PGT (PGTI) Q2 2018 Earnings Conference Call Transcript

PGT (NYSE:PGTI)
Q2 2018 Earnings Conference Call
Jul. 30, 2018 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day. Welcome to the PGT Innovations, Inc. second-quarter 2018 earnings conference call. [Operator instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Jackson, CEO and president. Please go ahead.

Jeff Jackson -- President and Chief Executive Officer

Thanks, Michelle. Good morning, and welcome to PGT Innovations' second-quarter 2018 conference call. I'm Jeff Jackson, president and CEO of PGT Innovations, and I'm joined this morning by Brad West, PGT Innovations' CFO. Before we begin our formal comments, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995, including our 2018 financial performance outlook.

These remarks involve risks, uncertainties, and other factors that could cause actual results to differ materially. These factors are detailed in the company's earnings press release and in the Risk Factors section of our 2017 annual report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements. You should also note that we will report our results using non-GAAP measures, which we believe provide additional information for investors to help facilitate the comparison of past and present performance.

A reconciliation of these non-GAAP measures to GAAP counterparts is available on the Investor Relations section of our website. A presentation of the quarterly results is also available on the Investor Relations section of our website. Now let's kick off this call and start on Slide 4. I'm pleased to report another strong quarter for PGT Innovations, primarily driven by continued growth in our repair and remodeling channel and solid operating performance across the portfolio.

For the second quarter of 2018, we delivered sales of $169 million, up 23% from the second quarter of 2017; strong gross margin of 35.4%, compared to 32.4% in the same period last year; earnings per diluted share of $0.43 and adjusted earnings per diluted share of $0.41, both increasing $0.20 in the same quarter last year; adjusted EBITDA of $33.9 million, up 35% year over year. Importantly, this marks the first time in the company's history we've achieved adjusted EBITDA margins of 20%. For the first half of 2018, we achieved sales of $310 million, a year-over-year increase of 24%; gross margin of 33.8%, compared to 30.5% in the first half of last year; earnings per diluted share of $0.57, increasing $0.26 in the first half of the year; adjusted earnings per diluted share of $0.60, compared to $0.27 in the first half of 2017; and adjusted EBITDA of $55.6 million, up 38% as compared to the first six months of 2017. The momentum of solid operating performance from 2017 and the first quarter of 2018 continued into our second quarter as we again demonstrated our ability to leverage fixed cost on a significant increase in sales.

This leverage, combined with operating efficiencies, resulted in a 3 percentage point increase in gross margin for the second quarter compared to last year. Demand continued to be strong in both new construction and repair and remodeling channels of our business, with sales growing in both channels compared to last year. Recent investments in our business and the continued commitment of our team to operational excellence enabled us to meet this increase in demand and deliver impressive operating performance. As we enter the second half of the year, we are well-positioned and focus to execute on our strategic plan to deliver exceptional full-year results as reflected in our increased full-year 2018 guidance.

We look forward to building on a strong foundation to drive enhanced value for our shareholders. Turning to Slide 5. While demand grew across both channels, growth in the repair and remodeling was the primary driver this quarter, up 30% over the same period last year. We achieved this continued repair and remodeling growth by capitalizing on increased demand for impact-resistant products following last year's active hurricane season and strategically investing in advertising and marketing to drive sales.

Sales in the repair and remodeling channel now represents 65% of our sales, and continued growth in this sector is expected to contribute to overall net sales growth through the back half of 2018 and beyond. As a result of this increased demand, we ended the quarter with a strong consolidated backlog of nearly $100 million while maintaining lead times that allow us to serve our customers' needs in a timely manner. Turning to Slide 6. As we look ahead, key drivers of our continued growth include: Florida is the fastest-growing state in the nation.

This is expected to result in normalized single-family housing starts of approximately 125,000 per year. We believe this indicates there is significant new construction growth potential remaining in Florida as we're estimating the 2018 housing starts to be approximately 95,000 to 100,000. We also expect to see continued growth in our repair and remodeling channel. Following the active hurricane season last year, we have seen increased demand among Florida consumers for impact-resistant products that can withstand tough weather conditions.

It is estimated that 6.5 million people evacuated Florida last year, the largest in U.S. history in response to Hurricane Irma, the Atlantic Ocean's largest-ever recorded Cat 5 storm. It is also estimated that only 18% of homes in Florida have impact-resistant windows and 13% have impact-resistant doors, another 18% have storm shutters. This indicates that at least 50% of Floridians have no protection on openings of their homes to safeguard their property against severe storms.

Hurricane Irma demonstrated that every home in Florida, not just coastal homes, can be impacted by severe weather. As a result, homeowners throughout the entire state of Florida have begun searching for hurricane protection for their homes, which is why we believe our advertising and marketing investments continue to benefit our growth. In addition to those efforts and to further position us to capture greater share, on July 16, we launched a value-custom product line, which targets homeowners looking to upgrade to an impact-resistant window at an affordable price. We expect our new CGI Sparta product line to help further penetrate the impact-resistant shutter market and offers an affordable alternative for those that have no protection.

We believe PGT Innovations is well-positioned to continue to capture an increasing share of our core market and maintain our status as the nation's leading manufacturer and supplier of impact-resistant windows and doors. As I discussed last quarter, we recently expanded into a new 330,000 square-foot facility in Miami. I am pleased to report that the CGI operations enjoyed the highest level of quarterly sales in their history while also executing the move to a new facility. The third quarter of 2018 will be our first full year in the new facility in Miami, and we expect to facilitate continued productivity improvements and operational efficiencies.

During the quarter, we also expanded our CGI commercial facility in Miami from 40,000 square feet to 80,000 square feet, which enables us to run multiple manufacturing lines. This facility features a larger production floor and showroom with additional office space for employees. Our CGI commercial brand also introduced a new Slim Front storefront system, which is made for high design pressure applications. This commercial segment continues to be a growing opportunity for us.

Finally, as we look forward, we are especially excited about the growth opportunity that Western Window Systems provides. This marks a new chapter and a significant milestone in our company as we become a national leader in the premium window and door space. As a matter of fact, I have a special guest joining us on today's call, Heather Zorge, chief financial officer of Western Window Systems. I would like to offer Heather the opportunity to say a few words.

Heather Zorge -- Chief Financial Officer of Western Window Systems

Thank you, Jeff. I'm honored to be here today, and thank you for allowing me to say a few words. As you all know, it was announced on Tuesday, July 24, that PGT Innovations has entered into an agreement to acquire Western Window Systems. The transaction is expected to close in the third quarter of this year.

Our team is incredibly excited about becoming part of the PGT Innovations family of brands. Our management team and employees at Western Window Systems have worked very hard to create a company that is recognized as an award-winning manufacturer of quality, premium, contemporary window and door products designed to unify indoor-outdoor living spaces and to meet the most stringent energy-efficiency ratings in North America. It is exciting to know the PGT Innovations team has worked just as hard to create a company that is the leading manufacturer of innovative products, which protects families, homes, and businesses by satisfying some of the most stringent building codes in North America. We look forward to working together to build a great combined company that all of its stakeholders can be proud of.

Jeff?

Jeff Jackson -- President and Chief Executive Officer

Thank you, Heather. We can't wait to officially welcome you and the entire Western Window Systems' team of 330 employees to the PGT Innovations family. We believe that as a combined company, we will be even stronger and more profitable, and we will be well-positioned to drive sustained growth and enhance shareholder value. Now let's review the key highlights of the acquisition on Slide 7.

As we announced last week, we believe the addition of Western Window Systems supports our geographic expansion outside of Florida, providing a strategic platform in important and growing geographies throughout the Western United States and diversifies our product portfolio. We expect this acquisition to deliver immediate accretion to PGT Innovations' cash EPS and gross and adjusted EBITDA margins while also maintaining our financial flexibility and solid balance sheet. In combining our offerings, we will have a more diversified product portfolio, with entry into high-end, niche, energy-efficient products designed to unify indoor-outdoor living spaces. Due to these products' high margins, we believe we'll be able to achieve margins at/or better than those that our current impact products provide.

Our complementary sales strategies are expected to generate exciting cross-selling opportunities that will enable us to strengthen brand recognition and leadership, aligning with our growth strategy. We are excited about the possibilities ahead and look forward to officially welcoming Western Window Systems' brand into the PGT Innovations' house of brands when we close the acquisition, which we expect to occur in the third quarter of 2018. Now let's turn to Slide 8. For the second quarter of 2018 and as we look ahead, our main driver of our success has been and will continue to be our focus on continued successful execution of our four strategic pillars, which we expect to create long-term customer and shareholder value.

Those pillars are: One, we believe putting the customer first builds brands, as evidenced by the strong numbers we reported today. The investments we've made in advertising and marketing have increased brand awareness and reached and connected us with new customers across the core market of Florida. By focusing on the customer, we have capitalized on these new relationships, developing deep customer loyalty, which in turn has driven sales. We believe our focus on the customer will continue to drive growth as we expand our footprint.

Second, we are focused on attracting talented, hard-working leaders and offering benefits to help our team members succeed. We believe that a talented, dedicated team is key to our success, and we strive to make our company the best place to have a career. In April, we opened a new 7,500 square-foot child care facility in our North Venice location. This benefit offers affordable, convenient child care to service PGT Innovation families with young children at a discounted rate.

In June, we also announced a onetime stock grant that provided 10 shares of company stock to each of our team members who are not already participants in the company's annual long-term incentive plan. As of July 2, I'm proud to say, every employee at PGT Innovations also became a company shareholder for the first time in the company's history. Third, we are committed to investing in our business and scaling our operations to meet increasing demand. PGT Innovations is differentiated from competitors by our high quality, innovative, impact-resistant products, products that not only meet but exceed Florida's building codes, which are the safest and most stringent in the country.

Likewise, Western Window Systems' premium energy-efficient products designed to unify indoor-outdoor living space serve as a key differentiator in its targeted markets due to increased regulations and the demand for energy-efficient products. We believe continued investment in R&R -- R&D will enable us to continue to be an innovative industry leader in innovation and product development, which we view as critical to our success. The increased production capacity afforded in our new facility in Miami was key in meeting the increased demand we saw this quarter, underscoring the importance of this pillar to our long-term growth. And fourth, finally, we strategically allocate capital generated from our strong free cash flow to support our growth.

This includes investing in our business but also making strategic acquisitions, like the acquisition of Western Window Systems we announced last week. We view the accretive, lean investment of our free cash flow as core to driving shareholder value. Now I'd like to turn the call over to Brad to discuss the financial results for the second quarter in more detail. Brad?

Brad West -- Chief Financial Officer

Thank you, Jeff. I will begin on Slide 9 with a summary of our results for the second quarter. As Jeff noted, we reported net sales of $169 million in the second quarter, an increase of 23% compared to last year, continuing our momentum from the first quarter as this year's repair and remodeling season was especially solid. For the second quarter 2018, our gross profit was up $15.4 million and the gross margin increased 300 basis points to 35.4%, compared to 32.4% in the second quarter 2017.

Our gross margin benefited from higher volume, improved operating effectiveness and a favorable mix of sales. Gross margins also benefited from price increases that took effect during the second quarter. Offsetting these benefits were inflationary factors, including an increase in the price of aluminum and increases in labor and fuel costs. The price of aluminum remains higher in the third quarter, at $1.13 per pound today, and is up from $1.11 per pound at the end of last year.

After considering the effects of our active forward-buy and hedging programs, the increase in aluminum prices had a negative impact of 110 basis points on the gross margin in the second quarter of 2018. Both strong sales and moderate price increases enabled us to cover these inflationary costs. As of today, we have covered for approximately 70% of our estimated aluminum needs for the remainder of 2018 at an average delivered price of $1.13 per pound, which compares to $0.97 per pound in 2017. Additionally, we are covered for approximately 55% for just the LME portion of the total cost at an average price of $0.99 per pound in 2019.

Please note that this does not include the delivery cost, which today is approximately $0.20 per pound. Going forward, we will continue to monitor the price of aluminum in a tariff and trade environment and, as appropriate, increase our coverage or make additional prudent increases in the price of our products. We are pleased that we expanded margins by more than 300 basis points for the second quarter of 2018 as compared to prior year despite discontinued inflationary pressures, and we believe we are positioned to further strengthen our margin profile looking ahead. We expect the Western Window Systems acquisition to be immediately accretive to PGT Innovations' growth and EBITDA margins -- adjusted EBITDA margins that are targeting a margin improvement of 150 to 200 basis points, depending upon brand mix as we go forward as we realize cost synergies and continue to offer both companies high-value products to an even broader customer base.

We expect this to deliver significant value to shareholders and look forward to providing additional details in following quarters. Selling, general, administrative expenses were $32.6 million in the second quarter, an increase of $7.9 million from the same quarter last year but slightly lower as a percentage of sales. This increase was mainly driven by $2.5 million of additional personnel-related costs, including higher estimated incentive compensation, and improved performance of the company, higher recruiting costs, and company 401(k) match. Additionally, we had $2 million of additional distribution costs due to higher sales and fuel costs and nearly $1 million in additional investment in marketing and advertising initiatives.

The remaining increase was due to higher costs from higher sales levels. Stock compensation was $684,000 in the second quarter of 2018, resulting in a first-half stock compensation expense of $1.2 million. Our estimate for all of 2018 continues to be approximately $2.5 million. We also recorded approximately $1 million in costs related to the Western Window Systems acquisition, which we excluded from adjusted earnings and EBITDA.

More cost will be incurred in the third quarter, which will also be adjusted. We recorded a gain of $2.6 million in the second quarter relating to the final transfer of certain door glass manufacturing assets to Cardinal under the asset-purchase agreement we entered into in September 2017, though this gain was excluded from our adjusted EBITDA. As part of the transfers, we received cash proceeds totaling $14.8 million from Cardinal in the second quarter. Interest expense in the second quarter was $3.6 million, a decrease of approximately $1 million from last year.

As we discussed last quarter, during the first half of 2018, we made $40 million of voluntary prepayments of our borrowings. The decrease in interest expense is primarily the result of a lower average level of outstanding borrowings compared to last year. The decrease is also related to our lower rate for borrowings under 2016 credit agreement as a result of the first-quarter 2018 refinancing, which resulted in a 125-basis-point reduction in the stated interest rate margin for borrowings under the term loan portion of our facility. Depreciation and amortization was $4.8 million in the second quarter, slightly higher than last year.

We recorded tax expense of $3.8 million in the second quarter, which represents an effective tax rate of 14.3%. This compares to $5.1 million and 33.1% in the second quarter of last year. Tax expense in the second quarter of 2018 has been reduced by $3.0 million of excess tax benefits relating to the vesting of equity awards and exercises of the stock options, compared to $407,000 last year. Excluding these benefits, our effective tax rate would have been 25.8% in the second quarter of 2018, compared to 35.8% in the second quarter of last year with the lower effective tax rate resulting from the decrease in the corporate tax rate from the Tax Cuts and Jobs Act enacted at the end of last year.

We continue to expect an effective tax rate for 2018 of approximately 26%. We recorded net income of $22.5 million, or $0.43 per diluted share, for the second quarter 2018 versus $10.3 million, or $0.20 per diluted share, in the second quarter of 2017. After removing the second-quarter 2018 impacts on gains in transfers of assets to Cardinal under the asset purchase agreement and costs related to our recently announced acquisition of Western Window Systems, net of their estimated tax impacts, adjusted net income for the quarter was $21.4 million, or $0.41 per diluted share. This significant year-on-year increase is primarily driven by the strong growth in our top-line sales for the quarter as well as improved operational performance and efficiencies versus the second quarter of last year.

Adjusted EBITDA for the second quarter was $33.9 million, or a margin of 20%, compared to adjusted EBITDA margin of $25.2 million, or 18.3%, last year. As with our gross profit and gross margins, adjusted net income and adjusted EBITDA benefited from higher sales volumes and improved operating performance. Reconciliation of our non-GAAP financial measures to their GAAP equivalents have been included in our earnings release for your reference. On Slide 10, we'll give you a breakdown of net sales for the quarter.

Overall increase in overall impact sales of 25% includes increases in sales of our vinyl impact products of 39% and of our aluminum impact products of 20% compared to the same period last year. This growth was driven by solid demand for our vinyl WinGuard products, which grew 43% versus the same quarter last year. Turning to our balance sheet on Slide 11. We ended the second quarter 2018 with a cash balance of approximately $63.9 million, up $29.9 million as compared to the prior-year period.

We invested $8.2 million in capital expenditures in the quarter, which is $5 million more than last year's second quarter, driven mainly by spending related to our new facility in Miami. Additionally, we made estimated federal and state income tax payments totaling $3.0 million. We received $24.8 million in cash proceeds related to the sale of our PGT-branded door glass assets in Cardinal pursuant to the asset purchase agreement executed September of 2017. We further reduced our net leverage during the second quarter of 2018 to 1.6 times.

As previously reported, at the close of the acquisition of Western Window Systems, we expect a pro forma debt to EBITDA ratio of approximately 4.0 times. We intend to capitalize on the strong free cash flow profile that we expect from the combined company to quickly delever as we did following the acquisitions of CGI and WinDoor. At this point, I'll turn the call back over to Jeff for comments on our increased 2018 outlook and some other closing thoughts. Jeff?

Jeff Jackson -- President and Chief Executive Officer

Thanks, Brad. Last week, we provided increased guidance for 2018. I wanted to remind everyone of that increase and that we expect to finish at the high end of the new ranges. Those ranges are net sales of $580 million to $600 million, increasing 13% to 17%; adjusted EBITDA of $100 million to $110 million, increasing 19% to 31%; net income per diluted share of $0.95 to $1.10, which assumes 52 million weighted average diluted shares outstanding; and free cash flow of $62 million to $72 million, reflecting our expectations of a solid growth for the remainder of 2018 and disciplined capital spending.

As a reminder, this outlook relates only to the legacy PGT Innovations operations and does not include any pro forma benefit from Western Window Systems. We will be able to provide more details on the Western Window Systems impact to our consolidated financials and related guidance after closing the acquisition. Before taking your questions, I want to close by saying thank you to every PGT Innovations family member for another strong quarter; and to our partners, customers, and shareholders, thank you for your continued support. Our culture at PGT Innovations encourages integrity, safety, innovation and sustainable growth, and I feel grateful to be part of such an incredible team.

Our leadership team and approximately 2,700 team members are focused on generating profitable growth and enhance shareholder value, and I believe the 330 team members from Western Window Systems will join in and further enhance that effort once this acquisition is closed. And I am fully confident that collectively we will. At this time, I'd like to turn the call over to the operator to begin our Q&A. Operator?

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Keith Hughes of SunTrust. Please go ahead.

Jake Cohen -- SunTrust Robinson Humphrey -- Analyst

Thanks. This is Jake Cohen on for Keith actually. I was just hoping to get a little bit more detail on how the quarter trended just given some of the weaker housing data we've seen recently. Were these growth rates consistent through the quarter? Or how did that look heading toward June?

Jeff Jackson -- President and Chief Executive Officer

Yes. As we moved through the quarter, it was pretty consistent quarter to quarter. For the third quarter, like I quoted, the backlog of $100 million going into the third quarter, so our third quarter started off strong as well. So in terms of growth throughout the months of the second, they were consistently year-over-year increases.

Jake Cohen -- SunTrust Robinson Humphrey -- Analyst

OK, great. And then just real quick, not sure if you're ready to give any detail on pro forma gross margin or sales mix, but how would that look in terms of R&R and new construction going forward?

Jeff Jackson -- President and Chief Executive Officer

Well, I can't comment on that kind of overall mix. Roughly with the integration -- once the integration is complete, we will be about 25% out of state and about 75% in-state on sales. In terms of the R&R, new construction mix, it will be closer to 50-50. Right now, we're roughly 65-35, but Western Window Systems is pretty much new construction, so that will bring our mix pretty even.

I'm not going to comment on gross margins at this point. Like I said in my remarks, once the acquisition is closed, which we expect it to close in the third quarter, we're going to issue a press release around that and we'll revise our annual guidance to include the impact of Western Window Systems for the remainder of 2018.

Jake Cohen -- SunTrust Robinson Humphrey -- Analyst

All right. That was great. I appreciate it.

Operator

The next question comes from Sam Darkatsh of Raymond James. Please go ahead

Sam Darkatsh -- Raymond James -- Analyst

Good morning, Jeff, Brad. How are you?

Jeff Jackson -- President and Chief Executive Officer

Good, Sam.

Brad West -- Chief Financial Officer

Good morning, Sam.

Sam Darkatsh -- Raymond James -- Analyst

Three questions, if you could indulge me. First, a clarification question, Brad, on the tax rate. Does the 26% guidance you're having for the year, is that inclusive or exclusive of the excess tax benefits that you recorded in Q1 and Q2? I'm a little confused as to what we should be putting in for second half tax rate.

Brad West -- Chief Financial Officer

No, that -- and yes, and that's exclusive. Basically that 26% is roughly what we'd see in any quarter where there's not any excess tax benefits.

Sam Darkatsh -- Raymond James -- Analyst

OK. So use the 26% rate in 3Q, 4Q for our modeling purposes?

Brad West -- Chief Financial Officer

Right.

Sam Darkatsh -- Raymond James -- Analyst

OK. Second question, directionally, Jeff, I know you said you're hesitant to give specificity on gross margin expectations going forward. But clearly, the 35% gross margin this quarter was terrific. Could you talk directionally about the sustainability of that on the legacy PGT business exclusive of the pending acquisition?

Jeff Jackson -- President and Chief Executive Officer

Yes. I mean, exclusive of that, Sam, what we've done and demonstrating now through the first at least all of '18, and we really started seeing some of this in '17 as we started driving our gross margin improvements, we've increased throughput, we've increased efficiencies, we've reduced scrap. We've done a number of things operationally in the legacy business to drive that margin enhancement to gross and EBITDA lines. But -- and also volume, quite frankly, we've invested really starting off with a glass plant investment in '14, really throwing a lot of investment in the company that's paying off handsomely now with the volumes.

And we're leveraging that fixed cost investment over that increase in volume. Brad, do you have anything?

Brad West -- Chief Financial Officer

Yes. So, Sam, we've seen improvements in our material and labor costs as our efficiencies have improved this year. And I think that part of it, we do feel, is sustainable. Our gross margins will fluctuate with overhead leverage just because of our sales volume.

Obviously, our second and third quarter tend to get more leverage than in Q1 and Q4. So I would just keep that in mind as you do any modeling go forward.

Sam Darkatsh -- Raymond James -- Analyst

But you had 300 basis points of year-on-year expansion in gross margin. I'm just trying to get a sense, is that realistic to think that type of cadence is realistic in the back half?

Brad West -- Chief Financial Officer

Yes. I mean, with the same kind of sales level, yes. But if sales level grew a little bit less than 20%, then the margin would be less as well is what I'm saying.

Sam Darkatsh -- Raymond James -- Analyst

Got it. And then my final question, I think last quarter, lead times, if my memory serves, were running about four weeks. Where are they running now? And more specifically, where do you think they're running versus the industry or versus your competitors?

Jeff Jackson -- President and Chief Executive Officer

Yes. Right now, anywhere from three to four weeks, Sam. That really hasn't changed. We have added some capacity since we last spoke.

But for the most part, we're either hitting that three- to four-week window. Now with Miami up and running, I think you'll see that kind of start to come down. The launch of the new Sparta line will also have obviously better lead times on that line. In terms of competition, we're hearing it's about the same.

Our competition is about that same kind of lead time, three to four weeks local. Out of state is obviously more because they have to get it here and buy third-party glass, so there's a lot more that goes into the out-of-state lead times. But that's what we're hearing as well.

Sam Darkatsh -- Raymond James -- Analyst

So you're not too concerned right now about aluminum prices coming off of late and then that influencing competitive pricing?

Jeff Jackson -- President and Chief Executive Officer

No. You mean -- are you talking about the aluminum pricing recharge or the input cost?

Sam Darkatsh -- Raymond James -- Analyst

I'm sorry, I apologize. The input costs. At least what we can see externally, it looks like aluminum costs have come down over the past two, three months or so. I was just curious as to whether that might influence competitive pricing.

Jeff Jackson -- President and Chief Executive Officer

Yes. I don't think it will, Sam, because the tariff talk is still bouncing around. And its impact, people are still trying to figure that out, to be honest with you. The Midwest premium, the transportation piece hadn't changed.

It's roughly still the same. We have seen some LME drop, but -- and we'll try to hopefully lock in some hedges. But we haven't seen any meaningful change in pricing that would drive in-user pricing to be affected downward at this point.

Brad West -- Chief Financial Officer

Yes. And I would add, while it dropped a little bit recently, it's still pretty meaningfully up over this time a year ago, which is what's kind of driving pricing in the competitive area.

Sam Darkatsh -- Raymond James -- Analyst

Right. But I would think that sequential action would be more of a play on pricing determinations going forward now

Jeff Jackson -- President and Chief Executive Officer

Yes. It's really not, unless you get into large projects. Once people come out with pricing, they typically don't quarter to quarter fluctuate those prices because they're getting bid on housing projects and the quotes in an R&D market. It can come into play if there's a large project, say, starting in '19, if you can go ahead and lock in pricing, it would -- sequential quarter potentially will be less or more depending on headwinds of input cost.

Sam Darkatsh -- Raymond James -- Analyst

Very helpful. Thanks, gentlemen.

Jeff Jackson -- President and Chief Executive Officer

You're welcome. Thanks.

Operator

The next question comes from Jeremy Hamblin of Dougherty & Company. Please go ahead.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Yeah. The momentum you have on the R&R side of the business, obviously, I think that's a positive contribution as well to your gross margins, just that product mix. But how much of the increase, I think a little over 30%, year to date do you attribute to tailwinds from the storm? And kind of wrapped in that, you did do some new things with the TV advertising at the end of last year and into the beginning of this year. How effective has that been? Are you getting better ROIs on the TV advertising? Any color you can provide on that.

How much of this is, again, kind of sustainable or attributable to the storm itself? And when do you typically see those tailwinds start to slow?

Jeff Jackson -- President and Chief Executive Officer

OK. I'll comment on a few of those, and I'll let Brad do it as well. But Jeremy, this is Jeff. This is the first storm we went through in the 13 years I've been here.

So sustainability, we're going to see. Obviously, you'd ask what's the impact of a storm, we couldn't really say until we had one. What we've seen is that a definitely heightened awareness and people wanting to upgrade their nonimpact to impact products. And you see that in our R&R growth.

You also see it in our backlog, $100 million of backlog, a lot of that's R&R-driven as well. And what we have in Florida that's not unique to the building products industry is a labor shortfall. And that labor is kind of tempering the ability to put and install products into homes as well as build homes but is acting like a governor to stretch out this, I guess, tailwind, if you will, from a hurricane. I think it continues and it continues to get stretched.

So far, we're roughly midway through the season almost, the hurricane season, no [ house doors repaired ] yet. So we're still, I guess, hesitant on even the impact of last year's storm, and we'll see this year as well. It's an ongoing kind of challenge in our market. But if you look at 6.5 million people evacuating Florida, the largest evacuation recorded in U.S.

history, you have a lot of folks out there that want to not do that again or at least make sure that their house is secured and safe when they do. And so that will take time to get out into the market, and we think the potential will keep -- in terms of the R&R benefit will keep right on through 2019. Brad, do you have...

Brad West -- Chief Financial Officer

Yes. Jeremy, I think Jeff mentioned in his prepared remarks, and I want to refer back everyone to Slide 6 from our deck, some very interesting data came out recently about an estimate of who actually has impact-resistant homes -- impact-resistant windows and doors in their homes. And the key takeaway from that is that this is still a market that has a lot of homes that have no protection. And we've said before that it's not a lot of repair work that we're doing when the storm comes through, it's mostly the awareness and people deciding to put in impact-resistant windows so that they don't have to deal with sawdust and plywood anymore.

And I think obviously, more storms helps that. But we certainly got a lot of benefit from last year's storm, and I think we're going to be able to grow on that for a while. Our advertising is very strong and it keeps that front of mind for people. And we will try to make sure that that's something that we're always going to do is keep things front of mind.

Jeff Jackson -- President and Chief Executive Officer

And just as a point to note, too, even though Western Window Systems, they do a lot of print ads and magazine architectural ads, they're heavy into brand-building as well. I think it's about building brand awareness, building that brand equity. And I think what we've done even on our TV side, the two different campaigns we ran last year and then also this year's kicked off hurricane season, we've had incredibly positive feedback from our dealer base as well as the end user. People that's new to Florida, you have a lot of folks move into Florida over the last, say, 13 years and had never experienced a storm until last year.

And the awareness that, hey, that's the window company you go to, PGT Innovations, and our house of brands has been very positively received in the market.

Jeremy Hamblin -- Dougherty & Company -- Analyst

So does that answer the kind of second part of my mission there on how do the ROIs, I'm not sure how you calculate that internally, but are you getting better ROIs on that TV advertising than, let's say, some of the other use of marketing dollars you've done in the past, whether it's customer events or some of the discounts that you've run historically? Is that kind of what you're suggesting, you're getting better returns on that TV advertising and we might see more of that in the future?

Jeff Jackson -- President and Chief Executive Officer

You will see at least this kind of the same amount in the future. What we've done is -- we have a general market advertising, marketing budgets. And as a percent, we didn't change it at all. It's just a matter of where you want to allocate it, whether it's TV, print ad, discount promo, wrapping our trucks, for instance, that's another piece of the business that we're currently doing, we're wrapping all our trucks with all our four brands on our fleets.

So there's various components we pull every year, and we'll emphasize or highlight a component within that marketing bench strength, if you will, each year. For the last two years, the dollars have been more allocated to TV and more of a broad Florida suite of recognition than, say, targeted promotions on local areas. That doesn't mean that we'll switch -- we'll redo that as influenced by the market. We listen to our dealer base, our customer base, and we adjust as we see fit.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Great. Thanks for the color. And then I want to ask a question on your custom value line, the Sparta line that you just launched. In terms of thinking about that from a margin-profile perspective, how -- is that going to be more in line with your new construction side of your business and a little bit lower than your typical R&R? How do you see the margin shaping up for that business? And how long do you think it will take your manufacturing facility to get kind of up and running on throughput and efficiencies, a couple of years?

Jeff Jackson -- President and Chief Executive Officer

Yes. We actually did a limited launch this quarter, this quarter we're in, Jeremy, with a select group of customers. So we're actually producing that as we speak. We're actually here in the Miami plant having this call.

So we came down to look at it. But we're actually producing it as we speak with a full launch expected in the fourth quarter roughly of this year with all our customers. And I'll let Brad comment on margins. But what this is really meant to do is, say, a laminated unit only at this point.

And so what we're targeting is aluminum impact. And we're targeting that customer or that homeowner that literally was going to put -- was maybe putting a plywood from Home Depot. And the price point itself will be a lower entry price point but from a quality standpoint. It's got our name.

It's got our reputation behind it. It's got our field service behind it. Its got our warranties behind it. So I'd say it will be an incredible buy for the price point we target.

Do you want to comment?

Brad West -- Chief Financial Officer

Yes. So Jeremy, when we work through and did our design of the product, obviously, we were very mindful of our impact margins. And part of the reason why we've not necessarily been in that space for the longest time is because of our concerns about getting into that space and the margins being decretive. But I'd say kudos to the team.

They actually designed a product and the marketing team went and looked at the price point. And based on our current expectations, we feel like this product will be right in line with our typical impact products, whether it's new construction, R&R or somewhere in that range, we'll have to wait and see. But right now, we know it's going to be the minimum of what I would consider the WinGuard new construction margin. And hopefully, we can even do better.

The good thing about it is it's going to be manufactured right here in Miami, servicing the market that is mostly located here in Miami. So even maybe we'd pick up from transportation side as well.

Jeff Jackson -- President and Chief Executive Officer

Right. And I want to be clear, this isn't a substitute play for WinGuard or Estate. Those products are designed on high pressures, bells and whistles that no other products can provide, quite frankly. So this is a play down on the cost point, and the design pressures will be different and limited, and it will be custom.

We're not going to make stock. It's still going to be ordered from the home. Homeowner will look to our dealer network to get it in their home and ordered custom for their home. It will just be for a different market -- geographic market.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Thanks for the color, guys. Good luck closing the acquisition and the rest of the of the year.

Jeff Jackson -- President and Chief Executive Officer

Thank you.

Brad West -- Chief Financial Officer

Thank you, Jeremy.

Operator

The next question comes from Ken Zener of KeyBanc. Please go ahead.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Good morning, everybody.

Jeff Jackson -- President and Chief Executive Officer

Hey, Ken.

Brad West -- Chief Financial Officer

Hey, Ken.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Wow. So this quarter makes it look like you're selling the best things since sliced bread, so kudos to you guys

Jeff Jackson -- President and Chief Executive Officer

Gee, thank you for that comment.

Ken Zener -- KeyBanc Capital Markets -- Analyst

I know, I know. But I mean, going back to the earlier question about R&R, 30%. So you had $107 million this year. Two years ago, you're at $65 million in that R&R category.

It's truly very impressive. Obviously, you just said that it's the first real hurricane you guys had in 13 years, so I don't know what pent-up demand is. And you guys have referenced here in Slide 6, was that -- I know you guys have talked qualitatively about stuff. But was this a new report that really looked at the market in terms of trying to put numbers around what doesn't have impact-resistance? What this a new analysis for you guys or from this third party?

Jeff Jackson -- President and Chief Executive Officer

Yes. We got it -- our marketing team picked it up offline and went through the third party and check the validity, if you will, of the source. And it was a new study that they picked up. Yes.

Ken Zener -- KeyBanc Capital Markets -- Analyst

So I guess, the reason I'm asking is the new construction that you have on Page 6 -- I mean, the future will be the future. But with remodeling having so much growth, is there -- I mean, how do you plan -- if you're doing 30% in R&R -- obviously, we had a big storm. But to your point, the awareness, I think your guys' business is running very smooth in terms of how you're reaching out and making people aware. Could you -- I mean, when you think about demand, how do you handle the risk profile of, let's say, if you're planning for 20% growth in that R&R next year? I mean, how do you kind of handle what could be operational challenges as you continue to grow? And I'm not being negative at all.

It's just it's so strong that you might not know how strong it is.

Jeff Jackson -- President and Chief Executive Officer

Right. Well, I'd like to point you back to one of our four pillars of growth that we concentrate on is our footprint of expanding our geographic footprint expansion, but also our capacity that we have to keep up with. And as I pointed out, we definitely plan ahead on a lot of this stuff, Ken. One of the things we're going to be doing, for instance, is technology.

We've had more capital spend over the last couple of years in our plans to better enable technology, and that's helped increase capacity without people. If you recall, we've had about 2,700 folks here for a couple of years. Now we went up and down 50 people here or there, but it's been roughly the same amount of people are -- and the sales have grown. We've done that through technology and rearranging lines, better utilization of what we have.

We will continue to do that. But we've added leadership in operations across all our brands and locations. We expanded the footprint, as I mentioned, here in Miami to 330,000 square feet, which is huge for us, huge for us. And I think the Cardinal deal where we, in essence, sold our door assets, the actual equipment that we made the door glass with, we sold those to Cardinal while keeping the building and land that we can manufacture in.

I think that also increased footprint and capacity. So we've gotten much -- a lot more capacity. We can actually add. It is not necessarily people dependent.

Because remember, the labor market is just incredibly tight here with unemployment, what it is. So we've had to turn to other alternatives, and it's working so far, I can tell you. But we ought to stay ahead of it. And that's why I wanted to make sure I focus our investment community and our investors on the four things we concentrate on.

And one of them is definitely capital allocation and what we'll do with that in trying to stay ahead of the game. And so far, we've been able to do that.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Yes. In no way was that negative. It's just it's really amazing how much demand you are getting there and thinking this didn't run over Miami last year. Switching over to Western Window.

I'm not sure exactly how you can use this or comment on it, but I think you guys talked about sequential growth being the best way to talk about the company. And like the $132 million from -- I guess, the $100 million the year before seemed to kind of apply maybe a 5% or 6% sequential growth. I mean, is that a reasonable way to think about Western Window's growth contribution into next year? I'm just trying to think about the growth that that business is also realizing.

Jeff Jackson -- President and Chief Executive Officer

Yes. Ken, I would encourage you, you and everybody else on the call, once we close this acquisition, which I do expect to occur here in the third quarter, we will issue a new press release announcing the close, talking about the terms of the funding, all that good stuff as well as the impact on guidance for '18. And as we jointly run our companies together, we'll learn more about what that means in '19 as well. But I can't and I'm hesitant and I also can't comment on potential impacts on Western other than what I said, until we close the deal.

Ken Zener -- KeyBanc Capital Markets -- Analyst

Thank you.

Jeff Jackson -- President and Chief Executive Officer

You're welcome.

Operator

The next question comes from Alvaro Lacayo of Gabelli & Company. Please go ahead.

Alvaro Lacayo -- Gabelli & Company -- Analyst

So just on gross margin, if you could sort of walk us through like, I guess, you have in the past and maybe just focus on price, mix, volume and just maybe highlight how much each contributed to the expansion year on year.

Brad West -- Chief Financial Officer

Sure. So the biggest impact that we had on the 300 bps came from scrap and efficiencies improvements. That was about 150 bps. And then I have volume at about 120 and then mix at about 110.

And then price is about 80. And then the offset would be aluminum, like I mentioned, and labor inflation, that was about another 70 bps. That should get you pretty close.

Alvaro Lacayo -- Gabelli & Company -- Analyst

Great. Thank you. And then just on Western Windows, just looking at the business in isolation, maybe you can talk about the growth trends over the last five months. I noticed that on the slide deck a big portion of the business is California.

And it's high-end new construction, which has shown some signs of slowing a little bit. Just wondering if that's had any impact on Western Window as a business as a whole? And maybe if you can comment in the last five or six months what you've been seeing in terms of trends.

Jeff Jackson -- President and Chief Executive Officer

Yes. Again, I'm going to shy away from discussing much about Western until we close the acquisition. If you had a chance to listen to last week's call, we talked about some growth trends on that call. I can tell you, they do offer a unique niche product as a step-up, and it's not related to growth trends necessarily in housing.

It's people that want to buy up the current home and expand it into indoor-outdoor living space. So they're not as much as tied to what I would consider a housing start number as a vinyl mass window company, builder rate, vinyl mass window, that's not why we got them. So I would caution hesitancy to look at any kind of housing trends to determine any kind of Western growth stories at this point. But again, I want to limit discussion on Western until we close the transaction.

Alvaro Lacayo -- Gabelli & Company -- Analyst

Got it. OK. Thanks very much, guys.

Operator

[Operator instructions] The next question comes from Alex Rygiel of B. Riley FBR. Please go ahead.

Alex Rygiel -- B. Riley FBR -- Analyst

I'm a little confused with guidance, and I want to chalk it up to you all being a little conservative on the second half with regards to your net sales guidance of $580 million to $600 million and having some uncertainty about hurricanes. But backlog is higher. You've got a new product that's launching. You've got more capacity, and you've got a pretty easy year-over-year comp versus the third quarter of last year when the hurricane hit.

So help me to kind of better frame why second half '18 guidance and the sales growth year over year could slow from the first half.

Jeff Jackson -- President and Chief Executive Officer

Alex, I think all those points you said were really well-framed. I can't argue any of them. I can tell you though, we are in the middle of hurricane season. We did have a hurricane that hit us last year third quarter, and it did have an impact on our top-line growth that quarter that we discussed in the call at the time, I don't know, Brad, $10 million?

Brad West -- Chief Financial Officer

$13 million.

Jeff Jackson -- President and Chief Executive Officer

$13 million, $13 million impact. So I guess, you just hear some hesitancy. We'd want to make sure we continue to deliver on what we've said, like we've done the last several quarters in a row, and not get ahead of ourselves. So I think we've laid out a guidance that we all feel very comfortable in at this point.

And again, I'll remind you that I do plan on updating our annual guidance for the entire company once we close the Western Window Systems acquisition. So it won't be just the impact of Western Windows. It will be more of an annual guidance for PGT Innovations in total.

Alex Rygiel -- B. Riley FBR -- Analyst

That's helpful. And sorry if I miss this, but you've added a fair amount of capacity recently. Where is your capacity utilization rate running at right now? And how might that change between now and year-end?

Jeff Jackson -- President and Chief Executive Officer

Again, for the legacy PGT Innovations, we still have plenty of capacity to go -- the move in Miami was exactly to meet the demand we saw. As I mentioned in my remarks, it was our highest quarter of production in Miami in the company's history. And we're in a new plant. We still have -- while we're running a second shift, we still have plenty of capacity we can add to that shift as well as looking at a third shift if we ever really had to for staffing up a full third.

So there's still capacity here in Miami and growth. That was designed that way because the market, especially with our launch of our new Sparta line, we think we're going to need it. So I'm not concerned with capacity here. And labor force is actually very, very strong in Miami, especially in Hialeah market, which we're in.

In Orlando, similar scenario in terms of capacity. As a high-end product, it's not more of a mass custom like PGT is, and so we have capacity there. We're only running one shift. We can definitely scale to two if we had to there.

And to be honest with you, I could push production, if needed, overflow production to that plant from our other product lines if necessary. PGT in Venice, that's where -- we've really changed the focus of that plant. It's now more vinyl than it ever has been. Percentage-wise, it's probably 40% vinyl.

So we've, over the last couple of years, expanded the capacity with the Cardinal deal I mentioned to you earlier. We did not let go -- we had 150-ish, Brad, 170, I think, people that were dedicated to that glass plant, what we call [ GP2 ] to make door glass. None of -- those individuals have transferred over into assembly to make windows and doors. So we tapped on that labor force.

And like I mentioned earlier, we took that glass plant that we had built and turned it into an assembly plant, and we've done that now. We're still in the process of doing that because we just really closed out that Cardinal deal at the end of the first quarter. So that's actively ongoing as well, so we're expanding that capacity. So I think we're in a good shape to meet the demand.

We'll continue to move forward and invest wisely.

Alex Rygiel -- B. Riley FBR -- Analyst

Thank you very much.

Jeff Jackson -- President and Chief Executive Officer

You're welcome. Thank you.

Brad West -- Chief Financial Officer

Thank you.

Operator

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

Brad West -- Chief Financial Officer

Well, thank you for joining this morning on today's call. We look forward to getting back with you with more information after we close the acquisition and then the next quarter of our earnings result. Take care, everybody.

Operator

[Operator instructions]

Duration: 61 minutes

Call Participants:

Jeff Jackson -- President and Chief Executive Officer

Heather Zorge -- Chief Financial Officer of Western Window Systems

Brad West -- Chief Financial Officer

Jake Cohen -- SunTrust Robinson Humphrey -- Analyst

Sam Darkatsh -- Raymond James -- Analyst

Jeremy Hamblin -- Dougherty & Company -- Analyst

Ken Zener -- KeyBanc Capital Markets -- Analyst

Alvaro Lacayo -- Gabelli & Company -- Analyst

Alex Rygiel -- B. Riley FBR -- Analyst

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