PGT Innovations Inc (PGTI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT, Inc. second-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). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Mr. Brad West, VP and Controller. Please go ahead.

Good morning, everyone, and welcome to PGT's quarterly investor conference call. We are pleased to provide an update on our second-quarter results and discuss the progress we are making in 2013. Hopefully everyone has had a chance to review our earnings release issued yesterday.

Before we begin let me remind everyone that today's conference call may contain statements concerning the Company's future prospects, business strategy and market outlook. Such statements are considered to be forward-looking. 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 our 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 income prepared in accordance with GAAP and adjusted information which is 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 July 31 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 Hershberger, our President and CEO, and Jeff Jackson, our Executive Vice President and CFO, will provide an overview of our performance for the second quarter. After their prepared remarks we will have ample time to address any questions that you may have. With that let me turn the call over to Rod.

Thanks, Brad. Good morning, everyone. We delivered our strongest quarterly sales growth since 2006, achieving 35.2% growth compared to our second quarter of 2012. This growth was driven by a combination of improving market conditions in Florida and market share gains.

As a reminder, approximately two years ago we changed our strategic focus to concentrate our resources in our core market of Florida. That change in strategy has and continues to pay off. Macro economic conditions continue to improve as consumer confidence is increasing and unemployment is down. Also, access to credit is improving. Interest rates remain low and housing prices are on an upward trend. In addition, Florida single-family housing starts increased 32% during the quarter.

Our sales and marketing programs also contributed to the growth in sales. We offered programs during the quarter focused on both consumers and dealers which drove incremental WinGuard sales and improved our product mix. As a result of these promotional campaigns, as well as the economic factors, sales increased in both the new construction and repair and remodel markets over the second quarter of 2012.

New construction sales in the second quarter of 2013 came in at $19.1 million, up 57.8% over the second quarter of 2012, while repair and remodel sales were $43.7 million, an increase of 27.2%. Our aluminum products represented 73% of total sales and grew 32%. Our vinyl products represented 27% of sales and grew 49%.

A highlight within our sales growth is our vinyl WinGuard growth of 64%. Impact sales grew 38% over the second quarter of 2012 and represented 76% of total sales compared to 74% a year ago. We see vinyl continuing to gain traction in our core markets and we have a strong line of products to serve this growing segment.

During the quarter we successfully completed a secondary offering which resulted in the sale of 12.65 million shares of common stock owned by JLL Partners. We did not receive any proceeds from the sale of shares of common stock. In addition, we purchased 6.8 million shares from JLL funded by refinancing our long-term debt. JLL now holds 12,650,000 million shares or 27.7% and we now have a much larger and more diversified shareholder base and public float.

Our strong performance resulted in an increase in net income to $9.9 million compared to $3.7 million a year ago. The financial improvement is the result of the continued dedication of our employees who worked hard to keep pace with the growing demand for our products and consistently deliver on our value proposition.

Second-quarter's adjusted EBITDA was $10.9 million or 17.3% of sales. This is a $3.1 million or 39% increase over the second quarter of 2012. Adjusted EBITDA for the first six months of 2013 was $18 million, an increase of $6.9 million as we continue to leverage our sales growth to the bottom line.

Gross margin dollars increased 27.6% or $4.5 million to $21 million over the second quarter of 2012. This increase was driven by strong revenue growth and improved operating leverage. As a percent, however, gross margin decreased to 33.5% of sales compared to 35.5% from the second quarter of 2012.

The decrease in gross margin percentage is due to an increase in labor costs in scrap resulting from the hiring and training of an additional 274 new employees in the quarter to meet the increased demand for our products. This is in addition to the 159 employees hired during the first quarter.

Our total employee headcount currently stands at 1,317 as we continue to hire into our third quarter. We estimate it takes six months on average for a new manufacturing employee to become efficient in terms of quality, labor hours and material scrap.

Margin was also impacted by the purchase of finished glass units to support sales in excess of certain internal capacities. As both quarterly and year to date revenue grew over prior year SG&A costs as a percent of sales declined from 25.6% in the second quarter of 2012 to 22.7% second quarter of 2013. Adjusting for fees related to the offering and debt refinance SG&A as a percent of sales decreased to 20.3%.

Some highlights for the second quarter of 2013 include -- an improvement in our mix as WinGuard product sales were up 38.9% from the prior year; selling, general and administrative costs adjusted for fees related to the secondary offering and refinance were 20.3% of sales, a decrease of 5.3%; net income of $9.9 million, and adjusted net income of $7.7 million or $0.14 per diluted share after adjusting for a discrete tax item and fees related to the secondary offering and debt refinance; and adjusted EBITDA of $10.9 million, up $3.1 million or 39% versus prior year.

In summing up our second-quarter performance, I am excited about our results and optimistic about our ability to continue to improve our performance as we drive top-line sales. I am thankful for the commitment of our employees who have worked hard to meet increasing demand for our products.

Our results demonstrate the strategies we put in place over the past few lean years are working and we have the right leadership team in place to deliver on the significant increase in demand for our products. With that I will turn the call over to Jeff who will review the results for the quarter in greater detail.

Thanks, Rod, and good morning, everyone. We continue to achieve strong top-line results with sales up 35.2% in our second quarter and adjusted EBITDA of 39% over prior year. This brings our 2013 first-half sales increase to 33% and adjusted EBITDA increase to 62%.

We continued to leverage revenue growth during the second quarter by reducing selling, general and administrative expenses as a percent of sales to 20.3%, after adjusting for the fees related to the offering, compared to 25.6% in the second quarter of 2012. This strong leverage of our growth allowed us to report the best second-quarter EBITDA since 2007 and report our highest earnings per diluted share since 2006.

Our quarter ending cash balance was $15.6 million which included the impact of paying $4.6 million in transaction fees related to the secondary offering and debt refinancing. We reported net sales of $62.8 million for the second quarter, a 35.2% increase. A continued strong pace of new construction remained a key driver as we saw our new construction sales up 58%.

Breaking down our sales drivers for the second quarter compared to 2012's second quarter -- we have our WinGuard sales were $45 million versus $32.4 million, an increase of $12.6 million or 38.9%; sales of vinyl non-impact were $8.8 million versus $6.7 million, up 31.3% over prior year; sales of aluminum non-impact were $6.3 million versus $5.2 million, up 21.2%; Architectural Systems sales were $1.1 million versus $600,000, an increase of $500,000; and our PremierVue sales were $1.6 million versus $1.7 million, essentially flat.

Gross margin dollars increased $4.5 million to $21 million for the second quarter of 2013. However, as a percent of sales gross margin was 33.5% versus 35.5% in the second quarter of 2012. Our decrease in gross margin as a percent of sales of 2% was driven by temporary inefficiencies as a result of hiring new employees during the quarter to meet the increasing demand for our product which negatively impacted margins by 310 basis points.

The cost of purchasing finished glass units from our outside suppliers negatively impacted margins by 140 basis points. Offsetting these were the leverage of higher sales, roughly 200 basis points, and reduced aluminum costs of 50 basis points. We are addressing the increase in cost of labor and scrap by actively recruiting and hiring additional employees in order to reduce the amount of overtime hours required and engage our employees in training programs to maximize both the quality of our products and efficiency.

At times during the quarter our overtime hours reached 30%. Our internal goal is to manage over time to a 12% rate. We will achieve this by continuing to add additional direct labor and starting third shifts on various product lines.

In addition, to address our internal capacities for glass production we have considered options to reduce our reliance on outside finished glass product which is driven by our strong sales increase. We determined that the best course of action involves additional cutting and tempering lines in house which will increase our glass processing capacity to meet the demand for incremental sales. Once plans for expansion are finalized and approved the process will take approximately 13 months to complete. Processing glass internally as opposed to purchasing finished units strengthens our value proposition and improves our margins.

With regards to aluminum, our average cost of aluminum was approximately $0.88 per pound during the second quarter compared to the second quarter of 2012's weighted average of $0.95 per pound. We had spot purchases averaging $0.83 per pound for approximately 72% of our needs and hedged purchases averaging about $0.93 per pound.

As of today we are hedged at approximately 43% of our estimated needs through the fourth quarter of 2014 at an average cost of $0.91 per pound. The cash price as of today is $0.79 per pound.

Our SG&A expenses were $14.3 billion, an increase of $2.4 million from the second quarter of 2012. As a percent of sales SG&A costs declined from 25.6% to 22.7%. Adjusting for costs related to the secondary offering, our SG&A costs were 20.3% of sales in the quarter.

Highlights within SG&A include $1.5 million for transaction fees related to the secondary market offering and debt refinancing, an increase of $600,000 in employee-related expenses such as 401(k) contributions and employee incentive plans. And an increase of $200,000 in credit card processing fees as a result of revenue growth.

Interest expense was $700,000 compared to $900,000 in the second quarter of 2012. The decrease primarily relates to lower debt levels and the effect of a lower interest rate resulting from improved leverage. That new debt resulted in a further reduction to our interest rate for the remainder of the quarter. We expect interest expense to be approximately $3.6 million annually going forward off the new debt and our interest rate during this quarter was 4.4%.

During the second quarter we reversed the valuation allowance recorded against our deferred tax assets. The reversal resulted in recognizing a discrete tax benefit of $3.9 million. The reversal was based upon consideration of a number of factors including recent earnings history and the forecast of future earnings, which enable us to conclude it is more likely than not that the deferred tax assets will be realized.

Our tax rate excluding this discrete item was 0% as we released a portion of the deferred tax asset valuation allowance to offset our regular tax expense. In 2014 and beyond we expect to have an effective tax rate of 38%.

We had net income in the second quarter of $9.9 million or $0.19 per diluted share versus $3.9 million or $0.07 per diluted share in the second quarter of our prior year. This net income in the second quarter of 2013 includes the impact of the tax item I previously discussed, offset by expenses related to the secondary offering and debt refinancing. Excluding these factors our adjusted net income was $7.7 million or $0.14 per diluted share.

Our weighted average basic shares outstanding were 49.9 million during the quarter, down from 53.7 million in the prior year due to our purchase of 6.8 million shares from JLL on May 28. At the end of the quarter there were 45.7 million shares outstanding.

Adjusted EBITDA was $10.9 million for the second quarter of 2013 versus EBITDA of $7.8 million for the second quarter of 2012. The increase in adjusted EBITDA of $3.1 million is due mainly to $6.8 million attributable to the increase in sales volume and $200,000 from improvement in cost of aluminum. Offsetting these increases was the $2 million impact of temporary inefficiencies resulting from recent hiring to meet increasing demand.

An increase in material cost of about $900,000 due to the purchase of finished glass units related to certain capacity constraints and an increase of $600,000 for employer-related 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 June 29, 2013 our net working capital excluding cash was $23.5 million, which increased $6.1 million from the prior year to support the increase in sales. This is primarily driven by an increase in accounts receivable of $4.9 million as well as an increase in inventory of $2.2 million.

DSO's, days sales outstanding, improved to 33 days at the end of the second quarter compared to 34 days at the end of the second quarter of 2012. Our free cash flow for the quarter was $5.1 million mainly driven by EBITDA excluding non-cash items such as stock compensation of $11.1 million minus $4.2 million in cash invested in our working capital, minus $1.5 million in capital additions and minus the payment of approximately $300,000 for interest.

The strong momentum witnessed during the first six months of the year is continuing as we recorded a 42% increase in sales during July. And I expect our third quarter to sustain positive momentum.

From a market standpoint we see continued strong growth in both new construction and repair and remodeling markets. We feel as our labor force becomes more seasoned we will improve our leverage on incremental sales growth. With that let me turn the call back over to Rod.

Thanks, Jeff. Our markets have shown substantial growth in the last three quarters and we will continue to focus on meeting market demand, taking share and operational efficiencies going forward. We will continue to capitalize on improving market conditions, invest in advertising to build brand awareness and focus on our commitment to quality to gain market share.

Our value proposition, which includes a premium pricing structure, is proving instrumental in driving sales and market share growth. Our employees are committed to deliver on this 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 would be happy to answer your questions. Allie, if you can take the first question please.

Sam Darkatsh, Raymond James.

Good morning, this is Josh filling in for Sam. Congratulations on an excellent quarter, guys. Wanted to talk about the gross margin headwinds from the new Labor and the inefficiencies there. Obviously as they get towards their six month anniversary that is going to be helpful. But I assume with July running up so well you are also hiring more folks. So, can you talk about the slope over time of the gross margin improvements, not necessarily just the third quarter but also beyond that?

Sure. First of all just kind of breaking down those gross margins by product line, WinGuard gross margins for the second quarter was 40.5% and kind of all other was 17%. As we look into the gross margins into the future, the new hires are definitely starting to gain momentum in terms of efficiency.

The past I would say three weeks or so our direct labor as a percent of sales has been right at 11.2%. That's compared to the second-quarter's percentage of 11.6%. So there is already some improvement we are witnessing. We are still hiring, we hired approximately 15 to 20 on Monday. Rod, do you want to --?

Right. Yes, we hired about 20 people last week and about 15 -- 16 people this week.

Yes. So we are still hiring into the third quarter. Turnover is probably the biggest issue we are addressing internally from a leadership standpoint. If you look at year and we had approximately 1,012 people, so 1,012 people at year end. We currently stand at 1,317, like Rod had mentioned. That is about a 30% increase in headcount in a relatively short period of time, a seven month period of time.

Our turnover has been about 40%. The gross amount of hires we have had is closer to 520. So as we go through the process our goal is to retain -- one, to retain people longer. Secondly to get the number of hours under control. As I had mentioned, our overtime hours due to the spike in demand has reached as high as 30% at times on a consistent basis. And we are going to address that by adding shifts on certain lines which will necessitate the further need to obviously hire more people to do that.

All this is variable labor, by the way. The support departments aren't hiring 1-for-1 with that. We will add in the support departments over the back half of the year, but on a sparing basis. So as we do look to add more people, we are talking probably another 150 to 175 more people I would say at the most that would close out the end of this year with in addition to what we have now net. Does that help answer?

So, would it be fair to assume that -- you have gotten 40 basis points or so of improvement already it sounds like. Is that sort of a good quarterly runway to improvements as we progress through the year?

It is hard to peg that at this point to be honest with you. We are still marching through the quarter. I do expect to leverage better in the third quarter than we did in the second quarter. But we are still hiring, like Rod mentioned, 15 this week, 20 the week before. So we are still hiring and training. And as we spin up that third shift, it will be less efficient.

The first shift is usually rule of thumb most efficient. It is more seasoned and it is when we get more production, more throughput. The second shift closely follows, we are almost at full capacity on the second shifts and we're still actually hiring on that shift. But we will reach full capacity in this quarter on a second shift. And again as we layer in that third shift it will be a little bit less -- it will be more of a challenge because it is a third shift and typically those shifts are hard to staff. But can be a little bit more challenging in terms of training.

So we've still got some things we've got to work through operationally, I can tell you we have got a team working on it that's in place, it is the same team that helped lead us through the downturn, they are now in place to lead us through an upturn. We have got various initiatives in place. And I feel confident that we will improve gross margin over the back half of the year, I just don't know about how much.

Hey, Josh, probably a good rule of thumb for you to look at is when we are growing between 30 and 40% we are going to create some inefficiencies because we have to hire a lot of people. When that drops to 20 to 30% we are going to pick up a few basis points and when it gets below that we can run pretty efficiently once the employees are trained. So kind of gives you a little rule of thumb to look at.

That is excellent color. I definitely appreciate that. And dropping to the SG&A line, where do you peg the fixed portion of those costs given the new staffing levels?

As a percent of total?

Of total SG&A, yes. I know most of your hiring has been on the COGS line but if you give us an update on that.

Yes, we are still running about 80% fixed SG&A expenses. The biggest variable components are going to be within distribution. Distribution is not totally variable but it's definitely semi variable. And obviously commission, total variable and AIP annual incentive plan is within that category as well. And that is variable to plan. So those are the bigger buckets, but we are still about 80% fixed there.

Okay, and then if I could just squeeze one last one in. Could you talk about how the ERP rollout is progressing? Maybe what lines you have got it on so far and what you have learned? And when you plan to roll it out to the impact lines of any safeguards you have in place to make sure that is a smooth process?

Sure, sure. This isn't our first barbecue when it comes to the ERP rollout. I have done it in past companies as well as we have done it here when we developed the original [mat pack] system. What I would say there, it is going according to plan. ERP is always a challenge, but I think we have got the resources behind it, we have got a good supplier that is providing the software, etc., in the consulting side of the business.

We are on schedule to get this done and implemented total switch on by basically this time next year is our goal, end of the second quarter of next year. The areas which it is working, obviously the finance piece of the business is currently on the new system, the first production side we implemented was in the Eze-Breeze product line followed closely by Storefront.

And what we did, we did those two categories because there are kind of least impact categories, if you will in terms of volume and we felt like if we did those areas first what we are doing is basically creating a skeleton which we will then move to other areas and just turn on switches.

I know I am simplifying it, the IT guys are probably rolling in their graves, but that is basically what happens. We have worked out all the bugs with Eze-Breeze and Storefront is running well and the glass operations is kind of the next portion that we are currently in that is going to plan and then eventually we will switch over and put that system into our impact lines and non-impact lines in terms of Windows and doors. That process will be in the first quarter of 2014.

So we are not going to do it at year end again because mainly because of SOX compliance related issues not because of lack of confidence -- it is just if you do change anything real close to year end if there are any problems you don't have time enough to mitigate it from a SOX control standpoint. So we made a decision to flip the switch, if you will. Probably at the end of the first quarter we'll run kind of some heavy testing and then probably go total live during the second quarter of next year at the end.

Thanks so much, guys. Again congratulation on the quarter.

Steven Dyer, Craig-Hallum.

Thanks, guys, congratulations on the terrific results. Obviously the cadence of the quarter seemed pretty strong given July was extremely strong as well. What percentage typically should we think about kind of Q3 sales come in July. Obviously as you get into the fall and winter things slow, but how should we think about July, I'm assuming typically the strongest month of the quarter.

Yes, I don't know that July is the strongest month. We don't see a big change in the middle of Q3, right before school, which is about this time period over the next couple weeks. People focus on getting back to school and it might be a little bit slower but then it kind of picks back up. When you look at the weekly average as we go through the quarter, it doesn't vary a lot. So I don't see it changing a lot as we go through the quarter. But things surprise us occasionally but it is not a monthly driven thing.

Yes, I will add just a little bit more color to that. If you look at last year, July, our average sales last year was about $3.3 million per week, this year we averaged about $4.6 million. If you look at the end of the second quarter that average was running about $4.8 million. So it fell off slightly from the end of the second quarter. If you look through July, I would expect August and September to step up in that average but -- in terms of average weekly.

Well, we have a holiday in there (multiple speakers).

Yes, but we have some holidays and whatnot. We have a July holiday as well, Fourth of July, so.

That is great color, thanks. And then as you talk about expanding the glass capacity, do you have sort of a CapEx figure in mind or is that still in exploratory stages and when might that come online?

Yes, I have got a number in mind, we are currently -- obviously we have discussed it with our Board and they are very supportive. We are currently going through the process of finalizing the details of the plan itself and what it involves. I am also and have talked to our banks in terms of how we would handle that from a bank kind of covenant issue or standpoint. We will fund it from cash from operations; we are not going to take out additional debt to do this.

Right now that target number I would say is anywhere from a low of $12 million to a high of $14 million, again depending on final negotiations with the general contractor, the final negotiations with the land we are going to buy. What we decided to do is go ahead and build for the proposal that is on the table is to build our own building.

We looked at several scenarios, we looked at a lease, we found a couple of buildings, they weren't exactly close to the facility. The closest leasing available building to meet our needs in terms of height, etc., was a good 35 miles -- or 35 minute drive plus through traffic. Those types of considerations were analyzed.

We also looked at expanding just our existing buildings, but that would take up too much of our parking, current parking space which we are in need of. So what we decided and proposed to the Board that we would buy a couple of lots very close to the Company, actually on the adjacent road within Technology Park and that we would build our own building and house our equipment there.

So, that will process from start to finish is what I was mentioning in my remarks. It's about a 13-month process and I expect the cost will be, like I said, anywhere from $12 million to $14 million.

Steve, it actually works out pretty well. If you look at the length of time it takes to buy the land and put the building up, go through the engineering process and the lead-time on equipment they marry really well. So it is not like it cost us more time or there is a faster way to get there or something like that.

Got you, that is helpful as well. SG&A looked really nice and lean in the quarter kind of when you back out the transaction expenses. How should we think about that sort of as a percentage of revenue as you move through the back half here?

As we move through the back half I don't see that percentage, at least in Q3, changing that much given relative sales volumes. There is not any big spends in the back half that weren't contemplated or experienced during the first half. We have had a big marketing spend during the first half, we really had it in the first quarter and we have reaped some benefits from that. So there is nothing in the back half that would make me think you won't see the same kind of leverage -- depending on sales, obviously. Does that help?

Yes, that helps. And then the last question, I may have missed it. So the reversal of the deferred tax asset, did you say then that is a full 38% tax rate going forward starting in Q3?

No, starting in 2014.

'14? Okay.

What we did -- again I'm going to explain it at a high level. What we did was release our valuation allowance that was a pickup of the $3.9 million, but we didn't release it all so to speak. You still have an offset we are going to use over the remaining half of this -- back half of this year as we did in the first quarter -- or I'm sorry, second quarter, to offset our tax expense.

Got it. Okay, thanks, guys.

Mike Dahl, Credit Suisse.

Great quarter on the top-line, guys, really impressive and nice to see the growth continuing in July. I did want to ask though, if I looked at the components it was interesting to see really sharp acceleration in the non-impact product sales. And so, I was wondering is there any load in effect from the business with Menards on the Eze-Breeze side? Or how should we think about that run rate going forward on non-impact?

I will jump in a little bit and then Jeff can probably add a little bit more color to it. One of the things that we did and we announced early is we negotiated some contracts with national homebuilders, our large homebuilders where we kind of bundled our product line together. So for their -- what we saw last year, when sales started picking up and new construction really started picking up, is our impact sales were growing pretty nicely. Our non-impact sales were not; the low end of the housing market wasn't using some of our product.

As those sales have picked up, and we talk a lot about our value proposition and getting product out with really short lead times on time complete, making sure they can fill every hole in the house. As building picks up that becomes more critical. And our short lead times are really playing in, so we are seeing growth in the non-impact line that kind of marry -- it kind of matches the market.

It is not necessarily that we are taking a lot of market share there, but it matches the market. We are grabbing a little bit of market share because we are taking some business away from our competition. And that is what is driving it. So I think you can kind of compare that to what the market is doing, particularly in new construction, and you will get a pretty good flavor for what happens in non-impact.

Yes, and I think just to add a little bit more to that -- if you look at the non-impact lines, aluminum, kind of what (inaudible) is known for, that particular framing material we were up 21% year over year when you look at Q2 this year versus last year in that particular line. But vinyl, which is really gaining traction, especially I would say -- what, North Florida especially, but it has even got (multiple speakers).

Central Florida North it is strong.

Yes, it is very strong. We are up in that particular category 50%. So again, those two areas are going to play in what Rod has mentioned, the new construction homes that aren't in a code driven area. They are putting in our aluminum and non-impact vinyl. And I think with our growth rates we are probably capturing some incremental market share in those categories.

Eze-Breeze, the Menards deal, obviously a very strong positive momentum for that product line. Eze-Breeze is up 16.2%. So Eze-Breeze we feel will continue to grow if it is successful at Menards at that kind of a percent. If it is not then we have other strategic initiatives in place, a DYI site, for instance, that will help drive Eze-Breeze sales. We have even looked at the West Coast at times for Eze-Breeze. So there is various levers, if you will, to pull on that. So I would look at continued growth in the non-impact side as well as you march through the remaining part of this year.

Okay, interesting, thanks. And then shifting gears to the margin side and digging a little deeper on the capacity expansion there. Given that timeframe now looking like end of 2014 the new capacity is kind of up and running and then there are maybe some initial inefficiencies there at the same time that you are ramping up sales from current levels, how should we think about the finished glass purchases over the next few quarters and understanding there is some increased efficiency on the labor side, but is that then offset by kind of the increased glass purchases in the market or how does that work together?

I think what you see -- or what you will see and I can't really predict what Q4 and Q1 is going to do. But typically Q4 and Q1 are a little bit slower quarters due to the holidays. They are not really due because sales don't come in, but there are holidays involved in that so you see some drop off in sales. And with that little bit of drop off in sales it allows us the ability to manufacture a lot of our own product. We will still have to buy some from the outside but not as much as we do in Q2 and Q3.

We would hope that our plant would be operational by Q3 of next year, not end of 2014. If you look at the timeline involved there will be a little bit of a learning curve but not long. The products that we are adding in are the -- what we are expanding there are things we have been doing for a long time and it is just a matter of getting the equipment and the bricks and mortar in place so that we can do that on more than the three shifts that we are doing right now.

So we will have additional space to do that. So Q2 of next year will affect us from outside buys, Q3 maybe slightly as we are bringing that curb up. But I think we will have that under control pretty well by that time.

To add to that, what hurts us in a sense is we don't have a steady weekly volume of $5 million a week. If we did, we would be fine because you could plan the glass accordingly. But have had a couple of weeks where it has been $6.5 million, we had a $7 million week and when we had that we can't -- what makes us different -- what makes us able to charge a premium price is the fact we need early times, we have had to extend them on certain lines but we are still well under the industry.

And in order to meet those lead times we have to buy class from the outside when demand comes in at that kind of pace. What we are doing on that front is we have a great relationship with our outside glass supplier, we are expanding not only that relationship but we're actually expanding and creating more relationships with other suppliers as backups because what we have found is the outside glass supplier has extended their lead time on us. I think the entire value chain kind of has shrunk.

And obviously with the recovery in the market pressures are getting put all over the industry. Including our suppliers. So we have expanded our supply base, we will be able to meet the demand for incremental growth in sales albeit obviously purchasing more glass from the outside than we want to as we move forward.

You will see a little bit of change potentially in that because one of the areas we are looking into is a price increase. As we look into the back half of this year we've analyzed the market, we work with our sales folks, our distribution base and we think price increase is definitely warranted and the market will support that.

So as we go into the fourth quarter I think -- could that curtail some volume? Maybe. But we are going to be looking at taking a 3% price increase on the majority of our products. It won't be all our products, we are going to pull the storefront and AS and a couple of other product lines constant. But for our main product lines, the WinGuard product lines we are going to look to implement a 3% price increase that will be effective in the fourth quarter -- partway through the fourth quarter.

So that will also help with some volume as well. But we will be able to buy the glass it will just cost is in the short term. We will meet our suppliers we will expand that supplier base which we are already doing. And obviously as our employees become more efficient we will actually get more glass out of our current plants. As well.

That is really helpful and glad to hear that you are in a position to raise prices here, that certainly is a strong indicator. Thanks.

Steven Dyer, Craig-Hallum.

Yes, just a follow-up from me. What was the diluted share count, Jeff, at the end of the second quarter?

45 --.

That was basic.

Oh, that was basic. Hang on, Steve, I have got here in notes somewhere. Let's see, the 45 733, Brad is --?

Basic shares. The diluted share count at the end of the quarter was -- now this is the quarter average, right? So weighted average for the quarter was 53,142 million.

I got that. I was just trying to figure out since it was a blended quarter kind of a good diluted number to use going forward.

Yes, unfortunately that is still dependent upon the price. What you might be able to do is notice that there is about a 3.1 million share spread between basic and diluted. And again you have to assume your own price for that because that obviously affects the diluted count. But if you take Jeff's number, the 45.7 million -- our spread was 3.1 million at the end of the -- for the quarter and that is probably relatively decent spreads going forward. But again, as the price goes up the diluted share count goes up and as price goes down vice versa, so.

Got it, okay, thank you.

Rob Hansen, Deutsche Bank.

Thanks. I just wanted to ask about the R&R being up 27% year over year. That seems like a pretty robust trend and kind of continued throughout the quarter because I think you mentioned it was up around those levels early in the first month of the quarter. So I wanted to see if you could talk out were there any new business wins there? I think I saw some WinGuard product line at Costco. Yes, so, I wanted to see how that has been playing out if that is -- how much that has been a factor.

What we see more than anything else is strength in the housing market. With housing values, housing prices going back up a lot of consumer confidence, a lot of people thinking that now is a good time to invest in their house. People are selling houses at a much more rapid pace is a little bit more of a seller's market again, a little tough to buy a house here right now.

So hopefully that doesn't heat up to terrible much with what we saw in the past. But I think there is just a higher confidence levels of people are doing some repairs. And I want to remind everyone like we try to do every quarter that it is a little easier for us sometimes to sell impact windows into the repair and remodeling market because it is code driven, it is insurance driven and code driven and it is not just a choice by the consumer to say, I have got to make a choice of going to improve my house, I'm going to remodel something.

The window portion of it is code driven and insurance driven so there is relates for insurance and there is good reasons to replace Windows. So we are seeing that pent-up demand. We do have representation in Costco and a couple of the large clubs, but that really hasn't changed dramatically, we have had that for quite some time.

It is just another method for us to get to the end-user or homeowner and make sure that they are seeing our product and understand what a PGT product is, we have great name recognition in our market, almost 100% name recognition in our markets. We want to make sure that we maintain that. But my personal feeling, and Jeff may add to it, but my personal feeling is housing values are going up, people are more confident and it is code and insurance driven.

Yes, I couldn't agree more. If you look at housing values alone in Naples we are seeing 30% increases year over year in housing prices, Fort Myers 32% increases, Miami is increasing. Unemployment I think is a big driver of R&R, we have always said that, I have always kind appointed to that. And unemployment is at a 5.5 year low. So all good indicators that help people feel confident about spending money and updating their homes.

Okay. And then it just a question on some of the business at places like Costco. How does it work in terms of the installation, you know, the installation of your windows is a little more complicated on the WinGuard side because it is a premium product, who -- I guess who is installing the Windows from -- when they buy from outlets like that?

The Windows that are in places like Costco are lead generators. So those -- we'll have dealers that are qualified, Costco qualifies the dealers and there are our dealer so we will bring them to Costco, get them qualified, if they can't be qualified. And then when the consumer expresses an interest in that product, that customer of ours actually goes out there and sells the product and the lead generation comes from Costco and there is a cost involved with that.

Okay, got it.

But it still goes through our -- I mean you know us, we are such strong believers in it needs to go through our customer, it needs to go through our dealer, it needs to be installed properly and that happened.

Okay, that makes sense. And then on the 42% increase in July, I just wanted to see how that looked, if there is any variation in terms of new construction and R&R there?

We don't look at that by month. I have a very confident feeling both those categories are growing strong in the quarter to see that kind of result. But we don't break it down during the month, and we look at that really at quarter end, so.

All right. Appreciate all the commentary. Thanks, guys.

(Operator Instructions). Bob Wetenhall, RBC Capital Markets.

Hey, guys, good quarter. I was curious, you did terrific on the top-line here, sales are up $16 million year over year. And Jeff had suggested that you guys are going at $4.6 million a week. Just trying to figure this out from third quarter looking at your top-line. Should we be thinking more of $55 million or closer to $60 million? And any thoughts on how you guys have looked demand wise since -- for July from a momentum standpoint?

Well, I will comment as much as I feel comfortable about third quarter. Again, we have never really given guidance. But July was up 42%. Our second quarter, which is typically our strongest quarter, was up 35%. So, yes, I think as you enter the third quarter you are going to see that kind of momentum continuing. What was the other question?

I will jump in a little bit too. We are comparing year over year, so with second quarter typically being our strongest quarter we are matching up against a quarter that has gone down a little bit in sales, went down a little bit last year in sales. So that is a little piece of advice.

And then looking forward we have extremely short lead times, anywhere from a few days to a few weeks. So we don't get to look into the future as far as some companies do. We also don't get cancellations because the opening is there by the time the window gets ordered. So we don't get quite as good a look at the remainder of the third quarter as maybe some people would.

Got it. And it is pretty obvious you got really strong demand, housing market is definitely firming aggressively in Florida. You've got some good velocity with the vinyl product in North Florida. I'm just curious, why not take a 6% price increase? Who cares about the elasticity if you can get price instead of volume? And have you guys tried this before in the past? Thanks.

You know typically -- typically what we have done in the past, and we won't be the same going forward. But typically in the past what we have done is we have become more efficient as a Company and made a little bit more money. And then as raw costs go up, our internal cost go up we raise the price. And at times that has been difficult to do because we have gotten a lot more efficient, costs haven't gone up and then all of a sudden they jump and we try to go out there with some pretty large price increases.

So, now we are trying to be a little bit more, as you say, elasticity with our pricing so that we can get some price increases when needed. And internally it is a constant battle for us with the -- how much market share can we gain? We know we are gaining market share now versus where should we be on pricing.

And I think it is a pretty good balance that we are seeing right now because we are definitely taking market share by every measure that we have internally, which, you know, I don't think we are ready to talk about externally a lot. We are taking some market share.

And we want to make sure that we balance that with the right pricing out there because as the market becomes more stable and stops growing at the rate that it is growing we want to be the market leaders again where we can do a little bit more what we want to do with our pricing. So that is kind of the way we are looking at the whole pricing market share structure.

Yes. And I will add a little bit to that. Even the 3%, it will impact volume. Right now we are at least 15%, sometimes 20% higher than our competitors. And with a 6% it was -- again it creates even a bigger gap, especially if they decide to run promotions, etc.

So until we are hitting like a, I don't know, a 20% EBITDA, we almost got to 18% this quarter, right, 17.7? 17% -- 17.7% EBITDA. As I can leverage that up we will look at potentially taking pricing again versus taking a one big 6%. But it is something we consider. We still make money, good money off of outside glass purchases even though we -- obviously it is a hit to our margin, we still make good money on those units.

If I could just sneak one in, if you had taken out the impact of the inefficiencies from bringing in new labor during the quarter and kept your volume and price the same, would your gross margin have been 35% or 36%? And where can you see gross margins going? Thanks a lot, guys.

Yes. If we hadn't have experienced -- I mean we ran at numbers, if would have hit those again we would have been at a 35% to 35.5% gross margin easily. And we have demonstrated that in the past, just as recently as our fourth quarter of last year our direct labor was 10.5% and less in terms of percent of sales, our scrap was much better. And we could have put that $2 million down to EBITDA.

You guys can do the math on that, it would definitely create a great EBITDA margin and obviously gross margin as well. So as we get better, and I'm not -- again, we can't predict when. But as we get better our margins can be and will be in the 35% to 36% area.

Great stuff. Thanks so much.

I would now like to turn the conference back over to Mr. Jeff Jackson for any closing remarks.

Thank you. We would like to thank everyone for attending our investor call today and we look forward to speaking with you all again next quarter. Have a great day.

Ladies and gentlemen, this does conclude today's conference. You may all disconnect and have a wonderful day.