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PGT, Inc. (NASDAQ:PGTI)

Q1 2012 Earnings Call

May 3, 2012 10:30 AM ET

Executives

Brad West – Director, Finance and Corporate Controller

Rod Hershberger – President and CEO

Jeff Jackson – EVP and CFO

Analysts

Josh – Raymond James

Rob Hansen – Deutsche Bank

Operator

Good day, ladies and gentlemen, and welcome to the PGT Inc 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 on how to participate will be given at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Brad West, Director of Finance and Corporate Controller. You may begin.

Brad West

Good morning and thank you for joining us for PGT’s first quarter 2012 conference call. I am Brad West, Corporate Controller, and I am joined 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 2 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.pgtinc.com. Included in the press release are; the unaudited 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 Form 8-K filed May 2 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 from 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 quarter and 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 Rod Hershberger. Rod?

Rod Hershberger

Thanks, Brad. Good morning, everyone. I am pleased to report that the first quarter of 2012 produced our best first quarter EBITDA as a percentage of sales since the first quarter of 2008. This achievement is the direct result of incredible efforts and achievements of our employees whose dedication, talent and commitment position us to reap the benefits of our consolidation. I also need to thank our distributors whose loyalty to our company is greatly appreciated. Our improved results, most notably increased EBITDA of 1.8 million were accomplished despite lower top line sales.

Sales were down to $2.5 million or 6.3% due mainly to three factors including challenging market conditions within our Southeast Florida market or sales were down $2.3 million, our decision to exit certain United State markets, which resulted in lower sales by $800,000, and lastly, the completion of a larger condo retrofit project in 2011, which resulted in lower sales for architectural systems product line of $900,000. These factors were offset by an increase in sales in our Southwest Florida markets of $900,000.

Though housing starts have increased 29% over the first quarter of 2011, the majority of this increase represent home at price point where impact products are not generally installed. However, increased housing start is a good sign even if they are not houses that traditionally utilize our products. We’re confident that as the employment market in general economic conditions stabilize, housing starts of homes at various price points will increase and drive demand for our products.

In the interim, we will continue to take market share within the R&R market, drive additional operational improvement and focus our efforts to driving topline sales to leverage our cost structure. As part of our effort to drive topline sales, we are excited to announce the addition of Todd Antonelli to our executive team. Todd is joining our team as Vice President of Sales and Marketing. He comes to PGT with many years of building products experience, most recently with Masco where he led sales teams in both the window and door and cabinet divisions. We are confident that Todd’s customer focused experience, expertise and proven track record will add incremental bench strength as we shift our focus from cost reduction and share preservation to aggressive topline growth and market share gains.

Our fixed costs and operational efficiencies are greatly improved and we have enjoyed significant financial benefit from the consolidation in each of our three most recent fiscal quarters. In terms of fixed costs, in 2011 we saved $1.5 million in each of the third and fourth quarters. In the first quarter of 2012, savings were $1.6 million and we are confident and we will reach our goal of $6 million to $7 million of annual savings.

Combined with fixed cost reductions, operational improvements including significant reduction in scrap, labor efficiencies and improved shipping schedules have contributed to a gross margin percentage of 31.3% compared to an adjusted gross margin 25.6% in the first quarter of 2011. Once again, this improvement is attributable to our employees, many of whom have been with us less than a year as they focused on producing quality products on time and delivering on our unique value proposition.

Continuing to compare our first quarter of 2012 to the prior year, our SG&A expense decreased 800,000 or 6.4% after adjusting for cost associated with the consolidation the prior year. This was driven by consolidation savings of $1 million. Leading these savings, our team in distribution reduced costs by 28% at a time when fuel costs are up 10%. This team worked hard to streamline routes, increased tractor utilization, and improve the efficiency overall. This once again is an example of the excellent work our employees consistently do, as they decrease costs while remaining focused on the needs of our customers.

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 successes that our employees are driving while first quarter 2012 net sales of $38.1 million were down 6.3% compared to $40.6 million in 2011. At the same time, our EBITDA improve 122% from $1.5 million to $3.3 million.

Going into 2012, we anticipated lower sales from certain out-of-state markets, which were down 21%, as well as a challenging market conditions in our Southeast Florida market with sales down 12%. However, even though the majority of the new construction is currently limited to low and housing outside of our typical space and the commercial markets remain mostly inactive, we successfully increased sales within our Southwest Florida market by 9%. Sales of our EV bridge product also grew $300,000.

On a product basis our WinGuard impact products, both aluminum and vinyl, continue to lead our sales, representing approximately 66% of sales in the first quarter of 2012 compared to 64% in 2011. Total impact product sales, which include WinGuard, PremierVue and Architectural Systems product lines, represented 71% of our sales in the first quarter of 2011, as compared to 70% in the prior year.

Florida sales represented 88% of total sales in the first quarter compared to 87% of total sales in 2011. Breaking down our sales drivers for the first quarter compared to 2011’s first quarter we have WinGuard sales at $25.3 million versus $26.3 million, down 3.4%. PremierVue sales were $1.8 million versus $1.1 million; vinyl, non-impact and other product sales were $5.6 million versus $6.6 million, down 15.1%. Aluminum non-impact sales were $5.1 million versus $5.6 million, down 8.9%; Architectural Systems sales were 300,000 versus $1.3 million.

Our gross margin for the first quarter of 2012 was 31.3%, up 5.7 percentage points versus an adjusted gross margin of 25.6% in the first quarter of 2011. Our increased gross margin percentage was driven by a change to the product mix in the affect of last year’s price increase announced in the first quarter of 2011 which increased margins by 370 basis points, consolidation savings which increased margins by 170 basis points.

Operating efficiencies and material usage improvements increased margins by 130 basis points and a decrease in our cost of materials which increased margins by 30 basis points. This was offset by a lower absorption consistent with the 6.3% decrease in volume which lowered our margin by 130 basis points.

Our average cost of aluminum was approximately $2,172 per metric ton during the first quarter comprised of spot purchases averaging $2,194 per metric ton for approximately 20% of our needs, and hedge purchases averaging $2,167 per metric ton for 80% of our needs. This compares to the first quarter of 2011’s average of $2,364 per metric ton. As of today, we are hedged at approximately 55% of our estimated needs for the remainder of 2012 at an average of $2,132 per metric ton. The cash price as of today is $2,050 per metric ton.

Our selling, general and administrative expenses were $11.7 million, down $800,000 when excluding consolidation charges from our first quarter of 2011. Driving this decrease was $800,000 in distribution saving, $300,000 in reduced bad debt expense, $200,000 in reduced depreciation expense, $100,000 in lower selling and marketing expenses. Somewhat offsetting these decreases was an increase in compensation-related expenses of approximately $600,000. Excluding consolidation charges out of SG&A as a percent of sales was 30.7% of sales for 2011 and 2012. Interest expense was $900,000 compared to $1.1 million in the first quarter of 2011. The decrease primarily relates to lower debt and a reduced interest rate based on new debt agreement.

I would like to reiterate that the consolidation is complete and we are achieving an in many key areas exceeding our expected operational improvement results. In the third and fourth quarter of 2011, we recognized $1.5 million of savings each. This continued into the first quarter of 2012 over experienced savings of approximately $1.6 million. These savings are in line with our original expectations of $6 million to $7 million annually and confirm that the hard work and dedication of our employee shown during 2011 in undertaking this historic effort has paid off.

During the first quarter of 2012 and 2011, we did not record any tax benefit. We have an effective tax rate of 0% due to the full valuation allowance that we apply to our deferred tax assets. We also expect 0% for the entire year due to the fact that we did not anticipate generating enough taxable income to exceed our current net operating loss carry forwards which are currently estimated to be $31 million at the end of 2011.

As we become more profitable, we will be in a good position to utilize our deferred tax assets by offsetting future income. We had a net loss in the first quarter of $650,000 or $0.01 per diluted share versus a net loss of $5.8 million or $0.11 per diluted share in the first quarter of our prior year. The net loss in the first quarter of 2011 includes $2.6 million in consolidation charges, adjusting for these charges there was an adjusted net loss to $0.06 per diluted share in the first quarter of 2011.

EBITDA was of $3.3 million for the first quarter versus an adjusted EBITDA of $1.5 million for the first quarter of 2011. In 2011, EBITDA was adjusted for consolidation charges of $2.6 million. Our increase in EBITDA of $1.8 million is due mainly to the previously mentioned $1.6 million consolidation savings, also $1.6 million from the impact of mix and pricing, $300,000 in marketing segments, $300,000 decreasing our bad debt expense. These reductions – these improvements were offset by $1.4 million in launch and contribution margin from lower sales and $600,000 of increased in incentive compensation expenses.

As additional information, our first quarter of 2012 depreciation net and amortization totaled $3.1 million versus $3.5 million for 2011. A reconciliation of the net income and EBITDA is included in our earnings release for your efforts.

Now, turning to our balance sheet, at quarter end our net working capital, excluding cash, decreased by $1.4 million compared to the end of the fourth quarter. DSOs decreased to 33 days at the end of the first quarter, compared to 40 days at the end of the first quarter of 2011. Our free cash flow for the quarter was $3.1 million driven by our adjusted EBITDA of $3.7 million, which include – exclude impact of non-cash stock compensation expense. Capital additions were $900,000. Cash paid for interest was $700,000, and we generated approximately $1.1 million in cash from working capital.

In closing, we’re positioned operationally to produce great results post consolidation. We have achieved the anticipated fixed cost savings are now driving towards incremental labor efficiencies and scrap improvement. With the right and mix and volume, we have a cost structure positioned to drive our EBITDA margin to mid-teens. We anticipate making additional investments to generate sales growth and target market share, particularly in the Southeast and Southwest Florida markets.

This will include targeted advertising and promotional activity designed to remind everyone that PGT has a strong value proposition which is high-quality products delivered on time with exceptional service before, during and after the sale. We are also in the process of opening a Southeast product gallery for all our customers to utilize and to use as a center for targeted marketing as well as customer and industry events. With that, let me turn the call back over to Rod. Rod?

Rod Hershberger

Thanks Jeff. We just completed a strong first quarter. This was especially true with regard to our operations. With the consolidation behind us and with additional sales leadership, we will continue to focus on sales growth within our core markets and our operations will continue to ratchet our performance and deliver on our value proposition, leveraging on our Q1 successes as we move forward. Florida remains a market where recovery lags behind other parts of the nation. However, the demographics of Florida are unchanged and the state’s population continues to increase. Accordingly our optimism increases when the housing markets of states which feed Florida improve.

Once again, I want to send a special thank you to all our employees, our distributors and our suppliers who have made PGT what we are for the past 32 years and look forward to working together to continue our success. With that, I’ll conclude and Jeff and I will be happy to answer your questions. Natalia, the first question please?

Question-and-Answer Session

Operator

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

Josh – Raymond James

Good morning, gentlemen. This is Josh filling in for Sam.

Rod Hershberger

Hey Josh.

Jeff Jackson

Hey Josh.

Josh – Raymond James

Congratulations on the quarter.

Rod Hershberger

Thank you.

Josh – Raymond James

I was wondering if I could get a little bit of color on how demand trended through the quarter and what you saw in April.

Rod Hershberger

Yeah. I think we started off the year a little slow in January which is typical for us as the New Year kind of starts off but as the quarter progressed the average weaker sales actually increased over the quarter. March ended up obviously higher than January and February we averaged about $3.3 million in weekly sales for March. A lot of that was driven around March (inaudible) promotion we ran to stimulate volume.

As we look into the second quarter, our lead times are any more from one week to three weeks depending on the product and it’s really hard to forecast out with reliability what that potential volume is when our customers can wait literally a week before they order the product. That kind of trend we saw on March did continue into April. April was a good month for us, a strong month for us. So May is just around the corner here and we are anxiously awaiting to see if the trends continue.

Josh – Raymond James

And along the lines of the marketing, you mentioned plans for additional spend in the coming quarters. Could you give us some sense of the cadence of that on the SG&A line?

Jeff Jackson

Well, on the SG&A line is probably around $500,000 impact in the second quarter. There is various marketing initiatives we are going to run, we are going to run a promotion for our WinGuard windows and doors, and I think it’s $20 window rod and -.

Rod Hershberger

Yeah. There is a rebate program – a consumer rebate program that we are running. I can’t really give you the cost on that because that depends on how many people utilize it, but the true marketing spends as we kind of ramp up that Southeast gallery that we’ve been talking about, we do some spending around that to make sure that people know about it and come in and use it, get the proper utilization out of it.

We’ll do some targeted marketing at people that have bought from us before as far as a reference and recommendations, and we’ll do some – as we get toward the end of the quarter, we start getting into the Hurricane season down here and we’ll be looking at some television advertising also. We want to be careful a little bit with the television advertising knowing that it’s a political year, and as we move towards the fall, it gets a little more expensive, so we’ll target that accordingly.

Josh – Raymond James

Okay. And if could take one more and with the consolidation behind you, how do you feel about your utilization rates right now, what are they looking like?

Rod Hershberger

Yeah, I mean, in terms of utilization rates, we’re probably tracking as good, if not better than we have since I’d say 2008 levels. We still have room to improve. Capacity, we are only running really one full shift on our production side, so we got ample room to expand and meet demand as it increases over time. The glass operations is running two shifts in our glass plant. But capacity is in line. We have improved our efficiencies in utilization, but we will continue to grab that. We do need obviously volume to prove that out as well.

Jeff Jackson

So, – hey (inaudible) if you just go back and look at 2006 maybe as a year where we did somewhere around $300 million plus out of this plant, with a product mix that wasn’t quite as heavily is landed towards Impact, which is more expensive product. And so you unit wise, that’s a lot of units coming out of this plant. And if you look at where we’re at this year from a sales perspective and we can translate that into units, there is a lot of room to grow, yes.

Josh – Raymond James

Excellent. Thank you very much.

Rod Hershberger

You’re welcome.

Operator

Thank you. (Operator Instructions). Our next question is from Rob Hansen of Deutsche Bank.

Rob Hansen – Deutsche Bank

Hey, guys just wanted to ask about your sales in terms of what you think it’s going to take to start to getting it going in the right direction, is this going to be kind of a pure volume turnaround in the Florida housing market or you think you would have to take market share gains on new products, it sounds like also you are kind of increasing the focus on sales if I heard this kind of correctly is outside of Florida. So is that going to be another focus in the Southeastern U.S. or not. So I’m just wondering your take on – your thoughts on that?

Rod Hershberger

Rob, not to be quiet, but the first part of your question was kind of a, yes, to all of those things that you are talking about. On the second part, we are really not focusing outside the State of Florida a lot, I mean we are looking at the coastal market and running that market, it’s an impact driven market, it’s a pretty high co-driven market from structural standpoint and from an energy standpoint. So we will look at that market pretty closely, but as far as attacking the rest of the market, we are – we announced that we’ve just hired almost ready to start a new VP of Sales and Marketing, Debby who has been our VP of Sales and Marketing will be here involving Customer Relations and so we’ll leverage that relationship portion unlike we have before.

As you look at the markets though, there will need to be some market share gains and we’ll have to go – we’ll need to get a little more aggressive on the attract homebuilding that’s going on right now when we talked about starts being up typically not some of the higher end homes that we generally enjoy a pretty good market share dominance on. And so we’ll have to be a little more aggressive on those and go after them a lot of those are driven by non-impact products. So kind of all those things you talked about at the beginning are things that we are looking at and we are doing.

Rob Hansen – Deutsche Bank

Okay. And then as you think about the kind of average price point, I guess I’m thinking for new construction here, the average price point of the home. I guess where would you say that is use your product now and then how that kind of compares to what it was in, say, 2005, 2006, the late boom years?

Jeff Jackson

Price points of homes, I’m probably not really qualified to talk about specific price point of homes because they’ve brought so much here. Typically in the past, homes would have been 300,000 to 400,000 and up and have been good homes for impact resistant windows. But some of those $400,000 homes now are developments where they were building $400,000 homes and $200,000 are under. And people are looking at ways to build that as the cheapest way possible.

Typically that $200,000 plus home is still a pretty good target for us. But it’s a lot less dollars and what it was before and you got be really careful how you get in there with impact resistant products. Anytime you start getting up in the $300,000 to $400,000 range, it’s almost a done deal that’s going to have impact resistant windows in it. And I think as people learned more and more about putting up shutters, taking them down, the other things you have to have – not to have passive projection, it becomes a little more difficult. But the price point is kind of all over the board right now.

Rod Hershberger

Yeah, I’d say the price point gives a lower obviously for a non-impact product. Our non-impact products in going to homes of $150,000 to $250,000, but the impact which is obviously with the margins for us is want to drop. I agree with Rod, there are typically homes that have the $300,000, $400,000 plus range.

Rob Hansen – Deutsche Bank

Right. And then just one last one was, I don’t think I can’t see WinGuard gross margin this quarter?

Jeff Jackson

Yeah, the gross margins for WinGuard were 40% for the quarter and all other was roughly 10.

Rob Hansen – Deutsche Bank

Okay. Thanks guys.

Rod Hershberger

You bet.

Operator

Thank you. And I’m not showing any further questions on the line at this time.

Brad West

Okay, operator. Well, thank you and thanks everyone for joining us today. We look forward to speaking with you again next quarter. If you have any further questions, please give me a call. Have a good day.

Operator

Ladies and gentlemen, this concludes today’s conference. You may now disconnect.

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