PGT Innovations Inc (PGTI) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT fourth-quarter 2012 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Brad West. You may begin.

Good morning and thank you for joining us for PGT's fourth-quarter 2012 conference call. I'm Brad West, Corporate Controller; and I am joined today 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 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 do not relate strictly to historical or current facts; rather they are based on our current expectations and are subject to risks and uncertainties. Actual results may vary materially from those contained in the forward-looking statements.

Please refer to the February 20 press release, our most recent Form 10-K, and other documents filed 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 press release which was included as an exhibit to our Form 8-K filed February 20 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 fourth quarter ended December 29, 2012; then 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 our CEO, Rod Hershberger. Rod?

Thanks, Brad. Good morning, everyone. In 2012 we focused on driving sales in our core markets, utilizing strategies such as promotional activities and partnering with national accounts to take advantage of the growing new construction market. Our focused promotional activities positively impacted Q4 sales, as did capitalizing on our value proposition.

These activities, combined with the improving housing market, drove a sales increase of $9.5 million or 26.6%. The sales of our flagship product line, WinGuard, grew 38% over the prior year.

From a market perspective, new construction sales increased $5.3 million or 59.8%, as a result of improvement in the new construction market and our partnering with national accounts. Repair and remodel sales increased by $4.2 million or 15.7%, as we continue to see signs of an economic recovery beginning.

From a product standpoint, fourth-quarter sales included an increase in our impact sales of 32.8% to $34 million, compared to $25.6 million in the prior year. Our non-impact products, which include aluminum, vinyl, and Eze-Breeze, increased $1.1 million or 10.6% from 2011.

EBITDA in the fourth quarter was $6.9 million or 15.3% of sales, compared to prior year's fourth-quarter EBITDA of 0.6 million or 1.8%. Our gross margin was 35.4% of sales, compared to 25.1% for the fourth quarter of 2011. This increase of 10.3% was driven by additional volume, mix improvement, and continued focus on operational efficiency.

SG&A cost for the fourth quarter of 2012 increased $300,000 or 2.2%. This was driven by a $1.3 million increase in employee-related compensation expense, offset by a decrease of $400,000 in selling materials and advertising expense, $200,000 in reduced transportation costs, and $200,000 in bad debt expense.

Lastly, within our core market total housing starts were up 52% for the fourth quarter of 2012 when compared to 2011. Single-family starts during the quarter were up 42% compared to a year ago.

Some highlights for the year include: sales were $174.5 million, up $7.3 million from prior year or a 4.3% increase. Housing starts improved 40%. WinGuard dollar sales were up 11.8%. New construction sales increased $8.7 million.

Gross margin percentage of 34.2%, up 640 basis points from 2011 adjusted gross margin. Net income of $9 million or $0.16 per diluted share, compared to an adjusted net loss of $0.10 last year. And EBITDA of $24.7 million, up $12 million or 96% versus 2011 adjusted EBITDA.

This improvement in net income and EBITDA resulted from increasing sales in profitable categories, improving manufacturing efficiencies, reducing scrap, and increasing efficiency within our transportation team.

Looking at 2013 and beyond, in January of this year we closed the sale of our Salisbury, North Carolina, facility for approximately $8 million in cash, which provides additional momentum for 2013. With that, I will turn the call over to Jeff, who will review the results for quarter and year in greater detail.

Thank you, Rod. For the quarter, WinGuard product sales grew 38.2% over last year. This was due to promotions and an improved new construction market.

In addition to our focus on sales, we also focused on gross margin, which increased to 35.4% for 2012 from 25.1% in 2011. This improvement is the result of increased volume, operating efficiencies, as well as reduced scrap.

EBITDA was 15.3% of sales, and we generated cash flow from operations of $6.8 million during the quarter. Our quarter ending cash balance was $18.7 million, and we prepaid an additional $3 million of our outstanding bank debt during the quarter, bringing our 2012 total debt payment to $8 million and our net debt to $18.8 million.

During the fourth quarter we announced a stock repurchase program. Through the end of December we acquired 922,694 shares of our common stock at a cost of approximately $3.9 million.

In 2013, we have acquired an additional 134,500 shares at a cost of approximately $600,000. As of today, the remaining authorized amount under our stock repurchase program is approximately $15.5 million.

We remain financially strong and poised to take advantage of opportunities to drive brand awareness and market share gains. We expect the additional investing in our brand to drive volume and our improved leverage to continue to fuel the momentum we've enjoyed in our EBITDA and cash flow growth.

We reported net sales of $45.2 million for the fourth quarter, a 26.6% increase over prior-year quarter. Breaking down our sales drivers for the fourth quarter compared to 2011's fourth quarter, we have: WinGuard sales were $32.2 million versus $23.3 million, an increase of $8.9 million or 38.2%. Sales of nonimpact products were $11.2 million versus $10.1 million, up $1.1 million or 10.6%. Offsetting these increases was PremierVue sales of $1.4 million versus $1.7 million, a decrease of $300,000; Architectural Systems sales of $500,000 in 2012 versus $600,000 in 2011.

Gross margin for the fourth quarter of 2012 was 35.4% versus gross margin of 25.1% in the fourth quarter of 2011. Our increasing gross margin was driven by: our strong sales increase, driving 360 basis points; improved operating efficiencies of 350 basis points; reduced insurance and other spending increased margins by 180 basis points; lower cost of materials increased margins by 110 basis points; and improved product mix added another 30 basis points.

Our average cost of aluminum was approximately $0.95 per pound during the fourth quarter, compared to the fourth quarter of 2011's weighted average of $1.03 per pound. During the fourth quarter of 2012 our cost of aluminum was comprised totally of spot purchases, as our aluminum hedges were not classified as effective for accounting purposes. We did pay $63,000 or approximately $0.02 per pound, which was reported in other income and expenses, for the ineffective contracts that settled during the fourth quarter.

As of today we have 24 aluminum forward contracts that settled at various times through the end of 2013 for 3.9 million pounds, at an average price of $0.94 per pound. These contracts are also ineffective for accounting purposes and will be reported in other income or expense in 2003 versus cost of goods sold.

Our selling, general, and administrative expenses were $11.9 million, an increase of $300,000 from the fourth quarter of 2011. Highlights within SG&A include: $1.3 million increase in employee-related compensation expense; decreases in advertising and selling materials of $400,000; a $200,000 reduction in transportation costs; a decrease of $200,000 in bad debt expense; and approximately $200,000 reduction in other miscellaneous expenses.

Interest expense was $800,000 compared to $900,000 in the fourth quarter of 2011. This decrease primarily relates to lower debt and a reduced interest rate driven by our improved leverage.

We had a small tax benefit during the quarter as we released a portion of our deferred tax asset valuation allowance to offset our regular tax expense. Our net operating loss carryforwards are estimated to be approximately $18 million at the end of 2012.

We had net income in the fourth quarter of $3.2 million or $0.06 per diluted share, versus net loss of $6.3 million or $0.12 per diluted share in the fourth quarter of our prior year. This net loss in the fourth quarter of 2011 includes $6 million in non-cash impairment charges, as well as the $2.3 million tax benefit related to the charges.

Adjusting for these charges, our net loss would have been $3.6 million in the fourth quarter of 2011 or $0.09 per diluted share.

EBITDA was $6.9 million for the fourth quarter of 2012 versus adjusted EBITDA of $600,000 for the fourth quarter of 2011. The increase in EBITDA of $6.3 million is driven by: our increased volume, which added $4 million to our EBITDA; $1.6 million from improved operating efficiencies; $600,000 from reduced insurance expenses; $500,000 from reduced cost of materials; $400,000 from reduced advertising and selling materials; $200,000 from a reduction in bad debt; and $200,000 reduction in transportation costs.

These positives were somewhat offset by a $1.3 million increase in employee compensation costs. A reconciliation of net income and EBITDA, which I have just discussed, has been included in our earnings release for your reference.

Turning to our balance sheet, as of December 29, 2012, our net working capital, excluding cash and assets held-for-sale, was $16 million, a decrease of $400,000 compared to the end of the third quarter of 2012. DSOs decreased 32 days at the end of the fourth quarter, compared to 39 days at the end of the fourth quarter of 2011.

Our free cash flow for the quarter was $6 million, mainly driven by our EBITDA. Excluding non-cash stock compensation expense of $7.3 million, we used $300,000 for working capital; we spent another $600,000 in capital additions; and paid cash for interest was $600,000.

During the quarter, we prepaid $300 million of our debt, bringing our gross debt to $37.5 million as of the fourth quarter end. On January 31, 2013, using proceeds from the sale of our Salisbury plant, we made an additional $7.5 million voluntary payment on our debt. This brings our gross debt balance to $30 million at this time.

In January we continued our growth trend, with sales finishing 22% above prior year. We expect this trend to continue during the quarter.

Our increased cash flow and improved profitability have provided us with new flexibility to take share within our core market of Florida and grow internationally as well. We are investing an additional $1 million in our brand during the first-quarter 2013 in various activities, promotional related, marketing related, such as TV and radio. Our operations are well positioned to produce product to meet the demand of incremental sales, which will allow us to increase profitability by leveraging our current cost basis.

Lastly, our stock repurchase program has reduced the outstanding shares, providing a benefit to our shareholders. As of today our current outstanding shares -- our basic outstanding shares are 52.7 million. With that, let me turn the call back over to Rod.

Thanks, Jeff. Several of the nation's largest homebuilders are reporting increases in new home orders. Our core markets, while still below normal, have grown as well; and we are well positioned to capitalize on market opportunities and gain share.

We expect our first-quarter launch of our new storefront commercial system and entry doors, which features large panes of glass used for retail storefronts and modern residential designs, to provide sales growth as we continue to focus on increasing our product offering and push into this adjacent market. As we head into our busy season, we have added over 60 new team members since January 1 and have more positions to fill.

Our Company is looking to build on our recent successes, and our leadership is implementing strategies which are designed to grow PGT sales and market share. Our employees are committed to deliver on our value proposition and to succeed as part of the PGT family.

In conclusion, we are pleased with our recent performance, excited with our present opportunities, and believe the future will produce increased shareholder value. With that, I will conclude, and Jeff and I will be happy to answer your questions. Mimi, if you could get the first question, please.

(Operator Instructions) Sam Darkatsh, Raymond James.

Good morning, Rod, Jeff, Brad. How are you? First question, regarding the share repurchase: pretty heavy, I guess, in December and a little bit also in January. Although I noticed that with the proceeds of the North Carolina plant you opted to pay debt down as opposed to use that for an additional share repurchase.

How should we read that? How valuation-sensitive are you, Jeff, with respect to your share repurchase plans?

We are not. We look at that, Sam, as an opportunity just to basically reduce the number of shares versus tying it to any certain valuation. Initially we did; but based off what we think the future holds I do, obviously, have a number in mind. We don't disclose that in terms of what we're willing to pay.

But as opposed to using the cash from the sale to do it versus operational cash, I think based off our current trends we should be net cash flow positive by the end of the second quarter. So we are basically using that cash flow, and it has been ample enough to fund our share repurchase program. So, we had the $7.5 million; we thought what better way than to just retire more debt.

Okay. Second question, probably the most encouraging thing I saw -- a lot of the things are encouraging. But the R&R being up well into the double digits in the fourth quarter, that is the first time I think we have seen a positive R&R market for a couple years.

What do you attribute it to now? And what do you think the prospects of that going forward are, based on your visibility and the leading indicators you look at?

This is my opinion, so it is really not necessarily a qualified opinion. But I think when you look at that market and you see housing prices are starting to rise again and there is a little more confidence -- depending on what area, what MSA you're in, you see prices go up year-over-year 7%, 8%, 9%. Some areas may be a little bit stronger than that.

There starts being a little more confidence, I think, in that homeowner that the value added, it is one of the better paybacks. So it's a value added by replacing windows and doors, particularly when you're putting impact in, you're going to get that back out of the house. And if you do choose to live there for a few more years because the value is not quite there yet, you're going to get a reduced insurance cost.

So I think it's -- I tie it more to consumer confidence maybe than anything else out there right now. I know Jeff may have a little different opinion as he talks to people.

Yes, I think that -- I definitely agree with what Rod said. I would add also the fact that the job market appears to be stabilizing and improving in general. Obviously, with new construction coming back into the market, like you pointed out in your write-up of us, 57% increase: that will create jobs.

Typically there is a one- to two-year lag in job creation with home starts. So as those home starts continue into their second year, I do expect the job market to get better and obviously that will lend to confidence.

And also the whole fact that the rental market seems to continue to be on fire, ultimately that is going to flip and it's obviously driving people into new homes even as we speak, just because of the supply/demand there. So again, all positive things that will ultimately lend to the R&R market's success.

Last question and I will defer to others. You noted in your remarks that you went after some promotional opportunities in the fourth quarter. I think you also mentioned that in the first quarter you are looking to spend a little bit more money in selling costs.

Obviously it was effective and has been effective to date. Do you think, however, that if this activity continues more widespread that it might adversely impact pricing?

No. I think pricing of the product itself is steady. We have actually heard of competitors taking price increases. We hadn't done that yet, obviously; but I think pricing is not as big of an issue now.

What is becoming more of an issue is meeting demand and capacity. And, obviously, with our infrastructure that plays right into our sweet spot.

So what we do with the promotional spends to drive the volume, they have been successful. And it will be, as I'd mentioned, at least $1 million more incremental spend during the first quarter. But we really believe that is going to lay a good foundation for us to leverage in the second quarter and third quarter in terms of sales growth.

But, no, I don't think it is going to affect pricing long term. I think pricing eventually, given all the positive indicators, we are going to have some pricing power, if anything.

Yes, to that point, with respect to the leverage on SG&A, so after the first quarter, where you are spending the extra $1 million, should we expect that typical 50% to 65% or so fixed costs to flow through on the SG&A line?

Yes. I mean apples-to-apples if we did the same thing in the first quarter as we did in the second, we'd be $1 million less in EBITDA, again, because of the extra spending. So the margins of the product, the contribution that make up the mix is all still tracking in the first quarter actually as expected and maybe a little better.

So you are going to spend an extra $1 million in the second quarter and then beyond on a year-on-year basis also?

No. We will spend additional in the second quarter, but it won't be the 41 million. The $1 million is the initial seed, if you will.

Okay. All right. Thank you much.

You bet.

(Operator Instructions) Gunnar Hansen, Sidoti.

Hey, guys. I think you guys already mentioned -- could you go over just the growth rate, I guess, so far in the month of January? And I guess give us a little bit more color in terms of the residential breakdown, in terms of what is driving that growth.

Yes, I had mentioned so far through January we had grown at 22% over prior year's January and also expect that kind of percentage to continue as we move through the quarter. The breakdown -- R&R is starting to get better for us, but it's still new construction driven. We are actually hitting some larger projects as well.

In the past we either had one or the other. Now, it seems like we have got a good, steady growth rate going; and we are getting some large projects, both international and Southeast Miami area.

So that is -- I don't have the breakout between new construction and R&R handy. But new construction is going to still be a good driver for us in the first quarter.

A lot of what we saw in January was driven by WinGuard, too. We saw a really nice bump from our WinGuard sales.

The rest of them were relatively flat to maybe down just a hair. But we saw a lot of demand for WinGuard.

We think as those WinGuard sales go up, particularly with some of the larger homebuilders, they will drag along some of the other sales, too, for their projects. So it's -- we are pretty positive looking out.

Yes. To that point, out of the increase year-over-year, 76% was impact related.

Great, great. Then I guess just with some of the advertising campaigns you guys are looking to do, what sort of mediums have you guys had the most success with in the past? And where are you guys looking to distribute some of that incremental spend?

We're actually doing it right now as part of the spend that is happening in the first quarter. We look at the MSAs and we look at households that we can touch, and we realized that our name is pretty well known, particularly in this market. But a lot of it in the first quarter is radio and television advertising in the markets that we want to hit, hitting the right demographics.

And it has been pretty successful for us. We typically would do that later in the year, maybe closer to hurricane season, when awareness is high. We wanted to do it this year early in the year, because we have more people here.

Great. I guess just with some of those incremental people, how many -- what is the workforce and salesforce at this point? What is the level at?

Right at 1,100 total.

Great, great. All right. That will do it. Thanks, guys.

Russ Silvestri, SKIRITAI.

Hi, good morning. A couple questions. One, I don't know if you said it, but the mix of US versus international business, what was the breakdown?

Florida only was about 88% of our sales. International was about 4%. And then the rest is US, but outside Florida.

Got you. Did the margins on the international -- are they comparable to the Florida market?

Yes. Actually international sales may be a little higher, only because typically we don't spend a lot of time down there servicing warranty. Net-net the margins tend to be a little bit more robust internationally.

Then the next thing I was going to ask in terms of lead times, what is the lead time today for a distributor or a contractor who orders windows? How long does it take him to get it? And are those lead times increasing or shortening?

Our lead times really haven't changed in about four or five years. We give our customers a standard lead time.

It may vary a day or two here or there depending on how busy we are. But we set our lead times up so when our customers are out selling products or projects they can quote it to their customer and know that they are going to get their product on time.

We talk a lot about the value proposition, and to us that is one of the most important things we do is -- you order the product, you get -- we a little north of 99.7% on-time complete delivery. So you know when you are going to get it, and you know that ahead of time. So that is pretty important to us.

Yes, in terms of -- like just to give you a number, our lead times range from probably five days standard up to 10 (multiple speakers).

Yes, on our most complicated product it is close to three weeks; on our simplest products it is five days, four or five days.

And everything we do is custom. We don't build to stock.

Good.

With that said, we can turn pretty much most any product in three days if we have to.

Okay. What kind of utilization is the facility running at? I was also wondering how many shifts you're running.

Well, right now we are running one full production shift; and spotted second shift for various product lines.

On the glass side, we are running pretty much three shifts. Not full shifts, but two solid shifts and a skeleton third shift.

In terms of capacity, we are running five days a week, so there is always a weekend. You can calculate into that, as well as additional shifts. So it is really a tough thing to say.

It also depends on the mix. If it stays like the current mix, we're probably maybe 50%.

Rule of thumb the mix is going to change things dramatically. Rule of thumb we are running about a shift and a half. We can go three shifts and we can add weekends if we need to.

So I would say rule of thumb 50%, and it might even be south of that a little bit. So we've got (multiple speakers).

So you think you could run sales -- I mean, I think back in the 2006 time frame you guys got up to like $60 million run rate on a quarterly basis. So do you think you could run that kind of sales level with the capacity you have in place?

Yes.

We were -- yes, we ran over $100 million in a quarter in 2006.

Yes, we can run that. Obviously we would add shifts and with that kind of volume we would add a little bit of infrastructure to support it as well, in terms of salaried people on those shifts.

But yes, this plant can produce, depending on the mix, current mix it can produce $300 million out of this thing.

Then going forward, other than aluminum, is there any reason to think, given the demand, that gross margins should change much, other than improve, in the next two quarters?

Again, not wanting to comment too much forward, but I don't see anything that is going to impact us negatively other than volume.

Okay. All right. That's all I had. Thank you very much.

Thank you. I am showing no further questions in the queue at this time. I will hand the call back to Jeff for closing remarks.

Okay. Well, thank you for joining us today and we look forward to speaking to you again next quarter. If you have any further questions, please give me a call.

And have a great day. Thank you.

Thank you. Ladies and gentlemen, this concludes the conference for today. You may all disconnect and have a wonderful day.