Q3 2019 Earnings Call
Welcome to the P.G.P. innovations Inc. third quarter 2019 earnings call today's conference is being recorded.
After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question Press Star then too.
I would now like turn the conference over to Sherry Baker. Please go ahead.
Thank you Andrea good morning, everyone and thank you for joining us on the call today on the Investor section of the company's website, you will find the earnings press release with our third quarter 29 years old as well, it's a slide presentation, we have posted to the yet to accompany today's discussion. This webcast is being recorded and will be.
A little for replay on the company's website.
Before we begin our prepared remarks, please direct your attention to the disclosure statement on slide two of the presentation as well as the disclaimers include it in the press release related to forward looking statements.
Today's remarks contain forward looking statements, including statements about our updated 2019 guidance 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 FCC.
Additionally on slide three you should also note that we report results using non-GAAP measures, which we believe provide additional information for investors to help facilitate comparisons prior in past 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 slide presentation I'm joined today by PGT innovation, CEO , and President, Jeff Jackson, and Brad West Senior Vice President of corporate development and Treasurer. After our prepared remarks, we will be available to take your questions I'll now hand, the call over to Jeff for opening remarks.
Thank you share and good morning, everyone.
Before going into our third quarter results each quarter I'll provide an overview of our interest do you plan for those of you who are new to the pitching ovation story.
Slide four provides a summary of our four strategic pillars that we execute against to create long term value for shareholders as well as our customers.
Our first pillar is to place our customers at the center of our business, while delivering exceptional products and exceptional service before during and after the self we believe customer loyalty across our portfolio of brands.
Which in turn drives the sales growth.
Our second pillar addresses our belief that the succeeding in a competitive market requires that we have the best health.
Our success is ultimately accomplish by having a highly capable and dedicated team of imports, which is which is why we continually strive to retain the best people and make our company and incredible place to build a crew.
Third pillar and investing in our business operations to meet expected increases in demand well continue to build it very best products that our customers demand.
We recently so they grand opening of our I Love innovations facility based in Venice, Florida, and Weve seen solid initial customer order in quoting patterns for our newly launched highly engineered products, such as our vical pivot and lifting slot doors.
And finally, our fourth pillar is to allocate capital that is generated from our strong free cash flow to support continued growth.
This could potentially including further expanding our national footprint with acquisitions of Nish building products.
Strong brands, our new channels that are positioned to generate attractive margins and cash flow.
We also continually assess our capital allocation options, including reduction of debt, adding reinvestments into business.
Oh, well Nicole driving shareholder returns.
In addition, we believe it is approved when it's appropriate to do so given our share price and other factors, we repurchased shares of our common stock in third quarter, we purchased 5.5 million shares of our stock.
Average price of $14.07.
Now turning to our results for the quarter on slide Todd.
Our legacy business faced a very tough call as we lap Inc. third quarter of 2018 in which we posted record sales growth.
Driven by heightened awareness from her change driven meaningful uptick in our repair and remodeling activity following hurricane Hermine and Michael.
As a reminder, we acquired western window system to the middle the third quarter of 2018.
And the current year quarter benefited from a full quarter of western sales. Additionally, in the current quarter. We experienced lost revenue of approximately 5 million related to the impact of its disruptions to operations caused by hurricane doors.
Net result of these factors was a 1% decrease in net sales for the quarter versus prior year, which came in at a 198 million.
The decline in our legacy business offset the growth in net sales at western window systems, which we were able to achieve despite a continued California housing headwind.
Our gross margins were down versus prior year quarter.
Continued accretion from western window systems, being offset by an expected some favorable shift in mix away from repair and remodeling products in our legacy business and two key investments made during the third quarter.
The first investment was increasing our promotional efforts in the south Eastern region on the heels of hurricane doors.
While this spin unfavorable impact margins in the short term we view this as an investment that should ultimately result in future increased sales.
The second investment impacting impacting gross margin relates to a continued increase in product mix in our western region towards custom products, rather than our volume product lines are custom products continued to produce accretive margins in comparison to our legacy margins. However, we invested in both direct labor.
And fixed costs in the near term to ramp up production of the more labor intensive custom products in order to provide better lead times for our customers.
Across our legacy product lines, we can continue to grow caused by focusing on operational efficiency.
And for the quarter, we achieved an adjusted EBITDA of $35 million or approximately 18% of sales.
In our Western business unit, we grew sales of 11% on a pro forma basis in the third quarter. Despite a housing headwind in our core markets or single family permits were actually down 6% year over year in the second quarter.
We are achieving this growth three primary areas.
First as I mentioned earlier, we're seeing strong growth in our custom products second we continue to expand our footprint in emerging markets, which grew 18% versus prior year.
The Western 3700, Sears performance vinyl line watched in early 2019 is seeing strong customer adoption in emerging markets in the Pacific Northwest and Midwest States.
Third our commercial channel.
A significant growth in the quarter, 58% versus prior year.
While these product lines in channels offer attractive accretive margin profiles. The price point is typically lower than the legacy product price point and more importantly complex.
More complex to produced in the Western volume product line.
Next I'll give an update of the macroeconomic factors in key markets and the assumptions behind our guidance revision.
As evident on slide six we are lapping a quarter an exceptional growth.
In our legacy repair and remodeling business sales declined 13%.
Which was inline with our expectation of 10% to 15% decline versus the prior year quarter.
We expect continued trends in the fourth quarter 2019.
Overlapping the fourth quarter of 2017, and 18, which had 30% and 18% growth rates respectively.
And in southeastern states outside of our core Florida market, we experienced 23% growth in our window and door business as a result, our strategic focus to still impact products outside of Florida in regions that have not previously been.
Good luck storms.
We believe increased activity in name storms in recent years has increased consumer interest in the benefits of impact resistant products, along the east coast and Gulf Coast. In addition to our core traditional Florida market.
We're continuing our efforts to increase awareness of the benefits of our products in the Florida Panhandle and other markets that have not traditionally been perceived as core markets for us.
We're looking at different options and attacking those markets where penetration has lacked.
And our legacy new construction business you construction sales were down 5% versus prior year, primarily due to Florida single family permits in the second quarter declining 9% year over year.
Regarding large projects, we're experiencing reduced volume in the back half 29 team from what we experienced in the back half of 2018.
We were optimistic that we will see an uptick in large project volumes in the first half a 2020 based upon the pipeline of large projects in the marketplace over.
Overall, we expect the legacy repair and remodeling and new construction trends, we've experienced in the third quarter to continue into the fourth quarter as we compete complete yes, very tough comps from 2018, a year in which we experienced 27% organic growth in net sales.
Looking into 2020, we have Mount forecasted data from John Burns real estate consulting to our internal data to determine relevant correlations that we believe we can reasonably good luck rely upon to forecast future growth rates.
These factors include single family permits household population colon volumes and medium household income.
Our initial forecasting suggest flat volume demand in the legacy repair and remodeling for 2020 as compared to 2019th.
We expect new construction in the primary markets for legacy in western window products could be slightly.
The low single digits in 2020.
Regardless of the macroeconomic outcome, we're focused on continuing to go to deliver above market can you construction performance on various initiatives that we believe will deliver increased sales.
These initiatives include meaningful dealer expansion third party financing and specific marketing initiatives to accelerate adoption of insight products in the production builder market. Following three consecutive years of significant hurricane activity.
We expect to implement these initiatives, which we believe will deliver our sales growth above these market estimates.
No return the call back over to share to discuss the financial results in more detail Jerry.
Thank you, Jeff now turning to slide seven to give more detail on our results for the third quarter. We reported net sales of 198 million, which included 162 million of legacy sales, reflecting a 10% decline in our legacy business versus the prior year quarter, driven by the decline in the repair and remodel.
Ill channel.
As Jeff already discussed the decline primarily reflected the tough comparison with the prior year quarter.
Our sales in the third quarter included the contribution of $36 million from western window systems, reflecting 11% pro forma growth in sales for western versus the prior year quarter. We achieved this growth against the headwind of the softening, California housing market, which further underscores our optimism in longer term consumer demand for the western.
Dennis business. She this products that unify indoor and outdoor living spaces.
Gross profit for the third quarter was 70 million a decrease of 3 million versus the prior year quarter gross margin decreased to 35.4% of sales and 130 basis point decrease from the prior year quarter. This decline was driven primarily by the continued unfavorable mix away from repair and remodel products in our legacy business.
Which typically have higher margins and the extensive promotional efforts in our legacy markets on the heels of Hurricane Dory. These items were offset by the continued accretion from western window system, which was acquired in the middle of the corner.
Adjusted selling general and administrative expenses increased $4 million versus the prior year quarter to 45 million inclusive of our increased marketing spend associated with hurricane Dorian any partial quarter impact incremental SGN a from western window system, we expect the marketing investments made in the third quarter to contribute.
The topline growth in future quarters, adjusted EBITDA for the third quarter of 2019 was 35 million or in margin of nearly 18% of sales versus adjusted EBITDA for the third quarter of 2018, a $40 million or 20% of sales. This marks a 2% decline in adjusted EBITDA as a percent of sale.
<unk> driven by.
On favorable shift in mix lower apparel model products, and our legacy business and that promotional efforts previously discussed.
Our effective tax rate for the quarter came in at 20.4% below our guidance estimate of 26% and was driven by excess tax benefits of approximately $700000 our tax rate guidance for the full year is 25% excluding discrete items.
We reported GAAP net income for the quarter of just over 15 million or 26 cents per diluted share versus 13.6 million or 26 cents per diluted share of the third quarter of 2018 adjusted earnings per share for the third quarter. At 2019 was 26 cents versus 38 in the same quarter last year the current quarter.
Includes 6 million additional shares as a result of our September 2018 equity issuance, partially offset by shares repurchased in the current quarter.
Turning to slide eight let's review our balance sheet highlights we ended the quarter with net debt of 298 million up slightly from 295 million in the second quarter. This year driven by timing of semi annual bond interest payments on an all cash negative basis, we maintain a net debt to trailing 12 month.
Adjusted EBITDA ratio of approximately 2.2 times pro forma for the Western window systems acquisition. As you can see we have a proven track record of successfully reduced reducing leverage after completion of an acquisition.
Next turning to our capital allocation priorities on slide nine.
Our first priority for capital allocation remains internal investment in projects that we believe will drive our gross and generate future shareholder value as we demonstrated in the third quarter, we support our product portfolio by making investments in advertising and marketing programs that have proven successful towards that goal.
Our second priority for capital strategic acquisitions that would give us a platform for expanding into new geographies, our markets or other building products and channels that would expand our footprint and not generate strong margins, our third priority as our commitment to debt reduction and maintaining a strong balance sheet. We finished the quarter with a cash the cash.
Vision of 82 million and net debt of approximately 2.2 times, we expect to maintain a conservative leverage profile with a range of two to four times net debt to EBITDA and the absence of any additional large acquisitions, our fourth quarter capital our fourth capital allocation priority is the opportunistic repurchase.
Of shares when we believe the stock price and other market factors make this an attractive use of capital since the end of the third quarter, we have repurchased.
Approximately 394000 shares at an average price of $14.07 for a total of price of 5.5 million. We currently have an authorization in place for the repurchase of up to $24.5 million of our shares.
For the full year 2019, we are updating our financial guidance as shown on slide 10, the topline reduction in guidance is largely a result of business interruption from hurricane Dorian or labor constraints in the marketplace hinder our ability to recapture the sales in the fourth quarter and reduced the large project.
Demand in our legacy markets versus our prior expectation.
The reduction in adjusted EBITDA is driven by the topline volume reduction along with the two investments discussed earlier promotional efforts in our legacy business following hurricane Dorian, which we expect to positively impact future sales and labor investments in our Western business unit, which we believe will better serve our heightened customs.
Mix.
We continued to show strong focus on controlling cost in our legacy business as evidenced by actions recently taken in our legacy markets in October of 2019, we reduced our annual legacy cost structure by an expected $4 million.
True salary personnel reductions and by leveraging our operational efficiencies in our Venice, Florida glass operations to our vertically integrate much of our glass needs at our highly a point.
For the full year 2019, PGT now expects to finish in the following range as net sales of 730 million to 740 million adjusted EBITDA of 126 million to 130 million and adjusted net income per diluted share of 79 cents to 84 cents our assumptions for depreciation.
In and amortization interest expense.
Tax rate and stock compensation remain unchanged and now I would like to turn the call back over to Jeff for some closing comments, Jeff. Thanks, Sherri before moving to Kuni I would like to conclude with PGT innovations investment thesis on slide 11.
First we are a national leader and have leading brands and growing categories in which we compete.
Okay.
We are product innovators.
We intend to maintain our advantage as leaders in our industry by investing in R&D to support product development as well as higher enriching the best talent.
Third we plan to continue our focus on improving operational efficiencies.
Through driving additional margin margin expansion over the long term.
Fourth we are excited and executing on our strategy and we believe it will create long term value for our customers and shareholders.
And finally, we believe our product portfolio across end markets, we serve will position us to capture profitable growth, both you construction and repair and remodeling channels.
All of us at PGT innovations remain excited as ever about the possibilities for future growth in our family of brands.
With that I'd like to turn the call over to the operated a bit again or acute today operator.
Thank you we will now begin the question answer session to ask a question in my Press Star then one on your Touchtone phone.
Do you think of Speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
We'll go first to Keith Hughes Suntrust.
Thank you.
Question Bob.
Fourth quarter, probably implied guidance here with revenue down about 30%.
So total question about number one what what would the western look like versus historic PGTI business and this estimate.
So we will see western in the range of flat to up probably low to mid single digits and what you will also see is a continued mix that is heavier on the custom business than what we have historically been seeing prior in prior quarters, although very similar to I think.
What we saw in Q3, so we're seeing a higher mix of custom products versus what were previously considered our volume product lines and we're also seeing some nice nice growth in our in our commercial business as well, but those different lines of business have different margin profile. So you will see that on impacting partially on the sales line.
But also on the margin lines as well.
So.
Yeah, the side of that Delta year, Florida Historic PG that business and down that change.
As you look within that a lot.
I know you have difficult comparison still but the third quarter was the most difficult comparison youre going to face the seems like a deceleration into reform.
Is there something else going on is there a competitive situation.
The tail from hurricane going longer just any sort of insight you would have on the fourth would be great in Florida.
Yes, yes, great question and I think the other piece that that you you need to factor in is also on the backlog that we had in Q4 of last year. So recall just with the and significant growth that we had we were eating through some of that pipeline in Q3 I'm back to that Q3 pipeline last year was over 100 million.
And we still had a backlog in Q4 of last year and over 64 million. So that is the other factor that you will also need to take into account, we think a macro pieces from.
The are in our new construction will be for most part predominantly similar but that's incremental piece that you have to factories, you're analyzing Q4, yeah, Keith and see if you recall, our and ours typically a tough.
For us fourth quarter as for further or an artist Thanksgiving is Christmas. So historically the fourth quarter has been our toughest quarter last year in shares and share hit is spot on.
We had accumulated a backlog given that significant growth had only a couple of years and it took us while from a technology capacity standpoint to catch up to that but quite frankly, we have a PGT from an operational perspective, we're best we've ever been we make more units. This year with about 200 less people than we have in the past so offer.
Additionally, we had that we're executing phenomenally well and we were able to eat in and catch up to that backlog and we're just we're not hearing that into fourth quarter. This year.
Do you have a sense that.
The hurricane demand has dropped from a couple years ago has all been satisfied and now it's you're back to just traditional renovation or is there still some some blogging renovation that will storm growth.
Yeah, Yeah, I think the the significant surge we saw in both 17 and 18 has been I would say called satisfied but what we've benefited from the awareness is still there. So when people are moving to Florida. Unlike.
Five years ago, when I was doing these calls from people moving to Florida, the end than a hurricane. So the awareness wasn't there now until you're moving into Florida, and 2020 and beyond there is a significant awareness of hurricane and are quoting activities actually reflected that still been up and the demand in the builder corporate builder program.
We're pushing to be more impact.
In terms of mix all that still there and we're still benefiting from the hurricane the significant spike I think what we've done as we work through that and from a capacity operational standpoint, we're ready for whatever comes at Us next.
Okay. Just final question on the door and 5 million from Dorian. This if I understand as you've got hurt you in the third quarter.
To get that factual fourth quarter until next year.
Your view.
Yeah in terms of the marketing efforts, we put in place yes.
We made some investments in promotional and marketing activities. We think will we will definitely get that back in the fourth in the first quarter of next year and to the first half so to speak again that this more consumer awareness, but fourth quarter.
We'll see necessarily getting that 5 million back at this point.
Okay. Thank you all the Florida others.
Well go next to Michael Rehaut at JP Morgan.
Hi, good Maggie on for Mike.
Hi, good morning.
First I wanted to ask a question on western wind down so following the announcement last week.
Stepping down.
I was wondering if you could talk about your plans for leadership within that segment.
Hello.
Yes, Scott and I talk to you is going to help me too.
Extended transition 90 day transition.
Obviously, Scott stepping down to pursue a personal dream and a goal he has.
This has to be admired and.
Over the next several weeks, we are putting together a structure that we think will support both a continued growth in the platforms. We currently are our operating in and into the future.
I have viewed and been consistent with a message that western.
In the platform out here will be our out of state hub, if you will and our growth vehicle. So.
Leadership here strong.
Teams that have been built from all the way from operation and especially in the sales arena and marketing side are incredibly strong so Scott.
We'll be missed in terms of a leader, but I think the like any good leader you put in place people around you that that can deliver and I think that's what's happened here and we will work together.
For a smooth transition and determine what that looks like into the future is just is too early to give details on that at this point.
Okay. Thank you and good luck to Scott.
Good question I was wondering if you could talk about.
A little bit more on those promotional efforts in the southeast legacy business.
Thank you.
You mentioned that some of the benefits are expected to calm.
And once you have next year or into the first half of next year. So could you talk about.
Maybe quantify but the expected benefits and then also remind us.
How much of what sounds like.
Legacy sales are outside of Florida, right, now and where do you see that number going.
Through the end of next year maybe.
Yes, so from a promotional perspective.
We ran a couple different promotions and one that was earlier in the third quarter. We ran a consumer rebate and then secondly, we ran a promotion where we were offering a free upgrade on some of our products. So you will see that really come more in the form of net sales.
So that is where that that will be showing up you will see partially I'd say two thirds of the investment of that shows up in Q3, and then you'll see another third it that investment come into Q4 and that has all been factored into the guidance ranges that we've just said so it's a little difficult to say what we.
We expect that full sales flip to be but note that we are continuing to analyze on other promotions that we believe will drive sales because it's important to us not just to raise awareness on the heels of hurricanes, but it's important for US do you also raise awareness of our products maybe in other areas, where we're not.
I'm quite a stronger or competing so I think it's important for us to look at that and analyze what those paybacks are that is one and then the second piece is is that as you. All know, Florida is still the majority of our legacy business. It does call what about 90% of our business.
For the 10% that is outside we have seen strong double digit growth as of late and we're very encouraged by that and we will clearly continue to drive sales initiatives to further expand that as we go into 2020, Yeah I would just little bit further on that the 23% growth we have seen outside the state, it's really driven up the east coast and.
The Carolinas up and then again like I mentioned to you earlier, we've been trying to get more penetration into what has traditionally been our core markets in that panhandle along through.
Hi, Bill and all the Texas, So we've gotten initiatives in place to drive more volume there. What we have experienced we didnt mention is the international piece, which is really flat to down year over year, and we attributed that to may need to storm activity in the past as well.
As you guys know the Bahamas was devastated by the storm.
Recently, and we do expect an increase what's that that contributes back in line and that's a good going to be a good market for us as well.
Okay. Thank you.
Our next question goes to Ken Zener at Citibank.
Good morning, everybody.
Hey, good morning.
Got several questions here I appreciate your.
Patients.
Confirmation of 18 million this year.
So can you break down these 13 million.
Even dot revision in terms of how much is related to the south east investment.
Which I assume could be transitory that by 25.
5 million drag from during I don't know catches flows through it let's say 30%.
And then how much relates to kind of W.W. Oscar I'm trying to understand that sales first they eat it.
Cock component.
Yes, I I'll I'll break him down I I won't discreetly call out the exact numbers of all of them, but I'll put them in <unk> in in order of important. So I think the first piece at least for Q3 and and to some extent keep for would be that promotions on the market marketing efforts that that we've put into the.
[noise] legacy business or that would be one the second piece would be the product mix and that's product mix both in the legacy business and at Western So you have to put the two of those together and then the third is just candidly volume. So that there is you know a point that comes in for for just the lower volume and that's the last piece.
<unk>, so I, probably put those in that order of priority.
Okay second question.
I think he said flag R. and R. outlook is what you're looking for in 20, you expect to grow above and beyond that is you have historically.
How old are your balance the ready to return of investing out promotion regional expansion and brand awareness.
<unk> really just running the business in a way that will give you.
You know better operating leverage.
A.
And then be.
Would be fun to go through the process that.
You.
Made in order to make these investments.
Knowing it would obviously about your earnings outlet can do it didn't seem like this was something you guys were communicating last quarter.
Yeah.
Take a stab at that I think.
Let me address thoughts on how we're going to grow this business to start with in Florida, obviously from a mixed standpoint, we see the new construction or or and or as you all know a or in ours been historically stronger margin profile force and so as we as that mix shifts.
From the core legacy business, we shift our costs structure. That's what we did in the third quarter. When we saw the R. and R. business continuing to be flat to incredibly tough comps in the past we shifted the cost structure and we'd taken you know an annualized $4 million for the cost of the business. So so we will continue to grow.
Margins there despite the mix it may be a delayed it if you know in in any given quarter based off a hurricane hitting us or they are in our market not training as quickly as we want it but as we've demonstrated we were act and react accordingly, when it comes to the cost structure from the western style.
<unk>, it's a different business.
That's where there's more girls opportunity in in what I'll call and what I mentioned emerging markets. So that product is still expanding into new territory.
In in the the the amount of territory's there is <unk>.
It was speaking you Gotta remember P.G.'s, we've been in Florida for 40 years next years or 40 year anniversary and we have that market, that's our core market and to and Western is just a different in terms of their ability to expand and scale into new areas.
Using that as a platform to increase hotline sales that will come over time, probably very profitable, but that mixed in that shift will change and we will adjust and just that we'll do a store who's our cost base will add cost if we need to there'll be periods, where we invest just like I said, we invest in dark labor.
And fixed costs here at western.
In fact in margins, but we expect that investment to pay off next year, because again the growth in both the 3700 series vinyl product lines, a simulated steal the commercial business, all or grilling and we want those dollars.
But that throws a new mix into the plan initially that you mix requires operational improvements in refocusing. That's what we're doing now nothing's broken it's just a different mix that we got to figure out how to make the same amount of money on no different than we've done historically P.G.G. So it's just you know we're more of the investment mine.
Sat here at western versus cost out because we want to grow this business and we see the potential for scaling.
Yeah. The only other thing I way to add is that keep in mind that hurricane Dorian came in in late August which would offend well. After we I came out with our last round of guidance. So that that clearly would not have been something that we anticipated in the last guy in this range, but because we have historically scene.
The ability to drive further awareness, we felt it prudent to make that short term investment for the balance of what to expect to be future growth. So you will see that happened so that that at least answers I think that that <unk>. The question, but I think continuing promotional efforts, particularly where we can and sent our dealers to grow their business.
Just as well those are things that we're looking at at literally as we speak. So there's there's multiple different kinds of ways that we can run promotions and investment a lot of it will really depend on what's going on in the marketplace than what we think will drive the best sales and <unk>.
Understood I could ask one more question.
Obviously, there and you know a deal that close today and flying your evaluation it'd be low some other transactions in Spain, I think that support it but you guys, but if I. If you have 'cause Israel down into the W.W.I. for a little bit and I think your answers have been very complete I just want to keep going.
In W.W.F. you know you mentioned the labor fixed costs. So detrimental margins when you talked about W.W.S. in the past portrayed as having significant capacity to drown always say, obviously, it's a very attracted clamped that you acquire yet.
Seems like this growth it seemed like the growth is going to be larger unconstrained by kind of that <unk>.
Incremental headway labor shift in all this stuff that.
And as you characteristic and the path so.
Since you're going through this process right now to talk about your visibility see that these issues are more transitory.
Nature verse structural and can kinda just expand on this cup can product windows. So I would get <unk> vinyl large builder for commercial should we see it.
Gross margin pressure or what you see it an attitude and can you just comment.
On 40 gross margins, we saw 150 basis points dragging three queues it could it be half that import you. Thank you very much for your patients.
Yep.
Questions to just a comment on western in general you in 2018, the split between custom in volume was roughly 50 50.
And volume implies exactly ways volume means is a lot bigger runs a lot easier run through a plant no different than we have volume and runs at P.G.T. at times bigger projects. So you know custom being custom versus volume.
Just typically flows better that mix, because we've introduced new products into our portfolio of western again and grow taught one that makes it shifted over time in 2019 that mixes more 60, 40, so 60% custom 40% volume, but that custom category includes.
I didn't like simulated steel <unk> you know the vinyl they need 3700 vinyl. There's there's a lot of stuff now that there is coming out that we have to adopt the plant too we still have capacity. There's there's capacity the plant that's not the issue. The issue is flowing through the plan and a shift.
Just a staging there there is how plant flows and operates and that's what we're heading into right now and adjusting because we feel the top one's got eight even worked seven raising your 2020, so we need to make investments now screen capture that at a more profitable level and I think in terms of profitability all day.
Is whether it's the ones we do it the P.G.T. in terms of cost reductions of technology upgrades to flow better through our plans to the ones. We do at western to investing in how you know productions major all those are investments that I feel drop incremental margins I I and no concern at all that we will we can be a 20%.
That is definitely overtime doable and I've seen that coming it's just a matter of investment.
Comments.
Yeah, and <unk> and the only other thing I would I just since you're you're thinking about Q3 to queue for keep in mind that historically in the lab legacy business. There's probably a you know two full percentage point delta and a bit down margin between cute Ranchi four so as you're thinking about the quarters, just make sure that you're taking that into.
Count as well.
Thank you very much.
That's a reminder, do you have a question. Please press so I want what connects to feel anger Jeffrey.
[noise] you guys can you see or something and say Hey, Jeff How're you doing can you hear something insights how the backlogs have progressed through the year at backlogs leveled off and it started to move in the positive direction.
Yeah, I will I will actually take that one so we in Q3.
The backlog last year was a hunter in 4 million I Q3 for this year was 72 million. So it's down 31%, we were saying I'd say kind of similar comps earlier in the or or though even maybe slightly above that the key for backlog for last year was 64 million. So.
We talked about earlier on the call that was where we were really getting more operationally efficient and kind of eating three that backlog. So he will probably see I'm more normalize backlog exiting queue for into into early key one.
Oh.
But sequentially things kind of level off or maybe that's not a good way to think about it just because you businesses seasonal nature.
Yeah, I think if you take that into account it it's been it's been sequentially very similar performance you know normalizing for those increase Q.T.M.P. three sales. So I think what you've seen in 2019 is a fairly stabilize backlog, you're just really I'm, having a factor in the overlap, particularly what we saw teach you include three which.
For the biggest backlog quarters of last year, and then it started to taper off in Q4 .
Okay. That's helpful color.
I think just few flagged early you expect flats lotion single digit growth in the market for 2020, the contra still pretty tough and the first half of next year. He considering the trend you've seen the back out this year. When you expect volume sexually conflict positively next year in it any insights that you can share that gives you confidence which your outlook.
You know I think first quarter will be another tough comp year, although I do think as possible to still produce growth a second quarter of next year I think you'll see a marketing change.
Why why don't we think that one I think the amount of growth in initiatives and we have in a western window systems. Some of those will actually come to fruition starting in the <unk>, it's like a quarter of 2020 and also several of the new initiatives. We've got on the plate it P.G.G. should be fully implemented in and.
And in place on the second quarter of 2020, So I I look at Oh look at the separate quarters and potentially a good turning quarter are good gauge on how we're doing a execution wise Jerry that's yeah <unk>.
And I'm, just gonna I'm getting just for the benefit of the group because this is probably the first time that we've really used some external data just start talking about the market. So we've been partnering with John Burns over the past call at four to six months on one thing I think was really important to us was to get a better sense of the market that are specific.
To our business so when you're seeing all of these you know national housing starts and permits and all of these other numbers that are interested in a high level what was more important to us as we really needed to make that actionable and specific to our business. So we have been working with them to really take what they're seeing market by market and apply it to our.
Business and where we compete so that we when we start quoting a market. It is really more relative to two P.G.C. legacy and to western So we feel it's just a better indication of our business as opposed to maybe snows Super high National levels that you would historically see 'em and other publications. So we're we're.
Are still working through this but we do feel it's a it's a better metric and so we felt at this point in time, because we're getting an early read a 2020, we at least when it to give you what we're seeing as early indications and then we'll continue to to really dig into that as we get into early 2020.
Got it.
That's one for me on the margin side of things, it's down noticed clean the back. After this year you know part of that is somebody's investments, you're making a in this mix dynamic it's unclear to me if that all reverse is largely next year, but given your outlook on sales and inflation is well do you expect <unk> next year and how we should think about.
Directly and how that in flux you could materialize <unk>.
Yeah.
I mean, yes year over year, I expect or even a margins to improve and we're not at a point, where we can comment on how much that wouldn't be kinda luxury said once we get a feel for our in our presence in into 2020 in our executing initiatives against that to grow that a segment because it is a very profitable segment for us.
And so once we get a feel for the new mixed we've had in 2019 from product launches in western once we get to we'll we can produce those more efficiently that will also drive that that margin and.
If you look year over year I do think there will be improvement.
In our even more.
But what about some of the things that are blogging your market down in the back at somebody's mix investments and promotional do you expect that the flip to be more <unk> early next year, that's going to linger little bit into early 2020.
It will linger someone into 2020 again to plant in mixed doesn't change you know we're a quarter.
But where were we look for the long term, we're going to go get the sale and and it will figure out how to make a profit profitable in the future. If we have two but we're going to get the sale. We're gonna girl the girl the top line, knowing how we're leverage from a cost structure and and what we need to do so I do think of investments they especially.
<unk> Western Windows systems, those will linger, if you will until the volume starts coming on those more volume starts coming on those product launches, but as they do we're going to be an incredible great position to leverage that so I I see that lingering at least was a bad word but kind of going into the first half of the year, but definitely turning.
Around by mid next year.
Okay. Thanks, I appreciate ago.
But.
Okay next determined Patterson at Wells Fargo.
Hi, good morning, everybody <unk>, just hoping to dig in a little bit more in your fourth quarter, you, but guidance you know it it looks like you could dial so 12% third quarter, but it looks to be intensifying and the fourth quarter I think you guys <unk>.
<unk>, 25%.
A year over year in fourth quarter, but you know it seems like these hurricane Doran sales headwins likely peak and the third quarter 17, what's new investments and the rebates for the hurricane awareness, probably Pete them, a third quarter you all for moved about 4 million and cost.
I'm, just hoping to understand why that intensified no in the fourth quarter is it you know the western Windows product mix. You also mentioned some 60 investments I'm just trying to you know understand the the big pieces, while you too you know kinda deteriorates from here.
Yeah, I I think the the western Windows product mix is probably the first second she will also have just the volume impact that will show up at eight but also that will also be a factor because we we did also reduce the the top line gotten so you'd have to factor that in as well and then it will just be that contain.
<unk> product next and legacy with our on our new construction that we don't see changing dramatically. It will be very similar to what we're saying just with our in our down more than what you're seeing a new construction. So I'd say, it's more of the same but maybe in in that particular order.
Okay. Okay. Thank you for that you just kinda piggy backing off like you know the the fourth quarter need a dollar range is is pretty wide about 20%.
Hello, Hi, I guess could you may be walk us through what pushes you to other ambiguous range.
Yeah, I I think a lot of it is it's really trying to see how this product mix flows. If it's if it comes in any different then then we will certainly look at that but from and investment perspective, we won't have someone at the cost coming in from the promotion pieces, but outside.
<unk> I think that's the bigger pieces is probably how much improvement were able to make in the western business, particularly around those incremental labor investments and inefficiency flow. So that's probably the bigger of the three <unk> and then they continued product mix and like I see yeah. The Truman just so you know what our.
My team with basically as we in you know 2019 and going into 2020, if mix did not change in other words of new construction is basically what we said single digits is boring or does not come back and is relatively flat how do we still be how do we <unk> legacy how do we produce.
20%, maybe dot com.
So we you know reacted to take in cost out to try to adjust as we entered into 2020 and there's a couple more initiatives quite frankly that you're you're going to hear about it will become out in the first quarter, but the goal is to see the market as it is make sure we can hit or margin profile within this changed market.
And tell drive initiative to actually grow and and be even better. So that's it's a tall order no doubt, but again.
We feel confident the cost reduction initiatives that we've taken in good still take and the potential of X., usually sells initiatives, we have a wheel drive incremental margin improvements and I only want to add one incremental things settle on the 4 million of of cost reductions that we didn't it'll light.
See business that was taken within a quarter. So it is not as simple as dividing 4 million by it by four in and saying you're gonna get a full million and that that will not be the case. They were executed on on a stairstep basis. So it will be less than a full quarter and Q4 ce of the predominant amount of <unk>.
That benefit will be coming in 2020, and one of them are based on volume when we brought glass internally, we and sorted into our internal glass Department is wasn't one of the initiatives that'll be they saw volume. So obviously, a bigger quarter is bigger savings and fourth quarter.
I am the the amount of the magnitude of that savings isn't necessarily in that fourth quarter. The magnitude of that particular, saying this is going to be in a second quarter next year for.
For instance, so.
Okay. Thank you all for that in in just one final one could you all give us an update on on the trying a curve so as well as just you know general cost inflation rolling through U.P.N.L. and 2019, you know how much of a headwind luxury 19, and does this intensified or ease a bit and 2020 I'm thinking it seems like transportation and start.
Do you use a little bit aluminum seem like it's a a bit low or you know on a year over year basis should just trying to understand the big moving parts, especially with you know trying a terrorist really took and.
Yeah. So I know aluminum piece, we've been running to call in the in the back half essentially flat, but we expect to see tail ones and that going into 2020. So we will see a tan when from that and as we mentioned in the call. We've already locked in close to 50 per cent of our needs for next year. So we feel good about that but we.
Our thing increases and other hardware so it isn't there as an inflationary aspect that we are saying now and that were also anticipating the C.N. 2020. So obviously as we're we're building on our plans we will be looking for waste to offset that whether it be incremental efficiencies, whether it be pricing and.
<unk> expect some had when but we will clearly take action offset back and and again, that's the costs on the business I'll continue to remind you all the biggest impact for for for me in my seat is the impact of foreign investment into the U.S.. So China is a significant player into the real estate market into California.
We are we concentrate our efforts in in what we called according designation stage people that people moved to the states and those are typically state that foreign investors will tie into Florida being one of the biggest foreign investment station the nation, California being one of those in China's going investor in the Chinese Oh.
An investor into that and real estate market that has impacted us in in my opinion more than the terrorist situation or cost we've been able to pass along in times of costs if needed. So I will be glad when when we do get over the hump from you know macro economic standpoint, and political standpoint, and and get the <unk>.
Which one result, more so from <unk>.
Okay. Thank you will.
And next summer <unk> at G. research.
Good morning, I have a question regarding just competitive dynamics, I mean competitor put up some pretty robust numbers, and and and sort of and their and their last call and and they talked about taking share and they talked about.
Oh dynamic pricing environment, He maybe talk to us about your thoughts on on what market share for you guys looks like and what you're seeing from any market share shift standpoints, <unk> or pricing movements on the industry as a whole.
Yeah, the competitor, you're you're probably referring to their their business model is geared towards.
<unk>.
And a lot of there but majority their portfolio, we don't play against they do have a residential arm and we do go up against a that particular competitor and mainly in the southeast ends on some more family and condo type project, they're they're not taking share from us.
Any more than we're taking chair from them and then the space. We play against so I can't comment on that commercial into their their <unk>. You know there there are significant play on the commercial sign no no and.
But I can't comment on that one.
Alright, that's it for me thank you.
But.
And that concludes our question and answer session I would like to travel conference back over the management for any closing remarks.
Hi. This this area. So thank thank you everyone for your continued interest in P.G.T. innovations, we look forward to talking to early next year and have a great rest your day.
Conference has now completed thank you for attending taste presentation.
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