Oct 31, 2013
Executives
Brad West – Vice President and Controller Rodney Hershberger – President and Chief Executive Officer Jeffrey T. Jackson – Executive Vice President and Chief Financial Officer
Analysts
Joshua K. Wilson – Raymond James & Associates, Inc.
Steve L. Dyer – Craig-Hallum Capital Group LLC Michael G.
Dahl – Credit Suisse Securities (USA) LLC Desi DiPierro – RBC Capital Markets LLC Jeremy Hamblin – Dougherty & Co. LLC
Operator
Good day, ladies and gentlemen, and welcome to the PGT, Inc. Third Quarter 2013 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.
(Operator Instructions) As a reminder, today’s conference is being recorded. I would now like to turn the call over to Brad West, Vice President and Controller.
Please go ahead, sir.
Brad West
Thank you. Good morning, everyone, and welcome to PGT's quarterly investor conference call.
We are pleased to provide an update on our third quarter results and discuss the progress we are making in 2013. Hopefully, everyone has had a chance to review our earnings release issued yesterday.
Before we begin, let me remind everyone that today's conference call may contain statements concerning the company's future prospects, business strategies, and market outlook. Such statements are considered to be forward-looking and these statements do not relate strictly to historical or current facts, rather they are based on 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 our 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.pgtindustries.com.
Included in the press release, are the unaudited consolidated balance sheets and statements of income prepared in accordance with GAAP and adjusted information, which was quantitatively reconciled to GAAP. Our company uses non-GAAP measurements as key metrics for evaluating performance internally.
A detailed explanation of these non-GAAP measurements can be found in our press release, which was included as an exhibit to our Form 8-K filed October 30 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 Hershberger, our President and CEO; and Jeff Jackson, our Executive Vice President and CFO, will provide an overview of our performance for the third quarter.
After their prepared remarks, we will have ample time to address any questions that you may have. With that, let me turn the call over to Rod.
Rodney Hershberger
Thanks Brad. Good morning, everyone.
During the third quarter, we delivered our highest quarterly sales since the first quarter of 2007, at $64.9 million, up 45% over our third quarter of 2012. Our sales growth continues to be driven by a combination of improving market conditions in Florida and market share gains driven by our marketing programs focused on both consumers and dealers, which targeted our WinGuard products.
As a reminder, approximately three years ago, we changed our strategic focus to concentrate our resources in our core market of Florida. That change in strategy continues to payoff.
Macroeconomic conditions have significantly improved during 2013, as credit is becoming more available, unemployment continues to improve and housing market in Florida is getting stronger with reductions in inventory and increases in both media and housing prices and single-family housing starts. As a result, sales increased in both our repair and remodel and new construction markets.
Repair and remodel sales were up 40% over the third quarter of 2012, while new construction sales increased 58% over the same period. Impact sales grew 47% over the third quarter of 2012 and represented 78% of total sales.
In addition, sales of non-impact products grew 38% over prior year. During the quarter, aluminum products represented 69% of total sales and grew 44% over prior year.
Our vinyl products represented 31% of sales and grew 48%. The highlight within our sales growth is our vinyl WinGuard products, which grew 65% over the third quarter of last year.
We expect vinyl to continue to gain traction in our core markets and we continue to invest in our already strong line of products to serve this growing segment. Net income was $6.3 million and adjusted net income was $6.4 million, compared to net income of $2.7 million a year ago.
The improved financial performance is the result of the efforts and dedication of our employees who work diligently to keep pace with the growing demand for our products as well as strategic initiatives in place to capitalize on improving economic conditions and take market share in our core market. Adjusted EBITDA was $10.2 million or 15.8% of sales.
This is a $3.5 million or 52.6% increase over the third quarter of 2012 EBITDA. Adjusted EBITDA for the first nine months of 2013 was $28.3 million, an increase of $10.4 million, a result of increased sales and operating leverage on our fixed costs.
Gross margin dollars increased $5.7 million to $20.9 million over the third quarter of 2012. This increase was driven by strong revenue growth and improved operating leverage.
As a result of the increasing demand for our products, we have been consistently hiring new employees since the beginning of the year, bringing our total headcount to 1,410 at the end of September up close to 400 employees since the first of the year. Let me remind you that in 2011, during our plant consolidation, we hired and trained approximately 400 employees causing excess overtime and material usage as we went through the training process.
This year, due to explosive top line growth, we are experiencing some of those same issues, which negatively impact gross margin. We can assure you that just like 2011, we put in measures to address those issues and stabilize the operations at the levels we have historically performed.
Although margins were negatively impacted by our rapid growth, SG&A cost as a percent of sales had dropped substantially due to strong leverage. These costs declined from 25.9% in the third quarter of 2012 to 20.8% for the third quarter of 2013.
Also SG&A cost declined from 27.2% for the first nine months of 2012, to 22.1% year-to-date in 2013, after adjusting for costs associated with the secondary offering, related debt refinanced and the gain on the sale of the Salisbury facility. Some highlights for the third quarter of 2013 include; WinGuard product sales were up 46% from the prior year, driving our sales increase.
Selling, general and administrative costs were 20.8% of sales, a decrease of 5.1%; net income of $6.3 million or $0.13 per diluted share and adjusted EBITDA of $10.2 million, up $3.5 million or 52.6% versus prior year. I am thankful for the hard work of our employees, both new and tenured, who delivered on our value proposition, which help to drive the positive financial results in the quarter.
I am also confident that we have the skills and talents to improve our operational performance as we drive top line sales. With that, I will turn the call over to Jeff, who will review the results for the quarter in greater detail.
Jeffrey T. Jackson
Thank you, Rod. We continue to achieve strong top line sales up 45% in our third quarter and adjusted EBITDA up 52.6% over prior year.
This marks four straight quarter of substantial year-over-year top line growth, bringing our 2013 year-to-date sales increase to 37.1% and adjusted EBITDA increase to 58.5%. The 45% sales growth during the quarter generated 37.3% increase in our gross margin dollars.
We also leveraged revenue growth during the quarter by reducing selling, general and administrative expenses as a percent of sales to 20.8% compared to 25.9% in the third quarter of 2012. Our $10.2 million in adjusted EBITDA represents 15.8% of sales and brings our year-to-date adjusted EBITDA to $28.3 million.
Our quarter ending cash balance was $23.7 million after paying $1.7 million for land in connection with the expansion of our glass facility. As Rod mentioned and as you may have learnt from our earnings release, we reported net sales of $64.9 million for the third quarter 2013.
Breaking down our sales drivers for the third quarter compared to 2012’s third quarter; we have WinGuard sales of $47.1 million versus $32.4 million, an increase of $14.7 million or 45.3%; vinyl non-impact sales of $8.3 million versus $6 million, up 38.3% over prior year; aluminum non-impact sales of $6.3 million versus $4.4 million, up 43.2%; architectural Systems sales of $1.6 million versus $600,000, an increase of $1 million; and PremierVue sales of $1.6 million versus $1.3 million, up $300,000. Gross margin dollars increased $5.7 million to $20.9 million for the third quarter of 2013.
However, as a percent of sales, gross margin was 32.3% versus 34.1% in the third quarter of 2012. Our decrease in gross margin as a percent of sales of approximately 1.8% was driven by temporary inefficiencies as a result of hiring 575 new employees over the last six months to meet our increasing demand for our products, which negatively impacted margins by 280 basis points.
The cost of purchasing laminated glass units from the outside suppliers, negatively impacted margins by 200 basis points and the impact of a mix shift towards vinyl and new construction, which reduced margins by approximately 90 basis points. These factors were offset by leveraging our fixed costs on higher sales of 360 basis points and reduced cost of aluminum of 30 basis points.
Our efforts are focused on hiring the right employees, effectively training newly hired employees and retaining our employees to leverage the skills that they develop. As you might have seen in our Form 8-K issued in August, we are addressing our internal capacities for glass production to reduce our reliance on outside – outsourced finished glass by constructing an additional glass plant.
The expansion will initially include the cutting and tempering processes and allow us to produce more finished units in-house. During August, we purchased 12 acres of land neighboring our existing campus for $1.7 million and expect operations to commence in our new facility by the end of our third quarter of 2014.
The construction cost of the additional facility has been structured to minimize interruption as well as current glass fabrication operations. We estimate this initiative will improve our gross margin by approximately 2%.
Our average cost of aluminium was approximately $0.85 per pound during the third quarter, comprised of spot purchases averaging $0.81 per pound for approximately 60% of our needs and hedged purchases averaging $0.92 per pound for 40% of our needs. This compares to 2012 third quarter weighted average of $0.92 per pound.
As of the day, we are hedged approximately 41% of our estimated needs through the second quarter of 2015 at an average cost of $0.90 per pound. the cash price as of today is $0.84 per pound.
Our selling, general and administrative expenses were $13.5 million, an increase of $1.9 million from the third quarter of 2012. As a percent of sales, SG&A declined from 25.9% to 20.8%.
Highlights within SG&A include an increase of $1.5 million in employee-related expenses and an increase of $300,000 in bank related fees resulting from our top line growth. Interest expense was $1.1 million, compared to $900,000 in the third quarter of 2012 and our weighted average rate for the quarter was 3.74%.
The increase in interest expense results from the credit agreement we entered into during the second quarter of 2013, which funded our stock repurchase transaction and increased our outstanding debt balance to $80 million. To protect this increased debt balance against rising interest rates, we hedged a portion of our debt.
This includes a forward swap starting with LIBOR at a rate of 2.15% on $40 million of our debt from the third quarter of 2014 until the end of the term. Our tax expense for the third quarter was minimal as we released a portion of our deferred tax valuation allowance to offset our regular tax expense.
For 2014 and beyond, we expect an effective tax rate of 39.1%. We had net income in the third quarter of $6.3 million or $0.13 per diluted share versus $2.7 million or $0.05 per diluted share in the third quarter over prior year.
This brings our year-to-date net income and diluted earnings per share to $21.5 million or $0.40 per share respectively. Adjusted EBITDA was $10.2 million for the third quarter versus EBITDA of $6.7 million for the third quarter of 2012.
The increase in adjusted EBITDA of $3.5 million is due primarily to $1.8 million attributable to new – our increased volume and $200,000 from the improved cost of aluminum. Offsetting these increases was $1.9 million impact of temporary inefficiencies resulting from the recent hiring to meet the demand for our products and an increase in material cost of $1.3 million due to the purchase of finished glass units, relating to certain capacity constraints, an increase of $1 million for employee-related cost and a negative mix shift of approximately $600,000.
A reconciliation of the net income and EBITDA, which I’ve just discussed, has been included in our earnings release for your reference. Now turning to our balance sheet, as of September 28, 2013, our net working capital, excluding cash was $24 million, which increased approximately $500,000 to support the increase in sales.
This was primarily driven by increases in inventory of $1.2 million and prepaid expenses of $400,000, offset with an increase in our accrued liabilities of $900,000. DSOs remained at 32 days at the end of the third quarter, compared to our subsequent Q2.
Our free cash flow for the quarter was $5.9 million, mainly driven by EBITDA, excluding non-cash items such as stock compensation of $10.4 million, we invested $500,000 in cash for working capital and we paid $3 million in capital additions, which includes a purchase of the land to expand our glass facility and we paid cash for interest and taxes of $900,000. During the third quarter, we continued to experience positive momentum in top line growth.
this trend has continued into our fourth quarter, with the October sales up 37% over prior year. as a reminder, our fourth quarter last year was the first of the past four straight quarters with substantial year-over-year growth.
Year-over-year comparables will become more challenging as we begin comparing to quarters that saw significant growth in 2013. Given the substantial growth, as we enter into our fourth quarter, I feel it’s important for our investors to know what we are estimating our fourth quarter sales to be.
Based on our October actuals and November’s pipeline, I feel confident we will end the quarter, fourth quarter, with a top line sales growth of approximately 30%, with sales ranging from $58 million to $60 million. This will put our full year sales at $235 million to $237 million or approximately 35% increase and growth year-over-year.
Our gross margins will continue to feel the impact of labor inefficiencies and material inefficiencies. We are addressing these by focusing efforts on both training and retaining newly hired employees and are seeing improvements, as recently as October, we closed our direct labor came in at 10.2% of sales versus Q2’s 11.2%.
We are also addressing our glass fabrication capacity by moving forward with a construction of a new facility, but we’ll continue to purchase some [indiscernible] that’s from the outside until the plant is operational by the end of our third quarter of next year. Lastly, we announced a 3% price increase on our most – on our products, most of our products that will impact sales in the back half of the fourth quarter and into the 2014.
With these measures in place, we are confident that we will be in positive position to fully leverage the strong growth that we continue to achieve on top line sales. With that, let me turn the call back over to Rod.
Rodney Hershberger
Thanks, Jeff. Our markets have continued to show strength and we are prepared for continued momentum in 2014.
While Q4 traditionally is lower in sales than Q3, the lower volume is caused primarily by the number of holidays and not a lower weekly sales volume. We will continue to hire and train throughout the upcoming months not only to stabilize current operations, but to prepare for continued growth in 2014.
We’re confident that our employees and leadership have the right skill set to improve our operational efficiency and deliver on our value proposition. We are focusing on new products, including storefront to capture more of a strong Florida commercial market and energy efficient French doors to capture additional residential market share in the coming years.
With that, I’ll conclude, and Jeff and I will be happy to answer your questions. Jamie, if you could get the first question, please.
Operator
(Operator Instructions) The first question comes from Sam Darkatsh from Raymond James.
Joshua K. Wilson – Raymond James & Associates, Inc.
Good morning. This is Josh filling in for Sam.
Congratulations on the great quarter.
Rodney Hershberger
Hi, good morning, Josh.
Jeffrey T. Jackson
Hi, good morning, Josh.
Joshua K. Wilson – Raymond James & Associates, Inc.
I appreciate the color on fourth quarter and October. Could you talk a little bit more specifically about what sort of level of labor inefficiencies you might still see as the sales volumes, as you said it’s going to come down a little, but it’s still pretty heady growth.
so how much can you really improve those efficiencies in the fourth quarter?
Rodney Hershberger
Josh, we’re already seeing improvement in the labor side as I mentioned, October coming in at 10.2% of sales, as our plans to hopefully hold that momentum into the November and December months. We will purchase less outside glass, because we will be obviously a lower sales base, we’ll be purchasing less outside glass.
so there will be a positive impact for that. But I do feel – our gross margins will continue to be weighted down if you will or impacted by the inefficiencies and glass grab we are experiencing.
Jeffrey T. Jackson
Yes. There’s a couple of things we have to do, Josh.
If you break our labor down into two parts, we’ve got glass plant labor and main plant labor, glass plants where we’re doing all the processing of glass, we’re actually running that on a four shift operation, the 24x7 now so. So initial surge of hiring there is pretty much done, so they’re working 24 hours a day, we can’t add a lot of people there.
So the growth in hiring is mainly in our main plant for the next probably couple of months, but immediately following that, we’ll have to ramp up our hiring in the glass plant. So we can train and be ready to have our new glass plant operational, so we’ll have trained employees going in there.
So we’ll see a little bit of that inefficiency until that new plant is operational and then we’ll work through the bugs on the new plant. but we’re pretty confident we got that covered, as just there is a lot of moving parts right now.
Also Josh, just remember that obviously, with a lower sales in the fourth quarter, there will be a little less leverage as well.
Joshua K. Wilson – Raymond James & Associates, Inc.
That makes sense. So just I guess – all of that summed up, is there any reason to look for any gross margin improvement sequentially?
Jeffrey T. Jackson
I feel gross margin will improve sequentially. It just won’t be meaningful.
It’s not – that’s not going to be huge. We will get some improvement.
I feel purchasing less glass from the outside and also labor will come in better or has come in better so far, but we’ll lose a little bit of that improvement to less leverage.
Joshua K. Wilson – Raymond James & Associates, Inc.
That makes sense. And then turning to 2014, there is a few more moving parts with obviously, the new glass plant.
Could you talk about what you think gross margin could like in 2014, if we say, mid-teen sales growth and no change in your aluminum and your other material input costs? What do you think 2014 could start to look like for gross margin?
Jeffrey T. Jackson
I think gross margin improves obviously, as we get into 2014; obviously, with the glass plant coming online, I think I’d mentioned that a 2% improvement in gross margin in that particular move alone, but you will see that till the fourth quarter of 2014. I think what we’ll look to drive is, continued improvement in labor what we’ve seen in October through 2013.
We continue to train our employees on both the production line in sales on how to drop that, how to cut laminates, the whole production process. I think we’ll start to read the benefits of that as well.
Rod had also mentioned now we’re continuing to hire. Obviously, the longer we have those employees, the better trained they become.
So I do think the margins will improve during 2014. I’m not sure if I’m ready to give some guidance on that exactly, but they will improve from where we’re at today.
Joshua K. Wilson – Raymond James & Associates, Inc.
Would it be fair to think that there is going to be gradual improvement throughout the year with – then a pickup as soon as the glass plant comes online there, will it be back end weighted than that?
Jeffrey T. Jackson
No. I think it will be fair to assume there will be a gradual improvement throughout the year, because like Rod had mentioned, we’re going to continue to hire.
So we get – we’ve got those over time down, as well as the get the people, our folks trained for efficiencies. So I think you will see a gradual improvement over the year and then obviously with a quarter glass plant expansion coming line, you’ll see a one-time kind of step improvement if you will.
Joshua K. Wilson – Raymond James & Associates, Inc.
That makes sense. and then just quickly on the October trends are you concerned at all about any pre-buying ahead of the price increase you talked about?
Jeffrey T. Jackson
No. We really didn’t – we really didn’t have a big spike in any given week, but Rod did mention our average weekly sales have stayed fairly consistent actually improving somewhat like we expected it at the back end of the quarter.
But no, even in the October – that average hasn’t changed dramatically.
Rodney Hershberger
Yes. Josh, we have our price increases in September and we didn’t see a big surge of orders.
And we know we stretched out the shipment time, in case, people needed to pre-order a little bit, but typically, our lead times are really short. they haven’t really changed since we had the price increase or during that price increase.
So we didn’t really see a big spike or big jump in orders or we though – we actually thought we would.
Joshua K. Wilson – Raymond James & Associates, Inc.
Excellent. Well, best of luck with the next quarter.
Jeffrey T. Jackson
Thank you.
Rodney Hershberger
Thanks.
Operator
The next question comes from the line of Steve Dyer from Craig-Hallum.
Steve L. Dyer – Craig-Hallum Capital Group LLC
Good morning guys, a nice quarter.
Rodney Hershberger
Thanks, Steve.
Jeffrey T. Jackson
Thanks, Steve.
Steve L. Dyer – Craig-Hallum Capital Group LLC
Several of my questions have been asked and answered. Just if we could zero down on the R&R, which the growth seems spectacular there relative to what I would have expected and certainly, seems to be accelerating.
do you have any sense sort of as to what’s driving that, is it credit? Is it consumer confidence and sort of how do you see that playing out into next year?
Rodney Hershberger
The answer is a little bit of yes. But next year, I think we should talk about it.
When you look at what’s happening this year. Housing prices in our market that we’re focusing on head drop so much that people were under water and I think a lot of folks were afraid to spend dollars on doing home improvement.
And we seen that price depreciation come up considerably over the past year and continues to grow. I think the pace of growth of price depreciation will slow down a little bit.
The advantage that we have, because the remodeling market isn’t improving as fast as our growth has been it, but the advantage we have is, we’re dealing with a product that’s core driven and insurance driven versus just making my house look nicer or feel nicer with grant and/or something like that. So we’re taking the benefit of being in a core driven area and an insurance driven area and price depreciation, so now people can all of a sudden do something what their house that has the yearly payback.
So I don’t know that that’s a big surge. We’re also seeing people by foreclosures.
We still got a backlog of our closures and so that we have to work through, because of our – it is legislative, not judicial foreclosure system, not just a dollar amount. So it takes a long time to get to a foreclosure and as those houses get locked people improve them, they want to make them livable, rentable, things like that.
So I think we’ll get some strength from repairing and remodeling. I don’t expect it to be as strong as it was this year.
but it will still be, I think a pretty good year for us. A couple of other points just, Steve, that we also look at is existing homes.
Existing home sales are higher, you guys can pull the data and info, but you’re talking upper teens. So when that happens, that’s obviously good with R&R market, because generally speaking people moving to those homes and we’re in the top three areas to improve energy efficiencies as windows.
Windows and doors, so we see a lot of pick up from that. Also last year, we’re bringing on Todd and his sales team; they’re getting up to speed and running.
We feel we’re gaining market share. We signed several new agreements with various customers or home depots at home services for example.
We’ve replaced Silver Line that was in there that should provide significant incremental sales this year for us and into next year. So we’re gaining market share as well.
Steve L. Dyer – Craig-Hallum Capital Group LLC
Okay great. And then just a question on tax rate, how should we think about that kind of both in Q4 and into next year?
Rodney Hershberger
Well, Q4, we will continue to release the valuation allowance again, started deferred tax assets to offset tax expense. So I don’t see a number there for this year.
Into next year, we’ll be a cash paying taxpayer. So 39% would be the rate I would use for next year.
Steve L. Dyer – Craig-Hallum Capital Group LLC
And that starts right at the beginning of the year?
Rodney Hershberger
Yes. It will.
Steve L. Dyer – Craig-Hallum Capital Group LLC
Okay. I’ll hop back in the queue.
Thanks guys
Rodney Hershberger
All right, thanks.
Jeffrey T. Jackson
Thanks.
Operator
The next question comes from Michael Dahl from Credit Suisse.
Michael G. Dahl – Credit Suisse Securities (USA) LLC
Hi. Thanks and good morning.
Rodney Hershberger
Good morning.
Michael G. Dahl – Credit Suisse Securities (USA) LLC
I wanted to a follow on Steve’s question a bit on the R&R side, is it possible for you to breakdown what you think the market growth was in your products versus those share gains and the new customer wins that you talked about?
Rodney Hershberger
No, there is not really any up to date market data out there, movies and what not to set that information literally at the end of last year. They do some updates, but as best we can tell the R&R market part is growing in that 5% to 6% range and so with our R&R sales up in the 40% in the third quarter, we are obviously gaining market share, but we don’t have details, percentage gains that we can back that up with.
Michael G. Dahl – Credit Suisse Securities (USA) LLC
And as far as the new products go, some of the store front and the French doors, if those may be a little more R&R focused as well or maybe not, but could – how much of those started to impact sales as of now?
Rodney Hershberger
Those are not necessarily focused on R&R. Store front will go in strip malls, bottom floor of condos, so as we do our condo replacement, which – when you think about R&R, that’s part of the R&R market that we are capturing more share, but we didn’t have a lot of before and store front helps us to get some of that.
So even if the store front sales aren’t real high, it drives some additional sales, like it’s given some places we weren’t before, but it does both. So it’s kind of hard to break that down and say it’s going to drive R&R sales to tremendous amount.
Our French door, vinyl French door that we are launching, really is a soft launch in a couple of weeks. It’s going to serve both markets I think very well.
So the new construction market is picking up and it’s a product that goes primarily in the higher-end homes. It’s a really energy efficient and greater aesthetics to it.
I think it will be a good addition, but it also will work well on the R&R markets. So I think it’s going to be a balance probably right along with where our sales are right now.
In terms of the store front, we had approximately $600,000 worth of sales in the quarter for store front sales which is again our best quarter since the launch, but we are continuing to penetrate that market and establish distribution network there.
Michael G. Dahl – Credit Suisse Securities (USA) LLC
Thanks. That’s helpful.
And then just shifting gears a bit back to margins and a couple of the other things that you had mentioned were had the mix impact as we see vinyl grow and it seems to be a trend that vinyl likely continue to grow in excess of the aluminum so how should we think about the difference in margin there as it relates to just the blended rate going forward for the company and what do you think that mix will ultimately get to as far as vinyl versus aluminum?
Rodney Hershberger
That’s just several questions in that, but this quarter, the mix impact was approximately $600,000 and that’s a combination of both vinyl and new construction. New construction sales will continue to grow and we’ll continue to sign agreements there and obviously get our share plus in that market.
In terms of the vinyl side, that’s probably the toughest one because as we do more vinyl, we get better. And we are also looking internally to develop new products and within the vinyl platform.
When we develop those new products, they will be developed to achieve better man hours and better efficiencies et cetera. So long-term, our job and our goal is to eliminate any kind of margin erosion.
So I don’t want to put a number out there because quite frankly I think there is not going to be one. Right now there is.
Jeffrey T. Jackson
Yes, I would think too if you look at what that mix becomes over the years. We’ve been – not we PGT, but we as an industry have been kind of struggling with what the Florida energy code has been or will be for the last couple of years and there is an energy code adopted its not enforced yet, it won’t – probably won’t be enforced until about 2015 now.
That will change product mix a little bit also. But aluminum, it will still be the product of choice in South East Florida [indiscernible] across partially in the Collier County although we are seeing a lot of vinyl movement in that.
So those are large aluminium product areas that will continue to see aluminium and then will see more vinyl introduced in the rest of the state where energy is going to require there. But we won’t really see that significant change until late 2014 or 2015.
Rodney Hershberger
And also keep in mind, on the new construction side that margin impact is gross margin. we also feel we make that up below gross margin in places like transportation, delivering full trucks to a job site versus various stops in the R&R side.
so we do make up that in other areas.
Michael G. Dahl – Credit Suisse Securities (USA) LLC
Thanks, that’s great color and good luck for 4Q.
Rodney Hershberger
Thank you.
Operator
The next question comes from Robert Wetenhall from RBC.
Desi DiPierro – RBC Capital Markets LLC
This is actually Desi filling in for Bob. Congrats on a great quarter.
Rodney Hershberger
Thanks.
Jeffrey T. Jackson
Thanks.
Desi DiPierro – RBC Capital Markets LLC
So you discussed the September price increase earlier, how much was the price increase for and then from a manufacturing logistics perspective, given the sharp rise in sales year-to-date and your strong competitive position, how do you balance price increases for your products versus higher volumes?
Jeffrey T. Jackson
The price increase was for 3% and it was probably for 90% of our product portfolio. So roughly, 90%, how do we balance that, we look at price increase as opportunistic as we go through the year.
If we have huge spikes in our input costs, we will look to take a price increase of a certain product within a market is demand. we will look to take a price increase if it’s wanted, what we don’t want to lose is market share and the as long as we can take pricing and gaining market share, we do it.
Desi DiPierro – RBC Capital Markets LLC
Right.
Jeffrey T. Jackson
The 3% was the first one we’ve taken since – really big ones since 2006 Rod, right.
Rodney Hershberger
Yes.
Jeffrey T. Jackson
Yes, took a broad 9% price increase.
Rodney Hershberger
Yes.
Jeffrey T. Jackson
And we also – we’re pretty close to our customers, pretty close to our dealers and distributors and anytime we talk about price increases, I know they are not the ones that make that decision, but you get really good feedback from them on how hard they push back or their comments or the acceptance level and that helps us a lot about what we can do in the marketplace also.
Rodney Hershberger
And on this last one, we got very little if any pushback on it.
Desi DiPierro – RBC Capital Markets LLC
Got it, thanks. And then on the market share gain, you think most of the share gains are coming at the expense of non-impact resistant window manufacturers or are you also gaining share from other impact resistant manufacturers?
Rodney Hershberger
We feel, we’re gaining share in the impact market. so it’s coming from impact manufacturers, definitely like in that home service example I gave earlier our R&R sales within the impact market are up.
If you looked at the R&R sales just for WinGuard alone were up 42% repair remodeling, so that again gaining share.
Jeffrey T. Jackson
I think we’ve said pretty consistently over the years even when we weren’t driving share that as things get busy, builders and remodelers appreciate having short lead times and guaranteed on-time delivery and that maybe there we got tested a little bit over the last couple of years, but we’ve continued saying it, we said it last year on our calls when we weren’t gaining a lot of market share and now the new construction has picked up quite a bit repair and remodeling has picked up quite a bit, there is a huge appreciation for getting new product for short lead times on-time complete with no problems and we’re seeing that benefit.
Desi DiPierro – RBC Capital Markets LLC
Okay, that’s very helpful. Thank you.
Operator
The next question comes from Jeremy Hamblin from Dougherty & Company.
Jeremy Hamblin – Dougherty & Co. LLC
Good morning, guys.
Rodney Hershberger
Good morning, Jeremy.
Jeremy Hamblin – Dougherty & Co. LLC
Wanted to just ask about the competition and as it pertains to capacity constraints, do you feel like part of the region you’re able to grab share, you guys are biggest, you have the highest by far market share. Are your competitors also facing similar capacity constraints?
Rodney Hershberger
Yes. I don’t know that I can answer that, I mean we don’t make our decisions based on what our competitors do.
That said, we do watch what they do and make sure that we’re maintaining the leadership position. though I don’t if there are, I know the industry in general might have some supply constraints.
I think we have the benefit there, because we are the – it’s kind of the big 500–pound gorilla in the room when we can cut some deals with suppliers and guarantee in some volumes to make sure that we get everything in time. Some of the competition that we’ve saw to are up at market, I mean if markets up 15%, they’re up 15%, so...
Jeremy Hamblin – Dougherty & Co. LLC
And I just wanted to ask also, you mentioned in the second quarter that you had peak overtime hours hitting near 30%. and I know you’ve gone to a third shift.
Has that obviously improved at least a little bit, the peak overtime hours that you’re experiencing? Can you give me a sense for where the range is since you’ve gone to that, are you getting overtime hours down now to like 20% or I know that the long-term goal is like 10% to 12%?
Rodney Hershberger
Right. Yes, we actually saw that range start to go down at the end of the third quarter and obviously, have seen it go down into October.
Jeffrey T. Jackson
October was under 20%.
Rodney Hershberger
Yes, October ran close to like 15% overtime, so it’s within our norm, if you will. So we want to hold it there.
That’s one reason we got 10.2% of direct labor as a percent of sales, because we are driving down overtime because we are starting to retain more employees.
Jeffrey T. Jackson
Yes, and I have mentioned in one of other questions that our glass plant is running 24x7. So when you are running basically four shifts on a swing shift, there's not a lot of room for overtime.
And that's really helped out because that was one of the areas we were getting a lot of overtime in.
Jeremy Hamblin – Dougherty & Co. LLC
And following up on that, so you hired 301 workers in this quarter and 274 in the last, should we expect at least some moderation in that hiring rate in the fourth quarter as sales seasonally if slows down a little bit in Q4 and Q1?
Rodney Hershberger
Yes, I just kind of want to remind you that sales per week don't really slowdown in Q4. Sales for the quarter slow down because we have the…
Jeffrey T. Jackson
Christmas
Rodney Hershberger
…the Christmas and New Year holidays, we have Thanksgiving in there. So there is a net effect of losing about two weeks worth of sales.
We can have the two weeks worth of sales. So if you factor that in and look at the volumes that we are running at, the weekly volume – the weekly volume really hasn't dropped off and we look at 2014 as being another year of increased sales, maybe not at the same rates that we are seeing right now, but increased sales, but we’ll continue to hire and train.
And the benefit of that is, if things do slowdown, and typically the first part of January is a little bit slower and then its starts ramping back up, it gives us additional time to train and that is – the key ingredient is, is finding the right time to train where you are not worried about getting product out of door quite as much, but you’re worried about making products right and train people correctly. So we'll continue to hire.
Jeremy Hamblin – Dougherty & Co. LLC
So in terms of the number of down – maybe down days at the plant in the fourth quarter, you say kind of two weeks, will there be any impact then because the calendar has changed, you had an early Thanksgiving last year and this year you’re having a later Thanksgiving, I don't know if that has any impact on the total number of days where you may not be operating at full capacity?
Rodney Hershberger
Not really. Not, it really doesn't.
Jeffrey T. Jackson
Thanksgiving for us is Thursday, Friday, whatever we think [indiscernible] scheduled event.
Jeremy Hamblin – Dougherty & Co. LLC
Yes.
Jeffrey T. Jackson
And it’s middle of that quarter. It's right in the middle of the quarter.
Jeremy Hamblin – Dougherty & Co. LLC
Okay. And then just on the price increase, the 3% price increase, can you just provide some color in terms of the timing of when that would be impacting delivered sales, is that like October 15, October 30 kind of what’s the timing on that?
Rodney Hershberger
Probably close to mid November, it’s when I think we’ll start really seeing being it full.
Jeffrey T. Jackson
Yes. It gets feathered in.
It's not a – it's not one day you walk in and you get the full effect of the sales, because order had to be placed by a certain day and shipments have to be shipped by a certain day. So literally two weeks after the price increase, some of what we are shipping will have that price increase majority won’t…
Rodney Hershberger
Yeah.
Jeffrey T. Jackson
And so it will be full effect by mid end of November.
Jeremy Hamblin – Dougherty & Co. LLC
But you do expect some positive impact on gross margin from that in the fourth quarter?
Rodney Hershberger
Yes
Jeffrey T. Jackson
Yes.
Jeremy Hamblin – Dougherty & Co. LLC
Great. Thank you so much.
Rodney Hershberger
You’re welcome.
Jeffrey T. Jackson
Thank you.
Operator
Our next question comes from [indiscernible].
Unidentified Analyst
Hi, guys. Just want to say we right upfront, you guys do a fantastic job.
I’m a finance guy or investor guy and I will say, I am local and I know that PGT treats its employee really very well and really gets along well in the community I just wanted to say that upfront. I have two basic questions.
One is, any plans for dividends down the road and what about stock splits?
Rodney Hershberger
First of all thanks Mark for those comments being local and your comments regarding our company. We both really appreciate that.
In terms of dividend, we are starting to build cash. One thing I will say is we are not planning on paying down debt right now.
We have historically used our cash to pay down debt and delver. But right now, we are naturally doing obviously through an increase in EBITDA plus we got outstanding rates paying 3.74% on our $80 million.
So we are comfortable with our leverage. We will not use our cash to pay down debt.
What we will do is look for potential acquisitions more aggressively. We are out in the market so to speak looking for opportunities to expand our portfolio or even geographic footprint if wanted.
We will be selective on those acquisitions obviously with our margins we don’t want them to be deluded so we are not just going by company to buy it we are going to buy something that would make sense. But I would say that would be kind of first priority for cash at this point.
Could we pay a dividend down the road? Sure most definitely, I don’t see that in the near future, though.
Your second question I think was regarding stock split? In terms of the stock split no, we are not contemplating the kind of stock split.
Unidentified Analyst
Okay. The only other question, I see that you bought 12 acres for the glass plant which only on a portion of that, so if you are thinking that if you have to expand production, you’re going to do it here instead of doing another [indiscernible] operation?
Rodney Hershberger
Yes. That would be the initial thinking.
Again we think the Florida market has a lot of legs to grow. New home construction starts will be in that may be mid 65,000-ish range this year clearly only half way back to a healthy market.
So we think there is a lot more volume here to gain and we are building the facility in a manner that we can’t expand it into the future. We can actually put up to with the 110,000 square foot,
Jeffrey T. Jackson
160,000 square foot.
Rodney Hershberger
We can go up to a 160,000 square foot building on that 12 acres and obviously that would be futuristic plans, but we did buy that with that in mind.
Unidentified Analyst
Okay great. Hey, I really appreciate you guys, keep that good work up, man.
Rodney Hershberger
All right, thank you Mark.
Operator
The next question comes from Jeremy Hamblin Dougherty & Company.
Jeremy Hamblin – Dougherty & Co. LLC
Hey guys, thanks for taking. Just one follow-up, so I also wanted to just ask, you mentioned home depot at home service.
I also wanted to ask a follow-up just on the healthy partnership. In terms of kind of initial expectations and impact from doing deals like that you have mentioned in your filings that no customers can have more than 3% of overall sales, do we – when do you expect to start to see impact from signing that deal with Pulte.
when would you start to see that flow through to sales, is that kind of a 2014 event or would you start to see some impact this year and then just which counties would be included in Florida or is it the entire state?
Rodney Hershberger
We see the impact from – when we do a deal that’s like a Pulte, there’s a lot national type builders out there that are building. they kind of look at their divisions in Florida and some of them have a statewide division, some of them have a southeast division, some of them have a southwest division, southeast.
So I don’t know that I could say here off the top of my head and tell you how all those companies are structured, I’d have to go back and look, but like a deal with Pulte, we’re seeing orders from that right now. and so as they ramp up and they finish, if they are in a certain subdivision, typically they’ll build all the models and what’s in those models is what may go in all those houses.
We work as hard as we can to make sure we can change how to model it possible. So we can get the rest of the subdivision, but we’ll see whatever goes in that subdivision then we’ll come out of the model.
So we’re seeing sales from that right now. We’re seeing pretty explosive growth.
So even though those sales numbers go up, they are not becoming a huge percentage of our overall sales. I think our largest customer this year again, will be probably under 5% of sales.
So a little bit larger than the 3%, because we’re seeing some pretty good growth out of a couple of our customers, but it won’t be 20% and 25% number.
Jeremy Hamblin – Dougherty & Co. LLC
Are you thinking now that these more institutional type deals or will become a bigger percentage of your overall sales, as we’re thinking about the model going forward as opposed to the – that this kind of the deep distributor relationships that you’ve had in the past?
Jeffrey T. Jackson
No, we still think it’s going to be a healthy mixture of both. Will we get bigger customers out there as this market turns, yes, but those same customers who were with us, several years back, we’re just getting big over the market?
What we’ll also see once a turn into this condo market comeback. We’ve really not seen that yet and then in 2005 and 2006, we will get big projects that would head us and also that would layer into sales.
But in terms of the overall mix between the mom-and-pop dealers to the big customers, everybody at this point, most – majority of our customers are experiencing good solid growth.
Rodney Hershberger
Yes. I think one of the advantages we have in our market is, we’ve got more coastline, I think than any other state, I’m not sure where California’s is.
But we’ve got a tremendous amount of coastline and when you’re – you really don’t build subdivisions on the coastline, you build really high end homes that are custom builders and we get a lot market share out of that market. And then we balance that against subdivisions that are usually little further in them.
And we also pick up a lot of condo as Jeff said. So we are at a great spot to be able to take advantage of all the different kind of moving pieces in the Florida market.
And just – kind of as a reminder, when you go back to 2005 and 2006 in our heyday, we had $5 million to $10 million customers and we’re back at that point now, but we’re not doing that top line sales, but we have customers that are in that $5 million to $10 million range.
Jeremy Hamblin – Dougherty & Co. LLC
Great, thanks so much.
Operator
And I am showing no further questions. I would now like to turn the call over to Mr.
Jeffrey T. Jackson.
Jeffrey T. Jackson
Thank you for joining us today. We look forward to speaking with you again, next quarter.
If you have any future questions, please feel free to call me. Thank you and have a good day.
Operator
Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation.
you may all disconnect. Have a good day.