sales. So that's going to also skew that little bit. We are selling from impact product into that Coastal markets outside of the State of Florida.

Got you.

That's what's hard to estimate that Texas all the way up through the East Coast. Those sales are starting to increase probably more so than we initially had planned.

So the raw material impact for the quarter, if my math holds, I guess -- about $400,000, $500,000 from aluminum, is that about right?

Versus last year? That is correct.

Now, how does that look like on Q2 and Q3 versus that Q1 delta?

Right now, our second quarter the spot price right now is running at about $2600, which is slightly higher than the first quarter spot purchases were. But our coverage in the quarter is relatively the same. So I am anticipating it's going to be a little bit more detrimental. It's hard to put a pin on that because second quarter is a more volume intense quarter for us. So in terms of dollars it could be an extra $150,000. Again, that depends on volume.

It's going to be one that we have to watch real closely. The last couple of days aluminum prices have dropped considerably. The answer might have been different three days ago than it would be right now. I think for the rest of the year we are about 60% covered, we weren't quite that well covered in the first quarter, but we're covered at a little higher dollar amount.

I guess that's the $1 million question for us, for me at least. You have pricing going through, you have aluminum and input changes, you've got additional volumes coming both from normal growth as well as seasonal growth. How should we look at sequential gross margins then, Jeff?

In terms of the expansion, obviously going to expand those, second quarter typically volume makes that possible because of fixed overhead leverage. We get out of volume. Offsetting that will be some aluminum. It is going to be hard for me to put a percentage out there for you. I do think we will expand our margins. Especially once the consolidation of our North Carolina facility is complete. We are right in the thick of that, I would say we are - try to put a percentage complete on that, I would say we are about 85% complete. With that consolidation. And on track to finish it in June. So we've got a lot of different moving components to your thoughts there, Sam. But I do expect our margin to expand, especially if we hold the product mix we are seeing in the first quarter. We should actually -- sequentially, in terms of the second quarter it will be more volume driven, but I'm hoping by the third quarter with the consolidation over, we will start recognizing those benefits because so it can be, not necessarily volume driven by performance leverage driven.

With the expansion, the sequential expansion from Q1 into the summertime, would that be both WinGuard and non-WinGuard, or impact and non-impact, or would that primarily one or the other in terms of the incremental expansion in the gross margin?

It will be both I think, because again we are bringing in those -- the non-impact vinyl into our Florida market. It's what's growing. And we are cutting out the cost to the support structure for that by that by leaving the Carolina plant. So I think that will actually see expansion in that non-impact vinyl margin as well as volume driven expansion for our impact products.

Sam, I'm not sure I think we shared it before in one of our calls but we're bringing about 65% of the products we manufacture in Salisbury back into the Florida market. And we're walking away from some of the sales that weren't coming back into the Florida market. So when you look at it from a logistics point of view we get some benefit there. Although oil hasn't been real friendly to us in the first quarter. Our transportation costs have been held in line real well.

Since it's largely under one roof, is it going to be difficult to break out to parse out gross margins by business line going forward or is it still going to be with allocations and such, you are able to parse that out?

We are probably going to -- the reason I mention on this call, impact versus non-impact, we are going to start skewing our internal views. To impact versus non-impact versus product line top margin. Again, we -- we're hesitant to give out product line margins because of the competition. Quite frankly. It's things we don't necessarily like to disclose. And internally we view it as impact and non-impact. We obviously want that mix to be more impact and we want to leverage our fixed cost as best as possible to increase margins on both.

Got you, thank you much.

Thanks, Sam.

Thank you.

(Operator Instructions)

Our next question comes from Michael Rehaut from JPMorgan.

I had a quick question about the Florida vinyl market in terms of competitive landscape. Can you talk about sort of what your market share is in Florida right now and how you expect to expand that market share? Over the next couple of quarters and into next year?

I'm probably going to struggle a little bit with that exact number. We haven't done a market share study for the last -- over the last year and we are seeing a pretty good sized shift in market demand between aluminum and vinyl. So I think I'd give you not real accurate information if I try to give you the exact vinyl market share because first we have to really get our arms around that big shift. And it is fairly significant. We are seeing a quicker move to vinyl than -- maybe not been expected, but probably more so than we predicted in a short period of time. We've developed some new products, some new doors and some new windows for that market and they've been extremely well accepted. We're seeing that grow quite a bit. I don't know that I could really give you an accurate number for market share of vinyl. There's areas of the state where I think we have a pretty dominant market share, there's other areas of the state where there's a lot of players there.

Okay, great. Then you talked about the international opportunity. Can you expand on that a little bit more?

Yes. We think there's opportunity particularly in the Caribbean and Central South America. All the areas that are threatened by storms or whether. And we are seeing, we are seeing growth in that market. It has been affected by the downturn in the economy but not necessarily as dramatically as what the Florida market, if you look at the hard-hit areas of the US. So, we think that's an area for growth. There's not a lot of code driving parts to that market, a couple of the countries have some good code but most of it doesn't have code. A lot of it is driven by insurance. And that's a pretty good driver for us if insurance is dictating the people have to put impact protection in place. We can sell a lot more impact product, and we are seeing some of our -- some of our distribution in that area now, stocking impact products that never stopped impact product before. So, we think there's just an opportunity there to continue pushing that and making sure people are aware of what happened and how it to protect their homes.

Plus we are obviously, that's been our core international market. We are also trying to expand into the Central and South America as well. Looking for new channels there. And finding that there are some opportunities. So we are optimistic about those areas as well.

In terms of Central and South America is that still sort of in the infancy stages where you guys haven't really gone too much of that market yet or -- I guess what stage in the process are you going?

Right now we are developing relationships within those markets that could potentially carry our project or new distributors for our product in those areas.

Okay, got it. And then just last question, terms of the pricing increases that you guys mentioned would be effective in April. Are those still roughly in the 4% neighborhood? Are you guys seeing for that pricing to stick as well?

They are actually -- they are effective in March, so we've got some benefit of that already in the first quarter. Not much but some. And those have stuck.

Okay. Great thank you.

You bet.

Thank you. I would now like to turn the conference over to Mr. Jeff 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 call me. Have a great day.

Ladies and gentlemen this does conclude today's program you may now disconnect and have a wonderful day.