PGT Innovations Inc (PGTI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your PGT, Inc. fourth-quarter 2013 earnings conference call. (Operator Instructions) As a reminder, today's conference is being recorded.

Now, I would like to turn it over to your host, Brad West, Vice President and Controller.

Good morning, everyone, and welcome to PGT's quarterly and fiscal year-end investor conference call. I am Brad West, Corporate Controller and Vice President, and am joined today by Rod Hershberger, President and CEO; and Jeff Jackson, Executive Vice President and CFO.

This morning we are pleased to provide an update on our fourth-quarter and year-end results and our outlook for 2014. 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.

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, condensed, consolidated balance sheets and statements of operations prepared in accordance with GAAP, and adjusted information which was quantitatively reconciled to GAAP. Our Company uses non-GAAP measurements as key metrics for evaluating performance internally. A detailed explanation of these non-GAAP measurements can be found in our press release which was included as an exhibit to our Form 8-K filed February 19 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 and facilitate the comparison of past and present performance. We will provide an overview of our performance for the fourth quarter and year ended December 28, 2013. After our prepared remarks, we have ample time to address any questions that you may have.

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

Thanks, Brad. Good morning, everyone. In the fourth quarter we continued to capitalize on the improving economic conditions in housing market, with sales coming in at $62 million, up 37.2% over fourth quarter of 2012. New construction sales led the sales growth charge. Despite a recent slowing growth trend in Florida single-family housing starts which grew only 17% in the fourth quarter, we enjoyed 56% growth in new construction sales, our third straight quarter of 50% plus growth.

Repair and remodeling also continued solid growth of 29%, thanks in part to share gains from targeted programs. Both markets also benefited from improved market conditions in Florida, including rising home prices and reduced unemployment.

For the quarter, new construction sales represented 35% of total sales, while R&R represented 65%. In terms of our product mix, impact sales grew 40% over the fourth quarter of 2012, and represented 77% of total sales.

In addition, sales of non-impact products grew 30% over prior year. For the entire year, vinyl product sales grew at a strong rate of 47%, and our aluminum products grew at 36%. Vinyl sales in our Southeast and Southwest Florida markets grew 58% in 2013. These markets have traditionally been dominated by aluminum and shows vinyl continues to be more accepted in Florida.

We continue to bolster our vinyl products offering with products such as our new vinyl French door launched just last month, and we are currently working on a new vinyl window platform for both our impact and non-impact products. Returning to fourth quarter, net income was $5.3 million and adjusted net income was $5.9 million, compared to net income of $3.2 million a year ago.

Adjusted EBITDA was $9.5 million or 15.3% of sales. This is a $2.6 million or 37.6% increase over the fourth quarter of 2012. For the year, adjusted EBITDA was $37.8 million, an increase of $13 million, a result of increased sales and operating leverage on our fixed cost.

Gross margin dollars increased $4.6 million to $20.6 million over the fourth quarter of 2012. This increase was driven by strong revenue growth. As a percent, however, gross margin decreased to 33.2% of sales compared to 35.4% from the fourth quarter of 2012. The decrease in margin percentage is mainly the result of purchasing finished glass units from third-party suppliers to support sales in excess of certain current internal capacities, a shift in mix toward new construction, and labor and scrap inefficiencies.

This more than offset the positive impact of leverage on higher sales and the price increase announced at the end of the third quarter. In previous quarters we reported headwinds against our margin percentage relating to an increase in labor cost and scrap, in connection with training a substantial of new employees to support the high growth rate.

In the fourth quarter, we saw improvement in both the labor and scrap categories, not yet back to levels we strive to achieve but approximately 180 basis points better than the third quarter of 2013. Going into 2014, we will continue to take actions to drive operational efficiencies while adding employees in advance of anticipated growth when appropriate.

SG&A cost as a percent of sales had dropped substantially due to strong leverage. These costs declined from 26.4% in the fourth quarter of 2012 to 22.2% for the fourth quarter of 2013. Also, SG&A costs declined from 27% for the full-year 2012 to 22.2% in 2013, after adjusting for costs associated with the secondary offering, related debt refinance, and a gain on the sale of the Salisbury facility.

Our fourth quarter represented our fifth straight quarter of substantial growth in both top and bottom line. I am proud of our sales team for helping drive this growth and gaining share. I'm proud of our operations group for persevering beyond expectations to deliver on our value proposition to our customers and increasing production. Lastly, I'm proud of our support teams for quickly adapting to the changing environment and focusing on the future to ensure we continue to dominate our core markets.

With that, I'll turn the call back to Brad who will review the results for the fourth quarter and full year in greater detail.

Thank you, Rod. In the fourth quarter, sales in adjusted EBITDA group 37.2% and 37.6% respectively over prior year. As Rod mentioned, this marks the fifth straight quarter of substantial year-over-year top-line and bottom-line growth. The 37% sales growth during the quarter generated a 29% increase in gross margin dollars.

We also leveraged revenue growth during the quarter by reducing selling, general and administrative expenses as a percent of sales to 22.2% compared to 26.4% in the fourth quarter of 2012. We finished the quarter with $9.5 million in adjusted EBITDA, which represents 15.3% of sales.

For the full-year 2013, sales finished at $239.3 million which represents a 37.1% increase, and adjusted EBITDA came in at $37.8 million which was an increase of 52.7% and was 15.8% of sales. Our year-ending cash balance was $30.2 million, and we generated $25.7 million in cash from operations during the year.

As stated in our press release, we reported net sales of $62.0 million for the fourth quarter of 2013, a 37% increase over the prior year. Breaking down our sales drivers for the fourth quarter compared to 2012 fourth quarter, we had WinGuard sales of $44.7 million versus $32.2 million, an increase of $12.5 million or 38.8%; vinyl non-impact sales of $8.3 million versus $6.2 million, up 33.9% over prior year; aluminum non-impact sales of $6.2 million versus $5.0 million, up 24.0%; architectural system and storefront sales of $1.4 million versus $500,000, an increase of $900,000; and PremierVue sales of $1.4 million, which was even with prior year.

Gross margin dollars increased $4.6 million to $20.6 million for the fourth quarter of 2013. However, as a percent of sales, gross margin was 33.2% versus 35.4% in the fourth quarter of 2012. Our decrease in gross margin as a percent of sales of 2.2% was driven by the cost of purchasing finished glass units from third-party suppliers, which negatively impacted margins by 190 basis points; temporary inefficiencies related to hiring new employees to meet increasing demand for our products which negatively impacted margins by 100 basis points; and the impact of a mix shift towards vinyl and new construction which reduced margins 100 basis points.

These factors were offset by leveraging our fixed costs on higher sales of 110 basis points and the impact of the price increase announced at the end of the third quarter, which improved margins by 60 basis points. As discussed in the third-quarter call, we are addressing our internal capacities for glass production to reduce our reliance on outsourced finished glass units by constructing an additional glass plant.

We officially broke ground on this plant on January 9 and expect operations to commence in our new facility by the end of the third quarter of 2014. We estimate this initiative will improve our gross margins by approximately 2%.

Our average cost of aluminum was approximately $0.83 per pound during the fourth quarter, comprised of spot purchases averaging $0.80 per pound for approximately 74% of our needs, and hedge purchases averaging $0.92 per pound for 26% of our needs. This compares to the fourth quarter of 2012 weighted average of $0.95 per pound.

As of today, we are hedged at approximately 37% of our estimated needs through the second quarter of 2015, at an average of $0.89 per pound. The current cash price is $0.78 per pound.

Our selling, general and administrative expenses were $13.8 million, an increase of $1.9 million from the fourth quarter of 2012. As a percent of sales, SG&A costs declined from 26.4% to 22.2%. Highlights within our SG&A include an increase of $900,000 in employee-related expenses, including increased healthcare costs; an increase of $700,000 in distribution costs necessary to support the increase in sales; and an increase of $300,000 in marketing-related spending.

Interest expense was $1.0 million compared to $800,000 in the fourth quarter of 2012, and our weighted average rate for the quarter was 3.37%. The increase in interest expense results from increased debt levels in connection with our new credit agreement that we entered into during the second quarter of 2013, which funded our stock repurchase transaction and originally increased our outstanding debt balance to $80 million.

To mitigate the risk of rising interest rates, we hedged a portion of our debt. This includes a forward-starting swap which will set the LIBOR portion of our interest rate calculation on $40 million of our debt to 2.15%, from Q3 of 2014 until the end of the term.

Our tax expense in the fourth quarter was $519,000, and represents a true-up of the estimates of annual book earnings made in the second quarter when we released our deferred tax asset valuation allowance. We no longer have a valuation allowance on deferred tax assets and accordingly in 2014 and beyond, we expect to record tax expense at an effective rate of approximately 39%. From a cash tax perspective, we currently estimate our tax affected federal and net operating loss carryforwards to be approximately $4.4 million.

We had net income in the fourth quarter of $5.3 million or $0.11 per diluted share, versus $3.2 million or $0.06 per diluted share in the fourth quarter of our prior year. After adjusting for the tax item, adjusted net income in the fourth quarter was $5.9 million or $0.12 per diluted share. For the full-year 2013, our adjusted net income and diluted income per share was $23.2 million and $0.44 per share respectively.

Adjusted EBITDA was $9.5 million in the fourth quarter of 2013, versus EBITDA of $6.9 million in the fourth quarter of 2012. This increase in adjusted EBITDA of $2.6 million is due primarily to $5.6 million, which is attributable to higher volume, and $600,000 impact from the price increase. Offsetting these increases was an increase in material costs of $1.1 million due to purchase of finished glass units related to certain capacity constraints; an increase of $1.0 million for employee-related costs, a $600,000 impact of temporary inefficiencies resulting from recent hiring to meet increasing demand for our product; a negative mix shift of $600,000, and $300,000 in additional marketing expense.

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

Turning to our balance sheet. As of December 28, 2013, our net working capital excluding cash was $22.9 million which decreased $1.2 million during the quarter, driven mainly by decreases in inventory. DSOs increased to 35 days at the end of the fourth quarter compared to 32 days at the end of our subsequent third quarter, due mainly to the shift towards new construction sales which generally have longer-terms.

Our free cash flow for the quarter was $7.3 million, mainly driven by EBITDA, excluding non-cash items such as stock compensations of $9.6 million. We received $1.2 million in cash for working capital. We paid $2.5 million in capital additions, and cash paid for interest was $800,000 for the quarter.

At this time, I'll turn the call over to Jeff for summary remarks.

Thank you, Brad. 2013 was a long-awaited turnaround year for both the Florida housing market and even more so for PGT.

For the full year, we grew sales in the repair and remodeling market by 30%, which we were confident represent substantial share gain in this category. Even with the surge in volume, we were able to deliver on our value proposition with quality products, complete orders and on-time delivery.

Also our new construction sales grew 54% in a year in which single-family housing starts grew 28%, finishing at about 54,000 starts. We believe a normalized level for housing starts in Florida for our current population of approximately 19.5 million is around 110,000 starts a year. So housing growth should continue into 2014, led by positive fundamentals such as increasing home values, favorable job growth and favorable supply dynamics.

Also of note during 2013, JLL, our majority-owned partner since 2014, divested its portion in our Company. The related increase in public float combined with the improved market conditions in our financial results have been favorably viewed by the market. Since December of 2012, our average daily trading volume has increased from 120,000 to 477,000 shares. Also, our stock generated a 120% return over 2013.

In connection with the exit by JLL, 3 of the 4 JLL affiliates who served on our board have decided to resign their positions. The fourth member, Al Castaldi, at our request has agreed to continue as a board member, and we look forward to his continued service.

Looking into 2014, sales to date represent an increase of approximately 30% over the same period a year ago. Our estimate for top-line sales for the first quarter is $62 million to $65 million. However, comps begin to get tougher as we head into the spring and summer months, though sales growth in those months near 40% in 2013.

While we achieved labor and material improvements in our fourth quarter versus our third quarter, we still have work to do in driving better flowthrough on incremental sales. Our margin, though strong, will continue to be impacted by operational inefficiencies.

Accordingly, our EBITDA margins will remain in the mid-teens until our labor and material inefficiencies improve and our new glass plant is complete and operational.

We will continue to hire and train new employees in order to ramp up to full capacity, and we are on track to complete the new glass plant by the end of our third quarter which will allow us to increase our in-house glass capacities and improve our material costs.

With that, I'll conclude and I'll be happy to answer your questions. Operator, first question, please.

(Operator Instructions) Sam Darkatsh, Raymond James.

Brad, How are you?

Good, thank you.

Three quick questions if I might. First off, once the glass plant is up and paid for, Rod and Jeff, what do you see as your most likely use of cash flow?

Well, the glass plant, we are probably going to be all in close to $14 million in the glass plant this year. Maybe some timing on some capital spending that will spill over into 2015. But this year's CapEx I am estimating at about $18 million to $20 million, depending on timing.

Once that is complete and behind us, we are and currently are actively looking for any potential acquisitions. That is definitely on the table as we continue to grow. We feel like any kind of a product category that would be in our kind of bandwidth of expertise would make sense. Obviously, we have got to be careful on that because of our high margins. We do not want it to dilute our margins. So it has to be a product offering that fits within our portfolio and our expertise that we could do well on.

Apart from that, we will have in the future additional capital needs. The current glass plant will get us to about $275 million in terms of cutting and tempering and laminating before we run up against laminating capacity. You know, at that point we will add some capital around our laminating equipment.

So there is different CapEx coming over the next 3 to 4 years, and as well as I mentioned earlier, we are looking at acquisitions.

You know, Sam, I just came back from the industry meetings, and the industry obviously is a lot more upbeat now than it was even a year ago. There is a lot of conversation around mergers and acquisitions. I think it is kind of hard at this point to really put your finger on one because that kind of -- everyone kind of plays it pretty close to the vest. But we will definitely keep our eyes wide open for what happens out there as the industry changes.

I would anticipate some changes in it as we go through this year. So we might save a little bit of cash for that. We will keep our eye on that closely.

So share repurchase, back burner at this point?

Yes, I think both a share repurchase and/or a dividend type use of cash, those are back burners unless we can't find a better use of that cash, obviously. We think we can, given some changes that we feel will take place in the market over the next 12 months or so.

Yes, the time we did our share repurchase before, it was a great buy. Obviously, we think it is still a pretty good buy. But we would look at dividends and stuff like that, too.

Two other questions if I might, and I apologize if these were in the prepared remarks and I missed them. Selling prices, I know the aluminum costs are largely locked in. But with the amount of volume and the amount of productivity and scrap that you are trying to absorb, what are you doing with ASPs?

And then my last question would be with respect to the ERP rollout. I know that WinGuard I think was getting in here in the first quarter. How is that progressing?

I guess I will start at the back end of that. The ERP rollout is progressing on schedule. We anticipate starting to run parallel with our current system within the month. And we will run parallel as long as we need to, to make sure there is no hiccups along the way. We have had many rollouts like, for example, our Eze-Breeze product offering is on the new system. And we worked out the initial kinks, if you will.

So we think the parallel and extra testing that we have got in place will generate a positive result for this ERP system. And we also expect the system to generate some efficiencies in terms of work flowthroughs and whatnot throughout manufacturing. So we are on track with that.

In terms of average selling price, we did take a price increase.

End of third quarter last year.

So we will look into 2014 at potentially taking another price increase. Again, we are letting kind of the market dynamics dictate that, but all appear favorable at this point. And we are trying to drive higher priced items. Doors now represent more than 40% of our sales, and with the new vinyl French door offering that Rodney mentioned we launched at IBS this year. We are starting to get higher average sales prices for obviously the impact product and lines of our business.

With your share, why would you wait to see what the market would bear? Why wouldn't you just be a price leader at this point based on the volume trends?

Well, I think we most likely will be a price leader. There's not a lot of people. There were prices taken last year by some competitors, but in terms of this year there is no one came out yet with that. But again, we expect to be a price leader, but at the same time we are online to bring a glass plant on and we do have overhead related to that.

So we want to continue to gain share and not price ourselves out of the market. We are on average 15% higher than our competitors currently. So I have to be very cognizant of that.

Thank you, very helpful. Good luck with the quarter.

Thanks, Sam.

Steve Dyer, Craig-Hallum.

Good morning guys, nice quarter. Just want to make sure I have it correctly. I think you had said, Jeff, sales year-to-date were up 30% or so. Is that through January or is that literally to date?

That was just to date, through last week. They were up about 30%, yes.

Great. And trying to kind of figure out where you think gross margins may go. I know you will get a couple hundred basis point bump at the end of the year once the glass facility is done. Is most of your heavy hiring behind you? In other words, should we just kind of keep getting more efficient throughout the year?

I've kind of tackled this question a number of times, Steve, and I think we need to keep saying the same thing until we see a difference. But when we see 30% or north of 30% growth, or around that number, we have to keep hiring. Because that is pretty strong growth and we can't just kind of manpower through that with overtime and stuff like that.

And so the training, we are getting better at our training, I think. We are getting a little more sophisticated, but there's still a training curve. And that training curve is labor efficiency and scrap efficiency.

So when the comparables start getting more in that 15% to 20% range, I think you see the labor efficiencies get much better. As long as it stays in the 30% range, we will take a little bit of a hit on labor inefficiencies and we will have to keep training.

Okay, that's helpful. And then your new construction business is by a factor of 3 or 4 outpacing single-family starts in Florida in the fourth quarter. Is that a function of sort of the geographic area that you guys operate in, more coastal areas? Or help me kind of understand the difference there.

I think -- and this is a think more than scientific -- but I think what is driving some of that is a number of items, one of them being you buy the windows for the house a few months after the start took effect. So it is driven by a little bit of the pace of starts before that, although what we have seen so far in the first quarter would kind of go against that a little bit.

But I think the biggest driver for us is our value proposition, our complete on-time delivery and short lead times. That is really important. And as builders get busier and they need to make sure their product is there in time because they have to hit schedules, scheduling now is becoming more important than just I want the cheapest price I can get for my product.

So if you can't deliver a house full of windows and close in every opening in the house, the next trade can't come in. So it is not getting almost complete and on-time delivery; it's getting 100% complete on-time delivery with short lead times, so that the schedule of the builders can be met.

Trades are a little harder to find right now. We lost a lot of them during the downturn. So the ability to hit scheduling becomes more critical and more important. And the big benefit we give anybody in new construction is we're going to tell you when the product is going to be there and it is going to be there, and you're going to be able to move on with your job.

And just to add a little bit to that, Steve. Back when we IPO'd back in 2006, and even before then when we were a private company, 2005, 2004, we always outperformed the housing market in those days. I don't have an exact number, but at times we would double. If the new home construction market was up 20%, we would be up 40%. That wasn't an uncommon at all theme back 2003, 2004, 2005, 2006.

So to see that now, it is not surprising us because we have seen it before. Now maybe the magnitude this year was a lot, but we do anticipate growing our new construction business greater than the market.

Got it. Okay, congrats, guys. Thanks.

Thanks, Steve.

Rob Hansen, Deutsche Bank.

Thanks. I just wanted to ask about the kind of growth in your sales operations. I know you hired a national sales manager just recently for national accounts. Are you hiring more sales people? What is the kind of outlook on that, especially given the rapid growth that you have seen here?

Yes, we actually are. If you look year over year, we have actually hired 8 new sales reps versus this time last year, so we're definitely laying investment into that channel, both international as well as local. And we have added a layer of management in there to also kind of back up those sales reps. So we have improved our footprint, if you will, into the Florida market and internationally. And we will continue to do that, depending on demand.

Hey Rob, let me just add one quick thing there. We have also added some architect reps, and we have added inside sales -- I know Jeff mentioned this before, but some of that is inside sales so that we can handle the quotes coming in and the business that comes inside where we can't physically get to a customer real quick.

So we have kind of layered in everything that we need to make sure we are managing that sales portion really well.

So on the architect reps, does that mean you're seeing a little bit more in terms of commercial construction as well?

Yes, a combination. Architects will spec out things, especially when you look at condos and that market, and architects will a lot of times be involved in a condo retrofit, also. So we want to make sure that we are calling on the architect and making sure our product is in there and getting spec'd.

There is not a big difference in our market with the condo market and the load required there versus single-family construction. You know, they take kind of the same product; it is an operational window. So we want to make sure that we get there early. Those projects tend to be -- we might be talking to an architect now on a project that will come out of the ground in 2015 or 2016.

Got it, okay. And then kind of -- I realize that the new facility won't be operational until late 2014. When does that mean that you start hiring people to kind of staff up and train; like how early in the process do you start that?

Like about now.

Yes, we are actually starting to hire now. We are running 24/7 shift on our current glass facility. And what we will do is we will take both experienced and new hires and salt that in into the new facility. So we are hiring now for the 24/7 still, and once that is online we will hire a full staff for that facility as well, I'd say at least by July. Because it takes a good couple of months for people to get up to speed on new equipment.

So you're not expecting any additional costs. And then I guess how does that work in terms of the costs in the meantime here until -- I mean how much of a drag is that?

Well, it's not really a drag yet because, again, we hire also because of attrition. We do have quite a bit of attrition. It is the training piece that we want to make sure we get in and get ahead of the curve, if you will.

So in terms of a drag, it is all direct labor and it really decreases on overtime as well. In other words, instead of working a 10-hour shift, now they are working 8. So there is inherent offsetting in that. The only cost, if you will, that is hard would be the healthcare-related benefit cost, and there is usually about a 90-day waiting period there for healthcare anyway.

So if I hire somebody in June, that's not hitting me until the end of the third quarter. So it is not a big drag. It is not something that I think I would build into any kind of a model at this point. Because again, we do anticipate all that in the guidance we give.

Yes. The drag on labor is really not much. The drag that we will see is we will have to purchase glass from the outside. We will have to continue doing that until the plant is operational. So that is really where you see the drag.

Got it, I appreciate it. One last quick one is just the WinGuard gross margin during the quarter, what was that?

40%.

40%. All right, thank you very much.

Michael Dahl, Credit Suisse.

Hi, thanks, guys. I wanted to drill down on the margins a bit more. I think in the prepared remarks you noted that price added 60 basis points. I guess relative to the increase that you put through, do you think there is still more benefit to come from that in 1Q, or what is the limiting factor there?

Well, the 60 basis points, Michael, was a function of timing in the fourth quarter. We actually announced that price increase towards the end of September. And considering lead times and whatnot, we didn't really see that impacting towards the back half of the fourth quarter.

So yes, there is a full quarter's worth of impact that you will see in the first quarter. And if you will, a pretty good estimate would be we probably got half a quarter's worth in the fourth quarter.

Okay, great, that's helpful. And then on the mix issue, could you give us a sense of kind of the progress you have made on lifting the vinyl margins? What is the differential today, and what is the thought process around further progress for 2014?

Yes, I think the issue in terms of the margin changing really -- obviously, with the door coming out, that helped the product portfolio in terms of its margins. But in terms of our core vinyl products as they stand, we are going to be limited on how we increase those margins with efficiencies until we redesign the product.

As I think was mentioned, we are actually looking at redesigning our vinyl platform, both impact and non-impact, with just that in mind. The goal is to be off a single platform, consolidate some suppliers, take cost out of the system, streamline the line and, therefore, improve margins.

That is all in progress. That will be a 2015 type event, end of 2014, beginning of 2015 type of event. And until then, our vinyl margins are going to stay about the same, absent any kind of change in pricing.

Okay, thank you. And I guess one final one. It is great to see the sales outpacing the overall new construction market to the degree that they are and actually seem to be still accelerating.

I was wondering if you had a sense of breaking it down a little further what the impact resistant market sales were in 2014? I mean, sorry, in 2013. (multiple speakers) Yes, I guess the whole market that you would be more comparable with.

I think the question is on the new construction starts, has it been geared more towards the impact resistant market, and that is why our increase has been more extended?

You have got the sales for just the new construction impact resistant only. Tell him what they were.

55% up.

So our new construction sales impact only was 55% up.

That is correct.

That is a tough question. I think people are still putting in shutters. I don't think the penetration play that, again, we initially went public on, that whole penetration into the shutter market, I don't think we have seen that yet at all, Michael. I think that comes with education and awareness and, unfortunately, some storm activity.

And so if you recall, shutters represent in 2006 probably 80% of that market. Now, maybe they are 70%. Maybe there has been some penetration over 9 years, but not much. So we think there is still a lot of growth left in the shutter penetration area in those markets.

Okay, so even against your direct peers on impact-resistant products, you think you are far above what the market growth has been there.

Yes.

Yes.

Okay, thank you.

Robert Wetenhall, RBC Capital Markets.

Hi, this is actually Desi filling in for Bob. Just a first question on SG&A market performance was very strong in 2013. Looks like amortization expense is expected to drop -- be pretty significant in 2014. How should we think about the trajectory of SG&A spending over the next year if the housing recovery in Florida continues?

Well, there is plenty of leverage left in SG&A. You picked up on a good point. Amortization does drop in the first quarter, Brad, $1 million?

Yes, we are going to record $500,000 of amortization in the first quarter. That compared to $1.5 million in both the first quarter last year and the fourth quarter of last year. And then that amortization goes away in the second quarter.

I think a good way to look at SG&A is it probably runs about 10% to 15%, maybe 15% now, variable. Our transportation costs are in SG&A as an example. Obviously, our warranty costs and commissions, those kinds of things are variable. And as a reminder, our fourth quarter of last year is a better reflection of our level of hiring that we did through the year to support the increased sales relative to the first quarter.

So sequentially, it may be a better comparison than year over year with this growth rate that we have experienced.

Got it, thanks. And then getting back to the topic of the addition of the sales reps that you guys talked about; are there certain states outside of Florida that you are actively targeting for expansion? Do you have a timeline in mind?

There is not specific states. We look at the coastline, any place that impact code is in place and any place that we can kind of drive impact code. We've got a couple of folks here that spend most of their time dealing with code and code enforcement, and making sure we are teaching people. So we naturally expand into those areas.

When we look internally at what our motivational driving force is, we want to own our backyard. Florida is coming back strong. We're seeing a lot of new construction growth. We are seeing a lot of remodeling growth, and everyone wants to come back and play. Back in 2005 and 2006, I think every window company wanted to have a pretty good presence in Florida. I don't know if it is quite to that point yet, but everyone sees the growth in Florida and it looks like a very attractive place to be.

And we like to put fences around our customers and make sure that we kind of are the bully in the backyard. And that is what we want to be, and that is really what we focused on; that, international and then expanding along the coastlines. And then we have talked in the past about our relationship with our Eze-Breeze product line and Menards and the Midwest and places like that where it is a little bit opportunistic.

We saw a lot of interest at the International Builders show for our product, particularly in our doors. We think there is some markets that may be attractive for them, but they are markets that are pretty far away and we want to kind it control our backyard before we go after those markets.

We have also had good success with broker reps as well in the out-of-state markets.

Got it. Thanks, that's helpful.

Jeremy Hamblin, Dougherty & Company.

Good morning, guys. I wanted to first just clarify a couple things from your prepared remarks. One, your laminating capacity is currently at what level?

Our laminating capacity is -- we could probably get up to about $275 million, $280 million in sales before we actually add a laminating line to the business.

And then you also had in your prepared remarks some commentary or color around the flow of gross margins as we think about it in the context for 2014. Would you mind just restating that for me?

Yes. I think if you look at the first quarter, what I was saying given the growth we still are experiencing and the operational inefficiencies we are working through, even though we did improve, as Rod had mentioned about 180 basis points versus Q3 into Q4, we will still run into some inefficiencies as we continue to hire.

Our scrap is not where we want it to be and know it could be. So we will still fall in that mid-teen level for EBITDA type margins until, one, I guess the glass plant comes online which we have indicated will be about 2 percentage points, Brad, a positive benefit to the gross margin, and as we continue to train our folks.

I do expect, if everything runs right, us to improve margins, EBITDA margins, over the year. In other words, it is not going to all come at the end of the third quarter or beginning of the fourth quarter. I do expect our labor to continue to improve. We've demonstrated that. I think you will see that.

I don't know if you will see it necessarily right out of the gate in the first quarter. But again, I think you will see as the year progresses we slowly start ratcheting up our results on the margin line.

Great. Then in terms of sales flow and the types of projects that you guys have been going after, are you seeing more opportunities in, let's say, condo or commercial products that potentially have higher sales values? Have you been participating at all in those types of deals?

Yes, we participate in those types of deals. The big surge for 2013 was single-family residential. I mean, that is where the market was. Multifamily starting to come back, as is commercial, but traditionally those trail single-family. So we will start and have participated in those. Internationally, I know we signed a couple of good deals, condo projects, as well.

I talked a little bit earlier about the architect reps that we have out there now that spend their day calling on architects and looking at jobs and looking at specs. And some of those or a lot of those are new construction related, so they may be coming out of the ground quite a ways in the future.

Some are those are replacements of existing product that is a little bit shorter timeline. So we expect to be a little bit larger player in the condo market, whether it be new construction or repair and replacement.

Great. Then just in the context of the color you provided on quarter-to-date sales, can you just provide additional color around whether it is being driven more by new construction or the R&R business in terms -- is the split similar to what you saw in Q4?

No, we don't really have a mechanism that tracks that to be able to give that to you. We get that every quarter in, basically, when we determine exactly the buckets that we ended up growing the most in. So no, I can't provide that.

And then coming back to kind of pricing power that you have, and you have been seeing some negative drag from your vinyl product mix increasing. Do you think that you have more pricing power? I know part of that has been an educational process for customers and distributors, but do you feel like -- are you more likely to take price in 2014 on the vinyl side of the business, as opposed to overall?

I don't know that I could give you a good answer on that. I think as we look at 2014 and we see it starting out a little bit like 2013 was, we are going to make sure that we maintain market share. Right now, it's so important as things grow to -- it is easier to maintain market share than it is to go out and try to get it back if you lose some of it. So we will look at our pricing, we will look at market share, we will look at the programs we are running. We will look at the redesign of our vinyl lines and where that brings us in.

And one of the things we won't do is we won't get greedy in the middle of the year and say -- let's take a vinyl increase so we can increase margins on vinyl. And then next year we introduce a new product line that we are a little more efficient on and we can drop it back down. That would not be a fair thing to do to our customers. So we will be pretty thoughtful about how we do it, but at this point we would focus on market share a lot.

And then last thing, in terms of the hiring, the rate of hiring slowed just a touch in Q4 from where it had been the prior two quarters. What have you been seeing in terms of retention rates in the staff? Is it getting harder to find new hires; and the quality of hires, is that any different? You guys actually made significant progress on labor and scrap inefficiencies in the quarter. So I'm guessing maybe the answer is no. But can you speak to retention rates?

I don't know that I can give you an exact retention rate. It is a little bit difficult to hire and retain where we are at. This is not a manufacturing area. So we are having to be very careful as we screen people and when we hire people about what their background is and how comfortable they are spending a day working on a factory floor. That is one of the things we look at pretty closely, but it typically is not a manufacturing area.

So we are adding additional things to make sure that we are screening the people correctly. We are bringing in the right people, and we are offering a pretty competitive package from pay benefit and from a training standpoint.

And we do get a lot of applicants. Unemployment in Florida is still 6.2%, I think, the last thing I saw. So we still do get enough applicants in. Like Rod said, it's a matter of screening those and being more picky of who we hire.

Yes, and we're viewed -- in this community we are viewed as an employee of choice -- or an employer of choice. So finding employees is not terribly difficult to do.

Great. Thank you for taking my questions.

Thanks, Jeremy.

Thank you, and it appears that this concludes our Q&A session. I would now like to turn it over to Mr. Bradley West for concluding remarks.

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

Okay, ladies and gentleman, this does conclude your conference. You may now disconnect, and have a great day.