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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to the PGT Innovations Third Quarter Earnings Conference Call. All participants are in listen-only mode.
I'd now like to turn the conference over to PGT Innovations Interim Chief Financial Officer, Brad West. Please go ahead sir.
Thank you. Good morning, everyone, and welcome to the PGT Innovations third quarter 2021 investor conference call. On the Investors section of our company website, you will find the earnings press release issued earlier today as well as the slide presentation we have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website.
Before we begin our prepared remarks, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the earnings press release and our SEC filings that discuss forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2021 financial performance outlook and the potential future impact of the COVID-19 pandemic on our business. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. Additional information on factors that could cause actual results to differ from expected results is available in the company's most recent Form 10-K and 10-Q.
Additionally, on Slide 3, note that we report results using non-GAAP financial measures, which we believe provide additional information to help investors compare prior and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
I am joined on this morning's call by Jeff Jackson, PGT Innovation's CEO and President. We will take your questions after delivering our prepared remarks.
I will now hand the call over to Jeff.
Thank you, Brad, and good morning, everyone, and thank you for joining us on today's call. Let me first begin by welcoming our 460 new team members to PGT Innovations family from our recently closed Anlin acquisition. Anlin windows and doors is a key part of the western expansion and represents an exciting addition to our growing western windows operations. During this call, we will discuss key points around the acquisition.
Now let me continue with key takeaways from the third quarter. On Slide 4, sales grew 26% from the prior year period to a record $300 million. This includes organic growth of 14% and $25 million in sales from Eco Windows Systems, which we acquired this past February. Third quarter sales benefited from solid growth across all our core markets, especially strong revenue growth in our western region. As the order entries we reported in prior year quarters translated into higher third quarter product shipments. The California market has gained momentum since COVID. restrictions were lifted, and the Texas and Arizona markets show continued strength as well.
Earlier this year, we opened up another Sky Walls retail showroom in San Diego to support the repair and remodeling market. While relatively small, the traction gained by Sky Walls in both Anaheim and our new location San Diego is representative of the overall growth in our western region. Overall western sales were up 29%, mainly driven by the production builder 51%. We also continue to see strong demand in our southeast region across both our new construction and repair and remodeling channels. Our recent New South acquisition also continued to see strong demand growth with sales up 92%. The price increases that we have communicated over the past couple of quarters began contributing additional top line in September as we continue to work through our backlog. While we only get a partial benefit in Q3, these price increases are expected to be fully in effect in Q4 and in future quarters, providing additional benefit to our fourth quarter margins.
As you have likely seen aluminum spot prices has dramatically increased throughout the year, including 16% during the third quarter alone. Approximately 60% of our sales are aluminum products. Our hedging program provided some relief, but our uncovered portion continues to be impactful going into the fourth quarter and we expect this to continue into 2022. As a result of the cost increases as well as many other cost increases we have experienced in glass, hardware, vinyl, and supplier based surcharges. We announced a 3% surcharge in our Florida operations that took effect at the beginning of November, which will help offset some of these expenses.
Additionally, we announced another 6% to 12% price increase for new orders beginning November 1 that will impact our results in the beginning of February 2022. You will also see that both labor and material cost headwinds were reflected in our Q3 results. For example, increased base wage rates and retention bonuses impacted this quarter as we prioritize retaining our experienced team members who have made our success possible throughout this pandemic. While these costs headwinds contributed to lower margins year-over-year, margins improved sequentially from Q2, reflecting price initiatives, our focused on cost management and improvement in our operations. We anticipate more normalized operations in margins in Q4 and heading into 2022, where we will have capacities more in line with robust demand. We continue to see and have seen over the past 15 months.
I am proud of the ongoing dedication and resiliency of our employees, our dealers and distributors who continue to do an outstanding job of servicing our customers despite ongoing challenges. In particular, we continue to increase output to meet customer demand by training the recently added employees integrating new equipment, expanding new facilities and diligently responding to COVID-19 related challenges, such as supply chain disruptions.
In terms of new and expanded facilities, our new Fort Myers production facility began 24/7 operations in June and continues to increase output. Earlier this year, we leased a new warehouse facility in southeast Florida to improve our fulfillment capabilities and free up capacity to accommodate increased production. This past quarter, we also invested in increased production capacity in our Venice, Miami and Tampa facilities. As a result of these initiatives, average lead time in our southeast business unit has decreased several weeks now ranging from 9 weeks to 15 weeks depending on the product.
Even with improved lead times, we continue to experience strong demand. Accordingly, even though our shipping revenue has increased our backlog today that $365 million, roughly in line with a $372 million backlog at the end of June. We have also added cutting capacity at our Eco glass operations during the quarter, which allows us to service more of our internal needs, reducing our reliance on our outside glass supplier who continues to struggle to meet our needs, and providing margin improvement from the vertical integration.
Our year-to-date accomplishments and investments are expected to position PGT Innovations to drive continued growth and margin improvement by helping us to increase our output decrease our lead times and meet expected strong demand for the remainder of the year and through 2022.
Turning to Slide 5, we have more detail on order entry. During the third quarter, our order entry in the southeast business unit was solid and consistent with the demand we saw all year. However, it was down 8% when compared to the third quarter of 2020. In October, we saw an increase in orders both sequentially and compared to prior year. At western order entry was up 31% as we saw continued momentum and recoveries in California, Arizona and Texas. Our recent acquisitions New South and Eco continue to achieve impressive demand growth.
For the third quarter retail orders at New South Window Solutions totaled $37 million an increase of 46% year-over-year. We are nearing the completion of our second year with New South. We believe that the acquisition would allow us to expand into the direct-to-consumer channels and improve our marketing environment for our business as well. The order growth we have seen over the past 18 months has proven that to be true.
Additionally, the returns from a financial perspective have also been realized. In 2019 just prior to closing the acquisition, New South had four legacy stores generating approximately $55 million in sales and an EBITDA of about 15% and three stores that they just opened up in 2018 and in 2019. Today, New South has seven legacy stores, projected to generate $120 million in revenue and an 18% EBITDA. In addition, we have opened up three stores in 2020, which will generate $18 million in revenue in 2021. With EBITDA margins beginning to consistently hit in the teens.
In 2021, we have open stores in New Orleans, Charlotte and Raleigh. As a reminder, it generally takes about 12 months to consistently turn a profit at a store and a total of 18 months to start to see the high teens EBITDA the legacy stores enjoy. We have made significant strides in the quarter and we continue to grow our capacity to position PGT Innovations to be able to meet this robust demand.
On Slide 6, we have provided information on our newest acquisition Anlin Windows & Doors, which closed in late October. This acquisition supports our strategic framework for profitable growth by expanding our market presence in the high growth west coast region. We have seen very strong growth trends in this part of the country similar to the trends we continue to see in our southeast region. In fact, Anlin experienced sales growth above 30% in the trailing 12-month period ended Q3 2021 compared to Q3 2020.
Anlin is a top regional brand for vinyl replacement windows and doors is a great fit for our existing Western Window Systems brand, which is a leading provider of aluminum products for the new home construction market. This acquisition allows us to better serve both markets with a broad product portfolio and expanded sales network. Since we acquired Western in 2018, we have been working on ways to get there innovative indoor outdoor living products into the R&R channel. Anlin’s existing R&R customers should provide an immediate boost to the Western products within that channel.
Additionally, between Westerns high end vinyl sliding glass door and Anlin’s complete vinyl window offering, we believe we now have a very strong and complete and robust vinyl platform offerings that can serve as both the new construction and R&R markets southwest. Anlin will operate under PGT Innovations Western business unit and I'm very pleased that Anlin’s top leadership will remain with the company. Anlin’s experience leadership will help ensure seamless integration of our capabilities, which is now underway.
Slide 7 summarizes our strategic operational framework as we seek to create long-term value for shareholders while servicing our customers and communities. Our first pillar is consumer centric innovation, bringing products to market that offer the features the performance and value demanded by builders and customers for today's market. Driving innovation and future sales requires us to keep our finger on the pulse of consumer preference insights. This is highlighted by our acquisition of Anlin, bringing a new complete vinyl platform to our western region customers.
Our second pillar is recruiting and retaining talent in a tight labor market. We have increased headcount by approximately 1,500 team members in 2021 to-date, this is more than a numbers game. We need employees in specific geographic areas with the right skill sets who want to excel, who want to work for us as an employer of choice and grow their careers. We attract and retain such talent through proactive communications, appropriate compensation packages, including long-term incentive programs, and emphasis on workplace safety and a culture where employees know they're appreciated. To that in we have seen improvement in retention numbers in our organization over the past several months, and we are seeing areas of improved capabilities as well. Work still needs to be done, since demand continues to be strong. But progress is apparent, as illustrated by September being our best month of the quarter in terms of both sales and margin.
Our third pillar is investing in the business. This year, we have been especially focused on increasing our manufacturing capacity and capabilities to scale our operations to meet the anticipated growth in demand over the long-term. For example, procuring critical vinyl and glass equipment has been an ongoing challenge. But our multi-prong strategy to manage materials has minimized disruptions. This has allowed us to increase capacity to the back half and into 2022.
Our fourth pillar is allocating free cash flow to achieve profitable growth. This has included finding the right strategic accretive acquisitions, investing in new products and development and production capacities and paying down debt.
Now I'd like to turn the call back over to Brad to review our results in greater detail. Brad.
Thank you, Jeff. Turning to Slide 8, we reported net sales of $300 million for the quarter a 26% increase over the prior year quarter. This includes 14% organic growth from all of our legacy businesses included substantial growth within our New South business, which continues to increase orders and installation. From a channel perspective, our repair and remodel sales benefited from two weakened acquisitions, both of which focused mainly on Florida's on our market.
In the third quarter, our sales breakdown finished at 59% R&R and 41% new construction. Organic R&R sales grew 8% during the quarter, and organic new construction sales grew 22% from the strength of our legacy brands.
Gross profit for the quarter was $104 million a 20% increase from prior quarter, reflecting increased sales, partially offset by cost headwinds from labor and materials as Jeff previously discussed.
Third quarter gross margin was 34.7%. a 180 basis points decrease from the prior quarter. The decline was impacted by increased investments in direct labor expense, mainly caused by the increased headcount and corresponding training costs and increased [wage] weights and overtime within operations. As we continue to compete for labor in a tight market.
And our Western markets, we continue to see labor expense improvement, which partially offset this impact. Inflationary pressure on materials also impacted our margins negatively during the quarter. This was mainly a result of the cost of aluminum, which from a cash perspective was up 69% in Q3 compared to the prior year. We were hedged for 75% of our needs during the quarter which mitigated some of this impact. Going forward, we are hedged at similar prices on 70% of our needs for the remainder of 2021.
Selling, general and administrative expenses for the third quarter increased by 39% compared to the prior quarter, primarily reflecting higher selling costs as a result of increased sales, and increased amortization expense related to recent acquisitions. We did also see an increase in distribution costs as we work to expand our southeastern operation, which we expect will begin to normalize as efficiencies are gained. These costs include $1.0 million each in Anlin related acquisition costs and in COVID related costs during the quarter. Our adjusted EBITDA was $43 million.
We recorded debt extinguishing costs of $25.5 million related to the refinancing of our notes and repayment of our term loan during the quarter. These costs were excluded from adjusted EBITDA, but did result in a GAAP net loss before taxes during the quarter. Our recorded tax benefit in the quarter came in at 31.9% higher than our normal expected full year modeling assumption 25% due to a change in our statutory rate as a result of enacted lower Florida State corporate income tax. We reported adjusted net income of $15.8 million or $0.26 per diluted share in the third quarter 2021 compared to $18.1 million or $0.31 per diluted share in the third quarter of 2020.
Turning now to our balance sheet on Slide 9. During the quarter we successfully refinanced our debt and position ourselves to subsequently complete the acquisition of Anlin in October. We completed a private offering at 4.375% senior notes totaling $575 million due in 2029. And use proceeds to redeem our $425 million, 6.75 senior notes due 2026. We pay $54 million outstanding on our existing term loan credit facility and partially fund the purchase price family. This new note provides a favorable long-term rate for our debt structure and lowers annual interest costs.
Our term loan agreement was amended to extend this term to 2024 and provide borrowing up to $180 million. On October 25, we borrowed $60 million to help fund the purchase price of Anlin. Pro forma for the acquisition we had total liquidity of $132 million, including cash of $58 million and $74 million of unused capacity on a revolver. After giving a spec of the acquisition as of October 25, 2021, we had to pro forma net debts of trailing 12 months adjusted EBITDA ratio of approximately 3.3 times.
Next, on Slide 10, we have updated historical net debt and leverage ratio to show how these have changed across a number of transactions. With our strong cash flow, we intend to maintain our past history of paying down debt after acquisition.
On Slide 11, I would like to discuss PGT Innovations anticipated capital allocation priorities. Our first priority is to find internal investment opportunities and projects we expect to increase capacity, drive margin growth by reducing expenses or by increasing revenues through product enhancements.
Another important priority is our commitment to maintain a strong balance sheet and conservative capital structure by paying down debt after acquisitions. Our goal generally is to maintain a conservative leverage profile between 2 and 3 times net debt to EBITDA and we expect to deleverage in the quarters ahead to get back to the target ranges we've consistently done in the past.
Finally, we use capital for strategic acquisitions that are expected to be accretive and generate strong returns over the long-term. We look for opportunities that would allow us to expand into new regions, channels or a product such as Anlin, or that would give us access to technologies, enhanced manufacturing or supply chain capabilities, such as our past acquisition of Eco. We will continue to work to integrate our newest acquisition and carefully evaluate other possible acquisition opportunities as part of our overall strategic plan, while focusing on delevering as we have done in the past.
Turning to Slide 12, our performance continues to track as anticipated, our EBITDA margins improved 190 bps from Q2 to Q3 and we anticipate further improvement in Q4 of approximately 150 bps.
Finally, sales in Q4 will likely be similar to Q3 as price increases take further hold, and revenue from two months of Anlin will offset the impact of typical holiday shutdowns we see in November and December.
And now I would like to turn the call back over to Jeff for some closing comments. Jeff?
Thanks, Brad. I'll conclude with a summary of why I am very excited about our future. And while we believe PGT Innovations creates long-term value for our shareholders, we are a national leader with strong brands, which have been further boosted by recent acquisitions. Our products are in growing categories in the fastest growing regions in the U.S. We have a long history of providing customers with innovative products to meet their challenging needs. Our continuous improvement of operations is how over time, we can drive long-term margin expansion. The overall economy is facing some challenges from the strong demand growth and supply chain challenges. And we continue to build upon existing programs to improve efficiency and gain the required capacity.
Lastly, we have a comprehensive strategy that we are striving to execute to create long-term value for our shareholders and customers. At this time, let me begin the Q&A. Operator.
[Operator Instructions]. At this time, we'll pause momentarily to assemble the roster. First question comes from Phil Ng of Jefferies. Please go ahead, sir.
Hey, guys, congrats on a really solid quarter in a challenging backdrop. I mean, Jeff, I know yes, your stock took a hit last quarter on transitory issues, but it's really great to see you guys get in front of that, especially on the labor front.
Thanks, Phil.
So I guess my question for 2022. It sounds like you've made some great progress, unlocking more production capacity and as your labor gets a little more scaled up. But looking now how much increased production do you think you'll be able to unlock? And I know you're making strides in the lead times? Do you expect that to be more normalized next year?
I do think lead times will continue to be extended. However, I do see us continuing to bring them down. We've increased capacity on various lines, sliding glass doors, frames, our vinyl line, we added a third vinyl line. We're currently adding a production capacity to our wind guard single hung line. So we've increased our production capacity at least 20%. So right now, I'd say from a production standpoint, we can produce more than we could ship out of this warehouses. So I'm feeling very good as we look into 2022, because I think we'll continue to see double-digit growth into 2022.
That's super. And I was curious from a production and labor standpoint, how are you guys set up on the Western side just because certainly orders have picked up pretty nicely. You pretty well positioned there as well?
Yes, I think Western yes, they had an incredible third quarter, with their orders up 31% or so. And with Anlin acquisition, to be honest with you, once we get that Western brand into that R&R market, which we've been trying to do. Anlin has -- is 95% R&R, so that do a base is hungry for a vinyl platform within it. So I’m definitely see Western continuing to scale into 2022, we're actually looking at expanding the facility, they're leasing more space in Arizona. But as we speak, so we continue to have more capacity available, but we do think we're going to see significant growth into 2022 especially if California stays open. Quite frankly, California and Texas are those major markets for Western Arizona and Utah, all these growing markets. So as long as barring any kind of COVID, top disasters happening again in 2022. We feel very optimistic about our Western expansion strategy.
Got it. And Jeff, you’ve announced a surcharge, I think, in the southeast, and then price increases. So I was just curious, have do your competitors matched? And with the pricing that you guys have out there ready that's going to roll through -- float a little more fully next year? Do you expect your margins to be pretty normalized? Call it 1Q 2022 because I know it's a very, very dynamic inflation environment right now?
Yes, inflationary costs are hitting everyone. We did have most of our competitors, actually all of them, I think have taken up pricing over the year, and even into the fourth quarter, there's recent announcement about a couple of weeks ago, but competitor taking pricing as well. So we do see, “matching of price increases” we have not seen a competitor match like a surcharge. That is the first time for us. And it's not something we're going to keep on there long-term, quite frankly, we just had a had a big increase in our glass cost and aluminum costs in the last three months. And the timing of the pricing, our backlog is up so high double that PGT for instance over last year.
So with that backlog it is just hard to recognize immediate offset sales price increases. That's why we implemented that 3% surcharge just to kind of bridges until our pricing does take effect. But we do feel like margins will normalize next year. Again, absent aluminum costs that's the one thing that's on our radar to really keep a watch on 60% of our sales are aluminum and quite frankly, aluminum has increased a lot this year.
And if you look at different forecasts, it has – it's continuing to go up next year. So we're going to monitor that closely. But absent that we think our pricing will normalize our margins and also the amount of extra leverage we're going to get on production throughput will also help normalize the margins into 2022.
Got it, got it. And this one last one for me. Brad, you usually give us some color on how hedged you guys are? Any color on 2022 for aluminum, how you're hedged, and how should we think about the step up from a cost standpoint? And some of the other materials that you guys do use? PBC, I've heard it's been quite tight, has that impacted your vinyl window? And certainly, there's been a lot of reports out there glass being a little choppy, like how are you guys kind of positioned in terms of getting glass to support all this growth when we think about 2022?
Yes, the -- starting with aluminum, Phil we obviously had a pretty nice program in place that help us out in 2021. As we head into 2022, we are putting in some coverage as we speak, the aluminum has dipped in the last couple of weeks that has given us some opportunity. So I would say we are in a better position today, relative to where we were call it three or four months ago for 2022. But it is still going to be one of the meaningful impacts that our price increase is designed to overcome.
In terms of the other items like vinyl. Obviously those vinyl costs have similarly been affected. They don't quite have the same market-based pricing structure that aluminum does. So and accordingly it's not really hedgeable. Although we have seen an increase in vinyl costs and resin costs that has affected us basically not to the same degree as aluminum, but both glass and vinyl I know and even hardware have gone up in pricing for us. And I think as we head into next year, some of those are more a little bit more contractual. Some of them we can negotiate and some of those opportunities to get extra supply and custom vendors who are willing to and wanting to work with us is way to cement in from that supply helps us on the pricing side as well. So aluminum tends to be the one is that is the one that we have to focus on the most, but we definitely are seen the impacts in the other categories as well.
Okay, Thanks a lot, guys.
Thanks.
Thank you. And the next question is from [Ben] Zener of KeyBanc. Please go ahead.
Good morning, everybody.
Good morning, Ken.
Hi, Ken.
You guys are really continuing to expand your footprint out of the southeast. Thinking about the Western Windows three years ago, coming on, I guess.
Yes.
Yes. And that was metal, more new. And when's the big deal obviously getting here squarely into California. Can you talk about I guess and I apologize, I was just trying to see the last transcript but was Anlin in your prior guidance for FY ‘21?
No, it was not Ken. Yes, that was last guidance we gave is in August. And we announced that position in September --
Right, September.
Yes.
So I think you guys talked about 8.5 times pre-synergies on 126. So can you talk about this -- the guidance stayed the same. And you guys acquired, it's not that much. I assume there's some initial cost headwinds, et cetera. But could you maybe just talk about, how you think that, vinyl is affecting your cost curve versus the aluminum out west. And really, in terms of synergies, how, the Anlin plan and the Phoenix plan are working together, because you guys are clearly rolling out a lot of M&A out west. And I'm just trying to understand your synergy concept between the plans? Thank you.
Yes, it's great questions. If you look at this year, it's not going to impact as you're talking a couple of months worth of Anlin results. If anything, I guess help us offset from a sales standpoint offset the traditional Thanksgiving and Christmas slowdowns, now we're going to add a little bit of Anlin sales and for the couple of months, so that'll be positive. From a cost standpoint, it's actually from a vinyl window standpoint, they're considered a medium to high end vinyl window.
And their margins are minimum, mid-teens, we've seen increases from there, actually. So we were able to get some good cost synergies, also in the form of supply mainly around glass and vinyl, there's been some good cost energy. So even though we paid 8.5 times, pre that actually the number is something south of that.
If you look at [marring] the two brands together, we really are going to marry the channels. So for instance, I've mentioned earlier, getting that aluminum product of Western that indoor outdoor living into that R&R channel that's going to be key and contribute to -- we think tremendous growth, getting Anlin’s vinyl window, ultimately into that new construction arena.
If you remember, Western has a vinyl sliding glass door Western does not have a vinyl window. So we've had to third-party that out with a joint agreement with another vinyl supplier for the new construction bills we do out west. So this will ultimately once we computed that windows somewhat it will ultimately allow us to have a complete package for the new home construction market. And our mind Western’s production builders is up 51% a quarter. So we are seeing tremendous growth there. And we think we've now got a balanced portfolio between aluminum and vinyl.
And now a complete product portfolio within those two framings within both aluminum and vinyl. And we're in both R&R and new construction markets now we think Anlin was a win-win, basically, and it'll lead to tremendous growth for us in 2022. In terms of margins in vinyl, look like I said earlier Anlin’s about a mid-teens to higher EBITDA player, and I think we'll be able to leverage PGT’s vinyl platform as well to maybe get some more synergies as we continue to expand and grow branch.
Hey, Jeff, I just want to add to that, that I know Anlin is set up to get some margin accretion just through additional volume, and they don't have capacity to grow with their existing footprint, which would help them start to improve their margins just on [indiscernible].
That's a very good point. Anlin’s only operating really one shift right now. And it has capacity to add two shift, yes. And it has capacity add a full second shift. They may have a skeleton crews at night keeper for basically clean up if you will, but they do not have two functioning shifts, just one. So there's a lot of opportunities for compassionate capacity expand to it.
Yes. Very fully answer there, Jeff. Just try to drilling down one more level if you don't mind. Vinyl windows at a Clovis, vinyl doors at a Phoenix? I mean, is that you're going to have two different shipments to like clients, is that how you're kind of thinking about that execution? And does that vinyl synergy, if you will, between the two manufacturing plants? Does this kind of supersede what you had thought to be kind of a retail? You were thinking about retail pre-COVID? And I don't think California is going to close down by the way again? That is my second question.
Okay. Yes. For now, yes there'll be cross-docking because of our doors being made -- vinyl doors being made at Western. In the future, not so distant future, we will be making those doors also in Anlin like I said, we got plenty of capacity to be able to do that to add a line within the Anlin footprint. And then also, obviously, another shift if needed as demand increases. So that that's kind of the goal long-term is to be able to make more of a Western vinyl products in Anlin and have kind of dual capabilities for that line.
Thank you.
You're welcome.
Thank you. And our next question will come from Michael Rehaut of JP Morgan. Please go ahead.
Hi, this is Maggie on for Mike. Thanks for taking the questions.
Hi, Maggie.
First, just on gross margins during the quarter, can you quantify the impact that the labor and raw material headwinds had and then also the contribution from price?
Yes, I can. The -- for the most part, I mentioned we were down 180 bps. We actually saw year-over-year improvement in material costs because of basically some mix factors and also some growth that we saw in some of the other high margin items and some scrap improvements, like out in Western. So -- but so the pricing impact was not as robust because it came in September.
So most of that improvement is coming from mixing scraps. But we did see basically a 250 bps negative on the labor side as we are still in the midst of July and August training the employee timing employees and some of the increases that we had in wages to compete before the pricing kicked in. So basically, I guess the answer, I would say is material was a little bit better. And the most of the jobs came on the labor side.
Yes, I just want to add to that. It did come on the labor side. But as Brad alluded, we are training those -- all the employees, we've made an investment in the second quarter higher. And we have seen improvement as the quarter went on. So being September being a 16.5% EBITDA Quarter 4. So we have improved, and we will continue to see that improvement into the fourth quarter.
Got it. Thanks. And then second, with the Anlin acquisition, it seems that some of the growth focus has shifted to the west, but within the southeast over a medium or longer term timeframe, can you talk about the growth opportunities that you're still seeing there particularly as you start to see the benefits of increasing your capacity? Are there any markets or channels or products where you see particular opportunity for growth or even any internal targets for annual New South store openings or markets that you're looking at for ‘22 there?
Yes, I mean, I’ll start with New South. And that's where you ended. I mean, New South, we saw tremendous growth, sales and use for the New South retail were [92%]. And like I mentioned in my comments we've now opened, we have seven legacy stores and they produce $120 million of sales at roughly an [18%] EBITDA margin. So we love that trend. All right, we love -- we’ve been able to do that brand, and the marketing surrounding it. So much so we're continuing to open up new stores, they won't necessarily be in Florida, obviously, with our 2020 stores it being in Charleston, Pensacola and Houston, 2021. We're looking into your New Orleans, we signed a lease there, Raleigh and Charlotte. And then Atlanta has closed on the hills 2021 probably 2022.
So we feel the expansion of these stores is going to continue to grow out our business from a brand standpoint, both in the southeast and feel very strong about it. And we're actually going to open up some more stores in Texas, I think we opened up Houston, if you recall, in 2020. But our plans are to continue to open up stores in the major areas within the Texas market.
The idea is you open up the stores and then you advertise very heavily in those markets. And you leverage that advertising amongst all those stores. And like I said, it's working very well in our legacy stores.
In terms of organic growth here just in the call it the legacy brands, we are experiencing growth, especially if you look at both CGR brands and PGT brands. It's been more of an operational execution issue, not a growth, it's not a growth challenge. We've got -- our backlog, even today, give me your backlog as of today is approximately $390 million. And so we are experiencing great growth in that store company. But we are experiencing great growth cross-brands. And with the added capacity and better execution, we think they'll feel that growth into 2020.
Got it. Thank you.
Thank you. [Operator Instructions] Our next question comes from Keith Hughes of Truist. Please go ahead.
Thank you. You would talk about gross margin sequential improvement. I think it'll be from the third to the fourth. If you look in the next year, given some of the pricing. Do you think that gross margin would improve even more as we get to the first half of the year?
I think that's a true statement Keith, because we do have the price increases that we've announced plus the price increase that we just announced. I would say our operations are becoming more efficient. So as sales grows up, we'll start to get some nice leverage there. So I do think you'll see some sequential margin improvement that continues on the Q1 and Q2 next year. Obviously, we'll keep an eye on the aluminum markets and some of the things that are a little bit out of control. But at this point based upon where they're at, I think we're set up well for margin improvement first half of next year.
Okay, thank you.
Thank you. Next question is a follow up from [Ben] Zener of KeyBanc. Please go ahead.
Hey, guys. Just follow up on that prior question. When you're talking about gross margins sequentially. Brad, are we talking 4Q to 1Q or you say year-over-year?
Now -- yes, Ken I was talking about sequentially. As we've been making the improvements and capitalizing on investments that we've made, most of our thought processes have been in that sequential improvement that we're looking for.
Can you talk to -- you haven't given an explicit number for 4Q, did you progress margin?
I did not. I mentioned that from an EBITDA perspective, we would be up 150 bps sequentially over Q3, I can just -- I guess that just -- I guess, potentially anticipate your question, Ken I think most of that improvement will come from gross margin.
[It’s an] anticipation. Let me ask you this, then because if I look at let's say ‘17, 2018, first half, first second half, without me trying to put details to those years, gross margins traditionally for your business. And I don't know if this was because of the Florida versus the west were lower in the first half of the year versus the second half of the year. Generally speaking, is that a seasonal pattern that is changed in your business, given the expansion out west or is that a -- whatever created that dynamic? Is that a reasonable pattern to assume, in FY ’22?
Some of that was -- let's call it seasonal, if you will, first quarter is, as all traditionally historically started off more slow than it has and then subsequently progressed throughout the year. But we don't see that right now, given the backlog we're sitting on, as we continue to improve our operations. We think we're going to change that historical, what you're referring to Ken, as a lower margin, gross margin in that first quarter.
And you got to also account Western, Western margins are significantly better than 2017, [indiscernible] we bought that in August. So we didn't really have them there, either. So you got to put Western in there to their gross margins are significantly more. And also New South, New South, they have their gross margins are significantly more so.
So the mix has changed historically. And given the robust backlog we're setting on we think we're going to leverage good in the first quarter. Whereas in the past, maybe it was a little slower coming into the January timeframe. Once you get through [indiscernible] you've just started checking in. So we think it's going to be robust at the gate.
Yes, and I for you, if you don't mind, I just want to get this out there. It seems like if you're up 150 EBITDA, Brad in the fourth quarter, you're seeing favorable price, favorable gross margin trends. And we think about the world sequentially because of these acquisitions in the absence of seasonality to some extent. It seems like that 150 number you talked about 4Q could easily be construed as the expansion perhaps rate next year or people will be to miss understanding some form of SG&A to come to that conclusion?
I think as EBITDA margins would improve because of SG&A absorption, like you mentioned as we increase our sales. So I just -- I mean, I think it's a pretty decent starting point, going into 2022. And generally our policy and we typically give guidance around 2022 in February, which we'll do again this time and what we've had a chance to see Anlin for a few months and be able to give a more thoughtful guidance going into next year for 2022 is that call, but yes, I mean, we certainly will have SG&A improvement as well.
And we've talked in calls in the past about distribution is one of the investment points. And Jeff mentioned the warehouse is one of the investment points as well, most typically tend to be SG&A costs. So the opportunity for improvement is in that category as well on -- in the next year.
Thank you, guys for your patience.
Thanks, Ken.
Thank you. This concludes our question and answer session. And I’ll go back to Mr. Brad West for closing remarks. Please go ahead.
Thank you. And first I want to thank all the veterans out there on this Veterans Day and thank you for your service. And look forward to speaking with everyone next quarter. Take care.
Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.