Brad West - SVP & CFO Rod Hershberger - Chairman & CEO Jeff Jackson - President

Sam Darkatsh - Raymond James Jeremy Hamblin - Dougherty & Company Ken Zener - KeyBanc Capital Markets Bob Wetenhall - RBC Capital

Good morning, everyone, and welcome to the PGT Innovations Inc.'s Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] And please do note that today's event is being recorded. I'd now like to turn the conference over to Brad West, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you, William, and good morning. Welcome to PGT Innovations' 2017 third quarter conference call. I am Brad West, the company's CFO, and I'm joined today by Rod Hershberger, Chairman and CEO; and Jeff Jackson, our President. This morning, we are pleased to provide our 2017 third quarter results as well as an outlook for the balance of 2017. We have posted a presentation on the quarterly results to the Investor Relations portion of our website. Before we begin our formal comments, I'd 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'll 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 the GAAP counterparts is available in the Investor Relations section of our website. Now, I'll turn the call over to our CEO, Rod Hershberger.

Thank you, Brad. Good morning, and thanks, everyone, for joining today's call. We ended the third quarter with sales of $127 million, down 2% compared to prior year. Due to the first major hurricanes that hit our market in 12 years, which we believe negatively impacted sales by $13 million in the quarter. I'm incredibly proud of our employees, customers and fellow Floridians came together during such an intense weather event. On September 10, Hurricane Irma, the largest and most powerful storm ever recorded in the Atlantic, made direct landfall in our core market of Florida. Irma was the first major hurricane to make landfall in our market since 2005. After leaving a path of destruction through the Caribbean, the Florida Keys took a direct hit from this massive category for storm with sustained 130-mile per hour wind. The devastation in the Keys was widespread, particularly between Cudjoe Key and Marathon. Irma made its second landfall near Marco Island and then headed into Naples, Florida, leaving additional destruction in its path. This 400-mile wide storm made its way up Florida's Gulf Coast, causing significant wind-borne damage in western Florida and severe flooding from storm surge in many coastal areas in eastern Florida. South Florida, which represents approximately 70% of our market, took an especially hard hit from Irma and the entire state of Florida, which represents approximately 90% of our market, felt the impacts from Irma to some degree. For example, between five million and six million people were evacuated during Hurricane Irma, which was the largest evacuation order the country has ever seen. Hurricane Irma is estimated to have caused between $50 billion and $100 billion in combined damages in Florida, Georgia, Alabama and North and South Carolina, and is considered to be the third most costly storm in U.S. history following behind Hurricane Katrina and Hurricane Harvey. It's important to note that both Hurricane Katrina and Hurricane Harvey's primary damage was caused by massive flooding, where Irma like most Florida hurricanes falls in a more traditional damage path, which includes intense winds, rains, windborne debris and associated damages. Hurricane Irma, in this regard, set another record by maintaining 185-mile per hour winds for 37 hours. While it takes years to fully account for all the cost of damage repairs, the 2017 hurricane season so far has caused an estimated between $150 billion and $400 billion in damages. To give you a comparison, the Congressional Budget Office estimates that on average hurricane damage averages approximately $28 billion per year. While the 2017 hurricane season certainly set new record, and created a heightened awareness of the damage these storms have caused. This is exactly what PGT Innovations has been preparing for since 1993 when we launched the first impact-resistant products into the market. Since then, we have shipped millions of units of impact-resistant windows and doors and worked closely with regulatory bodies to help ensure our communities were prepared for the next storm. Our participation in the drafting of new codes that helps strengthen our homes and buildings across the state of Florida and coastal areas in hurricane-prone states has undoubtedly lessen the impact of a potentially catastrophic weather event such as Hurricane Irma. I'm pleased to say that our relentless commitment to safety, the safety of our employees and the safety of our communities has paid off. First, we are incredibly thankful that our over 2,800 employees came through the storm without any serious injuries or losses. Second, due to our advanced preparation, our facilities came through impact with minimal damage, which allowed us to get back up to speed as quickly as possible. Third, we have received numerous reports after the storm from various sources commenting on how well our products perform and how important new codes and stronger homes and buildings played a major part in reducing the damage from the storm. Looking ahead, I am more confident than ever in the future of PGT Innovations, especially after seeing how well our team responded to such a challenging weather event and how our products played such an important role in guarding against injuries and property damage relating to a major hurricane such as Irma. My confidence continues to be high also, because the Florida market is strong. Not only are we a resilient community, Florida is also still steadily growing. Hurricane Irma may have slowed us down for a limited time, but the future is bright. In the 2017, hurricane season has reinvigorated awareness throughout Florida and beyond on how important the impact-resistant products are for homes and businesses located near the coastline. Our team here at PGT strongly encourages code and standard writing organizations to review how these products performed in this devastating storm prior to any discussions on changing how fenestration product assisted. Finally, I'd like to say to all our shareholders, customers and associates what an honor has been to service PGT's CEO for the past 12 years. And I'm grateful for the support that all of you have given me during that time. I know the company will be in good hands when Jeff assumes the role of CEO on January 1, 2018 and I'm excited about continuing to serve the company as Chairman of the Board after Jeff takes over as CEO. Now, I'd like to turn the call over to Jeff, who will review in more detail recent events and our operational performance. Jeff?

Thank you, Rod, and good morning everyone. During our third quarter, we delivered solid results through July and August with sales up 5% compared to the same two-month period last year. And solid -- volume produced solid operating results with adjusted EBITDA margin during the two-month period at approximately 19.3% compared to 17.9% during our second quarter of this year. During the beginning of September, prior to us feeling the effects of Hurricane Irma, these trends continue. However, as Hurricane Irma advanced towards Florida, daily order volumes began to decrease, dropping as much as 50% at times during the month, as many customers suspended operations. At our facilities, we were forced to cease operations for a period of up to 6 days at certain production facilities during which time we did not ship any products. We estimate that the storm caused an unfavorable sales impact to our 2017 third quarter of approximately $13 million. We believe that after the storm, we would have set another company record for sales in the quarter, as we were tracking with solid performance. Despite the impact on sales, we ended the third quarter with sales of $127 million, down just 2% compared to the third quarter of last year. The storm also added approximately $1.1 million in operating costs due to increased distribution and warehousing related to the disruption. These costs also included incremental costs to get the plants back up to full production. And lastly, we initiated community outreach efforts before and after the storm to help those affected by it in the local areas and in certain other markets we serve in Florida, providing members of the community with things like free generators, chainsaws, food, water and other supplies. While the first two weeks of October show continued signs of Hurricane Irma's impact, stronger sales were achieved in the second half of October, as the state began to the process of returning to normal, resulting in total sales for the month of October of approximately $41.5 million, up 12% over 2016 October, producing an estimated EBITDA margin of about 18% compared to 15.3% in October of 2016. Additionally, many of our customers had confirmed a sustained increase in call-in order volumes from their customers, while they work to return to normal operations post-storm. From the perspective of product sales, our Vinyl Winguard product experienced growth despite the negative impact of sales from the storm, increasing 16% compared to last year. We develop these products to provide customers with outstanding energy efficiency, style, impact-resistant offerings, and they have been a leading contributor over the recent quarters in our ability to gain market share. Since 2014, our Vinyl WinGuard products have grown at a compound rate of about 35% per year. Sales for the third quarter included 56% from the repair and remodeling market and 44% from the new construction, which is a slightly higher mix of sales towards new construction than our second quarter. We believe the unfavorable sales mix was driven by the hurricane, as most repair and modeling activity stopped a few days prior and after the storm. We expect that our repair and remodeling sales will benefit the most in the fourth quarter and beyond, as remodelers are reporting higher demand for impact-resistant windows and doors due to increased awareness and residential repairs caused by Irma across Florida. From the perspective of our markets, the third quarter of 2017 single-family housing starts in Florida were up 17%, strengthening our belief that we will finish at or above 85,000 estimated start for the year. Builder confidence continues to rise with the National Association of Home Builder's confidence index rising four points in October to 68. These increasing metrics show there is solid growing demand for new home construction. And our belief is that the Florida market will continue its upward trend over the next several years towards its population supported 120,000 starts per year. This hurricane season has certainly heightened awareness for our customers that have never experienced a hurricane, and those that may have forgotten how serious these storms can be. It has invigorated new conversation within our communities about better preparing for these types of events in the future. As leaders in the industry, we know how critical impact-resistant products are to ensure the safety of people and property during severe weather. And we plan to make additional advertising investments starting in the fourth quarter of 2017 and into 2018 to be on the forefront of that renewed awareness to better help educate consumers and builders. These investments include running TV ads for the first time since 2006. For more than 30 years, PGT innovations has dedicated countless resources into research and development of technologically advanced products that can withstand some of the toughest wind-borne debris impacts. And early reports show that our products performed extremely well. As 2018 approaches, we believe we are well-positioned for another solid year. We have a strong backlog in the housing market. Conditions remain favorable throughout all our markets. We will continue to focus on increasing profitability while growing our market share in investing and advertising to capture increased demand created by the awareness of the storms season. At this time, I'd like to provide an update on another action we took during the quarter. On September 22, we sold -- we announced we sold 2 Cardinal Glass Industries assets that we had used in the producing of glass components for our doors for the purchase price of $28 million and entered into a seven-year supply agreement for Cardinal to supply those components to us at our current cost to produce. Cardinal has been a key supplier to PGTI for many years and is an industry-leading manufacturer of residential glass for windows and doors, employing over 6,000 employees with 37 locations across the United States, including their largest impact glass production facility in Ocala, Florida. This deal is a win-win for us and Cardinal and represent the strong strategic partnership between the largest impact window and door manufacture and one of the largest supplier of residential impact glass. From the -- from a financial perspective, we believe this deal provides significant benefit to the company and shareholders and customers. Back in 2014, we invested in glass processing capacity the time when no other in our company -- in our industry was investing in those assets. And that investment is paid off, generating a 37% annualized return. But even more importantly, this will be an advantage partnership for us ongoing, as we produce more residential impact-resistant products, freeing up valuable labor for us to use in our assembly plant for windows and doors. The timing was great given the increase in demand expected in 2018 and beyond. Now, I'd like to turn the call over to Brad to discuss financial results for the quarter in more detail. Brad?

Thank you, Jeff. We reported sales of $126.9 million in the third quarter, a decrease of 2% compared to last year. We estimate that we lost approximately $13 million in sales from the quarter due to Hurricane Irma. On Slide 9, we give you breakdown of net sales for the quarter. Our decrease in overall impact sales was offset in part by an increase in sales of our Vinyl impact products, which grew 10% compared to last year. This growth was driven by solid demand for our Vinyl WinGuard products, which grew 16% versus last year. Our aluminum impact product sales fell 5% compared to prior year, and non- impact product sales fell in the third quarter due to the storm as well. Now, please turn to Slide 10 and I will briefly cover a few income statement items. The effects of Hurricane Irma were also fell in our gross profit, which was down $1.3 million and in our gross margin, which decreased 40 basis points versus last year. Gross margin in our third quarter was impacted by cost relating to Hurricane Irma, window leadership transition costs and glass supply chain transition costs. After adjusting for these items, gross margin was 32.1%, a decrease of 20 basis points from last year. Improvements in scrap rates and operational efficiencies were more than offset by decreases due to lower sales volume caused by the storm and the impact of higher depreciation and higher capital spending in recent years. With regards to aluminum, we have seen meaningful increases in the per-pound cash price of aluminum since beginning of the year from $0.87 per pound at the start of 2017 to $1.01 per pound at the end of the quarter, and $1.07 per pound as of today. This had a negative impact of 70 basis points on our gross margin during the third quarter. To help counter the effective change in aluminum prices, we have an active program to stabilize our pricing through forward contracts with our major aluminum material suppliers that fixes our pricing for portions of our aluminum needs. As of today, we are covered for approximately 74% of our estimated needs in 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 of approximately 20% of our needs for the first half of 2018 and an average delivered price of $0.97 per pound. We will look to add our coverage -- to our coverage in 2018 when the opportunity arises, and we believe it makes sense to do so. Selling, general and administrative expenses were $25.0 million in the third quarter, an increase of $2.4 million from last year. This increase was mainly driven by $1.1 million of additional accrued incentive compensation costs, $600,000 of additional distribution costs due to the disruptions of our delivery processes caused by Irma, and $300,000 of additional depreciation expense and higher capital spending in recent years, and finally $200,000 of costs relating to our community outreach programs. Interest expense in the quarter was $ 5.5 million, unchanged from last year. During the quarter, we made a total of $20 million in voluntary prepayment of borrowings under our 2016 credit agreement. These prepayments were funded with cash from operations. We also repriced this facility in February of this year, which resulted in a 1 percentage point decrease in the margin portion of the interest rate. These decreases were offset by the write-off of deferred lender fees and discount of $980,000, which is included as an additional non-cash interest expense in our 2017 third quarter results. Depreciation and amortization was $5.1 million compared to $4.1 million last year. Consistent with our expectations, third quarter depreciation and amortization expense was higher due to higher depreciation from increased capital spending in recent years. Our tax expense in the third quarter was $3.0 million and represents an effective income tax rate of 32.2%. This compares to $5.3 million and 32.8% in the third quarter of last year. Tax expense in the quarter has been reduced by $347,000 of excess tax benefits. Excluding these benefits, our effective tax rate would have been 36.0%. Incremental costs relating to the storm negatively impacted our net income in the third quarter. We recorded net income of $6.3 million or $0.12 per diluted share versus $10.8 million or $0.21 per diluted share in the third quarter of 2016. After adding back, the costs related to the storm, as well as the WinDoor transition costs and the non-cash write-offs of lender fees and discounts due to the voluntary prepayment of debt, adjusted net income was $8.1 million or $0.16 per diluted share, which decreased from $9.7 million and $0.19 per diluted share last year. This decrease was primarily the result of costs not related to the storm such as highly -- I'm sorry, higher accrued incentive costs and additional depreciation from higher capital spending in recent years. Adjusted EBITDA was $21.6 million or 17.1% compared to EBITDA of $24.0 million or 18.5% last year. Both adjusted net income and adjusted EBITDA were affected by the approximately $13 million of estimated lost sales due to Irma. It is our belief that with those sales and flow they would have generated, both adjusted net income and EBITDA margin would have exceeded prior year. A reconciliation of our non-GAAP financial measures to their GAAP equivalents has been included in our earnings release for your reference. Now, please turn to Slide 11 for a discussion of balance sheet items. We ended the third quarter of 2017 with a cash balance of $44.7 million, up nearly $6 million from the end of 2016. We used $20 million of cash during the third quarter to voluntarily prepay debt, we also fund a $3.3 million of capital spending in the third quarter, all funded by cash from operations. Free cash flow for the quarter was $18.8 million and $52.9 million year-to-date. Our net leverage was 2.5x at the end of the third quarter of 2017, a decrease from our post WinDoor acquisition net leverage of 3.4x. We intend to continue our focus on maintaining a strong balance sheet that will give us flexibility to make further investments and fund future needs. We announced on September 22 that we entered into 2 agreements with our long-time glass partner Cardinal Glass Industries. First was an asset purchase agreement in which we are selling certain equipments currently using the production of glass components for our PGT branded doors for $28 million. This represents a 37% annualized return on the original investment. We will retain the 96,000-square foot building that houses these assets. We will also retain our newly acquired Thermal Plastic Spacer equipment, which will be used to add insulating glass capacity to our window glass production lines. Additionally, we entered into a seven-year supply agreement with Cardinal, whereby they will supply us with our needs for glass components for PGT branded doors during that period. This new agreement allows us to heighten our focus in our core areas of window and door manufacturings, where we excel and enables us to pay down debt with the proceeds and remove some of our future capital requirements and equipment maintenance costs. In addition, based upon pricing agreed upon in the supply agreement, we expect there will be no unfavorable impact to our EBITDA margins. The proceeds from the sale will mostly be received in the first part of 2018 at which time the transferring of equipment and glass production will be completed. Now, let's take a moment to discuss our 2017 outlook. Please turn to Slide 12. We expect a solid fourth quarter, as repair and remodeling demand continues to be steady and will likely be stronger than normal due to the recent storm. Additionally, single-family housing starts continue to track towards our estimate of 85,000 for the year. The company anticipates 2017 third quarter sales were negatively impacted by approximately $13 million due to the storm, some of which is expected to be recovered in the 2017 fourth quarter with the remainder expected to fall in 2018. For the full year of 2017, we expect to finish within the previous guidance range for consolidated sales of $490 million to $500 million and are revised in the adjusted EBITDA range to be $80 million to $84 million due to the additional SG&A investments, including television advertising spending associated with the awareness from impact-resistant products, as well as the effect on EBITDA from lower sales as a result of the storm. At this time, I would like to turn it back over to Rod for some closing remarks. Rod?

Thank you, Brad. As you know, we've recently announced that Jeff Jackson will be appointed as Chief Executive Officer of PGT Innovations effective on January 1, 2018. I will remain on the Board of Directors with PGT Innovations as Chairman. I'm thrilled for Jeff and confident in the future of our company. Jeff is a seasoned corporate executive, who has an extensive track record of successes for our company and he is highly regarded by everyone in the PGTI family and also in the building products industry. From a late summer evening in 2005 sitting on our back patio with Jeff and Lisa, enlighten me talking about our goals and dreams for PGT and seeing and hearing Jeff make the commitment to join and be part of our PGT family. We've worked together as a team since that time now over 12 years ago. And I look forward to continuing to work with him and with all the people of the PGTI family, our customers and partners as I transition into a new stage of my career. While I won't be as closely involved in the day-to-day operations of business fundamentally, things aren't changing for PGT Innovations or our strong brands. Jeff will continue to carry the vision of the organization forward. I will remain on the Board of Directors as chairman and devote my time to supporting Jeff, while also engaging closely with the other members of our Board of Directors. I will also dedicate time to spend with our customers and will help to further advance the efforts of the PGT innovations lab, which works diligently to develop the cutting-edge products we are known for throughout the industry. I couldn't be prouder for what we have accomplished in the past 37 years and look forward to a bright future ahead. I believe that the continuity of the executive management means that PGTI continues to be in great hands. At this time, we'd like to turn the call over to our conference operator to begin the Q&A portion. William?

Thank you. We'll now begin the question-and-answer session. [Operator instructions] Our first questioner will be Sam Darkatsh with Raymond James. Please go ahead.

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

Great Sam.

And Brad, best wishes with your next chapter of your life, it's been an absolute pleasure for me doing with you over the years, and Jeff, as always congratulations on the new posting. A few questions here, if I could. Brad, you mentioned the $13 million sales impact to net income and EBITDA in the third quarter. Had you shipped that $13 million you would have exceeded prior year? Can you give us a sense of what the ballpark incremental margin might have been on that $13 million that you're contemplating on that math?

Sure, Sam. Basically in the short term, our EBITDA flow-through is estimated to be about 40% to 45% and that's obviously because of the cost that we had in place to deal with the growth that we had this year through the second and the third quarter. So, that's about a 40% to 45% EBITDA flowthrough is what we're estimating.

And then second question, you're stepping up the marketing spend in the fourth quarter and then in 2018 for product awareness and TV ad spending and what have you. Can you help quantify the impact in the fourth quarter and then what likely 2018 SG&A leverage might be with the new marketing spend plans?

Yes. Sam, this is Jeff. We are currently going through the throes of that now, should have been finalized next week. But that's why we gave a wider range. That spend is going to be anywhere from a $0.5 million to $1.5 million at this point. And it will start in the fourth quarter and bleed into the first quarter of 2018. Hope that provides a little clarity, but leverage on 2018 SG&A, Brad, do you have?

Yeah, we will have to, as we continue to expand and with growing up the new facility in Miami, next year we will be adding some fixed cost in SG&A, but we do expect next year we should be able to get some good leverage and we'll be able to provide more color on that when we get to your first quarter February call.

And then last question if I could. And if you mentioned this in your prepared remarks and I missed it, I apologize. Can you talk about backlog both in terms of, at the end of the third quarter as well as present day?

Yes. Just give me a second. Backlog finished at $50 million at the end of the quarter, and that is up 6.5% from what it was at the end of the third quarter of last year. And present-day backlog, we have been into it a little bit, somewhat, but we've also seen some nice demand in the fourth quarter. So probably hasn't changed all that much.

Thank you very much gentlemen. I appreciate it.

Thanks Sam.

And our next question will be Jeremy Hamblin with Dougherty and Company. Please go ahead.

Hey. Good morning, guys. I just add my congratulations to you, Jeff, as well as to Rod on the next chapter. I wanted to ask a question, Brad, about this $13 million estimated impact. I think that what that implies is close to $140 million in net sales, if not for the storm disruption. I think you indicated through the end of August that sales were up about 5%, $140 million would represent about an 8% sales increase for the quarter. Is that simply because September had an easier year-over-year comparison or how do you back into that $13 million estimated impact of sales figure? What would have represented that acceleration that you would have seen in September ex storm?

Yes, there was an easier comp, Jeremy. Actually, September and the third quarter of last year was the weakest of the three months. Actually, if you remember, there was a -- not nearly as impactful storm that came through about that time last year towards the end of September, not to the same degree. But we had seen 5% growth like you said in July, 5% growth in August and then it definitely would have accelerated through their first week even and accelerated. So, we had a pretty good handle on what we were delivering and that number was an absolute good representation where we ended up -- where we would have ended up for the quarter.

And then in terms of, I think you're referring to maybe Hurricane Matthew and there is another tropical storm as well that impacted, but it seems like you've seen some improvement in your repair and remodel business this year, maybe even related to last year's storms, which were clearly not Irma like. As we look forward from here, what do you expect your mix of R&R business to be in Q4 kind of range, because it's been running at this kind of 60-40 split. Should we expect that in Q4 to be materially different? And then looking forward into next year, do you see the split more like 70-30 R&R versus new construction and should we assume that that could be very positive mix shift for your margins?

Yes, Jeremy, this is Jeff. I think you'll see some benefit in the R&R market in the fourth quarter, like I had mentioned in my remarks. But as you look into 2018, I'm still comfortable with that 60-40 kind of split. I don't see it being too meaningful of a change just because of the growth we also see in new construction across the state. So, I would be -- if you're modeling it, I will keep it about the same split you have it now. If you want to favor it a couple of points for a free because I think given the advertising we're going to do, we're going to -- we will see some spike. It's just hard to estimate that at this point.

And then I think you've indicated an incremental $0.5 million to $1.5 million of ad spend. Should we be assuming that the majority of that -- how is that split going to look between Q4 and Q1? Is it half and half, I'm just trying to think about how to model your SG&A expenses here in Q4 and into Q1?

Yes, I would at this point think almost they hit in Q4. And as you know, the production costs are, what happens first, and those certainly get expensive immediately so.

And then the last question, just in terms of the operations. I think typically you guys treat your employees, while there's some time period for around the holidays and which the production facilities are closed down for time being. In terms of the increased demand for product, is there any change that you might anticipate or we should be anticipated related to the increase in demand, where you may run a few extra days than you normally would in Q4 on the production side?

Yeah, as you look into Q4, one reason is it's a tough quarter, because of Thanksgiving and Christmas. We are off two-day for Thanksgiving and two days for Christmas. And if they happen to fall in that weekend, we are typically a little bit more lenient on the weekends as well. In the past, we have been off up to a week at the Christmas holidays season. I don't anticipate being awful week this year given the demand. I think you will see maybe two or three more extra production days in that time period. It will be driven by the dealer and distributors. If they are there to take the product, we're going to be here to make it. So, that's our current thought.

Yes, this year, the holidays fall on pretty convenient. I mean as far as being busy with Christmas being on a Monday, it allows us the weekend, and then probably that week to get back. But it -- like Jeff said, it's going to really depend on if our customers can take the product, the demand is definitely going to be there for us to build it. It's just a matter of whether our customers are in the right frame to be able to take that and work on their houses during the holidays.

Great. Thanks guys and good luck.

Thanks Jeremy.

[Operator instructions] And the next questioner today will be Ken Zener with KeyBanc. Please go ahead.

Good morning, gentlemen, and congratulations on your new roles. Hey, Jeff, I wonder -- obviously, their storm demand activity is good. So, structurally, the sale of the door glass assets to Cardinal in September. I wonder if you could take a step back and put this in context, you bought the assets. Obviously, you got a good return on them. But what was the idea or what's changed from when you bought it, i.e., you try to be vertically integrated. And given the growth prospects you see and your desire to focus on your core window business, your decision to get rid of the assets, could you put that in context and maybe put it in context for how things might be different at PGTI in terms of the focus on the core businesses, because there's a lot of different things you are still doing internally?

I can start to answer, Jeff is going to jump in a little bit also, but if you go back to coming out of the recession and the industry we're starting to grow again, we saw our business really picking up and we predicted some pretty strong demand for impact-resistant glass, particularly on the door side with a lot of growth in some of our door products and some recently introduced door products. And we went out in the industry and we actually talked to a number of different manufacturers, primarily Cardinal about the ability to handle the needs that we predicted we would see over the next few years. And I think everyone was a little bit nervous as included about how strongly you could put that in the contract saying we are going to definitely need this much product in the next couple years. So, I don't think anyone who's really willing to make that plunge and say we're going to build extra capacity to handle all your needs and so it wasn't necessarily for us to vertically integrate it, was to make sure that we could take care of our customer the way we always take care of our customers, make sure we had enough production capability in place to produce the product and went to our board and talked about it and convinced everyone that we needed to put up a facility to manufacture that glass. Fast forward a few years, everything that we thought would happen happened and it actually happened even more so than we thought as far as the growth met. So, we grew that plant faster than we thought we would need to, but the industry also grew faster than we thought the industry might grow and that capacity is now there in the industry. And it's not our core, it's something that we're good at doing and it's something we can produce for ourselves, but our core is manufacturing windows and doors. So, now having enough capacity in the industry that we can buy that from the outside and focus a little bit more on core, it made sense to get that commitment from what we think is the best supplier of impact-resistant glass out there, Residential particularly, partner up with them and make sure that they can make it for us. And fortunately for us, we invested at the right time and got a good return on our investment.

And I'll just, Ken, just a couple quick reminders. We did retain ownership of both the land and the building and the TPS line that we will be using on our window production. So, from a strategy standpoint, we still make all our glass for our windows, just not the doors, and for PGT branded products. So, we still make 60% plus of our needs for impact glass. Also, what was key, and I have mentioned this on prior calls, is labor. Labor is -- we are in extremely tight labor market. And so those 200 plus employees that we have over in GP2 will be utilized throughout assembly. We are already redeploying on to fill open boards and positions we had. And that will allow us to obviously produce more windows, and given the demand that we've seen just this year and also with a heightened awareness with storm, we think 2018 is going to be a very strong year and we need the labor and folks to obviously make the windows. And now the Cardinal stepped up and expanded. They're actually expanding their facility in Ocala. They have enough capacity to supply that door need.

Understood, yeah, that seemed to be about 10% of your -- give or take of your employee count that is transferring over it seems? Does that...

Transferring over, I mean if they couldn't be still in the same building. Ultimately, we'll have production equipment in that building as well as other buildings we currently lease, we're going to consolidate into that building as more like maintenance. So, a lot of employees are staying there and work on producing windows versus just glass.

Right. And if I may just follow up, say it's obviously interesting in terms of how you're looking at your capacity of your bottlenecks? Could that same logic applied to other parts of the business? Ultimately, I mean you said you're doing 60% of your stuff vertically integrated right now. And obviously that's been helpful in terms of your cost structure when you do things internally, but with that idea of balancing assets, labor, capacity requirements, could that -- is there something perhaps that's changing versus 5 or 8 years ago within your service category?

No, I think what you'll see is our expansion of our efforts to produce product in the Miami area. As you all know, we mentioned before we're expanding and moving into new facility there at the first half of 2018 with the labor market's much more robust. And so, we would use that labor market to actually produce some of the aluminum here locally, as the Vinyl obviously with a growth of 35% compound since we introduced the product continues to grow, incredibly strong. So, we will still do impact windows glass for our impact windows. We think that's core and kind of key, if you will, for our future, because we want to be able to meet a lead time that nobody else can. So, even though, somebody else is doing our doors, we can still, if we had to, do a door panel through our current glass makeup of equipment, but we want to make sure we have that flexibility should things change in the future. So, I don't see any more of farming out the glass assets into the future at this point.

Thank you.

You bet.

[Operator instructions] And we will take -- our next questioner will be Bob Wetenhall with RBC. Please go ahead.

Hey. Good morning and congratulations on a very orderly transition. Best of luck, Rod. And Jeff, I think you're going to do an amazing job in the new role. Jeff, could you kind of give us a little color on where you were in EBITDA margin and how the business was trending before the storm? And then it sounds like based on your press release and some of your commentary, there is a good snap back in October. Any context there would be helpful, like where you're kind of 19%-20% before the storm, the interruption hits. There's kind of a lag and then you're back on track. Is that the right way to characterize it?

Yes, I think very simple -- simply stated, Bob. We were performing very well before the storm, 19% plus going into first 2 months of the quarter, even the first week of September was a strong week and in part how we calculated the $13 million sales loss for first week of September was close to $11.5 million to $12 million that week. So, we had a strong -- going into the storm, we had a storm, it disrupted us. We had some operational challenges and then on October, we've worked our way out of that along with our distribution network in the entire state. And October's looking -- looks good. Sales up 12% and EBITDA -- unadjusted EBITDA at about 18 percentage points approximately. So, looking good for the fourth quarter.

So, you made a sharp recovery after a bit of disruption, which means you're executing well. It obviously sounds like you are very confident, demand trends going into 2018. When I think of kind of what you and Rod have done in the last couple years, you've taken a bigger and more robust company through M&A. Give us like a little bit of insight into how you're thinking about PGTI in the next 12 to 18 months and even two to three years. What's the strategic action for the company under your leadership going to look like?

Yeah, I think as you look forward and we said this in the past, we want to continue to dominate the Florida market, our core markets and we think we're doing that and executing that well with the prior acquisitions and with expanding our product offerings under the PGT brand. You'll continue to see that attack on our market to maintain it as evidenced with advertising. We're going to invest and gain more share here. I do want to point out our out-of-state sales has grown this year. We've had good luck with the window and door business out of state. I think it's up in the probably 30% range, 25% to 30% up out of state, even though smaller number, but it's still growing through that distribution network out of the state. So, as I look to the -- as we look to the future as a team, I think we're going to be looking for the right markets to be in that will play to our strings. We're not a commodity-based window company. We are a high-end, high touch -- high customer touch window and door company. We're going to maintain that kind of momentum and look for potential acquisitions that will line up to that same philosophy or mindset. I don't know where they necessarily are. We talked to various companies outside the state. And I think so over the next 16 to 24 months, you would see us expand with an acquisition outside the state. Assuming everything keep -- continues its track carrying forward and we'll continue to execute those high-teens results from a margin EBITDA perspective.

And also, you just paid down $20 million on a voluntary basis. What's the outlook for the balance sheet going into next year, any thoughts on that?

Yeah, we are in a position to continue to delever quite quickly. Actually, we are, as I mentioned, 2.5x and expect to be lower than that at the end of the year. We were able to do that $20 million with the cash that we generated from operations, and generally in the fourth quarter, we get some additional cash from working capital, this is normal trend, so we might even be able to do some more. So, as it looks really good, we will be approaching that 2.0x level, which was about the time that we did each of the last couple acquisitions. So, I think we're having a very strong balance sheet that's going to give us the flexibility we need.

And final question, thanks for all the detail today. Hey, Jeff, do you think if the current trends continue and kind of the product expansion you're doing and the operational efficiencies you are driving to improve productivity, is it 20% EBITDA margin, something that's potentially achievable in the next two to three years?

Two to three years? Yes. Within the State of Florida. Again, as we march outside the state, every acquisition is going to present its challenges. So, an opportunity. So, it will depend on long-term, in two years, if we have another company outside the state and its margin profile layered into us. But within the State of Florida, it's definitely our goal to hit that 20% EBITDA margin in two-to three-year period. We've almost done it this year. We have hit 19% in the first two months of the year or this quarter.

Well, congratulations on a smooth leadership transition, well planned, well telegraphed to the street, and best of luck on that excellent 20% target. Thanks very much.

All right. Thank you.

And there look to be no further questioners. So. this will conclude the question-and-answer session. I would like to turn the conference back over to Rod Hershberger, the CEO and Chairman of the Board, for any closing remarks.

I just want to thank everybody for joining us on today's conference call. If there is additional questions, please call in and talk to Brad West, our CFO, and he'd be glad to answer your questions. Thanks for joining us today. Have a great day.

And the conference has now concluded. Thank you all for attending today's presentation. You may now disconnect.