PGT Innovations Inc (PGTI) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT first-quarter 2014 earnings conference call. (Operator Instructions) As a reminder, this call is being recorded.

Now I will turn the conference over to your host, Brad West, Vice President and Controller. Please begin.

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

This morning we are pleased to provide an update on our first quarter 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 our forward-looking statements. Please refer to our press release and 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 sheet and statements of operations 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 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 presence performance.

We will provide an overview of our performance for the first quarter of 2014; and 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. For those of you who might be new to our story, we are the premier impact-resistant window and door Company. We serve mainly the Florida market, with approximately 88% of our sales coming from our core market.

While starts in the first quarter were less than expected, industry forecasts haven't changed and continue to call for 71,000 starts, or a 30% increase, during 2014. We are well positioned to service this demand and expect to continue to outperform this growth.

We also deliver industry-leading margins and significant free cash flow. We continue to invest our cash into our infrastructure to support our growth by expanding our facility footprint, with an additional 96,000 square foot building, and we have added over 165 new employees year to date.

During the first quarter of 2014, our top-line growth continued, with sales coming in at $62.7 million, up $13.2 million or 26.6% over the first quarter of 2013. This marks our highest first-quarter sales since 2007 and the sixth straight quarter of at least 25% year-over-year growth.

This strong top-line growth was primarily driven by our new construction sales, which continues to outpace the Florida housing market, and by marketing programs focusing on our WinGuard products. New construction sales grew $7.8 million or 54.1% over first quarter of 2013, driving a shift in our mix, with new construction sales now representing 35% of total sales, up from 29% in first quarter of 2013.

During the first quarter, Florida single-family housing starts were up 1% over the first quarter of last year. However, starts in the Southern Florida coastal counties, which make up our core market and contain a higher percentage of homes priced above entry-level, have increased approximately 10% over prior year. Additionally, during the first quarter, we saw growth in the repair and remodel market, with sales up $5.4 million or 15.3% over the same period last year.

Macroeconomic conditions have continued to improve in our core markets, with overall population increasing, new home inventory at low levels, and existing housing prices appreciating. These conditions provide a positive outlook for growth in both our new construction and repair and remodeling sales.

Gross margin was $19.8 million in the first quarter of 2014, an increase of $2.2 million in gross margin dollars or 12.6% from the first quarter of 2013. However, as a percent of sales, gross margin was 31.5%, a decrease of 3.9% from the 35.4% over the first quarter of last year. We continue to experience pressure on our gross margin due to an increase in material costs from purchasing finished glass to support strong sales growth, and operational inefficiencies in both labor and scrap resulting from hiring and training our new employees.

Additionally, in order to gain share in both the new construction and repair and remodel market, we utilized aggressive pricing on certain large projects. These new revenue streams, which caused us to buy additional outside glass, will help increase volume for our new glass facility coming online at the end of the third quarter.

Also, while margins will be impacted in the short term, we will solidify these relationships with our value proposition for long-term gains. At PGT, we pride ourselves and our exceptional customer service before, during, and after the sale. As market demand increases, tight project schedules become increasingly important, and our customers in both the new construction and repair and remodel market embrace the importance of our value proposition and the consistent quality and on-time delivery we provide.

Our selling, general, and administrative expenses as a percent of sales declined to 21.3%, compared to 26.3% in the first quarter of 2013, as we continue to experience strong leverage in this category and a reduction of $1.2 million in amortization expense compared to 2013. During the quarter, we generated net income of $3.4 million compared to net income, adjusted for gain on the sale of the Salisbury plant and related tax impact of $3.2 million in the first quarter of 2013.

EBITDA came in at $7.6 million or 12.2% of sales, up $400,000 over prior year, after adjusting for the gain. We expect our second-quarter sales to continue to benefit from our go-to-market strategy, as we are currently estimating a year-over-year increase of approximately 21% to 24%.

With that, I will turn the call back to Brad, who will review the results for the first quarter in greater detail.

Thank you, Rod. In the first quarter, sales grew 26.6% over prior year. We generated a 12.6% increase in gross margin dollars.

We leveraged revenue growth during the quarter to reduce selling, general, and administrative expenses as a percent of sales to 21.3%, compared to 26.3% in the first quarter of 2013, and finished the quarter with EBITDA of $7.6 million, representing 12.2% of sales. Our cash ending balance for the quarter was $30.8 million, and we generated $3.5 million in cash from operations.

As stated in our press release, we reported net sales of $62.7 million for the first-quarter 2014. Breaking down our sales drivers compared to 2013's first quarter, we have WinGuard sales of $45.0 million versus $35.4 million, an increase of $9.6 million or 27.2%; vinyl nonimpact sales of $5.2 million versus $3.9 million, up 33.3% over prior year; aluminum nonimpact sales of $6.8 million versus $5.3 million, up 28.3%; Architectural Systems and storefront sales of $1.2 million versus $800,000, an increase of 50%; and Eze-Breeze sales of $2.7 million versus $2.4 million, an increase of 12.5% over prior year.

Gross margin dollars increase $2.2 million to $19.8 million for the first quarter of 2014. However, as a percent of sales, gross margin was 31.5% versus 35.4% in the first-quarter 2013.

Our decrease in gross margin as a percentage of sales was 3.9% and was driven by: the negative impact of large project pricing in order to gain share as well as a shift in mix towards new construction, combined to reduce margins 210 basis points; the cost of purchasing finished glass units from our third-party supplier to meet the demand from sales growth negatively impacted margins by 170 basis points; employee-related costs, including increased health insurance cost of over 57% negatively impacted margins by 130 basis points; and operational inefficiencies related to training and hiring new employees negatively impacted margins by 100 basis points. These factors were offset by leveraging our fixed costs on higher sales of 100 basis points and the impact of the price increase announced at the end of the third-quarter 2013, which improved margins by 120 basis points.

As we have discussed in previous calls, we are addressing our internal capacity constraints for glass processing to reduce our reliance on outsourced finished glass units by constructing an additional glass processing plant neighboring our current campus. We are on track to commence operations in our new facility near the end of the third-quarter 2014, and we estimate this initiative will improve our gross margin by approximately 2%.

Our average cost of aluminum was approximately $0.84 per pound during the quarter, and comprised of spot purchases averaging $0.77 per pound for 54% of our needs, and hedged purchases averaging $0.91 per pound for approximately 46% of our needs. This compares to first-quarter 2013's weighted average of $0.92 per pound.

As of today, we are hedged at approximately 36% of our estimated need through the second quarter of 2015 at an average of $0.88 per pound. The cash price as of today is approximately $0.79 per pound.

During the quarter, some of our aluminum hedge contracts became ineffective for accounting purposes. And as these contracts settle, they will be reported in other expense.

Our selling, general, and administrative expenses were $13.4 million. That is an increase of $400,000 from the first quarter of 2013. As a percent of sales, SG&A cost declined from 26.3% to 21.3%.

Highlights within our SG&A include an increase of $900,000 in selling activities, consistent with higher sales; an increase of $700,000 in employee-related costs, including increase in healthcare costs; and these items were offset by a decrease in amortization expense of $1.2 million. Additionally, first quarter SG&A costs included $700,000 in customer-related selling expenses and $400,000 in amortization expense, which will not repeat in future quarters in 2014.

Interest expense was $900,000, compared to $800,000 in the first quarter of 2013, and our weighted average rate for the quarter was 3.16%. This slight increase in interest expense results from increased debt levels in connection with the new credit agreement that we entered into in 2013. This increased expense is partially offset by decreased interest rates from the new agreement and increased deferred financing costs.

To mitigate the risk of rising interest rates, we hedge 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 at 2.15% beginning in September of 2014 until the end of the term.

Our tax expense in the first quarter was $2.0 million and represents an effective income tax rate of 37.0%, which is lower than the statutory rate of 38.8%. This rate is lower than the statutory rate due mainly to the estimated impact of the Section 199 manufacturing deduction. As a reminder, we are expecting to become a cash taxpayer during 2014.

We had net income in the first quarter of $3.4 million or $0.07 per diluted share, versus $3.2 million or $0.06 per diluted share in the first quarter of our prior year, after adjusting for the gain on sale of the Salisbury plant and the related tax impact.

EBITDA was $7.6 million for the first quarter of 2014, versus adjusted EBITDA of $7.2 million for the first quarter of 2013. This increase of $400,000 is due primarily to $4.0 million attributable to higher volume, and $1.2 million resulting from the impact of our price increase. Offsetting these factors was large project pricing as well as the shift in mix towards new construction of $1.5 million; an increase of $1.5 million for employee-related costs; an increase in material costs of $1.1 million due to the purchase of finished glass units; and the $700,000 impact of operational inefficiencies resulting from recent hiring to meet increased demand for our product.

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 March 29, 2014, our net working capital, excluding cash, deferred income taxes, and current debt, was $25.1 million, which increased $2.2 million during the quarter, driven mainly by increases in AR and inventory to support sales growth. DSOs decreased to 32 days at the end of the first quarter, compared to 35 days at the end of our subsequent quarter, and in line with 32 days at the end of the first-quarter 2013.

Inventory turns increased to 11.8 from 11.4 at the end of our subsequent quarter and has increased significantly from the 10.0 at the end of the first-quarter 2013. This improvement is primarily due to managing our lead times on raw materials purchased from our suppliers and holding inventory in check as sales grow.

Our free cash flow for the quarter was $1.9 million, mainly driven by EBITDA, excluding non-cash items such as stock compensation of $8.1 million, offset by an increase in working capital of $2.3 million due to higher sales demand. We also paid $3.2 million in capital additions, mainly associated with our glass plant expansion. And cash paid for interest was $700,000.

At this time, I will turn the call over to Jeff for some summary remarks.

Thanks, Brad. As Rod stated above, this marks our highest first-quarter sales increase since 2007, and the sixth straight quarterly increase of at least 25% year-over-year growth. To keep up with this demand for our products, we have added over 165 employees this year and over 400 employees in 2013.

Currently, our base is 1,582 employees. The last time our sales run rate was at this level, we had approximately 2,200 employees, which shows the success of our restructuring efforts during the downturn.

We are working hard to get our new folks up to speed, but do anticipate continued inefficiencies in the second quarter as we continue to hire employees to meet the estimated 21% to 24% increase in sales. We have implemented specific initiatives towards training our new employees in both production consistency and quality. We will continue to monitor this progress through various performance management practices and metrics.

Also, our new construction sales grew 54.1%, which significantly outpace the Florida housing market, as we continue to invest in our customer relationships and PGT brand. We believe the normalized housing starts in Florida for our current population of approximately 19.5 million is around 110,000 starts a year; the long-term outlook is very positive.

Our Company generates strong free cash flow as a result of our higher-than-average industry margins and our low maintenance capital requirements. In 2013, when excluding working capital increases necessary for higher sales, we generated free cash flow of approximately $27 million.

This year, we will generate enough cash flow to fund our entire construction of our new glass plant operation. Our cash flow gives us the opportunity to invest in brands, expand operations when appropriate, and absorb market fluctuations when they occur.

Looking into the second quarter, we continue to see double-digit growth. We expect to capitalize on improving economic conditions, especially in Florida, our core market, as well as capitalize on investments in consumer promotions and advertising.

In fact, sales in April represent an increase of approximately 24% over the same period a year ago. Based off current orders and our backlog, our estimated top-line sales for the second quarter is a range of $76 million to $78 million, compared to top-line sales of $62.8 million in the second quarter of last year.

We have consistently outperformed our markets, and we will continue to focus on taking share, improving operational efficiency, and seeking growth opportunities to grow the footprint within the window and door industry. In the short term, EBITDA margins will likely remain in the mid-teens, as we will see some overflow from our first-quarter large project pricing into the second quarter and we continue to address inefficiencies in labor and material usage.

Lastly, we are excited about the opportunities of our new glass plant will bring as it becomes operational at the end of the third quarter of 2014. This will both improve margins on incremental sales and help secure our customers and better serve them into the future.

With that, I will conclude and we will be happy to answer your questions.

(Operator Instructions) Robert Wetenhall, RBC Capital Markets.

Hi, this is [Colin] filling in for Bob; thanks for taking my question. After the addition of the new glass plant this year, you should be able to produce about $280 million in revenue, which is in line with current consensus estimates this year. So how do you think about the need for additional capacity after the current plant is finished, in light of expectations calling for continued growth in Florida housing starts?

Thanks for the question. As we look at future capacity and potential constraints needs within the glass facility itself, what we have done by adding tempering and cutting capacity, we feel we can meet the tempering and cutting needs up to about approximately $320 million, $330 million or so in sales. The next constraint we run into when we value-add to glass is in laminating and insulating.

So what we will do, most likely, given our sales run rate, by the fourth quarter, first quarter of next year, we will start adding equipment associated with those two value-adding processes. What we did strategically was build that glass plant facility big enough -- 96,000 square feet I think it is -- big enough where it will hold additional equipment as we run into those capacity constraints.

From an assembly standpoint, what we feel we have done in the past and what we think we can do now, based off our product portfolio, is from an assembly standpoint we think we can get up to about $330 million to $340 million of sales out of our assembly plant.

Yes, just to put it in perspective, the new facility we are building for glass is a little bit larger than the existing one that we have, so we will have room to add a lot of equipment in that facility. Plus we have additional acreage right beside that, that we can expand as we need it also.

So from a footprint standpoint -- or from a land standpoint, we are in good shape. From a footprint standpoint on glass, we are in good shape. And we have room to grow in the manufacturing portion of it, the assembly of the frames, if we need to.

Great, thank you.

Michael Dahl, Credit Suisse.

Hi, thank you. Guys, can appreciate how difficult it is to manage a business that is growing this sharply but clearly has seen the gross margin pressures for about a year now, and now the large-project pricing. So hoping you can be just as specific as possible about the whole large-project issue of: what are they? How long will it take for this business to flow through? What percent of the mix do you see this as, going forward? And how you plan to raise the margin profile on business like this over time.

The large-project sales were projects that we entered into in Q4 and Q1, mainly. So they represent sales in Q1 and Q2.

It wasn't a substantial portion of the total sales in Q1, about $3 million. And it was both new construction and R&R.

The new construction projects were also not just residential. They could be condos. And on the R&R side, they were typically multifamily or condo replacement.

We do expect to see that still have the same impact, not in the second quarter to the same degree is in the first quarter, but it will bleed out during the second quarter. And we are no longer as aggressive as we were in the first quarter attacking certain competitors to gain these sales.

But what these sales represent are new relationships and new opportunities for us to grow, and especially if you consider the commercial market and the condo market and the growth that we are seeing there. And we, as a margin profile, believe that this is short-term in nature and temporary.

In terms of the mix component I wanted to address, we did see a growth in new construction go from 29% to 35%. And a good portion of that growth came from the contracts that we gained with big homebuilders in the state, a lot of which was to get their nonimpact production or sales; and as a result of those sales, that has added to the mix component, since our nonimpact products don't come at the same margins as our impact margins do.

But in terms of the margin profile on large projects, that is -- about 110 basis points of the 210 basis points is what we estimate impacted our first quarter.

Okay, thank you. I think that's helpful. So to tie it together, then, how should we think about gross margin progression through the year? I guess, can we still get to the 34%, 35% range by year-end?

As the glass plant comes up online, we have said that that is a 2% increase. So that actually will help a great deal when we see that come online.

That would be the key component. Until we get to that point, I think it's going to be difficult to get to the 34%, 35% number. But certainly once we have that glass plant in line and we get those 2 points back, those numbers are certainly in reach.

We have the operational efficiencies that we are working on; and the 100 basis point impact in this quarter is actually one of the lower impacts that we have seen since this time has began. And we are continuing to make strides there, so we feel that that is not a long-term margin pressure, just a short term as we keep employees in line for the new glass plant.

And ultimately, when the glass plant comes online in the fourth quarter, we should be able to see that, both margins back to that 34% to 35% range.

Okay. Thanks and good luck.

Sam Darkatsh, Raymond James.

Good morning, Rod, Jeff, Brad. How are you? As a follow-up to the last question, so the 2 points of gross margin from the glass plant, what is the incremental depreciation from the glass plant? Just so we can get a sense of what the overall accretion might be once it's up and running.

The total purchases of that glass plant will total about $14 million. That breaks down to about $2 million of land; about $9 million -- or sorry, $7 million of building; and about $5 million of equipment.

Obviously, the building's depreciation is a little immaterial. So the $7 million -- or I'm sorry, the $5 million of the equipment will begin depreciating in earnest next year.

And you can -- that will probably be about $0.75 million to $1 million of depreciation per year on the equipment. Generally, it ranges between five and seven years.

All right. So maybe $200,000, $300,000 a quarter for actual depreciation, then?

Yes, $300,000 at the high end, I would say.

Okay, so you are looking at it, on a current run rate, somewhere between $1 million and maybe $1.25 million in incremental EBITDA -- or I should say EBIT, once it comes online?

Incremental depreciation expense against the EBIT, yes.

Okay. I am talking about you have 2 points of gross margin coming; I want to call it $76 million, $77 million sales run rate; less the $200,000, $300,000 in depreciation. Right?

Yes, it certainly depends on the sales level that you apply against the 2%, but yes.

Okay. Then can you talk about the acquisition pipeline, Rod and Jeff? What are you seeing out there? How fertile?

What do the multiples look like? How willing are folks to sell? And what type of debt-to-EBITDA ratio would you be comfortable operating on a post-deal basis should something come to fruition?

Yes, some of those are pretty tough to answer at this point, but we will take a good shot at it, Sam. The pipeline is larger now than I have seen it in probably in the last six, seven, eight years put together, through the downturn. People are seeing things turn around.

And companies that had targets for returns I think are pretty active in the marketplace. But it is really early in the marketplace.

We are seeing opportunities at a much greater rate, and we are looking into some of those opportunities. But it is really early in the process right now.

Numbers that we are hearing run about our -- and it depends again if it is a public company or private company when you are looking at it -- but good company multiplier is probably in the 7, 8 times EBITDA. Some people would like to see a little bit more, depending on how the company is performing, depending on the size of the company, and depending on where they are at.

The companies are really spread out. It is interesting that some of them are little more local in nature. Some of them are national in nature. Some of them are localized to the geographic area that they are in.

And we are seeing them pretty much all across the nation in almost all of these categories, from a national player or a couple national players to small, kind of mom-and-pop $10 million to $40 million companies. So the opportunities I think are definitely going to be there; so it is going to be incumbent upon someone to take a really close look and understand how that fits, how the financing works.

I think there will be a lot of work done on making sure that it is accretive. Everyone likes to talk about synergies and cost savings; and I think you've got to be really careful when you do that, because it is tough to prove that out.

So you've got to be able to look at what you really can do and what you bring to the table -- what each company brings to the table, and how you bring that together, how you put that together, and make sure that it's accretive and you don't factor in too much fluff to make it work.

A little bit more comment on the leverage part, Sam. Right now we are a little over 1 times. I am personally comfortable going up to 3.5, maybe 4, depending on the potential candidate.

We do generate, as you know, strong free cash flow, so that is not an issue. Assuming we get a nice company in terms of its EBITDA performance and we enhance that, it will even make it easier to pay that debt down over time to deleverage.

So we will be very picky on the type of candidates we look for. We will look for, obviously, their EBITDA and their margin profile, because we do not want to damage our current margin profile. If anything, we want to enhance it as we look at these candidates.

In terms of trading multiples, I will expand that a little bit. We have seen them all the way from 6 to maybe a high of 9; and it all depends on scale and position they currently have in the market.

By you saying that you would like for it not to be margin dilutive, can we then infer that you would be primarily looking at impact businesses from an acquisition standpoint?

We would be looking at specialty businesses from an acquisition standpoint, impact being one of those.

Hey, Sam. I would think we would have to be convinced that it would not be margin dilutive. And I hate to put a timeline on it, but approximately by the end of the first year. We would have to be able to look at the company and make sure if the margins aren't quite there that it's a very clear path to get there.

You are talking EBITDA? I'm sorry.

Yes, EBITDA, and to a certain extent gross margins, because you've got to figure if it -- let's say in your words -- it is an impact related acquisition. Right away, with our glass plant coming online in the third quarter, we have got instant volume. And obviously, with doing our own glass, that is an immediate savings of 10% or so from the incremental sale, which will be obviously accretive to the transaction.

So there is definitely some upside out there, opportunities out there, and we are looking.

How important is the location geographically to you, meaning Florida versus non-Florida?

50-50. What is more important is the company itself and the brand and the product and the market they serve. So we are not just looking at geographic.

Obviously, Florida's in our backyard, so we would probably be able to, I won't say nail it, but be a lot more successful at something in our own backyard. But there are also some very attractive outside the state opportunities that could generate higher margins as well.

Very helpful. Thank you, gentlemen.

Steve Dyer, Craig-Hallum.

Good morning. Thanks for taking my question. Just a couple of follow-ups; most have been answered. How do you think about EBITDA margins after the glass facility gets up and efficient and running? Is it still reasonable to think upper teens? Or is that going to be too much to ask as you look into next year?

No, I don't think -- I think upper teens is very reasonable once the glass plant is up and running.

Okay. Would you anticipate there is going to be a similar or hiring push with that as well? I know that has hamstrung you with margins the last several quarters in the primary facility; but is that going to result in a big staff-up as well?

In any given quarter -- like the first quarter we open it up, I would say sure. We are going to continue to hire. We are hiring now, and in hopes to leverage those hires into that glass plant.

That is why, unfortunately, you have to start further out, given the sheer magnitude of people we've hired. What we have learned is it takes more than the traditional six months to get a production worker up to speed. It is more like close to nine months to a year.

So with that knowledge now in mind, after a year and a quarter of this kind of growth, with that knowledge in mind we are proactively hiring for that glass plant. So some of the result, unfortunately, you see in the first quarter, is just that. It is an investment into the future that, if it works, it's going to leverage extremely nicely -- or I should say when it works.

But with that said, given the amount of turnover -- this is the industry we work in -- I do anticipate hiring still in the third quarter of this year and into the fourth quarter, assuming the growth continues, albeit hopefully not at the same pace of hiring that we've had.

Hey, Steve. One of the things we have talked about in the past and we continue to see is that when we are growing in that mid-20% and above range, we're having to hire a lot of people and bring them in and train; and it's hurting our margins to a certain extent.

And we have seen that pretty consistently, even to the point where when we have months that are a little bit flatter we see margins go up because we're not necessarily adding as many employees in a given month or two. So we have been able -- what Jeff was talking about -- we have definitely been able to see and we have been able to prove out with our performance. So going forward, we think we will see that.

Maybe as a note, we have hired 500 some employees in the last 15 months or so. So almost half of our manufacturing employees are around a year or less. And that is a pretty big digestion to have for any company, I think.

And we are seeing a little bit of the results of that. But we are very confident with what we have seen in periods of time through that 15-month period that we can perform very well.

Yes, I will give just a little bit more color to that, just to help bridge it with some data, Steve. During the fourth quarter, our direct labor was 10.4%, which was a good number. We know we can beat that actually over time, however. This quarter it was 11.1% of sales.

During the fourth quarter of last year, we had a net hiring of about 14 people. During this quarter, our net hiring was 118 -- net meaning after people had left. So when we get to a leveling-out point we will run extremely efficient.

Yes, even just replacing turnover is not that hard to do. It's when we are growing and adding people that it becomes a little more difficult.

Very helpful. Thank you. So, more near-term I guess on the gross margin line, we should think about more low 30%s, 31%, 32%, as opposed to more mid, at least until we get that glass facility up and running?

Yes, until the glass facility is up and running, I would definitely think lower-mid than middle-mid. April has already improved in terms of gross margin by about 80 basis points. But 32%, 33% gross margin, total glass plant up and running, that is what we are shooting for.

Okay. Then just a couple off the beaten path. The commercial business, any thoughts or commentary there as to -- I know South Florida commercial real estate doing quite well as well. Any renewed push into that area for you guys?

Yes, we have actually put -- as we said, we have put more feet on the streets. We have added a couple of sales reps that really focus on what we call the commercial market.

To define that for us, it is really the condo market, high-rise condos and that type of thing, as opposed to an office building or something that may take curtain wall or something in it. So we will get the storefront on the bottom.

One of the things that we see is the product lines that we have get us into those buildings. And the focus on condo boards and architects and engineers that are spec-ing those jobs are getting us more jobs.

And not a huge portion, but part of that was the result also of our price push that we talked about in the fourth quarter and first quarter that affected us a little bit. But the ability to get in there and now, instead of pricing things to get on the job, we have got some of those jobs, we get spec-ed on those jobs. There is a lot of difference when you are bidding a job when you are spec-ed by the architect and engineer than when you're walking in and you are other -- or other, and you've got to bid against someone that has had that job before.

So we have seen significant success in that. It doesn't all play out immediately, because a lot of those jobs -- a lot of those when you are dealing with condo replacement, or even condo building, we will be working on jobs for a year or two before they actually come out of the ground or get replaced. But we are seeing -- we are pleasantly pleased with our success in that category.

Okay, great. Then lastly for me, R&R, you are obviously going to start anniversarying some pretty tough comps there. What is your general feel on the R&R market and your role within it?

I know refis have obviously come in a lot. To the extent that that drives that business, how are you feeling about that business going into the summer?

Our market gets affected by -- as we all know, living in Florida, we are about three weeks away from hurricane season. A whole lot different driver than I think the rest of the country gets to see. So there is a lot of awareness with storms.

And even though we haven't had one for eight years, we are aware that they come. And people that live here are pretty aware of it, and even newcomers that come in ask a lot of questions.

So I think from an insurance code-driven process, that there is an opportunity for us to continue to gain some share in the R&R market. Our market is driven a little differently I think than the national market.

So I am not going to say we are sitting here terribly optimistic because we had a great year last year in R&R. But the drivers are a little different, I think, than the national market.

Great. Thanks, guys.

Rob Hansen, Deutsche Bank.

Thanks. Just wanted to ask about the potential for expanding the laminating and insulating capacity next year. What is going to be the primary driver of your decision here? Is it going to be -- is mix going to be a large factor?

And then what kind of -- would you expect there to be any impact on the gross margin? Or are there sources of glass that's already laminated and insulated?

Or is it going to be like where it's slower to get the product to your customers? How does that play out?

No, the need or the initiative we will undertake to expand both the lamination and IG side of the business will surely be volume driven. Mix is getting better on the impact side, but that wouldn't be the driver. It's the volume that we see could be coming in the future.

And we want to make sure that volume is on a sustained run rate before we invest capital in that equipment. The margin -- if we don't, we would be buying that glass from the outside, so obviously that would be a margin hit.

So when we buy the capital, you are talking a laminating line and a clave of probably $2.5 million for something like that. The building is already built.

An IG line is probably $1.5 million. Again, we would try to get the latest and greatest technology on some of this stuff, like we did with our tempering ovens.

So that is the kind of capital. And you've got to keep in mind the last time we bought those kind of lines -- it has been several years -- you really leverage those lines over a long, long period of time. And we want to do all -- our goal is to make 99% of our class in-house so we can control both the quality, the price, and on-time delivery to our customers.

Yes, there are some code changes coming in Florida next year, and it should drive additional IG needs. And we are aware of that. We were involved in the code.

We were actually involved in the code changes, making a lot of the proposals that drove the code changes. So we are aware of what is happening there, and we have got product that we are ready to roll out.

It may change the IG needs a little bit. Not necessarily the laminated needs, but the IG needs. And so we are prepared for that.

Those code changes, are those statewide, or are they more at the different local levels?

It's statewide. It is statewide and it is energy codes. They are changing -- I say it is statewide; it is a statewide code that is changing some of the requirements for energy efficiency, depending on which part of the geography you are in.

Got it. Okay. Then, now it looks like you have bumped up the -- being fully operational in your glass plant to the end of 3Q as opposed to the end of 4Q. Is that correct? And if so, what drove that?

We're going to turn on the switch at the end of the third quarter. Fully operational? I am expecting a couple months of uptime, training, getting things going, getting volume through.

But we have been consistent. The glass plant is going to be online at the end of the third quarter and is operationally efficient as soon as possible. It will be during the fourth quarter.

I can't tell you when. It will be as soon as possible, based off our people and our training.

Okay. Then one last one was you put out an 8-K just recently about your relationship with Royal Building Products, and I believe this is in relation to changing your vinyl window platform. So wanted to see if you could talk a little bit more about what you are doing there, and if there were any impacts on your business this quarter as a result of that.

No real impact on the business this quarter. What we are doing, as vinyl becomes more of a predominant framing material of choice to put in Florida, in our core market, what we are doing is expanding our product offering there.

We call it [Ultimately] vinyl. We came out with obviously the French door this year, sliding glass door two years ago. So we have already started that effort, and our goal is to make the margins we make in vinyl equivalent or better than those we make on aluminum.

And right now, they are not. We make more margin dollars in aluminum than we do vinyl.

So what we are going to do is reengineer our window platform, both impact and nonimpact, and basically consolidate to one supplier. That supplier is going to be Royal, and that is the agreement that we filed an 8-K with.

We have been designing, in design stages with them in terms of the window. It will run down the same line, for instance. It will free up plant space.

That is why I think ultimately we will be able to get even more production out of this plant than we have done in the past, because we free up some line space, square footage. So it is actually a positive thing.

We plan on launching the first series of products the first quarter of 2015. And this should be both -- enhance our vinyl margin as well as improve our presence in the vinyl side of the business and industry.

What kind of delta are you looking at in terms of the margin change? And I will stop there; sorry about that.

Generally speaking, it depends on the product, Rob. But generally speaking, all things considered, our aluminum window versus our vinyl window, it is generally about 5 to 7 points. So that would be the difference that we are expecting to make up.

Got it. Thanks.

(Operator Instructions) Jeremy Hamblin, Dougherty & Company.

Good morning, guys. Just wanted to follow up on -- did you give an April sales number on a year-over-year basis?

Yes, I mentioned April sales grew --

24%.

24%, year-over-year.

How did that compare to March and February?

Year-over-year you are referring to, Jeremy?

Yes.

March grew 22% and February grew 41%. And I guess you didn't ask, but January grew 18%, just for your -- in case you're wanting that.

Perfect. Let me just ask, then, about going after these larger projects. As this industry has really rebounded nicely, and I think both you and your competitors are also seeing nice growth, I am surprised that it sounds like the pricing environment is actually getting more competitive, despite the fact that there is a lot more business to be had.

Or was this just truly about a strategic choice that you are making in the hopes that you will have long-lasting relationships on these large projects? Can you talk a little bit more in terms of pricing and whether or not you thought you could take additional price increases moving forward on your traditional WinGuard products?

Yes, sure. I will talk about it a little, Jeremy. This was strategic. When we looked at the marketplace and we looked at areas we thought we could grow and sustain that growth over a long period of time -- to us it's really important that we never look at it by the quarter or even by the half of the year, maybe sometimes the effect that it might have in this year, but look at it for long term.

So there are some projects out there that right now, as you look at the bid process, you are bidding on Phase One of maybe five phases. And we weren't necessarily spec-ed on Phase One, but we wanted to go in and bid it, knowing that Phase Two was going to be another bid process, Phase Three was going to be another bid process.

But we believe our value proposition is so strong that once we get in on one phase it allows us to bid the second one and the third one with much less competitive bids out there. And we have seen that in the past, so this isn't the first time we have done this and say let's see how it works.

This is just the opportunity to do that as we look forward for the remainder of the year and realize we are going to have some capacity glass-wise because some of these projects are two-year projects or longer. And they are not contracts in place for 2 years. They are just -- if all three, four, or five phases are going to last that long. So very strategic when we looked at some of those projects.

Also, as we look at some of the condos, we knew we wanted to have a bigger presence in the condo market. And the interesting thing about the condo market is, you pick out kind of a signature condo and everybody knows that it is PGT's product in that condo. And it makes all the condos around it, particularly with success on that condo, much easier to bid.

So everything we did pretty much on this condo process was really kind of a strategic focus to say: where are we at as a Company? How do we make sure that we are positioned correctly for our new glass facility? How do we make sure we are positioned correctly for the markets that we want to serve long-term? And are we confident that we can get it?

To I think the latter part of your question, will pricing stick, we saw the price increase that we had last year stick pretty well for that general pricing. This was the competitive pricing that we put out there to get a couple of projects.

Yes. No, I was asking specific to your traditional WinGuard product, whether or not you thought you had additional pricing power and whether or not you might use that going forward.

Yes, again we've talked about that in the past, and we think that that is definitely an advantage for us, particularly with the market share that we maintain. Last time we announced the price increase, it stuck; we think the next price increase will stick also.

We see competitors having some capacity constraints also. So I know that as we go forward there will be a little more pricing pressure in our market.

I think nationally what you see is things haven't gone necessarily as well as what people thought, so there is a little extra capacity out there. But we are not seen quite as much of that in the state of Florida.

Okay. Let me just -- in coming back to the large project pricing and just the strategy behind this, when you guys had your conference call a couple of months ago, I would say obviously people were a little bit surprised to see the degradation in gross margins to where they were. Was this something where you feel like you had communicated this and people missed it? Or was this strategic choices that had been made post that call?

We don't give guidance. The guidance that we give is generally -- we are a month in by the time we have our call, so we see what that month has done on a top line. And then from a future point of view, obviously, you can drive by our plant; you see a new glass facility going up and they are putting steel up there. And it would be kind of ingenuine of us not to be talking about that, because it is something that we are doing.

But as far as our internal strategy for how we attack the market, it is not something that we have really given guidance on at any point in time.

Then just in terms of the healthcare costs, the other aspect on gross margin drag, are those purely transitory? Is this one time, specific to Q1? Or is that something where, because you have had so many hires, that we should be expecting those adjustments to your accruals to continue to flow through in Q2, Q3, etc.?

Jeremy, when we disclosed the impact of the cost of healthcare, what I was referring to there was the actual cost above what I would consider the volume driven. The cost of the new employees just on a volume basis to us is considered part of the contribution margin.

But in their first quarter we did experience cost per person if you will in excess of what we had in the first quarter last year, of that 57% number. And looking at the details of those claims, there were mainly several large claims as opposed to just every single claim going up by a bunch.

So we do experience additional healthcare costs or expect additional healthcare costs just because that is what the industry is experiencing, that is what the country is experiencing. But the first quarter in terms of its excessive 57% growth is more around large claims that are not likely to reoccur.

Great. Thanks for taking my questions. Best of luck.

Thank you. This ends the Q&A portion of today's conference. I would like to turn the call over to Mr. Brad West for any closing remarks.

Thank you for joining us today, and I want to thank our employees for their continued efforts and hard work. And we look forward to speaking to you again next quarter. If you have any further questions, please call us and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.