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Good morning and welcome to the PGT Innovations Third Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) I'd now like to turn the conference over to Brad West, Chief Financial Officer. Please go ahead, sir.
Thanks, Marco. Good morning, everyone, and thank you for joining us on the call today. In addition to the news release, we have provided a slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on the Investors page of our website at pgtinnovation.com along with the supporting slides. Before we begin, I would like to direct your attention to the cautionary statements on Slide 2, as well as the disclaimers included in the press release related to forward-looking statements. I'll remind you that the today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995, including the updated 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 our company's earnings press release and in the risk factors included in our Form 10-K for the year ended December 31, 2017, our most recent 10-Q as well as Form 8-K filings with the SEC. The Company undertakes no obligation to publicly update or revise any forward-looking statements. On Slide 3, you should also note that we report results using non-GAAP measures, which we believe provide additional information for investors to help facilitate comparison of past and present performance. A reconciliation of these non-GAAP measures to their GAAP counterparts is available on the Investor Relations section of our website. And lastly if we are unable to get to your questions today, or you need additional follow up, please give me a call at 941-480-2722. I would now like to turn the conference over to Jeff Jackson, PGT Innovation's CEO and President. Jeff. I would now like to turn the conference over to Jeff Jackson, PGT Innovation's CEO and President. Jeff.
Thanks, Brad, and good morning everyone. Before I comment on the quarter, I'd like to say a few words about the latest hurricane that hit our state, Hurricane Michael. Turning to Slide 4, last month on October 10, Hurricane Michael made a landfall becoming the first Category 4 storm to hit Florida's Panhandle with wind speeds of 155 mph. It was only 1 to 2 mph short of becoming a Category 5 storm. Hurricane Michael's wrath did not stop in the Florida Panhandle, where it decimated an entire town, it maintained its major hurricane status as it passed through Florida into Georgia, becoming the first Category 3 storm to hit Georgia since 1898. The storm's complete path stretched from Florida all the way to Maryland placing some 30 million people under a hurricane or tropical storm watch or warning along the way. PGT Innovations' immediate focus as always is on helping our communities affected by the storm. And I continue to be incredibly proud an humbled by the way in which our employees, customers and fellow Floridians come together during such catastrophic events. In Michael's immediate aftermath, PGT Innovations team members once again filled our trucks with much needed supplies such as generators, flashlight and water and sent them into the Florida Panhandle. Working closely with Homeland Security, dozens of our team members volunteered to distribute supplies after traveling into areas of devastation that had no hotels, electricity or even food easily available. Many of our customers opened up their businesses to allow our team members and others to have a makeshift [demand first]. This is another example of how we make a stronger impact together and how PGT Innovations puts into action one of our core values, community. Turning to Slide 5, while some South Florida areas require homes to withstand wind speeds of 175 miles per hour, many of the communities in the Florida Panhandle have far few less stringent building codes. Sadly, the area where Hurricane Michael hit the hardest had little to no protection, because current building codes in that part of Florida only require opening protection 1 mile from the coast. In the aftermath of Hurricane Michael, as local, state and federal officials assess the damage, a consensus is emerging that building codes along Florida's Panhandle need to be held to a higher standard. Not only do we agree, but we are committed to doing our part to ensure communities in hurricane prone regions are aware their options and help them be better prepared for the next big storm. We are proud to be part of a team of experts that was on the ground to assess this damage. As a 15-year resident of Florida, I'm troubled by how catastrophic the impact from the storm has been. As a community, we can do a better job protecting our citizens to improving our building codes and the areas of coverage, and also improving construction material and [methods]. Now turning to Slide 6. I would like to take a few minutes to review our strategy for creating long-term shareholder value for our customers and shareholders. The third quarter of 2018 was the start of an exciting chapter for PGT Innovations. With the acquisition of Western Window Systems, we have positioned PGT Innovations as a national leader in the premium window and door space. The addition of Western Window Systems' geographic footprint supports our strategic vision on expanding outside of Florida, with niche products that allow us to strengthen our margin profile. Western Window Systems shares our commitment to developing strong brands and innovative products and our continuous improvement culture. PGT Innovations as PGT Innovations, we attribute our success to our focus on the continued execution of our four strategic pillars shown on Slide 6. Our first pillar is on our customers and strong brands. And PGT Innovations will put the customer at the center of our business delivering 360 degree service before, during and after the sale. By focusing on our customers, we have earned the customer award, which we believe 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 of employees is key to success and we strive to make our company the best place to have a career. In July 2018, we made everyone at PGT Innovations a Company shareholder for the first time in the Company's history. Earlier in 2018, we opened a childcare facility at our headquarters offering affordable, convenient care for our team members. These 2 strong examples of our focus on improving the lives of our team members serve well in the month of October, of continuing to develop our employee base. In addition, Western Window Systems was recognized as one of the best places to work in Inc. magazine's June 2018 issue, which is evidence of their commitment to the shareholder. Third, we are committed to investing in our business and scaling our operation to meet increasing demand. PGT Innovations is differentiated from our competitors with our high quality innovated, impact-resistant products, which meet and even surpass Florida's building codes. And the premium energy efficient products of our Western Window Systems division are designed to unify indoor/outdoor living spaces and increase regulations and the ever-increasing demand for energy efficient products. Our products are compliant with strict impact resistant building codes in Florida and the energy codes and regulations in many Western markets in North America serve as a key differentiator in our targeted markets. And fourth, we strategically allocate capital generated from our strong free cash flow to support our growth. We view the investment of free cash flow and acquisitions in growth projects as core to driving shareholder value. These pillars including investing in businesses that support strong organic growth as well as making more strategic acquisitions like Western Window Systems when the right opportunity presents itself. With the Western Window Systems acquisition, we successfully entered the bond market for the first time achieving access to capital at an attractive fixed rate. Following the acquisition, we executed a successful equity offering, which allowed us to more quickly delever our balance sheet, thereby providing us with more flexibility in operational and strategic initiatives going forward. We believe our execution of these transactions in the third quarter has put PGT Innovations in a strong position and well poised to continued growth. Now I'd like to move to a discussion of our results for the quarter. Beginning on Slide 7, I'm excited to report another quarter of strong financial results, reflecting growth in the demand for our products across all our markets. For the quarter, we delivered sales of $199 million, which was a 57% increase over the third quarter of 2017. Sales in the repair and remodeling channel was the biggest driver in our top-line for our legacy PGTI business. We're up 56% versus the same period last year, we continue to grow the repair and remodeling 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 into the new construction channel for our legacy PGTI business grew 22% over the prior year quarter. Also a factor in the higher level of sales for the third quarter of 2018 compared to the same quarter last year is the impact of Hurricane Irma in 2017, which caused approximately $13 million in sales shift from the third to the fourth quarter of 2017 due to business interruption. Looking at adjusted earnings per share for the quarter, we reported $0.38 for the third quarter of 2018 versus $0.16 in the same quarter last year, a 138% increase. Solid operating performance have continued through the third quarter as we again demonstrated our ability to leverage our significant increase in sales across our fixed cost base. Last quarter, representing the first time in the Company's history, we achieved adjusted EBITDA margins of 20% and we have done it again in the third quarter. The most significant news of the quarter, of course is our closing of the acquisition of Western Window Systems in August. PGT Innovations is focused on developing industry leading products, operating with discipline and putting the customer first. Western Window Systems clearly fits that bill. We are especially excited about the growth opportunity at Western Window Systems with us. This marks a new chapter and a significant milestone for our Company, as we become a national leader in the premium window and door space. Turning to Slide 8, I would like to review the strategic fit between our newly combined businesses. We are currently in our four years into our strategy to become a national leader of premium windows and doors. Our first phase was to solidify our position in our core market of Florida, by focusing on that market and meeting the needs of our customers with new products. Additionally, we've acquired the second and third strongest brands in the impact product space in 2014 and in 2016 respectively and did all this while maintaining industry-leading markets. The next phase of our strategy was and is the expansion into new geographies and other niche window and door products. The addition of Western Window Systems and their products that satisfy some of the most stringent energy codes and regulations in North America and serve a growing contemporary indoor/outdoor living segment in states across the country. It does exactly that. We believe Western Window Systems has and will continue to achieve better in-market sales growth having [indiscernible] desired products that Western offers and we believe they have and will continue to achieve industry leading margins focusing on high-end niche energy efficient windows and doors, also striving for continuous operational improvement. Although we are still in the early stages, the integration of our Company is on track. We continue to expect annual cost synergies of $8 million to $12 million, primarily from the integration of our supply chain where we can benefit from our larger scale. Additionally, we see exciting cross-selling opportunities and expect to continue to strengthen brand recognition and leadership, an important aspect of our growth strategy. For the third quarter of 2018, Western Window Systems performed as expected, resulting in meaningful gross margin and adjusted EBITDA margin accretion for PGT Innovations. We believe we are on track to meet our margin improvement target of 150 to 200 basis points as steady brand mix and cost synergies began to be realized. On December 4, we will host our first Investor Meeting along with a site tour of Western Window Systems' headquarters in Phoenix, Arizona. I will be making a presentation along with Scott Gates, our Senior Vice President of PGT Innovations and President of Western Window Systems. The presentation will be simultaneously webcast on our website at www.pgtinnovations.com. We will then have an opportunity for investors and analysts to take a tour of our state-of-the-art facility to see firsthand our manufacturing processes, along with a strong culture that have driven impressive growth and [indiscernible] of leaders. Stay tuned for more information in the coming weeks. Turning to Slide 9, as we look ahead, a key driver of our continued growth includes our position as the fastest growing state in the nation now surpassing 21 million people. And we believe that significant new construction growth potential remains. In Florida, we are estimating the 2018 housing starts to be approximately 95,000, whereas normalized single-family housing starts is approximately 125,000 per year. We also expect to see continued growth in the repair and remodel channel, following an active hurricane season over the last few years, we are seeing increased demand among Florida customers for impact-resistant products that can withstand tougher weather conditions. On Slide 10, the niche markets we serve historically, and we expect to continue into the future, have grown faster than the regular window and door market. To provide evidence, it's estimated that 18% of Florida homes have impact-resistant windows, 13% have impact-resistant doors and 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 Michael and Irma demonstrated that every home in Florida, not just coastal homes, can be impacted by severe weather. As a result, home owners 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. As a result of strong demand, we ended the quarter with a sales top line of $104 million, including Western Window Systems versus $51 million at the end of the third quarter last year and we accomplished this while maintaining lead times that will allow us to serve our customers' needs in a timely manner. Now I'd like to turn the call over to Brad to discuss the financial results in more detail. Brad?
Thank you, Jeff. First, I would like to review some of our recent significant achievements summarized on Slide 11 and then discuss third quarter results in more detail. In addition to the strategic benefits of the acquisition of Western Window Systems outlined by Jeff, we were able to make other significant accomplishments in co-ordination with the transaction. Top line had the transaction for the first time in our history, we entered the bond markets raising $350 million at an attractive fixed rate of 6.75%. In September, we completed a stock offering, the proceeds of which allowed us to pay down $152 million of our term loan credit facility to further strengthen our balance sheet. At the consummation of the acquisition, our gross leverage ratio was approximately 4x trailing 12-months adjusted EBITDA, inclusive of $8 million in annual cost synergies. At the end of the third quarter, our gross leverage ratio has improved to 2.6x and over 80% of our remaining leverage is at a fixed rate of 6.75% in an environment of raising rates. Another positive result of our debt paydown was that we received a ratings upgrade from Moody's to B1. Additionally, we had a B+ rating from Standard & Poor's with a positive outlook. We believe our access to long-term borrowings at an attractive rate together with the completion of an acquisition that provides us with geographical and product line diversity and other benefits has put PGT Innovations in a strong financial and operational position well poised for continued growth. Now moving on to Slide 12 for a summary of our results for the third quarter. We reported net sales of $199 million, an increase of 57% compared to the prior-year quarter owing to a number of positive factors, previously mentioned by Jeff, including a 56% increase in our repair and remodeling segment and inclusion of $18.7 million in sales from the recent acquisition of Western Window Systems. For the third quarter of 2018, our gross profit were $73.0 million, up $33.3 million versus the third quarter of 2017 and our gross margin increased to 36.7% of sales, a 5.4 percentage point increase from the prior year quarter. The inclusion of Western Window Systems in our third quarter results provided a meaningful gross margin improvement of approximately 1.7 percentage points. Also, we continue to see gross margin improvement in our legacy business 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 of 2018. Offsetting these benefits were inflationary factors including an increase in the price of aluminum and increases in labor and fuel costs. After considering the effects of our aluminum covered program, the increase in aluminum prices had a negative impact of 1.1 percentage points on our gross margins in the third quarter of 2018. As of today, we have contracted for approximately 65%, of our estimated aluminum needs for the remainder of 2018 and the average delivered price is $1.17 per pound, which compares to $1.05 per pound in 2017. Additionally, we accounted for approximately 55% for just the LME portion of the total costs at an average price of $0.98 per pound in 2019. Please note that this does not include the delivery cost, which today is approximately $0.19 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 we expanded margins by 5.4 percentage points in the third quarter 2018 despite inflationary pressures and we believe we are positioned to further strengthen our margin profile looking ahead. Selling, general and administrative expenses were $44.1 million in the third quarter 2018, an increase of $19.1 million from $25.0 million in the third quarter of 2017. SG&A in the third quarter of 2018 includes $2.8 million related to our recent acquisition and in the third quarter of 2017, including $0.7 million in higher costs related to Hurricane Irma. Adjusting for these costs, SG&A was $41.3 million in the third quarter of 2018 or 20.7% of net sales compared to $24.2 million in the third quarter of 2017% or 19.1% of net sales, an increase of 1.6%. The adjusted increase in SG&A is primarily the result of the inclusion of the SG&A expenses of Western Window Systems in the third quarter of 2018 since the acquisition, which totaled $6.9 million including $1.1 million in non-cash amortization of their amortizable intangibles assets. This represents approximately 37% of the total sales contribution of Western Window Systems of $18.7 million in the third quarter of 2018. Excluding these items, SG&A as a legacy business grew $10.2 million or remain in level as a percentage of sales at approximately 19%. This increase in legacy SG&A spending is mainly a result of the higher level of sales but also includes higher personnel-related costs of approximately $3.2 million including higher incentive compensation reflecting the improved performance in the third quarter of 2018 compared to last year, an increase of $1.1 million due to our strategic investments in additional marketing and advertising initiatives during 2018 as well as an increase in stock-based compensation expense of $800,000. Adjusted EBITDA for the third quarter of 2018 was $39.8 million or a margin of 20.0% compared with adjusted EBITDA of $22.2 million or a margin of 17.5% for the third quarter of 2017. As with our gross profits and gross margin, adjusted income and adjusted EBITDA benefited from higher sales and improved operating performance as well as the inclusion of Western Window Systems, which benefited EBITDA margins by 40 basis points. Interest expense for the third quarter was $11.7 million, an increase of $6.3 million versus last year. The current quarter interest expense includes a $5.3 million non-cash charge related to the write-off of deferred financing costs as a result of the $152 million prepayment made on our existing credit facility during the quarter. Depreciation and amortization expense was $6.4 million in the third quarter of 2018, an increase of $1.3 million versus the prior-year period, driven mainly by the acquisition of Western Window Systems. Taxes for the quarter were $3.3 million, a $0.3 million increase versus the prior year quarter. Our third quarter tax rate was 20% versus a tax rate of 32% in the third quarter of 2017, with the decrease, mainly driven by the Tax Cuts and Jobs Act. In addition, tax expense in the third quarter of 2018 was reduced by $1.0 million of excess tax benefits of stock option exercises. We reported GAAP net income of $13.6 million or $0.26 per diluted share for the third quarter of 2018 versus $6.3 million or $0.12 per diluted share in the third quarter of 2017, representing a 117% year-over-year interest. Now excluding one-time items, adjusted earnings per diluted share for the quarter were $0.38 versus $0.15 in the same quarter last year, representing a 138% increase. On Slide 13, looking ahead to the next full quarter post acquisition, I will give some expectations regarding combined company assumptions going forward for interest taxes, depreciation and amortization and capital expenditures. We expect interest expense to be approximately $7 million per quarter. We expect the go-forward tax rate to be around 26%. We expect depreciation and amortization expense to be approximately $9 million per quarter and we expect the CapEx will average 3% to 4% of annual sales. After the issuance of the additional shares and equity offering we recently completed, we estimate that for the fourth quarter, the number of diluted shares will be approximately 59.3 million. And finally, I would like to review the 2018 guidance that we updated this morning to reflect increased product demand, as well as the addition of Western Window Systems sales for the post-acquisition period beginning on August 13, 2018. PGT Innovations now expects to finish in the following ranges: net sales of $675 million to $685 million, an increase of 32% to 34% compared to 2017; adjusted EBITDA of $123 million to $128 million, an increase of 46% to 52% as compared to 2017; net income per diluted share of $1.13 to $1.19; and lastly, free cash flow of $75 million to $80 million. With that, I would like to turn the call back over to Jeff for some closing thoughts. Jeff?
Thank you, Bradley. In closing, I'd like to remind you of the 5 elements of our investment thesis on Slide 14, we are a national leader in growing premium indoor and outdoor window and door category. We are committed to continue to invest in talent in R&D to remain the industry leader in innovation and product development. We have a continuous focus on operational efficiencies to drive additional margin expansion. We are focused on striving to achieve strong execution of our strategy to create long-term customer and shareholder value. And finally, we are well positioned with a diversified strong product portfolio and diversified geographic markets to capture profitable growth in both new construction and the repair and remodeling channels. 2018 has and continues to be a milestone year for PGT Innovations. It is an exciting time to be a part of our family of brands and investor in PGT Innovations as we continue to drive shareholder value. At this time, I'd like to turn the call back over to the operator to begin Q&A. Rocco?
We will now begin the question-and-answer session. (Operator Instructions) Truman Patterson, Wells Fargo.
Congrats on the good quarter. I take it you guys are having a pretty good morning.
Yeah. Thank you, Truman, and thank you for joining us, we certainly appreciate the support.
So first question just wanted to touch on the recent repair and remodel strength, it's really been driven by the 2017 Hurricane Irma and the Floridian awareness factor, if you will. How sustainable is this repair and remodel performance through 2019? And I'm kind of thinking of it, the roofing industry has seen a hangover start to occur and really more near term in the aftermath of this year's Hurricane Florence and Michael, are there any near-term items you can give us, how that's impacting demand recently?
We are little bit different from say like the roofing industry where the demand initially is probably more repair related, because quite frankly you can't [indiscernible] initial demand and repair, whereas in the window and door category you don't really see a lot of initial repair type demand. We're leasing and continue to see in Florida as I mentioned in my comments, roughly half the state half the population in the state, the homes in the state have no impact protection, and as hurricane Michael actually demonstrated this year, you can be in an area that normally is not prone to hit by hurricanes and hurricane happens and it's devastating. So we see a robust opportunity for R&R to continue over the next couple of years, you got to remember also, as I mentioned Florida now has over 21 million people in the state and we're surviving folks daily. So we think the climate here, the business climate, obviously, the weather, the retirees is coming down, the baby boomer generation population coming into this area and the drive to improve homes and make them hurricane efficient, if you will, or protected is going to continue in to '19, into 2020. So we see good strength in R&R market in Florida.
Jumping over to your guidance. If I take the high range of your 2018 revenue and EBITDA dollar guidance, it looks like your fourth quarter EBITDA margin should decline, we'll call it 120, 130 bip from an extremely high 20% level in the second and third quarter. Are there any near-term items that we need to be thinking about that would cause the sequential decline. I'm thinking know near term hurricane disruptions or anything along those lines?
Yes, assuming nothing specific as hurricane but it was actually a pretty typical pattern for us, our business cycle tend to be stronger in Q2 and Q3 and then in Q1 and Q4, sales tend to be a little bit lower, so we're somewhat cyclical. So it really just comes down to leverage on what we anticipate will be lower sales in the fourth quarter up from the third quarter, but no disruptions related to hurricanes or nothing that I would consider outside the normal course of business and the mix impact on our business is generally more profitable, so our margin is down in those quarters. Again, you also got to look at the population of Florida, in the fourth and first quarters, we have a lot of folks come down to spend their winter months here. And typically, they don't want to be disrupted. They do their repair and remodeling when they go back up north. And so around Thanksgiving, Christmas fourth quarter really slows from a R&R standpoint in the beginning of the year. It picks back up some at end of the first quarter, but it really does kick into this second quarter. So that's what you will see a little bit of just leverage loss from mix and obviously leverage on the [indiscernible] base.
And our next question comes from Jeremy Hamblin of Dougherty & Company. Please go ahead.
Thanks guys. I'll add my congratulations on the impressive results. I wanted to start with just could you give us a sense from kind of all the tariff news and what kind of impact you're seeing as it relates to the business today and kind of moving forward?
Yes, it has been an interesting year, Jeremy, in relation to tariffs, because if you ever think you guys have figured out or you think you know what's going to happen next, it's kind of always something to surprise you. So there's been more recent talk about tariffs again. And we had some inflation that we saw in the first half of the year, we came out with a price increase over the summer designed to address that back and now there's more recent tariffs even announced more recently than that. And just to put the math off, I think next year could have an impact on our commodities where you know might be as much as 50 bps of sales at these levels. And now we still always look at coverage and pricing, so what the actual impact will be, we'll have to wait and see. But this is something that we have to be mindful of. And I do think it's going to impact us going into 2019. So like I said, right now, it is as much as 50 bps.
Understood. And then just as a follow-up on that point. You've had a lot of your competitors have actually moved to raise prices. I think one of your -- or maybe your largest competitor in Florida just raised prices two weeks ago to account, I think, at least for some of the tariff impact. Most of them have raised prices twice this year, where do you guys stand in terms of thinking about that. Now that you've seen a lot of your competitors go even a little more aggressively than you have?
Yes, Jeremy, we have raised prices at the beginning year, like Brad had mentioned, we've set the price increase this quarter, at the end of this quarter we should benefit of that during the fourth quarter, but it's always a tool we have in the toolbox to go to, we do obviously, look at that in terms of all of our input costs, our ability to hedge those costs and also that leverages the fixed cost base in terms of return on the sales volume essentially impacting via price increase. So all of that is taken into account, we could do the same, it's definitely there and we will kind of gauge that as we need to as we approach into 2019.
And then just last question is regarding the guidance. And just as I think about the huge change here in guidance. Could you give me a sense of the split of how much of that increase in your guidance on the sales front is really driven by Western Window maybe performing better than you expected versus the organic or the legacy PGT business lines?
Brad, maybe, you can share more detail, but I can tell you that the Western Window Systems is performing better than, call our acquisition model, but PGT is really coming from PGT Innovations, across our brands, the legacy business is performing incredibly well right now.
Yeah, I think, Jeff nails on it and I wouldn't add anything to that.
And today's next question comes from Keith Hughes of SunTrust. Please go ahead.
Very helpful slides you have on the Panhandle and the curve requirements there. How long do you think it will take for you to get some rebuilding going on there? And I mean, obviously, thanks, because of the curve you have a chance for business. And maybe the bigger question is that just slightly [indiscernible] do we see business from that.
You know, Keith, I'll be honest with, I'm going to go back to hurricane Irma, hitting the Keys all the way down there this past summer in August and there was still devastation in the Keys almost a year later. I was there in August and the hurricane hit in September of '17. A year later there's still cleanup going on. There's still [indiscernible]. So I think it takes a while for that cleanup to occur. The aerial photos I have seen in the reports I have gotten back from teams on the ground for PGT, devastation has been horrid and horrible, it's almost like a bomb that's went off in some of these locations and places. So I think the cleanup there is going to take even longer because it involves a much denser kind forest population with trees, all that is much bigger landmass that got hit and just going to cross hit Florida Keys or hitting Marco Island like Hurricane Irma did. So you have a lot of clean up to do, I think we'll potentially start seeing some increase in sales associated with that, I'd say at best the back half of '19 in terms of that awareness across the state of Florida because of it. So I think we get immediate benefit from people seeing yet another hurricane hit Florida and they may have a home somewhere on the East Coast and don't have impact protection or and they are looking at that and you're saying, [we'll also go ahead and do that]. So we get some benefits immediately but from the affected area its 12 months out before you really didn't kind of benefit our sales into that area.
And within the guidance, the revenue guidance, of course, there's a fourth quarter range, what kind of organic growth, do you expect to see in the fourth quarter and if you could talk about dollars and units, how those would differ in the fourth quarter?
One second, I'm going to just get that number calculated for you there, Keith.
As we mentioned before, we had a $13 million transfer of sales from Q3 to Q4 last year. So as it relates to the organic growth, I think you're going to see a little bit other temper growth rates, I'll call it in the guidance is probably something in the range of high single digits, because it is a $13 million move. As Jeff mentioned, before the Western business is pretty much a little bit ahead of what we expected, but for the most part most of that increase in the guidance is based upon PGT's performance, but just remember that last year we had a $13 million cost that we were up against.
So you're saying high single-digit growth year-over-year in the fourth and is implied in the guidance, is that correct?
Yes.
I just want to make sure units and price or more units or what do you --?
Right, now it's probably 3 percentage points of that is price, the rest would be units.
This is kind of like a 22% or 23% comp, is that correct?.
Yes.
That's fantastic by the way. And then I guess final question on aluminum, the aluminum prices on the big industries are trending down for most of 2018, sometimes the [indiscernible] little different. From where we stand right now is aluminum in 2019 from the current prices is that going to turn into a tailwind for you at some point, will or not?
I think it would be the back half of the year, because this is a function of our coverage, I think we had coverage in place from 2017 that affected 2018 that offset some of the immediate increases on the cash and market price, but if you look at the prices that we are hedged for the back half of this year and moving into next year. I think right now, there will continue to be a little bit of headwind, not to the same degree that was what's been the most recent quarter, because that was going on relatively easy comps but it's the same with where it's at right now, could potentially become a little bit of a the tailwind as you get towards the back half of next year. But I would say those numbers -- the aluminum price had the LME has retreated some this year, but the Midwest premium, which is more of a function of kind of the tariff. I think is still has a high point and that is being compared to where it was this time a year ago, was up $0.10. And that's why [indiscernible] so we'll be fighting and have come all the way through until we'll have that first quarter of next year. So that's why, I don't think the tailwind might seem as dramatic, if you got the Midwest premium offsetting that LME.
The LME is a different LME, that's the answer, okay. Thank you.
And our next question today comes from Sam Darkatsh of Raymond James, please go ahead.
Good morning. This is Josh calling in for Sam. Thanks for taking my questions and congratulations on the quarter. First a clarifying question on the fourth quarter guidance, you said there is no hurricane impact on the margins. Is there any shift in the timing of sales related to Michael?
No, I mean, yes, but it's minor.
And then regarding the third quarter, what were the primary variances versus your plan?
Well, I guess I would say the easiest answer to that is, this year the R&R results from Hurricane Irma that was the first storm to hit Florida since Jeff and I have been here. So we are thinking about what the impact was going to be on the state, it has far exceeded our expectations and matter of tightening market and we've to capitalize it and then you drove it up further. So I guess, really by far the biggest impact on our results versus our expectations this year. It's just been the strength of the R&R market, obviously, your pleasant surprise.
And then I'll just add to that, again, we have another major hurricane hit a major market. The Keys is a major market for us, Marco Island and Naples, we got a majority of winners in those markets. So that was a major disruption for the company and then to have the power outages at our plants, we just have a lot of stuff going on in the third quarter as we were giving guidance, you know, third quarter '17 as we were looking into '18, we tried to kind of account for quite frankly, if this happens again what we would do in terms of the results and now that we're kind of almost through hurricane season. It looks like we're going to be okay and it looks what we thought we can do are actually going to be better, as a result.
Is there anything to call out in the monthly trends in the quarter, particularly as it relates to organic growth?
Obviously, did at September last year [indiscernible] as well was the fact major so as the month when our biggest hit was in September, but again [indiscernible], it was a pretty consistent trend due to the three months.
And our next question today comes from Phillip Ng from Jefferies. Please go ahead.
Hey guys, you obviously delivered some explosive organic growth last few quarters. But as you get pointed out comps to get a little tougher curious if you could give us any color on how backlogs are shaping up and how you are thinking about organic growth next year? Could Michael have a similar impact in terms of awareness and any color on how we should think about sizing that up would be helpful.
Yes, I'll give you some thoughts just as we look into next year. Obviously we're doing our budgeting process now and putting the final touches on that. Some headwinds for instance we're considering, I mean, obviously we live in an environment of rising interest rates. So we're having to take that into account and yes in input costs we've already discussed already in call in terms of tariff related input cost and even wage pressure at times. We are considering all those kind of input cost, if you will, but we have some good tailwinds. I'll be honest, R&R market I think is positioned nicely for growth as a result of -- in part in Florida because of all the hurricane activity, Hurricane Michael, I think does drive awareness, does drive people to change throughout the state of Florida. And I think even Hurricane Florence, the hurricane, that, you know, came into the Carolina area, that market will increase demand orders and awareness. So we will continue to benefit with that in terms of the tailwind and look home price appreciation, you know, homes are going up in value 6% year-over-year so that always bodes well for that R&R market also, so if you take that into account. I think what's happening is basically we are growing our job base and the economy is growing faster than the housing market can support it. So I think that bodes well for new construction also. Now okay off because interest rates, I think answer is yes. It could, on the new construction side, but we still think especially here in Florida this we got some good runway to go on new construction area as well. We are considering all of those things, we're looking into '19 to try to pull together what we think R&R and construction is going to be. You want to add Brad?
No, I think that's good. And Phil, thank you for also [indiscernible] coverage on us, and welcome to the team here. I think ultimately when you get right down to it, you know, we are still a company whose products gain penetration beyond just what the market supports. Right and we showed on that one slide how there is all kinds of opportunity for us to continue to do that. And so from our perspective, you know you have some fluctuating market macro situation that's changed kind of the pace of that work and then we always tend to be able to penetrate beyond that. So we always feel good about our position and that's kind of how we think about our strategy for these products to continue to do that.
Brad, any color on backlogs, in the past you've given some color on how that's progressing quarter-to-quarter?
The third quarter's backlog finished down just a little bit from the second quarter but that's normal because in the second quarter, the backlog is reporting to the third quarter and third quarter starts to begin to interview people coming then and we start thanksgiving. And I think this is kind of time a very strong backlog. As we mentioned in the script, those still over $100 million to support our fourth quarter and guidance.
Okay. And just, is there any expectation of Florida potentially expanding to building codes. The areas previously not like a panel, for example, in light of some of the recent hurricanes and potentially talks in similar markets like the Carolina.
Yes, I think there is, I know. As I mentioned, some of my comments we were part of the team that is on ground assessing damage in conjunction with University of Florida of organizations. And so, as we're doing that, we will get that information to the foreign ability position quite frankly you kind of [indiscernible] pushes for code changes and approves those changes and hopefully that will use information we have to. In my opinion, we demonstrate the around the Panhandle is written and look to move strengthening and coverage area. I think you'll see both those happen over the next say 12 months like anything is a safe brand things. So it can take time versus something this new in a way, it was for after me. But, I think that process is ongoing and I think it will ultimately get tougher and hopefully help the people moving better homes.
Got it. That's really helpful. Last one for me. It sounds like the integration of Western Window is coming on very nicely. Can you give us some color on the progress you're making how quickly we should we expect some of these cross-selling efforts to really kind of flow through, particularly on the R&R side of things and the cadence of the $8 million to 12 million synergy realization over the course of 2019. Thanks a lot.
Yes, I'll touch in general about progress got integration team comprises of PGT legacy folks as well as Scott and some of his team members and in their meeting literally weekly ambitious variation in that are driving different initiatives. I think progress is going well. On the cost saving side are less current ISO out of the $8 million to 12 million. We're just north of $7 million, if I recall, in terms of, actually in savings. And we have few more areas just still. So all that's going as planned, if not headwinds and we come out of them organizational structure we going to start looking at regional base, Southeast and Florida as a region in the West in general as a region. So there's lots of different activities happening within the sales organization and channels to drive. I would say, cross-pollination brands and channels. All that's going well. And as I mentioned also in my comments, we have our first Analyst Day, and we chose have any question, just to give the investors and analysts a feel for what we will going and acquire and is now part of PGT Innovations and what we going to take some looking very much forward to December forward to hopefully see some of you guys at Western location.
And our next question today comes from Nishu Sood of Deutsche Bank.
So first question on the -- even if I factor out the disruption to the sales the deferral, I think the $13 million in 3Q17. It looks like there were still some acceleration in the organic pace of sales, impact sales might have accelerated from the kind of mid 20s to low 30s , how remodeling, it looks like it accelerated as well. If I back to that. I am I doing the math correctly, did you see an acceleration in the pace of organic sales, even taking that into account the shift-by-shift.
Yes, we did an issue and I think there's a couple of drivers on that. The first one is that we had a very strong demand cycle through the entire quarter, but Legacy PGTI was able to increase their production and increase their daily output, which allowed us to start to shorten some of the lead times that had gotten a little extended during the quarter. I think the demand remained relatively consistent into the quarter and strong, but our actual ability to ship probably improved in the third quarter because we increased our capacity.
And obviously, the impact resistant Florida remodeling market is going gangbusters. I'm sure you're aware that there is pretty significant concerns about the new housing market, particularly on the West Coast any insights you can give us into your kind of early stage early construction stage indicators obviously a window goes in kind of part way through the construction process, but any kind of early discussions orders or anything you're seeing there that, can you tell us about the state of demand for Western.
Yes again, I assume, Florida. I think labor is probably the biggest constraint affecting demand and we have that is almost as governor on that demand. And then another it too much out control, I think rising interest rates are also in play a factor, but that's what we are pushing to development odd business with the Western brand, because if you think, due to the rising interest rates, what they'll do is, they'll force people stay in homes longer, but in homes longer, they will tend to fix those homes up. So it's actually a good thing for our hard market, so we are actively trying to develop that our R&R presence in California, for instance, one of our top markets will assume assistance. But now we they basically serve their price in level pricing , it's actually penetrating into a. market. And so even if the, let's say that the housing numbers start on them, Western is penetrating still in that market with a new product and taking share. So what you will see, what we have seen is in a declining market, we can still grow less than of us systems because of their share penetration and Gordon into new geographic areas.
Final one from me, I know, the obviously the new facility just this year, but your sales pace is running at a such as thing if you can't number. Can you just give us an update on your ability to serve that, if demand continues to grow at this current trends.
Yeah, I think we're well positioned from an operational standpoint footprint to continue to serve the demand as I mentioned earlier, the labor initially is an issue for us. But we've overcome technology, quite frankly innovative plans, we are getting more product out less people ever before. So I think equivalent of happening in our view distributor base they're adding as many crews ahead they can , but yeah, and kind of a governor on the amount of wafer this and they've also account keeping a naturals so sort of a page on that. I think on. All right. We are definitely aiming to be from the capacity side, the demand in the market and as it continues to grow. We go long-term, again three and five-year plans with expansion of capacity is needed from a brick and mortar standpoint incredibly good shape. Just in that adding on line, our shift depending on what location talking about. So, we are in very good shape from a capacity standpoint.
And Ladies and gentlemen, today's final question will come Ken Zener from KeyBanc.
I look forward to the Phoenix day. I have a couple of questions. I apologize, if I didn't hear the initial part just because I was under the call. But the gross margin, did you highlight how much of that wise organic as opposed to M&A mix, just so we get a better understanding and please comment on kind of fourth quarter, whether it's sequential, year-over-year?
Yes. Okay. I did mention that in my prepared remarks that the impact of what's in our gross margin in the third quarter was about 1.7%. And this acquisition was done basically halfway through the quarter. The line do any kind of extrapolation on that. And yes, we would anticipate again. Yeah, consider the fact that Watson was acquired halfway through the third quarter -- with that in mind. You got, you had a normally the you see of the margin decline little bit in the fourth quarter because of lower sales that we typically see and the leverage from that standpoint. But yes, we just have 1.7% in the third quarter.
Now the fact in R&R you said 56% growth, I think, so that's just, that's amazing, I mean operationally, how does this I mean -- how are you guys operationally doing that. So people like working overtime or is it just the efficiency and the shifts so great now due to. Jeff, you talked about automation. I mean it's an amazing amount of throughput there?
Yes. We obviously at the beginning of the year we said capacity for [indiscernible], we were up against the wall and therefore had it will location. That didn't allow for efficient with efficient flow of product is a facility. Now the new facility, we made a better all those lines and as we move into the new facility, we actually upgrading equipment. So we're able to make more faster or at a quicker pace than we could before and obviously that mix just quite frankly with the R&R side of the business bringing on higher mix, it's important for us. And the here, PGT , we are will more viable now than we ever have been in the automation, we invested in sales of pass to make -- 2.5 years has been more towards that final growth. And so as that growth occurs, we are now reaping the benefit we relaunched our PGT guard product, which is not be launch in our company's history, two years ago and when we did that obviously the volume witness 80 days built, [indiscernible] we had the brand new equipment, the technology changes etc. And so as that come. We are now reaping the benefit of that and that's what you're seeing you say really impressive growth that's part of our invested -- we invested in technology and to be honest, the last quarter, I'll say is leadership, like I mentioned, one of our affiliates, we added [TAP] to all our locations here in Florida from CGI. So we will say [indiscernible] has been on board now in growing opportunity three years and that talent you longer they understand the process better you couple that with volumes and improved technology. You got much more efficient product, much more efficient markets.
Realizing you are going to be addressing a lot of the stuff in Phoenix and expanding it, just I was reading an article yesterday about Toll Brothers was building some stuff in Phoenix but they actually were kind of doing a slightly lower price point than they are used to doing but they said it was going to be luxurious in the sense that they had a kind of a walk out door and guys Western Window is in their product, I imagine they are going to have a big 15 foot tracking door and $300,000 priced home. How given the penetration that you have in your Florida market, the reason I asked about Western Window, is that seems like that's got to be it's almost green field like lower price points in addition to R&R it seems is one of those things that you guys will look out it, but is that, what gives you guys so much confidence is that there's just so many home price points as well as just the R&R side to that business and then, obviously, I think you talked about, very large manufacturing footprint, that's unused still.
Yes. That's a great question. Couple of things, one is the indoor/outdoor living isn't necessarily a price point home. In other words, it could be an $300,000 home or it is a $2 million - $3 million home. In that prior can go in year quite frankly and we have different products within Western. This is just where niches within that market, and so we're not scared this $200,000 content for instance you they condos and town homes all over the time because still what that indoor-outdoor themed now you that can you sell 2 stores was they only selling a retail 4 slide or platform or whatever but it still goes into that market and the newness of one the indoor-outdoor living contemporary look all that still grown. So that's what makes us excited on that. And Bianchi really just had reached out to the dealer network that supports in R&R market, what we have in Florida and they haven't California tons a home hit every day from the our perspective in California. And so that's just the market we issued hand. I'm not going to say we've now down our homes with Western probably half of what we have done us concentrate on the dealer network specializes in that then have that how marketing team marketed to that network. And the product innovations, et cetera and programs. So that's what over the next 12 months, Scott and team continue here, our sales here, we'll be doing. And it is excited. Yes.
And this concludes question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.
And does anyone has any further call our questions, please feel free to reach out to me and with forward to talking to you again next quarter or even if you can make it, hopefully at the Investor Day in the fourth, in some of what we think. Thank you.
This conference has now concluded and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.