Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PGT, Inc. (NASDAQ:PGTI)

Q1 2008 Earnings Call Transcript

May 1, 2008 10:30 am ET

Executives

Jeff Jackson – CFO and Treasurer

Rod Hershberger – President and CEO

Analysts

Sam Darkatsh – Raymond James

Keith Hughes – SunTrust Robinson Humphrey

Jenkin Folly [ph] – JPMorgan

Rob Hansen – Deutsche Bank Securities

James Wilson – JMP Securities

Michael Praig [ph] – MM Management

Robert Kelly – Sidoti & Co.

Jonathan Sacks – Stonehill Capital

Operator

Good day and welcome to the PGT Incorporated first quarter 2008 earnings conference call. As a reminder, today’s conference is being recorded. And now for opening remarks and introductions, I would like to turn the conference over to Mr. Jeff Jackson. Please go ahead, sir.

Jeff Jackson

Good morning and thank you for joining us for PGT’s first quarter 2008 conference call. I’m Jeff Jackson, CFO and I will be joined today by Rod Hershberger, President and CEO. We will represent PGT on this morning’s call. Rod will provide an overview of the Company’s performance for the first quarter and then I’ll discuss our results in more detail. After our prepared remarks, we’ll take your questions.

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 yesterday’s press release and our most recent Form 10-K filed with the SEC. We undertake no obligations to publicly update or revive any forward-looking statements.

A copy of our press release is posed on the 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 pro forma information, which was quantitatively reconciled to GAAP. Our Company uses non-GAAP measures as key metrics for evaluating performance internally. A detailed explanation of these non-GAAP measures can be found in our Form 8-K filed yesterday with the SEC. These non-GAAP measures are not intended to replace the presentation of financial results in accordance with GAAP; rather we believe these presentations of non-GAAP measures provide additional information to investors to facilitate both past and present comparisons.

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

Rod Hershberger

Thanks Jeff and good morning everyone. Thanks for joining us on our call. I’ll begin with the highlights of our first quarter results, and then provide an update of some of our key strategic initiatives for 2008. Jeff will follow with a detailed review of our financials for the first quarter.

As I mentioned in our press release the building industry, in which we operate, saw significant deterioration in new construction starts as evidenced by decline in new housing permits of 56% in first quarter of 2008 versus the same period in the 2007. However, our revenues decrease only 24.5% over the same period. Our WinGuard product line was down only 20% and our non-impact aluminum product line was down 40%. Compared to the first quarter of 2007, sales into the repair and remodeling market, which we refer to as the R&R market, were down 6% this quarter. It is also important to note that as a percentage of the total sales for the first quarter of 2008, R&R sales accounted for 59% compared to 41% for new construction. This is in contrast to prior year where new construction represented 53% of total first quarter 2007 sales.

For the first quarter, a combination of decreased volume and a $1.8 million charge related to the restructuring activities initiated in March, resulted in a net loss of $1.8 million versus a net profit of $800,000 in the prior year’s first quarter. Adjusting for the effects of the charges in the first quarter 2008, there was an adjusted net loss of $700,000. Adjusted net loss per diluted share was $0.03 for the quarter compared to a net profit of $0.03 for the first quarter 2007.

As mentioned in previous calls, our plan for managing for the hosing downturn includes generating incremental sales and increasing market share. We do this through our core competency of customer service and through the introducing of new products, expanding into both new adjacent markets and geographic markets, while focusing on improving operational efficiencies, decreasing operating costs, and conserving capital. Recently, at the International Builders' Show, our new non-impact vinyl windows and doors where introduced to the market and were well received. We expect these new vinyl products to drive additional sales in 2008 and beyond as we increase our distribution network in targeted states outside of Florida.

On March 18, 2008, we announced the joint venture agreement with ASI LIMITED to expand our market presence in our architectural systems products stream. Today, this joint venture has substantially completed project in Michigan and signed two additional curtain wall projects representing approximately 750,000 total square feet that will generate revenue for the Company over the next 18 months.

On the cost side, we received a full quarter’s benefit from the actions taken in October to restructure our operations, which we estimated at that time to generate annual savings of approximately $16 million. We took additional actions in March of 2008 as the market continues to decline. These actions resulted in an additional reduction of workforce of approximately 300 people bring the total to over 600 people since October of 2007. We expect to generate approximately $8 million in additional annual savings associated with this restructuring. As a result of our action and due to the commitment of our dedicated employees gross margin, adjusted for restructuring charges, improved 290 basis points over the fourth quarter of 2007. SG&A costs, adjusted for restructuring charges, are down a 160 basis points over the fourth quarter of 2007. And adjusted EBIDTA increased $2.8 million to $5.8 million on essentially the same sales base, or as a percent of sales adjusted EBIDTA increased to 10.7% in the first quarter from 5.5% in the fourth quarter of 2007. While this quarter was difficult, we are on track with our restructuring initiatives and continue to look for new sales opportunities. Additionally, as we announced this morning, we have an amendment to our credit agreement. This will allow us greater financial and operational flexibility to operator our Company as we navigate through challenging market conditions.

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

Jeff Jackson

Thanks Rod. Let me give you more detail on first quarter numbers. We reported net sales of $54.8 million for the first quarter of 2008, a decrease of 24.5% versus the prior-year quarter, as generating sales in this challenging market continue to be difficult. Our decrease is mainly driven by new construction sales down 41% versus prior-year first quarter. We continue to weather the impact of the declining housing starts down approximately 56% in our core markets compared to first quarter of 2007. This decline was somewhat mitigated by our sales into the R&R market. As Rod had mentioned, our sales into the R&R market represented 59% of our first quarter sales. We also experienced a favorable mix with our WinGuard products representing 71% of total sales for the first quarter versus 66% in prior year’s first quarter. With our sales being generated from both the new construction and R&R markets, we are better positioned to leverage our distribution network and continue to outperform the housing downturn in our core markets.

Breaking down our net sales drivers for the first quarter versus prior year, we have: WinGuard impact sales at $38.7 million versus $48.1 million, down 20%; aluminum non-impact product sales at $9.4 million versus $15.6 million, down 40%; architectural systems sales were $3.3 million versus $4.7 million, down 30%; vinyl non-impact and other product sales were $3.4 million versus $4.2 million, down approximately 19%. When compared to our sequential quarter, our sales increased slightly, approximately 1% driven by sales into the R&R markets, which increased 4%, while sales into the new construction market decreased only 3% compared to the fourth quarter.

Single family housing starts in first quarter of 2008 were down only 7% to the fourth quarter of 2007, while declining, this decrease is much lower than the previous two quarters whose sequential decreases were 31% and 24%, respectively. Our gross margin for the quarter was 29.3% versus 34% in the same period of 2007. We recorded approximately $1.1 million restructuring charge in our cost of goods sold during the quarter most related to severance cost for our employees affected by the March restructuring. Adjusting gross profit with this charge would result in an operational gross margin of 31.3%, which is down 270 basis points versus the prior-year quarter, relating mainly to the deleveraging on our fixed costs within our operations offset by the improvement in mix towards WinGuard products.

On the material side, our average cost per metric ton of aluminum was approximately 2,600 per metric ton. We are current hedged at approximately 70% of our estimated need through 2008 at an average of 2,746 per metric ton. When compared to our sequential fourth-quarter 2007, we improved our gross margin by 290 basis points or $1.3 million, driven by the restructuring actions taken during the fourth quarter as we experienced the benefit of both a reduction in cost and improved operational efficiencies. Our selling, general and administrative expenses were $16.3 million down $3.9 million compared to the prior-year quarter driven by lower labor expenses of $2 million as a result of our October initiatives, lower spending in other categories such as service and freight of $1.1 million, lower marketing expenses of $1.3 million, and lower professional fees of about $200,000. Offsetting these lower costs was a restructuring charge in the quarter of $684,000, as well as increased fuel cost of $263,000.

Our marketing expense was $1.5 million in first quarter of 2008 versus $2.8 million in the same period a year ago. We continue to invest in our marketing efforts with spending focused in the first quarter in our R&R market, including coop advertising allowance with our distributors. We believe it is important to invest in this area during periods of downturns in order for us to achieve our goal of increasing market share. After adjusting for the restructuring charge, SG&A as a percent of sales remain consistent at approximately 28% when compared to prior-year first quarter. However, SG&A costs were down 160 basis points from fourth quarter of 2007 or approximately $689,000.

Interest expense for the first quarter was $2.7 million compared to $3.1 million in first quarter of 2007. The difference primarily relates to lower debt levels as a result of debt paydowns in the first three quarters of 2007 and a lower overall interest rate. Our first quarter average interest rate was 8.2%. For the quarter, our effective tax rate was 36.7% compared to 36.9% in the first quarter of 2007. Going forward, we anticipate our tax rate to range in the 37% to 38% area. Net loss for the first quarter was $1.8 million versus profit of $800,000 in the prior-year period, resulting in net a loss of $0.06 per diluted share compared to a net profit of $0.03 per diluted share for the same period last year. After adjusting our first quarter 2008 for the restructuring charge of $1.8 million, our adjusted net loss was $700,000 for the first quarter of 2008 or $0.03 per pro forma diluted share.

Our EBITDA for the first quarter was $4.1 m. Adjusted EBITDA was $5.8 million or 10.7% of sales for the first quarter versus $8.3 million or 11.5% of sales for the first quarter of 2007. Our 2008 EBITDA reflects the negative effects associated with the $17 million sales decline and benefits of our first quarter restructuring bill being realized in the first quarter. The full quarterly impact of the second restructuring will not be realized until the second quarter of 2008. We anticipate that that benefit to be an additional $1.5 million in the second quarter based on the first quarter sales run rate. As additional information, our first quarter 2008 depreciation and amortization expenses totaled $4.2 million. A reconciliation of the adjusted net income and adjusted EBITDA that I’ve just discussed has been included in our earnings release for your reference.

Turning to the balance sheet. As of March 29, 2008 our networking capital, excluding cash, increased by $3.1 million or $28.5 million. The increase in networking capital was driven by an increase in other current assets, driven by the change in fair value of our aluminum hedges of $1.3 million all of which is non-cash, and annual pre-payments of insurance coverages of approximately $1.1 million. Also, an increase of $930,000 in our inventories and accounts receivable as a result of normal operations at the end of March as opposed to the end of December, when we were close for the holidays. Of note, DSO continues to stay to 37 days as our credit department continues to do a great job in a tough environment.

In reviewing free cash flow for the quarter, we had an adjusted EBITDA of $5.8 million, cash based increase in working capital of $1.8 million, first quarter 2008 capital additions were $981,000, and cash paid for interest was $2.8 million. Net-net, we generated approximately $200,000 in free cash flow. The change in working capital was timing and I do not it to be a use of cash in future quarters, rather I expect working capital to be neutral.

Our cash on hand at quarter-end was approximately $18.2 million given us net debt of approximately $112 million at quarter-end. As Rodney mentioned earlier, we announced this morning an amendment to our current credit agreement. The details of this amendment are available for your review on Form 8-K filed with the SEC this morning. In summary, the amendment freezes certain financial covenants at the 2007 year-end requirements. It also changes the interest rate we are current paying on our debt and requires the repayment of at least $30 million against our current debt outstanding by no later than August 14, 2008. The paydown on debt will come from a combination of cash on hand and proceeds from an equity offering. The interest rate will be based on the metrics tied to our leverage and start at LIBOR plus 350 basis points. Should leverage exceed 3.5 times EBITDA, the rate would increase. The complete metrics detailing the leverage-based interest rates can be seen in our 8-K filed this morning.

Also the amended agreement includes a LIBOR floor, which is set at 3.25%. While the Company is in compliance with our debt covenants at the end of the quarter, and expects to remain in compliance being proactive in freezing these covenants at the 2007 levels for the next two years, provides increased operational flexibility during a challenging market.

I’d like to give you a brief update on our restructuring actions taken during March 2008 and fourth quarter of 2007, which resulted in $1.8 million and $2.4 million in charges being taken during those quarters, respectively. Combined, these two restructurings expected to result in annual savings of approximately $24 million comprised both the people savings or a total of 27% of our workforce has being reduced and operational savings in items such as materials, supplies, freight cost, and professional support costs. I am pleased to report during the first quarter we realized the full quarterly benefit of the people-related savings from our October restructuring of approximately $3.3 million or annualized $13 million. We also began to see benefits of some of the operational initiatives with over $2 million in annualized savings identified to date, in areas such as backhaul, material cost improvements. These operational savings are expected to reach the annualized target of $3 million by the third quarter of this year. In March, restructuring will result in additional $8 million in annual labor savings. With full quarterly benefit beginning in the second quarter of 2008, we did recognized approximately $500,000 of benefit during the first quarter related to this restructuring or about three weeks worth of savings. We took these actions in order to be a stronger, leaner, and more efficient force while weathering this significant downturn in our core markets.

We appear to be at the appropriate staffing level and support level to serve our current demand. We’re on track to realize the full amount of our estimated savings realizing approximately $4.3 million in savings during the first quarter. We will be adding another $1.5 million in the second quarter bringing our total savings to $5.8 million a quarter or $23.2 million annualized, with remaining $1 million operational savings in place by third quarter of 2008. Without the success of these efforts at a sales run rate of $54 million, we would have been a breakeven EBITDA Company. Our employees continue to look for ways to drive operational improvements, reduce cost, and utilize our operational capacity. We are pleased with the results to date.

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

Rod Hershberger

Thanks Jeff. We are still in a difficult market conditions that negatively affect our business. As I previously outlined, we instituted several measures to stimulate sales as well as to reduce operating cost to counteract the current market conditions, and we’ll continue to monitor those conditions closely. Long term, we believe the U.S. impact-resistance market will continue to grow and we will expand our presence in this market. Our new products and our vinyl and architectural systems streams have been received well and are meeting expectations. And we will continue to opportunistically review acquisition candidates as they come up. I believe we have the right strategy and the right people in place to not only effectively manage through the current market downturn, but also to quickly take advantage of opportunities as market conditions improve. I thank all of our employees for believing in us, committing to our strategy, and outperforming our expectations.

With that I’ll conclude, and Jeff and I will be happy to answer your questions. Takeesha, you can take the first question.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Sam Darkatsh with Raymond James.

Sam Darkatsh – Raymond James

Good morning Rod. Good morning Jeff. How are you?

Rod Hershberger

Good morning.

Jeff Jackson

Good morning, Sam. Great.

Sam Darkatsh – Raymond James

I am going to appear to be a (inaudible) for a couple of questions here, if you don’t mind. Talking about the risk the amendment of the credit facility, Jeff, when you are saying that it is now going to be relaxing certain financial covenants, meaning it’s going to keep at 2007 level for funded debt to EBITDA I am guessing. Does that mean the covenant is going to be 5.0 times for the next two years, is that how it works on an adjusted EBITDA basis?

Jeff Jackson

That is correct, Sam. The leverage covenant, basically EBITDA – trailing 12-month EBITDA to total debt will be froze at 5.0 times through the first quarter of 2010.

Sam Darkatsh – Raymond James

Okay. And that’s an adjusted EBITDA, meaning that’s going to be adjusting for some non-cash items like stock-compensation expense and net restructuring, that kind of thing?

Jeff Jackson

That is correct. We adjust for any non-cash item such as stock comp, hedge – some of the hedging related items can be non-cash a times or restructuring charges.

Sam Darkatsh – Raymond James

Okay. Now the applicable rate now – the new rate is going to be LIBOR plus 350 assuming that you don’t fracture the 3.5 times EBITDA level. What is your current rate that they use right now?

Jeff Jackson

LIBOR, as I mentioned, is going to actually have a floor to it Sam. So, LIBOR floor will be 3.25.

So, the LIBOR floor of 3.25 plus, in that case 350 basis points would be where it starts at.

Sam Darkatsh – Raymond James

So, at present – before this amendment what did it looked like?

Jeff Jackson

Well, our average interest rate for Q1 was about 6.4% we paid on our debt.

Sam Darkatsh – Raymond James

Okay. So, this basically raises your interest rate by at least at present maybe 35 BPs or so?

Jeff Jackson

Yes, maybe. I mean, minimum we are looking at with the floor of 2.0, 2.25 and then the 350 BPs is 6.75. So, yes it could raise it by about what --?

Sam Darkatsh – Raymond James

35 BPs, but that would be a floor meaning if LIBOR goes up at – but it would have occurred before also, right because there wouldn’t have been – if LIBOR goes up either way, you were still going to be hit by that, is that correct?

Jeff Jackson

That’s correct. At quarter end, we are actually 100% variable, our fixed caps rolled [ph] off in the quarter. So, we were paying variable rates. I would have look to fix some of that eventually, anyway. So, yes, LIBOR once it passes 3.25, it would obviously have gone up.

Sam Darkatsh – Raymond James

Would there been any costs besides the higher interest rate to the amendment of the credit facility?

Jeff Jackson

Minor. There is cost disclosed in the S-8 filing, 8-K filing associated with the actual cost paid to the banks, about 25 basis points. It will be in the range of $250,000 to $300,000 or so depending on how much debt we ultimately paydown. And there is attorney fees and accounting fees, typical fees like that. But the costs are $400 million [ph].

Sam Darkatsh – Raymond James

Outside of a rights offering, which is what I am assuming you are talking about – we are talking about raising equity capital. Excluding that what are your projections in terms of paying debt down this year from current levels?

Jeff Jackson

Well, excluding that obviously, our free cash flow is still our internal intent to pay down debt regardless of what level we get down to outside the rights offering or equity offering. It will be based solely on our free cash flow we generate. And at our current rate, we were about basically free cash flow, I said, it was roughly 200,000. There was some timing on working capital in there. So, if you really look forward, considering we had about million dollars worth of pre-paid insurance and we did have the – we’ll have an additional $1.5 million of cost savings I think coming in the second quarter, and considering working capital could be natural, our free cash flow could be as high as $3.5 million or so – $3.5 million. If that accumulates we will look to pay down debt with free cash flow.

Sam Darkatsh – Raymond James

$3 million to $3.5 million a quarter?

Jeff Jackson

Potentially, yes.

Sam Darkatsh – Raymond James

Okay. That’s helpful. Now I am going to turn back of being a stock analyst. Accounts receivable, any collectability issues that you seeing with your customers?

Jeff Jackson

Not really. Nothing outside the ordinary course of business, I mean we maintain great relationships with our customers. We have very open communications. If there are any issues we put them on payment plan. And two, with the R&R market side of the business really generating the majority of our sales now, all that’s custom-made order and typically almost 99% of the time, the builder or dealer will get a deposit for majority of the windows up to 50% to 60% deposit. So, there is less risk inherently in the R&R side of the business. But no – the DSO remained at 37 days, the reason dollar-wise it’s spiked up. Obviously sales increased some about $500,000, but the reason dollar-wise it’s spiked up is because March is a little heaver month than January and February’s average.

Sam Darkatsh – Raymond James

Aluminum pricing, you said you are 70% hedged through August. If aluminum stays where it is, Jeff or Rod, do you suspect that you will be looking into raising prices on aluminum windows going forward or how should we look at how aluminum is actually going forward?

Rod Hershberger

Sam, we actually locked in some forward buys just fairly recently because the price dropped, and the price dropped under where our forecast had actually been for the year. So, we think we are okay at least through August. We’ll continue to monitor that market and see if it is worthwhile doing some forward buys. Obviously, maybe obviously is too strong a word, now it’s not necessarily a good time to go out with the price increase, but it is something that we will look at. We have seen some of that in the marketplace. But it is tough market and I think every builder out there right now is clamoring for some decreases in pricing. But it is going to be driven by what the cost of commodities are. But aluminum over the last – really the last week has actually seen a little bit of weakness. We don’t anticipate that to stay. It will probably stay at about the levels it is now or maybe a little higher.

Sam Darkatsh – Raymond James

Last question Rod. I’ll defer to others. You are talking about you market share and I know you like to say the Florida permits and the existing home sales is perhaps your proxy for your new home construction end markets and your R&R end markets, but any visibility you may have in terms of how you are doing in specific to other window manufacturers and not the broad macro trends as a whole for the state?

Rod Hershberger

Yes, Sam, honestly a lot of that is probably a little more gut feel and I think we actually have a pretty good gut for a lot of us have been over 20 years here now – 25 years. We see a lot of local competitors that are struggle quite a bit working two or three days a week. Some of them slashing some prices, a lot of them going to market a little bit differently. The number of pretty major competitors, in-state competitors not national players, going direct or trying to go direct to builders and really confusing the distribution chain. That’s a process over the course of the last 20 years we’ve seen companies use and not use it very effectively because it confuses that distribution chain so much. So from – and we have actually seen a number of pretty good customers of ours over the years, make a little stronger commitment to us, and one of the reasons we’ve mentioned are customer service and that being a core competency we’ve also been able to charge a bit of a premium for our product and customers appreciate that although they are clamoring for lower prices having complete on time delivery, everything there, everything right, high quality. It still worse, it still worse something in this marketplace and we are seeing people come back to us for that reason. So, we can cite data and you know me pretty well, Sam. We can cite data all day long, but what our sales folks tells and what our marketing people tell us and what our gut tells us from being in the marketplace is just as important to us and we are seeing some of that in the marketplace.

Sam Darkatsh – Raymond James

Thank you so much, gentlemen.

Operator

We’ll take our next question from Keith Hughes with SunTrust.

Keith Hughes – SunTrust Robinson Humphrey

Thank you. First, can you tell us what the gross margin was in the WinGuard products in the quarter?

Jeff Jackson

Sure Keith. Gross margin for WinGuard was roughly 41%.

Keith Hughes – SunTrust Robinson Humphrey

And that was versus about 46 prior year, is that correct?

Jeff Jackson

Versus, yes, 45 prior year, is what I’ve got.

Keith Hughes – SunTrust Robinson Humphrey

45 prior year, okay. Given the – you’ve talked about raising equity in your comments before. Can you make any comment on whether JLL will maintain its proportional interest in the Company as part of that transaction?

Jeff Jackson

Just one other quick note, Keith, on the gross margin. We did have a restructuring component in that gross margin for people we let go. We have not broken that out because people work on multiple lines, it’s just tough to do it. So, if you look at it going forward, I do expect it to be there or better once you adjust for the restructuring.

Keith Hughes – SunTrust Robinson Humphrey

Okay, thank you.

Jeff Jackson

And your second question?

Keith Hughes – SunTrust Robinson Humphrey

On this potential equity rise, you talked about some questions in your prepared comments. Is JLL planning to participate in that, maintain its proportion of ownership in the Company or do you have any information on that?

Jeff Jackson

We really don’t have it. We can’t discuss information on that. JLL obviously will do it. They please – our board did vote on this and they are aware of what we are doing. But we do not know their intent.

Keith Hughes – SunTrust Robinson Humphrey

Okay. Thank you.

Jeff Jackson

Sure.

Operator

We’ll move on to our next question from Michael Rehaut with JPMorgan.

Jenkin Folly – JPMorgan

Hi, this is Jenkin Folly [ph] on the line for Mike.

Jeff Jackson

Hi, Jen.

Jenkin Folly – JPMorgan

Hi. I was just hoping to get a little bit more color on vinyl product line if I could. I know you went out to the market after the International Builders’ Show. You said it was meeting expectations. Do you have any type of color as to how that house being doing in the market in terms of possible sales volumes what you are targeting? I think longer term you said you possibly like $30 million to $40 million in sales, but what you are targeting for this year? And also along with that what percentage of installs where in start of this quarter?

Jeff Jackson

Well, the Florida quarter percentage is – it was 91%. But in terms of vinyl I think, Jen, it’s just too early to tell. With the February launch we did have a lot of interest in the product. We are making samples. We are actually building a little bit of inventory related to those samples right now to ship out to our network. And right now it’s just too early to tell in terms of its potential impact.

Rod Hershberger

Jen, our look at that was we introduced that at the International Builders’ Show, which was second week in February, and it was a pretty much an open introduction. We didn’t pre-introduce it, so the folks had samples and broachers and literature about it ahead of time. So, after that time, we really push to that and now folks have, I would say, 80% to 90% of our samples and broachers and literature are in the field. And so what we are basing the response on is the verbal and physical response we are getting from people. The bids that are coming in, some of the commitments that we’ve heard and that’s a little stronger driver than what the actual sales numbers are. I think that the end of Q2, we’ll need to talk a little bit more about what those sales numbers are, what we are seeing.

Jeff Jackson

Yes, I think Jen, if you look at it strategically what we are doing here is we are laying out the initial framework of our platform that we will expand on outside the state. And it is a new construction product and obviously that new construction market outside the state is hurting just like here in Florida. So, the initial – or even internally, initially we are not expecting a huge run up for our new vinyl product. However, over time as we have that product we introduced as we introduced another piece of that product line for the repair and remodeling market over time. We expect to build on that framework and have a good platform to march outside the state.

Jenkin Folly – JPMorgan

Okay. So, you don’t expect actual sales dollars to really start coming in until maybe the second half of the year and then the impact will be muted because of new construction. Is that the correct way to look at it?

Rod Hershberger

Correct.

Jenkin Folly – JPMorgan

Okay. And my second question was with the restructuring initiatives that you took in March, the additional restructuring, I think you had said on previous calls that maybe you thought that roughly three quarters of the amount of the savings would be permanent reduction in your cost structure. Is that the correct way to think about it going forward or because second restructuring was more headcount related, is the rest [ph] of that permanent?

Rod Hershberger

I would say yes, less of the second one is permanent only because it involves the actual production workers out on the floor. Obviously, if volume returns we are going to rehire individuals or hire again. But as a percentage the (inaudible) good. Our goal is to keep our direct labors a percentage of sales in line, but some of those costs will come back with volume. That level of volume however will be much higher than it was in the past, because again, we’ve restructured the Company, we’ve realigned apartments, and we can sustain an incremental increase in sales a lot better in terms of adding resources against it than we could in the past.

Jenkin Folly – JPMorgan

Okay, great. And then just last quick one. With the aluminum hedges, what percentage are you hedged in the second of the year if at all?

Jeff Jackson

Well, the hedges actually run out in August of 2008. So that will be basically two months. Right now, we are hedged during those two months at roughly 70% of the demand for those months. So, I haven't done exact math on that, but two months out of the six months and of those two months we are 70% hedged within those months.

Jenkin Folly – JPMorgan

All right. Great. Thank you.

Operator

We'll move on to our next question from Nishu Sood with Deutsche Bank.

Rob Hansen – Deutsche Bank Securities

Hi, this is actually Rob Hansen on for Nishu.

Rod Hershberger

Hi, Rob.

Jeff Jackson

Hi, Rob.

Rob Hansen – Deutsche Bank Securities

Your R&R has been hold up once again, I just wanted to try and kind of ask about with the weakening consumer – and how you’ve been able to overcome this, any particular products with that?

Rod Hershberger

I think there is a little bit different driver in the majority of our R&R market. And even though the R&R market I think nationally down a bit, when you look at the drivers, particularly in the impact, if people are going to replace the window they are not going to take out a non-impact window and put in a non-impact window. They are going to generally upgrade to an impact window. But the divers there when you are looking at remodeling the house even with house costs are the value of your home coming down slightly when you’re making a choice between your bathroom, your kitchen or a window, you are driven a little bit more by insurance savings, quote savings, and so there is an actual benefit even though there is some concern I think about people getting a payback on a remodeling job. So, we are seeing that drive some of the remodel sales. We believe that’s what’s driving a lot of the remodeling sales as people make those decisions.

Rob Hansen – Deutsche Bank Securities

Okay. And just in terms of – your financial position seems to be pretty good. EBITDA coming in at $5.8 million. Can you just walk us through a little bit of the thought process related to the accelerated debt repayment. I know you went into this a little bit before, but was the covenant changing, or how does that --?

Jeff Jackson

No. I think as we look into the future, we try to run at – we said here we try to think how long is that downturn potentially going to last. We don’t want to be constrained operationally or financially with any kind of covenant concerns. We did – like I said earlier, we did meet our first quarter covenants. We planned on still meeting the covenants as we looked into the future; however, to take them totally off the table and not have it an issue, we thought it was good time to do that. Again, it just better positions us during this challenging market to take advantages of both paying debt potentially, or as Rod had mentioned, we are seeing a ton of acquisitions come on the market now. People who are doing are hurting. The ones we’ve seen have ranged in top line sales anywhere from $10 million to $60 million type company, and they are down 50 just 65, 70% year over year. So, we are starting to see a lot more of that just to kind of sure up things more than anything.

Rod Hershberger

Yes, we have gone through a number of these downturns, but we’ve not gone from a big downturn like this as a public company and we want to make sure that we are not constrained because there are a lot of opportunities as you get well into a downturn and as that downturn starts – we are not going to sit here and predict when it is going to bottom and when it is going to level and then when it is going to start coming back, we do want to make sure that we are positioned to take advantage of any opportunities that are there when that happens and this really allows us to do that.

Rob Hansen – Deutsche Bank Securities

All right. Thanks.

Rod Hershberger

You’re welcome.

Operator

(Operator instructions) Our next question comes from James Wilson with JMP Securities.

James Wilson – JMP Securities

Thanks, good morning. I guess really (inaudible). Are there – as you look across your business and what you are seeing out of distribution across Florida? Are there any locations or bright spots that might seem to be stabilizing for your business? I know the general trend is continue to be down.

Rod Hershberger

I guess, it’s today, or last week, last year – it seems to vary quite a bit. The southeast market has continue to be probably a little stronger than some of our other markets. Although some of our markets that really got hit hard a year-and-a-half ago, two years ago, the southwest market, you see a little more activity, you see a little more bidding activity. I would say across the board, we don’t see real strength in any of the markets, although we do see a little more strength in bidding activity, quoting activity, preparation for some projects, and that seems to be a little bit more across the board than to sit here and say that one particular market is really strong and really starting to go and other markets are staying weak. I think across the board we are seeing activity pickup, not necessarily sales pickup.

James Wilson – JMP Securities

Okay. And then my other one, I’m not – sorry, I got on a little late from other call, but the commercial or multi-family side, how was that and how is the backlog look?

Jeff Jackson

Yes, we talked about that a little bit early. I think the really shining bright spot in that market was our joint venture, the curtain wall joint venture that we signed with ASI where we’ve substantially completed a job, and it’s actually a job in Michigan, a 34-storey building that’s almost done. And we’ve signed two new projects, both of them – one of them a little under 40 stories, one of them a little over 40 stories, over 750,000 square feet of vision area. And that’s going to continue for – those projects going on for about the next 18 months. We’ve seen a pretty strong bidding for a lot of repair and replacement. We’ve seen some motel work come through. And we are starting to see some activity not on the major project side, but more in that $100,000 to $250,000 range for some of those architectural series products. So, it’s been meeting our expectations and holding up pretty well.

James Wilson – JMP Securities

The 34-storey building, what was that worth to you in revenues?

Jeff Jackson

It will – total GM is really too hard to tell. They’ll solely depend on the project and the component that we are doing in the project, is it curtain wall, is it R series [ph], our AS product itself, they range too widely to give you even a good range.

Rod Hershberger

Yes, I don’t know that I can give you a number, just to give you a little more maybe details on is there is – some of these projects were manufacturing, get and pay the manufacturer, but there is a flow through on the material used. And so if you include that flow through on the material it looks like a high-dollar project. And maybe not quite as much return. If you look at the actual what we are buying and selling it is a pretty good return, and those numbers are skewed a little bit. We want to make sure as we report those number we report them clearly so that you really understand how we measure and what’s coming into the Company and it’s not just a flow through from a material or something like that. We get paid to manufacture, we get paid de-lever it, and in some cases we get paid to buy it at a better rate. So, they vary in all the different jobs, they vary in jobs sometimes.

James Wilson – JMP Securities

Got it. Okay, great. Thanks.

Operator

We'll move on to our next question from Michael Praig [ph] with MM Management.

Michael Praig – MM Management

Yes, thank you. A specific question on the ASI venture. Do you assume any contractor liability in the process or one of that rest with ASI?

Rod Hershberger

First of all I can’t sit here – we don’t assume the liability. But I can’t say that it all rest with ASI either. It rest with whoever either the contractor or the general on the job is in most cases. It’s kind of a win-win for us. We sell our products to dealers and distributors, particularly in the residential window side. That’s been our distribution base and I think everyone’s heard that story of how we built that base and how important that is. This is very similar to that where we are manufacturing for someone that’s installing the product on the job, in some cases that’s the general, in some cases they are installing it for the general or installing it for whoever owns the job. So, we are a party removed. I’ve been involved in curtain wall in previous years and it can be when you are responsible for the entire project, it can be a little bit daunting a times. I think we’ve got a win-win here.

Michael Praig – MM Management

And just a little bit of color if I could. In terms of thinking about potential profitability in that business, should we be thinking about your profits or gross margin from any of the window operations or is it likely to be more comparable to some form of metal fabricating.

Rod Hershberger

Yes, given the confidentiality nature of the business itself and (inaudible), we really don’t want to disclose those tops of margins yet. We are still working through each job by job. Some of them are actually very attractive margins. But we want to keep that internally for now.

Michael Praig – MM Management

And then just a final point on that business, are those revenues when they incur reported in the architectural number?

Jeff Jackson

They will be, yes.

Michael Praig – MM Management

Okay. Thank you.

Operator

Our next question comes from Robert Kelly with Sidoti.

Robert Kelly – Sidoti & Co.

Yes, good morning. Thanks for taking my question.

Jeff Jackson

Good morning. Hi, Robert.

Robert Kelly – Sidoti & Co.

I’m not to believe on the point on the joint venture. Is this something that you will be expanding in the near term or is it just excess space you have in the manufacturing floor that you are trying to fill up?

Rod Hershberger

We think it is a great market. There is a couple of large players in that market. Most of those use another company to manufacture some or all. I won’t say all, some or part of the product. And we have an expertise in manufacturing so it is a market we can serve. It is also a very good close adjacent market that drag some of our – and we’ve kind of punched openings a lot of times, but our affordable architectural series product into the market with it. And one of the things we’ve seen in the past is that we couldn’t be in entire job because we didn’t have the full market basket as this gets us into that full market basket. So, there is a number of reasons that it give us a nice advantage in that market.

Robert Kelly – Sidoti & Co.

Do you ever see it becoming more than, say, 5% of your sales?

Jeff Jackson

Yes, I mean we expect to grow that business 10%, 15% of our sales base one day. We think there’s great potential there.

Rod Hershberger

That’s going to grow. I mean personally I’d love to see the window side of it grow at the same rate. So, it remains at 5%, but it is a big number. But we think it’s going to continue to grow substantially.

Robert Kelly – Sidoti & Co.

Okay, thanks. Question on the SG&A for the quarter. Last year you had talked about a pretty big expenditure involved with the IBS, is that the case here in 1Q ’08? And can we use 1Q level of SG&A as a run rate or should it tick down from there sequentially.

Rod Hershberger

That is the case in terms of the IBS dollars as in the first quarter last year and this year. They were a little bit less this year, but for our practical purpose it’s the same. In terms of our run rate, yes, you can use – we are using internally the run rate of Q1 with the additional cost savings I mentioned earlier of $1.5 million. We will recognize the benefit of those in Q2. They’ll be spread between SG&A and cost of goods sold. So, hopefully we’ll improve on that front. But then there’s always timing of promotions and other items we do in the second quarter as well.

Robert Kelly – Sidoti & Co.

Understood. You flexed down pretty nicely here with SG&A in relation to the sales decline, manage to pose 11% EBITDA margin almost. Are you still comfortable if the 1Q run rate for sales holds up or even declines modestly, you can still book a double-digit EBITDA margin based on the restructurings you’ve made?

Jeff Jackson

Best of 1Q run rate, yes. The decline come in and dependents on the severity of the decline.

Rod Hershberger

And where that decline? We serve a number of different markets and they kind of move and not necessarily in parallel with each other.

Jeff Jackson

WinGuard was obviously a positive mix in the quarter, we like to see that continue. But we don’t know that. And also aluminum, in the second half we aren’t covered as much as we would like to be, but we are looking to do that. But the products aren’t where we want them to be at this point. So, there are some input costs that I would have to consider in that statement as well.

Robert Kelly – Sidoti & Co.

Thanks, appreciated.

Operator

(Operator instructions) Our next question comes from Jonathan Sacks with Stonehill Capital.

Jonathan Sacks – Stonehill Capital

Hi, how are you?

Jeff Jackson

Hi, John.

Jonathan Sacks – Stonehill Capital

Can you tell us approximately how much you are looking to raise in the rights offering? Are you just looking to raise the 30 million that you need to pay down on the debt or something more or something less?

Rod Hershberger

No, we can’t really disclose that at this point. We’re actually still going through that. There is a number actually in the initial filing. I think it’s $20 million. But that’s, again that’s the initial preliminary filing. The actual number to be determined here probably by June, July timeframe. We’d look to try and wrap that process up.

Jonathan Sacks – Stonehill Capital

Okay. And you expect the rights offering to be done in that timeframe, in June, July?

Rod Hershberger

Yes, in that timeframe.

Jonathan Sacks – Stonehill Capital

And is there a particular target of cash on hand that you want to have once you were done with the rights offering as well as the debt paydown?

Rod Hershberger

The only limits and it’s disclosed in the amendment is the amount of funds that can come from the Company’s operational cash in terms of the paydown. I think that amounts to $15 million. So, we consider that, we consider our needs, and we have plenty of liquidity, but you have the undrawn line of over $25 million on it available. But no, we don’t have an optable number that I disclose at this time.

Jonathan Sacks – Stonehill Capital

And does the amendment affect aside from adjusting the interest rate as the amendment affect the size or availability under the revolver or is that basically going to remain as it is? Thanks.

Jeff Jackson

The revolver will remain as it is in terms of availability.

Jonathan Sacks – Stonehill Capital

Okay. Great. Thank you very much.

Jeff Jackson

You are welcome. Thanks.

Operator

(Operator instructions)

Rod Hershberger

Well, thank you for joining us today. We look forward to speaking with you all again next quarter. If you have any questions, please feel free to call me. Thank you.

Operator

That does conclude today’s presentation. Thank you for your participating. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PGT, Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts