Executives: Brad West - CFO Rod Hershberger - Chairman and CEO Jeff Jackson -

President
Analysts: Bob Wetenhall - RBC Capital Sam Darkatsh - Raymond James Keith Hughes - SunTrust Jeremy Hamblin - Dougherty & Company Min Cho - FBR & Company Ken Zener - KeyBanc Capital

Markets
Operator: Good day, ladies and gentlemen, and welcome to the PGT Innovations Inc., Second Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded today, August 3, 2017. I would now like to introduce your host for today’s conference, Brad West, Senior Vice President and Chief Financial Officer.

You may begin.

Brad West: Thank you, Esra and good morning. Welcome to PGT Innovations’ 2017 second quarter conference call. I’m Brad West, the Company’s CFO and I’m joined today by Rod Hershberger, Chairman and CEO; and Jeff Jackson, President. This morning, we are pleased to provide our 2017 second quarter results, as well as an outlook for the remainder of 2017.

We also have posted a presentation on the quarterly results to the Investor Relations portion of our website. Before we begin our formal comments, I would like to remind you that today’s remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995, including our 2017 financial performance outlook. These remarks involve a number of risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the Company’s earnings press release and in the risk factors section of our 2016 annual report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements.

You should also note that we will report our results using non-GAAP measures which we believe provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation of these non-GAAP measures to their GAAP counterparts is available in the Investor Relations section of our website. Now, I’ll turn the call over to our CEO, Rod Hershberger.

Rod Hershberger: Thank you, Brad. Good morning and thanks everyone for joining today's call.

The PGT Innovations team delivered an all-time company record for quarterly sales during the second quarter of 2017, coming in at just over 137 million. This represents a 15% increase compared to the second quarter of last year. Our long standing leadership position in the mass custom market was the major driver of growth for us in the second quarter of 2017. Our Vinyl WinGuard products experienced solid sales growth, increasing 35% quarter-over-quarter. [Technical Difficulty] to provide our customers with the best energy efficient, impact resistant offerings with cutting edge styling and they have been a leading contributor of our recent ability to continually gain market share.

Since 2014, our Vinyl WinGuard products have grown at a compound rate of more than 35% per year. Our aluminum impact products also help drive our growth in the second quarter, increasing 15% over last year second quarter, including aluminum WinGuard, sales of which grew 14% compared to the second quarter of 2016. This solid top line performance was driven by strong order flow, stemming from the 2017 repair and remodeling season as well as operational improvements, which enhanced our ability to satisfy our customer's needs. Our true north [ph] is to provide the customer with the best experience possible and we did so this quarter by shortening lead times, improving on the quality of our already high quality products and providing exceptional customer service in the field. Sales for the second quarter were split, 61% from the repair and remodeling market and 39% from new construction, which is a slightly higher mix of sales towards repair and remodeling.

Our repair and remodeling sales have benefited from lower new home inventories and increasing home prices, which we believe have led some would be trade up homebuyers to remodel their existing homes instead. For the second quarter of 2017, single family housing starts in Florida were up 10% and continue to track towards our estimate of 85,000 for the year. We believe that supply side headwinds, including a shortage of skilled labor and increases in lot and material prices have impeded stronger growth in the single family sector. Additionally, a fair share of the growth in single family starts we have seen thus far this year have been more towards homes with lower opening price point. Although mortgage rates have risen slightly, with rates still at historically low levels, we believe there is a large group of first time and trade up home buyers waiting for new home inventories to expand.

I want to thank our team members for their solid performance in the second quarter. We made meaningful improvements in many key metrics. Going forward, in the near term, we will focus on continuing to improve operationally to better serve our customers and bring additional value to our shareholders. We will listen to our customers in order to strengthen the reputation of PGT Innovations, as the premier manufacturer of impact resistant windows and doors in the country. In the long term, we will continue to invest in our brands by further developing innovative products that our customers have come to expect from us and to the extent we find the right set, making accretive acquisitions.

Now, I'd like to turn the call over to Jeff who will review in more detail recent events and our operational performance. Jeff.

Jeff Jackson: Thank you, Rod and good morning, everyone. During the first half of 2017’s fiscal year, we accomplished certain strategic goals, consistent with our long term vision for PGT Innovations, addressed several temporary operational challenges and unveiled the next generation of our innovative new products. Our long term vision and strategic priorities remain focused on our three brand go to market strategy continuing to drive product innovation and operational improvement and accretive acquisitions.

It is exciting to see our brands operating effectively as one company and providing best in class solutions to our vast customer base. The combination of our brands continues to diversify our product portfolio and drive value for our shareholders and our customers. We have achieved this through product innovations in our core brand PGT and our process of making selective acquisition that fit our long-term vision and strategic priorities. We are focused on strengthening our position in Florida, one of the best markets over the past four years, but doing so as a single company with three powerful brands. During this period, we have greatly expanded our operation [Technical Difficulty] product, PGT product acquired CGI and WinDoor and created our commercial division CGIC.

Our overall performance has consistently improved which is a direct result of our team's ability to effectively execute our strategies and capitalize on current market dynamics. As we mentioned last quarter, we made certain planned changes in our management structure to align our operations to better capitalize on market opportunities. These changes have been effective and helped drive our performance during the second quarter. We took certain additional actions at our WinDoor brand directed towards creating an environment for sustainable growth, which cost some expected but temporary production challenges in WinDoor second quarter operations. These improvements included putting new leaders and production processes into place as well as adding to our bench of glass suppliers to diversify our supply chain for glass.

While we expect the transition period for these improvements to continue into the third quarter, we believe they will result in a stronger WinDoor brand, part of a strong three branded suite of high quality residential and commercial products. These improvements are in line with our objective of delivering value added to our shareholders as we strive towards our goal of becoming a premier national manufacturer of windows and doors. From these perspectives of goals during 2017, we achieved all-time record for sales in the quarter and also for the first half of the period. From our low of 85 million in the first half of 2012 to a record 250 million for the first half of this year. This represents a compound average growth rate of more than 24% per year.

We also focused on improving operations. This has resulted in a higher level of efficient manufacturing execution particularly at our PGT and CGI facilities. The improvement in manufacturing operations helped drive the increasing gross margin for the second quarter of 2017 which came in at 32.4% compared to last year’s second quarter gross margin of 31.5%, an increase of nearly 1 full percentage point. This increasing gross margin was achieved despite the impact of increasing depreciation expense of 40 basis points on this metric. Our increasing level of investment manufacturing technology has helped improve our execution in efficiency, but has also resulted in a higher level of noncash depreciation expense.

We also focused on our customers, striving to improve in every aspect of customer service and satisfaction, including shortening our lead times compared to last year and delivering better quality products. Despite strong growth in both quarter over quarter sale and orders, our backlog remained flat year over year and at a healthy $61 million at the end of the second quarter. This is a result of a decrease in our lead times due to our improved execution which enabled us to get our products to our customers at a faster pace. From a market perspective, homebuilder confidence continues at a historic high and interest rates low. We believe that more buyers were in the market in the second half of 2017 and the housing market will continue to strengthen albeit at a slower pace than last year.

We mentioned last quarter that in response to solid demand for a mass vinyl impact products, we installed two new thermal plastic spacer systems, an innovative and cutting edge technology for producing better higher quality insulated glass units. Both TPS systems are fully operational and we're pleased with the result. As we planned, this new technology is helping us improve our overall insulated glass quality. Improvements in glass quality help us reduce our scrap rates which benefited our gross margins in the second quarter of 2017. On a final note, the construction of our new lease facility in Miami is progressing.

We expect this new facility in our core southeast Florida market will enable us to increase our manufacturing capabilities and enhance our operational efficiencies by combining selected parts of our production, distribution and marketing efforts across all of our brands and we're very excited about the opportunities this presents to us. We remain on track to open this facility in early 2018. Now, I'd like to turn the call over to Brad to discuss financial results for the second quarter in more detail. Brad?

Brad West: Thank you, Jeff. We reported sales for the second quarter of 2017 of 137.4 million, an increase of 15% over the second quarter of last year.

On slide 7, we give you a breakout of net sales for the second quarter. Our growth continues to be fueled by our impact products, which grew 18%. This growth came from sales of our Vinyl impact products, which had solid growth of 27% compared to the second quarter of last year, driven by solid demand for our Vinyl WinGuard products. Our aluminum impact products provided growth and impact product sales as well, increasing 15% on a quarter-over-quarter basis, driven by an increase in sales of our aluminum WinGuard products. Non-impact product sales grew in the second quarter compared to prior year as well.

Now, please turn to slide 8 and I'll briefly cover a few income statement items. Gross margin dollars increased 7.1 million or 19% over the second quarter of 2016. Our gross margin of 32.4% increased 90 basis points versus the second quarter of last year. Gross margin in the second quarter of 2017 compared to last year benefited from the leverage of higher volume and a shift in mix of sales to higher margin repair and remodeling markets and an increase in sales of our higher margin WinGuard products. Gross margin also benefited from improvements in scrap and production efficiencies.

These gross margin increases were partly offset by the impact of high depreciation on higher capital spending. With regards to aluminum, we saw a meaningful increase in the per pound cash of aluminum since the beginning of the year, from the $0.87 per pound at the start of the year to $0.99 per pound at the end of the first quarter. During the second quarter of 2017, the price per pound decreased slightly to $0.97 at the end of the quarter. To counter the effective change in aluminum prices, we have an active program to stabilize our pricing through forward contracts with our major aluminum material vendors that fixes our pricing for portions of our aluminum needs. As of today, we are covered for approximately 71% of our estimated needs during the remainder of 2017 at an average delivered price of $0.91 per pound.

We have also begun to cover our needs for 2018 and have entered into forward contracts for coverage during 2018 and as of today, covers were approximately 20% of our estimated needs for the first half of 2018 at an average delivered price of $0.97 per pound, which approximates to the cash price as of today. These delivered prices per pound include components for the LME and Midwest premium, but exclude conversion costs. Selling, general and administrative expenses, as a percent of sales, in the second quarter 2017 finished at 17.9% compared to 17.3% in last year’s second quarter. The increase was driven by higher personnel related costs, including higher incentive compensation costs due to the strong 2017 second quarter results. Interest expense in the second quarter was 4.6 million, a decrease of 714,000 compared to the second quarter 2016.

The decrease in interest expense was due primarily to the repricing of the 2016 credit facility, which we executed in the middle of February of this year. On July 7, 2017, we made a voluntary prepayment of $12 million of borrowings under the term loan portion of the 2016 credit agreement. This prepayment was made with cash generated from operations. We estimate that as a result of this prepayment, we accelerated the amortization of deferred lenders’ fees and discounted approximately $600,000, which will be included as an additional non-cash interest expense in our 2017 third quarter results. Depreciation and amortization recorded in the second quarter of 2017 was 4.7 million compared to 4.0 million in the second quarter of last year.

Consistent with our expectations, second quarter depreciation and amortization expense was higher due to higher depreciation from increased capital spending. Our tax expense in the second quarter was $5.1 million and represents an effective income tax rate of 33.1%. This compares to 4.2 million and 36.5% in the second quarter of last year. Tax expense in the second quarter of 2017 has been reduced by 407,000 due to excess tax benefits. And excluding these benefits, our effective tax rate in the second quarter 2017 would have been 35.8%.

Going forward we expect to record tax expense at effective rate of approximately 36%. Also from a cash perspective, our year-end 2016 estimate of our tax effected federal operating loss carryforwards is approximately 1.2 million left over from the CGI acquisition and we expect to use that in 2017. We recorded net income in the second quarter of 10.3 million or $0.20 per diluted share versus 7.4 million or $0.15 per diluted share in the second quarter of 2016, 33% increase in net income per diluted share. EBITDA was 24.6 million for the second quarter 2017 or 17.9% of 2017 second quarter sales compared to EBITDA of 20.8 million for the second quarter of 2016 or 17.5% of sales, an increase of 40 basis points. A reconciliation of our non-GAAP financial measures to the GAAP equivalent has been included in our earnings release for your reference.

Now please turn to Slide 9 for discussion of balance sheet items. We ended the second quarter with a cash balance at 50.3 million, up $11 million from end of the year and also $11 million up from the end of the first quarter. We also funded 3.2 million of capital spending in the second quarter, all funded by cash from operations. As I mentioned previously, on July 7, we used $12 million of cash on hand to voluntarily prepay volumes on the term loan portion of our 2016 credit agreement. In the future we may continue to make voluntary prepayments of term loan borrowings as liquidity permits.

Our net leverage was 2.6 times at the end of the second quarter of 2017 and that has decreased from our post WinDoor acquisition net leverage of 3.4 times. We believe we continue to have a strong balance sheet with the ability to make further investments and future needs. Let’s take a moment to discuss our 2017 outlook. Please turn to Slide 10. We expect that solid second half as repair and remodeling demand continues to be steady and single-family housing starts continue to track towards our estimate of 85,000 for the year, with the higher growth in new construction in current and home with lower opening price points than we saw last year.

We produced strong free cash flow during the second quarter of 2017 from which we elected to make the $12 million voluntary prepayment of term loan borrowings. We estimate that this voluntary prepayment will save us approximately $3 million in debt service cost over the life of the facility, including approximately 360,000 during the remainder of 2017. Regarding depreciation and amortization, over the last three years, we have been making significant capital investments to increase and modernize our manufacturing capabilities and capacity including glass plant facility in several new grass lines including our two new Thermal Plastic Spacer system line. We have also acquired amortizable intangible assets as part of the acquisitions we have completed. As a result, we estimate the depreciation and amortization expense will be approximately $90 million in 2017, an increase of more than 3 million from 2016.

Combined with the solid first half of 2017, we anticipate ending the year towards the high-end of the ranges for consolidated sales and EBITDA we've previously provided which are sales of 490 to 500 million and EBITDA of 83 to 87 million. At this time we would like to turn the call over to the conference operator to begin the Q&A portion. Esra questions please.

Operator: [Operator Instructions] Our first question comes from the line of Bob Wetenhall from RBC Capital. Your line is now open.

Bob Wetenhall: This is clearly your best quarter since you became a public company. In the last few years, the execution is outstanding, so congratulations to everybody. It’s speaks to a lot of hard work organizationally. I was hoping you could spend a minute and talk about what’s changed to put you in this position, where everything is coming together. And I'm really asking from an operational standpoint what are the key drivers of the improved financial performance not just for the quarter but year to date.

And what's giving you confidence that you'll be in the high end of the range, it looks like your turn on backlog conversion is accelerated as well. What's giving you this confidence to say that your guidance range is intact and you're going to finish the year at the high end of it.

Rod Hershberger: First, thanks for the comments, Bob. We were pleased with the quarter as well. It's an accumulation of a lot of different initiatives we pulled together in an execution.

From an operational standpoint, I think if you look at what's impacted us in the past, it’s trying to keep our supply chain flowing to production with average compound growth rate of over 25%. Unfortunately, that doesn't come evenly. We've had some quarters, its way more and some quarters, its way less. But we have to prepare for it nonetheless and I think we've been able to align the supply chain or value chain if you will better to the end market. From a glass flow perspective at PGT, the glass plant is operating exceptionally well.

Glass suppliers to CGI, our third-party there, they’re operating extremely well. Demand for the CGI product and leverage there, fixed cost leverage there went great, because demand for that product is high in that market. The increase in our vinyl production capability to meet demand, we've been trying to chase that. It was an incredible product launch, very well received in the marketplace and we've been trying to catch capacity on that line ever since we launched it. We finally are getting to the point where we're seeing that enable to keep up with custom customer demand, which again is just better flow for the plant and better execution operationally and helps drive better margins.

In terms of the back half of the year, July started out okay. I'd say July was up at 5%, 4% to 5%. And so that gives us good confidence from what we see order wise into August already. August is pretty much, from an order standpoint, filling up very nicely, to say we’ll end at the high end of our range and hopefully that'll be conservative.

Jeff Jackson: Hey, Bob, I’d just add that that the performance that we're seeing out of the brands, especially PGT and CGI and we're starting to see it out of WinDoor really is a result of a lot of focus of our leadership.

When you acquire new companies, it is a little bit unsettling for the employees and it takes a little bit of time for things to settle back in and we saw that even though CGI had been sold before, there was still a little bit of, I think queasiness in the stomach about what's going to happen now that we're part of PGT and PGTI and so it took a little bit of time for that to settle. We saw the same thing at WinDoor and because we had to move some people around, we put some focus on CGI and WinDoor, you tend to lose a little bit of focus here. So we've brought in a number of new people that we've announced in the past and now things have settled down a little bit and folks are performing at an extremely high level, higher level than I've ever seen them perform before here and we talked about it in previous calls, but now you're actually seeing the results and I think when you start seeing those types of results and you think about the long standing reputation of PGT, it used to be PGT windows and doors, now it's PGT Innovations, some of that reputation, it's not completely there, but it's coming back and that gives us confidence for the back half of the year that when we perform like we're capable of performing, sales is usually not a terrible hard thing to grab and to drive, but we have to make sure that we're keeping performing and we're confident that the focus that's in place now and the people that are in place now will continue driving that and we’ll continue performing and our customers will see the difference and the market will see the difference as we go forward.

Rod Hershberger: And I’d add one other thing to that, Bob, I've repeatedly said labor has been an issue and a challenge for us. While it still is a challenge for building products in general, in the industry, I think what we've seen at PGT and CGI, it's kind of a stabilization and we're starting to build some tenure.

So those trained employees we talked about over the last 12 to 18 months that kind of trained up manufacturing production ready employee, we're really starting to see the benefit of that. Our retention has improved, our safety metrics is, there is lot of safety programs new leadership is putting to place. That's really helping to drive an overall better atmosphere. So all of that accumulates into better savings for the gross margin.

Bob Wetenhall: It's a tremendous quarter.

Can you talk about price realization? You had mentioned 3% to 7% and the relationship between pricing versus what you're seeing on the input cost inflation, you obviously have massive gross margin improvement of 100 basis points. Can you give us a little more detail in what's driving this large uptick in profitability and whether it's sustainable?

Rod Hershberger: Bob, we did announce that price increase earlier in the year and we have seen a realization as we kind of expected which would be probably around 2% to 3% to net of 3%. The thing also we’ve seen this year though is like I mentioned in the script comments, the aluminum price has gone up, we've also seen our raw glass cost go up this year and then also we've had an increase in our wages specifically at our PGT facility. So the reason why I didn't specifically call anything is because I think those things are kind of offsetting each other to about even. So really what kind of drove our margin improvement year-over-year is the scrap and efficiencies and labor improvements that we've seen particularly at PGT and CGI as well as the improvement in mix, we did have a stronger [indiscernible] then we saw a year ago relative to new construction.

Bob Wetenhall: And how should we think about just kind of a combo question, SG&A during the balance of the year, you mentioned some new leadership and a change in suppliers. I'm just trying to get some more granularity on that. And I think Jeff had called out the scheduled opening of a new plant in Miami in the first quarter of 2018 and just kind of how that plays into your focus on profitable growth heading into next year.

Rod Hershberger: As it relates to SG&A for the balance of this year, I think we're still on track to what we basically said in that is we’re going to see dollar growth consistent with sales growth to the tune of about 15% variable and then you have kind of additional item and that is our incentive accruals this year are going to pay out and we’re accruing to payout a really nice bonus for our folks, especially given the second quarter which was a very strong quarter for us and last year we didn't have the same degree. We're expecting that from an annual basis to potentially add about $4 million to our SG&A line.

Jeff Jackson: I’ll add in some thoughts on the plan, it's really kind of too early to tell, I would say at best moving into a bigger facilities at 300 - roughly 330,000 square feet versus what we have today that we're full, which is approximately 160,000 square feet or so between two different - three different locations. Just the savings to getting everything under one roof, there's also a benefit, we're going to, as I mentioned to you earlier we're going to probably transfer some aluminum production down there to the Miami area to take advantage of that labor market, which is very robust. That will also save in transportation distribution costs, all that still needs to be figured in but in terms of the overall I guess cost impact of the plant if anything it will be neutral if not - definitely long term positive as we consolidate production line savings on transportation and are able to tap a much more robust labor market. And then obviously that will allow us to free up more vinyl production capacity here which is growing at 30% plus clips a quarter.

Bob Wetenhall: You're making all this money, you're voluntarily repaying your debt, are you at the optimal leverage for PGTI at this point in the cycle and what your expectations for M&A.

Congratulations and good luck, what a fantastic quarter, very nicely done.

Rod Hershberger: Thanks a lot. Optimal leverage, I mean we can leverage up more you know we've been leveraged higher in the past. Obviously you guys know that. So in terms of leverage I think we've got plenty of flexibility, plenty of liquidity.

In terms of M&A, for the third quarter we're still concentrating on operations. We've got a lot going on here at PGT, WinDoor is coming around nicely, but like I said in the call, we've changed out leadership there as of this quarter, beginning in the last quarter - beginning of this quarter. So we've got a lot of change in leadership, processes, production going on at the WinDoor facility. We've actually changed suppliers or increased our supplier bandwidth I guess I should say in that facility because I mean WinDoor just had repeated reliability issues with some key glass supplier, which really created some instability within the organization, we’ve addressed that. So we've got a lot in hopper already in third quarter we're executing on.

Obviously sales volume is still going to be there. M&A, we're always looking and listening, but I wouldn’t expect to see anything till the very end of this year, probably beginning of next year before we would start taking M&A.

Brad West: One of the things we've talked about in the past is making sure that we had our brand strategy correct and putting all three brands under one corporate umbrella and making sure that the market and our customers understood what each brand was doing and I think we've done a great job. Our folks have really done a good job of marketing that and making sure that our customers understand and if you've seen our booth at some of the shows, you understand what we're doing. What we haven't done yet and we've got a pretty good roadmap in front of us is making sure that we're looking at the products and fitting the products at the right company, the right style, the right type and so you've seen some pretty massive product launches from us over the years.

So I think everyone's aware that we're pretty good and pretty quick at developing product and working product and we've still got a roadmap ahead of us with what we need to do with product. So strategically, that would be one of our next focuses is making sure the products match up with the brands that we have.

Operator: Thank you. And our next question comes from the line of Sam Darkatsh from Raymond James. Your line is now open.

Sam Darkatsh: Just wanted to piggyback a couple of questions here and also before I forget the terrific job this quarter, it was wonderful to see. Your guidance and I'm sure there's a fair amount of conservatize attached to it, but your guidance suggests that in the back half of this year, your quarterly sales rate in dollars is going to be less than that of Q2, yet, your quarterly margin rate will be above that of Q2. And just maybe as an overly simplistic question, but how, where is the elevation of the margin improvement sequentially in the back first versus the second quarter despite the lower volumes.

Brad West: Well, basically, it stems from two things, Sam. The first one is the improvements we’re making at WinDoor, which is obviously our highest margin from a contribution margin standpoint brand.

We expect to see sequential improvement in Q3 compared to Q2 at WinDoor, which will help drive better margins. And then also, there's the general operational improvements that we've been seeing at PGT and CGI have been gradual as the years gone to the point where April was better than March and then May was better than April and we continue to see that trend improve. The last thing I would add is we did have kind of, as you remember, in our SG&A line, we had our one time customer event in the second quarter, which won't repeat in Q3 and Q4. So I think those are the factors that can drive that margin improvement. In terms of the second quarter’s sales growth or I’m sorry third quarter sales growth rate being a little bit lower than second quarter, we’ve seen some weather in Florida that’s kind of maybe put a little bit of a hamper on new construction growth and I just dealt with that, like we mentioned, July, as we're closing the books, we’ll be about 4% to 5% above prior year.

Prior year was a tough comp. If you remember, our third quarter last year was quite strong as we caught up on some of the backlog we generated in the second quarter.

Sam Darkatsh: And my last question adding the capacity next year in Miami, the long term merits of the action are obvious and well needed. I'm more interested in what safeguards or learnings have you had in adding prior capacity whereby you can either prevent or inhibit some fixed cost under absorption near term as the capacity comes online?

Rod Hershberger: I guess some quick thoughts on that, Sam. You always learn from the various moves we've done, whether it's North Carolina consolidation to the glass plant build out.

And the last 18 months, we've been restructuring PGT, the plant we're in today in terms of production. I would say, the negotiation part of the lease also helped, we got, I think, it's 11 months of quote free rent negotiated into the package. That will help offset some fixed cost if you will. Obviously, that’s amortized I think over the lease, but it's still 11 months of free rent. And we're going to move timing wise during what is seasonally slower business for us, beginning of January.

January is usually our -- probably our slowest month in the year. So we're trying to time it around our slowest month of the year to be in a good spot for the second quarter, which obviously is one of our busiest quarter. So I think timing, I think some negotiations, I think proximity to the new location is only 10 miles or so approximately from the current location. I think that will help, we're not moving across state here. Several things we've got in play that will make it…

Rod Hershberger: And if you just think about right now, we don't have room in our facility in Miami to store aluminum.

So if we store aluminum a block or two away and cut it and put it on a truck and haul it over to the plant so we can assemble it. You just think about some of the inefficiencies and damages and dealing with Miami traffic, hauling product through the streets to get it to the main plant. All of a sudden you put everything under one roof in a really nice facility that's very attractive, employees are a little prouder to go to work and things go a lot smoother. You start working through some of those inefficiencies really quickly and driving some additional margin.

Operator: Thank you.

And our next question comes from the line of Keith Hughes from SunTrust. Your line is now open.

Keith Hughes: Just a litter on the quarter, can you talk about the cadence of the quarter in terms of orders and is there any changes with a pre-buy due to pricing or just a large order that came in or anything along those lines?

Rod Hershberger: Year-over-year the growth was actually accelerated as the quarter went, June was the higher year-on-year than April. But I don't think that was necessarily reflection of orders for this year because we saw a pretty strong consistent order improvement beginning in about March after a relatively slow start especially to the new construction site. I think that's really Keith, a more reflection of some of those challenges we saw at the end of the second quarter last year when we started having some issues with the glass supply.

So I think that's really what drove that. But we've had strong order growth I think [indiscernible].

Jeff Jackson: I think Keith, also that's reflected in the backlog. I’d mention you know there is 61 million despite our lead times coming down, nearly three weeks we decreased our lead times, dropped in by three weeks on average across multiple products. So we're making products quicker and the backlog is staying healthy.

So it's just really a consistent - pretty consistent order flow.

Keith Hughes: And the margins in the quarter you had really nice gross margins, SG&A was elevated, was that due to the WinDoor issues you described or where there other factors in place?

Rod Hershberger: Some of that absolutely is leveraged to the WinDoor sales but from an SG&A perspective we are also catching up some of those incentive accruals I was talking about since it was such a strong quarter.

Keith Hughes: And final question on that as we look at this margins in the second half of the year. Will we see a similar pattern to the second quarter with higher gross but also higher SG&A or how will that play out?

Rod Hershberger: Yes Keith, I think you will see that. Again, we've been kind of talking about from an EBITDA perspective you know striving for that 50 bps year-over-year improvement.

I think what drives a lot of the variability for us would just be the total amount of sales that we out of WinDoor like I mentioned we're going to get some sequential improvement, but how much is the question. And obviously the more they get out in Q3, the better leverage you will get both in gross margin and SG&A.

Operator: Thank you. [Operator Instructions] And our next question comes from the line of Jeremy Hamblin from Dougherty & Company. Your line is now open.

Jeremy Hamblin: Good morning guys, I'll add my congratulations on some really strong results. I wanted to just come back Brad if I might to the guidance here and I don't think that you gave any color necessarily on Q3. And obviously you had a strong record with quarterly sales in Q2, should we be thinking that Q3 on a kind of an absolute dollar basis normally would be a little bit better than your Q2. Given the strength of Q2, should we be thinking sequentially it's going to be down slightly? How can we think about that?

Rod Hershberger: Well, I think the best kind of information I can give to that, Jeremy, is mentioning what we said about [indiscernible] which finished between 4% and 5% up over the year. Last year was a unique situation for us where we saw some sales in the third quarter that normally would have shipped in the second and we're not seeing that this year.

But at this point I don't really want to say anything beyond this [indiscernible] is going to finish about 4% to 5% over prior year.

Jeremy Hamblin: Just you know honing in on that full-year guidance a little more because I think for the second half of the year, the implied sales growth even at the 500 million, the high end of your range is about 2.5%, you grew at it 14% in the first half of the year and obviously some of that is a slight benefit from the transaction and having a full quarter in Q1. But the interesting thing is your EBITDA grew 11% in the first half of the year and your guidance implies a back half of the year EBITDA growth of about 17.5% versus that 2.5%. So in terms of thinking about where we're going to see that margin improvement, is it more likely to see margin improvement on the gross margin line item or as you mentioned, because you had a customer event, which I think was at about $600,000 or $700,000 in Q2?

Brad West: Right.

Jeremy Hamblin: Okay.

And then are we going to just see a little bit more maybe leverage on SG&A?

Brad West: I actually think, yeah, Jeremy, actually I think it will probably more likely show up in gross margin and again I think what's going to happen is you're going to see some WinDoor improvement sequentially and that helps both categories, but it helps gross margin a good bit. And then also, there is just some disciplines that we’re working on we're -- as we're growing in operations and improvement, we’re going to have a better operations situation in the back half than the first half. So I mean, the top end of the range, as Jeff mentioned earlier, hopefully, that will end up being conservative, but also we're striving towards a number that we put up at the beginning of the year and we’re marching and doing pretty well towards that goal and we're very happy with where we’re at this point of the year. Again when you look at just sales, particularly, last year was somewhat unique in how third quarter was so much stronger than Q2.

Jeremy Hamblin: Understood and absolutely driving towards those good numbers.

Just following up on the WinDoor for a second. So it sounds like, have you changed suppliers entirely or you're just using multiple suppliers now and that's -- because it sounded like there's some issues with that brand in Q2, but it sounds like the improvement, we're going to feel pretty quickly here, in Q3 and beyond. Am I interpreting that right and I know last quarter, you gave a WinDoor sales number. What was it in Q2?

Rod Hershberger: Well, first, I'll talk about the supplier. We actually, for Q3, we've actually just added to that band of suppliers or if you will the bench strength of our suppliers.

Just so when there is an issue, we have other people to test and hopefully fill those. Brad, do you want to?

Brad West: Yeah. We gave the number in Q1, just because it was the last quarter of acquisition. We generally don't give specific numbers once we get past that point. But I can say that PGT and CGI have seen more year-over-year improvement and WinDoor is, we're still making the operational improvements there to see some of that more in the back half than we saw in the first half.

Rod Hershberger: But I will also say from an order flow standpoint that it's strong. We're very pleased with order flow from WinDoor. We just have to operationally execute and get it out to our customer in a timely manner. That's where all our resources are now focused on, starting with supply chain all the way to delivery.

Jeremy Hamblin: Okay.

And so, right, because WinDoor generates a little bit higher margin. So it sounds like that’s seen improvement as part of the confidence for the margin improvement in the back half of the year. Is that right?

Brad West: It’s definitely a factor in that. Yes.

Jeremy Hamblin: Okay.

And then one last follow-up here on the new facility. It sounds exciting in Miami and obviously there has been some challenges with changes made in production in the past. In terms of thinking about the implications of having that plant next year, is it going to be more geared towards, this is going to help us generate higher sales levels because we think we can produce better product or is this more about we're going to be more efficient in having this plant and we should expect more margin expansion next year because of having this plant and is that more geared, is that going to take some time to ramp and maybe we shouldn’t expect as much in the first half and more in the second?

Brad West: I couldn’t have almost said it better myself. I think, thank you, you laid it out pretty nicely, Jeremy. We're going to have more sales because again we're bumping up against literally capacity right now, because the buildings are full.

So it will allow us to actually increase our sales volume. From an efficiency standpoint, Rod has already pointed out, we have our experienced store at one facility, which we have to cut, ship over. We have glass out in the parking lot, literally we still have in the parking lot of the current facility. All that will create more efficiency and also reductions in scarp and material costs, so which will impact margins. And keep in mind we're not - currently we're not going to add any new equipment or new lines like a TPS line which you have to go through training and start up and technical challenges we're testing.

We're going to move existing equipment. Now I'm not saying there's not problems in moving existing equipment, but we're not bringing in stuff that we haven't really had before. So I think there's an inherent less risk in moving equipment you've had before and you're familiar with. Couple all that, it is a move and I don't think I think margins will build up more positive over time and I do not expect that to happen obviously January, February, March during the move process, but I would be - I would think by the second half of next year you'll see the margin benefit of this move.

Operator: Thank you.

And our next question comes from the line of Min Cho from FBR & Company. Your line is now open.

Min Cho: Just a few more questions here, I know last quarter we talked a lot about the luxury market and the demand there, I was wondering if you could provide any type of update this quarter?

Rod Hershberger: Yeah I would say the demand from a new construction standpoint, we're seeing it more in the lower end of the housing markets. So it's still growing but not as much as the lower end. Like I’d mentioned earlier our order volume in WinDoor is strong.

We're very pleased with the top end of the business, now we're just concentrating on the front of the business to get the stuff out. We don't see any change necessarily in that market at this point, is still stable and continues to be growing at a steady pace.

Min Cho: And can you talk about the success, I guess the success that you're having so far with diversifying outside of Florida and I know a lot of that is based on kind of the WinDoor product, but if you could just talk about the demand and what you're seeing outside of Florida right now.

Rod Hershberger: I mean we're still - what was our percentage of sales, we're still 90% Florida sales and probably 5% now and 5% outside of the state if I had to guess, [indiscernible] detail of that. So we hadn’t really concentrated our entire resources on execution outside the state yet.

We’ve established some strong broker networks, we have some great partners that are pushing both - all three brands actually, they're pushing all three of our PGT, CGI and WinDoor brands. As we get the operational flow at WinDoor, what we're going to do from an innovation standpoint is introduce new products that will be geared to the out of state market. And that will happen in 2018, we’ll come out with WinDoor that we think we know will fit nicely in the outer state market and we can leverage that. But right now I’d say steady out of state growth, nothing that we've concentrated strategically on resource wise at this point.

Jeff Jackson: And when I talked earlier about the management team really focusing on what we do well, what we do, what we know we do really well is the impact market, the Florida market, knowing our customer extremely well and we're really focused on that.

And it's not that we weren't paying any attention to the out of state market, we are. But not the same kind of focus and attention that we had in state and you can see from the results that it's worked really well. So we'll get that. I'm confident we'll get that same kind of result out of state when we're able to really kind of put behind this what we went through over the last couple of years and focus on the out of state.

Rod Hershberger: The other thing we did do and I’m going to make sure I highlight is, the end of last year we bought our expanding, our commercial line of business by buying one of our kind of partners in the storefront arena.

That's been going very well. Sales last year were approximately $10 million in that that area, it will be close to 15 this year. I know it was small number as relative to you know a first half of 250 million. But every little win within the Florida market we think counts. And so that's an area kind of the light commercial area that you may see us expand on product wise whether its acquiring a little product brand from someone or developing internally because that little niche business is going well also.

Min Cho: And all that light commercial is in Florida right now?

Rod Hershberger: Yes, the majority, yes.

Operator: Thank you. And our next question comes from the line of Ken Zener from KeyBanc Capital Markets. Your line is now open.

Ken Zener: Your comment on the thermal spacer, kind of new line there, I found that interesting.

Could you expand on that? Is that the automated thermal spacer machines that are kind of coming out now and entering the market and reducing labor intensity?

Rod Hershberger: There's various benefits we've achieved by converting to what we call TPS, thermal plastic spacer. There's not a lot in the US right now. This is very highly used in the European markets, but we did it more for the, there was sheer weight of an impact unit can cause shifting of that spacer, put pressure on that spacer over time and it creates what we call IG, insulated glass failures and the boom of the IG market, I’ll take you back, in 2006, our IG sales were probably 10%. Now, they’re what, 70. So IG is really in it into the Florida market heavily.

And so you get experience with your impact product with an IQ unit over that time and what we saw was an increase in failures because of that shift in that spacer and I'm getting too technical, but so we went to the TPS system because we felt that was a spacer system that could handle the loads of the windows that we produce and also from a labor standpoint, it's actually probably a little bit more efficient in terms of its actual throughput.

Ken Zener: Okay. And then you obviously talked about the gross margin success you had, you had scrapped RNR, there's definitely some offsets. But if RNR is, it sounds like it’s improving versus last year, first and second, while new, there is growing the mix as kind of against you a little bit. I don’t know if you guys are able to kind of quantify this, but like for like, how much is that RNR mix helping you guys on that gross margin? I mean, is that 50 bps just because you’re selling the higher end RNR and might that be a tailwind for you guys?

Rod Hershberger: Yeah.

It’s mix of all probably was about 30 bps improvement for us, Ken. Some of that is the RNR growth, but by the same token, you also saw WinDoor’s growth not as much as PGT. So I look at mix in total, it’s about 30 bps overall, but we certainly got a little bit of a benefit from RNR being faster than new construction this year.

Operator: I am not showing any further questions at this time. I would now like to turn the call back over to Brad West for any closing remarks.

Brad West: Well, thanks for your time today. We’re certainly available for any more questions and look forward to talking to everyone next quarter. Thank you.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.

Everyone, have a nice day.