PGT Innovations Inc (PGTI) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT Incorporated third 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 is being recorded.

I would now like to turn the call over to Brad West, Vice President and Controller. Please go ahead, sir.

Thank you. Good morning, everyone, and welcome to PGT's quarterly investor conference call. We are pleased to provide an update on our third-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 strategies and market outlook. Such statements are considered to be forward-looking. Any statements do not relate strictly to historical or current facts rather they are based on 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 sheet and statements of income 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 the 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 October 30 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 comparisons 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 third 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. During the third quarter, we delivered our highest quarterly sales since the first quarter of 2007 at $64.9 million, up 45% over our third quarter of 2012. Our sales growth continues to be driven by a combination of improving market conditions in Florida and market share gains driven by our marketing programs focused on both consumers and dealers which targeted our WinGuard products.

As a reminder, approximately three years ago, we changed our strategic focus to concentrate our resources in our core market of Florida. That change in strategy continues to pay off. Macroeconomic conditions have significantly improved during 2013 as credit is becoming more available, unemployment continues to improve, and the housing market in Florida is getting stronger with reductions in inventory and increases in both median housing prices and single-family housing starts. As a result, sales increased in both our repair and remodel and new construction markets.

Repair and remodel sales were up 40% over the third quarter of 2012 while new construction sales increased 58% over the same period. Impact sales grew 47% over the third quarter of 2012 and represented 78% of total sales. In addition, sales of non-impact products grew 38% over prior year.

During the quarter, aluminum products represented 69% of total sales and grew 44% over prior year. Our vinyl products represented 31% of sales and grew 48%. The highlight within our sales growth is our vinyl WinGuard products which grew 65% over the third quarter of last year. We expect vinyl to continue to gain traction in our core markets and we continue to invest in our already strong line of products to serve this growing segment.

Net income was $6.3 million and adjusted net income was $6.4 million compared to net income of $2.7 million a year ago. The improved financial performance is the result of the efforts and dedication of our employees who worked diligently to keep pace with the growing demand for our products as well as strategic initiatives in place to capitalize on improving economic conditions and take market share in our core market.

Adjusted EBITDA was $10.2 million or 15.8% of sales. This is a $3.5 million or 52.6% increase over the third quarter of 2012 EBITDA. Adjusted EBITDA for the first nine months of 2013 was $28.3 million, an increase of $10.4 million, a result of increased sales and operating leverage on our fixed cost.

Gross margin dollars increase $5.7 million to $20.9 million over the third quarter of 2012. This increase was driven by strong revenue growth and improved operating leverage. As a percent, however, gross margin decreased to 32.3% of sales compared to 34.1% from the third quarter of 2012. The decrease in gross margin percentage is due to an increase in labor costs and scrap as we experienced both inefficiencies and yield in connection with training new employees and an increase in material costs resulting from purchasing glass from outside suppliers to support sales in excess of certain current internal capacity.

As a result of the increasing demand for our products, we have been consistently hiring new employees since the beginning of the year bringing our total headcount to 1410 at the end of September up close to 400 employees since the first of the year.

Let me remind you that in 2011 during our plant consolidation we hired and trained approximately 400 employees causing excess overtime and material usage as we went through the training process. This year, due to explosive topline growth, we are experiencing some of those same issues which negatively impact gross margin. We can assure you that just like 2011, we put in measures to address those issues and stabilize operations at the levels we have historically performed.

Although margins were negatively impacted by our rapid growth, SG&A costs as a percent of sales have dropped substantially due to strong leverage. These costs declined from 25.9% in the third quarter of 2012 to 20.8% for the third quarter of 2013. Also, SG&A costs declined from 27.2% for the first nine months of 2012 to 22.1% year to date in 2013 after adjusting for costs associated with the secondary offering related debt finance and the gain on the sale of the Salisbury facility.

Some highlights for the third quarter of 2013 include WinGuard product sales were up 46% from the prior year driving our sales increase. Selling, general and administrative costs were 20.8% of sales, a decrease of 5.1%; net income of $6.3 million or $0.13 per diluted share; and adjusted EBITDA of $10.2 million, up $3.5 million or 52.6% versus prior year.

I am thankful for the hard work of our employees both new and tenured who delivered on our value proposition which helped drive the positive financial results in the quarter. I'm also confident that we have the skills and talent to improve our operational performance as we drive topline sales.

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

Thank you, Rod. We continue to achieve strong topline sales up 45% in our third quarter and adjusted EBITDA up 52.6% over prior year. This marks the fourth straight quarter of substantial year-over-year topline growth bringing our 2013 year-to-date sales increase to 37.1% and adjusted EBITDA increase to 58.5%.

The 45% sales growth during the quarter generated 37.3% increase in our gross margin dollars. We also leveraged revenue growth during the quarter by reducing selling, general and administrative expenses as a percent of sales to 20.8% compared to 25.9% in the third quarter of 2012.

Our $10.2 million in adjusted EBITDA represents 15.8% of sales and brings our year to date adjusted EBITDA to $28.3 million. Our quarter-ending cash balance was $23.7 million after paying $1.7 million for land in connection with the expansion of our glass facility.

As Rod mentioned and as you may have learned from our earnings release, we reported net sales of $64.9 million for the third quarter of 2013.

Breaking down our sales drivers for the third quarter compared to 2012's third quarter, we had WinGuard sales of $47.1 million versus $32.4 million, an increase of $14.7 million or 45.3%; vinyl non-impact sales of $8.3 million versus $6 million, up 38.3% over prior year; aluminum non-impact sales of $6.3 million versus $4.4 million, up 43.2%; architectural system sales of $1.6 million versus $600,000, an increase of $1 million; and PremierVue sales of $1.6 million versus $1.3 million, up $300,000.

Gross margin dollars increased $5.7 million to $20.9 million for the third quarter of 2013. However, as a percent of sales, gross margin was 32.3% versus 34.1% in the third quarter of 2012.

Our decreasing gross margin as a percent of sales of approximately 1.8% was driven by temporary inefficiencies as a result of hiring 575 new employees over the last six months to meet our increasing demand for our products which negatively impacted margins by 280 basis points.

The cost of purchasing laminated glass units from the outside suppliers negatively impacted margins by 200 basis points and the impact of a mix shift toward vinyl and new construction which reduced margins by approximately 90 basis points. These factors were all set by leveraging our fixed costs on higher sales of 360 basis points and reduced cost of aluminum of 30 basis points.

Our efforts are focused on hiring the right employees, effectively training newly hired employees and retaining our employees to leverage the skills that they've develop.

As you might have seen in our Form 8-K issued in August, we are addressing our internal capacities for glass production to reduce our reliance on outside outsourced finished glass by constructing an additional glass plant. The expansion will initially include the cutting and tempering processes and allow us to produce more finished units in-house.

During August, we purchased 12 acres of land neighboring our existing campus for $1.7 million and expect operations to commence in our new facility by the end of our third quarter of 2014. The construction cost of the additional facility has been structured to minimize interruption as well as current glass fabrication operations. We estimate this initiative will improve our gross margin by approximately 2%.

Our average cost of aluminum was approximately $0.85 per pound during the third quarter comprised of spot purchases averaging $0.81 per pound for approximately 60% of our needs and hedged purchases averaging $0.92 per pound for 40% of our needs. This compares to 2012 third quarter weighted average of $0.92 per pound.

As of today, we are hedged approximately 41% of our estimated needs through the second quarter of 2015 at an average cost of $0.90. The cash price as of today is $0.84 per pound.

Our selling, general and administrative expenses were $13.5 million, an increase of $1.9 million from the third quarter of 2012. As a percent of sales, SG&A declined from 25.9% to 20.8%. Highlights within SG&A include an increase of $1.5 million in employee-related expenses and an increase of $300,000 in bank-related fees resulting from our topline growth.

Interest expense was $1.1 million compared to $900,000 in the third quarter of 2012 and our weighted average rate for the quarter was 3.74%. The increase in interest expense results from the credit agreement we entered into during the second quarter of 2013 which funded our stock repurchase transaction and increased our outstanding debt balance to $80 million. To protect this increased debt balance against rising interest rates, we hedged a portion of our debt. This includes a forward swap starting with LIBOR at a rate of 2.15% on $40 million of our debt from the third quarter of 2014 until the end of the term.

Our tax expense for the third quarter was minimal as we released a portion of our deferred tax valuation allowance to offset our regular tax expense. To 2014 and beyond, we expect an effective tax rate of 39.1%.

We had net income in the third quarter of $6.3 million or $0.13 per diluted share versus $2.7 million or $0.05 per diluted share in the third quarter over prior year. This brings our year-to-date net income and diluted earnings per share to $21.5 million or $0.40 per share respectively.

Adjusted EBITDA was $10.2 million for the third quarter versus EBITDA of $6.7 million for the third quarter of 2012. The increase in adjusted EBITDA of $3.5 million is due primarily to $1.8 million attributable to new or increased volume and $200,000 from the improved cost of aluminum. Offsetting these increases was $1.9 million impact of temporary inefficiencies resulting from the recent hiring to meet the demand for our products and an increase in material cost of $1.3 million due to the purchase of finished glass units relating to certain capacity constraints, an increase of $1 million for employee-related costs, and a negative mix shift of approximately $600,000.

A reconciliation of the net income and EBITDA which I've just discussed has been included in our earnings release for your reference.

Now turning to our balance sheet, as of September 28, 2013, our networking capital excluding cash was $24 million which increased approximately $500,000 to support an increase in sales. This was primarily driven by increases in inventory of $1.2 million and prepaid expenses of $400,000 offset with an increase in our accrued liabilities of $900,000. DSOs remained at 32 days at the end of the third quarter compared to our subsequent Q2.

Our free cash flow for the quarter was $5.9 million mainly driven by EBITDA excluding non-cash items such as stock compensation of $10.4 million. We invested $500,000 in cash for working capital and we paid $3 million in capital additions which includes the purchase of the land to expand our glass facility and we paid cash for interest and taxes of $900,000.

During the third quarter, we continued to experience positive momentum in topline growth. This trend has continued into our fourth quarter with October sales up 37% over prior year. As a reminder, our fourth quarter last year was the first of the past four straight quarters with substantial year-over-year growth. Year-over-year comparables will become more challenging as we begin comparing to quarters that saw significant growth in 2013.

Given this substantial growth as we enter into our fourth quarter, I feel it important for our investors to know what we are estimating our fourth-quarter sales to be. Based on October actuals and November's pipieline, I feel confident we will end the fourth quarter with a topline sales growth of approximately 30% with sales ranging from $58 million to $60 million. This will put our full-year sales at $235 million to $237 million or approximately 35% increase in growth year-over-year.

Our gross margins will continue to feel the impact of labor inefficiencies and material inefficiencies. We are addressing these by focusing efforts on both training and retaining newly hired employees and are seeing improvements. As recently as October, we closed our direct labor came in at 10.2% of sales versus Q2's 11.2%. We are also addressing our glass fabrication capacity by moving forward with construction of the new facility but will continue to purchase some finished units from the outside until the plant is operational by the end of our third quarter of next year.

Lastly, we announced a 3% price increase on our products -- most of our products that will impact sales in the back half of the fourth quarter and into 2014. With these measures in place, we are confident that we will be positive -- positioned to fully leverage the strong growth that we continue to achieve on topline sales.

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

Thanks, Jeff. Our markets have continued to show strength and we are prepared for continued momentum in 2014. While Q4 traditionally is lower in sales than Q3, the lower volume is caused primarily by the number of holidays and not a lower weekly sales volume. We will continue to hire and train throughout the upcoming months not only to stabilize current operations but to prepare for continued growth in 2014.

We are confident that our employees and leadership have the right skill set to improve our operational efficiency and deliver on our value proposition. We are focusing on new products including storefronts to capture more of the strong Florida commercial market and energy-efficient French doors to capture additional residential market share in the coming years.

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, this is Josh filling in for Sam. Congratulations on the great quarter.

Thanks, Josh.

Good morning, Josh.

I appreciate the color on fourth quarter and October. Could you talk a little bit more specifically about what sort of level of labor inefficiencies you might still see as the sales volume as you said is going to come down a little bit? It is still pretty heady growth so how much can you really improve those efficiencies in the fourth quarter?

Josh, we are already seeing improvement in the labor side as I had mentioned October coming in at 10.2% of sales. It's our plan to hopefully hold that momentum into the November and December months. We will purchase less outside glass because we will be obviously a lower sales base. We will be purchasing less outside glass so there will be a positive impact for that. But I do feel our gross margins will continue to be weighted down if you will or impacted by inefficiencies and glass drought we are experiencing.

Yes, there's a couple things we have to do, Josh. If you break our labor down into two parts, we have got glass plant labor and main plant labor. Glass plant is where we are doing all the processing of glass. We are actually running that on a four-shift operation 24/7 now. So the initial surge of hiring there is pretty much done. They are working 24 hours a day. We can't add a lot of people there so the growth in hiring is mainly in our main plant for the next probably a couple months. But immediately following that, we will have to ramp up our hiring in the glass plant so we can train and be ready to have our new glass plant operational so we will have trained employees going in there.

So we will see a little bit of that inefficiency until that new plant is operational and then we'll work through the bugs on the new plant but we're pretty confident we've got that covered. It is just there's a lot of moving parts right now.

Also, Josh, just remember that obviously with lower sales in the fourth quarter there will be a little less leverage as well.

That makes sense. So just to I guess get all of that summed up, is there any reason to look for any gross margin improvement sequentially?

I feel gross margin will improve sequentially. It just won't be meaningful. It's not going to be huge. We will get some improvement. I feel purchasing less glass from the outside and also labor will come in better or has come in better so far but we will lose a little bit of that improvement to less leverage.

That makes sense. And then turning to 2014, there's a few more moving parts with obviously the new glass plant. Could you talk about what you think gross margin could look like in 2014 if we assume say midteens sales growth and no change in your aluminum and your other material input costs? What do you think 2014 could start to look like for gross margin?

I think gross margin improves. Obviously as we get into 2014 obviously with the glass plant coming online, I think I'd mentioned that a 2% improvement in gross margin in that particular move alone. But you won't see that until the fourth quarter of 2014. I think what we will look to drive is continued improvement in labor like we've seen in October through 2013. We will continue to train our employees on both the production line themselves on how to drop glass, how to cut laminate, the whole production process. I think we will start to reap benefits of that as well.

Rod had also mentioned our continuing to hire. Obviously the longer we have those employees the better trained they become. So I do think margins will improve during 2014. I'm not sure if I'm ready to give some guidance on that exactly but they will improve from where we are at today.

Would it be fair to think that there's going to be gradual improvement throughout the year, then a pickup as soon as the glass plant comes online or will it be more back-end weighted than that?

I think it will be fair to assume there'll be a gradual improvement throughout the year because like Rod had mentioned, we are going to continue to hire so we -- we drive both overtime down as well as get people -- our folks trained for efficiencies. So I think you'll see a gradual improvement over the year and then obviously with the fourth quarter glass plant expansion coming online, you will see a one-time step improvement if you will.

That makes sense. And then just quickly on the October trends, are you concerned at all about any pre-buying ahead of the price increase you talked about?

No, we really didn't have a big spike in any given week but Rod had mentioned, our average weekly sales have stayed fairly consistent actually improving somewhat like we expected at the back end of the quarter. But no even into October, that average hasn't changed dramatically.

Yes, Josh, our price increase was in September and we didn't see a big surge of orders and we stretched out the shipment time in case people needed to preorder a little bit but typically our lead times are really short. They haven't really changed since we had the price increase or during that price increase. So we didn't really see a big spike or a big jump in orders over it. We actually thought we would.

Excellent. Well best of luck with the next quarter.

Thank you.

Thanks.

Steve Dyer, Craig-Hallum.

Good morning, guys, nice quarter.

Thanks, Steve.

Thanks, Steve.

Several of my questions have been asked and answered. Just if we could zero down on the R&R, which the growth seen spectacular there relative to what I would have expected and certainly seems to be accelerating. Do you have any sense as to what's driving that? Is it credit, is it consumer confidence? And sort of how do you see that playing out into next year?

The answer a little bit of yes, but next year I think we should talk about it. When you look at what's happening this year, housing prices in our markets that we are focusing on have dropped so much that people were underwater and I think a lot of folks were afraid to spend dollars on doing home improvement and we've seen that price appreciation come up considerably over the past year and continues to grow. I think the pace of growth of price appreciation will slow down a little bit.

The advantage that we have because the remodeling market is not improving as fast as our growth has been in it but the advantage we have is we are dealing with a product that's code driven and insurance driven versus just making my house look nicer or feel nicer with granite or something like that. So we are taking the benefit of being in a code driven area and an insurance driven area and price appreciation. So now people can all of a sudden do something with their house that has a yearly payback.

So I don't know that that's a big surge. We are also seeing people buy foreclosures. We've still got a backlog of foreclosures in Florida that we have to work through because of our -- it's legislative -- not our judicial foreclosure system, not just a dollar amount. So it takes a long time to get through a foreclosure and as those houses as those houses get bought, people improve them and they want to make them livable, rentable things like that.

So I think we will get some strength from repair and remodeling. I don't expect it to be as strong as it was this year but it will still be I think a pretty good year for us.

A couple of other points just, Steve, that we also look at is existing homes. Existing home sales are higher. You guys can pull that data and info but you are talking upper teens so when that happens that's obviously good for the R&R market because generally speaking people move into those homes and one of the top three areas to improve energy efficiencies is windows, windows and doors. So we see a lot of pickup from that.

Also last year we are bringing on Todd and his sales team. They are getting up to speed and running. We feel we are gaining market share. We signed several new agreements with various customers, Home Depots at home services for example. We replaced a silver line that was in there. That should provide significant incremental sales this year for us and into next year so we are gaining market share as well.

Okay, great. And then just a question on the tax rate, how should we think about that both in Q4 and into next year?

Well, Q4 will continue to release the valuation allowance against our deferred tax assets to offset tax expense so I don't see a number there for this year. Into next year, we will be a cash paying taxpayer so 39% would be the rate I would use for next year.

And that starts right at the beginning of the year?

Yes, it will.

Okay. I will hop back in the queue. Thanks, guys.

All right, thanks.

Michael Dahl, Credit Suisse.

Hi, thanks and good morning. I wanted to follow on Steve's question a bit on the R&R side. Is it possible for you to break down what you think the market growth was in your products versus those share gains in the new customer wins that you talked about?

No, there's not really any up-to-date market data out there. Moody's and whatnot set that information literally at the end of last year. They do some updates but as best we can tell, the R&R market in Florida is growing in that 5% to 6% range and so with our R&R sales up in the 40% in the third quarter, we are obviously gaining market share but we don't have detailed percentage gains that we could back that up with.

As far as the new products go, some of the storefront and French doors, I guess those maybe a little more R&R focused as well or maybe not but how much have those started to impact sales as of now?

Those are not necessarily focused on R&R. Storefront will go in strip malls, bottom floors of condos so as we do a condo replacement which when you think about R&R, that's part of the R&R market that we are capturing more share that we didn't have a lot of before and storefront helps us get some of that. So even if the storefront sales aren't real high, it drives some additional sales, lets us get into some places we weren't before. But it does both.

So it's kind of hard to break that down and say it's going to drive R&R sales a tremendous amount.

Our French door, vinyl French door that we are launching really a soft launch in a couple weeks it's going to serve both markets I think very well. So the new construction market is picking up and it's a product that goes primarily in the higher end homes. It's really energy-efficient and aesthetics to it so I think it'll be a good addition but it also will work well in the R&R market. So I think it's going to be a balance probably right along with where our sales are right now.

In terms of the storefront, we had approximately $600,000 worth of sales in the quarter for storefront sales which is again our best quarter since the launch but we are continuing to penetrate that market and establish a distribution network there.

Thanks, that's helpful. And then just shifting gears a bit back to margins and a couple of the other things that you had mentioned were the mix impact as we see vinyl grow and it seems to be a trend that vinyl will likely continue to grow in excess of aluminum. So how should we think about the difference in margin there as it relates to just the blended rate going forward for the Company and what do you think that mix will ultimately get to as far as vinyl versus aluminum?

That's several questions in that but this quarter, the mix impact was approximately $600,000 and that's a combination of both vinyl and new construction. New construction sales will continue to grow and we will continue to sign agreements there and obviously get our share plus of that market.

In terms of the vinyl side, that's probably the toughest one because as we do more vinyl, we get better and we are also looking internally to develop new products within the vinyl platform. When we develop those new products they will be developed to achieve better man-hours, better efficiencies etc. So long term, our job and our goal is to eliminate any kind of margin erosion. So I don't want to put a number out there because quite frankly I think there's not going to be one. Right now there is.

Yes, I would think too if you look at what that mix becomes over the years, we have been -- and not we PGT but we as an industry have been kind of struggling with what the Florida Energy Code has been or will be for the last couple years and there's an energy code adopted. It is not enforced yet. It probably won't be enforced until about 2015 now. That will change product mix a little bit also.

But aluminum, it will still be the product of choice in Southeast Florida, Dade Broward, across partially into Collier County although we are seeing a lot of vinyl movement in that. So those are large aluminum product areas that will continue to see aluminum and then will see more vinyl introduced in the rest of the state where energy is going to require that. But we won't really see that significant change until either late 2014 or 2015.

Also keep in mind on the new construction side, that margin impact is gross margin. We also feel we make that up below gross margin in places like transportation, delivering full trucks to a job site versus various stops in the R&R side. So we do make up that in other areas.

Thanks, that's great color and good luck in 4Q.

Thank you.

Robert Wetenhall, RBC.

This is actually Desi filling in for Bob. Congrats on a great quarter.

Thanks.

Thanks.

So you discussed the September price increase earlier and how much was the price increase for? And then from a manufacturing logistics perspective, given the sharp rise in sales year to date and your strong competitive position, how do you balance price increases for your products versus higher volumes?

The price increase was for 3% and it was probably for 90% of our product portfolio, so roughly 90%. How do we balance that? We look at price increase as opportunistic as we go through the year. If we have huge spikes in our input costs, we will look to take a price increase. If a certain product within a market is of demand, we will take a price increase if it's warranted. What we don't want to lose is market share and as long as we can take pricing and gain market share, we do it. 3% was the first one we've taken since really big one since 2006, Rod, right?

Yes.

When we took a broad 9% price increase.

We are pretty close to our customers, pretty close to our dealers and distributors and anytime we talk about price increases, I know they're not the ones that make that decision but you get really good feedback from them on how hard they push back or their comments or the acceptance level and that tells us a lot about what we can do in the marketplace also. And on this last one, we got very little if any pushback on it.

Got it, thanks. And then on the market share gains, do you think most of the share gains are coming at the expense of nonimpact resistant window manufacturers or are you also gaining share from other impact resistant manufacturers?

No, we feel we are gaining share in the impact market so it's coming from impact manufacturers definitely like in that home services example I gave earlier. Our R&R sales within the impact market are up. If you looked at the R&R sales just for WinGuard alone, we are up 42% in repair and remodeling. So that is again gaining share.

Yes, I think we've said pretty consistently over the years even when we weren't grabbing share that as things get busy, builders and remodelers appreciate having short lead times and guaranteed on-time delivery and maybe that theory got tested a little bit over the last couple years but we continued saying it. We said it last year on our calls when we weren't gaining a lot of market share and now that new construction has picked up quite a bit and repair and remodeling has picked up quite a bit, there's a huge appreciation for getting your product with short lead times on time complete with no problems and we are seeing that benefit.

Great, that's really helpful. Thank you.

Jeremy Hamblin, Doherty & Company.

Good morning, guys. Wanted to just ask about the competition and as it pertains to capacity constraints. Do you feel like part of the reason you're able to grab share you guys are the biggest, you have the highest by far market share. Are your competitors also facing similar capacity constraints?

I don't know that I can answer that. We don't make our decisions based on what our competitors do. That said, we do watch what they do and make sure that we are maintaining our leadership position. I don't know -- I know the industry in general might have some supply constraints. I think we have a benefit there because we are the big 500-pound gorilla in the room and we can cut some deals with suppliers and guarantee them some volumes to make sure that we get everything in time. But some of the competition that we've talked to are up at market. I mean, the markets up 15%, they are up 15%.

And I just wanted to ask also, you mentioned in the second quarter that you had peak overtime hours hitting near 30%. I know you've gone to a third shift. Has that obviously improved at least a little bit the peak overtime hours that you are experiencing? Can you give me a sense for where the range is since you've gone to that? Are you getting overtime hours down now to 20% or I know the long-term goal is like 10% to 12%.

Yes, we actually saw that range start to go down at the end of the third quarter and obviously have seen it go down into October.

October was under 20%.

Yes, October ran close to like 15% overtime so it's within our norm if you will. So we want to hold it there. That's one reason we hit 10.2% of direct labor as a percent of sales because we are driving down overtime because we are starting to retain more employees.

Yes and I had mentioned in one of the other questions that our glass plant is running 24/7, so when you are running basically four shifts on a swing shift, there is not a lot of room for overtime and that's really helped out because that was one of the areas we were getting a lot of overtime in.

And following up on that, so you hired 301 workers in this quarter and 274 in the last. Should we expect at least some moderation in that hiring rate in the fourth quarter as sales seasonally slows down a little bit in Q4 and Q1?

Yes, I just kind of want to remind you that sales per week don't really slow down in Q4. Sales for the quarter slow down because we have the Christmas and New Year holidays. We have Thanksgiving in there so there's a net effect of losing about two weeks worth of sales, week and half to two weeks' worth of sales. So if you factor that in and look at the volumes that we are running at, the weekly volume really hasn't dropped off and we look at 2014 as being another year of increased sales. Maybe not at the same rates that we are seeing right now but increased sales.

So we will continue to hire and train and the benefit of that is if things do slow down and typically the first part of January is a little bit slower and then it starts ramping back up, it gives us additional time to train and that is the key ingredient is finding the right time to train where you're not worried about getting product out the door quite as much but you're worried about making product right and training people correctly. So we will continue to hire.

So in terms of the number of down days at the plant in the fourth quarter, you say kind of two weeks, would there be any impact then because the calendar has changed -- you had an early Thanksgiving last year and this year you're having a later Thanksgiving. I don't know if that has any impact on the total number of days where you may not be operating at full capacity?

Not really. It really doesn't.

Thanksgiving for us is Thursday Friday whatever week they schedule it in. And it's middle of that quarter. It's right in the middle of the quarter.

And then just on the price increase, the 3% price increase, can you just provide some color in terms of the timing of when that would be impacting delivered sales? Is that like October 15th, October 30th? Kind of what's the timing on that?

Probably close to mid-November is when I think we will start really seeing it full-blown.

Yes, it gets feathered in. It's not one day you walk in and you got the full effect of the sales because orders had to be placed by a certain day and shipments have to be shipped by a certain day. So literally two weeks after the price increase, some of what we are shipping will have that price increase, the majority won't and so it will be full effect by mid end of November.

But you do expect some positive impact on gross margin from that in the fourth quarter?

Yes.

Yes.

Okay. Great, thank you so much.

[Mark Sharber], [My Way Inc.]

Hey, guys, just want to say right up front you guys do a fantastic job. I'm a finance guy or an investor guy and I will say I'm local and I know that PGT treats its employees really well and really gets along well in the community. I just want to say that up front. I have two basic questions. One is any plans for dividends down the road and what about stock splits?

First of all, thanks, Mark, for those comments being local and your comments regarding our Company. We both really appreciate that.

In terms of dividends, we are starting to build cash. One thing I will say is we are not planning on paying down debt right now. We have historically used our cash to pay down debt and delever. But right now we are naturally doing that obviously through an increase in EBITDA plus we got outstanding rates paying 3.74% on our $80 million. So we are comfortable with our leverage. We will not use our cash to pay down debt.

What we will do is look for potential acquisitions more aggressively. We are out in the market so to speak looking for opportunities to expand our portfolio or even geographic footprint if warranted. We will be selective on those acquisitions obviously with our margins. We don't want them to be dilutive so we're not going to just go buy a company to buy it. We are going to buy a company that make sense.

But I would say that would the first priority for cash at this point. Could we pay a dividend down the road? Sure, most definitely. I don't see that in the near future though.

Your second question I think was regarding stock split, was it? In terms of a stock split, no, we're not contemplating any kind of stock split.

Okay, then the only other question, I see that you bought 12 acres for the glass plant which is only going on a portion of that so is your thinking that if you have to expand production you are going to do it here instead of doing another say Salisbury operation?

Yes, that would be the initial thinking. Again, we think the Florida market has a lot of legs to grow. New home construction starts will be in that maybe mid-65,000-ish range this year clearly only halfway back to a healthy market. So we think there's a lot more volume here to gain and we are building the facility in a manner that we can expand it into the future. We can actually put up to -- what was it 110,000 square foot --?

160,000 square feet.

Yes, we can go up to a 160,000 square-foot building on that 12 acres and obviously that would be futuristic plans but we did buy that with that in mind.

Okay, great. Hey, I really appreciate it guys. Keep the good work up.

All right, thank you, Mark.

Jeremy Hamblin, Dougherty & Co.

Hey, guys, thanks for taking just one follow-up. So I also wanted to just ask, you mentioned Home Depot at home service. I also wanted to ask a follow-up just on the Pulte partnership. In terms of initial expectations and impact from doing deals like that, you've mentioned in your filings that no customer is more than 3% of overall sales.

When do you expect to start to see impact from signing that deal with Pulte? When would you start to see that flow through to sales? Is that kind of a 2014 event or would you start to see some impact this year? Which counties would be included in Florida or is it the entire state?

We see the impact from -- when we do a deal with like a Pulte, or there's a lot of national type builders out there that are building, they look at their divisions in Florida and some of them have a statewide division, some of them have a Southeast division, some of them have a Southwest division, Southeast. So I don't know that I can sit here off the top of my head and tell you how all those companies are structured. I'd have to go back and look.

But like a deal with Pulte, we are seeing orders from that right now and so as they ramp up and they finish -- if they are in a certain subdivision, typically they will build all the models and what's in those models is what may go in all those houses. We work as hard as we can to make sure we can change out a model if possible so that we can get the rest of the subdivision. But we will see whatever goes into that subdivision then will come out of the model.

So we are seeing sales from that right now. We are seeing pretty explosive growth so even though those sales numbers go up, they are not becoming a huge percentage of our overall sales. I think our largest customer this year again will be probably under 5% of sales. So a little bit larger than the 3% because we are seeing some pretty good growth out of a couple of our customers but it won't be a 20% or 25% number.

Are you thinking though that these more institutional or tight deals are will become a bigger percentage of your overall sales as we are thinking about the model going forward as opposed to the deep distributor relationships that you've had in the past?

No, we still think it's going to be a healthy mixture of both. Will we get bigger customers out there as this market turns? Yes but those same customers were with us years back; they are just getting bigger with the market.

What we will also see once it turns is the condo market come back. We've really not seen that yet and in 2005, 2006, we would get big projects that would hit us and also that would layer into sales. But in terms of the overall mix between the mom and pop dealers to the big customers, everybody at this point the majority of our customers are experiencing good solid growth.

Yes, I think one of the advantages we have in our market is we've got more coastline I think than any other state. I'm not sure what California's is but we've got a tremendous amount of coastline and when you -- you really don't build subdivisions on the coastline, you build really high-end homes that are custom builders and we get a lot of market share out of that market and then we balance that against subdivisions that are usually a little further inland. And we also pick up a lot of condo, as Jeff said.

So we are at a great spot to be able to take advantage of all the different moving pieces in the Florida market. Just kind of as a reminder when you go back to 2005 and 2006 in our heyday, we had $5 million to $10 million customers and we are back at that point now where we are not doing that topline sales but we have customers that are in that $5 million to $10 million range.

Great, thanks so much.

And I am showing no further questions. I would now like to turn the call over to Mr. Jeffrey T. Jackson.

Thank you for joining us today. We look forward to speaking with you again next quarter. If you have any future questions, please feel free to call me. Thank you. Have a good 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.