PGT Innovations Inc (PGTI) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your PGT second quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to introduce Mr. Brad West, Director of Finance and Control. You may begin.

Good morning and thank you for joining us for PGT's second quarter 2011 conference call. I'm Brad West, Corporate Controller; and I am joined by Rod Hershberger, President and CEO; and Jeff Jackson, Executive Vice President and CFO (inaudible) this morning's call.

Before we begin, let me remind everyone that today's 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 August 3 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 August 3 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 second quarter, then Jeff will discuss our results in more detail. After their prepared remarks, we will take your questions.

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

Thanks, Brad. Good morning, everyone. During the fourth quarter of 2010, we announced the decision to consolidate our North Carolina operations into our Florida facility. All manufacturing lines have been moved, and we have filled approximately 400 new positions. These new employees, along with our existing ones, are working hard to produce high-quality products with industry-leading lead time, which is no less than we or our customers expect from PGT.

Vacating a 400,000-square-foot building and consolidating all of the production lines into our existing North Venice facility has been a herculean task, and I congratulate our team for accomplishing the move on schedule.

Sales in the second quarter decreased $3.8 million or 7.8% from a year ago. This includes a reduction in WinGuard sales, which were down $1.8 million or 5.9% mainly as a result of temporary capacity constraints. For example, in April of 2011, our vinyl WinGuard lines were able to produce approximately 50% of the units that we produced in April 2010. This was due to the shutdown of those production lines in North Carolina, to move to Florida and the subsequent ramp-up of the lines. As a result, the lines could not meet demand, and vinyl WinGuard sales were down $400,000 or 8% from prior year.

That particular product line had seen year-over-year sales growth in each of the previous four quarters, and we believe this trend will continue. I am pleased to report that we have experienced substantial improvement on these lines due to the efforts of our employments and leadership. In June, that line produced 90% of the units produced in June 2010. We returned to normal production capacity on these lines in July.

Although our aluminum WinGuard lines did not move from North Carolina, production was negatively affected by the increased pressure on our glass operations. In order to meet demand, we extend our lead times during April. This increase in lead time, along with the shift towards vinyl products contributed to the decline in aluminum WinGuard sales, which were down $1.4 million or 6% for the quarter. Lead times for this product line returned to normal, which is ten days at the end of July.

Our vinyl non-impact products, including SpectraGuard, reported a $1.6 million decline in sales or 33%, due both to our decreased efforts out of state, as well as capacity constraints caused by moving those lines during the second quarter. We also experienced a $1.6 million decrease in architectural system sales due to ongoing softness in the commercial market.

Our PremierVue line of high-end vinyl impact products continues to growth with a $1.1 million increase in sales to $2.2 million for the second quarter. The growth of this line shows that consumers in Florida are interested in energy efficiency products meeting the highest structural demand.

In terms of sales by region, out-of-state sales were down $3 million or 39%. This decline was not unexpected as we have intentionally decreased our efforts out of state and narrowed our focus to Florida and international markets. Sales into Florida were down $1.1 million or 2.8% from a year ago due mainly to temporary capacity constraints just described.

International sales have increased 17% over prior year. Our recently added resources are already making an impact in a territory which we believe there is strong demand for impact products. Our decline in overall sales occurred both in new construction, down 11%, and in R&R, down 5%. As a percentage of total sales for the second quarter of 2011, R&R sales accounted for 78% and new construction sales accounted for 22% of sales.

Comparing our second quarter to the prior year second quarter, our adjusted gross margin was 30.1% versus a gross margin of 31.1% in 2010. Adjusted gross margin decreased mainly due to lost absorption from lower sales. This was somewhat offset by lower spending in overhead categories. We also experienced an increase in the cost of materials, including an increase in the cost of aluminum, which is up 18% over prior years. The cost increases have been offset by a price increase announced in the first quarter of 2011.

SG&A costs adjusted for 2011 consolidation charges decreased $1.5 million. Driven by our consolidation charges of $1.4 million and expenses of $3.3 million, which was what contemporary additional labor and scrap expense incurred as a result of the consolidation, we recorded a net loss of $5 million for the second quarter of 2011. Adjusted EBITDA was $4.6 million in the second quarter of 2011, which was down from EBITDA of $5.3 million from prior year. The decrease in adjusted EBITDA was driven mainly by lower sales volume, offset by decreases in various spending categories.

Within our core market, total housing starts were down 5%. Multifamily starts were up 9% but single family starts decreased 8% compared to a year ago. Market conditions remained difficult and are not expected to turnaround significantly in 2011.

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

Thank you, Rod. This past quarter was very busy for us at PGT. I would like to start by highlighting two significant events that happened during the quarter, one being the refinancing of our term loan, the other being the consolidation of our North Carolina operations into our Florida facility.

We successfully refinanced our long-term debt, which was going to be due February 2012. The new credit agreement was included as an exhibit to our 8-K file with the SEC on June 23, 2011. Some highlights of the advantages provided by our new agreement over the prior agreement include the extension of a due date to June 2016, a reduction of our interest rate on the debt by 100 basis points to 5.75% initially, with a potential for further improvement as leverage decreases.

In conjunction with the refinancing, we paid down our outstanding debt by $2 million, bringing our term loan to $48 million. With the closing of this new facility, we have adequate resources and liquidity and reasonable covenants that should provide flexibility for future growth. Second, a major portion of our North Carolina operations were moved in March, April and May, including the vinyl product lines in glass plant operations.

With the majority of our move complete, we have turned our focus to improving operational efficiencies and better serving customers. The impact of the move, which involved over 120 truckloads of equipment and inventory relocation and the hiring of an additional 400 people in Florida resulted in excess labor hours, overtime, training and material usage that exceeded our expectations.

We highlighted our estimate of that excess totaling $3.4 million in our press release within the reconciliation of non-GAAP financial measures under manufacturing efficiencies. We also recorded $1.4 million in consolidation charges for employee severance cost and other related moving expenses in the quarter.

We discussed and agreed upon our method of calculating these charges with our creditors for the purpose of calculating our adjusted EBITDA for bank leverage reporting purposes. To date, including charges for the fourth quarter of 2010, we have recorded $9.4 million of consolidation and excess operational charges, and we are now anticipating incurring between $11 million and $12 million total, versus our original estimate of $7 million in total cash consolidation charges.

Our estimated savings from the consolidation will range from $6 million to $7 million annually, of which we estimate recognizing $2.5 million to $3 million in our current back half of fiscal year, beginning in the third quarter. Many of the items which caused delays and excess costs during the quarter have been addressed by the end of the second quarter. We continue to make adjustments to improve the operations and to get PGT back to the level of operating performance that we are known for in the marketplace.

While we continue to make improvements into the third quarter, preliminary July results indicate excess labor and materials have shown significant improvement in our trending to decrease by 55% to 60% of what we experienced in the second quarter. As our employees become more seasoned, we expect this positive trend to continue through the third quarter, and we expect to perform at our prior operating measures by the beginning of the fourth quarter.

Moving on to operational results, let me give you more detail on our second quarter. We reported net sales of $45.2 million, a decrease of 7.8% from prior year second quarter. Sales into the R&R market, which represented 78% of our total sales were down 5%, mainly due to lower R&R WinGuard sales. In total, our WinGuard products, both aluminum and vinyl, continue to lead our sales, representing approximately 63% of sales for the second quarter.

Total impact product sales which include WinGuard, PremierVue and architectural system product lines represented approximately 72% of our sales in the second quarter of 2011, as compared to 69% in the prior year.

Florida sales represented 85% of total sales in the second quarter and 81% of sales in the second quarter of 2010. Sales into Florida decreased $1.1 million in the quarter due to $2.1 million decrease in WinGuard sales, offset by an increase in our PremierVue sales of $1.1 million. The increase in PremierVue sales was driven by sales into Southeast Florida, typically an aluminum market, which was up $1 million.

Breaking down our sales drivers for the second quarter compared to 2010's second quarter, we have WinGuard sales at $28.7 million versus $30.5 million, down 5.6%. PremierVue sales were $2.2 million versus $1.1 million in the second quarter of 2010, up 100%. Vinyl nonimpact sales and other product sales were $7 million versus $8.5 million, down 17.7%. Aluminum nonimpact product sales were $5.7 million versus $5.8 million, virtually flat. Architectural system sales were $1.5 million versus $3.1 million, down 51.6%.

Our adjusted gross margin for the second quarter was 30.1% versus gross margin of 31.1% in the second quarter of 2010. Our decrease gross margin percent of 100 basis points was driven by a decrease in fixed-cost absorption due to lower sales, which reduce margins by 210 basis points, an increase in the cost of materials, including aluminum, which reduced margins by 180 basis points. This was offset somewhat by the impact of our price increase, announced in the first quarter, which increased margins by 210 basis points, and a reduction in overhead spending, which increased margin by 80 basis points.

Our average cost of aluminum was approximately $2,400 per metric ton during the second quarter, comprised of spot purchases averaging $2,588 per metric ton or approximately 43% of our needs. And hedge purchases averaging $2,264 per metric ton for 57% of our needs. This compares to second quarter of 2010's average of $2,036 per metric ton.

As of today, we are hedged at approximately 60% of our estimated needs for the remainder of 2011 and an average of $2,442 per metric ton. This includes zero cost collars for 22% of our needs for the second half of 2011. The cash price as of today is $2,540 per metric ton.

Our selling, general and administrative expenses were $12.6 million. Excluding consolidation charges of $218,000, our SG&A costs were $12.4 million, which was down $1.5 million compared to second quarter of 2010.

Driving this decrease was lower selling expenses of $300,000, lower indirect labor costs of $300,000, lower bad debt expense of $200,000, lower depreciation of $200,000, and a $400,000 decrease in noncash stock compensation expense.

Excluding consolidation charges and noncash stock compensation expense, SG&A as a percent of sales decreased to 27.4% of sales from 28.4% of sales in 2010. Interest expense was $1.1 million compared to $1.3 million in the second quarter of 2010. Interest expense was lower by $200,000, due mainly to lower debt levels, outstanding during the quarter, and our lower interest rate for the last part of the quarter. The resulting 100 basis point reduction in interest rate results in savings to our Company of approximately $480,000 per year at our current debt levels.

Other expense of $460,000 for the second quarter of 2011 included a $420,000 write-off of deferred financing costs from the previous credit agreement. During the second quarter of 2011, we did not record any tax expense or benefit. We have an effective tax rate of zero due to the full valuation allowance that we apply to our deferred tax assets.

We had a net loss in the second quarter of $5 million or $0.09 per diluted share, versus a net income of $1,000 in the second quarter of our prior year. The net loss in the second quarter of 2011 includes $1.4 million in consolidation charges, $3.3 million in excess operational charges and $400,000 in write-offs or deferred financing costs, adjusting these charges net income for what was $121,000 for the second quarter of 2011.

Adjusted EBITDA was $4.6 million for the second quarter versus EBITDA of $5.3 million for the second quarter of 2010. The decrease in EBITDA of $615,000 is due mainly to the impact of lower sales, offset by the savings and spending categories previously mentioned. As additional information, our second quarter depreciation and amortization totaled $3.5 million. A reconciliation of the net income and EBITDA is included in our earnings release for your records.

Turning to our balance sheet. At quarter end, our net working capital, excluding cash, increased by $300,000 compared to the end of the first quarter. DSOs came in at 41.2 days during the quarter. And reviewing free cash flow for the second quarter, we had adjusted EBITDA, excluding $500,000 of noncash stock compensation expense of $5.1 million. Capital additions of $900,000. Cash paid for interest of $1 million. Cash paid for consolidation expense and excess operational cost associated with the consolidation of $5.9 million. Cash paid for debt fees related to the refinance of $2.4 million. And we used $300,000 in working capital.

These items, along with a $2 million debt payment and a few other items resulted in cash on hand of $7.7 million at the end of the second quarter. Our net debt and corresponding leverage ratio at the end of the second quarter of 2011 was approximately $40.3 million and 2.8 times.

There are many factors affecting the economy and our industry, including high unemployment, a sagging housing marketing and uncertainty regarding our country's physical health. While these factors are outside of our control, there are several items that we can control, including complete the training of our new employees and returning to our normal operating levels. Continue to capitalize on Florida's market shift to vinyl, as we have done in the past with our PremierVue product and other products we launched.

And lastly, serve the customer in a way that only we have been able to do in the marketplace for the past 30 years. We are focused on these areas as we enter the back half of 2011.

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

Thanks, Jeff. We faced many challenges during the quarter operationally as a result of the consolidation. We are working through these challenges and already see improvement. Our products and customers are lined up nicely for the future. We are leading the charge into the Florida market, including the Southeast. We continue to be the dominant play in Florida and are expanding our internationally.

Lastly, we are positioned well to take full advantage of savings and improved focused granted by the consolidation. To all the new faces at PGT, welcome. We are glad you are here, and we look forward to a long relationship together.

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.

(OPERATOR INSTRUCTIONS) Our first question comes from Sam Darkatsh from Raymond James.

Good morning, Jeff, Brad, this is actually Josh filling in for Sam. How are you?

Hey, Josh.

Hey, Josh.

How you doing?

Good. Just wanted to get your thoughts on how the quarter shook out, versus your own expectations going back when we were last speaking.

Yes. I think throughout the call we had talked a lot about the consolidation and some of the struggles we had bringing everything in. And I -- yes, I think we're a little disappointed in ourselves and our -- operationally how we handled the consolidation, so it kind of breaks into two pieces. We really are experts at moving lines and facilities, and we were able to make the move in time, on time, on schedule, bring everything into this plant, and it was a huge task.

I mean, you think about taking a 300 -- almost a 400,000-square-foot building and moving it to another 400,000- or 500,000-square-foot building.

The scheduling of our product lines and the different product it made in North Carolina versus Florida was a little harder to integrate, particularly from the glass side, than what we had anticipated. And you know, hindsight is always 20/20, but we had some struggles there that we hadn't anticipated, so we're disappointed with our performance with that portion of the move.

Pretty proud of our folks and how quick, once the move was done and things stabilized a little bit, how quick they turned that out and were able to get the customer demands and get lead times back to where they were and start hitting our traditional 99% plus complete on time delivery.

So it was a tough quarter. A little bit more work consolidation wise than we thought. And we didn't give you, I think, the right flavor, after Q1's call, on how that would play out. But all in all, we're satisfied with where we're at. We're not happy with how we got there.

Okay. I appreciate the color.

Thank you. Our next question comes from Michael Rehaut from JPMorgan.

Hi, guys. This is actually Will Wong on for Mike. How are you?

Hey, Will. Good. How are you?

Good. Just a quick question. From a seasonality perspective, it looks like 2Q is typically our strongest quarter. Do you think that in the second half of this year there'll be anything different that's (inaudible) about pace the second quarter?

You know, it's tough to estimate the true impact the consolidation had on the second quarter. We know it impacted it, and we know our second quarter is typically our strongest sales quarter. So with that said, I don't think it's unreasonable to, you know, imply that the third quarter will be at least as good as the second quarter and potentially better. Because again, we were impacted -- as Rod had mentioned, we did change some lead times for our major product, WinGuard.

We are adjusting that -- we have already adjusted that lead time back down. We do have the vinyl WinGuard platform back up and running and can meet our lead times there. So you're talking major contributors to our top line are performing like they did in the past. And I do think our third quarter will not be worse. Potentially as good if not better than our second quarter. And I know we typically don't like to give guidance, but we do feel the second quarter was unfortunately impacted by the timing of the move.

Yes, well, Jeff hit the capacity constraints pretty well. Those are pretty much gone now. They affected us in Q2. I think the other thing that we've got to make sure everyone is aware of is we've (inaudible) a lot of the northern -- we call it the northern market, the out of Florida market. So we're focused more on Florida and internationally.

And that seasonality that you see from outside of Florida is a little bit greater than outside of the Florida market. Don't know that I'm ready to tell you exactly how that's going to play out, but that will make a difference in the seasonality that you've seen us, particularly as we hit Q4 and Q1, typically the slowest seasons out of state, which were markets that we're not doing a lot of volume in right now. So I think the rules have changed a little bit going forward.

Okay, very good. Also in terms of Florida housing starts, I know they sell 5%, and single family started to sell 8% this quarter. What are your thoughts on Florida housing starts over the next couple of quarters and also into 2012? Are you guys budgeting for an increase in housing starts this afternoon?

Boy, if we knew the answer there, we'd probably be in your shoes and not in ours. We'd be predicting what was going to happen to the market. At some point, demographics kind of dictate that housing starts are going to have to pop back up because if you look at household formation, you look at the age, both the upper -- the older folks that are here and the younger family formations that are here, there's some pretty good drivers of driving some housing starts and driving some things happening again. And you have to balance that against that glut of foreclosures.

You know, it's slowed down some, but Florida is leading the nation right now in foreclosures. There's a lot of REOs out there that I think are -- the banks are being pretty careful about dumping them not he market and driving prices down. And we've got to get through those, which gives some inexpensive houses for people to buy.

Hard to predict what housing starts are going to do. They really can't drop a whole lot more. They're down 90%. They've been down 90% in our market, and so there's not a lot there, so any move is welcomed news. If you put me on the spot and make predict something, I say 2011 we're not going to see a significant increase, so I think it's going to be relatively flat, maybe a little worse. 2012, I think things come back a little bit but not dramatically.

Yes, and what the -- I'll just add to that. Luckily, new construction only represents about 22% of our business as of the end of second quarter, so it's meaningful but it's not. It's probably more of an indicator of overall confidence in the economy that we're looking for. And once those starts start to rise, that will impact obviously our entire business just from a consumer confidence standpoint.

Great. In terms of your budget, you guys are basically budgeting flat to -- maybe a little bit worse in 2011, and then in 2012 just a little bit of growth, is that safe to assume?

When we started out the year, we were actually thinking 2011 was going to be up a little bit. 2010 was a better year housing start wise than 2009, and we were thinking that there'd be a little bit more consumer confidence and things would start bouncing back. I think the debt (inaudible) has taken its toll on people. There's the lack of confidence. Construction jobs in Florida dropped again in the past quarter. So there's still a lot of -- I think there's still a lot of angst to work through, and we're slowly but surely working through that, and things will get better, but not quite as fast as maybe we had anticipated when the year began.

Okay. And just a couple of housekeeping notes. What were your WinGuard margins for the quarter?

WinGuard margins were 41%.

Okay, great. And in terms of the zero percent tax rate, because of the DTA, are you guys assuming that in 2012 that you'll also have roughly a zero percent tax rate because of that?

You know, I'd love to think we'd actually start utilizing some of those deferred tax assets in 2012, so potentially a zero tax rate because of that, but that's hard to tell.

Okay, great. Thank you, guys.

Thanks, Will.

Thank you. Our next question comes from Rob Hansen from Deutsche Bank.

Hey, guys. Just a question on -- so you're expecting a little bit extra in sales, right, as a result of the kind of delayed orders, so that should kind of hit in 3Q. Another thing in 3Q, should we also be expecting that an extra $2 million to $3 million charge, or is that going to be spread out into 4Q as well?

Just initially on the delayed orders that you were talking about, I don't -- in the business we're in, I don't think we see a lot of delayed orders. We saw capacity constraints that affected our sales in Q2, but as capacity constraints are gone, but that doesn't mean that orders were just pushed out longer. When a house opening -- when there's an opening there, you've got to fill that opening, and I think it cost us in 2Q. That's been taken care of.

I'm pretty proud of our sales team that as we look at our customer base and going through some of the struggles that we went through with extended lead times, we didn't lose customers. Our customers believe in us and we're back to operating like we were before, so I think that starts bumping sales up and lead times coming down starts helping things out also.

Yes, I would just add to that. Some of those were definitely probably lost opportunities, so just like Rod said, if you got a house or if you want to remodel, they may just go ahead and do it. Some of them were delays, I mean, so we will pickup something. It's hard to quantify what that is. And obviously Q2 is our normal -- is normally our highest quarter, so it's hard to tell how much of that actually gets pushed off. There were will be something of that.

In terms of the actual charge, I'm thinking, again, based on very early dry results, you know, third quarter, I would expect it to come in around $1.5 million. If it's north of that, I'll be disappointed. If it's south of that, I'm going to be happy. So probably about another $1.5 million of these operational inefficiencies will flow through in the third quarter as compared to what we saw in the second quarter.

Okay. And then just, you know, now that you have this kind of consolidation almost complete, how do you guys think about opportunities in terms of growth going forward, you know, multifamily, that's been a big theme across the country. Do you guys have it -- are you going to be able to benefit from that from an increase in multifamily starts? You know, what else are you -- what other avenues are you thinking about?

Well, Rob, we're pretty happy with our product line and our extensive product line, and we talked a little bit about our architectural systems product line that it's a tough market out there. And that product line really serves the operational -- we call it the operational high-rise market, the condo market, which is perfectly when you're defining the multifamily type market.

Our PremierVue product with the testing loads that it has on it, the structural strength and the thermal efficiency, fits that market extremely well also. So from a positioning point of view, whether it's single family or whether it's multifamily, when it's operational windows that people want, I would argue that we have the most complete and substantial product line that serves this market of anybody out there. So we think we're in the right spot.

We're pretty happy with the headway that we're making with architects. I'm spending a lot of time with them as look at projects on down the road, and of course those are projects that are a year, two years, three years out. So I think we position ourselves extremely well for all that type of stuff. We just now have to wait until that actually happens and it comes out of the ground.

Okay. And then just one last question on the consolidation. Are there any, you know -- I guess looking at it on a comps basis, 2012 over 2011, are there any -- is there -- can you give us like a dollar figure for lost sales just because you're going to be more concentrated in Florida now and less out of state?

Yes, we initially thought we would be walking away, in essence, from out-of-state sales and that $10 million -- yes, well actually $10 million to $15 million, that's probably a good range. But at a minimum, $10 million, top range, just based off of the kind of customer analysis, the markets we were editing and the products that we're serving in those areas. So, you know, I would be comfortable with $10 million. It could go up to $15 million. It just depends on our execution along the coast.

All right. Well, thank you very much.

Thanks, Rob.

Thank you. I would now like to turn the conference over to Mr. Jackson for any additional remarks.

Thank you for joining us today. We look forward to speaking to you all again during our third quarter call. If you have any further questions please call or e-mail me. Have a good day. Thanks.

Ladies and gentlemen, this does conclude today's conference.