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PGT, Inc (NASDAQ:PGTI)

Q4 2014 Earnings Conference Call

July 29, 2014 02:30 ET

Executives

Brad West – VP & CFO

Rod Hershberger – Chairman & CEO

Jeff Jackson – President & COO

Analysts

Sam Darkatsh – Raymond James

Bob Wetenhall – RBC Capital Markets

Rob Hansen – Deutsche Bank

Jeremy Hamblin – Dougherty & Company

Steve Dyer – Craig-Hallum Capital

Operator

Welcome to the PGT, Inc Second Quarter 2014 Earnings Conference Call. (Operator Instructions). And now I'd like to introduce your host for today’s conference Vice President and CFO, Mr. Brad West. Sir, you may begin.

Brad West

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

This afternoon we are pleased to provide an update on our second quarter and discuss the progress we’re making in 2014. Hopefully, everyone has had a chance to review our earnings release issued yesterday as well as the release we issued in connection with our entry to a definitive agreement with CGI Windows & Doors Holdings pursuant to which CGI will become a wholly owned subsidiary of PGT.

Before we begin, let me remind everyone that today's conference call may contain statements concerning the company's future prospects, business strategies, and market outlook. Such statements are considered to be forward-looking. These statements do not relate strictly to historical or current facts, rather they are based on our current expectations and are subject to risk and uncertainty.

Actual results may vary materially from those contained in the forward-looking statements. Please refer to our press release, our most recent Form 10-K and other documents filed with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements.

A copy of our press release is posted on the Investor Relations section of our corporate website at www.pgtindustries.com. Included in the press release are the unaudited condensed consolidated balance sheets and statements of operations prepared in accordance with GAAP and adjusted information, which is quantitatively reconciled to GAAP. Our company uses non-GAAP measurements as key metrics for evaluating performance internally.

A detailed explanation of these non-GAAP measurements can be found in our press release, which was included as an exhibit to our Form 8-K filed with the SEC. These non-GAAP measurements are not intended to replace the presentation of financial results in accordance with GAAP. Rather, we believe these non-GAAP measurements provide additional information for investors to facilitate the comparison of past and present performance.

We will provide an overview of our performance for the second quarter of 2014, and after our prepared remarks, we have ample time to address any questions that you may have.

With that, let me turn the call over to our President and Chief Operating Officer, Jeff Jackson. Jeff?

Jeff Jackson

Thanks Brad. Good afternoon everyone. I would like to start with some highlights about PGT especially for our first time listeners. We’re the leading U.S. manufacturer of impact resistant windows and doors having pioneered the development of these products over two decades ago. 88% of our sales are from the Florida market, the nation’s largest impact resistant window and door market. Our customer base is highly diverse made up of over 1200 window and door distributors and dealers.

We have a leadership team in place with extensive experience in both manufacturing and the window and door industry. Our industry leading margins allow us to generate significant free cash flow which we continue to invest in our infrastructure to support both our internal growth and into targeted acquisitions. We’re nearing the completion of a glass processing expansion project in which we’re constructing a 96,000 square foot building and installing equipment to add cutting and tempering capacity all of which will be brought online at the beginning of our fourth quarter.

The building is also large enough for further expansion into the future. You may have seen in yesterday’s acquisition announcement, we have entered into a very attractive agreement to acquire CGI Windows & Doors. This acquisition is expected to close during the third quarter on or around September 27th.

In terms of our second quarter results, we continue our momentum of strong top line results with sales coming in at $81.6 million up 18.8 million or 29.9% over the second quarter of 2013. This marks our highest quarterly sales since 2006 in the 7th straight quarter of at least 25% year-over-year sales growth.

Our growth is primarily driven by new construction sales as well marketing programs focused on driving WinGuard products into the repair and remodeling markets. Although second quarter Florida housing starts were essentially flat compared to prior year. We have seen a steady increase in both the number of overall closed sales as well as the average closed price across estate.

The overall increase in home values positions the market to be more in-line with our high quality product offerings and provides positive outlook for growth in new construction and the repair and remodeling markets. We were able to capitalize on improving market conditions as well as our pricing strategies targeting several large projects that we initiated during the first quarter and drove new construction sales up $10 million or 52.4% over the second quarter of 2013.

This sales growth led to a shift in our mix with new construction sales now representing 36% of total sales. Additionally during the second quarter we saw growth in the repairing and remodeling markets with sales up 8.7 million or 20% over the same period last year. Our gross margin dollars were 26.1 million in the second quarter of 2014, an increase of 5.1 million or 24.3% over the prior quarter.

Gross margin as a percent of sales declined from 33.5% in the second quarter of 2013 to 32% this year. Until our gas plant is fully operational we will continue to experience pressures on our gross margin due primarily to an increase in material cost from purchased finished glass units.

We have purchased finished glass since the middle of 2013 to support sales growth in excess of internal capacities. The addition of our new glass plant will address internal capacity shortages from a glass processing and reduce reliance on outsourced finished glass.

Also impacting margin is the residual effects of our pricing strategies on several large projects initiated during the first quarter of 2014 to gain market share. While margins were impacted in the short term these new customer relationships factored into our strong sales growth during the second quarter.

Selling, general and administrative expenses as a percent of sales declined to 15.9% compared to 20.3% in the second quarter of 2013. Our revenue growth led to strong leverage in this category, additionally we had reduction of 1.6 million in amortization expense compared to 2013.

During the quarter we generated net income before taxes of 12.6 million compared to 7.7 million in the second quarter of 2013 after adjusting for expenses related to the secondary offering, our related debt refinancing and a discreet tax item.

The EBITDA came in at 14.5 million or 17.8% of sales up 3.6 million over prior year. After adjusting for cost related to the secondary offering and debt refinancing. This is an exciting time for PGT as we just closed one of our strongest quarter since 2006. Additionally we’re preparing for the opening of our new glass facility and announced our first major acquisition.

With that let me turn the call back over to Brad who will review the results for the second quarter in greater detail. Brad?

Brad West

Thank you Jeff. As Jeff mentioned we reported sales of 81.6 million up 29.9% over prior year. We finished the quarter with EBITDA of 14.5 million representing 17.8% of sales which represents our best quarterly EBITDA since 2006.

Breaking down our sales drivers compared to 2013 second quarter we have WinGuard sales of 58.2 million versus 45.0 million which is an increase of 13.2 million or 29.3%. Vinyl non-impact sales of 11.2 million versus 8.8 million up 27.3% over prior year. Aluminum non-impact sales of 7.1 million versus 6.3 million up 12.7%, PremierVue sales were 2.6 million versus 1.6 million, an increase of 62.5% and Architectural System sales of 2.5 million versus 1.1 million which is an increase of 127.3%.

Gross margin dollars increased 5.1 million to 26.1 million for the second quarter of 2014 however as a percentage of sales gross margin was 32.0% versus 33.5% in the second quarter 2013. Our decrease in gross margin as a percentage of sales of 1.5% was driven by the cost of purchasing finished glass units from our third party supplier to meet the demand from sales growth negatively impacted margins by 130 basis points and a shift in mix towards new construction reduced margin 90 basis points.

The residual effects of our pricing strategies targeting in large projects which we initiated during the first quarter to gain market share also negatively impacted margins by 80 basis points. And employee and other related cost in connection with higher sales negatively impacted margins by 130 basis points. These factors were offset leveraging our fixed cost and higher sales and the impact of the price increase announced at the end of third quarter 2013 with improved margins by 180 basis points and improved year-over-year efficiencies achieved in labor and scarp which positively impacted margins by 100 basis points.

The new glass facility that is nearing completion is specifically designed to address our internal capacity for finished glass unit. Once the new plant is fully operational we estimate that this initiative will improve our margins by approximately 2% to 3% based upon sales levels.

With regards to Aluminum our average cost of Aluminum was approximately $0.87 per pound during the quarter that comprised of spot purchases of 66% of our needs and hedged purchases of 34% of our needs. And this compares to second quarter last year of $0.88 per pound.

As of today we hedged approximately 45% of our estimated needs through the second quarter of 2015 an average of $0.89 per pound. In the current cash price today is $0.89 per pound. During the quarter all of our Aluminum hedge contracts became ineffective for accounting purposes. We leveraged revenue growth during the quarter to reduce selling, general and administrative expenses as a percentage of sales to 15.9% compared to the adjusted 20.3% in the second quarter of 2013.

Our selling, general and administrative expenses were 13.0 million which is an increase of 200,000 from the second quarter of 2013 after adjusting for last year’s secondary offering and debt refinancing fees. Highlights within SG&A include an increase of $1.2 million in selling activities and distribution cost consistent with higher sales, and an increase of $600,000 in employee related costs. These items are offset by a decrease in amortization expense of $1.6 million.

Interest expense was $900,000 compared to $700,000 in the second quarter of 2013 and our weighted average rate for the quarter was 3.15%. The slight increase in interest expense results from increased debt levels in connection with the credit agreement that we entered into in 2013. This increased expense was partially offset by decreased interest rates from the new agreement.

To mitigate the risk of rising interest rates, we hedge a portion of our debt. This includes a forward starting swap, which will set the LIBOR portion of our interest rate calculation of $40 million of our debt at 2.15% from September of 2014 until May of 2018.

Our tax expense for the second quarter was 4.8 million and represents an effective income tax rate of 38.0%, which is slightly lower than the statutory rate of 38.8%. The rate is lower than the statutory rate due mainly to the estimated impact of the section 199 manufacturing deduction. We currently estimate our full year tax rate between 37.5% and 38%.

We had net income in the second quarter of $7.8 million, or $0.16 per diluted share, versus $7.7 million, or $0.14 per diluted share in the second quarter of 2013 after adjusting for the tax benefit and expenses related to the secondary offering and debt refinancing.

As a reminder this year’s net income includes income tax expense based on the fact that we released our valuation allowance and deferred tax assets last year.

EBITDA was $14.5 million for the second quarter of 2014, versus adjusted EBITDA of $10.9 million in the second quarter of 2013. This increase in EBITDA of 2.6 million [ph] is due primarily to 5.3 million, it should be attributable to higher volume, 700,000 related to operational efficiencies in both scrap and labor rates and 400,000 resulting from the combined impact of our price increase offset by the shift to mix towards new construction as well as the residual effects of our pricing strategies initiated during the first quarter.

Offsetting these factors was an increase of 1.8 million for employee related costs, an increase in material cost of 1.2 million due to the purchase of finished glass units. A reconciliation of net income and EBITDA which I have just discussed has been included in our earnings release for your reference.

Turning to our balance sheet, as of June 28, 2014 our net working capital, excluding cash, deferred income taxes, and current debt, was $30.0 million which increased $4.9 million during the quarter driven mainly by increases in AR and inventory to support sales growth.

Our cash ending balance for the quarter was 33.4 million which included the impact of spending 1.9 million in the quarter at out new glass plant. We generated 4.6 million in cash from operations. To our value proposition we have developed strong relationships with our customers, our DSOs decreased to 31 days for the end of the second quarter compared to 32 days at the end of the first quarter and also down from 33 days at the end of the second quarter of last year. Additionally we have focus on managing our lead times in raw materials purchased from our suppliers and holding raw materials in check as sales grown. This initiative has driven improvement in inventory churns to 12.4 from 11.8 at the end of the first quarter and from 10.4 at the end of the second quarter of last year.

Our free cash flow for the quarter was 3.6 million mainly driven by EBITDA excluding non-cash item such as stock compensation of 14.7 million offset by an increase in working capital of 4.9 million due to higher sales. Capital additions of 4.6 million mainly associated with our glass plant expansion and scheduled up payment of 1.09. Lastly cash paid for interest and taxes of $700,000.

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

Rod Hershberger

Thank you Brad. Our ability to generate cash flow allows us to continue to invest in our customer relationships and the PGT brand. Our strategic initiatives over the past several years have positioned us well to capitalize on improving market trend.

We are seeing remarkable year-over-year growth each quarter since the end of 2012 and we expect the construction of our new glass facility will further strengthen our presence in Florida as the leader in the impact resistant window and door industry.

Lastly the recently announced agreement to acquire CGI presents an exceptional opportunity for all of our various stakeholders. We believe that this acquisition will diversify and broaden our product portfolio expand our manufacturing footprint and provide synergies by maximizing efficiencies and scale.

Ultimately this acquisition will strengthen our leadership position in the impact resistant window and door industry and better position us to compete against the national manufacturers. We have also invested in our employees as we have implemented specific initiatives to enhance our training practices targeting both production quality and consistency. We’re starting to see the impact of these initiatives as we had improvements in both our scrap and labor rates. We additional opportunities exist to lower our operational cost and leverage them with incremental sales.

Looking into the third quarter we expect our strong top line sales to increase as we expect double-digit growth. In fact sales in July represented an increase of approximately 17% over the same period a year ago. We’re forecasting third quarter sales to range between 74 million to 77 million up over sales for last year’s third quarter of 64.9 million. The next several months will be an exciting time for PGT. As our strategic initiative of increasing our foot print in this market is realized through our recent acquisition and facility expansion. We have invested resources in further developing and training our employees.

Our headcount is up 410 employees from the second quarter of last year and we have hired 257 net new employees since the start of 2014. I’m thankful for the dedication and effort put forth by all of our employees. With that I will conclude and we will be happy to answer your questions about our results or the pending acquisition.

Vincent if you can take the first question please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Sam Darkatsh of Raymond James. Your line is open.

Sam Darkatsh – Raymond James

Regarding CGI, what can you tell us from a quantification standpoint of what multiples you pay, what are the estimate sales, growth rates, accretion? Anything you can tell us will be helpful.

Jeff Jackson

Sure. Just to remind everyone as you know we’re still in the closing process. So I can give you very high level of results and once we finally close on this deal we will most likely issue some kind of release and maybe even have a follow-up call on that release. But right now sales if you look at the trailing 12 you’re looking at sales in the range of 40 million to 45 million in top line sales. Presynergy EBITDA percentages are in the low 20s. Historical sales growth over the past couple of years has been very similar to that of PGT.

So obviously they are in far so experiencing the same upside we’re. In terms of a multiple there is various ways to calculate that Sam, if you have a synergy applied multiple you can get to like an eight times, without synergies it can be as high as 10 times. It just depends on how you want to look at that.

Sam Darkatsh – Raymond James

Will there be capital outlay to reach those synergies that you’re highlighting here Jeff?

Jeff Jackson

Long term, yes. We’re going to have some capital outlay assuming this transaction goes through. It mainly surrounds our current glass facility. Obviously upon completion of this detail our current glass facility will be close to being full on couple of our other processes. So we will be adding laminating capacity to that facility which Brad correct me if I’m wrong but it's in the neighborhood of $3.5 million if I recall?

Brad West

That’s correct.

Jeff Jackson

So there will be some capital, you could say we will do it anyway but it will be associated also with it. We will be able to leverage that capital given this deal.

Sam Darkatsh – Raymond James

And the 10 times no synergies prior to today’s action would be somewhat similar at least -- as of yesterday it was somewhat similar to your existing multiple. So the thinking as to paying a similar multiple for CGI as opposed to buying stock back, could you help us look at that decision through?

Jeff Jackson

Sure. If you really look at it from our perspective acquisitions of this nature are limited. The margins I had mentioned, the presynergy EBITDA margins in the low teens. We just don’t see these come around very often and to target our core market, one of our core markets in the South East as well against all the larger players that we sometimes go up against, the Anderson’s and the (indiscernible) of the world to have more of a strong hold against some of the larger players and also take a defensive posture in a sense to get some of those guys. It's very attractive to us and I think we did release -- it is going to be accretive for sure in 2015. We’re still doing the purchase accounting, we will start rather after this things close due in the purchase accounting and so once the amortization and what not -- we will figure out the balance sheet, it's settled, in all likelihood it will be at least break even in the fourth quarter if not potentially accretive in the fourth quarter.

So I think long term it's an extraordinary opportunity for us to acquire a good player, very similar to us in the market, high quality product. Solid workforce and again long term we think we’re a combined companies, we’re much stronger competitor in the market.

Sam Darkatsh – Raymond James

You mentioned that a bit of the imperative to make the deal was defensive from some of the strategies that you compete against. Where there other strategies that were bidding on CGI to your knowledge?

Jeff Jackson

We have been advised to that [ph] Sam, so I don’t have any color on that I can share. It's not to my knowledge.

Sam Darkatsh – Raymond James

I will shift to the core business now if I could, directionally in July where is that growth coming from, where would you look at -- Florida versus non-Florida or construction versus R&R. Obviously it's moderated a little bit sequentially, where have you seen that moderation? Where have you seen the growth maintain itself through July?

Jeff Jackson

We’re not able to hone in on exact new construction R&R number for the end of the quarter but based upon what we have seen we estimate that our mix in July it actually moved up 39% new construction.

Sam Darkatsh – Raymond James

And then your non-Florida versus Florida, I think this is the second quarter in a row that non-Florida has outpaced the rate of Florida. Is that something structural, is that an initiative that is taking hold? What do we attribute that to and how sustainable is that trend?

Jeff Jackson

We had in the second quarter actually we did have one relatively large international project that shipped that was probably the main driver of that. So international sales do have a tendency to have some project timing with them, some large projects that shifts at times that will give a nice bump in a given quarter that’s what was the main driver in last year of that second quarter. Otherwise I don’t think there is anything really worth noting in that trend.

Brad West

Hey Sam, if I could also just add a little color on some third quarter thoughts and even July, seasonality does play a factor for us. Third quarter has historically been a little bit slower of a quarter than say our second quarter. That didn’t happen last year given the significant growth in the market and kind of the housing recovery and turnaround was very robust at that time. We do expect ultimately to get back more to second quarter being our strongest quarter, third our next strongest et cetera type of business. And as you close out in the third quarter September being a prime example of a month where school starts back, families are moving in et cetera. It has historically slowed down somewhat for us.

Operator

Thank you. And our next question comes from Bob Wetenhall of RBC Capital Markets. Your line is open.

Bob Wetenhall – RBC Capital Markets

Your guidance showed sequential decline in sales in 3Q and I wanted to understand if gross margin also contract with lower sales?

Jeff Jackson

The sales in the third quarter declined will actually come at with less outside glass as well. So like we saw in the second quarter where we did not see substantial margin increase when sales exceeded expectations, the margins will not be affected on the leverage side going down a little bit because it will also come with less outside glass.

So from the volume standpoint I would not expect an impact on gross margin for that. We have talked about some of the other things that will affect gross margin in the third quarter such as we had mentioned that large project pricing strategy would not be as prevalent in the third quarter as they were in Q1 and Q2. But you know we have seen some improvements in labor and scrap, although all the things considered I would suggest third quarter gross margins will be a slight improvement over Q2 but substantial until that glass plant gets up online.

Bob Wetenhall – RBC Capital Markets

And could you just talk to us about 4Q and thereafter once you’re fully ramped on the new facility. How much gross margin benefit is that going to provide?

Brad West

Bob I would just say we should probably plan for that in Q1 more so than Q4 because there will be some ramp up time to really get that facility up and running and as far as gross margins go.

Jeff Jackson

If you look at, let’s look at 2015 once the glass plant is fully operational. Basically when sales are as they have been for several quarters in a row running in the mid-16s it averaged about a 2% increase was higher than that this past quarter to sales or 81 million. So that’s why I quoted 2% to 3% but you know using 2% is relatively safe assumption and it could potentially be a little bit even higher on higher sales starting in 2015.

Bob Wetenhall – RBC Capital Markets

One final question, if this acquisition goes through are you taking any of the acquired management team with you? And what’s your view on the (indiscernible) gate market which is where CGI is. Thanks and good luck.

Rod Hershberger

Yes in terms of the acquisition, we’re still too early in the process to comment on the management team in and in themselves. We have assured employees in general, at CGI we will remain operational in Miami, Florida. We’re going to keep the plant here, we’re going to keep the manufacturing here and 95% of the operations will remain here. In terms of top level management we’re currently going through that process now and it will be too early to comment on that.

Obviously management has done a great job to get the company to where it's at, so we will be interested in certain members.

Bob Wetenhall – RBC Capital Markets

And one final question, any more acquisitions planned this year? Thanks a lot.

Rod Hershberger

This year? I don’t think so. This will be the only one this year.

Operator

Thank you. And our next question comes from Rob Hansen from Deutsche Bank. Your line is open.

Rob Hansen – Deutsche Bank

I just wanted to find out a little more color on CGI in terms of what percentage of the business is windows versus doors and I guess this is all impact product and what type of international presence do they have, you know some kind of color there.

Jeff Jackson

Comment in more detail on that and given where we’re at the process. Rob, it's just not what we’re wanting to do right now. So we’re going to hold that for when this deal is closed and we make an announcement in related call associated with that.

Rob Hansen – Deutsche Bank

Okay and I guess one another question regarding CGI, it's just -- have you looked at any of the market share stats or kind of, and is there any potential anti-trust issues anything like that with the deal?

Jeff Jackson

Yes we got the standard required filing like any other acquisition but we don’t anticipate any issues.

Rob Hansen – Deutsche Bank

Okay and then just in terms of the quarter, how do -- when you’re looking at the monthly sales trends over last year, like what are the comps you’re looking at on a year-over-year basis?

Jeff Jackson

For Q2?

Rob Hansen – Deutsche Bank

Yes.

Jeff Jackson

So Rob it was 24% in April, then 26% in May and then 39% in June.

Rob Hansen – Deutsche Bank

So saw some significant ramp up in June. All right that’s all the questions I’ve for right now. Thank you.

Operator

Thank you. And our next question comes from Jeremy Hamblin of Dougherty & Company. Your line is open.

Jeremy Hamblin – Dougherty & Company

I wanted to ask about CGI. I believe uses the same third party classifier that you do when you need to outsource. And thinking about the transaction moving forward would PGTI presumably become the supplier of glass to the company?

Jeff Jackson

You’re right, we both use the same third party supplier. Good partner for both companies and we’re in the process we call that company on our side and talk to them about acquisition. They are excited. We will look to make our own glass inside depending on our capabilities and we do plan on still buying outside glass with Cardinal. We don’t know the percentages at this moment because again we got product portfolio to review, we got manufacturing to go through. We got a lot of work integration work ahead of us before we can give more concrete information on what we do from the supply side.

Jeremy Hamblin – Dougherty & Company

And then just thinking about the portfolio of products that CGI sells and I think historically they have been almost exclusively an Aluminum vendor, given your agreement within Royal is this something that can potentially be leveraged on the CGI portfolio products that you could work with Royal to potentially do extrusion for their products as well moving forward and again I realize this isn't like a January 2015 thing but looking forward.

Jeff Jackson

Again all great questions, and I can assure there is an integration team actively working on that at the company and we’re just not prepared to answer that kind of question. Like I said we will have a conference call once we close this deal and once we can put out some more definitive information out there to the analyst into investment community.

Jeremy Hamblin – Dougherty & Company

Brad, just in terms of thinking about the increased interest expense and thinking about what the cost might be given the additional debt that’s been brought on. What would we be looking at in 2015 assuming that the deal closes?

Brad West

Well Jeremy there is an -- if you look at our current interest rate now it's about 3.15% as I mentioned but it was going to be increasing beginning September because we have that swap in place that’s going to put about half of our debt basically 200 basis points. So if you think of an average of over 100 basis points higher than now that suggest that in 2015 without the deal we would have been paying slightly over 4%. I think the way that deal is currently constructed, you got to have the flex and the pricing and all that on the Term Loan B. It will probably be a 100 to 150 basis points higher depending upon how the pricing comes out.

Jeremy Hamblin – Dougherty & Company

Okay and then just a couple other items 2014 CapEx what are we looking at in terms of now that we’re pretty fair along in building up the plant?

Brad West

It's still coming in at about 18 million to 20 million in that range Jeremy.

Jeremy Hamblin – Dougherty & Company

And then last question, can you -- I think I missed it but in terms of outside glass purchases and the negative drag that had on Q2 gross margins?

Jeff Jackson

Let me just follow it up and make sure I quote you right number, I believe it was 180 basis points but that was compared to last year and last year I think we quoted a 100 basis points compared to the year before. It was a 180 year-over-year.

Operator

Thank you. (Operator Instructions). Our next question comes from Steve Dyer of Craig-Hallum. Your line is open.

Steve Dyer – Craig-Hallum Capital

As you think back kind of the CGI, I’m just kind of curious is this something that was presented to as these discussions that have been going on for a while. You clearly know each other well but maybe a little bit of background as to kind of how this thing came to a fruition?

Rod Hershberger

We have known CGI, CGI was a customer of ours back in the 90s. So it's a long term relationship that we have had obviously as a customer we value them highly, as a competitor we respected them a lot. So, knowing the owner of the company from that time and occasionally touching base. I think what we did with CGI or what we do with any company that we really respect in the marketplace is you do touch base with them on, when I say on regular basis maybe that’s a couple of times a year. You run into them at industry meeting and you talk about what’s going on and you kind of always showed that -- if you’re interested let’s make sure we talk, kind of conversation.

They were bought by private equity bank in 2007 and fortunately we kind of knew that private equity, we stayed in touch with them. So when time came private equity by definition buys companies and sells them sometime later. So we knew that that would happen and we kind of stayed in touch with that just to -- we like to be exclusive, we realized that’s probably not going to happen, just please make sure know and that’s the way the deal really kicked up as they made sure we knew.

Steve Dyer – Craig-Hallum Capital

And then in it sounds like no more acquisitions this year but certainly something you potentially be open to in the future. How do you think about that in terms of criteria? Does it have to be kind of a complimentary product? Would you go something totally different? Would you go a different geographic area? Just maybe a framework for how you think about that?

Rod Hershberger

Typically we talk about this on almost every call. Typically we look at them almost the same way. They need to have some nice margins because we run some nice margins, we don’t want to be dilutive to our margins and then we look at adjacent product that will serve the market really well. Maybe a product that serves a portion of the market that we’re not heavily in. There is some parts of the commercial market that we don’t do a lot or we look into adjacent geography that we can jump into naturally we’re in Florida, there are some great product in California. It's not near as attractive product in Northern Florida or product in the Ireland’s that we can get to real quick.

So we look at adjacent geographies, adjacent product lines, some pretty good margins. It's kind of the driving criteria. In the past we did a small acquisition with a product line that didn’t really have a marketplace but it was a great design as our PremierVue line. So depending where it is in its product life can make some changes. So we look at product but generally we look at those three criteria and we want to make sure 2 of the 3 at least are really strong.

Steve Dyer – Craig-Hallum Capital

And then lastly I guess as most might have been answered. A lot of building products I guess comp so to speak of, have given pretty tepid outlooks, pretty tepid numbers in Q2 especially those that are sort of R&R related. What are you seeing that’s maybe a bit different or that’s keeping thing strong for you guys. Is it just that Florida continues to be or was so depressed that it's still the snapback there or is it that windows tend to be a higher on the spend list in most cases and a remodel or how do you think about that?

Jeff Jackson

We just saw a lot of really pent up demand. I mean Florida was dormant for such a long period of time and given this I don’t population growth again that we’re seeing given the, we did reach bottom, people come, prices start going up and then there is that kind of set in of people rushing in now and we’re seeing good growth and obviously with home prices increasing that bodes very well for the R&R market here. And it's just prime, we were really kind of the first almost in, almost last out and we are just experiencing some good results unlike maybe the rest of the country.

Brad West

Yes Steve, the other thing that we have seen too. We have talked about in the past when the kind of resurgence is building and remodeling kicked off in 2012 we didn’t participate in a lot of it. Our sales went up a little bit but it didn’t really grow rapidly and then as things heated up a little bit more and we talk a lot about our value proposition and how important it is to have complete on-time delivery and treat your customer amazingly well and people started really appreciating complete on-time delivery and filling in every hole and some shorter lead times and making sure that now the value is there and we continue to see that. So even if the market doesn’t pick-up as much, kind of that shift back toward appreciating what value, what good quality, what complete on-time delivery can do, drives a lot of that additional sales also.

Operator

Thank you. Our next question comes from Sam Darkatsh of Raymond James. Your line is open.

Sam Darkatsh – Raymond James

Just a couple of follow-ups, I didn’t want to monopolize the meeting early on. Back to CGI, two questions is there any meaningful overlap in their distribution versus yours? Meaning is there a risk that one or both of you may a little bit disintermediate at distribution with the combination, post-combination?

Jeff Jackson

Well they do share similar, we do share similar customer base if that’s what’s your asking. There is some overlap, this customer obviously carry both product. Again all of that I’m really hesitant to say much about it out of respect for the team here and the integration team is working on this and the sensitivity around this. So we’re actively looking at that distribution network and anticipate is our goal to minimize any kind of loss or disruption in that channel.

Sam Darkatsh – Raymond James

And last question, obviously when you’re growing 30% each at the last few quarters or so this continues to be important. How shifts are you running and how shifts are CGI’s Miami facility, are they running at present?

Jeff Jackson

PGT, we’re running three shifts, still in the manufacturing side of the business, assembly side of business. Really a full first shift, maybe a 80% full second and partial third. So we have still got some capacity on the assembly side. On the glass it's a little different obviously, we’re a capacity in a couple of areas in the glass so that’s running 24/7 and therefore the accompanying plan is going to be online in the fourth quarter will help on that end. So from a capacity side we still got room to grow ourselves.

In terms of CGI, it's just too early to comment on CGI’s capacity because we really -- again really have work to do and working with the team and we don’t want to get too direct involved in day to day operations yet of that company.

Operator

Thank you. At this time I see no further questions. I would like to turn the call back over to you Mr. West.

Brad West

Thank you for joining us today. We look forward to speaking to everyone next quarter and if you’ve any further questions please feel free to give me a call. Have a good day.

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This concludes the program. You may all disconnect.

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