Q3 2020 PGT Innovations Inc Earnings Call
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Good morning, and welcome to P.G.T. innovations third quarter 2020 earnings conference call. All participants will be in listen only mode should you need operator assistance. Please press Star then zero.
I would now like to turn the conference over to P.G.T. innovations Chief Financial Officer Sherri Baker. Please go ahead.
Thank you operator, good morning, everyone and thank you for joining us on the call today.
Mr Section at the company's website, you will find the earnings press release with our third quarter 2020 years old as well as the slide presentation. We have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website.
Before we begin our prepared remarks, please direct your attention to the disclosure statement on slide two of the presentation.
Well, it's the disclaimer included in the press release related to forward looking statements.
Today's remarks contain forward looking statements, including statements about our fourth quarter 2020 outlet and the impact of the COVID-19 pandemic that may involve risks uncertainties and other factors that could cause actual results to differ materially. This.
This disclaimer is a brief summary of the company's statutory forward looking statements disclaimer, which is included in the Companys filings with the EPS you see.
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 comparison acquire and credit performance it.
A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.
I am joined today by PGT innovation, CEO and President Jeff Jackson after our prepared remarks, we will be available to take your questions I will now hand, the call over to Jeff for opening remarks.
Thank you Sherri and good morning, everyone and thank you for joining us on today's call.
Before getting to the discussion of the business results I'd like to note that I'm very proud of the team for their efforts in what continues to be operating in a challenging complex and unpredictable environment.
Our primary focus will always be on protecting the health and personal safety of our employees and their families and communities.
The dedication and spirit shown by our employees has been exemplary and I want to thank them for stepping up and taking care of our customers and taking care of each other.
Order flow is increasing as is our backlog, we're working steadily to increase production output well here into important safety protocols to try to permit kobin notting transmission at our facilities.
We believe these enhanced safety protocols have been effective at allowing us to responsibly increase capacity to accommodate consumer demand without jeopardizing safety.
Each quarter I think it's important to begin our discussion of the results by reviewing our strategic pillars shown on slide four.
This framework guides, our execution as we seek to create long term value for our shareholders, while serving our customers.
Our first pillar is customer centric innovation, maintaining our focus on our customers who are at the center of our business, which in turn drives brand recognition and loyalty and ultimately leads to sales growth.
Our innovative market strategy has enabled us to further enhance customer intimacy.
And provide the insights into future demand that is now driving ourselves into door market and lot of the increase time people are spending in their homes.
Our second pillar, highlighting our need to continue to attract and retain dedicated employees with the right skill set in order for our company to succeed over the long term.
As we look to increase capacity to support increasing demand. We are actively recruiting talent in a tight labor market, we strive to maintain our long standing culture, where employees come to work every day, knowing they are appreciated and that they worked for a company that cares about them and their family.
Our third pillar is making investments in the business to grow our manufacturing capabilities and continually improving operations. So we can shift the best possible products to meet our customers demand.
As we discussed over the past few earnings calls, we have put substantial effort behind identifying and implementing operational improvements across the manufacturing process at our western business unit.
While we made steady progress and improvement along the way this really came to fruition during the third quarter as we achieve substantial better production rates, which drove significant EBITDA margin improvement versus prior year.
Our long term strategy includes continuing to invest in our business to drive product innovation and increased operational efficiency.
Our fourth pillar is to allocate capital across competing priorities, which may include reinvesting in the business, making acquisitions or paying down debt with the ultimate goal to drive shareholder value.
Next I'll review some key messages for the quarter on slide five before Sherry to provide further details on the financials.
We reported strong sales in the third quarter up 20% over prior year organic growth was 7%, primarily reflecting strength in the Florida market, while sales were down slightly in the western region as key markets in California, and Arizona have been slower to recovery from the downturn caused by the pending.
Based on our strong order entry patterns and increased backlog, we're expecting continued growth in organic sales in our south eastern markets in the fourth quarter.
This beliefs anticipates, our channels and markets are not negatively impacted by any new government restrictions related to the pandemic or material changes in the economy in our core markets either of which we expect that this time.
Sales contribution from new sales, which was acquired on February Onest of this year was $27 million.
The ongoing strength of that business emphasize is our view that new south was a great acquisition that is complimentary to our existing business model and we believe will be an important part of our future growth.
We're excited to announce that new South has opened its new its just show ramp in Houston, Texas.
Gross profit grew by 24% to 87 million driven by our strong sales growth and the operational efficiencies we realized that western.
Adjusted EBITDA margin increased 50 basis points would the improvement mostly driven by operational efficiencies, we have achieved through our manufacturing processes.
Looking ahead into the fourth quarter, we expect margins to again exceed prior year comparisons as we believe organic growth will continue and we will be able to exit some less profitable lines of business. It yourself.
Turning to slide six.
Let's look at our order entry and backlog.
We have continued to see strong recovery in order entry and momentum since the low point in April.
For the third quarter, the dollar value of order entry for our legacy business, excluding new south was up 26% over prior year.
Drilling down further our legacy southeastern business units third quarter order entry was up 33% versus prior year.
In our Western business unit order entry for the third quarter was down 2% versus the prior year quarter, primarily reflecting slower recoveries in Arizona and California.
While down year over year. This represents a sequential improvement from 20% decline in the second quarter.
Excluding the sale, our total backlog more than doubled versus the prior year figure.
The growth in backlog in our southeast business unit was driven primarily by increasing orders in somewhat by delays in receiving materials from certain suppliers due to cope and not team pandemic and related government measures.
For the third quarter retail orders that new self window solutions increased roughly 48% year over year.
On slide seven I would like to highlight key areas of this strategic marketing work. We've done that we believe have enabled us to improve lead time generation supporting our sales growth during 2020.
I've mentioned the importance of having the right talent. So one of the most important steps we have taken is putting in place the team and supporting infrastructure to drive commercial sales.
As a result, we've been able to build relationships to win new jobs in the commercial space.
Additionally, our sales team have developed exclusive agreements with production builders to capture growth in new construction.
We have expanded our presence in growing channels. These include share growth with big box retailers targeted growth in coastal states other than Florida and develop the direct to consumer channel through our new South acquisition.
Our company is based on the principle of innovation by collaborating with customers and investing in R&D. This has enabled us to stay in front of changing builder preferences, such as the need to accommodate demand for low price point options.
One example is the introduction of a value aluminum product branded CGS BARDA and another is the 3700 series vinyl products that western window systems began selling to spec builders last year.
To keep on the leading edge of consumer preferences last year, we launched our I left which serves as an incubator to distribute new and innovative products through select dealers.
To judge market reaction in demand before we began production on the larger scale.
Additionally, we are driving growth by using our brand strategy in digital outreach.
One example of this is the significant growth in the Florida market achieved through our increased implementation of this data driven strategy, which you will significantly generations for our dealer base.
In summary, I believe our targeted selling and marketing approaches have been a primary factor in our overall success in capturing sales during this challenging time.
We will continue to refine and expand upon the strategies as we make progress towards our goal of establishing PGT innovation as a national leader of premium window and door markets.
I now will turn the call over to Sherry to review the results in greater detail Jerry.
Thank you Jeff turning.
Turning to slide eight.
For the quarter, we reported net sales of 238 million, a 20% increase versus the prior year quarter and as Jeff mentioned this included $27 million of sales contribution from needs out.
Organic sales excluding itself were up 7% as you break this down further and our legacy southeast business unit, primarily consisting of Florida sales were up 9% versus the prior year quarter, while in our Western business unit sales were down 5%.
Although sales were down in the western region versus the prior year sequentially. The market decline is improving versus Q2 looking.
Looking at third quarter sales by channel in repair and remodel we saw organic growth of 13% year over year. We are expecting continued sales growth in the Urner channel in the fourth quarter.
In the new construction channel organic sales for the third quarter were flat versus prior year. This was largely driven by legacy, Florida sales, where new construction has proven more resilient with Q3 sales up 8% versus the prior year period, the western regions on new construction sales declined 5% versus the prior year quarter.
Primarily as a result of decreases by California production builders.
Selling general and administrative expenses increased by 12 million compared to the prior year quarter, primarily driven by the addition of the EPS Jenniffer needs out following its acquisition in early February X.
Excluding new south direct labor cost as a percent of sales decreased approximately 30 basis points compared to the prior year period as investments in operational enhancements and efficiencies at Western continue to have a positive impact on labor costs.
We're also realizing savings from our enhanced reporting and dash boarding, which we believe will drive an improved efficiencies of labor resources and workflow on the production line.
And finally, we are on track to achieve cost savings and an annualized run rate of approximately $3.5 million as a result of the consolidation of our Orlando plant into our Venice and Ts on the factory facility.
Gross profit for the quarter was 87 million an increase of nearly 17 million, reflecting the 40 million increase in sales and reduced manufacturing costs.
The EBITDA for the quarter increased 24% to $43 million compared to adjusted EBITDA for the prior year quarter of $35 million.
Our effective tax rate for the quarter came in at 25%.
We reported adjusted net income for the quarter, EPS 18.1 million or 31 cents per diluted share in the third quarter 2020, compared to $15.1 million or 26 cents per diluted share in the third quarter of 2019.
We expect Q4 2020 consolidated sales to be in the range of 200 to 210 million growing by 14% to 20% compared to the fourth quarter of 2019.
This fourth quarter outlook assumes we do not experience any significant new pandemic related government restrictions or other macro economic disruption that would adversely impact our business for the economies of our core market also.
Also as since we will not experience any significant disruptions to our supply chain for material or availability of labor isn't the pandemic or government responses to the pandemic.
We continually strive to manage costs, while also aligning cost structure to our sales forecast in order to provide a high level of customer service, including reasonable delivery lead time, our backlog provides a degree of visibility and we're constantly monitoring order entry and evaluating sales trend. While we are currently working toward.
Any production, we maintain flexibility to manage our cost structure in the event our outlook change it.
Turning now to our balance sheet.
We ended the quarter with net debt of $320 million and $11 million decrease for the second quarter, our only significant debt maturity in the near term as our term loan of $54 million. Due late 2022, we voluntarily paid down $10 million of the term loan during the third quarter of 2020.
At quarter end, we had total liquidity of $175 million, including a cash balance of 99 million plus $76 million of unused capacity on our revolver, we improved our net debt to trailing 12 month adjusted EBITDA ratio to approximately 2.2 times inclusive of an EBITDA acquisition.
Next we show the chart on slide 10, each quarter to highlight our track record of paying down leverage following the completion of significant acquisition.
On slide 11, I would like to review PGT innovations capital allocation priority.
Our first priority remains internal investment in projects that we expect to drive margin growth by growing revenue and ordered reducing expenses and the third quarter, we realized significant benefits that western where our internal investments in a number of projects have further improved our operational efficiency.
Another priority is our commitment to maintaining a strong balance sheet and conservative capital structure, we strive to maintain a conservative leverage profile with a range of two to three times net debt to EBITDA and continue to have a preference for saying at the low end of that range. We have maintained a healthy cash flow and a strong liquidity position, which.
Enabled us to make a total of $10 million in debt prepayment of our term loan in the third quarter.
We also have prioritized using capital for strategic acquisition that are expected to be accretive generate strong returns or allow us to expand into new regions channels or products as we did with our acquisition in the south in February of this year, we expect to continue to look for and evaluate potential acquisition.
Satisfy these characteristics and parameters and now I would like to turn the call back over to Jeff for some closing thoughts Jeff.
Thanks, Sherri in closing I would like to acknowledge our team members and our local distributor Doug Ashy building materials in Lake Charles Louisiana for their efforts to distribute much needed relief supplies. Following the devastation of Hurricane Laura and slips Lee Hurricane Delta.
With our company headquartered in Florida, we have seen the devastation that these incredibly powerful weather events can leave behind.
Our goal is that the support and supplies. We provide will help residents rebuild their homes their communities in their lives.
This relief effort is yet another reason PGT innovations is a great place to work and demonstrate our spirit of helping others, which has always been one of our core missions. At this time I would like to turn the call over to the conference operator to begin Q an operator.
Thank you Bill.
Now begin the question and answer session.
To ask a question.
Hi.
Good.
Yes.
Okay.
Right.
Please.
More than two.
It is possible.
Pause momentarily to assemble our roster.
And the first question will come from Bill.
Jefferies. Please go ahead.
Hey, Jeff and Sherri This is Matt on for Phil.
I guess just start there.
Similar trends and you felt imports you on.
The midpoint of the guide implies a deceleration in organic growth is on the right takeaway and can you talk about what would be driving that deceleration.
Yeah, no specifically, the new South no I mean, you sell through in the quarter alone grew 48%, so and our backlog is.
Close to $45 million alone and you sell so as we look into the fourth quarter. I mean, we still think new sales continue to grow but obviously, it's exceeding our model expectations. When we bought it it's been an incredible acquisition for us.
If you look at our range that we're putting out there a lot of that depends on where we fall in terms of of a supply standpoint.
As long as there's not any major disruptions and supplies.
But we've been able to do is increase our capacity.
Specifically at new sale, when we first bought them our capacity was less than a 1000 units a week round upper eight hundreds and now is 1500 heading to 17, hundreds so weve almost doubled the capacity there.
There are new cell. So we do expect start eating into that huge backlog and we do expect them to continue to grow as we.
Find out the year and even going into next year.
One additional consideration is also this year in the fourth quarter, we have three less production days than we did last year. So on a growth rate basis from a legacy perspective, it's actually going to be very similar to what we saw in Q3.
Okay, Okay that makes sense.
And then order.
Order trends, we're we're really strong in the quarter and definitely good to see western orders inflect positive on but backlogs have also been up significantly.
Can you talk about where lead times are trending and how you're thinking about the timing of converting those strong order trends and sales.
Sure I mean in October for instance, we have already started eating into that backlog it.
It really from a capacity standpoint, like I said really across every business unit, we've been able to ramp capacity.
We see a western you've seen the results with significant improvement in leverage and EBITDA there and.
Margin there, but if you look at even new south of already commented on we've already done that also here at PGT. So so again, we were starting to increase into.
Most of $200 million backlog and like I said earlier, it's obviously, a tight labor market everyone's experiencing that and from a supply chain standpoint, they're.
They are filling in as well I don't think is anything long term in nature, but I do think both from glass and aluminum standpoint. They struggled just like the industry has and they're getting back on their feet, which has allowed us to obviously bring down that lead time are the backlog as well if you look at our lead times in general.
We have several buckets of lead times, but.
And it will depend on which business you are talking about but I think the major bucket of lead times are major business unit, which is legacy PGT those lead times will get back under control by the beginning of I'd say 2021.
I would say over half of them already within that four week lead time is the other kind of piece of the business that.
Have extended lead times that we will continue to work on.
Okay, great. Thank you.
And the next question will come from Michael Rehaut with JP Morgan. Please go ahead.
Hi, Good morning, this is Maggie on for Mike.
First question just on.
Order trends that you saw maybe in October.
In September in the Western business, you saw a big improvement.
In that year on year growth, but there was a bit of a slowdown.
In terms of growth on the southeastern legacy business side. So could you talk about what you saw.
Caliber.
Relative to how you exited the third quarter.
Yes, I'd say from a from a legacy Florida business the growth rates are similar in October.
I started actually in October has a pretty tough comp just in that month, because we had several large commercial projects in 2019, but the last couple of weeks you know that we've been looking at I'd say that they're getting back.
To add to a healthy order growth rate, so improving as we expect it to improve as we go through the quarter and if you look at the macro perspective, just from what you're seeing from a starts perspective I'm just what the normal kind of lead time around from start to to order about 12 weeks, we expect to start to see some of that.
If it coming in as we exit Q4 and going into Q1 of next year.
Got it thanks.
And second on margins.
Talked about a lot of moving pieces in there in terms of.
The structural change in the western in new South I think exiting portions of the commercial business. So.
Can you talk about where you are in terms of the timing of those.
Is there anything left to comment western or is most of that already are we seeing most of that benefit already and then on new south.
The timing I believe you said that.
Exiting the commercial business would be for Q, but is that can be seen mostly in fourq you into one Q.
Just some more color there.
Yes, we will see some benefit of both those things in the fourth quarter from a western standpoint, those guys an incredible job direct labors improved north of 200, Bips distributions almost 200 bips. So so when you really look at that that unit is running I would say better than even when we bought it from an operational.
Standpoint, and results. So that will continue quite frankly, as we start to ramp back up in luxury said, we are facing some tough comps there from last year for some commercial jobs that they had but Texas is good Texas is a solid market for us both.
Both Arizona, and California have been slow to come out, but we are starting to starting to see some signs that there's like there and then we're starting to get back into those markets. So from operationally Westerns boys just to have an incredible 2021.
So I think you will still continue to see that benefit into the fourth quarter you sell a.
New self.
We are exiting some of the lines and we should be out in most of those lines in the fourth quarter, but you will see some benefit because that exiting started actually in the third quarter. So it will wind down and won't be as the negative this won't be as big of an impact in our fourth quarter is it wasn't a third so you will see benefit coming out in the fourth but.
Bob and Tom you reach first quarter again, a 2021 that those lines will be totally out and.
We will be focused on the more profitable ones.
Great. Thank you.
And the next question will be from Ken Zener with Keybanc. Please go ahead.
Good morning, everybody.
Good morning, good morning.
Yes, Sherri very good result, considering.
And your whole team obviously considering.
Any different markets you're in right now.
Headwinds.
You know I, just I don't recall, you guys executing as well so if we could start with like your comment Jeff I believe I do so you say you talked about 800 units.
A week when you got I mean, you're ramping up to I believe you said 1500, which.
I recall the history of your company ramping up it was a big issue for the window industry in general would you have to teach that many people out.
Got to make Windows, what is the difference right now I mean, how can you be ramping up so quickly with such good execution there.
Yes, just in terms of.
It's four eight people per team or how are you doing so well versus what happened in the past right.
All right really the key getting new South has been technology Weve made that we've been able to come in there and modify the plant.
Reengineered aligns cleanup.
Clean out the facility quite frankly, streamline the inventory flow all the way through to finished goods and Thats just help improvement tremendously. We added a couple of new machinery, a couple of CNC machines to speed along the process in and be less labor focused and we've been able to add.
People in Tampa to a certain degree so I think overall, we're very pleased in yet cannot we're at 1500 now I said it would be 1700.
By the time, we finished the first fourth quarter here. So our plan sort of go north of 2000, eventually and again as we open up more stores, which we plan on doing as I mentioned on the call. We opened up our Houston location and we're incredibly already pleased with that we're starting a new orders. So as we open up more stores, we're going to have to ramp.
That capacity and I know, we have much more to go we're not running two full shifts for instance, there. So right now I would say we put in the technology, we've reengineered to plant and now it's a matter of leveraging the shifts and employee talent.
Right. So you basically were able to get much more output because of the process and technology as opposed to doubling or even increasing.
Labour, 50% for example, that's exactly right.
Wow.
You you made obviously I appreciate the order.
Rates that you're putting in the different units I think thats very interesting, especially when you look back how you've been doing that since October last year.
But can you talk you know what I thought.
That's interesting is that new versus ours, because they knew was flat our was up 13. If I. My memory is correct is that really just because you're in so many different regions and product categories. Right. Now was that really just with the argonaut, reflecting success in your western.
Initiative to extend beyond new construction is that really what that aren't.
Our growth is reflecting.
No actually there are in our growth is almost 100% and legacy Florida business So and.
And the addition of new that so it's really it's a combination of both of those.
We just opened in one of our stores out West earlier this year. They cross the million dollar order threshold in Q3, which is really exciting and we're going to be opening up a second location in sometime soon the new construction piece that flat is really growth in Florida offset by still that 5% decay.
Mine in Western so it's more about the CBU Western next on the new construction side.
And then if you could comment.
Not only are a builders.
Getting a lot of orders, we just had an installation company report this morning that says look.
The orders are there to build there's just can't get stuff built and Windows 10 might go in before.
Installation.
So how are you thinking about the lags you're seeing in the industry.
Somebody homebuilder talks about a basically a 10% delay in their construction cycle time, so on the new side are.
Are you seeing that locks, it's obviously I don't know you're growth seems to be pretty pretty good.
Then the second question, which is separate would be how are you seeing demand people getting comfortable with the windows I E com.
Contractors coming in it seems like with our in Iraq.
Right. Thank you very much.
Yeah, I'll comment just in general you're right you construction it really starts from watch so available lots and for the new construction guys are coming premium and scarce. So it goes all the way through so the call various calls I've listened to or the in the executives of talk to there is a there is a general delay right now and just getting stuff done.
That's also tied to labor markets are very very tight as well.
From from Orin Weve been able to ramp up that capacity is as again as we've increased from an automation standpoint.
And we're starting to feed into that new construction boom, but in Florida. It is it is a robust market. We have north of 900 people a day moving into this date and we see that if anything increasing so I think thats going to bode well into 2021 from the or an or standpoint quite frankly, we're benefiting.
Just like all the other or in our businesses are you had a lot of people staying home for the last three four months.
Quarantine some luck sheltered in place and they want to fix up their place, whether it's aro sliding glass doors indoor outdoor living feel too.
Patios, our decking or whatever it may be so all of those markets serves I think.
Thanks Scott.
Tremendous growth because a pandemic related.
Let's stay at home measures and I think we've benefited from that as well both from a new south PDG really across all brands.
Thank you.
Perfect.
Thank you thanks.
Thanks.
And the next.
Question will come from Keith Hughes Lewis. Please go ahead.
Thank you.
Your order growth in the southeast has just been outstanding here, the last four or five months.
Is it going to be possible for you to have double digit organic growth next year from those orders are you simply just not going to have enough capacity to ship at that rate.
You'll certainly see the benefit of that backlog at least probably through the first half of next year. The real question will be on does that significant order growth continue as we get into the early part of the year price a little bit too soon to tell but just the overall strength of what we've been seeing in the mine.
Marketplaces is I'd say.
Very attractive for us at this point in time.
But are you going to be able to ship I mean, you're you're putting up high single digits in the third and probably somewhat in the fourth.
And the southeast is that going to be the maximum rate in New York at that rate increase if the orders are there.
No. It can definitely increased in and just say again, we will be able to shift between brands.
For instance, I'll tell you a new south we're going to we will more than double that capacity as we continue to add production lines, there and thats literally just an extra shift that's people. So so theres not really yet a restraint other than just getting the proper people in and train.
In Miami at our CGM facility, we still have plenty of capacity. There. If you look at our overall blended capacity for all our facilities, you're probably in that 65 or 70% capacity range. So I still think next year, we're going to be able to meet.
The increase in demand and again, we had another active hurricane season. This is dr. fourth in a row.
I think thats going to also drive a spirited awareness of the benefit of our impact products.
Well, if you got the low level of capacity I guess I'm kind of confused on why the fourth quarter.
Revenue growth is not as much stronger.
Good luck.
Builders.
Quick thoughts is there something else going on there.
Well in addition to the days share days, all our fourth quarter has almost every year since I've been here Ben.
Challenged from a share production day standpoint, you have both Thanksgiving and Christmas falling in in the fourth quarter. In addition to that Keith.
Keith for instance, augment get back on the new cell site. You also have to have the installation capacity as well. So those crews have to be hired and put in place as well. So it's just more complex than saying maybe mid quarter over quarter, there's various things that will that will fall into that.
Buckets, a lot of borrowing or does not happen in the fourth quarter people do not want you in their homes over Thanksgiving and Christmas. So there's just some inherited.
Inherent nature of the business is our fourth quarter, we will always be.
The challenge from from different aspects that we encounter.
Yes. This is typical seasonality.
Okay.
And the new self businesses has been fantastic as highlighted really this entire year.
As you go into next year is there going to be just a natural slowing that business just goes up against tough comps is going to come at your organic growth numbers next year or two or is that something we should think about or is there something else going on here that the this robust growth should continue.
Well, obviously, you know whatever 30 or 46%, 48% as Youre, saying, yes, yes, we're not going to continue percentage wise that kind of stuff, but but the key to new south and all the shared comment in a second are the key to new south is going to be opening up new stores. Okay. We opened up Houston, We've got New Orleans slated were eventually.
Going to open up to another store in Houston by the way and we're going to go into the South Atlanta market. So we in Virginia, we got different slated store openings and that will be the key to that continued.
You know if it remains pretty elevated and they are able to get the homes constructed an enclosed in 2021.
The answers quite simply yes, we do have the capacity like I said earlier running probably about 70% capacity, 65% to 70% capacity now.
And we have plans to obviously add capacity as we continue to grow the business organically and there is always acquisition added capacity. This always on the table as well.
Okay. Okay, and then my follow up is a two parter aluminum it's up modestly over the past couple of months and pretty materially versus earlier. This year. How are you all hedged for 21 and do you need any price hikes to offset it and then on the flip side on SG&A a lot of firms have actually.
Pulled back on course from due to the pandemic lack of travel advertising et cetera should we actually see some caution normalize going forward and SG&A.
Well I'll I'll take the them in order stuff from an aluminum perspective, we've been very actively putting on coverage right. Now we're 60% covered for next year, and we're actually going to see a tailwind versus what we're seeing currently just due to the fact that we had a higher hedge then spot prices that.
Times. This year. So we've been very active on that front. So it should be similar if not better next year with a 60% hedge on the SG&A perspective.
One thing to consider is that Ms down to just from Ah SG&A as a percent of sales has a higher SG&A structure, just because of their go to market strategy with direct to consumer they definitely have an a higher advertising expenses and marketing than what you would see in the legacy business, though that's probably the biggest factor.
But as we continue to get higher sales, we should continue to see some leverage on that.
Okay. Thank you.
You bet. Thank you.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Sherry bicker for any closing remarks.
Thank you and thank you everyone for joining us today and your continued interest in PTT innovations. We hope you and your families continue to remain cellphone statement healthy. Thanks, so much.
The conference has now concluded. Thank you for sending today's presentation you may now disconnect.
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