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Edited Transcript of PGTI earnings conference call or presentation 25-Feb-20 3:30pm GMT

Q4 2019 PGT Innovations Inc Earnings Call

NORTH VENICE Mar 7, 2020 (Thomson StreetEvents) -- Edited Transcript of PGT Innovations Inc earnings conference call or presentation Tuesday, February 25, 2020 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeffrey T. Jackson

PGT Innovations, Inc. - President, CEO & Director

* Sherri Baker

PGT Innovations, Inc. - Senior VP & CFO

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Conference Call Participants

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* Alexander John Rygiel

B. Riley FBR, Inc., Research Division - Analyst

* Joshua Kenneth Wilson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Margaret Jane Wellborn

JP Morgan Chase & Co, Research Division - Analyst

* Philip H. Ng

Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the PGT Innovations, Inc. Fourth Quarter 2019 Earnings Call. Today's conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to PGT Innovations' Chief Financial Officer, Sherri Baker. Please go ahead.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [2]

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Thank you, operator. Good morning, everyone, and thank you for joining us on today's call. On the Investors section of the company's website, you will find the earnings press release with our fourth quarter and full year 2019 results 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 press release related to forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2020 guidance and outlook that may involve risks, uncertainties and other factors that could cause actual results to differ materially. This disclaimer is a brief summary of the company's statutory forward-looking statements disclaimer, which is included in the company's filings with the SEC.

Additionally, 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 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 today by PGT Innovations' CEO and President, Jeff Jackson. After our prepared remarks, we will be available to take your questions.

I will now hand the call over to Jeff for opening remarks.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [3]

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Thank you, Sherri, and good morning, everyone, and thank you for joining us today. We have a fair amount of material to cover this morning, but as I do each quarter, I would like to give an overview of our strategic plan for those of you who are new to the PGT Innovations story.

On Slide 4, we list our 4 strategic pillars that we strive to execute against and we believe will create value for our shareholders as well as our customers.

Our first pillar is maintaining our focus on our customers who are at the center of our business and committing to deliver exceptional products and services.

Our second pillar addresses our belief that our long-term success requires maintaining the best employee talent, which we will certainly strive to attract, and maintain the best people.

A third pillar is investing in our business operations to meet expected increases in long-term demand in our core markets we serve. We accomplished this through increased operational efficiencies, achieved with automation and continuous improvement across our manufacturing facilities.

And our fourth pillar is strategic allocation of capital generated from our strong free cash flow. We are very excited to have recently completed the purchase of NewSouth Window Solutions. NewSouth direct-to-consumer channel is complementary to our existing dealer network, and we believe will help us continue to grow our customer loyalty across our portfolio of brands. We continually assess our capital market priorities, which may include reinvesting in the business, making acquisitions or paying down debt, all with the goal of driving long-term shareholder value.

Next, please turn to Slide 5. I would like to review our recently completed acquisition of NewSouth Window Solutions, which we expect to deliver several strategic benefits.

First, NewSouth expands our geographic footprint with its 8 retail showrooms throughout Florida and 1 in Charleston, South Carolina. Additionally, we have plans to expand NewSouth store locations in coastal areas outside of Florida, such as Houston and New Orleans, as part of our overall diversification strategy. Expansion of retail stores should require minimal capital investment, consisting primarily of leased retail showrooms.

Our NewSouth manufacturing facility has capacity to scale production to support expansion into markets adjacent to Florida. Going forward, with NewSouth as part of the PGT Innovations, we expect to realize input cost synergies through combined procurement, and in the future, our operational expertise should help NewSouth improve its manufacturing efficiencies.

NewSouth enables us to enter the direct-to-consumer distribution channel with a proven model to target homes at a lower price point than our traditional customers. By marketing directly to the consumer, NewSouth generates sales that we believe are incremental to our existing dealer network with sales primarily targeted towards the replacement projects that are smaller than what our typical dealer services.

And now turning to the results for the quarter on Slide 6. We reported revenue in the fourth quarter of 2019 at the top end of our revised guidance driven by performance in the legacy repair and remodeling business, which gained positive momentum in December that has carried forward into 2020. In the fourth quarter of 2019, our legacy business pipeline grew 8% compared to the prior year quarter, which is a notable leading indicator of future growth.

Our Corporate Builder business grew 4% in the fourth quarter of 2019 compared to the prior year quarter despite an expected decline in new construction. In our Western business unit, sales increased 8% compared to the prior year quarter, reflecting continued expansion in core and emerging markets. In the California market, we saw recovery from the headwinds faced in most of 2019, with housing permits for the fourth quarter increasing nearly 5% sequentially from Q3 and 19% from the prior year quarter.

Continuing the trend we discussed last quarter, we saw product mix in custom products, primarily driven by sales increases in Arizona and Texas regions. We have placed a strong focus on driving Western Window production builder sales back to growth. In the fourth quarter, we saw a 2.3% increase in sales compared to the prior year quarter, which we believe indicates an improving trend after seeing a sales decline of 12% through the first 9 months of 2019. We believe we are seeing strong momentum building on production builder growth going into 2020.

And finally, the fourth quarter of 2019 adjusted EBITDA margins of 13.6% declined from prior year quarter, primarily driven by lower sales and an unfavorable product mix across the portfolio as compared to 2018.

Now please turn to Slide 7 and looking forward into 2020. I'll share some thoughts over the macroeconomic outlook and the assumptions behind our new guidance, which Sherri will discuss in more detail.

In our legacy repair and remodeling business, I want to emphasize that we are focused on delivering year-over-year growth by implementing a number of key strategic initiatives. We saw 8% growth in our new order pipeline exiting 2019, and this momentum is continuing so far this quarter. Based upon the strengths in orders we've seen year-to-date, for the full year 2020, we are expecting market volume growth of up to 3% in the Florida repair and remodeling market, and we expect to realize above-market growth as a result of our sales initiatives. We are estimating a 3% to 5% market growth in our sales into the new construction channel during 2020 based upon our addressable market price points. If the market grows faster than our estimates, we will have the capacity to grow with the market while maintaining attractive lead times.

In addition, our legacy business continues to benefit from exclusive agreements signed with large builders and the overall increase in builder activity we've seen in January and February of 2020. We expect to generate both above-market growth through key sales initiatives and continued focus on driving Corporate Builder adoption.

Within large projects, which we define as a single job in excess of $500,000 in product, we have seen signs of strength in commercial and multifamily projects and have added product development resources to accelerate growth in this area. We are currently evaluating opportunities to grow in this segment in light of our recent acquisition, in addition to our current PGTI legacy brands. We are optimistic that we will see an uptick in large project volumes in the second half of 2020 based upon the pipeline of large projects in the marketplace.

Additionally, we are excited about our plans to expand our repair and remodeling sales in the Western business unit by opening a new division called Skye Walls, with showrooms featuring our moving glass wall product lines. Since launching earlier this year, we've added 14 new dealers dedicated to selling Skye Walls products, primarily in the Phoenix, Los Angeles and Las Vegas markets, where Western has strong brand recognition. Additionally, Skye Walls will be opening its first factory direct store in Los Angeles in the second quarter of 2020.

Before turning the call over to Sherri, I would like to take a moment to remind you of our overarching strategy to become a national leader in the premium window and door markets. With the acquisition of Western Window Systems a little over a year ago, we expanded our product lines as well as extended our footprint to include growing markets in destination states, including Texas, Arizona, Nevada and California. While Florida remains our key market, we continue to pursue profitable growth in our Western region as well as along the non-Florida portion of the East Coast and Gulf Coast. Now with the addition of NewSouth, we are able to add direct-to-consumer distribution channel, both within the State of Florida and along the southern coastal states with new future showroom openings.

While hurricane activity has certainly been a driver of demand, we expect to execute on a strategy to drive long-term organic growth and expand our base through incremental channels within and outside of our existing footprint by utilizing NewSouth's proven model for marketing and lead generation. In support of this objective, we are further developing our internal creative team to drive awareness through a mix of traditional advertising as well as digital channels.

To summarize, we expect to achieve our growth forecasts in 2020 based upon the ordering trends we've seen year-to-date, positive macroeconomic factors in our core markets and our selling initiatives that we believe will further expand our dealer base and product offerings. We expect to execute a strategy of geographic, product and sales channel diversification. We are also leveraging marketing experience, technology and tools acquired from NewSouth to build a presence in the direct-to-consumer space and improve our lead-generation capabilities across all our brands and channels.

And with that, I would like to turn the call over to Sherri to go over the quarter in more detail. Sherri?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [4]

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Thank you, Jeff. Now turning to Slide 8 to give more detail on our results. For the quarter, we reported net sales of $175 million, reflecting an 11% decline in our legacy business compared to the prior year quarter and, as Jeff mentioned earlier, better than our expectations. In our Western business unit, sales increased 8% compared to the prior year quarter, reflecting continued expansion in Western's core and emerging markets.

Gross profit for the quarter was $56 million, a decrease of $9.6 million compared to the prior year quarter. Gross margin was 32.1% of sales, a 250 basis point decrease from the prior year quarter. The decrease is primarily driven by an unfavorable product mix in both our legacy business and at Western Windows in 2019 as compared to 2018. Early indications in 2020 show a positive trend of moving towards a more normalized mix across both business units.

Selling, general and administrative expenses decreased $2 million compared to the prior year quarter to $44 million, primarily driven by lower incentive compensation.

Adjusted EBITDA for the quarter was $23.8 million or a margin of 13.6% of sales compared to adjusted EBITDA for the prior year quarter of $31.5 million or 16.6% of sales. The decline in EBITDA margin was primarily due to unfavorable product mix and higher employee benefit costs.

Our effective tax rate for the quarter came in at 26.3%, in line with our estimates. We reported GAAP net income for the quarter of $3.3 million or $0.06 per diluted share compared to $10.5 million or $0.18 per diluted share in the fourth quarter of 2018.

Turning now to Slide 9. We achieved full year 2019 sales of $745 million, including a sales contribution of $138 million from Western Window Systems. Gross margin for 2019 grew slightly to 35%, primarily as a result of gross margin accretion from Western Window Systems. Adjusted EBITDA for the year was $128 million or 17.2% of sales. Adjusted earnings per share for 2019 was $0.82 compared to $1.18 in the prior year. Weighted average diluted shares increased by 9.3%, primarily as a result of the 7 million additional shares we issued in September 2018. Additionally, while not included in PGT Innovations' results, NewSouth posted a strong year in 2019 and achieved its forecasted sales range of $82 million to $85 million that we shared in our December announcement of the acquisition.

Turning now to Slide 10. Let's review our balance sheet highlights. We ended the quarter with net debt of $282 million, down slightly from $297 million in the previous quarter. As of year-end, on an all-cash netted basis, we maintained a net debt to trailing 12-month adjusted EBITDA ratio of approximately 2.2x. After the fourth quarter, we issued $50 million of senior notes that add on notes to the $315 million aggregate principal amount of the company's senior notes due 2026, which were issued in August 10, 2018. We historically have a proven track record of reducing leverage after completion of an acquisition, and this will continue to be a priority for us in 2020.

On Slide 11, let's review our capital allocation priorities. The first priority for capital allocation is internal investment in projects expected to drive growth and generate future shareholder value.

Our second priority is our commitment to debt reduction and maintaining a strong balance sheet. We expect to maintain a conservative leverage profile with a range of 2x to 3x net debt to EBITDA.

Our third priority for capital is strategic acquisitions, such as NewSouth, that gives us a platform for expanding into new geographies and markets or other building products or channels that would expand our footprint and that we expect to generate strong margins. Given the recent completion of the NewSouth acquisition on February 1, we expect that our primary focus for the short term will be the successful integration of the company and completing our ongoing integration of Western Window Systems.

And finally, our fourth capital allocation priority is the opportunistic repurchase of shares. However, no stock repurchases were made during the fourth quarter, and we plan to remain committed to debt reduction ahead of share repurchases.

Using the macro assumptions that Jeff reviewed as well as the quarterly assumptions shown on Slide 12, we are providing the following guidance for 2020. For the full year 2020, PGT now expects to finish in the following ranges: net sales of $850 million to $880 million, adjusted EBITDA of $145 million to $155 million and adjusted net income per diluted share of $0.86 to $0.99.

Additionally, I want to point out that our 2020 fiscal year contains a 53rd week that falls in the first quarter, which will have a modest benefit to sales for the year. Also, please note that guidance includes initial estimates for NewSouth. Some opening balance sheet items, including intangibles, are still in process, and we will update guidance as necessary on a future earnings call.

We estimate that total incentive compensation was $6 million lower in 2019 than what we are modeling for 2020 due to our lower-than-planned performance in 2019. Additionally, we are expecting to invest an additional $4 million in advertising expense in 2020 as compared to 2019, with $2 million of that spend planned for the first quarter to continue to drive brand awareness in support of the robust selling initiatives Jeff discussed earlier. We have included a number of modeling assumptions embedded in our 2020 guidance estimates on the slide for your reference.

And now I would like to turn the call back over to Jeff for some closing thoughts. Jeff?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [5]

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Thanks, Sherri. Before moving to Q&A, I will conclude with PGT Innovations' investment thesis on Slide 13.

First, we are a national leader with strong brands in the growing categories in which we compete. Second, we are product innovators. We intend to maintain our advantage as leaders in our industry by investing in R&D, acquiring brands and hiring and retaining the best talent. Third, we plan to continue our ongoing focus on improving operational efficiencies that will drive margin expansion over the long term. Fourth, we are striving to execute on a strategy that we believe will create long-term value for our customers and shareholders. And finally, we believe our product portfolio positions us to capture profitable growth in both new construction and repair and remodeling channels.

2019 proved to be a challenging year, especially given our 27% organic growth achieved in 2018. We experienced headwinds in our repair and remodeling markets as well as a decrease in new home starts in our second largest market of California. However, achieving total sales of $745 million and adjusted EBITDA of $128 million in absolute terms was our biggest year ever. That would not be possible without our 3,000-plus dedicated PGT Innovation team members delivering exceptional service, putting our customers first and driving shareholder value.

At this time, I would like to turn the call over to the conference call operator to begin the Q&A portion. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will take our first question from Phil Ng with Jefferies.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [2]

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Your outlook for growth seems noticeably more upbeat since the last quarter. What's changed in that time frame, any markets that stand out? And can you help us think of the shape of the year from a growth standpoint?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [3]

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Yes. I think two of the biggest changes is in R&R legacy growth that we experienced in the fourth quarter as we ended the year, and then that trend continuing into January and thus far into February. It definitely is better than it was. And it gave us more insight into the potential of the Florida market. I think another significant trend that we've seen, again, as we closed the year, and has kept the same trend into January and February, was Western. Their sales continue to grow actually in the -- more of the volume program, which is the better mix of Western, has outpaced what it was in 2019.

So you combine those 2 -- and plus, to be honest with you, with new home construction starts in the State of Florida, our Corporate Builder program has delivered, so far this year, impressive growth. So I think if you combine those, that's where you see the optimism so far in early 2020 here.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [4]

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Got it. Any color how to think about the shape of the year? I think, Jeff, you mentioned the back half might be a little stronger, but can we inflect positively in 1Q?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [5]

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Yes. I mean I think we're going to have a solid first quarter. I think we've made noticeable improvements in mix in both the Western business unit and the Southeastern business unit, kind of the legacy brand, if you will, versus sequential quarter. And from an operational standpoint, we've made some changes at the Western business unit that are starting to show positive signs. So I think, sequentially, you will see an improvement. For the year, again, we're positive. At this point, 2020 started off strong for us. Sherri?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [6]

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I think what you could look at is, is maybe use 2018 as a base. So I would call that your more normal seasonalization. I would expect the year to follow something closer to that. And then as Jeff articulated, we are still continuing to execute some operational initiatives at Western that are continuing to ramp up throughout the year. So I think it's the combination of the 2, but we would expect a more normalized cadence across the quarters.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [7]

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Got you. And just on that note, Sherri, your guidance, I think, on our math, implied fairly flattish EBITDA margins, but your organic growth is obviously improving. What's driving a more flattish margin environment? Is it some of the investments you just talked about or maybe, from a mix standpoint, NewSouth might be a lower-margin business?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [8]

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Yes, it's actually a combination of all of those. So at the end of our prepared remarks, we highlighted two things. We do have a year-over-year incentive compensation increase to the tune of $6 million, actually $7 million when we include the cash payout related to NewSouth, that was part of the agreement. That is actually on the footnote of the presentation as well, so we have that. We have an incremental $4 million of marketing investments that we will be making versus what we saw in 2019. We spent actually very little in the first half of 2019. And so you'll see $2 million of that $4 million actually hit within the first half of the year and then exactly what you said about that last piece of continued product mix and then some amount of NewSouth. NewSouth does have some margin dilution, and they also have incremental investments when we're opening new stores, of which we are planning to do 2 this year. So it's a combination of all of those in total, but the legacy business itself is expecting to show EBITDA margin improvement with just those other offsets.

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Philip H. Ng, Jefferies LLC, Research Division - Senior Research Analyst & Equity Analyst [9]

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Got it. That's really helpful color. And just one last one for me. Jeff, you talked about your strategy about diversifying your legacy business outside of your key market, Florida. Can you give us an update on the progress you've made on branching out Western into some of the R&R markets and outside of the west? And then how does this NewSouth acquisition kind of fit into that strategy and perhaps accelerate that process?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [10]

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Yes. Great question. In terms of progress we've made, as I've mentioned in the remarks, we're actually going to open up our first retail store for Western in Q2. So Skye Walls is the brand we're going direct with in the R&R market there. And we have set up 14 new dealers since introducing the Skye Walls portfolio. So we're starting to make some good headwinds. We're also in negotiations with a couple of the bigger suppliers, if you will, builder suppliers out west that doesn't carry the Western product as well, which would target the R&R market.

For NewSouth, again, that's going to be store-dependent, if you will. They just opened a Pensacola store, and the next store is going to be Houston, Texas, followed very quickly with New Orleans. So if you think in terms of expanding there, we're very excited. In terms of the margin drag, I will just add a little bit. It will be -- NewSouth will be dilutive, but over time, we don't expect that to be the case as we, again, implement synergy savings from both the procurement side as well as operational execution. What we've proven at PGT, in terms of our operating performance at our plant, we're going to employ that at NewSouth. And I think, over time, again, 12 months out, you're going to see that dilution go away and actually be positive. So the expansion plans for NewSouth are aggressive. We will be going into other regions over the coming years outside of the State of Florida, up the East Coast. And we're just excited overall about the R&R opportunity there.

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Operator [11]

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We will take our next question from Michael Rehaut with JPMorgan.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [12]

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This is actually Maggie on for Mike. First, I wanted to follow up on the last question about NewSouth's margins. You said that they were going to be dilutive in kind of the next 12 months, but I was wondering if you could be a little bit more specific on how NewSouth's gross margin and SG&A profiles compare to maybe the legacy business.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [13]

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Yes, I'll be happy to take that. So I think you would consider both of them higher than the legacy business. So because they are vertically integrated, they have a slightly higher gross margin, but they also, on the flip side, because they do have the retail side, they also have a higher SG&A as a percent of sales. Clearly, that does not currently include the synergies that Jeff just talked about, so that would be pre-synergies, of which we expect those to be primarily cost and most likely primarily showing up within gross margin within COGS. So I would think about it that way. And then the last piece I would highlight is, is you also have to keep in mind that there is a ramp-up period when they're opening their new stores. So once their new stores hit, I'd say their normal run rate after, call it, 12 to 24 months, the retail margins are actually very similar to our historical PGT margins. So those would be, I think, the three things that I would call out for you.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [14]

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Okay. And then, I guess, last quarter, you talked about some of the increased promotional efforts and investments that you began making in 3Q. I think you said that there would be some more investment in 4Q, but you were really expecting the benefits to start to flow through in 1Q. So I was wondering if you could kind of give an update to how that impact is tracking. Is it as you expected or maybe a little bit better now that the market has kind of improved?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [15]

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Yes. I actually -- great question. So I think that it impacted us in both Q4 and what we're seeing in Q1. So I think that those marketing investments that we made and the promotional investments we made are partially why we performed better than what we initially expected for our Q4, particularly in our legacy business. So we're pleased to see that. We're also pleased to see that, that pipeline is growing. And we're seeing that continue in Q1. So I think that we're seeing positive benefits for that. We also plan to continue to invest within the marketing space to continue that synergies and the trajectory. And Jeff spent quite a bit of time talking about a lot of the selling initiatives that we have in place. Clearly, those are requiring some amount of marketing investments, but we're very pleased with, at least, the lift and the payback that we've been seeing thus far.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [16]

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Yes. And I would just add on the marketing spend. We mentioned we're going to make an investment this year. And obviously, that's a controlled investment. So we are -- the majority of our business is here in Florida and is hurricane-driven. So for instance, if we get a hurricane, we're more likely to spend some of those dollars to, again, more targeted audiences of the benefits of our product, et cetera. So the marketing investments are going to be key both to drive our current dealer network, again, expanding our lead-generation tool for our dealer base with the PGT legacy brands, turning those leads into actual sales and tracking that for our dealers, all the way through promotions to local areas to -- again, if a hurricane happens to hit or get close, just advising the public of the benefits of our product.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [17]

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Got it. And if I can just squeeze one more in, are there any plans to sell the legacy products in the new retail showrooms, kind of use that NewSouth infrastructure for legacy products?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [18]

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No, really not at all. That's a separate brand that we're going to just keep direct. The PGT legacy brands, in terms of benefit, will only benefit more from a lead-generation tool that we're developing for them. That, again, was similar to what NewSouth implemented and more robust TV advertising for our dealer networks, but that will be -- our PGT legacy brands are going to be our dealer-based brands and will go through those channels. And then we'll use the NewSouth brand, not only to continue here in Florida what they've done but, more importantly, to diversify outside the state, but through all the way to Texas. Houston is an incredible market that we've been trying to penetrate. And we -- that's an example of what we're very excited on. So we'll use that NewSouth brand to grow outside the state of the East Coast and all the way to Texas.

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Operator [19]

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We will take our next question from Keith Hughes with SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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So in the prepared remarks, Western was up 8%, I assume that's revenue in the fourth quarter. What did the EBIT look like at Western in the fourth?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [21]

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I think the EBIT, I'd say, was similar to what you saw in Q3, primarily because they were still running a higher custom mix. The improvements in their production builder really started happening at the tail end, so call it December really coming more into January. So they would be at close to similar margins. They did have some offsets within a higher scrap rate but was offset with a lower SG&A. So the improvements that they're making that are currently in process on both labor and materials have somewhat improved in Q1, and we expect those to continue to improve throughout Q2.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [22]

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Yes, Keith, in terms -- especially -- I'm going to speak to labor because that's the one I've seen the most. We're basically making more products than we did with about 20, 25 less people. So that process is ever going, and we're continuing to drive efficiency there. Materials is going to be -- take a little longer, again, because of new products and how they're made and tracked, but we've implemented -- are actually currently implementing different initiatives around the materials as well.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [23]

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And the mix shift in the reported quarter, I assume that was enterprise-wide. Was that literally just trade-down? Or was there any discounting in the market? What was the makeup of that?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [24]

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Yes, there wouldn't have been any trade-down. No, no. It was the R&R and new construction mix that we were expecting, both down year-over-year, not dissimilar to what we had been seeing and what we were expecting, so no trade-down on that. It was just very similar mix and exactly the same thing for Western, similar higher custom mix than the production builder.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [25]

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Although, again, production builder did improve in the fourth quarter, about 2%, 2.3% at the very end and trended -- that trend is continuing into 2020. And that production builder portion is a higher margin, so it's actually -- we expect that mix to change in the first quarter.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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Okay. So your production builder is a higher margin than the custom business?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [27]

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For Western? Yes, the volume program for Western is higher margins.

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Operator [28]

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We will take our next question from Joshua Wilson with Raymond James.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [29]

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Jeff and Sherri, congratulations on the quarter.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [30]

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Thanks, Josh.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [31]

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Thank you.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [32]

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Could you specifically quantify the dollars you're assuming for NewSouth Windows in sales and EBITDA in the guidance?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [33]

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We're still -- obviously, we just closed NewSouth January 1. So we put in the guidance in terms of sales that we thought was consistent with what we've shown before and the plan, the model that we based the acquisition off of. So we're still in the early processes of categorizing, if you will, the expenses between gross margin and SG&A and various other initiatives, finalizing the purchase accounting, which will affect amortization. So there's a lot still going on there. So what we basically used in the model, if you will, our guidance, is what we saw in the acquisition model, which, again, was the ranges that Sherri has discussed. And the margins are -- what was it?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [34]

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Mid-teens.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [35]

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Mid-14-something percent. And again -- but that's pre-synergy, just keep that in mind.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [36]

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Got it. And I believe when you initially announced it, you said $2 million of synergies. Is that still the expectation? And at what point do you hit that run rate?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [37]

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Yes, it is, and we should hit that run rate in the back half of 2020.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [38]

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Got it. And then in terms of -- go ahead.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [39]

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In the back half of 2020.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [40]

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Okay. And then in terms of the SG&A investments that you talked about, is most of that going into the Southeast segment? Or is some of the marketing spend going to Western?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [41]

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The incremental marketing is going into the legacy business primarily. There is a slight step-up in marketing, particularly in support of Skye Walls, which is the new R&R division that Jeff talked about earlier. The incentive compensation is across both business units.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [42]

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Okay. And then last one for me. Could you quantify what your backlog was at the end of the fourth quarter?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [43]

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Yes. It was $67 million in total across all of PGTI, including Western.

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Operator [44]

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And we will take our next question from Alex Rygiel with B. Riley FBR.

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Alexander John Rygiel, B. Riley FBR, Inc., Research Division - Analyst [45]

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Most of my questions have been answered, but two short quick ones. Any guidance for interest expense for 2020 and CapEx guidance for 2020?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [46]

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Yes. CapEx, we expect to be at 4% of sales, which is, I'd say, consistent with what we have typically done before. And interest expense, we are expecting $29 million. And you can also find those on Page 12 of the presentation along with any of the rest of our modeling assumptions.

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Operator [47]

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And this concludes our question-and-answer session. I would like to turn the conference back over to Sherri Baker for any closing remarks.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [48]

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Yes. Thank you for joining us on the call today. And as always, we appreciate your continued interest in PGT Innovations and hope you all have a great rest of your day. Thanks very much.

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Operator [49]

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Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation.