PGT Innovations Inc (PGTI) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the PGT Incorporated second-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Brad West, Senior Vice President and Chief Financial Officer.

Thank you, Emily, and good morning. Welcome to PGTI's second-quarter conference call. I am Brad West, and I am joined today by Rod Hershberger, Chairman and CEO; and Jeff Jackson, President.

Before we begin our formal comments I would like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the Company's financial reports. We undertake no obligation to publicly update or revise any forward-looking statements.

You should also note that we will report our results using non-GAAP measures, which we believe provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation of these non-GAAP measures to their GAAP counterparts is available in the Investor Relations section of our website.

Now I would like to turn the call over to our CEO, Rod Hershberger.

Thank you, Brad. Good morning, and thanks, everyone, for joining today's call. I am pleased to report our teams delivered strong sales and operational results in the second quarter, with each of our brands making meaningful contributions to our overall performance. The quarter had record-breaking sales of $119 million and our highest EBITDA performance of $20.8 million since the second quarter of 2006.

As we expected, the market continues to be strong, and our brands are experiencing solid demands across all market segments. As we have previously shared, part of our long-term strategy has been to position our Company to serve a broad spectrum of the impact-resistant market, with brands strategically positioned to serve various segments of that market and to continuously expand our market-leading offerings and capitalize on predicted market growth. We are already seeing the combined power of our three brands as they are performing well, strengthening our capabilities and furthering our market reach.

Now I'd like to turn the call over to Jeff, who will review in more detail the dynamics of our market and our operational performance that will lead us into the remainder of the year. Jeff?

Thanks, Rob. And good morning, everyone. As Rod mentioned, the market continues to be strong and is showing solid signs of growth after a sluggish start to the year. Our core market in Florida continues to lead the nation in terms of declining unemployment, job creation and overall economic activity. As the third largest state in the US, and the single largest factor for economic improvement in Florida continues to be the recovering housing market. Single-family starts in Florida were up 20% in the second quarter compared to the same period in 2015, which represents a positive quarterly increase of 19 of the last 22 consecutive quarters. We believe Florida will likely finish at approximately 75,000 single-family housing starts in 2016, which represents a 15% increase over 2015. Still, the Florida single-family housing market has yet to return to its historical long-term pace of approximately 110,000 a year.

To summarize, we are encouraged by the market conditions and continue to see demand across all our brands and market segments. Our backlog reflects this demand and recently topped $60 million, including a 45% increase in backlog in our legacy brands compared to a year ago. This dynamic environment positions us well for a strong second half as we continue to increase capacity to meet growing demand.

Now I would like to review specific details discussing our performance for the quarter. As Rod mentioned, our top line increased 18% to $119 million versus prior-year, and we generated EBITDA of $20.8 million, our highest since the second quarter of 2006. This is particularly impressive when you consider that our current-year results were impacted by a shortage in the construction labor market and internal and external glass supply constraints. Pressure within the construction labor market is being felt nationally and in Florida in our dealer base across all our three brands.

Across our brands, the demand for energy-efficient products continues to grow, thereby increasing the demand for insulated glass. To clarify, insulated glass represents an additional glass and processing time to produce, which has created a constraint that has been felt both internally and at our external glass suppliers.

Despite these industry challenges we believe will continue through the remainder of the year, we were able to deliver excellent operating profits during the second quarter and continue to improve our output capabilities. In fact, looking forward into the third quarter, July's organic growth was approximately 10% compared to 8% in the second quarter.

Additionally, across the entire Company we shipped more units per week in July than at any other point this year. The fundamental drivers of our business continue to align to our advantage, and we are diligently working to capitalize on this momentum.

Our performance this quarter demonstrates our focus on achieving financial and operational objectives. In the near-term, our primary goal is to continue to increase capacity across all three brands. We will remain focused on the continued integration of our two acquisitions, which, together with our PGT core brand and our strong balance sheet, will continue to create shareholder value in 2016 and beyond.

Now I'd like to turn the call over to Brad to discuss the financial results for the second quarter in more detail. Brad?

Thank you, Jeff. We reported sales for the second quarter of $119.0 million, an increase of 18% over the second quarter of last year. Second-quarter 2016 sales include $10.4 million from (technical difficulty).

On slide 7, we give you a breakdown of net sales for the second quarter. Our growth continues to be fueled by our impact products, which grew 22%. This growth came in both our aluminum and vinyl impact products, with a strong 47% growth in our vinyl impact products. Non-impact products had 2% sales growth quarter over quarter, with growth in the non-impact vinyl lines partially offset by a decrease in non-impact aluminum. Also in the second quarter, 58% of our sales were from repair and remodeling and 42% from new construction, which were consistent with the second quarter of last year.

Now please turn to slide 8, and I will briefly cover a few income statement items. Gross margin dollars in the second quarter increased $4.5 million over the second quarter of 2015. Our gross margin of 31.5% decreased 120 basis points from 32.7% for the comparable period. The decrease in gross margin was the result of running parallel systems as we finalized our ARP cutover during the quarter, which reduced margin by 70 basis points. Depreciation expense was also higher in the quarter as a result of higher capital spending, which impacted gross margin by 50 basis points. Gross margin was further impacted by 70 basis points due to a change in mix towards lower-margin products. These negative impacts are partially offset by favorable material costs, which benefited gross margin by 40 basis points. The addition of WinDoor added 30 basis points to gross margin in the second quarter of 2016.

With regards to aluminum, our average delivered cost of aluminum was approximately $0.86 per pound during the quarter, compared with $1.01 per pound during the second quarter of 2015. We are currently covered at 37% of our needs to the second quarter of 2017 at an average price of $0.87 per pound.

Selling, general and administrative expenses as a percent of sales in the second quarter of 2016 finished at 17.3%, increasing 70 basis points from 16.6% in the second quarter of 2015. SG&A expense in the second quarter includes $746,000 of increased amortization expense due to the amortizable intangible assets from the WinDoor acquisition. Excluding these expenses, SG&A as a percentage of sales was 16.6% in both periods.

Interest expense was $5.3 million, an increase of $2.4 million as compared with $2.9 million in the second quarter of 2015. Interest expense in the second quarter of 2016 increased as a result of a higher level of debt from the refinancing, which also carries a higher initial interest rate, as well as higher amortization and financing costs, which reported 0.7 or $700,000 of the quarter-over-quarter increase.

Depreciation and amortization recorded in the first quarter was $4.0 million, compared to $2.6 million last year. Consistent with our expectations, the second-quarter depreciation and amortization expense was higher than the prior-year period due to an increase in amortization expense from the acquired WinDoor intangibles as well as higher depreciation from both WinDoor and increased capital spending.

Our tax expense in the second quarter was $4.2 million and represents an effective income tax rate of 36.5%. This compares to $6.3 million and 48.2% in the second quarter of last year. The second quarter 2015 includes a $1.6 million nonrecurring, non-cash accounting charge related to our aluminum hedges. Excluding this charge, our tax rate in last year's second quarter would have been 36%.

We recorded net income in the second quarter of $7.4 million, or $0.15 per diluted share, compared to $6.8 million, or $0.13 per diluted share, last year. Adjusted net income in last year's second quarter was $8.6 million, or $0.17 per diluted share. EBITDA was $20.8 million for the second quarter 2016, or 17.5% of sales, compared to adjusted EBITDA of $18.9 million for the second quarter of 2015, or 18.8%.

Now please turn to slide 9 for some balance sheet items. We ended the second quarter of 2016 with a cash balance of $29.5 million, up $12.8 million from our cash balance at the end of the first quarter. And during the quarter we invested $4.5 million in capital expenditures. Our net leverage was 3.2 times at the end of the quarter, and we continue to have a strong balance sheet with the ability to make further investments and fund future needs.

In conclusion, our outlook for the remainder of the year is in line with the market consensus for the back half. Other factors and assumptions in our outlook are also provided on slide 10 for your reference.

At this time, we would like to turn the call over to the conference operator, Emily, to begin the Q&A portion. Emily?

(Operator Instructions) Bob Wetenhall, RBC Capital.

You guys called out a very robust backlog figure of $60 million, which is twice as much as your backlog at the end of the fourth quarter. Can you give us a little guidance on thinking about the second half of the year? You did not raise your guidance, and you look like you are in line with consensus, but the backlog is huge. And I just was hoping you could step us through what that backlog does for profitability as you move into the second part of the year.

Well, the demand is very strong, which is obviously what helped us generate that backlog that we saw in the second quarter. But as -- we did mention that we do have some constraints both on the supply side and for labor and glass. So as a result of that, that's why we feel comfortable with where consensus is for the back half, which is a higher sales level in the second half of the year than we saw in the first half of the year. But the demand is strong and the backlog is definitely going to support it.

Yes. Bob, I will just add our dealer base is extremely busy. We have just gotten back from two weeks' worth of dealer partnership council meetings with all our top dealers across all three brands. And the consistent theme was a tight labor market. Insulation installers are few are between. They are -- the market is there. It's robust. But we are shipping them as much product as they can handle at times. Even in July -- we had a July, we had an $8.2 million ship week, which prior record was $7.6 million. So we are having spikes in ship weeks based off demand and their ability to move that product into the channels. But we do think in the back half we will continue to hear that same message from our dealer base.

And Jeff, just on that, it sounds like you had an explosive July in terms of your organic growth. And you also came in lighter on WinDoor in sales, which is a very high-margin profit. Just trying to understand, if WinDoor comes back to normal and is a bigger part of your mix -- and it sounds like the ERP issues are now behind the next Company -- how should we be thinking about gross margin? Is that something that some of the headwinds that impacted the first half of the year are fully addressed and are packed up and behind us, and now we can think about a step forward to a higher level of profitability, especially if WinDoor kicks in? Or am I not getting this right?

No, I think you are. I think from an EBITDA perspective you can expect a higher level of profitability in the back half. We've already experienced it in July. Internally, we are still working on our internal glass supply, and we are actively getting efficiencies in production better there.

If you look at WinDoor, incredible flow-through on that brand. 50%, Brad, is, I think, the flow-through, roughly, of WinDoor.

That's correct.

Just in the last week alone, the last week of the second quarter, WinDoor missed about $1 million worth of shipment because they didn't get the glass. The frames were built. They are sitting in the plant; we just didn't get the glass shipped in. So that's a 50% flow-through on that approximately $1 million of sales.

So I think we are still going to see those kind of hiccups in the second half just because of glass supply constraints. And this is nationwide. We are hearing that from our suppliers, Cardinal, internal. We are seeing it. We will work through it and work diligently through that to increase our output. But we do expect margins to improve in the back half as we continue to reap the benefits of leverage and the various work we have done operationally.

I'd say 90% of the operational challenges we've had in the past are behind us.

Just a little bit more color on the WinDoor side, too, because the flow-through there is incredible and it's great when we get those sales. They are project-driven. A lot of their sales are project-driven. So at the end of the month, we get to the end of the month or the end of the quarter when they have got a project that they are ready to ship and they are missing a couple pieces of glass, we generally don't ship that project until it's complete. And that's why, when Jeff talked about $1 million worth of sales in that last week, it's because you are missing -- you might be missing a truckload of glass, but you might be missing two or three pieces. But it keeps the project from shipping.

So there's a little bit of concern when we look at the back half with how that is going to affect a quarter's sales or the back-half sales because we're not exactly sure when those projects are going to ship until that glass supply is under control. And it's not just US glass supply. Some of that glass comes in internationally. So, it's a problem that's pretty much across the globe right now.

One final question, and then I will hand it over. It sounds like demand is great and glass supply is tight. And I know that you had talked about a potential for a price increase in the third order. How should we be thinking about the potential to realize higher selling prices, given the fact that demand is incredibly robust right now and you are seeing tight supply? Thanks, and good luck next quarter.

Thanks, Bob.

Yes, we -- both CGI and PGT had announced price increases in the second quarter that have different impacts, the PGT price increase obviously being the most impactful. What's announced is a 3% to 7% price increase, depending upon the product. Now, that price increase will go into effect basically in September, based upon shipments and lead times, and will bleed in over time just because we have new construction prices that don't necessarily take as quick of effect as R&R. But we do expect to have a stronger realization of that price increase than we have seen in the past because of those supply constraints that you referred to and the strong demand.

Anything we could put down as magnitude that you could help us from the model?

I would say that, like I said, in September we would start to see in the PGT side some of that price increase. But at this point I think it's kind of early to say.

Got it. Thanks a lot. Good luck.

Rob Hansen, Deutsche Bank.

I just wanted to ask about the capacity increase that you mentioned. Was that specifically in the IG production? And I think last quarter you guys mentioned that you had plenty of capacity at WinDoor and that you were running out of space in Venice, and you could start shifting some of the capacity over there. So how is that kind of playing out?

The capacity increase during the second quarter was mainly production around our vinyl product lines. If you recall, we introduce our new vinyl WinGuard. We had that product launch last year, and very successful launch, and immediate demand was on that line. We have been able to increase the capacity to that line between anywhere -- on a given day, anywhere between 600 and 700 units, with the end goal being Q1 of 2017 with about, I think, 1,400 units --

1,500 units a day.

-- 1,500 units as the end goal. So we are increasing assembly-side capacity for vinyl -- the vinyl WinGuard line. And that's ongoing. We have equipment coming in in the fourth quarter -- welders, et cetera, machines that do that.

From the glass side capacity, we have a lot of equipment in place. We are installing a new IG line. It's called TPS. It's a new type of IG spacer we are installing which will add to throughput and capacity. That will happen in this back half of this year and into the first quarter of 2017.

Got it. And the CapEx -- what should we expect in the back half of the year? And any kind of -- should 2017 be a little higher than normal as you are increasing capacity?

No. The back half of this year, we are still looking at $18 million to $20 million, which does include a higher spend in the back half of this year because of those lines that Jeff referred to than what we did in the first half of this year. Going into next year, I would actually expect to see maybe a slightly lower capital spending because we spend a lot of capital this year on glass operations. So we obviously haven't gotten to our budgets to know exactly for sure. But when you look at total non-growth-related capital spending, you are talking $8 million to $10 million. So anything that we do about that would be, obviously, with the growth project in mind.

So just to clarify, this year's annual CapEx was anywhere between $18 million and $20 million annually. And to date we have probably spent about half that, Brad?

Just a little bit over $8 million.

Yes, a little bit over $8 million. So we probably have another $12 million-ish, maybe, to go this year. Some of that can be timing of when you get the project going and get the actual equipment, in terms of the actual spend. And we don't see that increasing next year. We see maintenance CapEx at $5 million to $6 million plus and then project CapEx at $10 million-ish level. So we will strive for a $15 million to $18 million CapEx next year in 2017.

Got it. And then last question, just on gross margins -- so I guess if you look at like the last 12 months, gross margins are at somewhere around 30%. I know that this quarter you improved it here to 30% -- 31.5% or so. What's the blueprint back to 34%? I'm just thinking maybe you are going to get X amount on leverage, certain amount on efficiencies. And how do you kind of get back to that kind of bridge back to 34%?

Well, I think the gross margin improvements that you have referred to leveraged and improved operational efficiencies as well as the capitalizing on the three brands that we have and the great margins that those brands can bring to the table are going to improve our margins from here. And we like to think about EBITDA margins from that standpoint. We did a 17.5% in the second quarter, and we are expecting improvement in the back half. So we're going to keep executing to get those margins to the levels that we want them to be.

I think mix probably plays the biggest part in gross margin from here on out. You've got WinDoor with a 50% flow-through. So obviously the more WinDoor or bigger project sales we have, the higher our overall margins are going to be. Whether it's gross or EBITDA, that's going to flow through. So mix is a bigger contributor to margins in general than it ever has been.

Yes, and we saw 47% growth in the vinyl side of the impact market, which is really explosive growth in that. And we announced (inaudible) vinyl a year ago. We talked a lot about it over the last couple quarters. And Jeff just talked about the ability to grow that line to 1,500 units a day as we get into next year's end-of-first-quarter time frame. And it will take that time frame to get that kind of volume flowing through to really start bringing the gross margin side up on the vinyl side.

So I wouldn't expect any immediate change in Q4. But once the vinyl lines are running a little bit more efficiently and are at full capacity and have full-blown lines, I think you will start seeing that number go up also.

Great. Just one quick one -- what does 1,500 units a day imply from a top-line perspective in vinyl?

Average sales price --

Yes, that's what I --

There's so much product mix that goes in that because 1,500 units a day also drives a lot of doors. And I don't know; off the top of my head, it would be hard for me to say because there's a mix of impact and non-impact.

In the second quarter, for this -- the quarter that we just had, we had $26 million in vinyl sales.

Between the two lines, though --

The vinyl impact sales.

But that's both the new vinyl and the old vinyl.

Right.

So how many units was that?

You are probably looking at getting us -- up to 1,500 units a day is the one thing. It will start moving us closer to 50% vinyl as opposed to the current 35% to 40% vinyl we are now.

Yes, at least double.

Yes.

Well, I appreciate the commentary, guys. Thank you.

Sam Darkatsh, Raymond James.

Three or four questions here, if I could. First off, you talked about when the internal glass capacity is added. What about external? What are you hearing from your glass vendors, be it Cardinal or whomever, in terms of when they might be able to have much better lead times for you?

Yes. I talked to -- our main glass supplier, at least for PGT and CGI, is Cardinal. I talked to the present of LG yesterday. And we are meeting mid-August to talk about that very subject. They do plan on adding capacity, and I need to provide them some thoughts on future growth on my end, too. So that process is ongoing. I definitely see it happening on their end.

In terms of WinDoor, WinDoor is kind of a mixture. They get the majority of their glass from overseas, Tecnoglass. We've visited that location as well and that supplier. And they are also in the process of opening up a new line in Colombia as well.

Yes. That line is going to be fairly exclusive to WinDoor. So we expect improved performance, but we're not going to predict it until we see it.

Is the Cardinal effort --

And internally, then, Jeff has talked a little bit about some of the new lines we are putting in, particularly on IG because we are seeing such a huge increase in IG. So we will start seeing some internal improvement as we get through the third and fourth quarter of this year.

Do you suspect that Cardinal could add capacity in 2016, or is that more of a long-term thing?

I'm going to talk to them on both fronts -- both short-term, Q3, and 2016 and beyond. So, they can add capacity. It's a matter of adding people, and they have been doing that. They ramped up when we requested that. We've got a great relationship there. They are a great supplier. And when we requested more glass, they added more people and started training. It's just a process. So I think they can add more capacity. Just for the long-term, if you just think about us growing next-year type numbers, even if it's a modest 10% top-line growth, you are talking a lot more IG glass. And between the two of us, and maybe three of us here with our third supplier, we have to figure out what that looks like.

Yes, because a 10% overall growth, which is -- and that's a great year -- probably means 15% to 18% growth in IG. So it's not a one-to-one ratio because IG is becoming more and more popular with energy codes changing.

So this is a bit of a touchy-feely question, I suppose. But you are calling out two specific constraints: one being glass and one being labor. And I also understand that they are not necessarily all that different. But is it a bigger deal right now or a bigger constraint for you getting product out the door, or is it a bigger deal that your dealers are struggling receiving and installing the product?

I would say equally. I'd say 50-50, Sam. If we could get more out, at times we wouldn't have any place to ship it because our dealers are busy. So if we could get more glass in the back end, could we get more out? Yes. But, again, the crews -- the installation crews, the number of projects that are going on -- and we have the biggest network in Florida. People are extremely busy.

Next couple of questions are more housekeeping, if I could. Do you have, Brad, the gross margin of impact versus non-impact? And then how much of a drag was the vinyl mix to gross margin? If you had said it in your prepared remarks, I missed it; I apologize.

Yes. The gross margin for impact was 35%, and non-impact was 17%. Then I did say in the prepared remarks that we had a 0.7 year-over-year, so 70 bps year-over-year, effect for mix. Some of that was vinyl, but some of that was also that at our CGI brand we saw higher sales of Sentinel, which is their lower-margin product relative to Estate. So, I'm not sure of the exact breakdown between those two, but that totaled 70 bps.

Then, the last question I have or series of questions would be around the monthly progression of sales as Q2 transpired. I think you said July was up 10%. Do you have the April, May and June organic numbers?

Yes. This would be 8% in April, 6% in May and the 9% growth in June. So, definitely June was the strongest.

I think last year you called out a 5% to 10% benefit from the July 4 holiday timing. Was there any issue around the timing of the holidays that might have impacted the plus-10% in July positively or negatively?

In this year, July 4 fell into the third quarter. So, if anything, it would have been negative. So, the 10% was a positive or overcame that.

Got you. Thank you very much.

Keith Hughes, SunTrust.

A question just quickly on SG&A. It was $21 million in the quarter. Roughly what we will see as we progress through the second half of the year?

We did have a full quarter of expense related to WinDoor, so the second quarter had that going forward. We did also have, however, a one-time spend in the second quarter of roughly $0.5 million related to a customer event that we did in the second quarter. By comparison purposes, last year we did that in the first quarter.

We will see an increase in dollars as sales goes up because there are some variable components to it. But for the most part, we've added probably about an 85% fixed category.

Okay. It appears as a percentage of sales it will be higher in the second half of the year, though. Is that correct, the SG&A?

Yes.

For the reasons you mentioned? Okay. You seem to be leading us towards the EBITDA margin should improve in the second half of the year. So that means you are going to have to have the big step up in gross margin. Is that step up just from the better throughput through the facility?

Yes. Basically, leverage -- we expect the higher sales across the brands to generate the higher leverage and improve margins, absolutely.

And mix.

And again, yes, mix.

Final question -- you have traditionally given us discrete guidance ranges, fairly specific. I know you stepped away from that and talked about the consensus number. Is that something that -- are we changing how we do this in the future?

The thought process is we give the annual guidance that we gave at the beginning of the year. And within that range we are still heading there. We do see that the second-half numbers, based at what's on the Street, is some pretty good representation of where we feel it should be. So that's why we gave that kind of color.

Thank you.

Alex Rygiel, FBR and Company.

This is Min Cho for Alex. I have a couple of housekeeping questions left as well. Was there any weather impact in the quarter?

The weather impact that we saw in Florida really consisted in a lot of rain in January. So I think in the second quarter in Florida there wasn't really any meaningful weather impact.

Got you.

Nothing we would call out. Again, Florida has had an extremely wet season. The lakes are pretty full, and it was raining this morning when we came in. So I would say, if anything, weather hasn't had a meaningful impact, but it has rained a lot.

Yes. First quarter is generally really dry here. Second quarter, we start getting into our rainy season. So it's wet, but it's almost always wet as we get into the second quarter. I think labor is the big factor, not weather.

Okay. Also, it sounds like the WinDoor acquisition is progressing well. Is there any change to guidance in terms of the revenue impact from WinDoor in 2016?

Yes. To the degree that the glass constraints affect WinDoor, we could end up seeing them be at the lower end of the range that is initially out there. But they are still continuing to grow, and we are developing some strong relationships with the customers. So at this point I'd say I don't want to give a specific guidance number for sales. But the glass supply could go down to the (multiple speakers) --

Yes, product demand -- product demand there is good. It's a matter of supply to get product out the door. So we are not concerned, necessarily, about the demand. But we are more concerned about able to ship at the high end or middle end of the range.

Got you. In one of the prior questions you talked about Tecnoglass potentially opening up a new line in Colombia. Do you know when that could happen?

It's in the process. It's in the process right now of being set up and ramped up. And an IG line doesn't take a -- once the line is in, it doesn't take a tremendous amount of time. There's a little bit of training time involved in it. So we would anticipate seeing better results from that as we get through this Q3.

Yes. It will be this third quarter.

Okay. Good to know. Also, in the past I believe you have provided at least revenue guidance for the next quarter out. Do you have any guidance for the third quarter?

No. We talked about the reasons why some of those things are hard to predict. So that's why we are comfortable with what's out there right now for the third quarter. Jeff mentioned that July sales were higher than what we had seen at any point in the year from a per-week standpoint. So we are increasing the shipping, and that's good.

Yes. Overall, Q3 is going to be better than Q2 and Q4 is going to be a little bit slower. Q4 has always been our --

Yes. Q4 has a lot of holidays.

-- slowest quarter. So if you look at Q2, we will increase top line in Q3 versus Q2. And you are going to see that tail off because of Thanksgiving, Christmas; all that R&R business slows down in the fourth quarter.

The final question has to do with your [DERP] system. It sounds like everything has been shifted over. Have you actually shut down the old ERP system, such that the second-half gross margin impact should be 140 bps better than the first half, just tied to the ERP system, excluding any other impacts?

We are 99% invoiced on the new system right now. So there are some products and some orders that are still struggling on the old system. But shutting down the old system in that sense is not the key thing that needs to happen. We just need to have the new system and get used to it and be able to adjust to the great efficiencies we can get from it.

So, I do think we will see improvement year over year in Q3, because obviously we struggled last year, Q3, as we had that tough quarter from an implementation standpoint. But in terms of sequentially, we have talked about what we would do in the back half after the ERP has been implemented. And I called out 70 bps in the second quarter. I think we are going to see some improvement as we go into the back half as we become more efficient, and it's just how quickly we realize it.

And to put it in perspective, I think there's 50 windows left to ship out of the old system.

Okay. Great. Thanks a lot.

Jeremy Hamblin, Doughherty Incorporated.

Wanted to ask just -- I think I missed this on the prepared remarks. But what was the total growth in Q2 on a year-over-year basis in R&R versus new construction for the impact lines?

Growth in R&R was -- for PGTI that's 15%. That includes WinDoor, though. From an impact standpoint, we saw that as an 18% growth, again, including Windows.

And what about impact new construction?

Well, I don't know that it's substantially different. Basically, for the total Company we saw a 23% growth in new construction and a 15% growth in R&R, which equates to the 18% that we saw. And I don't know that it would be meaningfully different in impact and non-impact.

Okay. Then, I think the way it calculates or the implied sales number for WinDoor is about $10 million in Q2. In terms of thinking of the second half of the year for WinDoor, you mentioned that there is a shift in a million-dollar project that probably you expected to hit Q2 that's going to hit Q3. Do you expect the Company to -- in terms of Q3 and Q4, to see sales growth in WinDoor? Are you limited in terms of your supplier there from the aspect of not being able to grow sales in that particular segment?

I think we are limited in the overall -- the supply limits what can happen on a monthly and weekly basis. But I think, overall, we do expect to see more sales in WinDoor in the back half of the year than we saw in the first half of the year because of the markets and just because of the timing of the project. Jeff mentioned that $1 million project. That could happen again. But I do think that overall concept of the second half of the year for WinDoor should be stronger than the first half of the year, just because of the market and their pipeline.

Right. But year over year for WinDoor specifically, they did $22 million in the second half of last year. Do you expect that to be up?

Yes. But how much, we will have to wait and see.

Okay. Then, just, again, a more specific kind of call-out here so I can understand the guidance. I think what's implied by your commentary around consensus would be for $242 million in sales combined between Q3 and Q4. That's a number that you feel comfortable with, those combined numbers?

Yes.

Without getting specific to Q3? Okay. And if you were not to meet that, you would expect that it's more of an issue related to suppliers couldn't get us glass rather than demand?

Right, because I think that the backlog and the growth in the backlog confirms that.

Okay. Then, just refining that even further, is it more specific to the vinyl side? Or would you say this is more of our traditional legacy PGT CGI business, where if we were to not meet that expectation it would be related to that as opposed to the new vinyl product?

No. I think the issues that we are seeing that we refer to affect the whole gamut of aluminum and vinyl. Now, we obviously have situation where we're trying to increase our vinyl capacity to meet strong demand in that. But that being said, the glass issues and the labor constraints that we have, they affect both aluminum and vinyl.

Good, high-class problem. Just to clarify on the SG&A, if I strip out the $500,000 or so for the customer event, that would apply a run rate at $119 million and revenues of about $20 million in SG&A. I think your variable rate is about 12% or something like that. Does that sound about right as we look into the back half of year, that there isn't anything else that's clunky about Q2 in terms of incentive comps that would make, let's say, Q4 -- which, again, consensus is at $116 million. You wouldn't suddenly see SG&A at $21.5 million?

Well, we do have typical spends in the back half-year, some marketing type spends as we look forward to next year. I think it's a relatively good bet to assume a 12% variable rate. But we do have reasons for SG&A to be a little bit higher, I think, like Keith had mentioned, in the back half of the year, but still not to the point where it would offset our ability to improve our margins overall.

If you look in the back half of the year, we have spent in advertising really around the season, this hurricane season. So we are out pretty heavy in the market advertising in June, July, August time frame.

Okay. I think that just about wraps it up for me, guys. Appreciate you taking the questions, and best of luck in the second half of the year.

Ken Zener, KeyBanc.

The growth rates you gave into July, from April, 8%, 6%, 9%, 10% -- very solid growth rates. One of the things that we've spoken to you about is the slowing existing sales, which is occurring due to lower unit volume at the low price points and high price points. Clearly, you are not seeing any of that impacting lower existing home sales (inaudible), impacting you all.

The new side is the new side. Can you talk about that strength that you are seeing in R&R? Is it -- are you seeing more constraints there? Because your dealer channel absorbs all of your volume. So, do you sense that those labor constraints are greater on the new side or the R&R side, because there doesn't seem to be any relationship. There are certain lags, but it doesn't seem as though any of that slower activity is impacting you at all, which is a good thing.

Yes, I would say it's across both, Ken. Again, we see it across both. And actually you probably have bigger new-home guys trying to steal labor from the smaller players by attracting them, literally by paying them more per hour. We constantly hear that. So I see it across both.

And you have got to remember -- our pipeline, our ability to look into the future really is our backlog, which we've said is up right now into the $60 million range. With our lead times, we can't see past -- whatever -- October. So, will that change in the future? Have no idea. Right now, we do now it's still tied on the labor side for both new construction and R&R.

Well, it's very good to see that sustained demand. When you guys highlight WinDoor -- and the flow-through there is very impressive -- as well as the project value, I guess, is how I would describe it --. Versus the past when you were taking in high-cost glass before you brought it on the IG side, is there any -- are you guys onto allocation yet, or is it just -- well, how is that dynamic working? Because it seems as though that is perhaps one of the bigger constraints that you are facing in terms of the demand. It seems like the back half is 53% of sales versus the front half, 47%. That's actually what you guys have been doing in recent years, so no surprise there.

But if there was some lumpiness, it really sounds like you guys are throwing down the gauntlet that ERP is done; you are going to get, obviously, some sequential lift. Mix is going to be happening as you get more into that vinyl. How much could that window component from a volume basis impact your thoughts as well as perhaps inflation on that input cost?

Yes. I'll add we are not aware of an allocation, to your point there, that I'm aware of. I'd have to talk to our supplier. We have not been told we're on an allocation. In terms of just running that kind of volume ourselves is something we don't want to do. Those are big panels. They take up a lot of capacity in our tempering ovens. And to be honest with you, I'd rather run smaller stuff that I can feed PGT and/or CGI with versus the bigger stuff like for WinDoor.

So, I think capacity there, I'm hoping. And we've got discussions with the supplier that that's more of a short-term issue. They are increasing capacity. We are going to get our share of it because we are a great customer and they make money on us. So I think I'm comfortable with that.

Thank you very much, gentlemen.

I am showing no further questions at this time. I would now like to turn the conference back to Brad West, Senior Vice President and Chief Financial Officer.

Thank you, everyone, today for participating in the call. And if you have any further questions, don't hesitate to give me a call. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day. You may all disconnect.