PGT Innovations Inc (PGTI) 2017 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PGT Innovations First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. Now I'll turn the conference over to your host, Brad West, Senior VP and Chief Financial Officer. Please begin.

Thank you, Tyrone, and good morning. Welcome to PGT Innovations 2017 First 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 2017 first quarter results as well as an outlook for the remainder of 2017. We also have posted a presentation on the quarterly results to the Investor Relations portion of our website.

Before we begin our formal comments, I'd 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 2016 annual report on our Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements.

You should also note that we 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 the GAAP counterparts is available in the Investor Relations section of our website. Now I'll turn the call over to our CEO, Rod Hershberger.

Thank you, Brad. Good morning, and thanks, everyone, for joining today's call. We delivered a company record for sales in the first quarter at $113 million, up 12% compared to last year. This compares to a 5% increase in single-family housing starts in the first quarter of 2017 compared to last year, an indication that we continue to take share in our core market. Although single-family housing starts in Florida were flat in January and February, starts strengthened in March and were up 17% compared to March 2016. We believe this bodes well for starts in Florida in the near term, and our top line growth has consistently demonstrated our ability to outperform the housing start market in Florida. The repair and remodeling market benefited from Hurricane Matthew not because of actual damage but from the awareness driven from a close call. The last major storm to make landfall in the U.S. was Wilma in October of 2005, making this the longest recorded period of time with no storm impact. As a reminder, Wilma was the fourth major storm to make landfall in 2005.

Florida's population grew by over 330,000 in 2016 and is projected to grow by another 325,000 in 2017 by the Florida Office of Economic and Demographics, nearly all from migration. This rate of population growth is more than at any point in the last 6 years. Florida's population will soon approach 21 million people, with migration gains continuing to be driven by the influx of retirees, foreign investors and the draw of working age people to Florida's strong job market. We continued to execute on our strategic plan in the first quarter of 2017.

Successfully driving several key initiatives, our 3 brand go-to-market strategy has been well received by our customers and we believe it is a key success for us. At the 2017 National Association of Homebuilders show in Orlando in January, we unveiled the next generation of cutting-edge new products across all of our brands. The strength of our brands was evident as we showcased our remarkable new products, like our WinDoor brand lift-and-slide door and bifold door, and provided a glimpse at prototypes of other new products, all of which demonstrated our ability to leverage our intellectual property across our brands and to introduce innovative designs in the window and door space. We are focused on strengthening our position in Florida, one of the best markets over the past 4 years. During this period, we have greatly expanded operations of our flagship PGT product and acquired CGI and WinDoor, the latter of which focuses on the high-end market. While we are pleased with WinDoor's first quarter 2017 sales amount, its seasonally low first quarter sales makes it too early to gauge the degree of any recovery from the softness in the luxury market we experienced in 2016.

However, we remain confident that WinDoor is well positioned to capitalize on a recovery in the market for high-end luxury products due to our market-leading position in this sector. 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, and good morning, everyone. Sales in the first quarter of 2017 finished strong after a slow start to the year in our core market, with average weekly shipments in March higher than last year, driving March results up 20% over prior year. Sales growth in the first quarter of 2017 was led by a 24% increase in our custom vinyl impact products as demand in this product category continues to be strong. Home builder confidence continues to be at historic highs. The NAHB market index, a gauge of homebuilders' feelings towards current and future sales of single-family homes, leaped 71 points in March of 2017, the highest level it has seen since peaking at 71 in late 2005. We believe builder confidence is on firm ground and consensus among our friends in the home building industry points to strong interest and increased foot traffic among potential homebuyers. These indicators bode well for new home construction and for real estate construction projects in general for 2017, which we should have favorable impacts on the supply chain for all new home construction materials, including windows and doors. After starting off slow in 2017, single-family housing starts in Florida strengthened in March. As Rod mentioned, starts were up 5% quarter-over-quarter, including a 17% increase in March. We believe that the momentum gained in March in single-family housing starts will continue as the move further into the spring new home construction season.

Our second quarter has started off strong, with April sales up 8% compared to April of 2016. Single-family starts in Florida increased 15% in 2016 to approximately 78,000. The historical long-term pace for starts in Florida is about 110,000 per year. We believe this gives us a solid runway for continued growth in new home construction sales over the next several years and beyond.

Regarding our margins, as expected, our margins compared to the first quarter of 2016 were unfavorably impacted by a full quarter of WinDoor's fixed costs in our first quarter of 2017. The first 6 weeks are typically the lowest sales period of the year for WinDoor, and we carry variable and fixed costs in preparation for future higher volumes typically seen during the remainder of the year. This impacted our gross margins by approximately 50 basis points. 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 all our initiatives in the first quarter of 2017. As previously discussed, in response to a solid demand for our core custom vinyl impact products, we installed 2 new thermal plastic spacer systems, which is an innovative and cutting-edge technology that enables us to produce better quality insulated glass units.

Operations in the second TPS line gained significant traction in the first quarter of 2017 and is now up and running. While we incurred some additional startup costs in January and February, we are pleased with our results of our TPS line that are producing. This new technology should help us improve our overall insulated glass quality and related warranty claims. The execution of our strategic initiatives in the first quarter included making certain planned changes in our management structure to align our organization to better capitalize on market opportunities. These changes were directed towards maximizing effectiveness and efficiency of our leadership team, which has strengthened our bench and improved our execution. These changes were also part of our planned goal to move towards a cost savings, shared service operating model among all our brands. We continued to realign in April by consolidating our HR and field service leadership teams.

On a final note, the construction of our new leased location in Miami is progressing as planned. We are very excited about the opportunities this presents to us. This new facility in our core Florida market will enable us to increase our manufacturing capabilities and enhance operational effectiveness by combining parts of our production, distribution and marketing efforts across all our brands. We expect to begin operating in the new facility during the first quarter of 2018.

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

Thank you, Jeff. We reported net sales for the first quarter of 2017 of $112.7 million, an increase of 12% over the first quarter of last year. First quarter 2017 sales include $7.7 million from WinDoor, compared to first quarter postacquisition sales last year of $4.1 million.

On Slide 8, we give you a breakdown of net sales for the first quarter. Our growth continued to be fueled by our impact products, which grew 16%. This growth came from our vinyl impact products, which had solid growth of 24% compared to the first quarter of last year, driven by solid demand for our mass custom vinyl WinGuard products. Non-impact product sales were down slightly quarter-over-quarter.

We saw growth in both new construction and repair and remodeling of 11% and 14%, respectively. For the quarter, 60% of our sales were from repair and modeling, while sales in new construction represented 40%.

Now please turn to Slide 9, and I'll briefly cover a few income statement items. Gross margin dollars increased $1.8 million or 6% over the first quarter of 2016. Our gross margin of 28.2% decreased 170 basis points versus the first quarter of last year. Adjusting for costs related to the TPS glass line startup totaling $517,000, gross margin was 28.6% in the first quarter of 2017 compared to the 29.9% in the first quarter of 2016, a decrease of 130 basis points. Our margins in the first quarter of 2017 compared to first quarter of 2016 were unfavorably impacted by the incremental 6 weeks of WinDoor's fixed costs as well as incremental non-cash depreciation expense, both of which were approximately $700,000.

With regards to aluminum, we have seen a meaningful increase in the per pound cash price of aluminum during the first quarter of 2017, from $0.87 per pound at the beginning of the quarter to $0.99 per pound at the end. To counter the effects of changing aluminum prices, we have an active program to stabilize of our pricing through forward contracts with our major aluminum material vendors that fixes of pricing for portions of our aluminum needs.

As of today, we are covered for approximately 70% of our estimated needs during the remainder of 2017 at and an average delivered price of $0.91 per pound. The current delivered cash price is approximately $0.98 per pound. This delivered price per pound includes components for the LME and Midwest premium but excludes conversion costs.

Selling, general and administrative expenses as a percentage of sales finished at 20.2%. SG&A expense in the first quarter of 2017 includes $922,000 in costs relating to the rollout of our brand unification at the International Builders' Show in Orlando in January as well as $715,000 in costs related to actions we took to reorganize our management leadership. SG&A expense in the first quarter of 2016 includes $902,000 of WinDoor transaction and refinancing related expenses and $275,000 of certain product line wind-down costs. Excluding these non-recurring costs, SG&A as a percentage of sales were unchanged, at 18.8% in both the first quarters of 2017 and 2016.

Interest expense in the first quarter of 2017 was $4.9 million, an increase of $0.7 million compared to the first quarter of 2016. Interest expense increased as a result of a higher level of average debt in the first quarter of 2017 compared to last year resulting from the February 2016 refinancing, which occurred at the midpoint of the first quarter of 2016. The increase in interest expense was partially offset by a decrease as a result of the repricing of our term debt on February 17, 2017, which resulted in a full 1 percentage point reduction in the stated interest rate and was accomplished with no additional lender fees and minimal third-party costs. We estimate that the repricing of our term loan facility will save us $2.3 million in debt service costs in 2017 and save approximately $13 million in cash over the term of the facility.

Depreciation and amortization recorded in the first quarter of 2017 was $4.6 million, compared to $3.5 million in the first quarter of last year. Consistent with our expectations, first quarter depreciation and amortization expense was higher due to an increase in amortization expense from WinDoor intangibles as well as higher depreciation from increased capital spending. Our tax expense in the first quarter was $1.0 million and represents an effective income tax rate of 25.8%. This compares to $0.9 million and 36.6% in the first quarter of last year. In the first quarter of 2017, we adopted the new accounting guidance regarding recognition of excess tax benefits on equity awards. This guidance requires excess tax benefits to be recognized as a reduction of income tax expense, where previously, they were recognized as additional paid-in capital. Cash expense in the first quarter of 2017 has been reduced by $388,000 of excess tax benefits. Excluding these benefits, our effective tax rate in the first quarter was 35.4%. Going forward, we expect to record tax expense at an effective rate of approximately 36%, absent any 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 acquired in the CGI acquisition, and we expect we will use in this year.

We recorded net income in the first quarter of $3.0 million or $0.06 per diluted share versus $1.5 million or $0.03 per diluted share in the first quarter of 2016. We recorded net income in the first quarter of $3.8 million or $0.07 per diluted share versus $4.5 million or $0.09 per diluted share in the first quarter of 2016 after adjusting for the costs I previously mentioned, as well as $3.4 million of debt extinguishment costs in the first quarter of 2016 from the refinancing relating to the WinDoor acquisition. Adjusted net income in the first quarters of 2017 and 2016 include the impact of $1.9 million and $2.5 million in tax expense from operations, respectively. The new accounting guidance I mentioned earlier also changed the calculation of diluted shares outstanding to exclude the presumption that common stock equivalents can be reduced by repurchasing shares using excess tax benefits.

For the first quarter of 2017, diluted shares outstanding included 730,000 shares that prior to the adoption of the new guidance would have been presumed to be bought back and therefore, not outstanding, using the proceeds of excess tax benefits. The equivalent share total for the first quarter of 2016 would have increased by 816,000 shares using the same methodology.

Adjusted EBITDA was $14.8 million for the first quarter of 2017, or 13.1% of 2017 first quarter sales, compared to adjusted EBITDA of $14.6 million for the first quarter of 2016 or 14.5%. As we mentioned in the comments on our outlook for 2017 last quarter, the first quarter of 2017 included $922,000 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. Therefore, on a comparable basis, adjusted EBITDA margin for the first quarter of 2017 improved by 70 basis points. A reconciliation of net income, EBITDA and adjusted EBITDA, which I've just discussed, has been included in our earnings release for your reference.

Now, please turn to Slide 10 for a discussion of balance sheet items. We ended the first quarter with a cash balance of $38.9 million, down slightly from the end of the year despite funding our first quarter networking capital increase, which typically occurs near the end of the quarter, due to strengthening sales and increases in inventory in advance of the second quarter repair and remodeling season. We also funded $3.1 million of capital spending in the first quarter, all funded by cash from operations. Our net leverage was 2.9x at the end of the first quarter of 2017, and 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 11. We remain confident in the long-term strength of our core market of Florida and continue to see demand increase across all of our brands. Our backlog at the end of the first quarter of 2017 stood at over $56 million compared to $44 million at the end of the first quarter of 2016, up 27%. This dynamic environment sets us up for a solid second quarter, with sales in April finishing up approximately 8% over last year, and we look forward to the spring 2017 home buying and remodeling season. We continue to 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 sales at this level will generate consolidated EBITDA between $83 million and $87 million. As I mentioned earlier, we estimate the newly priced term loan will save us approximately $2.3 million in debt service costs in 2017, and as such, we estimate total interest expense related to our long-term will be approximately $18.6 million in 2017, depending upon future LIBOR rates.

Regarding depreciation and amortization, over the last 3 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 2 new TPS system lines. We have also acquired amortizable intangible assets as part of the acquisitions we have completed, and as a result, we estimate that depreciation and amortization expense will be nearly $20 million in 2017, an increase of more than $4 million from 2016. At this time, we'd like to turn the call over to the conference operator to begin the Q&A portion. Tyrone?

(Operator Instructions) Our first question is from Bob Wetenhall of RBC Capital.

Jeff, I was hoping you could spend a minute and just talk me through kind of what you're seeing through the quarter by month and how it looks like April. It sounds like you have a lot of momentum. And maybe any more color you could just provide on terms of what's driving the momentum. I know in Rod's prepared remarks, you said you weren't sure if this was just kind of like a recovery of softer demand in the luxury segment, or is this something more sustained?

Thanks, Bob. I think if you look at the beginning of the year, we just started out flat. January and February housing starts are actually down to flat, and March, they came back roaring. And we were able to capitalize on that. Obviously, we were ready for it and executed well. And actually, if you look at March -- if you looked at March on a stand-alone basis, we would have an upper-teen EBITDA for March. So as we move forward into the second quarter, I mean, April, again a strong month, up 8% year-over-year from an operational standpoint. We have continued that kind of improvement. I'd say, April EBITDA, if you looked at it year-over-year, we're probably beating it by about 50 bps or so. So both volume leverage as well as continued operational execution is helping drive some good tailwinds right now. In terms of the luxury market, we -- like Rod said, it's too early to tell if that's really come back roaring. WinDoor, in general, our orders are up about 20% year-over-year if you look at our backlog at WinDoor. So we're actually cautiously optimistic, I guess is a word I could use there, because order volume has increased. And that's spread out all the way -- they're longer projects. So that's spread out all the way through July at this point. But if you look year-over-year, order volume at WinDoor is up about 20%.

Yes, we're seeing good project work there. We're still -- the reason we're cautiously optimistic is we want to see the single-family or the one-offs, we want to see that market get a little bit stronger, also. And in that market, we don't get as much -- we don't get to see quite as far into the future in that market as we do on the project side. But overall, it looks like a better market, and that's why we're optimistic about it.

That make sense. It's helpful. Can you maybe speak for a moment, your gross margin was light versus what we were expecting, but it also sounds like WinDoor really didn't start to get the volume leverage that you were expecting till later in the quarter. What's the right way to think about the trajectory of gross margin performance in the context of the adjusted EBITDA guidance you reiterated?

Yes, and we did see that, Bob, as we went through the quarter. Obviously, as Jeff mentioned, our March margins were definitely improved over prior year, and if you look at the guidance for the rest of the year, we expect a margin improvement. And that does come mostly from the operational improvements that we discussed, that kind of that 50 bps trend is what we're seeing. Now that gross margin, we will have an incremental depreciation expense, which is not in cash, obviously, but does affect gross margin expense. So that will be one of the headwinds that will affect gross that doesn't necessarily affect EBITDA. But we are seeing a gross margin improvement in the second quarter in our estimates, and that's something that I think will continue throughout the rest of the year. It certainly happened that way in March and into April.

And you're talking about year-over-year gross margin improvement in your comment?

Right.

Got it. And Jeff, what's your take on capacity? Maybe you could flesh out a little bit more the strategy behind the new plants in Miami. It look like it's a very large-scale production. How does this change, from an operational standpoint, capacity constraints and kind of what you're trying to do with the business? You had a lot of acquisitions, and now you're kind of adding even more space. What's the rationale behind this, and what can this deliver to PGTI in the next 2 to 3 years?

Yes, I think, as you look at that particular build-out in Miami, it's -- there's several things driving that, Bob. One is our current lease, which is about 130,000 square feet. That lease is due up this year, and we are slammed to the wall there. Actually, we, during this year, we rented an additional 30,000 square feet to store some materials. So right away, the current building we're in, we've grown out of it. And so we're looking to expand, obviously, that particular production. And then, obviously, we bought CGIC, which is a commercial -- our storefront commercial line. That continues to show very strong growth and potential, and they, too, are up against space constraints. So we'll be moving out and negating the CGI lease, obviously. So moving 130,000 square foot of equipment and materials, et cetera, plus another 30,000 off-site. So right away, we're taking up from about 160,000 square feet of that. And then, over time, as we move some of CGIC's equipment in there so we can increase production there as well. The other issue we're facing, quite frankly, is labor. Here in Venice, this Venice area, we're pretty much -- we're tapped out in labor. And we're continuing to grow. I mean, vinyl -- WinGuard Vinyl was up 24% year-over-year. So that's continuing to fuel a lot of growth in labor requirements. So aluminum is mainly a South Florida material, and so over time, we will shift some of our aluminum lines here at PGT down to Miami. That will save both in transportation and it also will tap a much stronger labor market in Miami. It's probably 10x as strong as it is here in Sarasota, Florida. So that will give us more labor here for vinyl, and so we can expand the production here at PGT.

That's the thought. We had some leases coming due. We know we've got a tight labor market, and we know from a transportation standpoint, aluminum's basically South Florida, and we needed to get it closer to the market so we can avoid some costs there long term.

A lot of industrial logic. One question for me, and I'll pass it on, but that's a great answer. I guess, Brad, previously, you've provided the WinDoor contribution in the quarter, and I was looking for that number. And Jeff, could you maybe comment, or Rod, on the idea of expanding WinDoor sales outside of the Florida market? Because you had mentioned that last year. Any progress with that? And what's your expectation?

Thanks, Bob. If you're referring to sales, WinDoor's sales contribution in the quarter was $7.7 million.

And then also just a little bit to touch on top line growth. We did consolidate our sales teams between CGI, WinDoor and PGT in January. That was kind of the kickoff at the IBS show. That was the over $900,000 we invested in the first quarter in IBS to kind of launch that brand initiative. And that did involve bringing the sales teams together. So we are starting to get some better traction for the WinDoor product line within our distribution channel, and when I say our, I mean across all 3 brands of distribution channel within Florida. Outside the state, we've got various initiatives going on with both our current national customers as well as through some brokers that we use outside the state to drive more volume. And that's the goal. The goal is to, this time next year, we're not saying the first 6 weeks of WinDoor hurt margins because we've got volume in those first 6 weeks to offset that.

Yes, part of it, we talked last time, Bob, about the thermal broke product that we had at WinDoor. And so that product works really well for projects. And again, when you're looking at projects outside the state of Florida, there's 2 little hurdles that we've got to cover. The name is somewhat well-known but not as well-known as everybody else out there because we haven't been there as long. So we've got to make sure that people outside the state of Florida understand the WinDoor brand name and that we now have product that fits their market. And then the project's got to be bid, and the project, I mean, we're bidding projects right now that might happen in 2017 and might happen in 2018. So it takes a little bit of time for those projects to kick in. So we're pretty optimistic about what we can do outside the state of Florida. But it's not going to happen next month.

Our next question is from Sam Darkatsh of Raymond James.

This is Josh filling in for Sam. Another question on the new plant in Miami. Can you quantify for us the CapEx and the sales capacity?

Well, it's going to be a leased facility, Josh. So from a capital standpoint, we currently own all the equipment we're going to be moving into that plant, both here -- whatever equipment we move from PGT as well as the current CGI equipment and CGIC stock. So there's not a big CapEx spend on our part. In terms of capacity, I think it's going to open up doors from a labor market, like I was mentioning earlier, my answer, and allow us to really increase the capacity on our aluminum lines, which is much needed throughout our brands. So not sure I could quantify that at this point until we get moved in kind of see what ends up happening.

Josh, when you look at our strategic initiatives, one of them is to really maximize the footprint of the plants that we have, and that's going to involve moving some product lines around. And as we look at the demand, and we've talked a lot about vinyl and the demand for vinyl in the center part of the state and Northern, and even the Southeast to a certain extent, making sure that we manufacture that at the right place and understand what that capacity is. Manufacture aluminum at the right place and maybe even put some of the brands together a little differently than they are right now. So we're working pretty hard on what that overall capacity for PGT is as opposed to individual capacity of each plant, because each plant right now, even though the equipment may be maximizing the plant, we've got shifts available, and by expanding a little bit more of our footprint, we'll be able to move some things around and increase capacity quite a bit.

Got it. And then regarding the monthly sales trends, do you think the shift in the timing of Easter benefited March and maybe hurt April?

No, I actually think, Josh, more it related to last year and how -- and the comps that came out of last year. I think this year has been a relatively typical trend. And so I think -- I would say that April and March have the same kind of feel as in terms of our -- the way this year is progressing. It's just that March last year was a little bit lower, so the comp made it look like March was a big growth. It's definitely not slowing, that trend.

Got it. And then lastly, could you elaborate a little bit more on the management changes you made in the quarter?

Yes, what we did was we consolidated leadership roles at CGI and WinDoor. That's now ran by one individual. We also consolidated leadership roles between our glass plant -- our glass operations and PGT assembly, the window and door assembly plant. And then we, as I mentioned earlier, we consolidated the sales team. And there were some various changes within the sales organization structure that occurred in January. So those are kind of the changes in March. And as I mentioned, also, in April, we also, from a shared services standpoint, consolidated leadership with the field service group as well as the HR departments.

Our next question is from Ken Zener of KeyBanc.

This quarter, obviously, you have all these brands coming together. You showcased those well at the builders show. You're working on the facilities to make sure that those growth rates are handled in a more appropriate manner. I wonder, what we -- on the macro side, in the past 2 or 3 months, we've seen an acceleration overall in the price appreciation, and I don't think Florida was an exception to that. And that's really interesting, because had supply accelerating. While Miami's had some tough comps, it seems to be not declining as much. So when you talk about too early to say softness in the luxury side of the market is over, could you help perhaps quantify what that would mean to your business if that did pick up both from sales, and I do believe those are the better margin sales as well. So what type of movement could we see there, or exposure do you have? Because it is still "soft."

Yes, I think, we have several brands that really touch that luxury market. Obviously, all of WinDoor's product portfolio touches that luxury market, as well as what I would call the estate series of CGI. It's a high-end aluminum window, and they have a nice, very nice front entry door. So those are the 3 main brands that touch luxury. And to a certain degree, and to be honest with you, to a certain degree, our vinyl WinGuard, with all its benefits and features, is now considered pretty much a borderline luxury product as well. But those main 3 that I mentioned, the EBITDA margins, our flow through, are higher than the rest of our product portfolio by, I don't know, Brad, how much?

Probably 10 to 15 bps.

Yes, probably 15 bps higher. So from an upside potential, if the luxury market does catch on fire again and continues to grow at least a minimum, we get very, very nice flow through, because there's not a lot of, it's almost hardly any, fixed costs. Our variable costs, it's all variable cost driven at this point for those products. So the flow through is very nice and very good upside.

And to the extent that slowed down in tandem with, I think kind of volume led by the Miami market, I mean, what are the contractors that you talk to say? Are they just not getting the calls? Are they getting the calls that people aren't sure if they're going to spend the money? What's the more perhaps anecdotal comments around that market? Because it seems like if that was 5% of sales, if that were to come back online, that would obviously be very beneficial. Because it does seem like the degradation is slowing down.

I'm not sure that we -- I'm not quite sure how to answer that question. What we see is, we see the project portion of that market definitely strengthening from what it was last year. What we're not as confident yet in seeing, and we're hearing about it but we're not seeing the orders actually come in, are the single-family. When you really start talking about that really high-end, single-family, $3 million, $4 million, $5 million house that we will get that package on many times. But the lead times on those are much shorter than they are when you're looking at a project that's going to break ground in June and need windows in maybe December or January of next year, that's the portion of the market that we're waiting to see the strength. And we're hearing about it. Architects are talking about it. Engineers are talking about it. But we've got to see those orders starting coming in before we start talking a lot about it on these calls and saying that market is really back, and we've got that portion of the market. So that's why we say we're pretty cautiously optimistic because of what we're hearing and what we're seeing out there, but we've got to see the order flow.

Yes, and I'd just add to that, if you look at permit data, which is one of the items we look at, permit data is okay. It's actually growing a little bit. Now it's not off the charts, but it's definitely grown in permits. That doesn't mean starts, right? So there's a time lag between the 2. And then, obviously, a permit doesn't necessarily equal a start if things change down the line. So from a permit side, we are optimistic from what we see. And that's what we're hearing in the market as well from our dealer and distributor base. A lot of quoting activity. Not necessarily closing, but a lot of quoting activity.

Our next question is from Alex Rygiel of FBR & Co.

This is Min Cho in for Alex Rygiel. I have a couple of questions. Can you talk a little bit about the glass supply situation? Are there any potential constraints going into 2017? Or is that no longer an issue?

I would think that's no longer an issue. I think the capacity we've put online in the last 2 years, 2 plus years, as well as the extension of capacity that our main glass supplier, Cardinal, has done and where also the plants are currently doing, I think, from a glass supply, both IG and impact glass, I don't see that necessarily being an issue. And we've entered into actually a couple of other relationships with other suppliers that we also use now, just in case. So I don't see that as an issue in 2017.

Okay, that's great. Can you also talk about what the pricing impact was in the quarter and if you've had any additional price increases since the third quarter of '16?

Yes, so the price increase in the first quarter that we actually announced in the first quarter, so I guess I'll answer the second question first. We announced a price increase in the first quarter for both the PGT and CGI that actually doesn't go effective until the quarter that we're in right now. So and that price increase is similar to last year in that 3% to 7% range, product specific, though we do feel like the market is a little bit more receptive to the price increase this year and it will stick a little bit better than last year. Going back to the first question, the price increase that, it was basically in the summer of last year did have an impact in the first quarter of this year, but it was kind of offset by the glass cost increases we were seeing. So I didn't call it out specifically. It was offset by material increases.

Got you. Also, can you talk a little bit about your competitive environment for the impact-resistant windows in Florida, especially given the increased awareness from hurricane Matthew. Have you seen any change in the competitive environment?

I don't necessarily think changes. Probably more activity. There's the local players that they're always around. They seem to have gotten much more aggressive in their pricing, especially in that Miami area. There's a couple of players there that just -- that's all they go on is price. They can be at times 30% less than us to try to win jobs. So from that end, I think that's a negative. From the bigger players, the name players, no more activity than normal. Most of them go through big boxes, and I know activity -- we do big box, but not in the actual box itself; we're special order. And I know that activity is strong with us. I'm assuming it's strong with them in the box itself. So I think overall, competition is here. It's a great market. The market is obviously still coming back, as we had mentioned earlier. But the only, I guess, negative would be that, unfortunately, some of them want to just play on price.

The advantage we have, too, in our market, it's a little different market than the rest of the country, and it's a dealer distributor driven market, where there's a value add that the dealer and distributor brings to the market. Because of the code-driven nature of it, the installation of the product is so critical. Those are the relationships that we've been -- we'll fight. We'll fight really hard to make sure that we maintain those relationships, that we strengthen those relationships. As we say, we like to build walls around our customers. And to do business in Florida and to really grow, you've got to have those types of relationships in place. And when you look at some of the costs that even Brad talked about in the first quarter, some of those costs are driven by some of the things that we do with our customers every single year, and we did it again in the first quarter. So having those relationships and making sure that we fight for those and maintain those, and a lot of those are 30-year old relationships, makes a big difference in the competitive nature of our market.

Got you. And then the final question has to do with you mentioned the additional management change in HR and field services this quarter. What are the additional kind of SG&A expenses expected for that in the quarter?

Yes, I mean, I would say, just because of the level of changes that were made, or the level of management being affected, they're not really materially, like they were in the first quarter.

Yes, not at this point, anyway.

(Operator Instructions) Our next question is from Jeremy Hamblin of Dougherty & Company.

Just a follow-up on the management reorganization costs. $715,000 in Q1. Can you just be more specific about what that was? Was it severance? Or what was the $715,000?

Actually, it's a combination. It was mainly severance, yes. Severance payments and then also just some realignment in bringing on new leadership costs.

Okay, so severance plus some hiring costs as well?

Yes.

Yes.

And then, I wanted to ask a question on aluminum prices. You mentioned that they've clicked higher here, that you have, I believe, 70% of needs covered, I think, Brad, you said at $0.91 a pound. As we compare that to last year, it looks like the run rate if things kind of stayed at this level would be maybe about $0.10 a pound higher than where it was the 3 quarters Q2 through Q4 from last year. I guess I'd estimate that's about a $2 million difference in terms of impact, but could you quantify for us what the potential impact is on margins? Are we looking at kind of 40, 50 basis points?

Well, I think, Jeremy, you might be comparing cash last year to our hedge position this year. Because I think if you look at the year-over-year, I don't think it's going to quite end up being $0.10, assuming it stays where it's at today on our uncovered portion. I think it would be little bit less than that. I think the average price last year that we paid, ultimately, was more in the mid-80 area. So as a result of that, I do-- there is definitely an aluminum price increase, and I don't want to get specific to the margin impact, because it could still change from this point. But I will say this that we had in our thoughts at the beginning of the year, we were kind of expecting aluminum to go up. That's why we increased our coverage. And we have a price increase that's out there. So both of those 2 factors have not changed materially in my mind in the last 3 months, and that's why I'm still very confident in our guidance that we have for the full year.

Okay. And then I just wanted to clarify then the comment on the gross margins as it relates to Q2. Did you say that they're running up 50 basis points year-over-year versus the 31.5 you had in Q2 of last year?

No. What I said was that we are expecting an EBITDA margin improvement that would run about 50 basis points. And I think that's going to happen in the full year, and we've seen that so far in the second quarter. Now that doesn't necessarily equate to an exact 50% improvement in gross margin. That's an EBITDA margin concept. We do, however, think that gross margins will be better the second quarter year-over-year than they were last year. And that's so far what we're seeing in April.

The gross margins would be better year-over-year than they were in Q2 last year?

Yes, but not a -- I didn't say a specific number on how much.

Okay, understood. That's helpful. And then I just wanted to come back to the new facility again and just understand, I think back to the 2013, 2014 expansion, 100,000 square foot expansion in Venice facility. Just in thinking about this in planning for potential impact of training costs and so forth with bringing on new personnel, that was one of the things that I recall created some drag on margins. How should we be thinking about that as we look forward to 2018? Do you have a sense of what the drag on margins, or the benefit on margins, for next year would be of moving into this facility, just given the sheer size of it?

Yes, it's a little different than when we expanded our glass operations. We actually added people, almost 300 people to the overall headcount. This is actually a shift of employees. Employees still live within 10 miles of the current facility. So from a training standpoint, initially, there will be none because I'd say 99% of the employees will just go to a different location. Some, it's actually closer. Some, it's not. But on average, I think the average was a 10-mile radius we're covering 99% of our current employee base. So there will be no training. Now when we do shift product down to Miami. Once we do, and that's in 2018, sometime probably mid-2018-ish, depending on sales. When we shift some aluminum product to Miami, we will have to hire. But you're talking one line, and you're talking 30 people, or maybe 40 people, at the most versus an entire glass plant where we had to staff, like I said, over 300 people.

Yes, and manufacturing glass is a lot different than running a production line. Technical ability to run those product lines, it's different. So I think it's quite a bit different than what we were talking about here. The other advantage, too, that Jeff didn't mention is the ability to consolidate our commercial portion with our residential portion in the same building. And it doesn't necessarily have to happen overnight, but when that does happen, you don't have to move product quite as far. Some of those products can be run on the same pieces of equipment, and if there's a problem with a piece of equipment, right now, we're shifting between factories as opposed to just moving it to another piece of equipment in the same factory. So I think there's some benefits that we'll get from that also.

Okay, great. That's really helpful color. Last question, just in terms of the backlog increase, $12 million year-over-year. In terms of thinking about that and how that flows through, not sure of the split on that between WinDoor projects that could be longer tailed and kind of your traditional PGT, CGI business. When do we consider working off some of that backlog? Is that something that the catch-up can happen here in -- all in Q2? Or maybe 50% of it in Q2? How do I think about that backlog and working some of that down?

Yes, well -- we typically see an increase in backlog and an increase in lead times. It's just when you're getting into the summer season, there's just that demand for the R&R product that comes in. So some of the increase in backlog is actually just typical with the sales growth. So we're up 27% in PGTI backlog. Jeff mentioned that sales growth in April was 8%. So no, we would not expect to get through that backlog in the second quarter, all of it. I would think that we'll see that higher backlog not only through the second quarter but even potentially beyond the third quarter. And typically, when we get our backlog down most effectively is in Q4. But what I think it does is allows us to say, hey, we've got a really strong season coming up here, and be confident about all the things that we need to do to actually make it happen.

And I would also add, you also have to look at the mix of that backlog. Right now, that mix of that backlog is slated towards our vinyl products because they're growing so fast, and the lead times on those products are 6 weeks. So we're not going to take them down until we increase capacity, and that will happen over time as we shuffle stuff within the plant and reallocate resources. So from that standpoint, I mean, our vinyl lines are booked up the rest of the second quarter at this point, all the way through July. So stock solid growth through July. So increased capacity there will also bring down that backlog, but I think to have a strong, healthy backlog is actually a good thing as long as we're executing operationally.

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

Well, thank you for taking the time with us today, and we look forward to talking next quarter. If you have any other questions, please contact me. Thank you.

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