PGT Innovations Inc (PGTI) 2013 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the PGT, Inc. first-quarter 2013 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)

Today's conference is being recorded. I would now like to turn the call over to Brad West. Please go ahead, sir.

Good morning and thank you for joining us for PGT's first-quarter 2013 conference call. I'm Brad West, Corporate Controller, and I'm 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 risk and uncertainty. Actual results may vary materially from those contained in the forward-looking statements.

Please refer to the May 1 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.pgtindustries.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 May 1 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 ended March 30, 2013, 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.

During the first quarter of 2013 sales grew 30.1% to $49.6 million, primarily driven by two factors. First, sales increased in our repair and remodel markets 26% due to improving market conditions driven by macroeconomic factors such as lower unemployment, better access to credit and improved housing prices as well as focused promotional programs targeting our WinGuard products which drove share during the quarter.

Second, new construction sales increased 42% driven by improved market conditions including an increase in Florida single-family housing starts of 50% during the quarter. Florida single-family housing starts are projected to grow at a compound annual growth rate in excess of 30% over the next three years which will bring our core market close to its normalized 100,000 starts per year.

Impact sales grew 39% over the first quarter of 2012 and represented 77% of total sales compared to 72% a year ago. This growth was led by a 40% increase in our WinGuard product line which grew substantially in both the new construction and repair and remodel markets.

The sales and marketing programs ran during the quarter were both dealer and consumer driven and focused on our WinGuard product which drove improved product mix. We also completed the sale of our Salisbury, North Carolina facility for $7.5 million, net of selling costs resulting in a gain of $2.2 million. The proceeds of the sale were used to voluntarily prepay an additional $7.5 million worth of outstanding bank debt bringing our gross debt to $30 million.

Net income from the quarter improved to $5.3 million compared to a loss of $700,000 a year ago. The improved financial performance is the result of the hard work and dedication of our employees including 159 new employees who joined us during the first three months to satisfy the growing demand for our product and to deliver our value proposition.

Adjusted EBITDA, which excludes the gain on Salisbury, was $7.2 million, or 14.5% of sales. This is $3.8 million or 114.8% increase over the first quarter of 2012 EBITDA.

Our gross margin was 35.4% compared to 31.3% for the first quarter of 2012. The increase of 4.1% in gross margin was driven by mix improvement and improved operating leverage resulting from higher sales.

As our revenue grew, SG&A costs as a percent of sales declined from 30.7% in the first quarter of 2012 to 26.3%. In terms of dollars, SG&A costs grew $1.3 million driven by an incremental investment in sales and marketing dollars of $1.2 million to further drive revenue within the quarter and into the remaining year.

Additionally, we had increased employee related expenses of $400,000. These increases were offset by reduced warranty-related costs of $300,000 resulting from improved quality.

Some highlights for the first quarter of 2013 include a significant improvement in our mix of WinGuard product sales, up 40% from the prior year. Gross margin percentage of 35.4%, up 410 basis points from 2012 gross margin. Net income excluding the gain recorded on the Salisbury sale and related tax impact of $3.2 million or $0.06 per diluted share and adjusted EBITDA of $7.2 million, up $3.8 million or 114.8% versus prior year.

I am thankful for the hard work of our employees, both new and tenured, who delivered on our value proposition which drove the positive financial results in the first quarter. I am also optimistic about the opportunity to leverage our sales and advertising campaign which will drive brand awareness in this growing market. With that I will turn the call over to Jeff who will review the results for the quarter in greater detail.

Thank you, Rod. Our WinGuard product sales increased 40% over prior year. This was due in part to the improved market conditions in new construction and repair and remodeling markets as well is targeted sales and marketing programs ran during the quarter.

Our gross margin increased 47% driven by revenue growth, improved operating leverage from higher sales and improved product mix. SG&A increased over prior year primarily due to investing in selling activities and advertising campaigns which fueled our sales increase.

Our $7.2 million in adjusted EBITDA represented 14.5% of sales. Our quarter ending cash balance was $14.3 million and we voluntarily prepaid an additional $7.5 million of our outstanding bank debt during the quarter with the proceeds from the sale of the Salisbury facility bringing our gross debt to $30 million.

Additionally, we repurchased approximately 1.1 million shares of our common stock for approximately $6.1 million. This brings our total investment in our stock to $10 million adding 2 million shares of stock to our treasury. As Rod mentioned, and as many of you have learned from our earnings release, we reported net sales of $49.6 million for the first quarter of 2013, a 30.1% increase over prior-year quarter.

Looking at our results by product line for the first quarter compared to 2012's first quarter, we had WinGuard sales up $35.4 million versus $25.3 million, an increase of $10.1 million, or 40%. Sales of our vinyl non-impact and other products sales were $6.3 million versus $5.6 million, up 12.6%. Sales of aluminum non-impact were $5.3 million versus $5.1 million, up 3% over prior year.

Our PremierVue sales were $1.7 million versus $1.8 million during the quarter, essentially flat. And our Architectural Systems sales were $800,000 versus $300,000, an increase of approximately $500,000.

Gross margin for the first quarter of 2013 was 35.4% versus gross margin of 31.3% in the first quarter of 2012. Our increase in gross margin as a percent of sales of 1.4% was driven by leveraging our increased sales of 390 basis points, improved product mix, mainly aluminum WinGuard, adding 170 basis points.

Offsetting these increases is the impact of temporary inefficiencies in labor associated with hiring 159 new employees to meet the increasing demand during the quarter which negatively impacted margins 150 basis points. Our average cost of aluminum was approximately $0.92 per pound during the first quarter compared to the first quarter of 2012's weighted average cost of approximately $0.98 per pound.

During the first quarter of 2013 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 approximately $19,000, or $0.02 per pound which was reporting in other expense for the ineffective contracts that settled during the quarter.

As of today, we are hedged approximately 40% of our estimated needs through the third quarter of 2014 at an average of $0.92 per pound. The cash price as of today is $0.84 per pound.

Our selling, general and administrative expenses were $13 million, an increase of $1.3 million from the first quarter of 2012. As a percent of sales, SG&A declined from 30.7% in the first quarter to 26.3% during our current quarter.

Highlights within SG&A include an increase of $700,000 in selling activities, an increase of $500,000 in marketing investments and an increase of $400,000 in employee-related expenses. Offsetting these increases was a decrease in warranty-related expense of $300,000.

During the first quarter of 2013 we recorded $400,000 of tax expense. Our tax rate is 7.7% for the first three months ended March 30, 2013, as we released a portion of our deferred tax asset valuation allowance to offset a portion of our regular tax expense.

This rate is based on an estimated annual rate excluding the potential impact of discrete events such as the release of a valuation allowance on deferred tax assets. We do expect to release the remaining balance during 2013.

We had net income in the first quarter of $5.3 million, or $0.09 per diluted share versus a net loss of $700,000, or $0.01 per diluted share in the first quarter of our prior year. The net income in the first quarter of 2013 includes a gain of $2.2 million related to the sale of the Salisbury facility.

Excluding the gain on the sale and the related tax impact, adjusted net income was $3.2 million, or $0.06 per diluted share. Our current shares outstanding total approximately 52 million.

Adjusted EBITDA was $7.2 million for the first quarter of 2013 versus an EBITDA of $3.3 million for the first quarter of 2012. The increase in adjusted EBITDA of $3.8 million is due mainly to $5 million attributable to increased volume and $800,000 from improved product mix.

Offsetting these two increases was the $700,000 impact of temporary inefficiencies resulting from our recent hiring and increased advertising and promotional activities of $1.2 million. A reconciliation of net income and EBITDA which I have just discussed has been included in our earnings release for your reference.

Now turning briefly to the balance sheet. As of March 30, 2013 our net working capital excluding cash was $20.4 million, an increase of $5 million. The increase is driven by an increase in our accounts receivable of $4.9 million.

DSOs remain relatively flat at 32 days at the end of the first quarter compared to 33 days at the end of the first quarter of 2012. Our free cash flow for the quarter was $1.3 million, mainly driven by EBITDA excluding non-cash items such a stock compensation of $1.7 million.

We invested $5 million in cash for working capital, mainly accounts receivable. We paid a $600,000 for capital additions and we had cash paid for interest of $800,000.

Over the course of the quarter we experienced a 22% increase in sales in January compared to our prior year. This was followed by a 33% increase in both February and March over prior year.

The growth experienced during the quarter was a result of improved market conditions in our core markets as well as targeted sales promotional activity. Our expectation is that with improved marketing conditions and our investment in promotions, television and radio advertising we will see solid year-over-year growth in our second quarter. I'm pleased to report April finished 37% up in sales.

We have also hired an additional 125 employees since the beginning of the second quarter bringing total employees hired for the year to 284. We are working hard to get these new employees up to speed but do expect some continued inefficiencies in our second quarter.

With the growth in sales experience so far this year we are now operating at approximately 60% capacity for our manufacturing lines. We are, however, bumping up against capacity within certain parts of our glass operations. We will utilize outside glass suppliers to fill in the gaps and have already begun to consider and implement glass capacity expansion strategies.

As you likely saw, we filed an amendment to our registration statement with the SEC. It is important to note that the amendment clearly states that the Company is only registering shares currently owned by JLL and any sale of these shares will increase our public float and reduce the overhang of a majority owner.

However, it will not have a diluted effect as no new shares will be issued. With that let me turn the call back over to Rod.

Thanks, Jeff. Our markets have shown substantial growth during the quarter and we are well-positioned to capitalize and gain market share. 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 certain the future will produce increased shareholder value.

With that, I'll conclude and Jeff and I will be happy to answer your questions. Jamie, if you could get the first question, please.

(Operator Instructions) Sam Darkatsh, Raymond James.

Good morning, Rod, Jeff, Brad. How are you?

Good morning, Sam.

Good morning.

Great.

I would say congratulations but that implies that the best is behind us so I'll try and keep the congratulations to myself. But very nice quarter.

Thank you.

Thanks.

First off, and these are I guess high-class problems, the inefficiencies that you talked about due to the scrap and the labor costs and I guess you're also talking about having to add some glass capacity, too, what do you peg the duration of those inefficiencies going forward based on your current run rates and the typical learning curve that your labor force has and what have you? How should we look at incremental gross margins and how long the inefficiencies might last?

Sam, typically based off our experience in hiring, which you've hired a lot of people over the last two years with the consolidation, beginning with the consolidation of our North Carolina facility, it takes about six months for direct labor, an hourly employee to really get up to speed and trained. We do take our time in doing that because obviously turnover is an issue.

This is a tough job, it's a manufacturing environment on a hard floor and heavy product. But I am also happy to report we have only about a 10% turnover ratio on that 280 we've hired so far. So we are doing a good job of retention.

And also training. That's the biggest thing, just getting them in here, getting them used to the working conditions, the hours, building the product. And I would say six months, an average person after about six months is up to speed and you'll see those inefficiencies start to bleed back into the P&L and go away -- come to the bottom line.

In terms of scrap, scrap's an ongoing battle in a sense because we're always looking at better ways to utilize our products as they come through the line. And that will kind of mirror that same timeframe although it could be shorter.

People tend to learn how to cut quicker. It's a matter of putting it together and travel through the plant, etc. to get it loaded to a truck that tends to take longer. So I would expect scrap to probably come down a little before you see that direct labor piece come down but on average, I'd say six months.

Six months from the initial hiring though and I'm guessing you're still hiring, though, into Q2. So would it last longer than six months or would we really see that start to bleed off six months hence?

You'll see that in stages. So in other words in the first quarter I believe it was $700,000 roughly the impact on our margins. Obviously, all those people we hired in the first quarter, they're going to become more efficient during the second quarter.

Actually we're already starting to see that some even in April as our throughput, our capacity, increases as they become more efficient and we actually saw that in April. So you'll start to see some of that go away yet we are hiring, like you had mentioned, we are hiring. We hired Monday, Rodney how many -- we hired roughly 20 --

Right around 20 on Monday.

Right around 20 employees on Monday. We probably have open reqs, Sam, you know about 100. That doesn't mean we're going to hire 100, but that's probably what we're looking at over the course of the remaining year.

Okay. And then the 60% utilization, I'm guessing that's hard capacity. What would you peg your crude capacity at this point or how many shifts you're running and how many could you go if you had to go flat out?

We're running one full shift. We're staffing for our second shift which is probably two-thirds the way full.

It depends on which line. Some lines are fully staffed, some aren't but we're probably two-thirds away on the second shift.

No really third shift. And I'm talking production capacity, actually the making of the window.

On the glass side we are running three shifts in our glass plant already and two full shifts with a skeleton third in our IG, our insulating glass plant. So it depends on where you're at in the plant but the main plant, the 60%, was what I was referring to.

We can still make -- add another shift. So we can still make a lot of product out of the plant. We would just be buying more glass from the outside until we expand that capacity.

And I guess the next obvious question is how do you break through that bottleneck on the glass side and what would that free up and then what would the timing of that be?

Timing's rough to say, Sam, because really you know we did experience some of that in the first quarter in terms of having to buy it from the outside. It wasn't much but it was -- it did hit the P&L, I'm going to put a peg of about $300,000, Brad, $250,000?

Yes, maybe $250,000.

Maybe around $250,000 in terms of its impact in purchasing outside glass. But remember we don't walk away from a sale. Our job is to leverage fixed cost so as long as we can get that sale and still make a decent margin, my WinGuard margins in the first quarter were 42.4% on average.

So as long as I can still leverage that fixed cost we're still going to get to sell even though we may be buying some glass from the outside from our suppliers such as Cardinal as an example. In terms of actually expanding that capacity, that's a process we're currently going through.

We've been looking at it for over a month now. I can't give you an exact timeline.

There's basically two areas we're going to expand first -- cutting, the actual cutting of the glass and the tempering of the glass. So those are the two areas we're going to buy machinery for into the future as we look to bring that in-house. But timing, leadtimes on those things, Rod, you know three months to six months?

Yes, three to six months. It depends on how sophisticated you want to be and how high end you want to go. And then we have got to have a place to put it.

Yes, so there's different things going on in terms of meetings and strategies to look at this. And you know it is important to note that in the meantime we're not walking away from any sale, we can always buy glass from the outside.

Yes, we're one of the few companies that, few residential companies, that actually does its own tempering, cutting, tempering and laminating. So we're kind of unique when it comes to that standpoint.

You know our business pretty well, Sam. We're busier in the second quarter and third quarter usually then we are in the first and fourth.

And so we're really hitting it in the second and third quarter is what we're looking at. So we'd be looking at making sure that we have that need covered just for our margin's sake. Not because we can't get the product, it's not that hard to get the product, but for margin's purposes.

Which leads me to my next question perfectly. You just mentioned you don't walk away from a sale. Have you considered raising prices a bit to alleviate some of the throughput pressures you have particularly on the glass side and eliminate some of these learning curve inefficiencies or are you concerned that maybe elasticity of demand or competitive response might not be a good idea?

We'll always look at pricing and consider raising pricing not for the reasons you gave. I will remind everyone that we kind of came through five or six years of pretty tough times and the ability to gain market share is pretty important to us right now, not walking away from a sale.

But we want to look at the pricing in the marketplace and the cost of the inputs and make sure that we're balancing what it costs us for product, what it costs us for labor, what it costs us for benefits we can pass along. But from a manufacturing standpoint, there's plenty of capacity in the main plant.

There's glass capacity that's a little distressed, it's easy to buy so we can bring that in. So we would not raise prices to control throughput. We would raise prices because it gives us better margins.

And I think we'd look at the competitor landscape obviously with share being most important for us right now because of our fixed cost structure we make good margins. And as we look at the competitors' landscape we are hearing of people raising prices, in particular a couple of competitors we know about in the 5%-type price increase range.

We hadn't had a major price increase in a long time. We've had spot price increases on certain products that for whatever reason were low margin, we wanted to bump up that margin or maybe there's some input cost that it changed on it or whatever. So we've had some spot price increases here and there but we hadn't had across the board price increase in a long time.

But we are hearing a lot of our competitors are and actually a lot of the building product suppliers in general whether it's lumber to drywall. I mean, a lot of that stuff we're hearing pricing is starting to come to bear. So that's something we always keep in our back pocket.

Last question and then I'll defer to others before I start to monopolize the call here. The R&R business up really nicely went up high 20s, percentagewise.

I'm looking at the Florida existing-home sales. I think that was up low double digit, maybe 10%, 12% or so in the quarter and that's encouraging to me at least because it shows that your R&R business, which tends to track home sales have been on a lag is exceeding that.

Do you anticipate your R&R business to continue to exceed the existing home sales? Because I think it was the first time in a while that we've seen that development in your numbers.

You know, Sam I think a little bit of that is some pent-up demand, people that wanted to do some improvement. And we look at it maybe not driven as much by the sales as by home values going up.

Once the home values start rising and people feel like they have a little equity or will be creating some equity in their homes I think that frees up the ability to do some improvement. The improvements that we offer homeowners is a little different than your typical home improvement because of codes and because of insurance.

You put granite countertops in you don't get an insurance break. You put impact windows in you get an insurance break. So we'll watch that pretty closely but we think home values will be more important, necessarily, than just the sales.

Yes, I will add to that R&R in the quarter up roughly 26% for us year over year. I do -- we do expect our R&R sales to probably trend higher than the national kind of R&R percentages that are out there for that very reason. So we do expect a good R&R market here in Florida for us in the foreseeable future.

Being in the Florida market myself your lips to God's ears, that'd be terrific. Thank you very much, gentlemen.

Thanks, Sam.

Thanks.

Steve Dyer, Craig-Hallum.

Thanks, good morning, congratulations, guys

Thanks, Steve.

Thanks, Steve.

A lot obviously has been covered already so I'll just try to fill in the blanks. When you look at all the moving pieces so you just hired a bunch of people and they'll get gradually more efficient, you've got aluminum coming down in prices, you've got theoretically more revenue to spread over it. I mean safe to say you'd expect gross margins to tick up higher from here?

Yes, I mean long-term this year into next year when I say long-term our targets for gross margins to definitely improve as we both become more efficient, as mix continues to improve, as throughput continues to improve and we hold our fixed cost as tight as we can with increasing sales. There will be a point in time, and I don't know where that is, but where sales reaches a certain amount and we have to layer in some fixed cost, we'll do that cautiously.

Obviously, with margins in mind as well as servicing our customer first but I do expect our gross margins to improve. My long-term target is closer to upper 30s. I know we're at mid 30s now but my long-term goal is upper 30s.

Okay. And then I think you'd said on the last quarter's call that you were going to layer in some incremental sales and marketing expense. It looked like about $1.2 million or so in the first quarter.

Obviously, seems to be paying dividends. Are you planning to kind of hold it at that level, grow it, maybe shrink it? How should we think about that overall number throughout the rest of the year?

We're going to continue to opportunistically invest in that area, Steve. We're going to look at it and really a lot's based on volume.

Obviously, the market turning around, we want to not just ride the market up, we want to take share in this turnaround. So it'll be based on where we can most get the bang for the buck, so to speak.

But we will invest in the second quarter in promotional activity. Maybe not to the same degree as you saw in the first quarter in terms of dollars but there will be more investment. I don't have an exact number for you.

Yes, we actually shifted a little bit, Steve. Typically we run some television and radio ads right before hurricane season kicks off in June. And this year we wanted to look at what happened if we did that earlier in the year.

We tend to have a lot more second homeowners down here that time of the year and we wanted to make sure we got the message out to them, also. And that was pretty effective.

Okay. Sounds good. And then the last question from me, any real changes you're seeing kind of in the first month of the quarter as it relates to mix? I know you give the mix by product line in the first quarter but so far in April anything that's dramatically different or sort of the same path?

No, no change in mix. Kind of the same path in terms of mid-to-upper 70s impact-related sales.

Okay, great. Thanks, guys.

All right, thanks.

(Operator Instructions) Gunnar Hansen, Sidoti.

Hey guys, a lot of the questions have been answered here but I guess just for clarification purposes, can you run me through what the year-over-year growth was for the first quarter for both new construction and R&R markets are?

Sure. Hey, Gunnar. New construction we grew 42% and then in R&R it was 25.8%. I think I said 26% but it was 25.8% for a total growth of 30.1% total sales growth.

Great. And I guess through April here I mean how has that kind of end market mix shifted at all or how do you kind of see that developing going forward?

Unfortunately, I wish I could answer that but unfortunately we don't really track that by month like I want to, like we're going to.

It involves getting information from our dealers and suppliers and it takes a while. As we close the quarter we get that kind of information. So I don't have that April breakout for you. (multiple speakers)

Sure, sure. And just in terms of some of the added employees, just over 280 year to date, what does that kind of bring you to at this point total wise?

About 1,200 in total.

And I think you said potentially another 100 throughout the year?

We have 100 open reqs. That will depend on both the efficiencies in terms of the current employees I had mentioned as we train them up how fast that happens as well is demand.

If sales continues its current pace we will definitely start looking at that third shift and things like that. So, yes, I'd say 100.

Yes, I would say the immediate concern is probably 50 to 60 maybe 70, and then by that time we'll have a chance to assess where we're at and see if we need to add an additional 30, 40 people.

Great. Thanks so much, guys.

Thanks, Gunnar.

I am showing no further questions. I would now like to turn the call back over to Jeff for closing remarks.

Thank you. Thanks for joining us today and we look forward to speaking with you all again next quarter.

If you have any questions feel free to call me. Have a great day.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation.

You may all disconnect. Have a good day.