PGT Innovations Inc (PGTI) 2015 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the PGT, Inc. third-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. I would like to introduce your host for today's conference Mr. Brad West, CFO. Sir, please go ahead.

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

This morning we are pleased to provide an update on our third-quarter results as well as an outlook for the fourth-quarter 2015. Hopefully everyone reviewed 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 fact. Rather they are based on our current expectations and 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 sheet and statement 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 exhibit to our Form 8-K filed with the SEC yesterday.

These non-GAAP measurements are not intended to replace the presentation of financial results in accordance with GAAP. Rather we believe these non-GAAP measurements provide additional information for investors to facilitate the comparison of past and present performance.

We will provide an overview of our performance for the third quarter ended October 3, 2015 and after our prepared remarks we will have ample time to address any questions that you may have. With that let me turn the call over to our President, Jeff Jackson. Jeff?

Thank you, Brad, and good morning everyone. Our third-quarter results continue to show growth in both the PGT and CGI branded products.

Highlights include consolidated sales of $100.7 million, the second time this year we exceeded over $100 million in quarterly sales. Top-line sales growth of 30.2% compared to last year's 8.1% for PGT branded products and 22.1% with the addition of CGI, solid demand for our new vinyl WinGuard and EnergyVue product lines and an increase in our workforce to over 2,200 employees.

As we recently passed the one-year anniversary for our acquisition of CGI we reflected on what a great combination this has proven to be. Reactions from the broader market and our customer base has been outstanding.

The combined entity has exceeded and excelled in terms of both top line and growth and profit. Additionally our organization is fully integrated culturally and our expectations for the future remain high.

With this acquisition we expanded our portfolio of exceptionally designed impact windows and doors and solidified our position as the leading manufacturer of impact resistant products in the US. Our impact resistant products continue to lead the way in our quarter-over-quarter sales increase and represented 83% of sales.

Our sales increase of 30% over last year led by sales of impact resistant products which grew 39%. Sales of other window and door products represented 17% for the third quarter, basically flat versus last year.

Also in the quarter 59% of our sales were from the repair and remodeling market, up 25% over the third-quarter last year while sales in the new construction market represented 41%, growing 39%. Single-family housing starts in Florida in the third quarter were approximately 18,400, up 22% over last year's third-quarter starts. We again outperformed the broader market as our new construction sales increased 24% when including CGI sales for the entire third quarter of 2014.

Our current-year start estimates for single-family housing is around 65,000. And as a reminder we believe the Florida economy and its growing population will support starts of over 110,000 annually. Additionally based off our historic results we believe we can continue to outperform the growth in the housing starts and capture additional market share.

From a margin standpoint our performance during the quarter was impacted by a combination of both positive and negative factors with adjusted gross margin coming in at the low end of our estimates. During the quarter we went live with our new ERP system in our insulated glass department. This led to certain operating challenges during the third quarter which negatively impacted our gross margins.

These challenges were centered primarily on production and scheduling issues for our insulated glass line. The effects of these issues impacted our ability to produce our vinyl products, all of which have IG glass in them. This resulted in higher than anticipated labor costs and scrap levels.

Additionally these challenges temporarily decreased our vinyl manufacturing capacity and caused us to experience increased leadtimes resulting in nearly $6 million or a 24% increase in our sales backlog. Flow-through from the main plant, glass plant processing centers to our IG facility and then to our window and door line assembly lines has improved dramatically as we closed out our October results. We are confident that the majority of our ERP issues which disrupted the flow of our process through our IG facility have been addressed.

Recent improvements in both weekly sales and on-time deliveries support this belief. In the past two weeks we shipped over $7 million each week and so far this week our on-time delivery performance is running at 96%. On-time delivery is a key measure for our performance.

We reached lows of 85% during the third-quarter as an example. However, due to the nature of system issues operational improvements will only gradually work their way to the bottom line and gross margins in the near-term will continue to be pressured. In addition to these operating challenges we experienced other factors that have negatively impacted our gross margins during the quarter including product mix as we continue to see a higher percentage of our sales composed of new construction sales as compared to last year and higher employee-related overhead costs on our increasing sales level.

Demand for our products remained strong. The fourth quarter is typically our slowest quarter given the impact of both Thanksgiving and Christmas holiday weeks. Both labor and weather continue to be headwinds in the Florida market.

In the face of these facts we estimate that consolidated sales will be between $88 million and $92 million which represents a solid growth in the range of 4% to 9%. As a reminder, sales comparisons between fourth quarter of 2015 and 2014 will include CGI sales for the entire quarters in both years.

Our ability to effect the top end of this range is dependent upon our ability to decrease our lead times bringing in some of the $6 million increase in backlog we experienced. While we have made meaningful strides in improving operation in recent weeks we do not anticipate any meaningful reduction in our backlog until the first quarter of 2016.

With that I will turn the call back over to Brad who will review the results in greater detail. Brad?

Thank you, Jeff. As Jeff mentioned we reported sales of $100.7 million, up 30% over prior year. Breaking down our sales drivers compared to 2014 third quarter we have impact sales of $83.6 million versus $60.0 million, an increase of $23.6 million or 39.2%, vinyl non-impact sales of $10.6 million versus $10.3 million, up $300,000 or 3.1% and aluminum non-impact sales of $6.5 million versus $7.0 million, down $500,000 or 6.9%.

Gross margin dollars increased $6.2 million or 26.9% over the third quarter of 2014. Our gross margin of 22.9% decreased as a percent of sales by 0.8% compared to the same period last year.

During the third quarter we continued to focus on the future with three ongoing initiatives. We installed our new laminated glass line to increase production capabilities of our new vinyl products and we converted a large portion of our operations to the new ERP system. In total we spent $2.0 million during the quarter on these initiatives.

After adjusting for these costs our gross margin was 31.2%, an increase of 80 basis points over last year's third-quarter adjusted gross margin. To quantify these factors the 80 basis point increase in our adjusted gross margin was a result of the price increase announced in the first quarter of this year of 130 basis points, lower aluminum cost 70 basis points, improved leverage from higher volume 20 basis points and the addition of CGI 130 basis points. These positive factors were offset by an increase in overhead cost of 230 basis points and a decrease of due to product mix of 40 basis points.

With regards to aluminum our average delivered cost of aluminum was approximately $0.96 per pound during the quarter compared to $1.09 per pound during the third quarter of 2014. The delivered cost of aluminum is comprised of 41% of spot purchases at $0.82 per pound and 59% of forward buys at $1.06 per pound.

To cover our aluminum needs in the near-term we have been entering into contracts for future purchases of aluminum with our two largest US suppliers of aluminum extrusion. As of today we are covered for approximately 54% of our estimated need to the end of 2015 and an average delivered price of approximately $0.95 per pound. Additionally we are covered for approximately 52% of our estimated needs during 2016 at an average price of $0.88 per pound.

The current delivered cash price is approximately $0.76 per pound. This delivered price per pound includes components for the LME and Midwest premium components but it does exclude conversion costs.

Selling, general and administrative expenses as a percent of sales benefit 16.3% compared to 18.5% in the third quarter of 2014. On a dollar basis our selling, general and administrative expenses were $16.4 million, an increase of $2.1 million from the third quarter of 2014. Included in those expenses for the quarter are CGI expenses of $3.4 million which includes 865,000 in non-cash amortization expense related to CGI's amortizable intangibles.

Selling, general and administrative expenses for the third quarter of 2014 did include $1.5 million of costs related to the acquisition of CGI. Excluding CGI-related expenses for both periods results in an increase in selling, general and administrative expenses of only $300,000, primarily due to a higher variable SG&A consisting of higher sales.

Interest expense of $2.9 million compared to $1.0 million in the third quarter of 2014. The increase from prior year relates to higher outstanding debt levels as a result of the refinancing in September 2014.

Depreciation and amortization reported in the third quarter was $2.6 million compared to $1.1 million last year. Going forward as a result of the acquired intangibles and the incremental depreciation related to the new class facility depreciation and amortization expense is expected to be between $10 million and $11 million for the year.

Our tax expense in the third quarter was $3.6 million and represents an effective income tax rate of 36.5%. This compares to $1.7 million and 42.1% in the third quarter of last year.

The effective tax rate in the third quarter is lower than our statutory rate of approximately 38.8% due mainly to the impact of the section 199 domestic manufacturing deduction. The effective tax rate in the third quarter of 2014 is impacted by an update to our full-year estimated rate which resulted in the increase in estimated effective tax rate.

Tax expense in the year-to-date period in 2015 was $13.7 million. That includes a nonrecurring non-cash accounting charge of $1.6 million related to an inter-period income tax allocation on our affective aluminum hedges. This amount allocated comprehensive income in the prior fiscal year was reversed during 2015.

Excluding the charge our effective tax rate for the year-to-date period in 2015 was 36.1%. Going forward we expect to record tax expense effective rate between 36% and 37%. Also from a cash perspective our year-end 2014 estimate of our tax effective federal operating loss carryforward is approximately $6.1 million mostly acquired in the CGI acquisition.

We had net income in the third quarter of $7.9 million or $0.16 per diluted share after adjusting for the costs we incurred related to the ERP systems conversion, new product launches and laminated glass line installation versus $6.2 million or $0.12 per diluted share in the third quarter of 2014, net income and cents per diluted share in the third quarter of 2014 as adjusted for a debt extinguishment cost, interest swap fee designation, DD acquisition cost and gross profit glass processing facility startup cost. Adjusted EBITDA was $17.9 million for the third quarter of 2015 compared to adjusted EBITDA of $12.1 million for the third quarter of 2014, an increase of 48%.

A reconciliation of net income and EBITDA which I have just discussed have been included in our earnings release for your reference. We ended the quarter with a cash balance of $54.8 million. Our cash growth has been achieved despite capital spending of $13.6 million in the first nine months of the year, all funded by cash from operations.

We anticipate consolidated capital spending requirements for 2015 to approximate $18 million as we fund additional glass facility and equipment costs needed to service the increasing consolidated sales. With $54.8 million of cash on hand, our net leverage was 2.0 times at the end of the quarter. We have a strong balance sheet with the ability to make further acquisitions and fund future needs.

At this time I will turn the call over to our CEO Rod Hershberger for a summary.

Thank you, Brad. This quarter makes the 11th consecutive quarters that our new construction sales growth has exceeded 30%, increasing 39% over last year with five of those quarters exceeding 50% growth. Our markets remain strong and we continue to experience growth in both our PGT and CGI branded product lines.

Despite skilled labor constraints for some of our dealers and recent bad, particularly rainy weather our primary market of Florida continues to exhibit strength in its growth of single-family housing starts and within the repair and remodeling market. Additionally demand for our new vinyl products has been excellent.

On October 28 we announced that our Board of Directors authorized our $20 million share buyback program which in addition to our history of profitable operations provides us with another vehicle for increasing shareholder value. The confidence we have in our business and our markets combined with our consistently strong cash generation and profitable operations gives us the confidence to announce the buyback program at this time.

We continue to actively evaluate acquisition opportunities in the window and door space and we are resolute in our goal to identify and close deals which fit within our core values: culture and long-term growth strategy. Like CGI we seek candidates that will help us achieve our goals of earnings improvement and expansion both in product offerings and geography. In fact, thus far in 2015 we have actively analyzed numerous opportunities, passed on several and continue to aggressively pursue a select few.

Lastly, the PGT family continues to grow. During the third quarter we exceeded 2,200 employees for the first time since 2007 at which time we had approximately 2,600 employees with a sales run rate less than where we are today. For the fourth quarter we expect to continue to outpace our underlying markets in terms of top-line growth.

After increasing only 4% in the first quarter single-family housing starts in Florida have increased by more than 20% in consecutive quarters which we believe will result in solid sales growth in the fourth quarter. Looking ahead, our priorities include improving our production flows and reducing lead time. We also will continue with the third phase of our glass capacity expansion with the addition of more glass cutting and tempering equipment.

I am thankful for the dedication and effort put forth by all of our team members who have worked hard to help us realize our strategic initiatives and execute on our value proposition every day.

With that I will conclude and we will be happy to answer your questions about our results. Michelle, if you could get the first question please.

(Operator Instructions) Sam Darkatsh, Raymond James.

Good morning. This is Josh filling in for Sam. Thanks for taking my questions.

Could you give us a little bit more color on what remains to be done with the ERP rollout? If there's any other lines that still are on the docket to be converted and that sort of thing?

Sure. So we converted the vinyl lines first basically over the summer which represented about 30% of our business, though a large proportion of our insulated glass lines. So when this full integration is complete we will then move forward sometime next year with converting the aluminum lines.

I'll add to that. The biggest part of the conversion was the IG department.

Now that that's clearly behind us and we've experienced issues there and rectified those, the remaining part is assembly driven, assembly on the aluminum side of the business. The assembly on the vinyl side of the business like Brad had said was turned on in basically July and August and all those issues have been resolved as well and it really wasn't the main issue.

The main issue from the ERP standpoint, the addition of all the cost, is centered around the IG department and that glass. I will remind you that we didn't -- we turned the system on in stages over the last year and a half and the first stage is being administrative functions, the next stage was actually the glass plant and the glass plant both cutting, tempering and laminating has been running on the system now very successfully for several quarters.

As recently as a result of the system our lami IG yields, our lami yields, excuse me, have hit records. We've been doing better at laminating glass than we've done in the last six years. So we're getting benefits of the system in the glass plant.

When we flip the switch to the ID side of the business that was the next biggest switch if you will. So it's fair to say that 70% of the systems have been implemented. In terms of its impact on the business, we still have the aluminum side of the business to go on the assembly side.

Hey, Josh, just one more note too. We turned on our Eze-Breeze, our porch enclosure product, in this new system virtually two years ago and it was a smooth transition and that's one of our manufacturing lines. But it's a manufacturing line that didn't take any type of glass, particularly didn't take any type of IG glass that kind of stood alone.

So hence the confidence in our manufacturing line's ability and the system to handle our manufacturing lines because some of those lines have been running on it for two years now. It was the integration of the IG glass.

Got it. That's very helpful color.

And then you've talked about some gross margin pressure as things work through the system. Could you give us a sense of quantification of how much pressure we might see in the fourth quarter or 2016 and what kind of timeline you're looking at for that to work its way through?

Yes, Josh, as we mentioned in the press release in the third quarter we're going to continue to see pressures on those margins. We're not going to give guidance for the fourth-quarter number.

Suffice it to say we are still experiencing some of those issues in October and this last couple of weeks we've been seeing some great results. But at this point because of system issues and the nature of them we do expect them to continue to be pressured.

And is that into 2016 as well?

You know, not as much. Definitely I mean we felt it in October, the last two weeks we felt less. I'll give you an example, direct labor during the third quarter at times hit 14%-plus centered right again around IG and the vinyl side of the business.

The last two weeks that same number has been 11.5%. In the first part of the year that number was close to 10.5%. So just to frame the magnitude of the issue we face, the positive fixes we've done and then but we do still have some work to go.

So there will be some indirect or sorry direct labor quote addbacks. We still are outsourcing some IG glass that we want to obviously do internally and we stopped -- we've decreased the amount of IG glass about 30%, 35% from what we were doing and the goal is to obviously bring that back in over the fourth quarter as well and actually we do that weekly. So those are some of the areas, you'll see some labor issues still and some scrap material issues as well.

Got it. And lastly for me, could you talk about what your sales growth was by month in the third quarter and in October?

Yes, and this is going to be for the PGT brand only. The July growth was 23% and then August and September were 1% and 4% respectively.

And October?

We had not given our corporate sales number.

Got it. Good luck with the next quarter.

Keith Hughes, SunTrust.

So going back to the last question, the October -- the August, September of 1% and 4% growth, I know you've had internal issues in terms of servicing. Is that an order number or sales number?

Those are sales numbers, Keith. And they were definitely impacted by the orders of backlog pushout happened during August and September, absolutely.

Okay. What kind of -- do you have an order number of what does those look like?

We don't at this time but we did mention that $6 million was the increase in backlog during that time period. So you might be able to back into something.

All right. And you've talked about how it's going to take a little bit of time just to work these issues out.

I guess the question is you had talked about acquisitions. Does this change your time horizon of when you would pull the trigger on an acquisition as you work through these issues?

No, not really because Keith just to give you an example CGI stands alone and has its own system. Their results have not been impacted at all related to our IG glass and our system issues we faced during the third quarter. So as we look at acquisitions they stand on their own merit and we evaluate them accordingly.

We typically don't look for an acquisition that would take our management team going in and replacing somebody else's management team and putting a whole new structure in place. That's not something that really fits our model quite as well, especially with our leadership structure that we have here.

So because of that it doesn't affect it near as much. We would expect an acquisition to pretty much stand on its own with a little bit of benefit from as we said big brother.

You had referred to your share repurchase authorization that you announced several days ago. If that's completed and the stock is depressed as it has been today for example, would the Board, do you think the Board would be open towards authorizing another repurchase?

Yes, it's something that we definitely talk at the Board level about. And the blackout period will be lifted sometime next week and we will have to evaluate it at that time.

Final question on the gross margin for fourth quarter you've highlighted you're going to have some pressure as aluminum is going to be lower. Are you going to be able to deliver some level of increased gross margin in the fourth as we saw here in the third?

Well I think the two factors that we're dealing with in the fourth quarter compared to the third, it is a lower sales volume quarter so there would be a negative impact that would come from leverage that's typical and then the price of aluminum is definitely up. So at this point like we said we have continued to put off, I'm sorry I misunderstood the question. You were talking --

The gross margin in fourth quarter versus the fourth quarter of 2014, given what you know as you're fixing these issues would that gross margin be down year over year or would you expect it to be up?

No it would be up year over year. I'm sorry. I misunderstood the question.

All right. Thank you very much.

Rob Hansen, Deutsche Bank.

Thanks. I just wanted to ask about the aluminum business and the next kind of phase of the ERP implementation.

So this is a much larger part of your sales. So I think I would imagine investors are probably worried about the next transition here. So I guess if you could just give an example or why you think you should be better off in this implementation, whether it's structural, just the nature of the business and how you plan to attack what you've learned from the most recent situation.

Yes, Rob again the biggest issue we faced was the IG side, not be a assembly of aluminum windows. So now that we've got IG fixed, 80% fixed again we will get the remaining percentage as the quarter works its way through.

Now that IG is on its way to recovery that same IG unit will not be an issue when it comes to the aluminum line. The assembly part of the system we've tested very thoroughly. The actual processor, the BOM, the bill of materials, how the window's put together no issues there at all.

So even on the vinyl side which we've already turned on, the assembly side for the vinyl we are finding no issues on the assembly side there at all. So I do not anticipate when we flip the switch for the aluminum side for it to be an issue. Again because the same IG that we've fixed for all practical purposes will feed that aluminum assembly side.

Got it. That makes sense. Okay. And then you mentioned obviously the direct labor and efficiencies.

Is this is from employee turnover or new hiring just to kind of as you grow here? What's the impact there?

The impact there is a combination of things but mainly surrounded adding additional resources to sort glass and process glass through the IG side of the business. Again if you could imagine the glass coming over and it wasn't in order, in the past it was.

So we made close to over 3,000 IG units a day, so you can imagine 3,000 pieces of glass every day coming at you that's not sorted we had to put in, just as an example, we had to put in labor to help manually sort that until we worked out the programming within the system to do it. So that's an example of the types of labor we're considering in terms of one-time in nature or addbacks.

Got it. So that labor, that impact that you mentioned was primarily one-time. It shouldn't be, it's not like you're investing into the future there and adding a fixed component there that's going to stay?

Just to clarify that there is a slight amount of that. We think sales we're kind of bullish on what the Florida market is. We talked a lot about starts and where we think starts are going to go.

The forecast for next year by the experts that we don't necessarily agree with entirely are really strong in the state of Florida. So we will maintain -- I don't know that I can quantify it for you. We will maintain a few extra employees making sure that we're able to grow the business as the starts pickup and as remodeling stays real strong.

All right. Thanks. I will hop back in the queue, guys.

Jeremy Hamblin, Dougherty & Company.

Hey guys, thanks for taking my questions. I wanted to ask about just to follow up on that sales guidance, so I think what's implied here is that maybe it would have been a little bit higher had it not been for the manufacturing issues. Is that a correct assumption?

Yes, that's a correct assumption.

And then on the gross margin sequentially, Brad, you're not giving a guidance here but is there a possibility that it could actually be down from the level that you just produced at in Q3?

You know, we're saying that it's going to continue to be pressured. The range is somewhat large because of the amount of sales that we could get and Jeff mentioned whether we could get through the backlog or not. I think the situation is that it's going to be similar to what we saw in Q3.

Well, I will add to that though. I mean obviously there's volume involved. We just finished $100 million quarter.

If we have a $90 million quarter or whatever $92 million top into the range then there are $8 million of sales subsequent quarter that will have an labor impact, lost leverage in essence. So there could be issues around that just from a top-line perspective.

Yes, there's some lost days in there. When you hit Thanksgiving week you've got Thanksgiving and the day after and you've got Christmas week.

Productivity and sales is affected in weeks like that. It's not going to be the same as you would see. We don't get a true 13-week period.

No, understood. It's just if I go back to 2012, 2013 timeframe you saw sequentially results up on gross margin compared to Q3. So I just wasn't sure if that was necessarily going to be the case.

But if you go back to 2012 and 2013 you saw sales growth sequentially as well. So you had leverage and 2012 in particular we had 980 employees at the end of the year.

So you had a lot of leverage when the market first started turning. And obviously as you invest in the market over time from an employee standpoint, that leverage percentage is going to decrease.

Okay. Let me come to CGI for a second which has had outstanding performance. In terms of the EBITDA margins, are you still generating in that 22% to 25% range in terms of the EBITDA margins on that business?

Well we talked about the fact that when we acquired CGI being an impact only company they do generate margins north of 20% and we have started implementing some synergy there which continue to drive it north of 20%. We're not going to give specific numbers on that but yes, we are seeing very favorable at north of 20% EBITDA margins at CGI.

Okay and then in terms of you talked about supply, the potential to supply them with some of the glass by the end of this year. My assumption is obviously things have changed a little bit and that's not going to happen this year because you've got other issues to resolve.

Is that a correct assumption? And is that still something that's part of the plan as we head into 2016 and the potential timing of when that possibly could happen?

Yes from a timing standpoint it will be delayed. We will eventually supply them glass but not until we get through the fourth quarter and work out internally every issue that's on the table, again of which a majority, vast majority 75%-plus have a been worked out.

But the goal will be to obviously start supplying ourselves glass again. Like I had mentioned earlier we did outsource during the third quarter and the beginning of October 1, first week or two weeks of October.

We have outsourced glass, IG glass and we want to get that back internally first. But we will look to supply CGI glass in 2016. I don't think anyone here is comfortable in saying exactly when that will be but when it is we will tell you.

Yes, one of the things that's interesting is this has been primarily an IG problem. Our laminated line is running well and CGI, although they are using more insulated glass, IG glass, than they did in the past the majority of their business is not IG. So it's tough to answer that question because it's not necessarily flowing through our IG plant, it's flowing through our tempering, cutting tempering laminating facility which we do have has been performing well.

Now as we produce more IG glass internally and don't buy as much from the outside we need to produce more laminated glass to feed that IG line also. So that's the balance that we'll look at.

Everything on the CGI side is tested, approved and ready. NOAs are in place, so we can pull that trigger at any time that we think we're ready to do that.

Okay, just one more CGI question. So you guys I think by my calculation you grew the CGI business at somewhere between 35% and 40% in the third quarter which is still pretty phenomenal. What is -- what's happening in terms of obviously the PGTI brand is bigger, it's got bigger numbers, you're not growing at that kind of rate.

But is this some of these issues it's just disruption in your business is causing problems with orders and particularly on the R&R side of your market? I'm assuming that you can't keep growing CGI quite at that rate but is it something where you think that could grow 15%, 20% maybe for an extended period of time because of the synergies?

From a CGI perspective? Yes.

Yes.

Yes. Most definitely.

Right. And then what about -- I'll jump back in the queue. I appreciate your taking my questions.

Bob Wetenhall, RBC Capital Markets.

Hey guys, good morning. Your stock saw 15% today which is a lot and over the last three months it's down 34% and I'm getting calls from investors saying what's the reason now to be in PGTI, what should we be telling investors, why the stock is going to recover lost ground?

We're still, as you probably know and as you can probably tell from this call we're still pretty bullish on Florida and the Florida market. We're actually a little surprised, all the forecasts for this year were higher than 65,000 single-family starts. The forecasts for next year are up considerably.

We have an ERP system that will allow us to do things that I don't believe, and I don't want to say this is a fact, but I don't believe any other window and door company can do with their customers. Granted we've had a hiccup in the IG portion of the implementation but it doesn't change the fact that what we believe the system can do for us and can do for our customers and I think that's a pretty significant fact.

Our customers have a lot of confidence in PGT. We've seen a pressure in third quarter from our performance but we've also seen pressure because it was one of the rainiest third quarters that we've seen in Florida, so the weather affected us and the ability of not just our customers but our customers' customers to get the labor that they needed is a little bit of a headwind.

We think that headwind is going to be there. It's not going to go completely away next year. But that doesn't change the fact that we think we can continue to grow our business.

We've seen CGI's business. We've pushed it through select dealers. That's worked real well.

It's allowed them to grow extremely fast and PGT's sales growth is also strong. Granted, a strong dollar sales growth on big numbers as a percentage isn't as much as a little bit smaller dollar sales growth on a smaller number but we're still seeing good sales growth.

We've got a backlog that we wish wasn't quite as large but it makes you feel good that you have a bigger backlog to normal and we'll work through that backlog and we're still working actively and working hard on potential acquisitions. So in spite of -- when I look at it I say okay, there's the ERP implementation that's a little bit of a hiccup it. Everything else we feel is in our favor.

Yes, Bob, just add a couple of things to that. The fundamentals of this business have not changed. We got an ERP system implementation that basically you do once every 20 years and we're through it, for the most part.

We just introduced a state-of-the-art new vinyl impact line that has better design pressures than aluminum. It's feature-rich.

No other competitor in the market can match it. And the demand in essence outpaced our capacity and we're catching up to that.

So the housing starts are 65,000 this year, they are going to get back up to 110,000. It's just a matter of time.

The Florida market in its entirety is labor shortage, so there is a pent-up building if you will just due to labor. I'm personally building a house and it's probably almost two months behind schedule because of either labor or weather.

So there's a lot of good pent-up demand. We haven't had a hurricane in 10 years.

We had a couple of good scares this year. We think there's still awareness that needs to happen in the market and we think we're on top of that with our brand and our marketing.

So the fundamentals of this has not changed. We generate an incredible amount of cash flow. Our cash flow is now over $54 million as an example.

That hasn't changed. We're still doing that.

And we have a product pipeline. As we look out into the next couple of years we have already got that product pipeline just kind of marching towards the finish line so that we can continue to introduce products that the consumer is either asking for or that we're seeing in the marketplace that will make a difference.

Got it. So it sounds like this quarter was kind of a misfire, would that be a fair characterization?

This quarter we implemented an ERP system that had issues that we've worked through.

I'm just trying to understand. We're into October, you've got two months left and I think we're hearing a lot of investor concern around profitability and gross margins. So I'm just trying to get some comfort given the fact that I think, Jeff, you're saying hey, these issues are in the rearview mirror, we're moving forward into year-end.

We've got a good view on visibility and demand. Can we get a little bit of comfort on the gross margin line and just how to think of it?

You obviously had some bottlenecks, at the same time you had some lower aluminum cost. Just help us reconcile this.

The only thing that you've got to remember we are in the fourth quarter. November, we have three weeks of this remaining two months that are going to be holiday-related weeks and we sell mainly into an R&R market that doesn't have R&R work during that timeframe.

So our ability I firmly believe if we're sitting in the second quarter the next eight weeks the backlog is back in and we're back on track. The fact we're in the fourth quarter is going to hinder us getting our volume in the backlog back down because surely because of time.

I think I mentioned to you on the call the last two weeks have been $7 million weeks. We just have so many of those left. In terms of margin it is going to be hard to give any kind of a range because again we're going to have an addback in the fourth quarter for the costs associated with the systems implementation in glass impact.

It won't be to the magnitude we don't feel it was in the third because everything is pointing in the right direction. That's really all I can say at this point other than again look at the last three weeks.

My indicators are all back in line. So things are definitely in the rearview mirror to your point.

And do you guys can't give us kind of a bookmark range like, hey, here's the wide, here's the high, the low, the high?

I think Brad had mentioned earlier it's going to beat last year and it should meet would you say it was going to meet or be right in line --

It will be near the third quarter.

Near the third-quarter number.

That's beautiful. And to your point a lot of cash flow and I think you guys are also touching on acquisitions.

What do you do with the cash flow if you don't find good M&A? You've done a great job of consolidating Florida market, you've got CGI. What's the plan with that?

We did announce the share repo that we're going to do initially $20 million. I think it was Keith that might have asked, will we go back if we burn through that?

And the answer is yes, we will go back and talk to the Board about how to best invest the cash, is it another share repurchase or is it other opportunities. But we are still definitely aware that we produce great cash flow and needs to somehow work its way back to the shareholders in terms of either a share repo or an acquisition like CGI that's been incredibly successful.

Hey, Bob, I think our internal acquisition strategy it's well thought out, its defined and we've executed well although there haven't been a lot, I'll grant you that. But it's because the criteria is pretty tight on how we do it but that doesn't mean we're not continuing to look. So we will keep some cash to make sure that we can achieve what we want to achieve internally.

Got it. Thanks for the help in clarity and good luck next quarter.

Ken Zener, KeyBanc.

Good morning, gentlemen. So I think the volatility here versus last year at least since I started covering your Company is that it seemed structural last year where you had to buy outside glass and that was an understandable dilution that occurred amid still a fundamentally solid top-line demand and I'm fine with that.

To me, though, I think helping us understand this ERP like Hershey's had ERP issues at Easter so it's not unique to you guys, but why do you think you underestimated the risk in the system, so why did you guys choose to implement it then on the IG side? And then it sounds like all the labor, not all but the vast majority of the labor is associated with getting the glass to the right spot because it seems to me that within your 35% long-term gross margin target that in FY16 you're supposed to maybe get upwards of 200 basis points lift tied to just the vinyl. If it was operating 600, 700 basis points below your average you're supposed to roll it out.

So in a full-year you're supposed to get that 200 basis point lift FY16 versus FY15. But this seems a lot more related to your guys' execution now versus structure. So I think that's why people are very concerned and I understand 4Q, Brad, you're talking about gross margins being flattish, there's going to be a volume issue there but can you guys help us resolve this?

I know you're thinking it was a one-time issue and it happens. But why didn't you guys risk test it better on the IG side and how are you going to go ahead and test this as you bring it out on the aluminum which is obviously the majority of your business in terms of that process?

Okay I'm going to -- we're all probably going to comment to a certain degree but I'm going to attempt to clarify a couple of things in terms of the testing side of the implementation. We did test certain areas. We tested them and they worked.

Certain areas we didn't emphasize as much. That was the scheduling and capacity areas that ultimately ended up being a tip of an iceberg. But underneath we did a lot of testing over the dutch of the system, like I said earlier the BOMs, that configurator the actual configurator itself.

But in our glass operations which before was run on basically an antiquated system and needed to be upgraded and based off our success we did have with the glass plant as I had mentioned earlier the glass plant itself tempering, cutting and laminating has been on the system and working well we thought the next phase rightfully so should be IG. And I think the areas we did not test enough once you apply volume to those areas you really saw the impact and that's what happened. It is as simple as that and once we saw that some things that we did we increased the vendor on-site staff.

There is a war room literally dedicated to answering issues daily that come up. We hired an additional project manager, very experienced individual to help lead the remaining part of this project in conjunction with our current IT team. We switched out executive leadership roles on the whole implementation process.

There's been several internal moves we've done to attack this problem. As a result we're seeing better outcomes, we're past this. It did and from a top line I am going to try to answer the top-line question you asked --

Yes, I think that's fine. It just seems like the ERP, I mean to the extent you might have overlooked some of the risk issues as you leverage the system and higher volume, how are you guys assessing the risk relative to the aluminum with your war room? How are you guys exploring the next set of unknowns?

We're volume testing related to the assembly of our aluminum side of the business. I spoke to the project lead this morning and we're confident that now we can run volume parallel before we flip the switch on the assembling side of the aluminum.

But again I want to reemphasize that the vinyl assembly side wasn't really an issue. It works. The BOMs, the bill of materials, it worked, we built the windows.

It was the feeding of that line with IG glass. So now that we're over the IG glass hump the assembly of aluminum should not be as impactful; however, we are testing it at volume. Hopefully that makes sense.

It does. I think you guys ability as Rumsfeld said identify the unknown knowns.

On that the vinyl side if that's working relative to the IG flow are you guys still on track to close that 600 basis points by the end of -- when are we looking to close that gap if you're moving your production all over to that new IG system going into the new vinyl line? Have you closed 500, 600 basis points and when should we really see that ex-these production issues in volume?

Well, we are still producing product in our old vinyl lines in part because of this cutover and its impact. So that did have a delay from what our initial expectations were. So as we go through 2016 we will continue that cutover and sometime in the middle of next year we will be on the new product.

In terms of the margin expectations once we're on the new product, that has not changed. The demand remains really strong for the product. The feedback we're getting is great.

And in terms of the cost metrics that we use for labor and materials all those are coming in line. The product that we're selling we're very happy with it and as soon as we get cutover we will be very pleased with the result.

Ken, I just want to ask or add about the top line. You mentioned last year and how the top line wasn't impacted. This year it has been.

That's literally solely related again to IG. We've never outsourced IG before and so once we got into this process of implementing the system on IG we had issues we could not pull a lever to go and simply order IG from a third-party. That had to be set up and so that was a three-, almost four-week process to enable us to order outside IG glass.

Whereas last year we could order lami, we picked up the phone, we had a production issue we really picked up the phone, we called our third-party supplier we said we need lami glass Friday and they would get it to us. This year that wasn't an option, so the sales impact, the top-line guidance that we've given and its impact which is reflected in the backlog was there simply because we couldn't pick up and order third-party IG in time enough to prevent it.

Right.

So the market itself hasn't changed. Look the Florida market is solid, it's robust and it's growing.

It was our execution only and only related to IG. Our aluminum lines were fine.

The impact side has been fine. And now that we've got the IG business, ERP system behind us I think during the fourth quarter you're going to see the remaining issues flow out and this is done.

Good. I do appreciate you guys trying to flesh out these obviously opaque issues.

But the one comment I would leave you guys with as you guys are considering how you frame FY16 is if you guys could go back to that longer-term outlook so you could put this up and down, turn left, turn right issues within a broader framework I certainly think the financial community will appreciate your guys broader view when you get to FY16 versus just the quarter to quarter which I think is undermining your guys' longer-term story and cadence relative to how you are actually positioned in the market. Thank you, gentlemen.

(Operator Instructions) Michael Conti, Sidoti.

Hey, good morning. Yes, just relating to the production issues wondering if I guess what impact DID that have on your customers' buying ability? Do they have to buy their product needs from other competitors then, that's fair to assume?

Well some is that fair? Yes, that's probably fair to assume but you got to remember some went into our backlog. We are the branded product for impact.

People want PGT, so to the extent they had to have them and again only vinyl related, let's make sure we understand that yes, they probably went to a competitor or they could have also went to our sister company CGI. So again we have some ground to make up in terms of bringing back down the leadtimes and therefore reducing that backlog but we do not at all anticipate IT being AN issue to win back any kind of lost share which we don't think there's been that much of a material impact.

Okay. And then I wanted to ask if you're seeing maybe any of your competitors also increasing capacity just given the level of demand over there in Florida? And if so how should that impact your premium pricing OR maybe your ability to raise prices in the future?

Well, you know, we've kind of had a price program in place where we have a little bit of a price increase every year as opposed to a large big one. And the timing of that price increase has a lot of factors including the performance and operation that we're dealing with now as well as other factors and other strategic initiatives. That being said, I don't think anything that we're dealing with is going to affect pricing going forward, maybe the timing but certainly not the concept of a price increase annually.

Yes, our pricing will be based off what the market will bear and we are typically and we will probably always will be a good 15% to 20% premium on that. And we did, again we did that when we deliver at the 96% rates that we are now back to.

Great. That is all I have.

I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Brad West for any closing remarks.

Thank you for the time today and I look forward to talking to everyone next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.