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Ply Gem Holdings, Inc (NYSE:PGEM)

Q2 2013 Results Earnings Call

August 13, 2013 10:00 AM ET

Executives

Shawn Poe - Chief Financial Officer

Gary Robinette - President and CEO

Analysts

Michael Rehaut - J.P. Morgan

Mike Dahl - Credit Suisse

David Goldberg - UBS

Trey Grooms - Stephens

Nishu Sood - Deutsche Bank

Dennis McGill - Zelman & Associates

David William - Williams Financial

Jack Kasprzak - BB&T

Yilma Abebe - J.P. Morgan

Philip Volpicelli - Deutsche Bank

Operator

Good day, ladies and gentlemen. And welcome to the Second Quarter 2013 Ply Gem Holdings’ Earnings Conference Call. My name is Derek, and I'll be your operator for today. At this time, all participants are in a listen-only mode. We shall facilitate a question-and-answer session at the end of the conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now like to turn the conference over to Mr. Shawn Poe, Chief Financial Officer. Please proceed.

Shawn Poe

Thank you, Derek. Good morning. I would like to welcome everybody to today's webcast. Today's announcements and our comments may contain forward-looking statements and words such as expects, anticipates, intends, estimates, or similar expressions are intended to identify these forward-looking statements.

These statements are based on the company's current plans and expectations, and they involve risks and uncertainties that could cause future activities and results to be materially different than those set forth in the forward-looking statements.

The company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. For further information, I’d like to refer you to the company's reports and filings with the Securities and Exchange Commission.

During today's webcast, in addition to discussing results that are calculated in accordance with Generally Accepted Accounting Principles, GAAP, we will refer to Ply Gem’s adjusted EBITDA which is a non-GAAP financial measure.

A reconciliation of GAAP to non-GAAP information is included in our earnings press release, which was issued earlier this morning. Management believes that this non-GAAP information is important to investors understanding of our business.

Now I would like to turn the call over to Gary Robinette, Ply Gem's President and Chief Executive Officer. Gary?

Gary Robinette

Thanks, Shawn. Good morning and thanks for your interest in Ply Gem. Following my remarks, Shawn Poe, Ply Gem’s CFO will review our financial results. Before discussing the results, I want to summarize several significant transactions that occurred and impacted our financials during the second quarter.

We -- as you can tell, we had a pretty busy quarter in projects like on May 23, 2013, the company successfully completed initial public offering and issued $18 million, a 57,895 shares of common stock and received net proceeds of approximately $354.4 million, which were primarily utilized to redeem our outstanding debt. PLY Gem is now traded on the New York Stock Exchange under the symbol, PGEM.

Also on April 9, 2013, we acquired Gienow, a manufacturer of window and doors in Western Canada for cash consideration of across approximately $20 million. And on May 31, 2013, we acquired Mitten, a leading manufacturer and distributor of vinyl siding and accessories in Canada for cash consideration of approximately $79 million.

The acquisitions of Gienow and Mitten complement Ply Gem's existing portfolio of products, while expanding our North American footprint. We would expect each of these strategic acquisitions to yield meaningful synergies and growth opportunities, while enhancing Ply Gem's future sales and earnings performance.

So now for the quarter, Ply Gem’s net sales for the quarter were $368.1 million, which was a 19.8% increase from the second quarter of 2012, and of course in that number, we have some of Gienow and about a month of Mitten in those sales numbers.

Excluding a $23.5 million one-time initial public offering costs which incurred in the second quarter, our operating earnings were $24.2 million, which was down approximately $6 million from the prior year and our adjusted EBITDA for the quarter was $41.1 million, compared to $45 million in the second quarter 2012.

Our second quarter sales continue to benefit from the recovery of the new construction markets. However, demand for big ticket repair and remodeling items remained sluggish and were further compressed by the unfavorable weather conditions in our trading areas that drove higher inventory levels within distribution channels, which then of course resulted in a lower demand for our -- in our products during April and May.

The expected recovery in the U.S. housing market will still represent a significant growth opportunity for Ply Gem is demonstrated by our window units being up the first half of 2013 by nearly 50%.

However, as we have mentioned in the past that also brings near-term challenges primarily in the form of labor resource requirements to meet the increasing market demand, as well as a lower and mix of products in this early stage of the recovery. Both of these have an unusual effect on our profit performance because of the abnormal inefficiencies due to the ramp up cost to produce the substantial increase.

Recognizing this challenge late last year, we launched our enterprise lean initiative that when completed will provide greater manufacturing flexibility thus abiding some of a current ramp up inefficiencies we are experiencing. While also migrating our customers to more substantial value-added product, which should also improve our overall mix.

It is clear that housing market is trying to pull out of this six-year demise. However, the recovery will remain choppy with big ticket remodeling, expenditures lagging as the overall economic factors that drive that sector remain tepid.

Accordingly, Ply Gem will continue to focus on maintaining a lean overall cost structure, while striving to outperform the markets across all our product categories, while pursuing our strategic initiatives that will build a stronger and more profitable company.

I would now like to turn it over to Shawn Poe, Ply Gem's Chief Financial Officer to discuss Ply Gem second quarter operating highlights and other key financial matters. Shawn?

Shawn Poe

Thank you, Gary. I'll start by covering some of Ply Gem key operating performance highlights. As Gary mentioned, Ply Gem’s second quarter net sales increased 19.8% as compared to the prior year. The improvement in sales reflects a 49.1% increase in our U.S. new construction windows unit sales, partially offset by a 1.6% decrease in our U.S. repair remodeling window sales and a 9% decrease in our Canadian window sales on a comparative basis.

Excluding sales contributed from our recent acquisition of Mitten, our second quarter vinyl siding units were up 2.3% as compared to the vinyl siding industry, which was down 3.5%.

As many of you are aware, our vinyl siding sales are weighted towards repair remodeling market, which as Gary mentioned was impacted by sluggish demand during the second quarter due in part from our customers ending the first quarter with higher levels of inventory thus reducing demand for our product in April and May.

Our gross profit margin for the second quarter of 2013 was 20.2% as compared to a gross profit margin of 23.9% in the same period of -- in 2012. The reduction in gross profit percentage was largely due to the labor inefficiency and ramp up costs that were incurred in our U.S. window business related to the significant increase in unit volumes in which we have experienced for the third consecutive quarter of volume increase in excess of 100% on certain product categories.

We also incurred increased costs associated with the consolidation and startup costs of our production facilities in Dallas, Texas, as well as our enterprise lean initiative, which will lead to improved operating flexibility in the future.

Additionally, margins for our aluminum accessory products with our -- within our siding segment experienced contraction as we sold through higher cost aluminum inventory. As we look ahead, the performance of the repair remodeling market, as well as our ability to manage the ramp-up costs and labor inefficiencies that Gary discussed will be key to our performance in the second half of 2013.

Our selling, general and administrative expenses as a percentage of sales were 12.3% for the second quarter of ‘13 as compared to 11.6% in the second quarter of 2012. The increase in SG&A expense is attributable to our acquisition of Gienow and Mitten in Canada which were completed during the second quarter.

Both Gienow and Mitten utilized company-owned distribution in Canada, which results in higher SG&A as a percentage of sales. Excluding the impact of the two acquisitions, our SG&A expense as a percentage of sales actually decreased from 11.6% to 10.2% for the quarter, which reflects positive leverage on the sales increase.

I should also comment that our second quarter results included several items either directly or indirectly related to our initial public offering completed in May 2013, which include $23.5 million of IPO costs which primarily consists of an advisory termination fee payments to an affiliate 18.9% -- $18.9 million of loss on extinguishment of debt, which is the call premium and write-off of unamortized debt discount and debt issuance costs, which resulted from the redemption of $84 million of our 8.25 senior secured notes and $64 million of our 9.375% senior notes.

Finally, we recorded an $8.1 million charge associated with the tax receivable agreement, which was disclosed in our S-1 prospectus and discussed in our 10-Q report, which will be filed later today.

Next, I’ll cover some of the key balance sheet working capital and liquidity metrics. As of June 29, 2013, Ply Gem had $15 million drawn on our ABL revolving credit facility, as compared to $49 million drawn at June 30, 2012.

Taking into account the $15 million drawn on our ABL revolver and approximately $6.4 million of other commitments under our revolver, Ply Gem had $191.1 million of contractual availability and $183.1 million of borrowing base availability under our $212.5 million ABL facility.

As of June 29, 2013, Ply Gem had $27.9 million of cash on hand. When we combined the $183 million of borrowing base availability under our ABL revolver and the $27.9 million of cash on hand, Ply Gem had $211 million in available liquidity.

Ply Gem's capital expenditures for the second quarter of 2013 were $4.7 million or 1.3% of net sales bringing our capital expenditures for the first six months to $11.4 million or 1.8% of net sales.

Our primary working capital which we define as accounts receivable plus inventory less accounts payable was $248 million at June 29, 2013, reflecting an increase of $71.2 million from the $176.2 million at June 30, 2012.

The increase in working capital is directly attributable to the Gienow and Mitten acquisitions, as well as higher accounts receivable and inventory related to our net sales increase in the second quarter.

With that, Gary and I would now like to open the call up for questions. Moderator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Michael Rehaut, J.P. Morgan.

Michael Rehaut - J.P. Morgan

Hi. Thanks. Good morning, everyone.

Gary Robinette

Hi, Michael.

Michael Rehaut - J.P. Morgan

First question I had was on the margins and -- would love to get color in terms of by segment, I guess, we might have to wait for the Q to come out on that. But you mentioned several items that impacted our profitability this quarter and I was hoping to get a better sense of how much each of these items was either on a dollar basis or basis point perspective.

You mentioned labor inefficiencies and ramp-up costs, costs with the Dallas facility, the enterprise lean initiative and also the aluminum siding, I believe it was, that went through that was an impact. So just trying to get a sense for each of these dollar impact and when you might -- somebody of these I think you might still continue for a quarter or two, others sounded more like just limited and perhaps to this quarter. So any additional granularity there will be very helpful?

Shawn Poe

Sure. Let me kind of hit some of the highlights there, Michael. I'll start with our siding, fence and stone segment. So that’s pretty straight forward. As we said, it was tied really to aluminum cost and the relationship of the cost that flushed new cost of sold for the quarter, relative to selling price and that impact was approximately $3 million on the quarter, which essentially accounts for on a normalized basis the reduction that you saw in that segment.

In the window and door segment, I’ll touch on few other points that impacted that. Our enterprise lean initiative in the quarter impacted us by around three quarters, about $700,000 on the quarter and about $0.5 million associated with the Dallas facility. So that was a component.

The other piece was really the combination and they kind of go in together. The inefficiency is associated with ramp-up costs and that’s really the volume increases we talked about and specifically on our aluminum windows where the volumes were up 100% and overall our windows been up, call it 50% in the U.S. That drove, call it something in the $8 million range of negative impact.

And it's not just efficiencies, it impacts the -- they are tied together and if there is a mix component of it, Michael, in it -- that increase in volume was skewed towards are lower-end value product. Some of it was specific to a new customer that rolled out during the first half of the year and the rollout -- their initial rollout was on their lower margin -- the lower margin product. And then in the second half of the year will be rolling out the higher margin product and that was Home Depot who we picked up coming into this year and that we rolled out in the first half.

So some of that will abate in the second half of the year. I would say in terms of the volume, the ramp-up costs as, I think, Gary and I've said many times that on -- as long as volumes are going up 50% and you’re dealing with a made-to-order product, that will continue to be a challenge. But once you essentially stabilize the labor force to that level of volume then you turn -- the next period than you're making money on that incremental volume.

So it will be a -- it will continue to be a challenge for the second half of the year but ultimately then those sales will contribute to the bottom line as we look forward.

Gary Robinette

So Michael, if you have basis, this may help you or may not help you. But if your window unit sales are up 10%, you normally throw overtime at a Saturday or Sunday at it. So you have some inefficiency. If it’s up 20%, you have put -- bring on shifts and of course, the difficulty with that is getting -- the labor pool that loved like this, they have a churn. And then if you are up 40% to 50%, you get a whole different ball game, which is a little bit of Tsunami coming off of the plant.

So I think back to Shawn’s point, we can dictate -- we can predict what our labor ramp-ups going to be. But the inefficiency really comes into the whole price mix of our -- in our financial statement.

Michael Rehaut - J.P. Morgan

While I guess, I appreciate that, just a clarification that before I kind of follow on, on this line here, the $0.5 million from Dallas, is that part of the enterprise lean of $700,000 or in addition to?

Shawn Poe

No. That’s an addition. Actually, that’s specific to supporting Texas and southeast markets.

Michael Rehaut - J.P. Morgan

Okay. Well, just going back to windows for the second and a huge increase in volumes and I guess, some of limitations with labor or resources. Given that, obviously, windows is very much exposed to new construction, you’re still going to have a big ramp as the recovery unfolds with, single-family starts still well below their 30-year average. I mean, at what point does it make sense to add another plant or do something a little bit bigger picture to address some of these constraints that you're saying could very well continue for the time being?

Gary Robinette

I would think -- there is a couple (inaudible). Number one, that’s really what enterprise lean was designed to do. We knew that we’re going to have to go from 400 to 1000 starts single family to a million. So we started that process last year.

Unfortunately, it’s about a 20-month project and we’re about 50% into it. So -- and we’re probably a little bit behind where we want to be because of the ramp-up issues in our plants. And it’s really focused in three areas, one is our product offering which takes 33 different product platforms that we have and combined it into eight. So that we can then move over lines in different plants and have more of a virtual manufacturing. So you can balance out your capacity.

So that would be problem -- that would be one issue. So for example in Peachtree which caused most of the -- our Peachtree plant which caused most of this. Had we had that product up and running in other plants, we could have moved some of that capacity and abated some of these inefficiencies. And also with that it standardizes really our new vinyl platform. So that’s one area and once that’s rolled out, that will help tremendously.

Now that doesn’t abate everything. So I think the other issue has been in this industry for long time, from ‘90 to 2006 being on the other side of the fence, lumberyards carried windows in inventory wasn’t at all a special order. So as the downturn came, everything became a special order.

So I think we've got to get back to a process where we as a company. So part of enterprise lean, we are redesigning our S&OP to have complete visibility into the builder which is not our customer so that we can see what’s coming out. So that we can prepare and manufacture products that are standard in advance. And I’ll give you an example.

In Dallas, we knew we were getting this Home Depot business. We knew what the product that was coming at us. We were delivering 8,000, 9,000 units a week with no ramp-up issues because we knew those were the standard products. So I think that’s the other piece, a complete visibility into the builder, I think that will help the lumberyard chains as well because it comes at them.

These volumes came at them and they just pass it on to us. So those are the two things, we’re really working on that in the future will help us abate a tremendous amount of this inefficient costs that we have.

Shawn Poe

And Michael, I guess, the one thing I would add to, to clarify on it is during the quarter, we did have paid a buyback, if you will, associated with that new customer win which is really a one-time cost that does affect the margins on the quarter by about a full -- a little over a full 100 basis points. So it represents about 20% to 25% of that margin compression in the window and door segment. And that would not be an ongoing type thing.

Michael Rehaut - J.P. Morgan

Now, that’s very, very helpful. So by the time you’ve done with the enterprise lean which should be about another, I guess, you’re saying three quarters or so. You believe that the -- you have the full capacity and flexibility to address not only today’s levels but getting back to that million single-family starts?

Gary Robinette

Well, I would say this. As you probably can tell, this housing market rebound isn’t a peanut butter spread. I mean it’s not painting with a single brush. So all that sounds good as if everything comes back normally across all the markets. If they become hot markets, which has what happened to us.

So Florida is a hot market, now, it may go back. Texas has been a hot market, it may drop off. So I think it really depends on the hotspot because if you’ve got a hot market that’s coming out of plant, still you can’t take on 100% percent.

And prime example of that Michael would be that new business we picked up this year, the National Home Center. I mean when you pick up $40 million to $50 million of business essentially in one regional area, we had to take two smaller facilities and consolidate them into a bigger one.

So you have that aspect and then I would say to your question is if we can get a clear visibility from the builder to our plants, then we can react, I mean, we opened that Dallas plant in three months and we’re up and running.

So that we may have to put a plant in the hot market versus letting it stress our other plants. So that would be another solution, if we can really predict where those hot markets are going to be.

Michael Rehaut - J.P. Morgan

One last one and I’ll turn it over to others. You mentioned in the prepared remarks about the slower sales in demand because of inventory in the channel in April and May. Any change in those trends in June if you did -- if you felt like the excess inventory in the channel perhaps it almost seemed like it was implying that kind of worked it through in April and May. Were there any difference in terms of your sales into the channel in June?

Shawn Poe

Yeah. Let us kind of give you the, I guess, the trajectory of the second quarter build, Michael. I think that answers a lot. First -- and when we talked about that channel inventory, that specifically impacts our siding, fence and stone business because that’s what made the inventory product. Windows and doors, there's essentially no inventory there.

So if you are looking at their sales, they were pretty consistent during the quarter and consistently strong, I might add. In siding, March was somewhat of a normal month but that’s where the weather impacted our customers. April sales were down 25%. May, they were up in the mid-single digits. June, they were up upper teens. And so clearly, it was very clear and our sales to some extent that -- while we outperformed the VSI or the vinyl siding industry, they mirrored in terms of the pattern that the industry saw.

Gary Robinette

So to add to that Michael, our customers in that channel which are big customers, well documented, they told us that 3rd March was their worst March in eight years. And it wasn’t ours. So we knew that.

Michael Rehaut - J.P. Morgan

It was coming.

Gary Robinette

That was going to hit. And it hit in April and maybe wasn’t our worst April in eight years but it was our worst April in a while. So as Shawn said. So if you look at that, it did come back and June was more obsolete, more normal.

And I would just say, we don’t like to give forward guidance but in July and August, we’re kind of back to a normal. And a normal that still mean that sales are lagging. So I think in our model, we were at a 2% as our projection. So we’re back to our normal basis. But I don’t know if you have make that, some of that weather stuff.

Shawn Poe

The weather I don't think -- and even I have said this before, I think it can either be a positive influence or dampening influence on a given year. But it doesn't change long-term trends. And I think this year -- last year in ‘12, it clearly was a positive influence in the first half of the year because that was our fourth warmest winner on record.

This year it was an extended winter and then it led into a heavier than typical rain season. So I think it's been a negative influence. I don't think you make all that up on the year but I don’t think it changes the long-term outlook, Michael.

Gary Robinette

And our trading area, just a reminder for that, product category for the most part of the Midwest or North East so that’s…

Michael Rehaut - J.P. Morgan

So the down 25%, up mid single, up high teens, that was industry numbers, not your numbers?

Shawn Poe

Those are numbers but the industry -- the industry would've been -- because ours will have other than just final siding. But I would say the -- just the pattern was, that was -- the industry followed that same pattern.

Michael Rehaut - J.P. Morgan

Right. Thank you very much.

Gary Robinette

Okay.

Operator

Your next question is from the line of Dan Oppenheim, Credit Suisse.

Mike Dahl - Credit Suisse

Hi, this Mike Dahl for Dan.

Gary Robinette

Hey, Mike.

Mike Dahl - Credit Suisse

Hey. As curious just conceptually if we think about your comments on, okay, maybe July and August are back to normal but we’re still seeing big ticket lagging, I think with some of the other companies that have some different big ticket exposures, we’ve seen a bit more in terms of signs of life. Some of those would be interior building products.

Gary Robinette

Right.

Mike Dahl - Credit Suisse

So when you think about the recovery, do you think the first step is kind of, okay, big tickets starts to pickup. But you have a consumer preference to maybe remodeled kitchen before you deal with siding or how should we think about that lag as far as your product specifically?

Gary Robinette

Yeah. I would always say the interior comes first. The exterior, I always go back to these economic factors that I talk about that the three that I think you need all headed in the right direction. One is the price of the house which obviously you are not going to spend 15 to 20. And again remember these big ticket, 75% of that comes out of a bank account. So it’s not a loan item.

So you’re not going to spend that money if your house prices are going up. So we know we got that trend headed in the right direction. The other two major is consumer confidence which in the first seven months was -- it was up four months -- four of the months was up, three of the months was down. So it's choppy at best and people got to feel good about their lot in life.

And then the third is unemployment which is still on the -- it’s debatable but let’s call it in the upper 7% area. You’re not going to spend -- maybe your siding looks a little dingy. Your windows are okay. You can live with them. We’re not going to spend that money if you don't have a job or you think your job is insecure.

So, it does come -- but it will come and because there is a lot of homes that need -- need those products. And I generally think that from the interior stuff, this is from my 40 years of doing this. It’s usually lags the interior by three months or six months or so. But eventually those that catch up and when those factors head in the right direction, I think you'll see that be more robust than flatter 2% or whatever the dynamics are out there.

Mike Dahl - Credit Suisse

Thanks. That’s helpful. And then as a follow-up, just shifting gears to the windows side, you clearly had that nice business win with Depot and starting to see that flow through. On the R&R windows, I mean, are there any other opportunities that you see or that you've already secured and can you update us on your progress on pushing more into R&R on the window side?

Gary Robinette

Yeah. I would say the R&R windows are our higher ticket. It’s out of our Great Lakes plant. And as we say that we're building that brand, one hull at a time. I think the big box does help that brand to be candid with you because their contractor makes that decision usually, not the homeowners.

So the more the contractor sees, the Ply Gem brand, the more they’re willing to say hey, windows are complicated. I mean there -- it’s a complicated product and for a contractor to switch, he’s got to feel pretty comfortable that he is not going to have any complications. So usually they take the status quo. So we’re just chipping away at that. And I think the home center, which is obviously some of that window is the same, it’s our mid-repair, remodel window that does gives us the exposure.

Mike Dahl - Credit Suisse

Great. Thanks and if I give just squeeze one last one in…

Gary Robinette

Sure.

Mike Dahl - Credit Suisse

… with the -- you've owned Gienow now for a couple months and Mitten for a couple months, how are those integrations progressing against your plans? Any surprises either on the positive or negative side as you’ve owned those?

Shawn Poe

Yeah. I would say -- but first let me give you the general is that each of those acquisitions will generate anywhere from $5 billion to $10 billion in synergies each and probably would be more closer to higher end and lower end. We are fully engaged in achieving those synergies. So two months in, we started that process.

We are not waiting the -- one of them, the mitten synergies are probably come quicker than the Gienow because the Gienow is going to one platform on windows and going into one facility and those type things. So that takes a little bit of time. But we’re pretty confident about it. We’ve laid out the project teams and we’re often running. So we feel pretty good that that will happen.

I think we’re only really surprised that the score has been like the perfect storm, I don't know what else we could had come out, but that’s, okay, we’re pretty thick skinned here. Is that the weather in Western Canada, Calgary, if you haven’t seen where the majority of this business had a flood and it just had an impact on some of the volumes there, not only in the Gienow but in our plan? So it's one of those things that you don’t -- you don’t expect that you going to have a flood in the prairies of Canada.

But, I think from the team, everybody is excited about how this will fit in and again, as we mentioned, Canada is probably not as robust of a market, but these were strategic for us that we’ve been talking about these acquisitions for the long time and how they would fit. And the synergies are real and hopefully that will have all those baked in in the next 12 to 24 months.

Mike Dahl - Credit Suisse

Great. Thank you.

Gary Robinette

Thanks.

Operator

Your next question is from the line of David Goldberg, UBS.

David Goldberg - UBS

Good morning

Gary Robinette

Good morning.

David Goldberg - UBS

I want to just the start by making sure I understood the response to, Mike’s, question earlier and that was in the Canadian windows business a decline, we shouldn't read anything in demand from that perspective that was simply a weather-related issue, there is no, you guys aren’t seen any impact from the demand perspective in the quarter?

Gary Robinette

No. Well, I think, the -- I think that generally speaking the markets are softer there than they obviously are in the U.S. and the bulk of our sales in -- our legacy sales in Western Canada are towards the new construction site. So, David, there are demand and certain regions was softer. But, no, I mean, I don’t, nothing specific there. Weather played an impact in the Calgary market, yeah.

David Goldberg - UBS

And then just kind of bigger picture question, when we think about kind of planning for the business? How do you think about higher mortgage rates and I know, you guys have made the comment that 75% of I think sliding purchases are done out of pocket versus borrowing? But how do you think higher rates are going to impact consumers as you kind of think about your business on a go-forward basis?

Gary Robinette

Yeah. I would say that, my first house I bought, I won’t get into all the details, but I paid 70% interest. I had a good job and I felt pretty good about the economy to do that. So, I think, interest rates to a certain degree could be a restrictor on the housing recovery. But, I think, at the current level so low that you could go up several -- you go up several points and it doesn’t have any impact. So for us right now on a short-term basis, I mean, in the next couple of years we just don’t see that have an impact on our business.

David Goldberg - UBS

Great. Thank you.

Gary Robinette

Okay.

Operator

Your next question is from the line of Trey Grooms, Stephens.

Trey Grooms - Stephens

Hey. Good morning.

Gary Robinette

Good morning, Trey.

Trey Grooms - Stephens

First question is on Mitten and Gienow, the revenue kind of run rate as we look at those businesses? I mean, there is a lot of stuff going on this quarter and there was -- and it was a partial quarter anyway, you had weather and a few other things? How do we think about, Shawn, the run rate on the revenue side of these businesses?

And then secondly, on the margins, how do the margins in Mitten and Gienow compared to the kind of standalone siding in window businesses as we kind of look forward here?

Shawn Poe

Yeah. On a -- let me give you there, I’ll give you, there are 2012 sales on a combined basis they were about $235 million, Trey. In terms of margins, they would be similar to the individual segments that they fall within. The Gienow which is in our window and door segment today is going to be in that kind of that from EBITDA margins standpoint, I would say is similar to our legacy Ply Gem, our Canadian window business, if you will, maybe a few points actually below it,

Gary Robinette

This is before synergies.

Shawn Poe

Yeah. This is before synergies.

Trey Grooms - Stephens

Okay.

Shawn Poe

And when you think about that acquisition, Gienow was about a little over $100 million in revenue last year and if you can get $5 million to $10 million in synergies, as Gary said, on that that specific acquisition, you've done a whole lot to improve the gross profit margin to that business.

On Mitten, that business last year was called it -- in that $135 million range. Once it get similar to our siding, fence and stone segment, but to a lesser extent, they obvious…

Gary Robinette

They have distribution.

Shawn Poe

Yeah. They have distribution, so there are composition in terms of, they'll have higher SG&A expense because of the distribution in our U.S. siding business and they're not going to have obviously be a much, much smaller than Ply Gem's existing siding business. There not going to have the same purchasing power that Ply Gem has in it siding business. But that's all opportunity, right.

That’s part of the synergy that $5 million to $10 million that Gary talked about. So on $135 million business, $5 million to $10 million of synergies on that acquisition are pretty meaningful as well. So I’m bullish on both those acquisitions. I'm pretty high on both of them and I think there are going to be significant contributors down the road.

Trey Grooms - Stephens

All right. Thanks for that. And just on the Home Depot rollout, can you give us a little bit more color. I think you are rolling -- only rolling out the lower end aluminum, if understand that right? But can you -- can I talk about the timing for the full rollout of the higher end windows, and is that going to be on kind of the same scale as what we saw with aluminum windows and then is -- are we still kind of looking at the same type of impact from, I guess, the growing pains associated with that there from an efficiency standpoint, would that be similar with the remaining portion of the rollout as what we’ve seen thus far?

Gary Robinette

Okay. Well, let me just say that you got most of that correct and I don’t want to get too deep into the weeds. But the first part of the rollout was the low-end aluminum and I do mean low-end, okay. So it really played havoc with our mix.

The second rollout is the vinyl which really started in the third quarter. So started around the 1st of July and we’ve -- for the most part hear in the near, near, near future we’ll have all of that rolled out and that is a little bit higher mix, but it’s still a lower end of the vinyl, but it’s a better process. So what -- and they’re about the same amount trade. So the dollar amounts are about the same.

Now the real benefit will come in the future months because the business is about 50% out of stock and 50% special order. So once you’re in those stores then somebody needs, well, I don’t want this low end, I need a high-end and they start to order the higher end products, so that will take probably another year to flush out.

So you’ll have -- it will improve each quarter to the point that you have and again, if it’s 50-50 you should be able to and maybe it’s 60-40 we don’t really know, but you’ll have the higher end to pull that whole profitability on that portion of the business.

Trey Grooms - Stephens

Okay. And you mentioned that is -- I believe it’s regional here with this rollout.

Gary Robinette

Okay.

Trey Grooms - Stephens

Can you give us an idea of the number of stores you’re talking about here and is there opportunity to expand from this -- from where we are today with the kind of number of stores you’re looking at?

Gary Robinette

Yeah. The stores are in the 300 range. So it’s in the Texas, Oklahoma, Louisiana, Arkansan markets, the buying group there. I think because we’re new with them, they look at to see how we rolled it out and how we perform, and I think if we -- which indication we’re having that new plant there helped because it didn’t put stress on our other plants. But I think we will -- if we perform we’ll have an opportunity to participate in another line buys down the road.

Trey Grooms - Stephens

Okay. That’s all. Very helpful. Thanks a lot and good luck.

Gary Robinette

Thank you.

Shawn Poe

Thanks.

Operator

Your next question is from the line of Nishu Sood, Deutsche Bank.

Nishu Sood - Deutsche Bank

Thanks. I wanted to follow up on -- one of the many questions, Mike, asked about the weather impacts and I think you gave a pretty good description of the second quarter month-by-month trends? But I wanted to take a step back and think about the ’13 view, when we had been speaking a few months back we had talked about the possibility that sales losses because of weather might be recovered in the aggregate for ’13 in the back half of the year? So that’s one possibility if we’ve have to think of the sales losses or just the deferral into the second half? I wanted to get your thoughts on that. Is that still the correct way to think about those sales losses or is there some component of debt loss here as well?

Shawn Poe

I think that, I think in terms of the weather, you make -- if it’s a near-term impact, let say 30 days, you probably make up the bulk of that but if you have an extended weather like we did winter like we did this year. I think it creates some pent-up demand, Nishu, but you don’t make all that up in the year. And I think this is one of those years where I think that’s the case.

We like some of it, I am not, I think a great example that is just looking at the second quarter projection, 25% down in April in our siding sales and up 17% in June. So, if some of that, is some of June customers then -- and then refilling their stock from basically depleting it. So but I think overall, I think, some of that does damp in the year, absolutely.

Nishu Sood - Deutsche Bank

Got it. And now we’re…

Shawn Poe

I would also add, Nishu, as I said earlier. I don’t think it changes the long-term view, weather is -- it’s a near-term thing but the big driver is long-term are ultimately going to be the new construction market and how the repair remodeling market performs overall, which goes back to the fact as Gary discussed.

Gary Robinette

Yeah. So if you look at the unit.

Nishu Sood - Deutsche Bank

Got it.

Gary Robinette

If you look at the siding units, in the quarter we were up 2.3 as Shawn mentioned and the industry was down 3.5. Year-to-date we’re up 2.2 and the industry is down 4.3, which tells you the industry hadn’t picked it back up either. I mean we’ve picked up some share in States fairly constant, but I don’t see that ramp, I think when I used the term before it’s going to be normalized it’s still normalize it up at a lower level.

Shawn Poe

Yeah. I guess, and as Gary said on a positive note, I mean, we outperformed the industry. We ended last year at 36% share in the U.S. and we’re at through the first half 38% share, excluding Mitten. So we’ve improved our position and outperformed the industry. It’s just everybody was impacted by that.

Nishu Sood - Deutsche Bank

Got it. And when as we’re considering these comments that you’re making about the weather? Is this really your thoughts on the Midwest and the Northeast in the U.S. or does this also the correct way to think about the weather issues in Western Canada?

Gary Robinette

Western Canada was definitely impacted by weather as well year-over-year, Nishu. But I would say there are certain markets up there. For example, British Columbia…

Shawn Poe

Soft…

Gary Robinette

… which is a soft -- softer and…

Shawn Poe

Ontario.

Gary Robinette

… that’s Saskatchewan and into the east Ontario is softer and that’s really more market driven or is much market driven.

Nishu Sood - Deutsche Bank

Got it. Okay. And then my follow-up question, I just wanted to ask you about the operational efficiencies, I mean you laid out pretty clearly in the some of the earlier Q&A about the 24 months timeline you’re kind of halfway through it? Obviously from our perspective we’re thinking about operational inefficiencies dampening your incremental margins? So my question just numeric as we think about that 24 months horizon? At what stage do we expect to see the -- when you have an X% sales increase year-over-year what have you that the incremental margins kind of live up to the potential that your business have?

Shawn Poe

Yeah. I would say, I mean, we are not giving our model or anything is that, so in the first half of the year that the window sales were up $50 million, okay, something in that range. And so you can see the incremental EBITDA we had on that. Next year on that same $50 because once the ramp up cost you get it, you get the people trained then they stay that we would on that $50 million I would see that we would be a more normalized margin. Does that help…?

Nishu Sood - Deutsche Bank

Got it. Yeah.

Shawn Poe

So for the year that I would think that that if you -- we look at, I look at it from the year meaning we’re going to do X amount, let just double and say $100 million that what we made this year I would expect us to make a more normalized and we believe we will, which ties close to the models we’ve been talking. So you get that on that $100 but the next year if you’ve got another $100 million that incremental $100 million…

Nishu Sood - Deutsche Bank

Yeah.

Shawn Poe

… maybe at a lesser for that first year.

Gary Robinette

Yeah. So if we have -- if you get this is how we look at it, if you have a million single family starts and in the first year you have it you’re going to make X, the second you’ll make and you’re still -- you’ll be probably closer to what you call a normalized margin, the third year you’ll definitely because you’ll have the inefficiencies behind you, you can run your plans on a normal basis or have added a plan if you need that.

Shawn Poe

Yeah. Our enterprise lean initiative is intended to help mitigate that as we go forward to, I would say more quickly realize the normal as margins on incremental sales. But it’s still made the order product, so you have to invest in people in training them in advance of demand.

Nishu Sood - Deutsche Bank

Got it. Okay. Great. Thanks a lot.

Operator

Your next question is from the line of Dennis McGill, Zelman & Associates.

Dennis McGill - Zelman & Associates

Hi, Gary and Shawn.

Gary Robinette

Hey. Good morning, Dennis.

Dennis McGill - Zelman & Associates

My first question just quickly, the momentum that you talked about siding being up upper teens in June, did that type of trend carry into July as well?

Shawn Poe

No. It was more of July and August at least thus far in August it’s not, August isn’t done. But as Gary said, it was really more in line what he referred to it as normal which is in line, which is kind of what we said the guidance that we expect the R&R market to be up kind of in that in low single digits and that’s kind of the levels we were seeing.

Dennis McGill - Zelman & Associates

Low single on the remodel side and then that’s supplemented by the new construction.

Shawn Poe

Yeah. I mean if we were weighing them it would be yeah.

Gary Robinette

Yeah. Of course, siding…

Shawn Poe

The bulk of it’s R&R.

Gary Robinette

It’s in R&R itself

Shawn Poe

Yeah.

Dennis McGill - Zelman & Associates

Okay. And I guess, Gary, bigger picture you said there was a lot of turn that you get this quarter and seemingly the first half of the year between raw material cost and efficiencies, et cetera, all the things that you’ve gone through. So margins in the first half of the year I think were down a little over 200 basis points? Is this is the trough in margin performance, do you feel like from this point forward all things equal that we’re going to start seeing accelerating trends in these things?

Gary Robinette

Yeah. I would say that, I mean, I’ll have a wheezy board here or anything, but I’ve never seen as much come at our business even in the downturn as we had. So I would think we will be able to have our margins get back to a normal base.

Shawn Poe

Yeah. And the only thing I would add to that, Danish and it really goes back to the siding segment and we said, we have forever said that, in any given quarter you may see some margin expansion or contraction depending on what’s happening with material cost in relationship to price. It so happens that the second quarter of this year we saw contraction on the aluminum side.

There have been many quarters where we’ve seen expansion, but will there be other quarters in the future that where we may see a quarter of contraction on, could be line or I don’t know. Yeah, there’s going to be fluctuations. But long-term we -- as we’ve said many times as well, long-term we’ve managed the business and been able to maintain our gross profit margins in pretty narrow band.

Gary Robinette

So, for example, and I’ll just give you one plant and this was not going to be enough to go into your -- figure your model. But the one plant to guide here was 100% for three consecutive quarters now in aluminum increase and vinyl that plant now is back to normal lead times running what I call on a normal basis doesn’t mean it’s perfect.

But in that second quarter, first quarter and some of the second quarter, the inefficiencies in cost in that plant was $6 million. Now those costs won’t be in the second half of the year for that plant, but they may go to another plant, so we have to deal with that we have to work on. But does that help you, Dennis?

Dennis McGill - Zelman & Associates

Yeah. That’s helpful. And I guess…

Gary Robinette

No. Technically you should see, I mean, this should be the low and it should improve from here.

Dennis McGill - Zelman & Associates

Okay. And then just last question as …

Gary Robinette

Yeah. Next year we’ll have enterprise lean rolled out. So if you look at another 200,000 starts you’re saying, well, why wouldn’t it be a repeat and that’s what we’re trying to mitigate. You’ll have some repeat on inefficiencies but we’re trying to mitigate that as much as possible.

Shawn Poe

And then over the next 12 to 24 months you’ll -- we would expect to start seeing the synergies from the acquisitions roll in as well.

Dennis McGill - Zelman & Associates

Sure. And then just last question, I guess, on the windows business, the unit volumes have been very strong, there seems to be a lot of issues with mix? Can you just isolate out what’s happening with pure price and then how much of a drag is mix going to be moving forward?

Shawn Poe

Well, from a price versus volume, price probably offset the vast majority of the volume in the quarter. In terms of the contribution, we would expect to get but that is more of a near-term -- a lot of it’s that near-term issue that we talked about. So going forward than you expect to able to -- that volume to contribute on an ongoing basis.

I do expect to see there the labor inefficiencies and that the -- some of that mix, I do expect that to continue into the third quarter, Dennis, perhaps to a lesser extent but I do expect it to contribute -- to continue under the third quarter and impact that….

Dennis McGill - Zelman & Associates

Sorry, Shawn, I was just referring to top line price and mix, you are referring to margin impacts?

Shawn Poe

Yeah. I was referring to margin impact. From a from a top-line standpoint in our windows segment, it was probably -- I'll call it 80% top line was driven by volume and actually price went the other way. So, it was kind of that in that relationship. Top line was probably -- volume probably drove somewhere in that $40 million range and then offset by about $10 million a price.

Dennis McGill - Zelman & Associates

Okay. Thanks, guys.

Operator

Your next question is from the line of David William, Williams Financial.

David William - Williams Financial

Hey, good morning everyone. Thank you for taking my question. You touched on this a little bit just now, but I wanted to think if we kind of ex out the contribution, I guess, from the aluminum or the lower end unit. And we look at just maybe the vinyl or the upper end units, what kind of pricing power are you seeing there? And thinking specifically about the volume growth, how do we think about that going forward as far as your pricing power as we get into may be the first part of next year and we do start seeing that real uptick in housing starts?

Shawn Poe

Well, I think one, the margins in our siding segment are -- are you asking about siding, because you specifically mentioned there aluminum. Are you asking siding or windows?

David William - Williams Financial

Well, yeah, I guess, let’s think about both but windows specifically. If we ex out maybe the lower end and the mix -- the mix that you had there?

Shawn Poe

Well, let’s focus on windows then because I do think as the market recovers that I think helps the industry get more pricing power. I think the industry frankly needed more pricing over the last several years during the downturn, but you know when the market was off 70% in new construction and given the fragmentation of that industry, you frankly -- you just didn't see much pricing if any put forward and at the same time, there was a migration by the builders to a lower price point product during that time.

I think as the market improves and heads more towards a normalized market, I think that obviously that only helps that dynamic from a manufacture standpoint.

Gary Robinette

But one thing that we were able to do in Florida is because of -- because of our capacity when you are up a 100% on aluminum windows is we drove some of the customers of the new enterprise lean windows, this 1500 which is a vinyl. So it’s some more expensive window than aluminum. It’s a better window for their homes. And we were able to convert some of the builders downs there to do that. So I think once you -- you get to -- I think you can get the prize, but I think you can also move them up in product categories as well.

David William - Williams Financial

Great. And then we -- I know for a long time I’ve been thinking that the repairing model segment really does pick up in the second half. We obviously had some weather headwinds in the first half, but if we think about maybe the longer term trajectory of the R&R market, you talked about mid single digits here. What do you think we can look like as we get into 2014. Do you think we get back to a more normalized level or is this a slow and steady pace as we get through the year?

Gary Robinette

I think we -- our view is more of a slow and steady pace, but higher than 2%. But next year, we are not expecting -- while we are expecting some improvement, we are not -- it’s still in that call it -- low mid-single digits on R&R.

David William - Williams Financial

Thank you very much.

Operator

Your next question is from the line of Jack Kasprzak, BB&T.

Jack Kasprzak - BB&T

Thanks. Good morning, everyone.

Gary Robinette

Good morning, Jack.

Jack Kasprzak - BB&T

The acquisitions, obviously you talked a lot about Gienow and Mitten but what’s your appetite for acquisitions over the next 12 to 24 months. Are those two deals sort of enough to work on and integrate for the time being or how would you describe the pipeline?

Gary Robinette

I would say, first of all, we’ve got a pretty good platform to grow and obviously -- we got the volume coming at us from a window perspective and our siding platforms pretty mature of what we need to grow the business.

But with that being said, I think the thing that's missing and we said this on the road is probably asset that's more R&R driven from the window side because that will get your overall mix up and if one of those became available -- I guess my hope is that it doesn’t come available tomorrow but it comes in the next six to nine months, so we can roll out this enterprise lean.

But that’s something that we will need because it’s hard to build that high-end business one hole at a time like we’re doing. It would be good to have one of those assets that have -- what I am talking a bigger asset, couple of 100 million of pure R&R windows. So that would be one that I would hope would come our way and that we would -- would take on as a company.

Jack Kasprzak - BB&T

Okay. Great. You guys have talked about new -- other new products, exterior products, maybe that you're developing. Is there anything you can update us on with regard to that area maybe over the next 12 to 24 months in terms of new product introductions?

Gary Robinette

Right. We have -- I think as most of them know that started a new company called Foundation Labs which is really our development of -- of new products. It's products that are not hold the base that -- hold the base would be in the current business unit. And we’re in a position -- I just can’t really really go into too much detail but we've been doing a lot of test.

We have our lab set up here in North Carolina and will probably have a rollout and these are a 100% recyclable products. They have got a unique production aspect to them. They are less costly in material and will probably have a soft release of at least one of those products in the fourth quarters. So we’ll give you more details. And we will probably have at least one or two of those in the -- the goal is to have them in the builder show in January that we can then roll out in ‘14.

Jack Kasprzak - BB&T

Okay. Great. Thank you very much.

Gary Robinette

Thanks, Jack.

Operator

Your next question is from the line Yilma Abebe, J.P. Morgan.

Yilma Abebe - J.P. Morgan

Thank you. Good morning. Two quick ones for me. The first is, if I can ask one more question on the mix issue highlighted towards the low end of your product. Is there any evidence that this is anything but cyclical trend? What I am trying to get at is, is there any customer behavior changes that’s more long term than just a dynamic this early in the cycle?

Gary Robinette

Yeah. I would say that that right today if you use 600,000 single-family starts, most of those are being built by production type builders, national builders. They use lower end products and that’s the mix that you're seeing. If you looked at our business before this downturn we’ll -- that was only -- the production builder was only 20% -- 10% to 20% of our window sales.

So it has taken up the majority of it. So I think as mortgages become more attainable and the custom builder -- the custom builder does not put an $80 vinyl window in their house. So they put the higher end. And I think the windows are becoming more energy-efficient. So that's important.

So I don't think it's a trend. I think it’s just where we are as a snapshot. But I think people will be selective on return on investment if it is in a repair or remodel mode. So that’s how we see it. I think when you get to a million starts on a couple of year basis that mixture of custom and -- and big builder gets more normalized and than our mix will go with them.

Yilma Abebe - J.P. Morgan

Thank you. That’s helpful. And then one last and a quick one, as you look forward, perhaps can you remind us your priority -- use of cash going forward?

Shawn Poe

Yeah. Obviously, from the IPO proceeds the -- it was essentially used to pay down debt. From a cash flow generation going forward, we would expect to fund either reduced debt with it or to support new products and/or growth in the business.

Yilma Abebe - J.P. Morgan

Thank you. That’s all I had.

Operator

Your next question is from the line of Philip Volpicelli, Deutsche Bank.

Philip Volpicelli - Deutsche Bank

Good morning and congratulations on your IPO.

Gary Robinette

Hi, Phil.

Shawn Poe

Hi, Phil.

Philip Volpicelli - Deutsche Bank

My question is regarding the PVC pricing. Can you give us a sense of what -- what you’re seeing from suppliers and then I just wanted to double back on pricing. In the discussion, previously you mentioned that pricing was a 10% negative impact on revenue, is that because of mix or our actual prices down for your window and siding products?

Shawn Poe

I will take them in a reverse order. It’s a -- it is really mixed. We didn’t go out and do a price decrease on our products that’s for sure. So it’s really, it’s really a mix issue, Phil. In terms of PVC resin pricing, they peaked in, kind of, the March-April timeframe and came down a little bit during the latter part of the second quarter and they appear to be pretty stable right now.

Philip Volpicelli - Deutsche Bank

Okay. So you haven’t had to give up any pricing because of PVC coming down?

Shawn Poe

Not dramatically, I mean, there could always be some one off, a situation but, generally speaking no. It’s -- we -- the price increases we put forward were based on really where the market price is today for PVC.

Philip Volpicelli - Deutsche Bank

Okay. Great. And then just on the topline, can you give us the contribution for the one month from Gienow and Mitten that on revenue?

Shawn Poe

On revenue for Gienow and Mitten for the one month?

Philip Volpicelli - Deutsche Bank

Yeah. I am just trying to get an organic comparison?

Shawn Poe

We actually do break that out in our Q which is going to be out later today but Gienow which we owned for really two and half months revenue, they were around call it $23 --$23.4 million for the quarter and Mitten was about $14 million. So….

Philip Volpicelli - Deutsche Bank

Okay. I appreciate. Thank you.

Gary Robinette

Derek, we’ll take one more caller.

Operator

And the final call will be a follow-up question from the line of Michael Rehaut, J.P. Morgan.

Michael Rehaut - J.P. Morgan

Thanks. I just had a question of clarification actually. The -- when you had said earlier that the Home Depo buyback with the new customer win was about 1% impact to margins, just want to make sure, that was separate from the aluminum cost inventory issue. Is that correct?

Shawn Poe

That $2 million was specific to the windows. The aluminum was in our siding, fence and stone segment.

Michael Rehaut - J.P. Morgan

Okay. Yeah, that’s what I thought. I just wanted to make sure. Thank you.

Shawn Poe

Absolutely. Yeah. Thank you.

Gary Robinette

In closing, even though the market environment was better during the first half of 2013, we believe the recovery will be slower than faster and require the patience and focus of managing the ramp-up costs and labor by growing our products and markets throughout our trading area. As always, we appreciate your interest and support in Ply Gem and we look forward to discussing our business with you on our third quarter call. Thank you.

Operator

Ladies and gentlemen that conclude today’s conference. We thank you for your participation. You may now disconnect. Have a great day.

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