PGT's CEO Discusses Q3 2012 Results - Earnings Call Transcript

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 |  About: PGT, Inc. (PGTI)
by: SA Transcripts

Operator

Good day ladies and gentlemen and welcome to the PGT, Inc. third Quarter 2012 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 follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.

I would now like to turn over the call to Brad West. You may begin, sir.

Brad West

Good morning and thank you for joining us for PGT's third quarter 2011 conference call. I’m Brad West, Corporate Controller, and I'm joined today by Rod Hershberger, President and CEO; and Jeff Jackson, Executive Vice President and CFO. Rod and Jeff will represent PGT in 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 do not relate strictly to historical or current facts. Rather, they are based on our current expectations and are subject to risk and uncertainty.

Actual results may vary materially from those contained in the forward-looking statements. Please refer to the October 31st 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 to evaluating performance internally.

A detailed explanation of these non-GAAP measurements can be found in our press release, which was included as an exhibit to our Form 8-K filed October 31st, 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 third quarter and the nine months ended September 29th, 2012 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 our CEO, Rod Hershberger. Rod.

Rod Hershberger

Thanks, Brad. Good morning, everyone. During the third quarter, WinGuard sales which generate our best margins grew 9% in units and 4% in dollars due in part to promotions we ran to capture additional market share in targeted geographic markets as well as improved new construction market conditions. Accordingly WinGuard sales represented 73% of total sales compared to 68% in the prior year.

Total company sales in the third quarter were down $1 million or 2%. Major factors contributing to the decline include lower sales of $1.1 million in our premier view products due to our reduction in low margin sales to one particular customer and lower sales in architectural systems products which decreased by 600,000 from the prior year, driven by the completion of a large retrofit project in 2011.

The improved product mix, combined with continued improvement in operational efficiencies and the hard work and dedication of our employees, resulted in the highest net income since third quarter 2006. We posted net income of $2.7 million compared to $241,000 a year ago, generated cash from operations of $7.5 million and made an optional $3 million payment on our debt.

EBITDA in the third quarter was $6.7 million or 15% of sales. This is an $800,000 or 14% increase over the third quarter of 2011 EBITDA after adjusting 2011 for consolidation charges and manufacturing inefficiencies caused by the consolidation.

Within our core markets, total housing stats were up 37% for the third quarter of 2012 when compared to 2011. Single-family stats were up 28% compared to a year ago. Our growth in housing stats has improved every month this year, as reminder this growth is off a low base and primarily in price point homes that have not historically included impact windows. However, the positive momentum evident in this segment of the new construction market is a welcome and promising sign.

Our gross margin was 34.1% compared to 28.2% for the third quarter of 2011, which after adding back consolidation charges and manufacturing inefficiencies would have been 29.8%. The increase of 4.3% in gross margin in 2012 was driven by both mixed improvements and operational efficiencies and was offset by targeted promotional activities to drive share gains in certain highly profitable markets. SG&A costs for the third quarter of 2012 increased $100,000 or 0.6%. This was driven by $700,000 increase in employee bonus compensation and 401K expenses and a $300,000 increase in advertising expense to help capture market share, offset by $400,000 reduction in other employer related expenses, a decrease of $300,000 and warranty costs driven by improved quality and $200,000 in reduced bad debt expense.

Some highlights for the first nine months of 2012 include a mixed improvement as WinGuard dollar sales and units were up 4% from the prior year, gross margin percentage of 33.8%, up 530 bases points from 2011 adjusted gross margin, net income of $5.8 million or $0.11 per share and EBITDA of $17.8 million, up $5.8 million or 48% versus 2011 adjusted EBITDA.

I’m quite pleased with our third quarter and year-to-date results. We grew sales in high margin products and did so while maintaining various in operations. Looking forward, we will continue to focus on driving top line growth in key markets and leveraging our current core structure.

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

Jeff Jackson

Thank you, Rod and good morning everyone. Our WinGuard product sales increased 4% over prior year. This was in part due to the promotions Rod mentioned, but also due to an improved market conditions for a new construction market. Our gross margin increased 18% due to operational efficiencies and improved product mix. We kept our SG&A expenses flat, achieved an EBITDA margin of 15% of sales and generated free cash flow of $7 million during the quarter.

Our quarter ended cash balance was $19.7 million and we prepaid an additional $3 million of outstanding bank debt during the quarter, bringing our 2012 total bank debt to $5 million, total prepayment to $5 million and our net debt to $20.8 million. We remain financially strong and poised to take advantage of opportunities to grow our brand awareness and market share gains. We experienced an improved leverage and expect to continue to experience this improved leverage and to fuel our momentum we are currently enjoying and to help drop market share gains. As Rod mentioned, and as you may have learned from our earnings release we reported net sales of $44.7 million for the third quarter of 2012, 2.2% increase over prior year.

Breaking down our sales driver for the third quarter compared to 2011 third quarter, we have our WinGuard sales $32.4 million versus $31.2 million, an increase of $1.2 million or 4%. Offsetting the increase our PremierVue sales were $1.3 million versus $2.4 million, a decrease of $1.1 million.

Architectural Systems sales were $600,000 versus $1.2 million, a decrease of $600,000. Sales of non-impact products were $10.5 million, versus $10.8 million, down $300,000 or 3%. Our gross margin for the third quarter of 2012 was 34.1% versus gross margin at 28.2% in the third quarter of 2011.

After adjusting for consolidation charges and manufacturing inefficiencies caused by the consolidation, our 2011 gross margin would have been 29.8%. Our increasing gross margin percent was driven by improved operational efficiencies and lower scrap 340 basis points.

Improved product mix added an additional 140 basis points. Cost of materials decreased which increased our margins by 120 basis points. Offsetting these increases was the impact of the promotional activity which lowered our margins by 170 basis points.

Our average cost of aluminum was approximately $2,019 per metric ton during the third quarter, comprised of spot purchases averaging $1,872 per metric ton, for approximately 29% of our needs and hedged purchases averaging $2,080 per metric ton for 71% of our needs.

This compares to the third quarter of 2011’s average cost of $2,440 per metric ton. As of today we are hedged at approximately 45% of our estimated needs through December 2013 at an average of $2,084 per metric ton. The cash price as of today is approximately $1,900 per metric ton.

Our SG&A, sales, general and administrative expenses were $11.6 million, an increase of $100,000 from the third quarter of 2011. Highlights within SG&A includes $700,000 increase in employee bonus and 401K related expenses, $300,000 increase in advertising and marketing related costs to assist in our efforts to drive brand awareness. Offsetting these increases was our continued improvement in our distribution efforts generating approximately $400,000 decrease in expenses.

Decreased warranty related expenses of $300,000 as we continue to improve our quality of our products post consolidation and a reduction in our bad debt expense of $200,000.

Interest expense was $900,000 compared to $1.1 million in the third quarter of 2011. This decrease primarily relates to our lower debt and a reduction in interest rates associated with our credit agreement and improved leverage.

During the third quarter of 2012, we recorded $60,000 of tax expense related to our corporate AMT liability. This resulted in effective tax rate of 2% for the quarter. We do not anticipate generating enough taxable income this year to exceed our current net operating loss carry-forwards which are currently estimated to be approximately $27 million at the end of 2011. As we've become more profitable we will be in a good position to realize our deferred tax assets by offsetting future income.

We had a net income for the third quarter of $2.7 million or $0.05 per diluted share versus net income of $2,000 or approximately $0.00 per diluted share in the third quarter of prior year. The net income in the third quarter of 2011 includes $100,000 in consolidation charges and $600,000 in excess of operational charges.

Our EBITDA was $6.7 million for the third quarter of 2012versus an EBITDA of $5.9 million for the third quarter of 2011. The increase in EBITDA of approximately $800,000 is due mainly to $1.5 million from improved operational efficiencies and lower scrap, $600,000 from improved product mix, $500,000 in reduced material costs. These increases were somewhat offset by $1 million in targeted promotional activity in rebates and $700,000 in increased employee bonus in 401K expenses.

A reconciliation of the net income and EBITDA which I’ve just discussed has been included in our earnings release for your reference.

Turning to our balance sheet, as of September 29, 2012, our net working capital, excluding cash and assets held for sale was $16.4 million, a decrease of $1 million compared to the end of the second quarter of 2012.

DSOs decreased to 34 days at the end of the third quarter compared to 41 days at the end of the third quarter in 2011. Our free cash flow for the quarter was $7 million, mainly driven by our EBITDA, excluding non-cash stock compensation of $7 million. We received $1.4 million in cash from working capital. We spent $800,000 in capital additions. We paid cash for interest of $700,000.

During the quarter, we prepaid $3 million of our debt, bringing our gross debt to $40.5 million as of the third quarter end. this morning we paid an additional $3 million on our debt, bringing our balance to $37.5 million as of this call.

As our third quarter progressed, we experienced a 12.9% reduction in sales for July when compared to prior year. This was followed by a 2.7% increase in August sales and another 3.3% increase in September sales over prior year.

The growth experienced in the last two months of the quarter was a result of improved market conditions and targeted promotional activity we’ve discussed. As a result of this success, we extended some of our promotions into the fourth quarter, which is helping drive top line sales in October significantly above prior year. We currently estimate, with our strong October sales plus our current run rate positions us to finish the full year slightly above prior year in terms of total sales.

Our increased cash flow and improved profitability have provided us new flexibility to take market share in our core market of Florida are running targeted promotions and investing in our brand awareness.

Our operations are well positioned to produce product and meet demand of incremental sales which will allow us to increase profitability by leveraging our current core structure as the market continues to recover.

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

Rod Hershberger

Thanks, Jeff. Our markets while still well below normal, are showing signs of growth and we are well positioned to capitalize and gain market share. The company is looking to build on our recent successes and our leadership is implementing strategies which are designed to grow PGT sales and market share. Our employees and our customers are committed to deliver our value proposition and to succeed as part of the PGT family. In conclusion, we are pleased with the recent performance, excited with our present opportunities and certain the future will produce increased shareholder value.

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

Question-and-Answer Session

Operator

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

Sam Darkatsh - Raymond James

Jeff, Brad. How are you?

Rod Hershberger

Good Sam. How are you?

Sam Darkatsh - Raymond James

I'm doing well. I’ve got three or four questions if I might. First off, some moving parts obviously with promotions and the search. How should we look, Jeff, at near term gross margins? You’re going to continue the promotions you said into the quarter but you also have some fixed cost absorptions also. So would you expect some gross margin leverage near term sequentially versus Q3 or does the promotion more than eat into that?

Jeff Jackson

Well, it all depends on obviously as you know, Sam, the total top line impact of that promotion. If sales are lower than the third quarter it’s going to eat into that, total sales for any given quarter. Our overhead that’s more or less fixed is probably 80% fixed, runs about $8 million consistently between the quarters in terms of cost of goods sold overhead and so that’s the portion that when sales decreases, leverage goes the opposite of what we want to see.

So, in terms of the fourth quarter, sales will be lower than they were in the third quarter, because third quarter is our second strongest quarter typically in a given year. So you will see a little bit of a decrease leverage of that overhead number I just told you.

The promotions themselves will continue impacting us anywhere from that 100 to 150 basis points is what I would guess. But as I look into the fourth quarter given our volume that they were currently anticipating, I’m thinking those gross margins are going to help hold fairly steady to the third quarter, maybe dropping some. I think we get 34.1% in the third quarter. Maybe we were 33 and ½ to 34, somewhere in that range in the fourth quarter.

Sam Darkatsh - Raymond James

So the 100 and 150 basis points hit from promotions, that’s a year on year as opposed to sequential issue, Jeff?

Jeff Jackson

Yes.

Sam Darkatsh - Raymond James

Okay, got it. Second question, I guess that leads perfectly into what the second question which is, you said October was up significantly. The running joke is we analysts try to put the word significantly into our models and it comes up arrow signs.

Jeff Jackson

Yeah. That’s why I mentioned for the full year we do expect to be total sales growth because of the fourth quarter.

Rod Hershberger

If you look back a little bit at last year too, last year’s fourth quarter was not a great quarter. December was fairly strong, October, November were pretty weak for months in that quarter. So we’re comparing over a previous year that it’s almost like plugging that same number in. There’s really not a good number to plug in there because that was a tough month in sales.

Sam Darkatsh - Raymond James

And you attribute the demand bump entirely to the promos or are you seeing some underlying recovery in the core business?

Jeff Jackson

It’s both. Obviously the promotion is definitely helping us gain more momentum. But overall, the market conditions are better than they were this time last year. To Rod’s point, last year’s fourth quarter was our worst fourth quarter since I have been here. So we are definitely going to be over that and that’s why I was kind of alluding for the full year. I think last year we came in approximately 167 million in top line sales. We are going to be slightly north of that once the full year is finished and that’s going to be driven by fourth quarter results.

October was our strongest month for the year in terms of a four week month. Now you’ve got to break into Thanksgiving in November, a week shut down for Christmas in December. So our November, December results while we anticipate them being better than last year will not continue that same October clip we’ve seen just because of the holidays.

Sam Darkatsh - Raymond James

Okay then, the third question. Can you give us sense of the promotions in terms of the ASPs on like for like product? What types of pricing are you talking about and are they being managed? Are you a leader or are you following the competition? How do we look at pricing in that phase?

Rod Hershberger

Sam, we’re not really going across the board on these types of promotions. What we’re doing, I think it’s a little more surgical. We’re going and we’re talking to specific customers and arming them with the tools to specifically go out and take jobs or to take business away as opposed to going out there and offering, you can offer a 5% or 10% discount, a consumer rebate or something like that that’s kind of across the board and drives your entire margin base down or maybe changes the pricing in the market place. What we’re doing is a lot more focused than that, with some of our larger, more significant customers in each geographic area that we target. So it’s kind of hard to put an entire basis on because we’re arming them with the tools they need to be successful and that may be different in each area.

Sam Darkatsh - Raymond James

So the fact that you’re looking to gain share from these proportions indicates that they’re not really being matched across the board from a competitive standpoint? That you’re flying the banner a lot largely by yourself, is that how to read it or no?

Jeff Jackson

Yeah Sam, I would say are we matched at times to get jobs? Yes. We’re going up against a lot of small players in this close market if you will. So at times we’re a match but for the most part arming the select dealers that Rod has mentioned has definitely paved the way and while we are giving up some margin, the incremental sales given our current leverage makes it worth it.

So our average sales price, we aren’t taking down because like Rod said it’s select. So if a dealer doesn’t get practicing pressure he’s offering on a normal sale our same margin product. But if he does get price pressure from our competition, like Rod said he’s armed to go out there and meet or beat that in order to get volume. And again he works in conjunction with us obviously to make those kinds of deals.

Rod Hershberger

And our value propositions still holds, Sam? In year past, quite a few years ago we used to talk about a 15% incremental increase because of the value that the PGT name brought. I think we could argue now that it’s maybe not quite 15% particularly in a new construction difficult market. But there is still a value proposition for being able to sell a branded for being able to sell a branded product like PGT or WinGuard and we’re still seeing that in the market place.

Jeff Jackson

And that was for the promotions were targeted towards, obviously that impact product which gives us higher margins and a little bit more flexibility to run those types of promotions.

Sam Darkatsh - Raymond James

Last question before I monopolize this whole call here. Jeff, could you give us an update on the North Carolina facility?

Jeff Jackson

Yes. As you guys know we’ve held that for sale for a while now. We’ve had heightened interest on the last I think six months. Several different companies have been in and out of that location. Most recently some I guess stronger interests. We did sign a letter of intent and currently have a draft agreement circulating between us and a potential buyer. That agreement is standard industry top agreement. We hadn’t signed it yet but it’s very close I expect it to be signed in the next week or so and the price has been agreed upon.

Well I don’t want to disclose that at this point. It is above our book value of that property so there will be a gain associated with it. But definitely some good interest and we’re feeling that this buyer has the wherewithal and it’s just a matter of the standard due diligence process that they’ll go through to close such a deal. But we don’t see anything getting in the way of that and we’re feeling pretty good.

Sam Darkatsh - Raymond James

Remind us what the book value is of the facility?

Jeff Jackson

$5.2 million was the net book value of this facility.

Rod Hershberger

Hey Sam, just a quick disclaimer, the letter of intent is non-binding, but we’re feeling pretty good about this process going forward.

Sam Darkatsh - Raymond James

Very good. Thank you gentlemen.

Operator

(Operator instructions) The next question is from Richard Paget of Imperial Capital. Your line is open.

Richard Paget – Imperial Capital

So I know it’s kind of early obviously and not necessarily in your core geography, but how should we think about the potential impact for you guys with the hurricane?

Rod Hershberger

You’re right. It is really early to try to put a number or anything around that. We’ve got a sales rep that’s right in that area that we have gotten some pretty good reports back. From what we see, from what we think we see so far, there seems to be a lot more water damage than wind damage. But I think there’ll be, if it follows track of almost every other storm that’s been there, building departments will get together and start reviewing damage and what caused the damage and look at their building codes and make decisions to whether they need to adopt more stringent building codes. Sometimes it’s maybe just enforcement of more stringent building codes.

But I think it’s a little bit early to tell what’s going to happen there. I think the good news is is that a lot of organizations have looked at the rebuilding process and looked at companies that are good investments for it. PGT’s name has been mentioned a number of times as a long term solution for impact resistance. So I would hate to give you any kind of numbers or any kind of prediction about what’s going to happen on the rebuilding process.

Jeff Jackson

Yeah. I think the long term awareness over the next 12 months will play in our favor. Obviously the East Coast has gotten hit by two hurricanes over the last several years versus Florida none in the last seven. So that’s your fact there I think helps push code, helps push enforcement and will help push awareness and demand for the top products we sell. Now how we align ourselves to take advantage of that, that’s what we’ve got to do on our end.

Richard Paget – Imperial Capital

Okay. So your ability to sell into the Northeast on a larger basis, would that require any kind of ramp up for you guys?

Jeff Jackson

We currently have distributors in the Northeast. Right now we’re running a truck up there once every other week or so. But yeah, if we wanted to ramp up full scale we would obviously want to set up more just a larger distribution base.

Rod Hershberger

Manufacturing wise we’re fine. It’s distribution base may need to be larger.

Richard Paget – Imperial Capital

Okay. And then you guys have been paying down debt. Is that any kind of I guess cash balance? Let’s call it over $20 million that you get, that that would be the first use of cash to continue to pay down that term loan?

Currently, yeah. I think regardless of what we do we’re going to pay debt down here and there. If it’s $2 million, $3 million or whatever and we’re always looking to potential acquisitions or whatever that could be used for cash or other uses. But whatever we end up doing we’re going to continue to chip away at the debt somewhat.

Richard Paget – Imperial Capital

All right, thanks. I’ll get back in queue.

Operator

(Operator instructions). There are no further questions in queue at this time.

Rod Hershberger

Okay, thanks operator. Thanks for joining us today for our third quarter conference call. We look forward to speaking with you all again as we close up the year into next year and reporting on the full year. If you have any further questions please call myself. Have a good day.

Operator

Ladies and gentlemen, this concludes today’s program. You may now disconnect. Good day.

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