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Executives

Brad West - Corporate Controller

Rod Hershberger - President and CEO

Jeff Jackson - EVP and CFO

Analysts

Sam Darkatsh - Raymond James

Will Wong - JP Morgan

PGT, Inc. (PGTI) Q1 2011 Earnings Call May 6, 2011 1:00 PM ET

Operator

Good day ladies and gentlemen and welcome to PGT Incorporated First Quarter 2011 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions) As a reminder, today’s conference is being recorded.

I would like to introduce Mr. Brad West, Corporate Controller. You may begin.

Brad West

Good morning and thank you for joining us for PGT’s First Quarter 2011 conference call. I am Brad West, Corporate Controller, and I am joined today by Rod Hershberger, President and CEO, and Jeff Jackson, Executive Vice President and CFO. Rod and Jeff will represent PGT on this morning’s call.

Before we begin, let me remind everyone that today’s conference call may contain statements concerning the company’s future prospects, business strategies, and industry trends. Such statements are considered to be forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements 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 the May 5th, 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 Investor Relations section of our corporate website at www.pgtinc.com. Included in the press release are, the unaudited consolidated balance sheet and statements of operations prepared in accordance with GAAP and adjusted information, which was 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 Form 8-K filed May 5 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.

For today’s call, Rod will provide an overview of our performance for the first, then Jeff will discuss our results in more detail. After their prepared remarks, they will take your questions.

With that, let me turn the call over to Rod Hershberger. Rod?

Rod Hershberger

Thanks Brad and good afternoon everyone. I am pleased to report that we began 2011 with growth in our Florida market. Sales increased $2.6 million or 7.9% compared to prior year. WinGuard sales increased by $1.6 million or 6.8% with vinyl WinGuard sales up $1.3 million or 43.2% and our new PremierVue line of high end vinyl impact products contributing $500,000 in additional sales.

Our vinyl non-impact product SpectraGuard performed well with an increase in sales of $700,000. This growth in our Florida market was largely driven by efforts concentrated from our change in market strategy. At the end of 2010 we decided to focus our resource on our core Florida market and with these results it appears our strategy change is well underway.

The growth in Florida sales is largely offset by a decrease in our out of state sales of $1.9 million or 32.3% driven by a decrease in vinyl sales of $1.1 million and curtain wall revenue down $500,000.

In addition international sales decreased $600,000 for the quarter. We are addressing this decrease in international sales by adding additional resources to further expand our presence. We continue to believe there is a strong international market for both our impact and non-impact products.

We also experienced that inconsistent economic housing recovery with January and February sales lower than prior year but we’re encouraged to see March sales increased over prior year. Excluding curtain wall revenues, sales in the first quarter was slightly up, 1.6% led by an increase into the new construction market, which increased 15% over a year ago.

Sales essentially R&R market decreased 3% as compared to first quarter 2010. As a percentage of total sales for the first quarter of 2011 R&R sales accounted for 74% and new constructions sales of kind of 26% of sales.

Comparing the first quarter to the prior year first quarter, our adjusted gross margin was 25.8% versus a gross margin of 27.9% in 2010. Adjusted gross margin decreased due to an increase in the cost of aluminum, which is up 6% over prior year, and increase in other material including glass, startup cost associated with our new vinyl door and PremierVue and temporary operating inefficiencies related to our plant consolidation.

SG&A cost adjusted for the 2011 consolidation charges increased $600,000 due mainly to an increase in selling and marketing expenses of $600,000 and $500,000 increase in non-cash stock compensation expense. Partially offsetting these increases were the decrease in depreciation expense of $300,000. Driven by our consolidation charges of $2.6 million, we recorded a net loss of $5.8 million for the first quarter of 2011. Our adjusted net loss was $3.2 million compared to a net loss of $2.1 million in the first quarter of 2010.

Adjusted EBITDA was $1.5 million in the first quarter of 2011, which is down from adjusted EBITDA of $3.4 million from prior year. The decrease in adjusted EBITDA was driven mainly by an increase in the cost of materials, temporary operating in efficiencies related to our plant consolidation as well as the increase in selling, marketing and stock compensation expenses I just described.

With our core market total housing starts were down 8%. Multi-family starts were up 68% and family starts decreased 21% compared to a year ago. Market conditions were made difficult and are not expected to turn around significantly in 2011.

During the fourth quarter of 2010 we announced the decision to consolidate our North Carolina operation into our Florida facility. The consolidation while disrupted in the short term will enhance our long-term competitiveness and improve the efficiencies.

During the first quarter we filled approximately 250 new positions and have retained the new hires at 90% rate. We will continue to fill positions throughout this year as we complete our consolidation. Transitioning to a centralized location will optimize our manufacturing capacity and logistics, positioning PGT to be a stronger company with focus on growing our share within our core wind-borne debris market areas.

With that I will turn the call over to Jeff who will review the results for the quarter in greater detail.

Jeff Jackson

Thank you Rod. We are encouraged by the growth in our Florida market with sales up 7.9% or $2.6 million for the quarter. However, also in this increase was decreases in our out of state sales of $1.9 million and international sales of $600,000.

Now let me give you more detail regarding our quarter. We reported net sales of $40.6 million, flat from prior year's quarter. Another encouraging note was sales in to the new construction market up 15% driven by our WinGuard products with sales into this market up $1.4 million.

Sales into the R&R market, which represented 74% of our total sales were down 3%. In total our WinGuard impact products both aluminum and vinyl continue to lead our sales representing approximately 64% of sales for the first quarter.

Total impact products sales which include our WinGuard, PremierVue and architectural system product lines represented approximately 70% of our sales in the first quarter of 2011 as compared to 67% in the prior year.

Florida sales represented 87% of total sales in the first quarter and 81% of total sales in the first quarter of 2010. Our 2.6 million increase in Florida sales was driven by our vinyl products including increases and sales of vinyl WinGuard of 1.3 million, non-impact vinyl of 700,000 and PremierVue of 500,000.

We have increased vinyl sales into Florida market by 2.5 million or 44% which shows our commitment to sell into a changing Florida market. This includes growth in vinyl sales into the Southeast Florida market, historically an aluminum market of 700,000 or 181% increase. Once our consolidation efforts are complete, our refocus sales strategy should yield promising results as we expand into our core market.

Breaking down our sales drivers for the first quarter compared to 2010’s first quarter, we have WinGuard sales at $25.9 million versus $25.1 million up 3%. , PremierVue sales were $1.1 million versus $600,000 in the first quarter of 2010. Aluminum non-impact product sales were $5.6 million versus $5.9 million, down 5%.

Architectural systems sales were $1.2 million versus $1.9 million, down 32% and vinyl non-impact and other products sales were $6.4 million versus $6.6 million, down 3%.

Our adjusted gross margin for the first quarter was 25.8% versus gross margin of 27.9% in the first quarter of 2010.

Our decrease in gross margin percentage of 210 basis points was driven by an increase in our cost of materials which reduced margins by 160 basis points and operating inefficiencies related to our plant consolidation which reduced margin by 50 basis points.

Our vinyl non-impact margins are improving as we focus on the Florida market, where dealer direct sales are more prevalent and as we consolidate our support structure. We will continue to work on various initiatives to improve our vinyl impact and non-impact margins, including reviewing design, improving our labor efficiencies and reducing costs.

Our average cost of aluminum was approximately $2,364 per metric ton during the first quarter, comprised of spot purchases, averaging 2,434 per metric ton for approximately 70% of our needs and hedge purchases averaging $2,196 per metric ton for 30% of our needs.

This compares to the first quarter of 2010’s average of $2070 per metric ton.

As of today, we are hedged at approximately 60% of our estimated need for the remainder of 2011, at an average of $2,406 per metric ton. This includes zero cost collars for 25% of our needs for the second half of 2011.

These collars represent a ceiling at $2,700 per metric ton and a floor at $2,300 per metric ton. Should process remain within these ranges, these collars would have no effect. The cash process of today is approximately $2,600 per metric ton.

Our selling, general and administrative expenses were $12.5 million up $600,000, when excluding consolidation charges from our first quarter of 2011. Driving this increase was $600,000 increase in selling and marketing expenses, an increase in non-cash stock compensation expense of approximately $500,000 and going forward we anticipate non-cash stock compensation expense to be $1.2 million for the remainder of 2011.

Offsetting these increases we had lower depreciation expense of $300,000 and lower spending in other various categories of approximately $200,000. Excluding consolidation charges and non-cash stock compensation expense, SG&A as a percent of sales increased to 29.3% of sales versus 29.2% in 2010. Interest expense was $1.1 million compared to $1.5 million in the first quarter of 2010.

The decrease primarily relates to lower debt compared to prior year, as we paid $18 million in pre-payments in the last 12 months. At the end of Q1, the interest rate on our bank debt was 6.75% based of our credit agreement and a secured interest rate structure.

In the fourth quarter of 2010, we announced the consolidation of our Florida operations of our operations into our Florida facility. At this time I am pleased to report that the consolidation remains on schedule and is expected to be completed by the end of the second quarter.

In the first quarter, we recorded approximately $2.6 million in consolidation charges related to employee severance costs and consolidation related expense. We will continue to record consolidation charges throughout the second quarter of 2011. We currently anticipate incurring between $6 million and $6.5 million in total cash consolidation charges.

Our estimated savings from the consolidation will range from $6 million to $7 million annually, of which we estimate that we’ll recognize $3 million in our fiscal year 2011. During the first quarter of 2011 and 2010, we did not record any tax expense or benefit.

We have an effective tax rate of 0% due to the full evaluation allowance that we apply to our deferred tax assets. We also expect 0% for the entire year due to the fact that we do not anticipate generating enough taxable income to exceed our current net operating loss carry forwards.

As we become more profitable, we will be in a good position to realize our deferred tax assets by offsetting future income. We had a net loss in the first quarter of $5.8 million or $0.11 per diluted share versus a net loss of $2.1 million or $0.05 per diluted share in the first quarter of our prior year. A net loss in the first quarter of 2011 includes $2.6 million in consolidation charges. Adjusting for the consolidation charges, it was an adjusted net loss of $0.06 per diluted share in the first quarter of 2011.

Adjusted EBITDA was 1.5 million in the first quarter versus EBITDA of 3.4 million for the first quarter of 2010. The 2011 EBITDA was adjusted for the consolidation charges 2.1 million. A decrease in EBITDA 1.9 million is due mainly to the previously mentioned 600,000 in selling and marketing expenses and the increase in non-cash stock compensation expense of approximately 500,000 as well as increase in material prices of approximately 600,000 and labor and efficiencies related to the consolidation.

An additional information, our first quarter depreciation and amortization totaled 3.5 million. A reconciliation of the net income and EBITDA is included in our earnings release for your reference.

Turning to our balance sheet. At quarter end, our net working capital, excluding cash, increased by $4.2 million compared to the end of the fourth quarter. DSOs decreased to 40 days during the quarter. In reviewing free cash flow for the first quarter, we had an adjusted EBITDA excluding our non-cash stock compensation expense of $2.1 million, capital additions of $800,000, cash paid for interest of $900,000, cash paid for consolidation expenses of $3.1 million and we used $4.2 million in working capital mainly relating bonus payments previously accrued for and our increase in accounts receivable.

In addition, we received $600,000 from the Sarasota County to facilitate our consolidation and we used $200,000 related mainly to initial margin placements resulting in cash on hand of $15.5 million at the end of the first quarter. The funds received from Sarasota County will be recognized over five years in the quarters with the performance period in the agreement.

Our net debt and corresponding leverage ratio at the end of first quarter of 2011 was approximately $34.5 million or 2.2 times. This compares to net debt of $28 million at the end of last year.

You may have noticed that our long-term loan is now classified as current on our balance sheet. This was due to the fact that the term loan is due within one year on February 14, 2012. We are currently in the process of refinancing loan and we expect we will be successful, although on assurances can be made in that regard.

It appears that 2011 will continue the loans for recovery with the tax credit expiration, commercial softness; vacant housing inventory and the remaining uncertainties surrounding our economy were off to a sluggish start in 2011. Housing prices are now back to 2001 levels, approximately 18% of homes in Florida are vacant.

Foreclosures are expected to hit an all time high in 2011 before dipping and dropping into 2012 and permits continue to remain low. 2011 represents a year of transition for our company, as we refocus our resources on the core market of Florida and the coastal areas from the Mid-Atlantic to Texas and consolidate our North Carolina operations. These actions which will allow us to better serve our customers needs within these markets are not without paying.

We are trying to minimize the impact of this consolidation of our customer, but are highly aware it is felt. We are in a solid position to continue to lead our core market of Impact windows and doors and to lead our market and this increasing usage of energy efficient vinyl products.

This is a result of the dedication of our employee to maintaining exceptional customer service and to think strategically, as well as the loyalty of our customer base during this call.

With that let me turn the call back over to Rod.

Rodney Hershberger

Thanks Jeff. The increase in our Florida sales during the first quarter of 2011 reflects our continued focus on serving markets which have the greatest potential to drive long-term profitable growth. Long-term, we believe that the impact resistant and the energy efficient vinyl markets will grow and we will expand our presence into this market.

During this market downturn we’ve expanded our product lines and adjusted our internal structure to quickly take advantage of opportunities as market conditions improve. During the first half of 2011, we are moving our product lines from our Salisbury facility to Venice. Our employees have worked around the clock to keep the move on schedule and to ensure the long-term success of our company and commitment to our customers.

I would like to extend a special thanks to those teams. I believe we have the right market focus, the right strategy to serve our customers and the right people in place to grow our company. I thank all our employees and our customers for continuing to believe in us, commit to our strategy and outperform our expectations.

With that, I will conclude and Jeff and I will be happy to answer your questions. Mary, if you could get the first question please?

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Our first question comes from Sam Darkatsh from Raymond James.

Sam Darkatsh - Raymond James

Rod, Jeff, Brad, good morning or good afternoon I should say. How are you?

Rodney Hershberger

Hey, Sam, how are you doing?

Sam Darkatsh - Raymond James

Excellent. Three quick questions; it looks like your non-Florida sales now are running at about $5 million quarterly run-rate. What would you anticipate that run rate to be or where would it be at year-end once everything is fully cycled through?

Rodney Hershberger

We initially looked at pulling out of those markets. We were anticipating walking away from potentially 10 million in out of state sales. We’re tracking that – I would say, we’re tracking to that, but anticipation. It has been faster, and been slower. What we have seen is obviously a bigger impact or pick up rather in our Florida vinyl sales than anticipated, but in terms of pulling out of the state markets it's going right about 10 million or so.

Sam Darkatsh - Raymond James

Okay. So, it shouldn’t deteriorate further sequentially from here. It would just probably go on normal seasonality from the $5 million run rate in Q1?

Rodney Hershberger

Yeah probably normal seasonality just a reminder Sam that Q2 and Q3 for that market is typically a little bit larger than Q1 and that gets skewed a little bit by some of the product mix that we serve into that market; but typically Q2 and Q3 are a little bit larger. We are seeing a pretty good up tick so in our impact sales. So that's going to also skew that a little bit. We are selling some impact product into the coastal markets outside the State of Florida.

Sam Darkatsh - Raymond James

Got you.

Jeffrey Jackson

And that's what's hard to estimate that Texas all the way up through the East Coast. Those sales are starting to increase probably more so than we initially had planned.

Sam Darkatsh - Raymond James

So the raw material impact for the quarter; if my math holds, I guess well about $400,000 to $500,000 from aluminum is that about right?

Jeffrey Jackson

Versus last year, that's correct.

Sam Darkatsh - Raymond James

Now, how does that look like on Q2 and Q3 versus the Q1 delta?

Jeffrey Jackson

Right now our second quarter, the spot price right now is running about 2,600 which is slightly higher than the first quarter spot purchases were; but our coverage in the quarter is relatively same. So I am anticipating its going to be a little bit more detrimental. It’s hard to put a pin on that because second quarter is the more volume intense quarter for us. So in terms of dollars it could be an extra $150,000. Again that depends on volume.

Rodney Hershberger

Yeah that's going to be one that we have to watch real close Sam, because the last couple of days aluminum prices have dropped considerably. So the answer might have been different three days ago than it would be right now. I think for the rest of the year we are about 60% covered., we weren’t quite that well covered in the first quarter but we’ll covered it in a little higher dollar amount.

Sam Darkatsh - Raymond James

I guess that’s a million dollar question for us, for me at lease would be, you have pricing gone through, you have aluminum input changes, you’ve got additional volumes coming both from normal growth as well as seasonal growth. How should look at that sequential gross margins Jeff –

Jeff Jackson

In terms of the expansion, obviously, we sort of expand those in the second quarter. Typically volume makes that possible because there is fixed overhead leverage volume to get our volume. All said, there will be some aluminum. It’s going to be hard for me to put a percentage up here for you. I do think we will expand our margins and especially obviously one consolidation of our North Carolina facilities is complete is. We’re right in the thick of that. I’d say we’d put percentage complete on that and say we’ll probably say 85% complete with that consolidation and on tract to finish in June.

So we’ve got a lot of different moving components to your thoughts here Sam, but I do expect our margins to expand especially if we hold the product mix we’re seeing in the first quarter. We should actually sequentially in terms of the second quarter to be more volume driven but I’m hoping by the third quarter with the consolidation over, we will start recognizing those benefits that would be not necessarily volume driven but performance, leverage driven.

Sam Darkatsh - Raymond James

With the expansion the sequential expansion from Q1 into the summer time, would that be both WinGuard and non-WinGuard impacted, non-impacted, would it be primarily one or the other in term it would be incremental expansion in gross margins?

Jeff Jackson

It’d be both. I think because again, we’re bringing in those the non-impact vinyl into our Florida market, that’s what's growing and we are cutting out the cost, the support structure for that by leaving the Carolina plant. So I think we will actually see expansion in that non-impact vinyl margin as well as volume driven expansion for our impact products.

Rod Hershberger

Yes Sam, I am not sure, I think we shared it before on one of our calls that we were bringing about 65% of the product we manufacture in Salisbury back into the Florida market and we were walking away from some of the sales that weren’t coming back into the Florida market.

So when you look at it from a logistics point of view we get some benefit there. Although oil hasn't been real friendly to us in the first quarter, our transportation cost have been, you know held-in line very well.

Sam Darkatsh - Raymond James

Since this is largely under one roof, is it going to be difficult to break out, to parse out gross margins by business line going forward or is it still going to be we put allocation into such that you will be able to parse that out?

Jeff Jackson

You know we are probably going to – the reason I mentioned on this call, impact versus non-impact. We are going to probably start stewing our internal views, say impact versus non-impact versus product line top margins. Again, we were hesitant to give our product line margins because of competition quite frankly. These things we don't necessarily have to disclose and internally we view it as impact to non-impact. We obviously want that mix to be more impact and we want to leverage our fixed cost as best possible to increase margins on both. So.

Sam Darkatsh - Raymond James

That's it. Thank you much.

Rod Hershberger

Thank you, Sam.

Operator

(Operator's Instructions) Our next question comes from Michael Rehaut from JP Morgan.

Will Wong - JP Morgan

Will Wong on for Mike, how are you?

Rodney Hershberger

Hello, how are you?

Will Wong – JP Morgan

Good. I just had a quick question about the Florida vinyl market, in terms of competitive landscape. Can you talk about sort of what your market share is in Florida right now and how you expect to expand that market share over the next couple of quarters in to next year?

Jeff Jackson

You know I am probably going to struggle bit that exact number. We haven’t done a market share study for the last -- over the last year and we are seeing a pretty good size shift in market demand between aluminum and vinyl.

So I think I gave you not real accurate information if tried to give you the exact vinyl market share because I think first we have to really get our arms around that big shift and it is fairly significant we are seeing a quicker move to vinyl may be not an expected shift, but probably more so than we predicted in a short period of time.

We’ve developed some new products, some new doors and some new widows for that market and they have been extremely well accepted.

So we are seeing that growth quite a bit but I don’t know that I can really give you on accurate number for market share of vinyl. There is areas of the state where I think we have pretty dominate market share there is other areas of the states where there is a lot of players there.

Will Wong – JP Morgan

Okay great. And then you talk about the international opportunity, can you expand on that a little bit more.

Jeff Jackson

Yeah, we think there is opportunity particularly in the Caribbean and Central South America all the areas that our threatened by storms or weather. And we are seeing growth in that market, it's has been effected by the down turn the economy but not necessarily as dramatically as what the Florida market -- if you look at the hard hit areas of the US. So we think that’s an area for growth.

There is not a lot code driving parts of that market, a couple of other countries have some good growth but most of it doesn’t have a code. Lot of its driven by insurance and that’s a pretty, good driver for us if insurance is dictating the people out to put impact protection in place…

We can sell a lot more impact products and we are seeing some of our distribution in that area now, stocking impact products. They never stock impact product before. So we think there is just an opportunity there to continue pushing that and making sure people are aware of what happens and how to protect their homes.

Jeffrey Jackson

We are also, obviously, that’s been our core international market. We are also trying to expand into the Central and South America as well, looking for new channels there and finding that there are some opportunities. So we are optimistic about those areas as well.

Will Wong - JP Morgan

In terms of Central and South America, there are still further in the infancy stages where you guys haven’t really gone to that market yet or I guess what stage in the process are you going?

Rodney Hershberger

Just, right now, we are developing relationships within those markets that could potentially carry our product or just get distributors for our product in those areas.

Will Wong - JP Morgan

Okay, got it. And then just last question, in terms of the price increases that you guys mentioned to be effective in April. Are those still roughly in the 4% neighborhood or you guys seeing so that pricing stick as well?

Jeffrey Jackson

Actually, they are affected in March. So we’ve got some benefit of that already in the first quarter not much, but some. And those have (inaudible)

Will Wong - JP Morgan

Okay. Great, thank you.

Jeffrey Jackson

You bet.

Operator

Thank you. I would now like to turn the conference over to Mr. Jeff Jackson for any additional remarks.

Jeffrey Jackson

Thank you for joining us today. We look forward to speaking to you again next quarter. If you have any further questions, please call me. Have a great day.

Operator

Ladies and gentlemen, that does conclude today's program. You may now disconnect and have a wonderful day.

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