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Good day. Welcome to the PGT Innovations Incorporated Second Quarter 2018 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] Please note this event is being recorded.
I would now like to turn the conference over to Jeff Jackson, CEO and President. Please go ahead.
Thanks, Michelle. Good morning and welcome to PGT Innovations’ second quarter 2018 conference call. I’m Jeff Jackson, President and CEO of PGT Innovations. And I’m joined this morning by Brad West, PGT Innovations’s CFO.
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 2018 financial performance outlook. These remarks involve 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 2017 Annual Report on Form 10-K. We undertake no obligations to publicly update or revise any forward-looking statements.
You should also note that we will report our results using non-GAAP measures, which, we provide – 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 GAAP counterparts is available on the Investor Relations section of our website. A presentation of the quarterly results is also available on the investor relations section of our website.
Now let’s kick off this call and start on Slide 4. I’m pleased to report another strong quarter for PGT Innovations, primarily driven by continued growth in our repair and remodeling channel and solid operating performance across the portfolio. For the second quarter of 2018, we delivered sales of $169 million, up 23% from the second quarter of 2017. Strong gross margin of 35.4%, compared to 32.4% in the same period last year.
Earnings per diluted share of $0.43 and adjusted earnings per diluted share of $0.41, both increasing $0.20 in the same quarter last year, adjusted EBITDA of $33.9 million, up 35% year-over-year. Importantly, this marks the first time in the company’s history we've achieved adjusted EBITDA margins of 20%.
For the first-half of 2018, we achieved sales of $310 million, a year-over-year increase of 24%; gross margin of 33.8%, compared to 30.5% in the first-half of last year; earnings per diluted share of $0.57, increasing $0.26 in the first-half of the year, adjusted earnings per diluted share of $0.60, compared to $0.27 in the first-half of 2017; and adjusted EBITDA of $55.6 million, up 38%, as compared to the first six months of 2017.
The momentum of solid operating performance from 2017 and the first quarter of 2018 continued into our second quarter, as we again demonstrated our ability to leverage fixed cost on significant increase in sales. This leverage combined with operating efficiencies resulted in a 3 percentage point increase in gross margin for the second quarter compared to last year.
Demand continued to be strong in both new construction and the repair and remodeling channels of our business, with sales growing in both channels compared to last year. Recent investments in our business and the continued commitment of our team to operational excellence enabled us to meet this increase in demand deliver impressive operating performance.
As we entered the second-half of the year, we are well positioned and focused to execute on our strategic plan to deliver exceptional full-year results, as reflected in our increased full-year 2018 guidance. We look forward to building on a strong foundation to drive enhanced value for our shareholders.
Turning to Slide 5. While demand grew across both channels, growth and the repair and remodeling, was the primary driver this quarter, up 30% over the same period last year. We achieved this continued repair and remodeling growth by capitalizing on increased demand for impact-resistant products following last year’s active hurricane season and strategically investing in advertising and marketing to drive sales.
Sales in the repair and remodeling channel now represent 65% of our sales and continued growth in this sector is expected to contribute to overall net sales growth through the back-half of 2018 and beyond. As a result of this increased demand, we ended the quarter with a strong consolidated backlog of nearly $100 million, while maintaining lead times that allow us to serve our customers’ needs in a timely manner.
Turning to Slide 6. As we look a head, key drivers of our continued growth include, Florida is the fastest-growing state in the nation. This is expected to result and normalize single-family housing starts of approximately 125,000 per year. We believe this indicates there is significant new construction growth potential will remain in Florida, as we are estimating the 2018 housing starts to be approximately 95,000 to 10,000.
We also expect to see continued growth in our repair and remodeling channel. Following the active hurricane season last year, we have seen increased demand among Florida consumers for impact-resistant products that can withstand tough weather conditions. It is estimated that 6.5 million people evacuated Florida last year, the largest in U.S. history.
In response to Hurricane Irma, the Atlantic ocean’s largest ever recorded CAT5 storm. It is also estimated that only 18% of homes in Florida have impact-resistant windows and 13% have impact-resistant doors, another 18% have storm shutters. This indicates that, at least, 50% of Floridians have no protection on openings of their homes to safeguard their property against severe storms.
Hurricane Irma demonstrated that every home in Florida, not just coastal homes can bee impacted by severe weather. As a result, homeowners throughout the entire state of Florida have begun searching for hurricane protection for their homes, which is why we believe our advertising and marketing investments continue to benefit our growth.
In addition to those efforts and to further position us to capture greater share, on July 16, we launched a value custom product line, which targets homeowners looking to upgrade to an impact-resistant window at an affordable price. We expect our new CGI Sparta product line to help further penetrate the impact-resistant shutter market and offers an affordable alternative for those that have no protection.
We believe PGT Innovations is well-positioned to continue to capture an increasing share of our core market and maintain our status as a nation’s leading manufacturer and supplier of impact-resistant windows and doors.
As I discussed last quarter, we’ve recently expanded into a new 330,000 square foot facility in Miami. I’m pleased to report that the CGI operations enjoyed the highest level of quarterly sales in their history, while also executing the move to the new facility. The third quarter of 2018 will be our first full-year in the new facility in Miami, and we expect to facilitate continued productivity improvements and operational efficiencies.
During the quarter, we also expanded our CGI commercial facility in Miami from 40,000 square feet to 80,000 square feet, which enables us to run multiple manufacturing lines. This facility features a larger production floor and showroom with additional office space for employees.
Our CGI commercial brand also introduced a new SlimFront Storefront System, which is made for high design pressure applications. This commercial segment continues to be a growing opportunity for us.
Finally, as we look forward, we are especially excited about the growth opportunity of Western Window Systems provides. This marks a new chapter and a significant milestone in our company, as we become a national leader in the premium window and door space.
As a matter of fact I have a special guest joining us on today’s call, Heather Zorge, Chief Financial Officer of Western Window Systems. I’d like to offer Heather the opportunity to say a few words. Heather?
Thank you, Jeff. I’m honored to be here today and thank you for allowing me to say a few words. As you all know, it was announced on Tuesday July 24 that PGT Innovation has entered into an agreement to acquire Western Window Systems. The transaction is expected to close in the third quarter of this year. Our team is incredibly excited about becoming part of the PGT Innovations family of brands.
Our management team and employees of Western Window Systems have worked very hard to create a company that is recognized as an award-winning manufacturer of quality, premium, contemporary window and door products designed to unify indoor/outdoor living spaces and to meet the most stringent energy-efficiency ratings in North America.
It is exciting to know the PGT Innovations team has worked just as hard to create a company that is the leading manufacturer of innovative products, which protects families, homes and businesses by satisfying some of the most stringent building codes in North America.
We look forward to working together to build a great combined company to all of its stakeholders can be proud off. Jeff?
Thank you, Heather. We can’t wait to officially welcome you and the entire Western Window Systems team of 330 employees to the PGT Innovations family. We believe that as a combined company, we will be even stronger and more profitable, and we will be well-positioned to drive sustained growth and enhance shareholder value.
Now let’s review the key highlights of the acquisition on Slide 7. As we announced last week, we believe the addition of Western Window Systems support – supports our geographic expansion outside of Florida, providing a strategic platform in an important and growing geographies throughout the Western United States and diversifies our product portfolio.
We expect this acquisition to leverage media accretion to PGT Innovations cash EPS and grows in adjusted EBITDA margins, while also maintaining our financial flexibility and solid balance sheet. In combining our offerings, we will have a more diversified product portfolio with entry into high-end, niche, energy-efficient products designed to unify indoor/outdoor living spaces. Due to these products high margins, we believe we’ll be able to achieve margins at or better than those that our current impact products provide.
Our complimentary sales strategies are expected to generate exciting cross-selling opportunities that will enable us to strengthen brand recognition and leadership aligning with our growth strategy. We’re excited about the possibilities ahead and look forward to officially welcoming Western Window Systems brand into the PGT Innovations house of brands when we close the acquisition, which we expect to occur in the third quarter of 2018.
Now let’s turn to Slide 8. For the second quarter of 2018 and as we look ahead, our main driver for our success has been and will continue to be our focus on continued successful execution of our four strategic pillars, which we expect to create long-term customer and shareholder value. Those pillars are, one, we believe putting the customer-first builds brands, as evidenced by the strong numbers we reported to date.
The investments we made in advertising and marketing have increased brand awareness and reach and connected us with new customers across the core market of Florida. By focusing on the customer, we have capitalized on these new relationships, developing deep customer royalty, which in turn has driven sales. We believe our focus on the customer will continue to drive growth as we expand our footprint.
Second, we are focused on attracting talented hardworking leaders and offering benefits to help our team member succeed. We believe that a talented dedicated team is key to our success and we strive to make our company the best place to have a career. In April, we opened a new 7,500 square foot childcare facility in our North Venice location. This benefit offers affordable convenient childcare to service PGT Innovations families with young children at a discounted rate.
In June, we also announced a one-time start grant that provided 10 shares of company stock to each of our team members who are not already participants in the company’s annual long-term incentive plan. As of July 2, I’m proud to say, every employee at PGT Innovations also became a company shareholder for the first time in the company’s history.
Third, we are committed to investing in our business and scaling our operations to meet increasing demand. PGT Innovations is differentiated from competitors by our high-quality innovative impact-resistant products, products that not only meet, but exceed Florida’s building codes, which are the safest and most stringent in the country.
Likewise, Western Window Systems premium, energy-efficient products, designed to unify indoor/outdoor living space to serve as a key differentiator in its targeted markets due to increased regulations and the demand for energy-efficient product. We believe continued investment in our R&D will enable us to continue to be an innovative industry leader in innovation and product development, which we view as critical to our success.
The increased production capacity afforded in our new facility in Miami was key in meeting and the increased demand we saw this quarter, underscoring the importance of this pillar to our long-term growth.
And four, finally, we strategically allocate capital generated from our strong free cash flow to support our growth. This includes investing in our business, but also making strategic acquisitions like the acquisition of Western Window Systems we announced last week. We view the accretive lean investment of our free cash flow as core to driving shareholder value.
Now I’d like to turn the call over to Brad to discuss the financial results for the second quarter in more detail. Brad?
Thank you, Jeff. I’ll begin on Slide 9 with a summary of our results for the second quarter. As Jeff noted, we reported net sales of $169 million in the second quarter, an increase of 23% compared to last year, continuing our momentum from the first quarter as this year’s repair and remodeling season was especially solid.
For the second quarter 2018, our gross profit was up $15.4 million and our gross margin increased 300 basis points to 35.4%, compared to 32.4% in the second quarter 2017. Our gross margin benefits from higher volume, improved operating effectiveness and a favorable mix of sales.
Gross margins also benefited from price increases that took effect during the second quarter, offsetting these benefits for inflationary factors, including an increase in the price of aluminum and increases in labor and fuel costs. The price of aluminum remains higher in the third quarter at $1.13 per pound today. It is up from $1.11 per pound at the end of last year.
After considering the effects of our active forward-buy and hedging programs, the increase in aluminum prices had a negative impact of 110 basis points on the gross margin in the second quarter of 2018. Those strong sales and moderate price increases enable us to cover these inflationary costs.
As of today, we have covered for approximately 70% of our estimated aluminum needs for the remainder of 2018 at an average delivered price of $1.13 per pound, which compares to $0.97 per pound in 2017. Additionally, we are covered for approximately 55% for just the LME portion of the total cost at an average price of $0.99 per pound in 2019. Please note that this does not include the delivery costs, which today is approximately $0.20 per pound.
Going forward, we will continue to monitor the price of aluminum and the tariff and trade environment, and as appropriate, increase our coverage or make additional prudent increases in the price of our products. We are pleased that our – we are pleased that we expanded margins by more than 300 basis points for the second quarter 2018, as compared to prior year, despite these continued inflationary pressures. And we believe we are positioned to further strengthen our margin profile looking ahead.
We expect the Western Window Systems acquisition to be immediately accretive to PGT Innovations’ growth and EBITDA margins – adjusted EBITDA margins that are targeting a margin improvement of 150 to 200 basis points, depending upon brand mix as we go forward, as we realize cost energies and continue to offer both companies high-value products to an even broader customer base. We expect this to deliver significant value to shareholders and look forward to providing additional details from following quarters.
Selling general and administrative expenses were $32.6 million in the second quarter, an increase of $7.9 million from the same quarter last year, but slightly lower as a percentage of sales. This increase was mainly driven by $2.5 million of additional personnel-related costs, including higher estimated and incentive compensation and improved performance of the company, higher recruiting costs and company 401(k) match.
Additionally, we had $2 million of additional distribution costs due to higher sales and fuel costs, and nearly $1 million in additional investment in marketing and advertising initiatives. Remaining increase was due to higher cost from higher sales levels.
Stock compensation was $684,000 in the second quarter of 2018, resulting in a first-half stock compensation expense of $1.2 million. Our estimate for all of 2018 continues to be approximately $2.5 million.
We also recorded approximately $1 million in costs related to the Western Window Systems acquisition, which we excluded from adjusted earnings and EBITDA. More costs will be incurred in the third quarter, which will also be adjusted. We recorded a gain of $2.6 million in the second quarter relating to the final transfer of certain door glass manufacturing assets to Cardinal under the asset purchase agreement we entered into in September 2017, though this gain was excluded from our adjusted EBITDA. As part of the transfers, we received cash proceeds totaling $14.8 million from Cardinal in the second quarter.
Interest expense in the second quarter was $3.6 million, a decrease of approximately $1 million from last year. As we discussed last quarter during the first-half of 2018, we made $40 million of voluntary prepayments of our borrowings. The decrease in interest expense is primarily the result of a lower average level of outstanding borrowings compared to last year.
The decrease is also related to a lower rate for borrowings under 2016 credit agreement as a result of the first quarter of 2018 refinancing, which resulted and a 125 basis point reduction in the stated interest rate margin for borrowings under the term loan portion of our facility.
Depreciation and amortization was $4.8 million in the second quarter, slightly higher than last year. We recorded tax expense of $3.8 million in the second quarter, which represents an effective tax rate of 14.3%. This compares to $5.1 million and 33.1% in the second quarter of last year.
Tax expense in the second quarter of 2018 has been reduced by $3.0 million of excess tax benefits relating to the vesting of equity awards and exercises of stock options, compared to $407,000 last year. Excluding these benefits, our effective tax rate would have been 25.8% in the second quarter of 2018, compared to 35.8% in the second quarter of last year with a lower effective tax rate resulting from the decrease in the corporate tax rate from the Tax Cuts and Jobs Act enacted at the end of last year. We continue to expect an effective tax rate for 2018 of approximately 26%.
We recorded net income of $22.5 million, or $0.43 per diluted share for the second quarter of 2018 versus $10.3 million, or $0.20 per diluted share in the second quarter of 2017. After removing the second quarter 2018 impacts on gains and transfers of assets to Cardinal under the asset purchase payment and costs related to our recently announced acquisition of Western Window Systems.
Net of their estimated tax impacts, adjusted net income for the quarter was $21.4 million, or $0.41 per diluted share. This significant year-over-year increase was primarily driven by the strong growth in our top line sales for the quarter, as well as improved operational performance and efficiencies versus the second quarter of last year.
Adjusted EBITDA for the second quarter was $33.9 million, or a margin of 20.0%, compared to adjusted EBITDA margin of $25.2 million, or 18.3% last year. As with our gross profit and gross margins, adjusted net income and adjusted EBITDA benefited from higher sales volumes and improved operating performance. A reconciliation of our non-GAAP financial measures to their GAAP equivalents have been included in our earnings release for your reference.
On Slide 10, we’ll give you breakdown of net sales for the quarter. Overall increase in overall impact sales of 25% includes increases in sales of our vinyl impact products of 39% and of our aluminum impact products of 20% compared to the same period last year. This growth was driven by solid demand for our vinyl WinGuard products, which grew 43% versus the same quarter last year.
Turning to our balance sheet on Slide 11. We ended the second quarter 2018 with a cash balance of approximately $63.9 million, up from – up $29.9 million, as compared to the prior year period. We invested $8.2 million in capital expenditures in the quarter, which is $5.0 million more than last year’s second quarter, driven mainly by spending related to our new facility in Miami.
Additionally, we made estimated federal and state income tax payments totaling $3.0 million. We received $24.8 million in cash proceeds related to the sale of our PGT-branded door glass assets in Cardinal pursuant to the asset purchase agreement executed in September 2017.
We further reduced our net leverage during the second quarter of 2018 to 1.6 times. As previously reported, at the close of the acquisition of Western Window Systems, we expect a pro forma debt to EBITDA ratio of approximately 4.0 times. We intend to capitalize on the strong free cash flow profile that we expect from the combined company to quickly delever as we did following the acquisitions of CGI and WinDoor.
At this point, I’ll turn the call back over to Jeff for comments on our increased 2018 outlook and some other closing thoughts. Jeff?
Thanks, Brad. Last week, we provided increased guidance for 2018. I wanted to remind everyone of that increase and that we expect to finish at the high-end of the new ranges. Those ranges are: net sales $580 million to $600, increasing 13% to 17%; adjusted EBITDA of $100 million to $110 million, increasing 19% to 31%; net income per diluted share of $0.95 to $1.10, which assumes $52 million weighted average diluted shares outstanding; and free cash flow of $62 million to $72 million, reflecting our expectations of a solid growth for the remainder of 201 and disciplined capital spending.
As a reminder, this outlook relates only to the legacy PGT Innovations operations and does not include any pro forma benefit for Western Window Systems. We will be able to provide more details on the Western Window Systems’ impact to our consolidated financials and related guidance after closing the acquisition.
Before taking your questions, I want to close by saying thank you to every PGT Innovations family member for another strong quarter and to our partners, customers and shareholders, thank you for your continued support. Our culture at PGT Innovations encourages integrity, safety, innovation and sustainable growth, and I feel grateful to be part of such an incredible team.
Our leadership team and approximately 2,700 team members are focused on generating profitable growth and enhance shareholder value. And I believe the 330 team members from Western Window Systems will join in and further enhance that effort once this acquisition is closed. And I’m fully confident that collectively we will.
At this time, I’d like to turn the call over to the operator to begin our Q&A. Operator?
We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Keith Hughes of SunTrust. Please go ahead.
Thanks. This is Jake Cohen on for Keith actually. I was just hoping to get a little bit more detail on how the quarter trended just given some of the weaker housing data we’ve seen recently? Were these growth rates consistent through the quarter, or how did that look heading towards June?
Yes. As we move through the quarter, it was pretty consistent quarter-to-quarter. The third quarter is like a quarter the backlog of $100 million going into the third quarter, so our third quarter started off strong as well. So in terms of growth throughout the months of the second, they were consistently year-over-year increases.
Okay, great. And then just a real quick if I’m not sure if you’re ready to give any detail on pro forma gross margin or sales mix. But how would that look in terms of R&R and new construction going forward?
Well, I can’t comment on that kind of overall mix roughly with the integration – once the integration is complete, we will be about 25% out of state and about 75% in-state on sales. In terms of the R&R and new construction mix, it’ll be closer to 50-50. Right now, we’re roughly 65-35, but Western Window Systems is pretty much new construction, so that will bring our mix pretty even.
I’m not going to comment on gross margins at this point. Like I said in my remarks, once the acquisition is closed, which we expect it to close in the third quarter, we’re going to issue a press release around that and we’ll revise our annual guidance to include the impact of Western Window Systems for the remainder of 2018.
All right. That was great. I appreciate it.
The next question comes from Sam Darkatsh of Raymond James. Please go ahead.
Good morning, Jeff, Brad, how are you?
Good, Sam.
Good morning, Sam.
Three questions, if you could indulge me. First, the clarification question, Brad. On the tax rate, there is the 26% guidance you’re having for the year. Is that inclusive or exclusive of the excess tax benefits that you recorded in Q1 and Q2? I’m a little confused as to what we should be putting in for second-half tax rate?
No, that – yes, Sam, that’s exclusive. Basically, that 26% is roughly what we’d see in any quarter, where there’s not any excess tax benefits.
Okay. So you use the 26% rate in 3Q, 4Q for our modeling purposes?
Right.
Okay. Second question, I – directionally, Jeff, I know you said you’re hesitant to give spec – the specificity on gross margin expectations going forward. But clearly, the 35% gross margin this quarter was terrific. Could you talk directionally about the sustainability of that on the legacy PGT business exclusive of the pending acquisition?
Yes. I mean, exclusivity that Sam, what we’ve done in demonstrating now through the first, at least, all of 2018 and we really started seeing some of this in 2017 as we started driving our gross margin improvements. We increased throughput, we’ve increased efficiencies, we’ve reduced scrap, we’ve done a number of things operationally in the legacy business to drive that margin enhancement to grow, Sam, EBITDA lines, but also volume.
Quite frankly, we’ve invested really starting off with a glass plant investment 2014 really throwing a lot of investment in the company that that’s paying off handsomely now with the volume. So we’re leveraging that fixed cost investment over that increase in volume. Brad, you have anything else?
Yes. So, Sam, we’ve seen improvements in our material and labor costs as our efficiencies have improved this year. And I think that part of it, we do feel it’s sustainable. Our gross margins will fluctuate with overhead leverage just because our sales volume obviously our second and third quarter tend to get more leverage than Q1 and Q4. So I would just keep that in mind, as you do any modeling go forward.
But you had 300 basis points of year-on-year expansion in gross margin. I’m just trying to get a sense of, is that realistic to think that type of cadence is realistic in the back-half?
Yes, I mean, with the same kind of sales level, yes, but if sales level grew, it’s a little bit less than 20% than the margin beat would be less as well is what I’m saying.
Got it. And then my final question, I think, last quarter lead times, if my memory serves, we’re running about four weeks. Where are they running now? And more specifically, where do you think they’re running versus the industry or versus your competitors?
Yes. Right now, anywhere from three to four weeks, Sam, that really hasn’t changed. We have added some capacity since we last spoke. But for the most part, we’re either hitting that three to four-week window. Now with Miami up and running, I think, you’ll see that kind of start to come down. The launch of the Sparta line will also have obviously better lead times on that line.
In terms of competition, we’re here it’s about the same. Competition is about that same kind of lead time three or four weeks local. Out-of-state is obviously more, because they have to get it here and by third-party glass, so there’s a lot more that goes into the out-of-state lead times. But that’s what we’re hearing as well.
So you’re not too concerned right now about aluminum prices coming off of late and then that influencing competitive pricing?
,No you mean, are you talking about the aluminum pricing we charge or the input cost of of the lead time?
I’m sorry, I apologize. The input costs, at least, what we can see externally, it looks like aluminum costs should come down over the past two, three months or so. I was curious as to whether that might influence competitive pricing?
Yes. I don’t think it will, Sam, because the tariff talk is still bouncing around. And its impact, people are still trying to figure that out to be honest with you. The Midwest premium, the transportation piece hadn’t changed, it’s roughly still the same. We have seen some LME drop…
Yes.
…but we’ll try to hopefully lock in some hedges. But we haven’t seen any meaningful change in pricing that would drive in user pricing to be affected downward at this point.
Yes, and I would add, while it’s dropped a little bit recently, it’s still pretty meaningfully up over this time a year ago, which is what’s kind of driving pricing in the competitive area.
I would think that sequential action would be more of a play on pricing determinations going forward now?
Yes, it’s really not unless you get into large projects. Once people come out with pricing, they typically don’t quarter-to-quarter fluctuate those prices, because they’re getting bid on housing projects in the quotes in an R&D market. It can come into play if there’s a large project, say, starting in 2019, if you can go ahead and lock in pricing, it would sequential quarter potentially be less or more depending on headwinds of input cost.
Very helpful. Thank you, gentlemen.
You’re welcome.
Thanks.
The next question comes from Jeremy Hamblin of Dougherty & Company. Please go ahead.
Yes. The momentum you have on the R&R side of the business, obviously, I think that’s a positive contribution as well to your gross margins just that product mix. But how much of the increase, I think, a little over 30% year-to-date do you attribute to tail winds from the storm?
And kind of wrapped in that, you did sew some new things with TV advertising at the end of last year and into the beginning of this year, how effective has that been? Are you getting better ROIs on the TV advertising? Any color you can provide on that, how much of this is again kind of sustainable or attributable to the storm itself? And when do you typically see those tailwind start to slow?
Okay, I’ll comment on a few of those and I’ll let Brad do it as well. But Jeremy, this is Jeff. This is the first storm. We went through since – in the 13 years, I’ve been here. So sustainability, we’re going to see how you see it ask what’s the impact of a storm? We couldn’t really say until we had one.
What we’ve seen is that definitely heightened awareness and people wanting to upgrade their non-impact/impact products, and you see that in our R&R growth. You also see it in our backlog, $100 million of backlog, a lot of that’s R&R-driven as well. And what we have in Florida, this is not unique to the building products industry is a labor shortfall. And that labor is kind of tempering the ability to put and install products into homes, as well as build homes, but is acting like a Governor to stretch out this, I guess, tailwind, if you will, from hurricane. I think, it continues and it continues to get stretched.
So far we are roughly midway through the season, almost, the hurricane season, no house doors repaired yet. So, we’re still, I guess, hesitant on even the impact of last year’s storm, but we see this year as well. It’s an ongoing kind of challenge in our market. But if you look at 6.5 million people evacuating Florida, the largest evacuation reported in U.S. history, yes, a lot of folks out there that want to not do that again or at least make sure that their house is secured and safe when they do.
And so that will take time to get out into the market. And we think the potential will keep – in terms of the R&R benefit will keep right on through 2019. Brad, do you have…
Yes, Jeremy, I think, Jeff mentioned in his prepared remarks and I will refer back everyone to the Slide 6 from our deck. Some very interesting data came out recently about an estimate of who actually has our impact-resistant homes or impact-resistant windows and doors in their homes. And the key takeaway from that is that, this is still a market that has a lot of grandfathered in homes that have no protection.
And we’ve said before that it’s not a lot of repair work that we’re doing when the storm comes through, it’s mostly the awareness and people deciding to put in impact-resistant windows, so that they don’t have to deal with shutters and plywood anymore. And I think, obviously, more storms helps that. But we certainly got a lot of benefit from last year’s storm, and I think we’re going to be able to grow on that for awhile.
Our advertising was very strong and keeps that front of mind for people, and we will try to make sure that that’s something that we’re always going to do keep things front of mind.
And just as a point to note, too, even though Western Window Systems, they do a lot of print ads and magazine architectural ads. They’re heavy into brand building as well. I think it’s about building brand awareness, building that brand equity. And I think what we’ve done even on our TV side, the two different campaigns we ran last year and then also this year’s kicked off hurricane season.
We’ve had incredibly positive feedback from our dealer base, as well as the end user. People that’s new to Florida, you have a lot of folks move into Florida over the last, say, 13 years, they had never experienced a storm until last year. And the awareness that, hey, that’s the window company you go to PGT Innovations, and our house of brands has been very positively received in the market.
So does that answer the kind of second part of my question there on. How do the ROIs, I’m not sure how you calculate that internally. But are you getting better ROIs on that TV advertising than, let’s say, some of the other use of marketing dollars you’ve done in the past, whether it’s customer events or some of the discounts that you’ve run historically, or is that kind of what you’re suggesting you’re getting better returns on that TV advertising and we might see more of that in the future?
You could – you will see at least this kind of the same amount in the future. What we’ve done is, we have a general market advertising marketing budget. And as a percent, we didn’t change it at. It’s just a matter who you want to allocate it, whether it’s TV print ad, discount promo, wrapping our trucks, for instance, that’s another piece of the business that we’re currently doing rewrapping all our trucks with all our four brands on our fleets.
So there’s various components we pull every year and we will emphasize or highlight a component within that marketing big strength, if you will, each year. The last two years, the dollars have been more allocated to TV and more of a broad Florida suite of recognition and then, say, targeted promotions on local areas. That doesn’t mean that we’ll switch – we’ll redo that as influenced by the market. We listen to our dealer base, our customer base and we just as we see fit.
Great, thanks for the color. And then I want to ask a question on your custom value line, the Sparta line that you just launched. In terms of thinking about that from a margin profile perspective, how is that going to be more in line with your new construction side of your business and a little bit lower than your typical R&R?
How do you see the margin shaping up for that business? And how long do you think it’ll take your manufacturing facility to get kind of up and running on throughput and efficiencies couple of years or?
We actually did a limited launch this quarter, this quarter we’re in, Jeremy, with a select group of customers. So we’re actually producing that, as we speak. We’re actually here in the Miami plant having this call. So we came down to look at it, but we’re actually producing it, as we speak, with a full launch expected in the fourth quarter roughly of this year with all our customers.
And I’ll let Brad comment on margins. But what this is really meant to do is, say, a laminated unit only at this point. And so what we’re targeting is aluminum impact and we’re targeting that customer or that homeowner that literally was going to put – was maybe putting a plywood at Home Depot and the price point itself will be a lower entry price point.
But from a quality standpoint, it’s got our names, got a reputation behind it. It’s got our field service behind it. It’s got our warranties behind it. So I’d say, it will be an incredible buy for the price point we target. Do you want to comment more on that one?
Yes. So, Jeremy, when we work through and did our design of the product, obviously, we were very mindful of our impact margins. And part of the reason why we’ve not necessarily been in that space for the longest time is because of our concerns about getting in that space and the margins being decretive.
But, say, kudos to the team, they actually design a product and the marketing team went and looked at the price point. And based on our current expectations, we feel like this product will be right in line with our typical impact products, whether it’s new construction, R&R, somewhere in that range, we’ll have to wait and see. But right now, we know it’s going to be the minimum of what I would consider the WinGuard new construction margin. And hopefully, we can even do better.
The good thing about it is, it’s going to be manufactured right here in Miami servicing and market that is mostly located right here in Miami. So even maybe we pick up some up on the transportation side as well.
Right. And I want to be clear, this isn’t a substitute play for WinGuard or a state. Those products are designed of a high pressure bells and whistles that no other products can provide quite frankly. So this is a play down in – on the cost point and the design pressure will be different and limited and it will be custom. We don’t – we’re not going to make stock. It’s still going to be ordered from the home, homeowner will work through our dealer network to get it in their home and ordered custom for their home. It would just be for different market – geographic market.
Thanks for the color, guys. Good luck closing the acquisition in the rest of the year.
Thank you.
Thank you, Jeremy.
The next question comes from Ken Zener of KeyBanc. Please go ahead.
Good morning, everybody.
Hey, Ken.
Hey, Ken.
Wow, so this quarter makes it look like you’re selling the best things in slice and bread, so kudos to you guys.
Ken, thank you for that comment.
I know, it’s good. I mean, going back to the earlier question about R&R, 30%. So you had $107 million this year. Two years ago you were at $65 million in that R&R category. It’s truly a very impressive, obviously, just say that it’s a first real hurricane you guys have 30 years.
So I don’t know what head up demand is. And you guys have referenced here in Slide 6. Was that – I know you guys have talked qualitatively about stuff. Was this a new report that really looked at the market in terms of trying to put numbers around? What does it have impact-resistance? Was this a new analysis for you guys or from this third-party?
Yes, we got it. Our marketing team picked it up offline and went through the third-party and checked the validity, if you will, of the source. And it was done a new study that they picked up, yes.
So I guess, the reason I’m asking is, the new construction that you have on Page six, I mean the future will be the future. But with remodeling driving so much growth, is there – I mean, how do you plan – if you’re doing 30% in R&R, obviously, we had a big storm. But to your point the awareness, I think, your guys business is running very smooth in terms of how you’re reaching out and making people aware.
Could your – I mean, when you think about demand, how do you handle the risk profile of, let’s say, you’re planning for 20% growth in that R&R next year? I mean, how do you kind of handle what could be operational challenges as you continue to grow? And I’m not being negative at all just it’s so strong that you might not know how strong it is?
Right. Well, I’d like to point you back to one of our four pillars of growth. We concentrate on is, our footprint of expanding our geographic footprint expansion, but also our capacity that we have to keep up with. And as I pointed out, we definitely plan ahead on a lot of the stuff, Ken.
One of the things we’re going to be doing, for instance, is technology. We’ve had more capital spend over the last couple years in our plants to better enable technology and this help to increase capacity without people. If you recall, we had about 2,700 folks here for a couple of years.
Now we went up and down 50 people here or there, but it’s been roughly the same amount of people and then the sales have grown. We’ve done that through technology and rearranging lines, better utilization of what we have, we will continue to do that. But we’ve added leadership in operations across all our brands and locations.
We expanded the footprint, as I mentioned here at Miami to 330,000 square feet, which is huge for us. And I think, the Cardinal deal where we in essence sold our door assets, the actual equipment that we made the door glass with, we sell those to Cardinal, while keeping the building and land that we can manufacture in. I think, that also increased footprint and capacity.
So we’ve got much – a lot more capacity. We can actually add. It is not necessarily people-dependent, because remember, the labor market is just incredibly tight here with unemployment what it is. So we’ve had to turn to other alternatives and it’s working so far, I can tell you, but we ought to stay ahead of it. And that’s why we wanted to make sure I focus our investment community and our investors on the four things we concentrate on. And one of them is definitely capital allocation in what we do with that and trying to stay ahead of the game and so far we’ve been able to do that.
Yes. I mean, I know it’s – in no way was that negative. Just it’s really amazing how much demand you are getting there and thank goodness, it didn’t run over Miami last year.
Switching over to Western Windows, I’m not sure exactly how you can use this or comment on it. But I think, you guys talked about sequential growth being the best way to talk about the company and like $132 million from, I guess, the $100 million the year before seem to kind of apply maybe a 5% or 6% sequential growth. I mean, is that a reasonable way to think about Western Window’s growth contribution, or into next year? I’m just trying to think about the growth that, that business is also realizing? Thank you.
Yes, Ken, I would encourage you, again, you and everybody else on the call. Once we close this acquisition, which I do expect to occur here in the third quarter, we will issue a new press release announcing the close, talking about the terms of the funding, all that good stuff, as well as the impact on guidance for 2018. And as we jointly run our companies together, we’ll learn more about what that means in 2019 as well. But I can’t and I’m hesitant and I also can’t comment on potential impacts on Western other than what I’ve said until we close the deal.
Thank you.
You’re welcome.
The next question comes from Alvaro Lacayo of Gabelli & Co. Please go ahead.
Good morning, guys.
Good morning, Alvaro.
So just on gross margin, if you could sort of walk us through like, I guess, you have in the past and maybe just focus on price, mix, volume and just maybe highlight how much each contributed to the expansion year-on- year?
Sure. So the biggest impact that we had in the 300 bps came from scrap and efficiencies improvement that was about a 150 bps. And then I have volume at about 120 and in mix at about 110. And then price is about 80, and then the offset would be aluminum, like I mentioned, and another labor inflation that was about another 70 bps that should get you pretty close.
Great, thank you. And then just on the Western Windows, just looking at the business in isolation. Maybe if you could talk about the growth trends over the last five months. I noticed that on the slide deck, a big portion of the business is California. And it’s high end new construction, which has shown some signs of slowing a little bit. Just wondering if that’s had any impact on Western Windows as a business as a whole? And maybe, if you could comment the last five or six months what you’ve been seeing in terms of trends?
Yes, again, I’m going to shy away from discussing much about Western until we closed the acquisition. If you had a chance to listen to last week’s call, we talked about some growth trends on that call. I can tell you, they do offer a unique niche product as a step up and it’s not related to growth trends, necessarily in housing. It’s people that want to buy up the current home and expand it into indoor/outdoor living space.
So they’re not as much as tied to what I would consider housing start number as a vinyl mass window company, builder rate, vinyl mass window, that’s not what we’ve gotten. So I would caution hesitancy to look at any kind of housing trends to determine any kind of Western growth stories at this point. But again, I want to limit discussion on Western until we actually close the transaction.
Got it. Okay, thanks very much, guys.
[Operator Instructions] The next question comes from Alex Rygiel of B. Riley FBR. Please go ahead.
Thanks, gentlemen. Nice quarter.
Thank you.
I’m a little confused with guidance and I want to chalk it up to you all being a little conservative on the second-half with regards to your net sales guidance of 580 to 600 in having some uncertainty about hurricanes. But backlog is higher. You’ve got a new product that’s launching. You’ve got more capacity, and you’ve got a pretty easy year-over-year comp versus the third quarter of last year when the hurricane hit. So tell me the kind of better frame why second-half 2018 guidance and the sales growth year-over-year could slow from the first-half?
Alex, I think, all those points you said were really well framed. I can’t argue any of them. I can tell you though, we are in the middle of hurricane season. We did have a hurricane that hit us last year third quarter and it did have an impact on our top line growth that quarter that we discussed in the call that time around, Brad, $10 million?
Well, $13 million.
$13 million impact. So, I guess, you just hear some hesitancy. We want to make sure, we continue to deliver on what we said like we’ve done in the last several quarters in a row and not get ahead of ourselves. So I think, we’ve laid out our guidance and we all feel very comfortable in at this point.
And again, I’ll remind you that, I do plan on updating our annual guidance for the entire company once we close the Western Window Systems acquisition. So it won’t be just the impact of Western Windows, it’ll be more of an annual guidance for PGT Innovations in total.
That’s helpful. And sorry, if I missed this. But you’ve added a fair amount of capacity recently. Where is your capacity utilization rate running at right now? And how might that change between now and year-end?
Again for the legacy PGT Innovations, we still have plenty of capacity to go the move in Miami was exactly to meet the demand we saw. As I mentioned in my remarks, it was our highest quarter of production in Miami in the company’s history, and we’re in a new plant. We still have, while we’re running a second shift, we still have plenty of capacity we can add to that shift, as well as looking at a third shift if we ever really had to for staffing up a full third.
So there’s still capacity here in Miami and growth. It was designed that way, because the market, especially with the launch of our new Sparta line, we think that – we think, we’re going to need it. So I’m not concerned with capacity here and then labor force is actually very, very strong in Miami, especially in the Hialeah market, which we are in.
In Orlando, similar scenario in terms of capacity. As a high-end product, so it’s not more of a mass custom what PGT is. And so we have capacity there, we’re only running one shift. We can definitely scale to two if we had to there. And to be honest with you, I could push production if needed overflow production to that plant from our other product lines, if necessary. PGT in Venice, that’s where we’ve really changed the focus of that plan is now more vinyl than it ever has been on a percentage wise probably 40% vinyl.
So we’ve over the last couple of years expanded the capacity with the Cardinal deal I mentioned to you earlier. We did not let go. We had 150-ish, we had 170 I think people that were dedicated to that glass plant, what we call [GP2] to make door glass. Those individuals were transferred over to assembly to make windows and doors. So we tapped on that labor force. And like I mentioned earlier, we took that glass plant that we had built and turned it into an assembly plant, and we’ve done that now. We’re still in the process of doing that. We just really closed out that Cardinal deal in the first quarter.
So that’s actively ongoing as well. So we’re expanding that capacity. So I think, we’re in a good shape to meet the demand. We’ll continue to move forward and invest wisely.
Thank you very much.
You’re welcome. Thank you.
Thank you.
This concludes our question-and-answer session. I would like to turn the conference back over to Brad West for any closing remarks.
Well, thank you for joining this morning on today’s call. We look forward to getting back with you with more information after we close the acquisition and then next quarter earnings as well. Take care, everybody.
Operator’
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.