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Edited Transcript of PGTI earnings conference call or presentation 2-May-19 2:30pm GMT

Q1 2019 PGT Innovations Inc Earnings Call

NORTH VENICE May 8, 2019 (Thomson StreetEvents) -- Edited Transcript of PGT Innovations Inc earnings conference call or presentation Thursday, May 2, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bradley R. West

PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer

* 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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* Alvaro Lacayo

G. Research, LLC - Research Analyst

* Brendan Asher Cutler

KeyBanc Capital Markets Inc., Research Division - Associate

* Jeremy Scott Hamblin

Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail

* Joshua Kenneth Wilson

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

* Keith Brian Hughes

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Margaret Eileen Grady

Jefferies LLC, Research Division - Equity Associate

* Margaret Jane Wellborn

JP Morgan Chase & Co, Research Division - Analyst

* Marius Cornel Morar

Deutsche Bank AG, Research Division - Research Associate

* Michael Jason Rehaut

JP Morgan Chase & Co, Research Division - Senior Analyst

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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

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

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

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Thank you, Jessica. Good morning, everyone, and thank you for joining us on the call today. I'm honored to have recently joined the management team here at PGT Innovations and I'm really looking forward to meeting many of you in the months ahead. With me on the call today is President and CEO, Jeff Jackson; and additionally, Senior Vice President of Corporate Development and Treasurer, Brad West. Brad will be available with Jeff and me on the question-and-answer portion of the call.

Earlier this morning, we issued a press release with our first quarter 2019 results and we have also posted a slide presentation on our website to accompany today's discussion. This webcast is being recorded and will be available for replay on the investors page of our website at pgtinnovations.com along with the supporting slides.

Before we begin, 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 that may involve risks, uncertainties and other factors that could cause actual results to materially differ. 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 legally provide additional information for investors to help facilitate comparison of prior and past performance -- 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 will now turn 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. First, I'd like to reiterate that we are very pleased to welcome Sherri to the management team of PGT Innovations. Sherri brings tremendous finance, accounting and investor relations experience as well as a strong understanding of manufacturing operations.

Additionally, I would like to thank Brad West for his leadership during his tenure as CFO and I look forward to continuing to work with him in his new role, which will be focused on strategy and corporate development as well as maintaining treasury.

Related to the company's reporting, we have formed a new business unit structure comprised of 2 business units: the Southeastern business unit, which includes Florida, the core market of our legacy business as well as Alabama, Georgia Louisiana, Mississippi, North Carolina, South Carolina and the Caribbean; while the Western business unit includes the rest of the United States along with Canada and Mexico. To be clear, these business units will be actual segments for purposes of financial reporting. We will -- you will hear us reference these 2 business units from time to time in our earnings call and in earnings materials.

I am happy to report we started off the year solid in our first quarter. Our Western Window Systems products continue to penetrate indoor/outdoor living market and our strategic investments in our legacy business have resulted in increased adoption of impact products by our corporate builders and expanded our capacity.

Over the trailing 12-month sales of $732 million represents a 36% increase over the prior 12-month period, with 21% of our growth achieved organically. Our adjusted EBITDA has grown $41 million or 44% over that same period.

Following our acquisition of Western Window Systems last year, we became a national leader in the premium window and door space. We now have an expanded geographic footprint and diversified portfolio that is rebalanced to nearly 50-50 split between repair and remodeling and new construction end markets. We believe this even mix has us well situated to serve Florida's growing population as well as our Western business unit, where our penetration is increasing in indoor/outdoor living market.

Turning to Slide 4. It is important to take a few minutes to review our strategy that is creating long-term value for our customers and shareholders. At PGT Innovations, we attribute our success to the continued execution of our 4 strategic pillars. Our first pillar is putting the customer at the center of our business and delivering 360 degrees service before, during and after the sale to drive brand recognition and loyalty.

During the first quarter, we launched the Western 3700 series vinyl door, which amplifies this pillar. Several top national builders approached Western Window Systems looking for a high-quality vinyl door that rolled with ease to accommodate custom configurations and have exceptional energy efficiency ratings. With the 3700 series door, we saw an opportunity to address the production builder market by bringing a lower-priced, multi-slide door to the market, directly targeting entry-level homes and expanding our overall addressable market while maintaining the strong margins Western products deliver. Although we are early in the new construction cycle for the 3700 series door, we expect long-term incremental market penetration from this expanded price point of homes we will serve.

Our second pillar is attracting and retaining top talent. We believe that a talented, dedicated team of employees is key to success and we strive to make our company an ideal place to have a career. One example of how we engage our employees and ensure they are part of the team is that for the second year in a row, we granted equity to every employee in the company. We are all shareholders together, in it to win together. Third, our future success depends on our investment in our business and scaling our operations to meet increasing demand.

Achieving organic growth of 27% in 2018 was a significant accomplishment and we could not have delivered this without well-timed investments in our production capabilities. To that end, we invested significantly in marketing, advertising and operational improvements during 2018 and have continued those types of investments into 2019. Year-to-date, we've invested in process automation to drive incremental efficiencies and expand capacity to improve our ability to timely meet increased demand.

And fourth, we expect to strategically allocate capital generated from our strong free cash flow to support our growth. Going forward, we plan to maintain a strong balance sheet and build cash that will provide us flexibility for future opportunistic acquisitions. Our strategic path forward involves reducing our debt and where attractive acquisition opportunities are presented, expanding our national footprint with a focus on niche building products and brands that yield strong margins and significant cash flow.

Now turning to our results for the quarter. We reported another quarter of solid financial results that tracked as expected with our overall full 2019 guidance. Both Western Window Systems and our legacy business grew revenue and profitability as compared to prior year.

Despite the decline in repair and remodeling market overlapping our significant growth in the prior year period, we continued to see overall growth driven by the new construction channel, both from market penetration in our Southeastern business units Corporate Builder channels and our Western business unit penetration into markets with products that unify indoor/outdoor living spaces.

Regarding Western Window Systems, our integration continues to be on schedule and well underway. We achieved meaningful progress in building the infrastructure to begin selling Western products into our legacy markets during the first quarter. Our expected first year annualized cost savings of $8 million, primarily driven by supply chain efficiencies, where we offer greater economies of scale, begin to be realized in the first quarter and are reflected in our current 2019 guidance.

Turning to Slide 5. While certain regions in the national housing market have shown signs of slowing, we expect Florida to maintain its position as one of the fastest-growing states in the nation. With a population of more than 21 million, we continue to expect significant new construction growth potential. Florida had a compound annual growth rate of 14% in single-family starts from 2012 through 2018 and Moody's has forecasted a growth rate of 15% from 2018 through 2022.

Our -- for our 2019, we expect Florida single-family starts of 105,000 versus Moody's projections of 107,000 starts, and we continue to assume normalized Florida single-family starts of 125,000 will be achieved over the long term.

In addition to the support in Florida in new construction tailwinds, we will continue to drive increased adoption of impact products in the Corporate Builder channels driven by strategic investments in our business. We also expect to continue strengthening our repair and remodeling market channel, albeit at a more normalized rate. Following an active hurricane season over the last few years, consumer awareness for impact-resistant products that can withstand tough weather conditions remains high.

On Slide 6, we project the growth rate of the impact-resistant products market to outpace the regular window and door market. In 2017, prior to Hurricane Irma, it was estimated that homes in Florida -- of the homes in Florida, only 18% had impact-resistant windows, 13% had impact-resistant doors and 18% had storm shutters.

After a strong 2018, more homeowners have now taken advantage of the solutions to provide -- provided by our impact products. Still a large majority of the Floridians have no protection on openings to their homes to safeguard their property against severe storms. In order to take advantage of this opportunity, we have many initiatives in place involving marketing, product development and operations. Related to marketing, we have refreshed our online marketing presence, allowing customers to quickly find us and increase engagement.

From a product shipping standpoint, we have refreshed our flagship PGT aluminum WinGuard line with better styling for today's architecture. We have already launched a low-cost aluminum line in our CGI Sparta brand to expand our addressable market. Operationally, we continue to invest in capital in ways that are expected to increase capacity and reduce lead times for our dealers to achieve -- to receive our products as soon as possible.

Now I'd like to turn the call back over to Sherri to discuss the financial results in more detail. Sherri?

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

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Thank you, Jeff. Turning to Slide 7. I will review the summary of our financial performance for the quarter. We reported net sales of $174 million, including organic growth of $1 million or about 1%. In our legacy markets, sales into our new construction channel grew 9% versus prior year. Our legacy repair and remodel channel declined by 4%, but as compared to record growth of 32% in the prior year period.

First quarter sales included a sales contribution of $32 million from Western Window Systems. Despite a meaningful year-over-year down market in California, Western Window has delivered double-digit sales growth versus the prior year period through continued penetration in the indoor/outdoor living market.

Our gross profit for the first quarter was $61 million, up $16 million or 37% versus the first quarter of 2018, and our adjusted gross margin increased to 36% of sales, a 3 percentage point increase from the prior year quarter driven mainly by gross margin accretion from Western Window Systems' contribution to first quarter sales. In our legacy business, we were able to offset higher materials and labor costs with price increases and improved operating efficiency.

Within selling, general and administrative expenses, they increased $44 million in the first quarter of 2019, an increase -- or they were $44 million in the first quarter of 2019, an increase of $15 million versus the prior year quarter. The majority of the increase is attributable to the addition of Western Window Systems. The remainder of the increase is primarily related to strategic headcount additions, equity stock compensation expense and increased sales.

Adjusted EBITDA for the first quarter of 2019 was $28 million or a margin of 16.3% compared with adjusted EBITDA for the first quarter of 2018 of $22 million or 15.5%. This marks an 80 basis point improvement in adjusted EBITDA as a percentage of sales. Our tax rate for the quarter came in at an effective tax rate of 22%, which was below our guidance estimate of 26% driven by excess tax benefits of $400,000 from our equity compensation plans. Our guidance going forward remains at a 26% effective tax rate.

We reported GAAP net income of $8 million or $0.14 per diluted share for the first quarter of 2019 versus $7 million or $0.14 per diluted share in the first quarter of 2018. Excluding reconciling items, adjusted earnings per share for the first quarter of 2019 was $0.16 versus $0.19 in the same quarter last year. As a reminder, our 2019 earnings per share metrics are affected by the higher level of shares outstanding versus the year ago period due to the equity offering we completed in late 2018.

Next, I will provide an update on our aluminum coverage program. As of today, we have contracted approximately 75% of our estimated aluminum needs for 2019. Our current coverage is only for the aluminum portion of the total cost at an average price of $0.96 per pound. This does not include the delivery cost, which today is approximately $0.18 per pound. We will continue to monitor tariff and trade environment effects on aluminum pricing, and as appropriate adjust our coverage program and pricing strategy.

Moving now to Slide 8. I would like to review our capital allocation priorities. One of our priorities is internal investment and strategic growth projects that accord to our ability to drive future shareholder value. And we expect to continue to support our product portfolio by making investments in advertising and marketing, which have proven beneficial to our growth.

Another priority is our commitment to debt reduction and maintaining a strong balance sheet. At the end of the quarter, our cash position was $45 million and net leverage was approximately 2.2x trailing 12-month adjusted EBITDA. We expect to maintain the priority of receiving a conservative leverage profile within a range of 2x to 4x net debt-to-EBITDA in the absence of any additional large acquisitions.

Finally, another one of our capital allocation priorities has been and still is looking for strategic acquisitions and we will continue to look for attractive opportunities to expand into new geographies or other niche building products that offer strong margins.

On Slide 9, we are reaffirming our guidance for 2019 that we provided last quarter. For the full year 2019, we continue to expect PGT Innovations to finish in the following ranges: net sales of $775 million to $800 million, an increase of 11% to 15% compared to 2018; adjusted EBITDA of $143 million to $152 million or an increase of 13% to 20% compared to 2018; and finally, net income per diluted share of $0.93 to $1.05.

With that, 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. In closing, I would like to remind you of our 5 elements of our investment thesis on Slide 10. First, we are a national leader in growing premium impact-resistant and indoor/outdoor living categories. Second, we expect to continue to invest in talent and R&D to maintain (sic) [remain] an industry leader in innovation and product development. Third, we have ongoing focus on capital efficiencies, operational efficiencies expected to drive additional margin expansion. Fourth, we strive to achieve strong execution of our strategy to create long-term shareholder value and customer value. And finally, we believe we are well positioned with a diversified product portfolio and expanding geographically to capture profitable growth in new construction and repair and remodel channels. It is an exciting time to be a part of our family of brands and an employee team member here at PGT Innovations.

At this time, I'd like to turn the call over to the operator for -- to begin our Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Keith Hughes of SunTrust.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Question on the sales guidance. You came in with what you thought for the first quarter. For the rest of the year, what kind of organic growth you have contemplated in that number?

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

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Yes. I think in terms of the full year, Keith, we're still comfortable with the guidance as we reiterated. Western, however, after the first quarter, is probably tracking a little better than we had thought. They're actually up 12%. So we have some hope there that, that demand continues. Their backlog is actually building -- their backlog is up, I want to say, close to 50% over last year. So that's given us some encouragement. The biggest unknown still is, obviously, the R&R market as we enter into hurricane season. Predictions are 2 to 4 major storms -- major hurricanes will hit the U.S. And that's the wildcard for the R&R market. So -- and in terms of organic growth, we're pretty much flat until we get a better feel for the R&R market and the impact a storm could potentially have.

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Keith Brian Hughes, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay. On the Western, I think you said you're up 12% in the quarter. Was that 12% driven by just kind of core business, California and some of the other states? Or is that -- or I guess, maybe how much of it was other initiatives whether it be Canada, bringing products West, things of that nature?

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

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Yes. It's going to be a combination. Remember, California, Western's core market, is down almost 20%. And despite that, Western Window Systems is up 12%. So that's basically just expanding their footprint geographically into the other markets that they've been trying to penetrate and success in doing that. Texas is also -- and Hawaii are also up. Arizona is up. So those are some other core markets of Western that we're experiencing some solid growth year-over-year that's driving more of an optimistic view of Western's execution despite California that we've seen.

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Operator [6]

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Our next question will come from Jeremy Hamblin of Dougherty & Company.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [7]

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Welcome aboard, Sherri, and congratulations on the strong results to the team. I wanted to just follow up here on Western for a moment and ask a little bit about pricing as well. So I think, Jeff, that's a pretty big number that you're citing there. Backlog up almost 50%. 12% growth in Q1. Can you give us a sense for -- given that there is some softness in the California market in particular and maybe in Western markets overall, what are you seeing out there on pricing? Is this just a reflection of a change in architectural styling and demand for the indoor/outdoor living products? But can you give us a sense of what you're seeing on pricing? And what's driving this continued growth in the WWS products.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [8]

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Yes. Well, a couple of things. We've got to remember that their whole model is to continue to expand that indoor/outdoor living market and they have the products that do that. So that's why I guess after seeing it -- seeing them execute for the last few months here in -- for the first few months here in 2019, we're definitely more excited about what they have to offer this year than we were last year. The 3700 series is out. That's been a big hit with our Corporate Builder program. California is still the wildcard, like I mentioned to Keith. It's rebound -- if it rebounds, I think we could have an incredible year with Western Window Systems.

And we continue to build that R&R market. You'll see some costs in SG&A to basically support an infrastructure -- a meaningful infrastructure of sales to ramp up the R&R market. Probably we won't see that benefit until -- end of '19, early 2020. In terms of selling into like PGT Innovations for legacy core markets, we're seeing a lot of good success there as well. We did get some products certified here in Florida this past few months and those products are now getting into the hands of our dealers here in markets that we previously didn't have that kind of product to serve. So there's been some upside there, too. Brad, I don't know if you want to comment or Sherri can comment on pricing with Western Window Systems?

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [9]

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Yes. I guess Jeremy, Western came out with a price increase this year on some specific products that was not an overwhelmingly large portion of their business, but I would say that their pricing strategy would not be different than anyone else's, mainly designed to cover any kind of cost. Remember, their pricing situation is a little bit different than legacy business. And they're kind of priced more in the middle of their competition. So most of that increase that you're seeing is definitely coming from the increase in volume sold. It's not as much about a price increase.

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Jeremy Scott Hamblin, Dougherty & Company LLC, Research Division - VP and Senior Research Analyst of Consumer & Retail [10]

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Understood. And then I wanted to ask about your gross margins were up more than 300 basis points. And I think for the year, you had really talked to kind of a 35% to 35.5% gross margin range. But historically, Q1 seasonally is one of your lowest quarters and on an adjusted basis, you're already at the top end of that range. Can you give us first, kind of a breakdown of some of the components that added to that contribution to gross margins? And then secondly, at this point in time, is it tracking a little bit higher than you previously had expected on gross margins?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [11]

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Yes, I'll take that. So the predominant amount -- I'd say first, that you would see -- we're really seeing our pricing and operating efficiencies are really offsetting our inflation. So the bulk of the accretion that you're seeing or improvement from a gross margin perspective is really from Western. And we would expect, I'd say, a normal seasonality that you would see as we move throughout the year. So we would expect that to increase. We are seeing our sales and efficiencies continuing to go throughout the year. So I'd say it's a combination of Western -- is the bulk of it, with the offsetting in the efficiencies from an inflation perspective.

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Operator [12]

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Our next question will come from Michael Rehaut of JPMorgan.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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The first question I had was just to make sure I understood a little bit on the Western growth and also kind of your views overall in terms of your organic growth for the year. The 12% growth in Western, just to clarify, are you saying that -- I assume you're saying that the market or maybe starts in California dropped 20%. I was curious if Western itself had any growth or a decline in California? And then the other states and perhaps some early success in Florida was driving the growth that perhaps more than made up for any type of decline in California. Just trying to get a sense for what the company did in California versus the rest of the country?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [14]

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No. Year-over-year, Western was down 20% in California for the Q1. And there were -- despite that, they're up 12% year-over-year in total growth. So that basically means that they're executing in markets like I mentioned earlier, Texas, Arizona, Hawaii, other core markets. And like I had said earlier, we've actually had some of our -- the first Western Window sales into the Florida market. So we're starting to get some sales synergies on that end as well. So my outlook for Western is for them to basically continue to do the growth model that we purchased, and that was keep expanding in geographic areas as they push the adoption or the desire to have that indoor/outdoor living feel as it grows out from their base. And that's what they're doing and that's what we've seen.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [15]

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No. That's obviously very impressive. So great to hear on that. And then just on the organic sales. You're saying, ex Western, you're expecting the base business to be flattish. Obviously a very tough comp from last year. Would that be comprised of kind of a similar trend where -- to the first quarter, where down a little bit in R&R and legacy new construction up double digits?

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

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Yes, I wouldn't say double digits. I would say our legacy new construction is up 9%. So our R&R is down roughly 3.5%, 4%, call it. And so if you look at that, after a growth of last year's R&R at 30 plus percent or something like that. Last year's growth in R&R to be only down 4%, we're calling that almost a win at this point, absent hurricanes yet. But again, R&R is driven by hurricane awareness and people wanting to protect and safeguard their assets from the devastating effects of the storm. And '17's Irma and then '18 Michael, the storm that hit the Panhandle, that's created -- drove a lot of awareness that we saw over the last couple of years.

And we just entered hurricane season this year. So we're very comfortable new construction is going to continue to grow. It could grow double digits. I think it would be safe to say that. Given what we've seen in the first quarter, we think it's going to be more than 9%, as we go through the year. And Western Windows continues to execute despite being down, like I said, 20% in their core market. R&R is down and it will be dependent on Floridians continuing to realize the impact of a hurricane and working to protect from it.

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Michael Jason Rehaut, JP Morgan Chase & Co, Research Division - Senior Analyst [17]

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Great. And just one last one, if I could. It was just a little too hard to hear some of the comments earlier. The -- Sherri's comments on gross margin cadence throughout the year, I think she referred to some seasonality. I think typically, your fourth quarter is a little less than your third. But just trying to get a sense from the 35% gross margin that we're seeing today, the middle quarter should still be a little bit higher, fourth quarter a little bit lower. Is that a fair way to think about it?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [18]

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Yes, it is. That's absolutely fair. That's what I was calling the normal seasonality. You've got it.

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Operator [19]

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Our next question will come from Truman Patterson of Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]

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Just wanted to dig into the R&R outlook a little bit more. The revenues fell quarter-over-quarter, which is a little unusual. They were down slightly year-over-year. Could you just give us an idea, do you think -- what would it take to drive this actually positive for the year, kind of absent a hurricane? And do you think potentially those hurricane hangover could actually last in the repair and remodel portion of your business into 2020 absent further hurricanes? And I believe you guys previously said that the mix shift away from R&R was about 100 bp margin headwind. Any update there?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [21]

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Yes. Well, I'll address the last, the mix shift away from R&R. With Western's growth at 12%, it actually -- it's offset because Western margins are robust. And so the -- that mix has actually been -- helped this offset that lower mix in R&R. In terms of what will '18 hold -- or '19 hold in R&R, again, Florida is the fastest-growing state in the nation. We continue to get folks in and these -- the individuals who move into Florida, at times -- most of the time, that might experience hurricanes. So once that hurricane cycle comes through, we have a very big drive for demand. After someone's been through a hurricane, they want to do the impact products. I don't think it's totally dependent on it. We did grow, I would say, 37% last year.

And so when you grow 37% in one year, are you going to have some pull forward? Yes, sure. I'm sure you do. You have a lot of reaction to a couple of bad years of storms. But I don't -- I think what we've done is move the threshold up of awareness for adoption. Florida still has an incredible market that doesn't -- that's out there trying to put in our product because you remember in my comments I've said, roughly half the homes in Florida still don't have hurricane protection. So I think we'll see absent a hurricane, just a more normalized R&R market once we comp (sic) [lap] this bad comp. So in other words, if a hurricane didn't come, yes, we're going to have a flat to down R&R market this year. If it does, I think it could increase. I think the spillover will not be in 2020. I think in 2020, absent a hurricane, you're going to see a standard 4% to 7% R&R growth like we've historically had.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [22]

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Okay. Just thinking about -- you guys had a pretty good 1Q, but you left your EBITDA margin guidance unchanged. Just thinking through the parts, I believe you built in about 40 bps of headwinds, assuming a 25% China tariff. It looks like China tariffs are remaining at 10% or may be going to 0 and then also aluminum costs are trending down. I know you guys hedge those but regardless, they're still trending down. Are there any offsets that we should think about to your unchanged margin guidance?

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [23]

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Yes. So I think there's still a couple of unknowns, Truman, that are out there that we're early enough in the year that we want to still be conservative in our thought process. One would be that R&R mix that just Jeff mentioned. And that's obviously a big part of our margin fluctuations in Florida. And then second area would be just what we're going to do on the expense side on synergies as we ramp up our Western business sales structure and R&R structure. So I think that's the main reason why you continue to see our conservatism.

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Operator [24]

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Our next question will come from Nishu Sood of Deutsche Bank.

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Marius Cornel Morar, Deutsche Bank AG, Research Division - Research Associate [25]

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This is actually Marius in for Nishu. My first question is about -- could you tell us more about where you are with Western Window System integration process? Where you are in the integration phase?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [26]

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Yes. I mean obviously, we closed it last August of 2018. We recognized -- identified all the $8 million of cost-savings synergies and actually recognized -- started recognizing in the first quarter, which is reflected in our guidance. And we're actively setting up dealers in the Florida market. I am aware of 9 dealers that have been set up so far, bigger dealers that are in multiple locations carrying the Western product here just in our core market in Florida. And we set up dealers along the East Coast as well, the distribution arm, we meaning the legacy business was using. They have access to Western Window products and training also.

From a Western standpoint, they continue to execute on the product pipeline that was in place when we bought them. The simulated steel is doing well. They launched the 3700 series vinyl door for the corporate builder market. That's doing well. So we continue to see the execution of what -- the items that were on the plate when we bought the company. And the team integration, I think, is going phenomenally, too. Scott Gates, he's the President of that group. He's got incredible team and they continue to drive and execute on the strategy that they laid out before. You guys have anything you want to add on that?

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [27]

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Nothing else. It's part of the -- when we were doing the review and using McKinsey to kind of look at the opportunities last summer, we certainly put forth in place some of the strategies that we're wanting to employ. And as Jeff mentioned, we're kind of going through that process now. So I think we're excited and you can see Western's results despite the California market suggest that what we bought was a product that has the ability to penetrate in the marketplace and we're going to take advantage of that and do it.

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Marius Cornel Morar, Deutsche Bank AG, Research Division - Research Associate [28]

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And then my second question. On your third quarter call last year, you talked about how -- Hurricane Michael is going to drive a change in codes, especially in the Panhandle, which had less stringent codes. And I was just wondering, could you give us an update of, on what you're seeing in terms of codes changing?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [29]

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Yes. I think on our end, what we tried to do through the Florida Legislature was push the adoption of more stringent codes in that area, again, to protect homeowners and their assets and lobbied it. And it's still going through the process. That's probably at least a 2-year cycle. They update the codes roughly every 2 years. So I know that there's talk about how you increase the codes in that area. Also, we've been pushing the Florida Legislature to adopt some kind of sales tax incentive or lack thereof, if you will, that we have this hurricane tax relief for suppliers for hurricane. We're trying to also push adding in impact products into that kind of initiative as well. So those are ongoing efforts that are still ongoing and have not reached its final conclusion.

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Operator [30]

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Our next question will be from Sam Darkatsh from Raymond James.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [31]

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This is Josh filling in for Sam. And Sherri, congratulations on the new position.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [32]

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Thank you very much. Glad to be here.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [33]

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First question from me. What was your backlog as of the end of the quarter?

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

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Are you asking from a dollars perspective or from a percent perspective?

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [35]

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Dollars, please.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [36]

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It was a little over $68 million.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [37]

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Got it. And then regarding April, what have you seen so far in terms of sales growth, both in the legacy business and Western?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [38]

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Again, I don't want -- we've discussed giving the quarterly guidance at one point. We're going to stick to more the annual guidance we addressed. We're still comfortable with what's out there, what we've given. And I don't think we're at the point where we want to comment on April or anything on the second quarter.

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Joshua Kenneth Wilson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [39]

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And then regarding accounts receivable, that wasn't up quite as much as I had originally expected given the Western Windows acquisition. Is that just timing or some seasonality? Or can -- some change in sales trends?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [40]

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It's just a drive to collect money. We are in a unique business, as is Western Windows. And everything's custom made-to-order. And the deposits that are required are hefty upfront because you can't really use that product elsewhere. And I think given the overall demand of the market and demand of our products, we're in a better position to collect money and -- on our receivables at a faster rate.

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Operator [41]

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Our next question will come from Phil Ng of Jefferies.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [42]

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This is Maggie on for Phil. Just wanted to go back to Western. I believe when you acquired it, it was almost entirely new construction-driven. Any update on how the penetration into R&R markets is progressing?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [43]

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Yes. I would say right now, we're in the early stages of building that R&R team. And that's not only -- hiring, obviously, the director and then the sales reps will actually be driving that, but also identifying viewers within, say, California and other markets that Western serves that will carry the product. I think we definitely started building that infrastructure. But you're not going to see meaningful sales into the R&R market until the back half of '19 and early 2020.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [44]

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Got it. That's helpful. And then does -- are you expecting Western to have a similar growth margin differential between new construction and R&R like the legacy business? Or will that be pretty fluid or similar through those end markets for Western?

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [45]

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Yes. Maggie, I think it's a little bit hard to say at this point because, obviously the market dynamics are quite a bit different when you talk about inside of Florida and outside of Florida. I would say that Western's new construction margins are very strong and I can't imagine why the R&R margins would be any lower than that. I guess the potential could be that they could be higher. But it's kind of too early to say. So I think the conservative thought process would be from a modeling perspective, that any kind of new growth would be about the same. And if in the future, we can say it's a mix improvement, that would be great.

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Margaret Eileen Grady, Jefferies LLC, Research Division - Equity Associate [46]

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Okay. And one more clarifying question. Sherri, you mentioned the backlog was $60 million at the end of the quarter, and I'm assuming that includes Western. How was the backlog in the legacy business tracking year-over-year, either from a dollar or a percentage perspective?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [47]

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I can give you both. From a legacy perspective, it's at $55 million. It's down roughly 28%. But important to call out, you have really got to factor in that we're overlapping the price increase demand that we had last year, which we do not have in Q1 of this year, in addition to the increased capabilities, the reduced lead times from our investments. So on a normalized basis, the backlog, I'd say, is overall similar to last year when you're adjusting for those 3 factors.

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Operator [48]

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Our next question will come from Ken Zener of KeyBanc Capital Markets.

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Brendan Asher Cutler, KeyBanc Capital Markets Inc., Research Division - Associate [49]

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This is actually Brendan on for Ken. So just continuing on backlog. Backlog, you mentioned was it $58 million or $68 million for the quarter?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [50]

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It's $68 million all-in. And then, on the legacy side, it's $55 million.

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Brendan Asher Cutler, KeyBanc Capital Markets Inc., Research Division - Associate [51]

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Okay. And then so what was Western Window's backlog last year to the $13 million -- was about $6.5 million for -- sorry, it was up 50% you said, right?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [52]

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Yes.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [53]

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Yes, yes. On a round basis, that's between $13 million, $14 million, so kind of your delta between that $68 million and $55 million is just a rounding piece, but it is -- you're correct, up almost 50%.

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Brendan Asher Cutler, KeyBanc Capital Markets Inc., Research Division - Associate [54]

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Got it. Okay. And then given that the SG&A as a percentage of sales was up significantly in the first quarter with Western Windows, how much of an SG&A drag do you expect for the rest of the year is from that?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [55]

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So keep in mind, on a dollars basis, the predominant amount of your dollar increase is really driven by Western. It's the bulk of the dollar increase. But as a percent of sales, also keep in mind that, that Q1 is typically our lowest quarter. So I think last quarter, we were suggesting that we expect to see a range of, call it, 21% to 22% SG&A as a percentage of sales. And we would still expect that to be very similar to our expectations for the balance of the year.

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [56]

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Yes. And I'll just add to that, SG&A includes basically $9 million of amortization on Western alone, which is over 1% of sales for the year or so. There's a good bit of noncash amortization there that I want to make sure everybody understands.

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Brendan Asher Cutler, KeyBanc Capital Markets Inc., Research Division - Associate [57]

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Got it. And then -- so with 2019 being a year of transition with the Western Windows business being in for a full year and the tough R&R comps from -- in the legacy business. Understanding you're not giving guidance, but do you expect this expansion into R&R for Western Windows to be a drag on the business at all as you grow in the back half of 2019 into 2020?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [58]

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From an SG&A -- this is Jeff, from an SG&A expense standpoint, yes, as we build that -- the team, the infrastructure needed, the marketing literature, it's a whole different go-to-market strategy with R&R. And we're -- again, we're actively doing that. Some of those costs are actually reflected in the SG&A you see in the first quarter. So from an expense standpoint, the answer would be yes, it will be a drag, if you will, or an investment, I like to call it. But we will start to see some of that benefit in '19 -- end of '19, like the fourth quarter of '19, but definitely you should see it in early 2020 -- Q1, Q2 of 2020. We do expect some meaningful headway into the R&R market.

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Operator [59]

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Our next question will come from Alvaro Lacayo of G. Research.

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Alvaro Lacayo, G. Research, LLC - Research Analyst [60]

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Sherri, I look forward to working with you. And Brad, it's been good, congrats on all the good work you've done.

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [61]

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Thank you.

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [62]

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Thank you.

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Alvaro Lacayo, G. Research, LLC - Research Analyst [63]

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Jeff, I have a three-part question with Western Windows. I want to get a clear understanding of the magnitude of sales in Florida. It seems like it was small but I just want to get an idea of what the size was. And from a sales channel perspective, are you going to be able to leverage the existing dealer network? Or is this a whole other set of dealer network that you need to sort of build out? And then finally, on the addressable market, you've talked about the addressable market in the past about impact windows. What do you think your addressable market in the U.S. is for the Western Windows product? And then specifically for Florida, how big do you think it is?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [64]

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Yes. I'm going to take a couple of shots at those questions. The magnitude of sales to date in Florida is not meaningful enough to point out. What we've done is we've gotten 9 different products certified, impact certified with Florida. And we've set up roughly 9 or 10 of our bigger dealers that have showrooms and have infrastructure, the bigger players. We've set them up to sell Western and we're actively training them. We have had a couple of jobs. The [cody] pipeline is obviously growing here in Florida. But in terms of actual jobs, we've only had a couple actually turn into sales orders. I think you also mentioned the infrastructure about Western Windows and it being more of a national?

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Alvaro Lacayo, G. Research, LLC - Research Analyst [65]

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I was focused on -- sorry, the ability to leverage your existing dealer network in Florida, if the idea is you're going to be using that existing dealer or is there a different channel? And then just the addressable market in Florida and then in the U.S. overall?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [66]

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Yes. We will be using our existing dealer network. We're going to go through -- we'll probably limit it to the dealers that do more high-end homes and we'll definitely try to open up and give it to more dealers in the areas that we don't have enough exposure in, I'd say like the Orlando, Jacksonville area. We're definitely pushing penetration there with dealers in the Western product, it fits that area nicely. But we will use our current network to expand in Florida.

In terms of national -- like, I thought you mentioned the national presence for Western product, it's already national. They have jobs up the Eastern seaboard all the way up through New York. It's just a matter of expanding that and getting it out to more distribution. And that's what I mentioned. We've introduced it to all our -- what we call our sales force or the distributor partner in those areas and they're actively training their sales force to sell the product, and that's had some orders. So that piece is going on. And we actually feel that Western's product line is a more national platform product line than the PGT legacy impact products.

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Alvaro Lacayo, G. Research, LLC - Research Analyst [67]

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Okay. And just addressable market here, how do you guys view it from a dollars perspective, how big is it?

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [68]

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Well, I think the addressable market, we said Florida was roughly...

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [69]

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The total impact market $1.2 billion, probably.

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Jeffrey T. Jackson, PGT Innovations, Inc. - President, CEO & Director [70]

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Yes, we have roughly $1.2 billion approximately impact market Florida. We would estimate over half of those homes do not have products, so I'd say there's a huge market there. In terms of Western specific, which targeting market? Their product and the impact -- the ability to take impact is not as robust as say a PGT product line. So you're not going to -- currently, we're not going to be selling Western Windows on the coast of Miami, on the seaboard. That's more PGT, CGI our legacy products. What we've done is get Western certified at a lower design pressured EP rating for the inner Florida and for more -- the golf course communities, Orlando, Jacksonville, those areas where code isn't as stringent. And those markets, again are -- I don't think I can put a dollar amount on that.

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [71]

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No. When we did our studies, it's more national based. But we needed the opportunity within Central Florida or not even close to those bigger cities like Jacksonville, Tallahassee and Panhandle. And indoor-outdoor living is a growing phenomenon, even in Florida, contemporary living is a growing phenomenon in Florida. So while it may not be so addressable right on the coast in the impact markets, obviously, there's quite a big population in Florida that doesn't live on the coast, and that's grown as well. So I don't want to give you a number at this point. But obviously, we feel like it's an opportunity that we're going to go after.

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Alvaro Lacayo, G. Research, LLC - Research Analyst [72]

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Got it, okay. And then with regards to the new vinyl product for Western Windows with a lower price point, if you can maybe talk about the price point versus the traditional product? And then if you could also just talk about the margins if they're similar versus the traditional product? And then finally, did I hear it clearly, that you have anniversaried all your price increases from last year, or will you still be benefiting from that throughout 2019?

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Bradley R. West, PGT Innovations, Inc. - Senior VP of Corporate Development & Treasurer [73]

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Yes. The last price increase that we did for PGT in 2019 was in the summer. So we still have a little bit to anniversary in the back half of this year. In terms of the 3700 series that Jeff talked about, the new Western product, it tends to be a little bit more towards those $300,000 homes. The pricing will be correct for those homes, but in terms of the design and the way we get the materials from our suppliers, Western has been able to maintain very strong margins in those categories and we don't expect to see a major mix issue with that regard. When it comes to Western, they tend to get a higher profit whenever they sell doors as they have a little bit stronger market position for doors than they do for windows. That's the only kind of a mix issue that we generally see there. But for the most part, with this 3700 series, it's a heavy platform towards doors as well. So margin should be great.

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Operator [74]

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Our next question will come from Michael Rehaut of JPMorgan.

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Margaret Jane Wellborn, JP Morgan Chase & Co, Research Division - Analyst [75]

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This is actually Maggie on for Mike this time. I just have a quick follow-up question to an earlier comment. When you said that you're expecting SG&A of about 21% to 22% for the balance of the year, is that -- did you mean for the remaining 3 quarters or for the full year?

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [76]

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For the full year.

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Operator [77]

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

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Sherri Baker, PGT Innovations, Inc. - Senior VP & CFO [78]

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Thank you, everyone, for joining us today. I'm very much looking forward to talking to you next quarter. Have a great rest of your day.

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Operator [79]

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This concludes today's conference. Thank you for your participation. You may now disconnect.