PGT Inc (PGTI) Q4 2018 Earnings Conference Call Transcript

PGTI earnings call for the period ending December 29, 2018.

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PGT Inc  (NYSE:PGTI)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 10:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, everyone, and welcome to the PGT Innovations Fourth Quarter 2018 Earnings Call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) I'd now like to turn the conference over to Brad West. Please go ahead.

Brad West -- Senior Vice President and Chief Financial Officer

Good morning, and welcome to the PGT Innovations Fourth Quarter 2018 Earnings Conference Call. All participants will be in a listen-only mode. And good morning and thank you for joining us on our call today. This morning, we are pleased to provide our fourth quarter and fiscal year 2018 results, as well as an outlook for 2019. In addition to the news release, we have provided a slide presentation to accompany today's discussion. This webcast is being recorded and will be available for replay on the Investors page on our website at pgtinnovation.com along with the supporting slides.

Before we begin, please direct your attention to the disclosure statements on Slide 2 of the presentation, as well as the disclaimers included in the press release related to forward-looking statements. Today's remarks contain forward-looking statements including the outlook for our 2019 performance that involve risks, uncertainties and other factors that could cause actual results to differ materially. This disclaimer is a brief summary of the Company's statutory forward-looking statements disclaimer, which is included in the Company's filings with the SEC.

Additionally, on Slide 3, you should also note that we report results using non-GAAP measures, which we believe provide additional information for investors to help facilitate comparison of past and present performance. A reconciliation into the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slides presentation.

I would now like to turn the call over to Jeff Jackson, PGT Innovation's CEO and President.

Jeffrey T. Jackson -- Chief Executive Officer and President

Thanks, Brad, and good morning, everyone. Fiscal year 2018 was a transformative year for PGT Innovations, and I'm very pleased with our results. On Slide 4, we have included some background information on our Company for those of you who may be new to the story. And I will highlight some key facts.

Our full year sales of $698 million represent a 37% increase over 2017, with 27% of our year-over-year growth achieved organically. With the acquisition of Western Window Systems last year, we became a national leader in the premium window and door space. The acquisition expanded our geographic footprint and rebalanced our portfolio to nearly 50-50 split between repair and remodeling and new construction in markets. Additionally, Western has a strong non-impact brand that come in at higher margins as with our legacy impact products.

To finance the acquisition, we entered the bond market for the first time, and as a result, over 80% of our current leverage is at an attractive fixed rate of 6.75%. Following the acquisition, we've completed a successful equity offering with net proceeds used to pay down our debt, floating rate debt, quickly deleveraging our balance sheet. I'm proud to report PGT Innovations net leverage in the 2018 was 2.1 times. We believe this balance sheet provides significant strength and flexibility for future operational and strategic initiatives.

Turning to Slide 5, it's important to take a few minutes to review our strategy for creating long-term value for our customers and shareholders. At PGT Innovations, we attribute our success to the continued execution of our four strategic pillars. Our first pillar is putting the customer at the center of our business, striving to deliver 360 degree service before, during and after the sale.

Second, we worked hard to attract top talent and we offer benefits and support to help our team member succeed. We believe that a talented, dedicated team of employees is key to success and we continually look for ways to make our Company an attractive place to have a career. In 2018, I am especially proud we made every employee a shareholder, giving them a chance to participate in our future success. We continue this benefit from another grant through all our team members at the beginning of 2019.

Third, we are committed to investing in our business when it is prudent to do so and scaling operations to meet increasing demands. Our organic growth of 27% in 2018 with solid margin improvement pretty much with significant accomplishments that would not have been possible without well-time strategic investments in our business to increase production capacity and improve efficiencies. Looking forward, we expect to continue to invest in operational projects designed to improve efficiency and capacity.

And fourth, we strategically allocate capital generated from our strong free cash flow to reduce our debt and support our growth. Going forward, we expect to maintain a strong balance sheet and build cash to allow flexibility for futuristic and opportunistic acquisitions and other investments in our business. We anticipate that our strategic path forward will involve creating a national market-leading building products company with a team focused on niche products and brands, which will continue to yield strong margins and significant cash flow.

Now, I'd like to discuss our results in more detail. Beginning on Slide 6, I'm excited to report another quarter of strong financial results reflecting continued growth in demand for our impact-resistant products in our legacy markets and growth in demand for our Western Window Systems' energy-efficient products, which are designed to unify indoor-outdoor living space.

For the quarter, we delivered sales of $190 million including a sales contribution of $31 million from Western Window Systems acquisition and organic growth of $24.7 million or 18%. Our legacy repair and remodeling and new construction markets grew by approximately 18% and 19% respectively versus the prior-year quarter. Adjusted gross margin grew by 2.3% in the fourth quarter versus prior year, due largely driven by the accretion from the Western Window Systems acquisition. Our legacy markets, we were successful in implementing price increases and driving operational efficiencies to offset labor, material and other cost inflations in our business. Adjusted EBITDA of $31.5 million in the fourth quarter represents growth of 34% versus the same quarter last year.

On Slide 7, for our full year, I'll reiterate the 2018 sales increased by 37% to $698 million, which includes the sales contribution of $49.7 million from Western Window Systems, versus the prior year, sales in our legacy repair and remodeling and new construction markets grew by approximately 34% and 17%, respectively.

Adjusted gross margin for 2018 grew by 1.3% versus 2017 driven primarily by our successful efforts in implementing price increases and driving operational efficiencies, including a significant reduction in our scrap. Gross margins were also positively impacted by the accretion from our Western Window Systems acquisition. Adjusted EBITDA for the year of $127 million, an increase of 48% versus prior year.

Next, turning to Slide 8. I would like to provide a further update on Western Window Systems. After closing on the acquisition in August of last year, integration is on schedule and well under way. We expect first year annualized cost synergies of approximately $8 million primarily coming from supply chain efficiencies where we can offer greater economies of scale. We also anticipate many cross-selling opportunities and strengthen brand recognition as we utilize brands across the PGT Innovations portfolio. The Western Window Systems acquisition meaningfully expanded our geographic coverage and enhanced our premium product offering in the growing indoor-outdoor living market and created synergy opportunities moving forward.

Moving to Slide 9, I would like to remind you we are currently four years into our strategy to become a national leader of premium windows and doors. The phase one was to further solidify our position in our core market of Florida by increasing our product offerings to meet the needs of our customers in our market. Next, we acquired CGI and WinDor, the second and third strongest brands in the impact product space in 2014 and '16, respectively. We were able to complete these acquisitions and subsequent integrations while maintaining industry-leading margin profiles. The next phase of our strategy is and continues to be expansion into new geographies and other niche window and door products. We took our first step by the addition of Western Window Systems in this product lines, which satisfy some of the most stringent energy codes and regulations in North America, and serve a growing contemporary indoor-outdoor living segment across the country. We believe the Western Window Systems will continue to achieve sales growth above the overall market by adding builders who desire the products Western owns, and that will continue to achieve industry-leading margins by focusing on high-end niche, energy-efficient windows and doors while driving continuous operational improvements.

Turning to Slide 10, while certain regions of the national housing market has shown signs of slowing, we expect Florida to maintain its position as the fastest growing state in the nation. With a population of more than 21 million, we continue to believe there is significant new construction growth potential remaining. In Florida, we are estimating the 2019 housing starts to be approximately 105,000, well below the normalized single family starts of approximately 125,000 per year.

On Slide 11, prior to 2018, it was estimated that of the homes in Florida, only 18% have impact-resistant windows, 13% have impact-resistant doors and 18% storm shutters. That indicate that at least 50% of Floridians have no protection on their openings of their homes to safeguard their property against severe storms prior to 2018. This 34% growth we experienced in the repair and remodeling market in 2018 is evidence that many Floridians decided to add impact-resistant windows and doors and new shutters and plywood. Hurricane Michael and Irma demonstrated that every home in Florida, not just total homes, can be impacted by severe weather. As a result, homeowners throughout the entire state have become searching for Hurricane protection for their homes, which is why we believe our advertising and marketing investments continue to benefit our growth.

With Western Window Systems, we have expanded into the indoor-outdoor living market, which represents a total opportunity of approximately $8 million to $9 million. The largest segment is in new construction of high-end homes that feature more back-line doors in the back of the houses. From 2012 to 2017, the indoor-outdoor living market saw an average annual growth rate of 11%. For new contemporary homes, this market represents approximately $2 billion opportunity and is growing at a faster pace averaging 24% per year from 2012 to 2017.

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

Brad West -- Senior Vice President and Chief Financial Officer

Thank you, Jeff. First, I would like to review some of our significant achievements in 2018 and then discuss fourth quarter results in more detail. In August 2018, we acquired Western Window Systems for $355 million. In order to finance the transaction, we entered the bond markets for the first time raising $350 million at attractive rate of 6.75%. At the consummation of the acquisition, our gross leverage ratio was approximately 4 times trailing 12 months adjusted EBITDA inclusive of $8 million in annual cost synergies, and within our targeted range of 2 times to 4 times.

In September 2018, we completed a stock offering, which generated proceeds allowing us to pay down $152 million of our current loan credit facility to further strengthen our balance sheet. In the fourth quarter, we also paid an additional $8 million of our current loan credit facility. As Jeff mentioned, at the end of fourth quarter, our net leverage ratio has improved to 2.1 times and over 80% of our remaining leverage is at fixed rate of 6.75% in an environment of rising interest rates.

Another positive result of our $152 million debt pay-down was that we received ratings upgrade from Moody's to B1. Additionally, we have a B Plus rating from Standard & Poor's with a positive outlook. We believe our access to long-term borrowings at an attractive rate together with the completion of an acquisition that provides us with geographical and product line diversity and other benefits has put PGT Innovations in a strong financial and operational position, well poised for continued growth.

Now moving on to Slide 12 for a summary of our results for the quarter. We reported net sales of $189.9 million, including our organic growth of $24.7 million or 18%, driven by a growth in our legacy repair and remodel and new construction markets of 18% and 19%, respectively versus prior year. Fourth quarter sales also included a sales contribution of (inaudible) from Western Window Systems.

Our gross profit exclusive of adjusted items was $66.1 million for the fourth quarter of 2018, up $22.6 million versus the fourth quarter of 2017, and adjusted gross margin increased to 34.8% or 2.3% increase from prior year, driven mainly by gross margin accretion from Western Window Systems in our fourth quarter.

In our legacy business, we were able to offset higher cost with increases in our prices, higher volumes and improved operating effectiveness and efficiency. You get an update on our aluminum covered program, the increase in aluminum prices had a negative impact of 1.5 percentage points on the gross margins in the fourth quarter. As of today, we have contracted approximately 75% of our estimated aluminum needs for 2019. Our current coverage for aluminum portion only in is at $0.96 per pound. This does not include the delivery cost which today is approximately $0.19 per pound. We will continue to monitor tariff and trade environment effects on aluminum pricing and as appropriate make adjustments for our covered program and pricing strategy.

Selling, general and administrative expenses were $45.6 million in the fourth quarter 2018, an increase of $19.2 million from $26.4 million in the fourth quarter '17. Adjusted selling, general and administrative expenses was $44.1 million in the fourth quarter or 23% of net sales compared to $25.6 million in the fourth quarter of 2017 or 19.1% of sales, an increase of 4.1%.

Western Window Systems contributed $12.6 million including $2.4 million of non-cash amortization and SG&A in the fourth quarter of 2018. Our legacy business SG&A grew from 19.1% of sales in the fourth quarter of '17 to 19.8% of sales in the fourth quarter of '18, including $1.7 million of higher incentive compensation due to our improved performance year-over-year.

Adjusted EBITDA in the fourth quarter of 2018 was $31.5 million or a margin of 16.6% compared with adjusted EBITDA of fourth quarter '17 of $23.5 million or 17.5%. As additional information, the new accounting standard for revenue recognition impacted our fourth quarter 2018 results negatively by reducing sales and adjusted EBITDA by $7.5 million and $2.5 million, respectively, which reduced our adjusted EBITDA margin by 70 basis points.

Interest expense for the fourth quarter was $7.1 million, an increase of $1.8 million versus last year. The increase in interest expense was primarily due to a higher debt balance for the quarter. The current quarter interest expense includes approximately $300,000 of non-cash charges related to the $8 million prepayment that we made during the quarter.

Depreciation and amortization expense was $8.6 million in the fourth quarter 2018, an increase of $3.4 million versus the prior-year period, driven mainly by the acquisition of Western Window Systems. Taxes for the fourth quarter were $2.5 million at an effective tax rate of 19.4%. Additionally, in the fourth quarter of 2017, we had a tax credit of $12.4 million reflecting the positive impacts of the Tax Cuts and Jobs Act. Tax expense in the fourth quarter of 2018 was favorably impacted of $6,500 for excess tax benefits of stock option exercises.

We reported GAAP net income of $10.9 million or $0.18 per diluted share for the fourth quarter versus $20.3 million or $0.39 per share in the fourth quarter of 2017. Excluding one-time items, adjusted earnings per share for the fourth quarter of 2018 was $0.21 versus $0.18 in the same quarter last year, representing a 17% increase.

Moving on to Slide 13, I would like to review our current expectations regarding our capital allocation priorities. Our first priority is internal investment and strategic growth projects that we believe are important to PGT Innovations' ability to drive future shareholder value, and we expect to continue to support our product portfolio by making investments in advertising and marketing, which have proven beneficial to our growth. Our second priority is at reductions in making an solid balance sheet. I've already gone over how we completed a major transaction and we are able to subsequently paid down debt to finish the year with a net debt to EBITDA ratio of 2.1 times. We maintain as a goal, achieving a conservative leverage profile within the range of 2 times to 4 times.

Our third priority for capital allocation is not -- just looking for strategic acquisitions. We expect to continue to look for attractive opportunities to expand into new geographies and/or other niche window and door products.

Looking ahead to 2019, on Slide 14, I'll give some of our expectations regarding combined company assumptions going forward. We expect interest expense the approximately $7 million per quarter. We expect the tax rate around 26%. We expect depreciation and amortization expense to be approximately $9 million per quarter. And we expect annual non-cash stock compensation to be approximately $4.2 million due to our employee stock base (ph), Lastly, we expect capital expenditures to be -- to average between 3% and 4% of annual sales.

And finally, I would like to review 2019 guidance provided this morning. PGT Innovations expects to finish in the following ranges for 2019 fiscal year: net sales of $775 million to $800 million, an increase of 11% to 15% compared to 2018; adjusted EBITDA of $143 million to $152 million, an increase of 13% to 20% compared to 2018; and net income per diluted share of $0.93 to $1.05. In first quarter, we are currently tracking to $174 million to $179 million in sales, which will be growth of approximately 3% to 5% on a pro forma basis. This is higher than our full year guidance of 3% at the top end of our annual range. EBITDA for Q1 is expected to finish at approximately 16% (inaudible).

With that, I'd like to turn the call back over to Jeff for some closing thoughts. Jeff?

Jeffrey T. Jackson -- Chief Executive Officer and President

Thank you, Brad. Now, I'd like to take a few minutes just to elaborate on the macro economic assumptions behind our guidance for 2019. Consistent with many industry forecasters, we are expecting a low single-digit growth rate in national housing starts, mainly due to labor constraints, affordability concerns and interest rate increases we experienced in 2018. Relating to a couple of our core markets, we are expecting new home starts in Florida to grow approximately 9% to 10% in 2019. While we expect new home starts in California to remain relatively flat versus -- in 2019. We believe PGT Innovations is strategically insulated in most building product companies from national housing starts. Due to our geographic concentration in destination states and our focus on selling into indoor-outdoor living market, which has historically grown at rates higher than the national housing starts.

Regarding the growth prospects for the indoor-outdoor living market, please note that Western Window Systems has grown at a compound annual growth rate of approximately 22% since 2015, far exceeding the growth than housing start during that period. We believe this level of growth demonstrates the strength of demand for building products that unify indoor-outdoor living spaces and we anticipate opportunity to continue to gain market share and penetrate into this growing market. Our 2019 guidance assumes an overall high single-digit growth rate for new construction sales.

Related to the repair and remodeling market, we just concluded the strongest year in Company history, with 34% repair and remodeling growth fueled by Hurricane awareness from Irma, the first hurricane hit Florida since 2005. While we believe repair and remodeling markets are still strong quarter, our expectations will be for the repair and remodeling market to be flat as 2018 with another storm driving further awareness. Regardless, at the end of 2019, our two-year compound annual growth rate will still be quite healthy. Florida remains in great state to operate in and we will continue to drive sales of our impact-resistant products with our leading market position, of highly innovative product offerings and increase adversiting.

From a margin perspective, our 2019 guidance assumes the following: cost inflation from materials mainly due to tariffs; continued wage inflation associated with attracting and retaining qualified workers; the negative impact of mix that will result from new construction sales outpacing the repair and remodeling growth, somewhat offset by the impact of a price increase announced in the back half of 2018. We will strive to continue to drive operational efficiencies as we demonstrated during 2018, and supply chain initiatives also to offset these cost of inflation initiatives. Finally, our guidance for 2019 assumes that there are no major hurricanes in Florida that would disrupt our ability to manufacture and deliver our products or disrupt the ability of our dealers to take orders during 2019.

In closing, I'd like to remind you of the five elements of our investment thesis; first -- on Slide 15, first, we are national leader in the growing category of premium window and doors. Second, we are committed to continuing our investments in talent and R&D to remain the industry leader with innovative products. Third, we have an ongoing focus on operational efficiency expected to drive additional margin expansion. Four, we are focused on striving to achieve strong execution of our strategy to create long-term customer and long-term shareholder value. And fifth, we are well positioned with a diversified product portfolio and a diversified geographic markets to capture profitable growth in new construction and repair and remodeling trends. 2018 was a milestone year for PGT Innovations and our team. It is an exciting time to be a part of our family of brands.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) We'll take our first question from Truman Patterson with Wells Fargo.

Truman Patterson -- Wells Fargo -- Analyst

Hi, good morning guys. Thanks for taking my questions. The first one -- first thing that I'd like to dig into is your revenue growth guidance for 2019, you guys set up 11% to 15%. If I throw in an extra seven to eight months of Western Windows in there, it seems like your guidance implies flat to maybe 1% growth in the legacy PGTI and even Western Windows growth in there. Could you walk us through the moving parts, you guys said California market should be flat while Florida new resi (ph) should be up high single digits. I think this implies that actually Florida R&R should be negative then. Could you just walk us through how to think about this?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. I'll touch on that and I'll let Brad dig in some details as well. As Brad told -- mentioned in his comments, our Q1 guidance, right now, Florida overall company, we are tracking anywhere from 3% to 5% growth in our first quarter, that's before our heavy R&R quarters. And the second and third quarter are very heavy R&R periods for PGT legacy brands and we are comping an incredible year, 34% growth rate in R&R, largest percentage in our Company's history, largest base in our Company's history. So, right now, we have that kind of headwinds that to go through and we're trying to lay out what we consider a conservative guidance as we face that comp that will impact us on that process. Second is moving to California market, which you mentioned in your comments that the California market being flat; what we have to do and it will be new for us this year consistent with Western previous but we have to execute in that flat market and gain share.

We think we want to -- we got initiatives to drive penetration in a flat market, we think we can still grow, but our assumption in our guidance is that's flat and that's going to be a tough hurdle to overcome. So those are the two driving initiatives that have our guidance to where it is and we have initiatives in place to address at all, it's just too early in the process for us to be aggressive and thinking we going to succeed.

Brad West -- Senior Vice President and Chief Financial Officer

And let me add to that -- as going to last year, in Q4 of '17, you started to see in the demand for R&R pickup and that carried all the way through 2018 as we mentioned. But at the beginning of the year, we kind of anticipated some of that -- a price increase that we announced at the beginning of last year and also the middle of the summer season, we announced a price increase specifically dealing with aluminum heritage rate that was going on. We had two price increases last year as well that also probably drove some of the summer season tough comps that we are dealing with as we go into 2019.

Truman Patterson -- Wells Fargo -- Analyst

I'm having a little bit of a hard time hearing you guys. But is it safe to assume that what's implied in your guidance is probably negative R&R growth yet that might not be exactly what's in your real expectations, is that safe to assume?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. Again, we're comping at 34% incredible growth year, and so, yes, we are saying, after an another major storm or something happening, we could be negative to slightly negative in our R&R growth offset by obviously new construction still growing that's taking share there and then offset somewhat again by tough comp in California with housing starts -- everyone saying they're going to be roughly flat and trying to gain penetration there.

Truman Patterson -- Wells Fargo -- Analyst

Okay. Okay, thanks. Thanks for that guys. Another question on guidance. When we look at your 2019 EBITDA margin, the midpoint I think is only up about 50 bps year-over-year at 18.7% or so. It seems like the accretion from Western alone just from another seven to eight months should add that to your 2019 margins alone. This is excluding any of the $8 million in synergies that you guys are suggesting you're going to achieve. So, essentially we've got flat legacy PGTI and flat Western Windows margins year-over-year. I guess what's driving that or are there any mix issues, are we actually going to see negative gross margins or just flat gross margins, flat SG&A? I'm trying to understand what's going on with your legacy -- your legacy pieces of the business?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. So, Truman, the initial estimates that we talked about for Western are still in place. The basic issue that we're dealing with is absolutely mix. So last year during the first, second and third quarter where R&R growth substantially outpaced new construction, we called out about 100 bps on average of mix improvement that we saw from the R&R growth. What we're thinking this year with our guidance is the kind of the reversely, new construction growth faster than R&R. So, there are some implied mixed negative impact in our guidance of about 100 bps and that is kind of basically how you get to the expectation we had of 150 bps from Western to 50 bps now, is that a 100 bps reduction on the mix side and that's basically the legacy at R&R and new construction mix that we're talking off.

Truman Patterson -- Wells Fargo -- Analyst

Okay. So, there's no negative margin in Western Windows at all implied in that guidance or accretion?

Jeffrey T. Jackson -- Chief Executive Officer and President

No, absolutely not.

Truman Patterson -- Wells Fargo -- Analyst

Flat as well?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes -- the cost synergies in Western, margin profile continues to grow as expected.

Truman Patterson -- Wells Fargo -- Analyst

Okay, thanks guys.

Jeffrey T. Jackson -- Chief Executive Officer and President

Thank you.

Operator

We'll turn next to Michael Rehaut with JPMorgan.

Maggie Wellborn -- JPMorgan -- Analyst

Hi, this is actually Maggie on for Mike. First, I was just wondering if you could kind of quantify some of those gross margin drivers a little bit more for 2019 and could you talk about what you're expecting to see in terms of like inflation, raw materials as well as price?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. So, we talked about on the last call the impact of tariffs being about 40 bps and that is still kind of implied in the guidance. We do not have any -- at this point in time any assumed price increases that will go into place in 2019. We do get the impact of the price increase that was made in the summer of 2018, the first six months of that. I do think in the first quarter, we'll still have some aluminum headwinds. Last year, the Midwest premium jumped up at the end of the first quarter, so we saw that in second, third and fourth quarter. In the first quarter, we will probably get 50 bps of aluminum headwinds that just overcome and then it should be flat for the rest of the year. But I think the most important issue is the mix issue I just described to Truman at at 100 bps, that's really the most important factor on gross margin for this year.

Maggie Wellborn -- JPMorgan -- Analyst

Okay, great. Thank you. And then secondly, I was wondering if you could talk about how you're thinking about your M&A pipeline. Are you actively looking into potential acquisitions or are you more fully focused on integrating and leveraging internal systems and growing Western Window?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. This is Jeff. As I look at that -- I'll be honest with you, the team is keenly focused on the integration efforts, which are going incredibly well. We will probably -- I get different companies sent to me just like everyone else. But right now, honestly, we are at 2.1 times leverage, I always like to go below 2. So we got another couple of quarters for that to happen. And then again integration once Western's -- as Western continues to perform like -- and then PGT, we will look to -- future acquisition is more toward the end of this year or beginning of 2020 versus currently.

Maggie Wellborn -- JPMorgan -- Analyst

Okay, great. Thank you.

Operator

We'll turn next to Jeremy Hamblin with Dougherty & Company.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Thanks and congrats on a strong 2018, guys. I wanted to hop into the EPS guidance for the year and just -- Brad, if you might just help us to understand the puts and takes here on share count, taxes it sound -- I think I caught 26% tax rate. But could you just walk us through a little bit more of the puts and takes on your EPS guidance?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. Sure, Jeremy. So we finished the year at $1.18 reported in 2018 adjusted EPS that does have a couple of things that I'd like to normalize whether those go into 2019. First is the share count. Obviously, versus last year, our share count is up a good bit and our weighted average is up about 5.5 million of shares based upon the equity offering. If you look at that, that's about $0.10. So that $1.18 was then therefore be a $1.08. And then, if you look at our tax rate, as we mentioned, we had $0.09 of excess tax benefits; we have quite a bit of option exercises last year in 2018. Our guidance does not assume any of that will happen in 2019 though likely -- they likely will as you really can't put that your guidance; that was $0.09. So that was -- got the $0.99 in 2018 kind of apples-to-apples basis. So the top end of our guidance of $1.05 will be EPS growth of about 5% to 6% off of that.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay, great, that's helpful. I wanted to come back to Q4 for second and just see -- I think it contributed -- Western Windows contributed $31 million to sales. What was the contribution to EBITDA from Western Windows in Q4?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. That's not -- that is not a number that we normally would put, Jeremy. I will say one thing about Western as we go into Q4 of 2018 and into 2019, they do operate in both custom and production builder volume market channels that we talked about a good a bit during -- in site tour that I know you are at, in Phoenix. And one of the things that the mix -- that 100 bps that we are kind of talking about, there is a little bit of -- in Western, when they sell into the production builder business, they sell mostly doors and the company business will tend to have a little bit higher percentage of windows. So one of the things that we see with Western is -- from a mix perspective is, as they sell less production, builder will sell less doors, which will have less effect (ph). It's a small impact on the total of the company since Western is a smaller portion of the business, but they did in Q4, has a little bit higher percentage of window sales than they had the rest of the year and that is a part of that. But we're not going to give specific in to that guidance.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay, understood. And then just elaborating on the EBITDA margin, the swing from or I should actually even focus just on the gross margins here in Q4 that kind of roughly 200 basis point decline from Q3 to Q4 despite kind of a full quarter of benefit from Western Windows. Was there slightly negative mix shift as well, but just a little bit more color on that sequential change in gross margins, I know some of it's just from lower sales probably end of year, reduction in factory times?

Brad West -- Senior Vice President and Chief Financial Officer

Yes, from a sequential standpoint, it is basically mostly just a change in sales from Q3 to Q4. We did have a little bit of a mix issue, because we were -- had been 34% plus in R&R all year long, and new construction was something less than that, but then in Q4 they leveled out. We talked about 19% and 18%. I do want to go back -- I'm not going to spend a lot of time because it's kind of accounting technical. But when I mentioned that accounting 606 implications that actually -- that 70 bps for the most part all our gross margin. And that's -- what that comes down to just to get as real quickly is just the level of finished goods you have on hand and typically going into the end of the year. We will reduce our inventories as we head for the shutdown.

So from -- while we actually invoice and sold, our performance would have been higher and our results and our margins would have been higher based on this new accounting treatment. Would you take in 2019 that kind for the most part will level so far because our inventory levels were higher at the end of '18 because of Hurricane Irma and that's what kind of drove it. But that's really what kind of drove the earnings, the gross margin issue -- looking at 2019, we still expect the improvements that we talked about from Western and the only real headwind that we're facing on that besides aluminum in the first quarter, I mentioned, was the mix issue that we're probably going to fight with all year.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay, thanks. Last one here. Just the implied range in your guidance for SG&A for the year?

Brad West -- Senior Vice President and Chief Financial Officer

Well (inaudible) it's probably going to be a number of this will be a full year of Western, which has the higher SG&A cost coming from improved --higher non-cash amortization. But it's probably in the neighborhood of 21% to 22% in that range and so on.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay. And the amortization that you factoring in there is rough?

Brad West -- Senior Vice President and Chief Financial Officer

Well, $9 million a quarter is combined company depreciation and amortization, and I think I mentioned in the last call that amortization from Western will be $9 million a year in SG&A. So that's unchanged.

Jeremy Hamblin -- Dougherty & Company -- Analyst

Okay. And so the amortization, I get, it's kind of in the $15 million, $16 million range for the year?

Brad West -- Senior Vice President and Chief Financial Officer

For the total company? Yes, I think that's correct.

Jeremy Hamblin -- Dougherty & Company -- Analyst

All right. Thanks guys. Good luck this year.

Brad West -- Senior Vice President and Chief Financial Officer

Thanks, Jeremy.

Jeffrey T. Jackson -- Chief Executive Officer and President

Thanks, Jeremy.

Operator

We'll turn now to Phil Ng with Jefferies.

Jefferies -- -- Analyst

Good morning, guys. It's (inaudible) for Phil.

Jeffrey T. Jackson -- Chief Executive Officer and President

Good morning.

Jefferies -- -- Analyst

I just want to -- Hi. I wanted to dive into the projected organic growth, you know it implies a pretty short deceleration. I know in the past you've talked about increasing consumer awareness driving demand in 2018. So, I guess given the lack of major storms in Florida this year, are you starting to see that tail end taper off?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. I don't think it is not this tapering off, I would say it's more, yes. If you look at the R&R growth market in Florida this past year 2018, I think it grew way more than even our dealer base anticipated would. So, there are inherent constraints in that growth in that market (inaudible) continue to grow, namely in labor, and so that's acting kind of as a Governor and again in our thought process of how much more in R&R grow in any given quarter. But with that said, we do think we're going to continue to advertise and then continue to push our brand and there is more market share, we can take within R&R market is flat. But that's executing against a competitor versus just growing in a market is growing 34%. So it's a little bit different strategy, little bit different taxes involved, but we're definitely executing on the strategy to take share even as our market does end up being flat year-over-year.

Jefferies -- -- Analyst

Okay. Got it. And then on a larger theme, we've been seeing is kind of the shift to more affordable homes, so curious to hear, if you've seen or expect to see any trade-down effect from that shift to affordability?

Jeffrey T. Jackson -- Chief Executive Officer and President

No, not really. That's really not the market we serve, that's the commodity window and door market. With that said, our products, especially the indoor-outdoor living products can go into a lower-priced homes, because the cost of having a wall full of windows versus a wall, a couple of doors, and sheet rock and forming electrical, et cetera, is about the same. And so the up selling options for that builder is much more obviously. So, it can go into that and also to address that kind of lower impact market, we didn't watch Sparta last year if you will recall, and so that's been a definitely a good win for us in locking up some builder business that typically would have been went to other competitors.

Jefferies -- -- Analyst

Got it. And if I could squeeze in one more. You mentioned internal investments as your top capital allocation priority. Can you just talk us through some of those and whether it's improving efficiency or expanding capacity? How we should think about those benefits starting to flow through to results? Thanks.

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes, I mean from my seat, we're constantly looking at innovation and products, product offerings. We have an innovation lab, we have products in there that we're testing in the market to see if there viable, so technology surrounding how we actually produced. One of the driving factors of our improved gross margin and EBITDA margin over the last few years is the technological advances we put our plant here behind me, as well as what Western Window Systems had bought previously to our acquisition. So technology advances, we wouldn't be on that cutting edge to drive our labor cost and obviously would benefit with improved margins. So we mentioned investing in our technology is surrounded with the thought process of sustained industry leader in our categories with innovative products and then automation, that's kind of the next phase of manufacturing in terms of driving out labor costs.

Brad West -- Senior Vice President and Chief Financial Officer

And if I add to that, Jeff, we had a point last year where we increased within our Venice operations, basically, our ability to deliver almost $1.5 million to $2 million more a week in a very short amount of time to handle the 34% R&R growth. With some of that growth was fueled by the marketing and advertising decisions that we made both following the storm in fourth quarter 2017, as well as thoughtful additions to our portfolio from a margin perspective in the first half of 2018 as we head into the season. So, I thought our internal investments that we made or passed over the year, specifically the back half of 2017 and the first half '18 were huge driving factor toward what we called off in 2018.

Jefferies -- -- Analyst

All right. Great. Thanks guys. Good luck this year.

Jeffrey T. Jackson -- Chief Executive Officer and President

Thank you.

Operator

We'll now turn to Alvaro Lacayo with G Research.

Alvaro Lacayo -- G Research -- Analyst

Good morning, guys. Just have a question a regarding Western Windows and California and the assumption for flat housing starts in California. The dynamics in California a little bit different from Florida from an affordability standpoint, which seems to be a little bit more stretched and there seems to be a little bit more volatility recently in demand from housing starts there. So, maybe if you can give some color on how you arrive to flat housing starts in California? And then bigger picture, when you think about the growth algorithm for Western Window, how do you think about the piece of increased penetration, market share and if pricing plays a role at all. And when you put on all that together, what are the expectations for 2019? What kind of growth are you expecting to see out at Western Windows?

Jeffrey T. Jackson -- Chief Executive Officer and President

As relates to the actual guidance for housing starts in Florida, I mean, that's basically just based on the movies or any kind of those housing starts that we see in the trends. Obviously, we are back to kind of single digit nationally, but Florida and California are very different in that. And as we mentioned, about 9% in our Florida. Western operates both in Southern California and in Northern California and just probably some different housing start factors within those if you split the state in half like that, but I think flattish kind of where we landed on for our guidance and as Western has always trying to accomplish and has accomplished, they gained share and they beat that number, and that's what we expect going forward from Western.

Brad West -- Senior Vice President and Chief Financial Officer

Yes, I'll just comment briefly on Western as well. I mean, the goal is very simple, is to grow Western brands in a flat market. Initiatives involving that are a little bit more complicated. We are actively establishing an R&R market. So, we're going through California today establishing dealers that deal more in that R&R space to get that Western brands in that market, as well as expanding our relationships with the current home builders there to further penetrate and get into the model homes, so that product can be shown as an option versus other choices. So those are the two kind of initiatives that we're tackling what we consider a potential flat market in California and we will grow and it's just a matter of the success of those initiatives.

I don't think we have ever commented on certain brand growth before really want to get into that at this point. In terms of pricing -- the kind of the third part of your question pricing, Western currently in their setting incredibly nice in their pricing in terms of compared to competitors. They are not the highest, they're typically more toward the lowest even though obviously those higher will come down account in pricing to try to get a job, but for the most part, Western Windows Systems and our products, there are priced in the lower side versus the competitors. And what key is the delivery lead times are better. So again, that plays into that capturing share in the flat market, we can deliver a lower-priced product in a quicker manner, but the quality is as good or better. So that kind of combination, I think we also comfortable we're going to succeed, but again 2019 is going to be a challenging year. That's been the consistent theme we heard from a building community and we got to playing that or executing that.

Alvaro Lacayo -- G Research -- Analyst

Thanks. And then just with regards to the pricing carryover from last year, could you just give us a reminder on what's the magnitude of that pricing and what to expect in the first six months of '19 from the carryover?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. We basically announced -- and this was a PGT legacy price increase -- we basically now excised the 7% price increase in the summer as far as specific and it was kind of geared toward aluminum costs offset though some labor costs as well aluminum labor costs. That basically started hitting toward the end of Q3 and in Q4, so we'll have about two quarters of that. I did mention that just kind of implied in our guidance as well though because -- the price of labor continues to go up as we attract the best talent and I did say that we probably have about a 50 bps to 60 bps aluminum pressure in Q1 that's coming from last year.

Alvaro Lacayo -- G Research -- Analyst

Thank you.

Brad West -- Senior Vice President and Chief Financial Officer

You're welcome.

Operator

We'll turn next to Sam Darkatsh with Raymond James.

Sam Darkatsh -- Raymond James -- Analyst

Good morning, Jeff, Brad. How are you?

Brad West -- Senior Vice President and Chief Financial Officer

Hi, Sam. Good. How are you?

Sam Darkatsh -- Raymond James -- Analyst

I'm well. And I just wanted to also send my thoughts out to anybody that was affected by the shooting earlier this week; our thoughts and prayers go into your employee base and hopefully all as well. I just have a -- like three or four housekeeping questions, and I apologize for the elementary nature of these. So, Brad, I didn't catch us if you mentioned it, what were impact sales in the fourth quarter year-on-year in the legacy business, percentage wise?

Brad West -- Senior Vice President and Chief Financial Officer

Yes, just a second, Sam. We were basically -- well, let me do this way. We were -- legacy wise, we were 86% in Q4 and when you look at the depth of total share -- in the total, impact sales were $136 million basically for the consolidated business, 72% of impact -- of sales were impact.

Sam Darkatsh -- Raymond James -- Analyst

I'm not sure I'm following. So, I'm looking for the year-on-year growth rate of impact in the fourth quarter?

Brad West -- Senior Vice President and Chief Financial Officer

I thought you are talking about dollar amount, so. Okay, no. It was up 20% year-over-year.

Sam Darkatsh -- Raymond James -- Analyst

That's it, there you go. And then backlog at the end of the year, Brad, do you have that handy?

Brad West -- Senior Vice President and Chief Financial Officer

I do, just one second, please. So, we finished the year with backlog of $64 million, which includes $11 million from Western.

Sam Darkatsh -- Raymond James -- Analyst

And that would be related to the $50 million, 5-0, from last year on an organic basis, right?

Brad West -- Senior Vice President and Chief Financial Officer

Yes.

Sam Darkatsh -- Raymond James -- Analyst

All right, so it's up markedly. That's good. Okay. And then two other questions. And if you talked about this -- you talked around it on the call, but I want to make sure I'm aware. So, in the fourth quarter, you obviously had a terrific sales print and it looked like the gross margins at least might have fallen below expectations, at least either externally or internally. You mentioned aluminum, you mentioned mix of R&R versus builder, but where was the primary negative variance versus your internal plan in gross margin in the fourth quarter?

Brad West -- Senior Vice President and Chief Financial Officer

Yes, Sam actually -- it all came down to the accounting entry related to the new accounting standards, so that affected by 70 bps. It's just when we ended up with lower finished goods at the end of the year, it required us to have a accounting entry that reduced margins by 70 bps that actually the biggest factor. But the reason why I didn't talk about it so much because it's not really a factor in 2019, it was a factor in Q4.

Sam Darkatsh -- Raymond James -- Analyst

Got it. Okay, thank you for that. And then last question, I apologize also, if this was covered directly. But the guidance for the year -- sales guidance for 2019, what's the implied organic sales growth rate? I think you mentioned for Q1 is 3% to 5%. But what specifically is it for the year, inherent within your guidance?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. It's the combination of R&R expectation, which at the top end of the range is probably flat, like Jeff mentioned, and the new construction is growing at 9%, so it basically flat to 3%.

Sam Darkatsh -- Raymond James -- Analyst

Got it. Thank you very much, gentlemen. I appreciate it.

Jeffrey T. Jackson -- Chief Executive Officer and President

And then Sam just do your point of reference, just in case if others don't know on the call, we did have a shooting; one of our employees was in his car in the parking lot on Tuesday night -- actually Monday morning -- Tuesday morning early, and obviously, our number one priority is safety of our team members and we're committed to ensure they have a safe work environment. But what we found out is more of a domestic issue with him and another person, and we immediately got him attention (inaudible) took him to hospital, minimal downtime in terms of the events here at PGT. We obviously have secured plant and we'll work with the police accordingly to make sure that this incident was resolved with him and the issue he was facing. So thank you for asking about that. And just wanted to let you know things are good here at Kansas.

Sam Darkatsh -- Raymond James -- Analyst

That's terrific. Thank you, Jeff.

Operator

Let's turn next to Nishu Sood with Deutsche Bank.

Myers -- Deutsche Bank -- Analyst

I had this is Myers (ph) in for Nishu. Thank you for taking my question. So my first question I just trying to go back to the growth assumption -- the sales growth assumption for 2019, is 11% contribution from WWS acquisition a good assumption to use?

Brad West -- Senior Vice President and Chief Financial Officer

Well, we are not going to get into brands specific growth. The bottom line is, I think we kind of said what our legacy growth is kind of being kind of imply. We have a whole bunch of initiatives around synergies and driving additional brand awareness with Western as the new brand for us that's going to help drive growth faster than the market. But I think when we get a combined guidance that we're kind of that's the extent that we really want to talk about.

Myers -- Deutsche Bank -- Analyst

Okay. And going back to price, do you mind giving your price assumptions, for example, Masonite talked about how most of their growth is going to be priced. So same thing -- I assume you anticipate some volume growth as well, that's what I am -- I think I'm hearing and I was just wondering if you could maybe give us a sense of how much is coming from pricing, how much from volume?

Brad West -- Senior Vice President and Chief Financial Officer

Yes. So, basically only price increase assumed in our model is the remaining effect of the price increase we have from last summer. So it -- about half year and followed 5% you could probably say in 1% to 2% is left over from that growth and price rest is on -- in the first half, not for full year.

Myers -- Deutsche Bank -- Analyst

So 1% to 2% for impact for full year?

Brad West -- Senior Vice President and Chief Financial Officer

1% to 2% impact for the first half and then we catch up with the pricing increase.

Myers -- Deutsche Bank -- Analyst

All right, thank you.

Brad West -- Senior Vice President and Chief Financial Officer

You are welcome.

Operator

I'll turn now to Ken Zener with KeyBanc.

Kenneth Zener -- KeyBanc -- Analyst

Good morning, gentlemen.

Jeffrey T. Jackson -- Chief Executive Officer and President

Hi, Ken.

Brad West -- Senior Vice President and Chief Financial Officer

Good morning.

Kenneth Zener -- KeyBanc -- Analyst

So, I empathize we heard trying to forecast comps when you're R&R is up 30% to 50% in the second and third quarter, it's obviously very difficult. If we can to kind of narrow that in, I think your backlog, you talked about $53 million -- well, adjusted $53 million versus $50 million, so up 6% your kind of backlog that you're seeing right now that I assume is obviously your organic business. I am not sure, but I just said if R&R because it grew so well and I think being conservative as appropriate. R&R was 5% higher than you're talking about that being roughly $0.05 or $0.06 is how we're calculating it given your guidance. How I mean, -- a quarter from now, are you going to have a much cleaner view on perhaps how you're cautious view on R&R is -- well, not cautious, but you're 1% to 3% view if we're seeing backlog up 6% or 10%, is that going to get you to kind of shift your view about what the second, third quarter comps might be?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. Ken, as you look at how we executed in 2018, as '18 played out and we realized we're go in to do better, as we beat expectations every quarter, as we saw that we did change our guidance. And so we will definitely have a better feel for how that R&R comps going to impact our second quarter really at the beginning of the second quarter just based on order patterns and backlog, like you'd mentioned. We will also have a better feel for how we can execute in a flat, say, California resident a flat how we execute in taking share, which we've historically done, as that I pointed out with the growth patterns in Western in a flat market, we will have a better understanding of how we are going to be able to do that and our initiatives there and we will adjust accordingly. Hopefully, it was all be positive and we will be in a position to adjust our guidance upward. But right, now we feel based on what we said and the order patterns we've seen and the comps we're looking at and the housing commentary we listen to, we think we're still going to execute 11% to 15% growth and be conservative and have a great year.

Kenneth Zener -- KeyBanc -- Analyst

Yes. And I appreciate that. And Brad, I think you talked about mix, right, impacting R&R versus new construction. Obviously, 2Q and 3Q is going to be very relevant for you. I'm just trying to get sensitivities, if gross margin -- I think you talked about higher SG&A 21%, 22%. I'm going to call that 21.5% kind of the midpoint of your guidance -- for your EBITDA guidance. That means gross margins are kind of flat, but if we face, about 100 bps gross margin pressure this quarter, was your 100 basis point comment for gross margin pressure, was that -- is that a full year thing, I'm just trying to think about how we can properly set expectations for 2Q and 3Q given that that was enormous R&R, therefore uplift in mix. And how we should think about the full year versus kind of that 2Q and 3Q mix issue, I just want to make sure everyone's on the same page here.

Brad West -- Senior Vice President and Chief Financial Officer

Yes, the 100 bps is the full year, but it will definitely have a more impact in a quarter that you're comping a harder on our quarter because that's the genesis of the mix issue, is the strength of the R&R margin. So, yes, in Q2 and Q3, it might be slightly higher than 100 bps and Q1 and Q4, maybe not as high as 100 bps, but this 100 bps for the full year.

Kenneth Zener -- KeyBanc -- Analyst

Okay. All right. I appreciate it. Thank you.

Brad West -- Senior Vice President and Chief Financial Officer

All right. Thanks, Ken.

Jeffrey T. Jackson -- Chief Executive Officer and President

Thanks, Ken.

Operator

And with that, we'll conclude our question-and-answer session. I'll now turn the conference back to you, Mr. West, for any closing remarks.

Brad West -- Senior Vice President and Chief Financial Officer

Thanks everybody for taking the time to join us on the call today and we look forward to speaking to you next quarter. Take care.

Operator

With that, we will conclude today's conference. Thank you everyone for your participation.

Duration: 64 minutes

Call participants:

Brad West -- Senior Vice President and Chief Financial Officer

Jeffrey T. Jackson -- Chief Executive Officer and President

Truman Patterson -- Wells Fargo -- Analyst

Maggie Wellborn -- JPMorgan -- Analyst

Jeremy Hamblin -- Dougherty & Company -- Analyst

Jefferies -- -- Analyst

Alvaro Lacayo -- G Research -- Analyst

Sam Darkatsh -- Raymond James -- Analyst

Myers -- Deutsche Bank -- Analyst

Kenneth Zener -- KeyBanc -- Analyst

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