PGT Innovations Inc (PGTI) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT Innovations, Inc. fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Senior Vice President and CFO Brad West. You may begin.

Thank you, Courtney. Good morning.

Welcome to the PGT Innovations 2016 fiscal year and fourth-quarter conference call. I am Brad West, the Company's CFO, and I'm joined today by Rod Hershberger, Chairman and CEO, and Jeff Jackson, President.

This morning we are pleased to provide our 2016 fiscal year and fourth-quarter results as well as an outlook into 2017. We have also posted a presentation on the quarterly results in the investor relations portion of our website.

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 earnings press release and in the risk factors section of our 2015 annual report on Form 10-K. 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 will turn to the call over to our CEO Rod Hershberger.

Thank you, Brad. Good morning and thanks everyone for joining today's call.

2016 was an exciting year of growth and change for our Company. Our strategy to become the premier manufacturer of windows and doors in the US offering the broadest spectrum of state-of-the-art products available today came further into focus with the mid-February acquisition of WinDoor. By adding its high-end luxury products to our already extensive offerings of impact products we solidified our position as the industry leader among window and door manufacturers in Florida.

Our impact-resistant market leading position in Florida is unchallenged. We also reimagined who we are as a Company. With three powerful brands serving the premium window and door market we wanted to bring them all together under a single unifying identity.

Innovation has always been and will always be the beating heart of our identity. So it is no surprise that innovation would become part of our name.

And on December 14, we announced our new name: PGT Innovations. Under the umbrella of the new PGT Innovations brand name we unveiled the next generation of cutting-edge new products at the 2017 National Association of Home Builders International Builders' Show in Orlando. IBS 2017 was a great success for us.

The strength of our brands was evident as we showcased our remarkable new products like our WinDoor brand lift-and-slide door and bi-fold door and provided a glimpse at prototypes of new products, all of which demonstrated our ability to leverage our intellectual property across our brands. At the same time we announced our parent Company name was changing to PGT Innovations, we announced that trading of our common stock was moving to the New York Stock Exchange, the world's largest stock exchange. While our time on the NASDAQ benefited our shareholders since it first began trading on an exchange in 2006, we believe the move to the New York Stock Exchange will further raise the profile of our Company and aligns us with many of our key peers and some of our largest customers and suppliers.

The New York Stock Exchange includes the listing of many of the premier building materials companies in the US. We are honored to be taking our place among them and excited to be part of the New York Stock Exchange.

We also achieved a few records in 2016. Annual sales of $459 million for 2016 which grew $69 million, or 18% from last year is the highest annual sales level in the history of the Company as was each quarter of this year. We continue to outpace our underlying markets in terms of top-line growth as single-family housing starts in Florida grew 15% in 2016.

Adjusted EBITDA for 2016 was $75.7 million, another Company record, and was $8.3 million or 12% higher than last year. We reconciled adjusted EBITDA from net income in today's release.

Our long-term vision and strategic priorities remain focused on strengthening our brand, investing in our innovative products to better serve our customers and, to the extent we find the right fit, accretive acquisitions. But none of what we do can be accomplished without our dedicated, talented, hard-working team of executives, managers and employees who have a passion for our customers and foster innovation every single day. I want to take the opportunity to thank every member of our team of customer innovators which continues to grow and has reached over 2,600 people.

Now I'd like to turn the call over to Jeff who will review in more detail recent events, market dynamics and our operational performance. Jeff?

Thank you, Rod. Good morning everyone. Our core market of Florida continues to be a leader in terms of economic activity and the continuation of the recovery in the housing market.

Like last year Florida's expanding population combined with rational home pricing and consumer confidence continued to drive the recovery in the housing market. Florida's population grew by over 330,000 in 2016, more than at any point in the last six years, and now stands at over 20 million with population gains continuing to be driven by the influx of retirees, foreign investments and the draw of working age people to Florida's strong job market. We saw slower home price appreciation in 2016 which aided affordability as home builders responded to increasing demand for newly constructed homes by ramping up construction activity.

Please turn to page 7 of the deck. Home builder confidence is at historic highs. As measured by the NAHB Market Index, home builder confidence peaked at 71 in late 2005 and bottomed out at 8 in early 2009.

The NAHB Market Index is a gauge of home builder's feelings towards current and future sales of single-family homes. Ending 2016 at a decade long high of 69, just 2 points shy of the late 2005 peak.

We also watch the Architectural Billings Index, or ABI. As a leading economic indicator of construction activity, the ABI reflects the approximate nine- to 12-month lead time between architectural billings and construction spending.

The ABI has been above 50 for the last seven consecutive quarters and was 56 for December, up sharply from less than 51 at the beginning of the year. These indicators bode well for high-end, new-home construction and for real estate construction in general for 2017.

As Rod mentioned earlier, single-family housing starts in Florida increased 15% to approximately 78,000 in 2016. There is ample room for growth in single-family housing starts in Florida, which has yet to return to the historical long-term pace of about 110,000 here. We believe this gives us a solid runway for continued organic growth in new construction sales over the next several years and beyond.

In 2016 we did see softness in the high-end luxury market. This softness impacted us operationally in 2016 as we continue to maintain support cost at both WinDoor and CGI in anticipation of the return of the high-end market.

We believe the softness in the high-end luxury market was due to several factors including the strength of the dollar on the purchasing power of our international customers and the uncertainty surrounding the effects of the outcome of the US presidential election on the stock market and overall economy. Since the election the stock market has continued to set records and every measure indicates consumer confidence is at a record high. We feel the indicators I've pointed to point to future improvement in the high-end luxury market for 2017 which both our WinDoor and Estate brands serves well.

But our ability to consistently leverage and capitalize on our core competencies, especially through our long-standing leadership position in the mass custom market, helped support our growth initiatives in the fourth quarter of 2016 and throughout the entire year. Demand for our mass custom vinyl impact products with insulated glass continues to drive our Florida growth. Sales of our vinyl impact products finished up 44% for both the fourth quarter and full year when compared to last year.

In response to this significant increase in demand, we have installed two new Thermal Plastic Spacer systems, which is an innovative and cutting-edge technology that enables us to produce better quality insulated glass units. One TPS system is fully operational, and we expect to bring the second TPS system to fully operational status by the second quarter of 2017.

The fundamental drivers of our business continue to align to our advantage and our strategies for growth have and should continue to deliver peer-leading operational and financial performance. Since the beginning of the housing recovery our compound annual growth rate exceeded 20% in sales, 29% in gross profit and 42% in adjusted EBITDA. While the dynamics of our business, especially experiencing these growth rates, can cause unpredictable shifts from quarter to quarter, we continue to prove that our annual performance remains reliable.

We believe the steps we have taken combined with our long-term vision are evolving the business, our capabilities and will enable us to deliver an unparalleled customer experience in innovative products for years to come. Together we are committed to making PGTI the nation's leading premium window and door manufacturer, providing the most innovative products and exceptional brands in the eyes of our customers, our employees and shareholders.

And now I'd like to turn the call over to Brad to discuss the financial results for the fourth quarter in more detail.

Thank you, Jeff. We reported sales for the fourth quarter of 2016 of $109.5 million, an increase of 18% over the fourth quarter of last year which includes organic growth of 7%.

For the year, net sales were $458.6 million compared with $389.8 last year, an increase of 18%, and that includes organic growth of 8%. Fourth-quarter 2016 sales includes $9.8 million from WinDoor, resulting in total sales for the year from WinDoor since the mid-February acquisition of $38.2 million.

On slide 9 we give you a breakdown of net sales for the fourth quarter. Our growth continues to be fueled by our impact products which grew 17%. This growth came from our vinyl impact products, which had solid growth of 44% compared to the fourth quarter of last year, and non-impact products had a 21% sales growth quarter over quarter, with more than half of that growth coming from vinyl as well. Also in the quarter 59% of our sales were from repair and remodeling while sales in new construction represented 41%.

Now please turn to slide 10 and I will briefly cover a few income statement items. Gross margin dollars increased $5.8 million or 23% over the fourth quarter of 2015. Our gross margin of 28.8% increased 110 basis points versus the fourth quarter of last year. Adjusting for costs relating to the product line relocations in the 2016 fourth quarter relating to the planned manufacturing efficiency strategies and Thermal Plastic system glass line startup cost totaling $771,000 and costs related to our ERP system's conversion and new product launch costs in the 2015 fourth quarter totaling $2.5 million, gross margin was 29.5% in the fourth quarter of 2016 compared to 30.3% in the fourth quarter of 2015, a decrease of 80 basis points.

With regards to aluminum, our average delivered cost of aluminum was approximately $0.83 per pound during the quarter compared to $0.89 per pound during the fourth quarter of 2015. As of today, we are covered for approximately 51% of our estimated needs during the remainder of 2017 at an average delivered price of $0.88 per pound.

The current delivered cash price is approximately $0.95 per pound today. This delivered price per pound includes components for the LME and Midwest Premium but excludes conversion costs.

Selling, general and administrative expenses as a percent of sales finished at 19.0%. SG&A expense in the fourth quarter includes an increase of $746,000 in non-cash amortization expense relating to the amortizable intangible assets from the WinDoor acquisition. Excluding the increase in SG&A expense from the incremental WinDoor amortization, SG&A as a percent at sales was leveraged to 18.3% in the fourth quarter of 2016, a decrease of 40 basis points from the 2015 fourth quarter.

Interest expense in the 2016 fourth quarter was $5.2 million, an increase of $2.3 million compared to the fourth-quarter 2015. Interest expense increased as the result of higher level of debt from the February which also carried a higher initial interest rate as well as higher amortization of financing costs which represented approximately $400,000 of the quarter-over-quarter increase. On February 13, 2017 we announced that we would be repricing our existing $264 million term loan credit facility.

The new facility carries a full 1 percentage point reduction in interest rate margin and was accomplished at par with no new lender fees and minimal third-party costs. We estimate that the new term loan facility will save us $2.6 million in debt service costs over the next 12 months and will save approximately $13 million in cash over the term of the facility.

Depreciation and amortization recorded in the fourth quarter was $4.2 million compared to $2.9 million in the fourth quarter of last year. Consistent with our expectations, fourth-quarter depreciation and amortization expense was higher due to an increase in amortization expense from WinDoor intangibles as well as higher depreciation from both WinDoor and increased capital spend.

Our tax expense in the fourth quarter was $1.5 million and represents an effective income tax rate of 26.2% which compares to $1.6 million or 30.0% in the fourth quarter of last year. Tax expense and the accordion effect of tax rates in the fourth quarters of 2016 and 2015 benefited from the recognition of various state and federal income tax credits.

Going forward we expect to record tax expense at an effective rate of between 36% and 37% absent a change in tax rate by Congress. Also from a cash perspective our year-end 2016 estimate of our tax affected federal operating loss carryforwards is approximately $1.2 million which were required in the CGI acquisition and we expect we will use in 2017.

We recorded net income in the fourth quarter of $5.0 million or $0.10 per diluted share versus $5.8 million or $0.12 per diluted share in the fourth quarter of 2015, both after adjusting for costs I previously mentioned. Adjusted net income in the fourth quarters of 2016 and 2015 includes the impact of $2.6 million and $3.2 million in tax expense from operations respectively.

EBITDA was $15.0 million for the fourth quarter of 2016 compared to $11.2 million for the fourth quarter of 2015. After adjusting for previously mentioned costs, adjusted EBITDA was $16.3 million for the fourth quarter of 2016 or 14.9% of sales compared to adjusted EBITDA of $14.4 million for the fourth quarter of 2015, or 15.4% of sales, an increase of 14%. A reconciliation of net income, EBITDA and adjusted EBITDA, which I have just discussed, has been included in our earnings release for your reference.

Now please turn to slide 11 for a discussion of balance sheet items. We ended the fourth quarter with a cash balance of $39.2 million, nearly $10 million more than at the end of the third quarter.

Our cash growth during the quarter was achieved despite capital spending of $4.3 million in the fourth quarter, all funded by cash from operations. Our cash balance increased by $23 million for the year after adjusting for the $43 million of cash used to help acquire WinDoor and the $2 million of cash used to acquire USI.

We also funded capital spending of $17.6 million for the year and prepaid $4 million of our credit facility borrowings. Our net leverage was 2.9 times at the end of the 2016 fourth quarter, down from 3.0 times at the end of the third quarter. We believe we continue to have a strong balance sheet with the ability to make further investments and fund future needs.

Now let's take a moment to discuss our 2017 outlook. Please turn to slide 12. We expect the organic strength in our mass custom business to carry into 2017 both to underlying momentum in our markets and continued strong demand for our vinyl products, particularly our vinyl impact products.

We expect 2017 net sales to be between $490 million and $500 million, representing an increase of between 7% and 9% versus last year and we expect that growth rate will occur ratably through 2017. We expect sales at this level will generate consolidated EBITDA of about $83 million to $87 million.

The first quarter of 2017 will include $1.0 million of marketing-related expenses invested in our PGT Innovations three brand rollout and approximately $1.4 million of fixed costs and expenses from the inclusion of our acquisitions for the entire first quarter. As I mentioned earlier, we estimate that the newly priced term loan facility will save us $2.6 million in debt service costs over the next 12 months and $2.3 million of that estimated savings will be in 2017. As such, we expect the total interest expense related to our long-term debt will be approximately $18.6 million in 2017, and that includes $2.9 million of non-cash amortized deferred financing costs.

Regarding depreciation and amortization, over the last three years we have been making significant capital investments to increase and modernize our manufacturing capabilities and capacity, including our glass plant facility and several new glass lines including the previously mentioned two new Thermal Plastic Spacer system lines. We have also acquired amortizable intangible assets as part of the acquisitions we have completed. As a result, we estimate that depreciation and amortization expense will be nearly $20 million in 2017. That's an increase of about $4 million from 2016.

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

(Operator Instructions) Bob Wetenhall, RBC Capital.

Hey guys, good morning. This is actually Marshall Mentz on for Bob. Congrats on the year, the successful rebrand and the credit deal.

I was wondering if you could give some more detail on your 2017 outlook, maybe what housing start number does that assume in Florida? Are you anticipating any growth out of the state or within the state also as a result of Hurricane Matthew? And with respect to WinDoor, do you have an outlook for the growth in that business off the $38 million that you reported this year separately from the overall business?

Yes, I will take a stab at some of those questions real quick. The housing starts we're planning in our 2017 results range from about 85,000 to 90,000 this year in terms of new construction starts.

If you look at the WinDoor brand and trying to leverage that, we have a goal and that's to get WinDoor outside of the state of Florida. Their products line up very well, especially the thermally-broken and larger doors on a project basis to go up the East Coast as well as around the Texas. So we've got various initiatives underway to help drive that volume.

I don't know if we're comfortable commenting on the growth year over year in that particular brand at this point. I can tell you that 2017 from an overall mix perspective has started off I would say good. We are cautiously optimistic about the high-end market as we enter 2017, but the initial January and so far in February those sales have met our expectations.

Yes, Marshall it is kind of difficult to really predict what the sales will be this year. Long-term prognosis we feel really strong about. So much of those sales are project-driven, so we will be bidding projects that might happen in 2017 and might happen in 2018.

It might not happen until 2019, but we will know that as we go forward. So actually predicting which year those sales go into it's a little too early for us to do that. But we do feel very good about the product line and the bidding process.

Thank you. And then maybe just a follow-up on the implied margins that you give for the outlook for 2017, could you maybe just walk through some of the headwinds and tailwinds?

I know you have your new Spacer system, at least one line on and I think you are going to get some benefit from that in the back half of the year. But maybe just what headwinds and tailwinds are implied in the margin that you all are showing for 2017?

Well, the implied margins do have an incremental EBITDA improvement of, call it, roughly 50 basis points. I think what you are seeing there is mostly operational improvement as we get those lines up and running. Conservatively now we are maintaining the mix profile from the high-end to be pretty consistent with 2016.

If it comes in better, great, but we are maintaining a pretty conservative posture there. Obviously, aluminum costs have gone up lately. We are covered for about 50%, but there's still an uncovered portion.

But we do have some price increases that represents a tailwind, as well. So I really think the ultimate story for the year within that range will be how strong the high-end comes back. And right now I think we have a relatively conservative view of that, but potentially the opportunity would be there if it comes back strong.

Is that it Marshall?

Thank you.

Sam Darkatsh, Raymond James.

Good morning, this is Josh filling in for Sam. Thanks for taking my questions. Could you walk us through the puts and takes on the fourth-quarter gross margin?

Yes, just real quick, basically it's pretty simple. There was an 80 bps decline. It really comes 40 bps from increased depreciation and then 40 bps from mix because of the higher end being softer.

Okay. Then as we think about 2017 what sort of margin are you assuming for the year and how does that play out beyond just the seasonality but with the other factors going as well with (technical difficulty) or change in mix?

I don't want to get into the specifics. Like I said on the previous questions there is, obviously, a little bit of EBITDA improvement as a percent mainly coming from the operation side.

On the sales side like I had mentioned we do expect sales growth to be somewhat ratable throughout the year. So we are 7% to 9% is what we said. I think that would be something similar for each quarter is basically what I mean by that and, obviously, that would result in higher margins in Q2 and Q3 just because of those are higher sales quarters.

And lastly, I know you said October was 7% growth. Could you give us November, December, January?

I can give you November and December. November was 5%. Again, this is PGT only where we track this.

November is 5% December 16%. Like I said January we are just basically at this point saying that the 7% to 9% growth for the year is going to be pretty consistent throughout the year.

And your backlog?

The backlog ended this year, one moment, I have that. We ended the year at a backlog of $40.6 million.

That compared to the end of the previous year pro forma for WinDoor at $35.6 million. So a little bit, like a 12% increase or so.

Thank you. Good luck with the next year.

Ken Zener, KeyBanc.

Good morning, gentlemen. I wonder if you could comment on the start growth that looks in the low teens there on the new side versus the RNR. I'm just wondering if you could perhaps comment on your EBITDA guidance range as it relates to positives or potential negatives risk in each of those categories as it might impact your forecast range?

Well, Ken, like Jeff mentioned, the 85,000 to 90,000 starts would represent teens growth in new construction. We do typically make more money on the R&R side than the new construction side, and as new construction has grown last year that has represented a little bit of a pressure on our margins. But we do anticipate the same kind of growth in new construction this year that we saw last year and on the R&R side something similar.

So I think what you get in that range is a relatively pretty good representation of that impact. If new construction ends up being the faster growing segment then initially that could be a little bit of pressure on the margins.

Conversely, if it's R&R we would do a little bit better. But I don't know that we're expecting a lot of variance relative to those points at this time.

Okay. And I wonder if you it seems like you guys mentioned price here.

I'm just wondering how much, if you could perhaps put in context how much pricing occurred within each of those two categories. Not in the fourth quarter specifically, but just maybe directionally so we could understand how much price was flowing through revenue? Thank you very much.

So the last price increase that we announced last year, we probably realized about 2%. But that is a more immediate effect in the R&R segment. In new construction it tends to bleed in over 12 months just because of the existing contracts that we have with our builders.

And actually the last price increase was actually announced in the third quarter. So we are still gaining the benefit from that price increase even into this year.

Okay, thank you very much.

Steve Dyer, Craig-Hallum.

Good morning, it's actually Greg Palm on for Steve today. Going back to the gross margin questions I guess longer term what's a good level here?

I know structurally things are a little bit different. There is more, obviously more depreciation in it currently. But what would need to happen to get that back up to the 33% to 34% range, or is that maybe out of the question given some of the structural changes?

Well, I think the depreciation expense definitely makes our long-term gross margin a little bit lower than it has been in the past. But right now because of our most recent acquisitions, especially the Estate line at CGI and then the whole entire WinDoor brand, we will see margin fluctuation depending upon the high-end market and the strength of the high-end market.

So I think the answer to your question what would it take to see 33% or 34%? It would be really strong high-end where we get a really positive flow through north of 40% at the time on those products sales. That can drive the type of gross margins. And to a certain degree last year without that that's one of the reasons why our gross margin was a little bit lower.

Okay. And then I think in past calls you've called out the weakness, the softness in luxury. It sounds like you are maybe a little bit more cautiously optimistic there. Just curious whether you've seen any change post-election given where consumer sentiment is?

Yes, I think what we've seen is some projects that were on the plate last year actually getting signed already this year. So from especially from a WinDoor standpoint and our Estate sales also we are starting to see some flow related to projects that were on the table last year that are coming to fruition in 2017.

Okay, got you. Maybe shifting gears a little bit to M&A, curious if you have any updated thoughts there on how you are approaching this, whether you'd be looking at adjacent products within Florida or something entirely new that diversifies you away from the state?

It sounded like you mentioned that you are trying to bring WinDoor outside the state in a little bit more material way. So what do you need to do in terms of sales, distribution in order to make that happen if you are going to start looking at increasing your presence outside Florida in a more significant way?

You know in terms of 2017 the last two, going on three years now we've done a lot here at PGT, opening up a glass plant, new ERP system, two acquisitions pretty much within 12 months. So 2017 we are really going to hone in on what we've done and try to basically reap the benefits of those investments. While we think we've done great as we've alluded to, especially since the recovery of the housing market, we've had solid performance, we really want 2017 to be a reset year in terms of what we've invested and then go from there.

WinDoor can go outside the state very easily. And we've established a pretty strong sales network led by a leader, an individual we brought onboard about a year ago, and he's made some great inroads outside the state in terms of contacts and setting up distribution networks and we also have a limited salesforce, about three guys outside the state, that are driving the product as well. We may add to that depending on the success, but we currently also go through a broker network outside the state to get volume, too.

So I wouldn't look at 2017 as a particularly active year on acquisition. I would look at it as a year we are going to reap the benefits of the investments we've made.

Makes sense. Last one for us, I know it's been several months since Hurricane Matthew, was just curious if you saw or have seen any impact there from an awareness standpoint either in Florida or some of the areas where you're less in like the Carolina coastlines whether that could be a catalyst longer term or not from an awareness standpoint?

You know, I think as you look at awareness, what did for us, actually there were two storms last year in terms of awareness factor, it increases that level of awareness for the new folks that come in. As I had mentioned north of 300,000 new people came to Florida in last year in 2016. Well, that's occurred for the last 10 years people have been coming in.

So you've got a lot of the population here that just has never experienced a strong storm. And I think once they do or they see people evacuating certain areas or trying to find hotels in the center of the state to stay in, once they go through something like that and trying to put up plywood on their homes, I had some friends that literally caught on the East Coast, that was trying to do that, once they go through that I think they won't want to go through that again.

And we've seen some of that, to be quite honest with you, that kind of heightened awareness. And right after the storm our dealer network did get a lot more increasing calls. Obviously, those calls have to turn to orders and subsequent installs, but I think given their business and volume levels that's occurring.

Thanks for the color and good luck.

(Operator Instructions) Jeremy Hamblin, Dougherty & Company.

Good morning guys. I wanted to come back to WinDoor for a second and just ask a question about the margins that were generated in Q4 on that. Did you get above a 20% EBITDA margin on that business?

I can't answer specifically about that on the WinDoor side. Obviously from a consolidated you see where our results came in, so I am not going to give that specific information.

Okay. But you had at least in two of the quarters this year WinDoor sales were down. I guess I'm just trying to understand, was that presumably a negative impact to margins on the business? And given that I think you said there's like 40% or 45% incremental margins, should we assume that WinDoor EBITDA was down at least 100 basis points on a margin basis year over year?

Your thought process is correct. Obviously, WinDoor sales with the flow-through that they have when they're down they will impact both the WinDoor margins and the consolidated margins.

And, again, as we always state so on the CGI brand and as I had mentioned what we did not do is we did not adjust that cost structure to account for the decrease in or the softening of that high-end market. We felt it better to maintain the current cost structure we had in place with our feeling of 2017 being a stronger year and not wanting to go out and rebuild and rehire, etc. So we did carry extra cost to support that end of the market that did not materialize.

Okay, and then just another question on brands. CGI performance had picked up a little bit of momentum in Q3 after a little bit more sluggish start the first half of the year similar to the rest of the legacy PGT business. But how did CGI performance just on a relative basis compared to PGT in the fourth quarter?

I would say CGI, that brand in general, the mass, more mass custom market, PGT had a solid quarter, fourth quarter. I would say that if you get down into the brands the Sentinel brand is more aligned to PGT's brand. It had a solid performance. And we still had the mix issue with Estate sales being down in that fourth quarter because of, again, the softness in that high-end market.

Okay. And then I want to come back to what seems to be an underlying issue, and you've made, as you mentioned, a lot of progress in areas, you've done some acquisitions. But in terms of your gross margin performance, it just seems to be lagging the underlying growth of the business with organic growth up solidly in 2016, yet your gross margins were down 100 basis points year over year.

What is happening on the glass production side where it seems as though even though your leadtimes have improved since the ERP system issues there seems to be more problems with the production side of the glass. Is it just -- are you having trouble scaling the business? Why have we not seen any leverage on those gross margins?

I know some of it is mix issues, and there's a little bit of it that is depreciation. But I think in a theoretical sense you should be seeing much more gains on that line item. What is happening at the plant?

I think if you look apart from mix issues like you said our vinyl sales has increased I think I mentioned 44% --

44% for the year.

And that in essence is a much more robust glass package. Every vinyl window is an IG unit. If you look at the aluminum side that's not the case.

So for every vinyl is an IG and, obviously, every impact vinyl is impact IG. So with a 44% growth in that area scaling to that growth and supplying it consistently we have had our challenges during 2016.

I think we're in a much better place now than we were then. Our on-time and complete has improved. I have heard that from our customers firsthand.

Now we've just got to keep that momentum going. For instance, I had referenced the second TPS system, Spacer system. We do plan on having that online for the second-quarter volume increase and hopefully fully operational.

Again, it may be the end of the second quarter. We are shooting for the first quarter. But our volume will definitely increase in the second quarter, it always has, and we are trying to scale and be ready for that given the significant final increase we have.

You've got to also remember, vinyl margins aren't the same as aluminum WinGuard margins. Now, what we can do and what we are trying to do as we gain scale there is equalize that out and improve those vinyl impact margins as it relates to aluminum impact margins.

I think you will see that over time. That's a 12-month process. As we gain more traction in vinyl we will improve those margins just simply by leveraging overhead and also improvements on the line in terms of how it runs.

Yes, Jeremy, one of the things that we've got to think about is when vinyl increases 44% and that's all IG and a lot of it is impact IG, that is a lot more than a 44% increase in the IG portion of our plant. So you start looking at 80%, 90%, 100% production increases in our glass plant and those are hard numbers to manage and make sure that you are doing everything correct.

So you buy the outside, you have a different mix and you put in a lot of capital spending to make sure that you are handling that growth properly. We are continuing to see vinyl grow at a pretty fast pace. So we are prepared for it, but it's still growing extremely fast.

Okay. Brad, I know you are not looking to give quarterly guidance on something like gross margins but just directionally, should we be assuming first half of the year much lower gross margins relative to the second half of the year? Can you give any relative sense?

I know you had a very weak Q1 last year, gross margins of just under 30%, we are assuming a slight improvement from that. But just directionally speaking based on the timing of the TPS project and so forth, should we be assuming first-half year gross margins are meaningfully lower than the second half of the year?

Yes, but I would not necessarily point it to the TPS lines. I do think those investments will make a difference in the first half and cause a bit of pressure.

It's actually more just I think that you might see a stronger sales third quarter than the second like we saw this year. And if that trend continues to flow through you would see would suggest that the third quarter would be meaningfully stronger. So I think that's the real reason why you might see that situation.

The Q3 even with the really big numbers you guys did this year that you think that Q3 in 2017 could be a stronger than Q2 number?

Well, when I am saying that we are going to have sales that have that growth occur ratably I'm actually anticipating that there might be some push of backlog and stuff like that from Q2 into Q3 like we saw last year.

Got you. One last question in terms of your price increases, roughly 4% price increase taken last summer. Now another 4% price increase being taken this spring.

Are you looking, are you seeing pushback at all from your customers? We know that it had been January 2015 was the last time you had taken a price increase. So they probably weren't surprised over the summer. But are you getting any pushback, are you getting any pull-forward into Q1 because people are looking to place orders ahead of time? Just any color would be helpful in terms of impact on the cadence of sales resulting from that.

At this point actually we have not heard pushback, but I will mention that I don't think we will see pull-forward into Q1 just because of the timing of the price increase will most likely have shipments that will occur in Q2 even though the orders will be taken in Q1. So I don't suspect we will see a Q1 pull-forward. And at this point we have not seen any pushback.

Yes, I would just add the only kind of pushback we do see, and it's consistent with every price increase, is if there is already projects in the works. And our dealer or distributor has already bid those projects we will get pushback on those and typically we won't make them take that price increase if they have already got that quote in the system and that's already going.

Then also it triggers around our performance. If we perform we get no pushback. Obviously, in 2016 we had some hiccups, so we heard some noise.

But in terms of our performance driving future price increases that's in our hands. And we are improving every day, and we feel that any pricing we take is warranted and will be accepted by the market.

One last quick one, Brad. Tax rate that we should be thinking about for this year?

I quoted 36% to 37%. We were fortunate to get some credits at the end of last year and we never know, especially with tax laws in flux right now, what could happen by the end of this year. So I am going to stick to that 36% to 37% right now until I have more information to change it.

All right, great. Thanks so much for taking all my questions, guys, and good luck this year.

At this time I am showing no further the questions. I would now like to turn the call back over to Brad West for closing remarks.

Well, thanks for joining us on the call today. And call myself if you have any additional questions. And we look forward to talking to everybody next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program.

You may now disconnect. Everyone have a great day.