PGT Inc (PGTI) Q2 2019 Earnings Call Transcript

PGTI earnings call for the period ending June 29, 2019.

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PGT Inc  (NYSE:PGTI)
Q2 2019 Earnings Call
Aug. 01, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the PGT Innovation, Inc. Second Quarter 2019 Earnings Call. [Operator Instructions]

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

Sherri Baker -- Senior Vice President and Chief Financial Officer

Thank you, Ashley. Good morning, everyone, and thank you for joining us on the call today. On the Investors section of the company's website, you will find the earnings press release with our second quarter 2019 results as well as the slide presentation we have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website.

Before we begin our prepared comments, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the press release related to forward-looking statements. Today's remarks contain forward-looking statements that may involve risks, uncertainties and other factors that could cause actual results to 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 provides additional information for investors to help facilitate comparison of prior and present performance. A reconciliation to the most directly comparable GAAP measures is included in the tables attached to the earnings release and in the appendix of the slide presentation.

I am joined today by PGT Innovations' CEO and President, Jeff Jackson; and Brad West, Senior Vice President of Corporate Development and Treasury. After our prepared remarks, we will be available to take your questions.

I will now hand the call over to Jeff for opening remarks. Jeff?

Jeffrey T. Jackson -- Chief Executive Officer and President

Thank you, Sherri, and good morning, everyone.

Before I cover the highlights of our second quarter performance, I'd like to provide you with an overview of our strategic plan for those of you who may be new to our story. Slide 4 provides a summary of the four strategic pillars that we execute against and that we believe will create long-term value for our customers and our shareholders.

Our first pillar is based on putting the customer at the center of our business and building loyalty with our brand of products. By delivering exceptional products with exceptional service before, during and after the sale, we enhance brand recognition and loyalty, which in turn drive future growth.

Our second pillar emphasizes our belief that we need to attract and retain the top talent required to win in a competitive market over the long-term. Our ultimate success is achieved by having a capable and dedicated team of employees, which is why we strive to make our company an ideal place to have a career. I'm proud to announce PGT Innovations was recently named in the inaugural Forbes Best in State Employers in America. For the state of Florida, PGT Innovations was one of six companies in the engineering and manufacturing category to make the list.

A third pillar is investing in our business to build the best products and meet increasing demand. Our ongoing efforts to increase our operational efficiency have not only been key to maintaining our quality levels, but also have contributed to the improvement in margins we reported this quarter. We continue to innovate through our iLab with exciting new products such as our recently launched impact-resistant keyless entry door and continue to invest in marketing to drive consumer awareness.

This leads to our fourth pillar. We expect to strategically allocate capital from our strong free cash flow to continue our growth, which may include expanding our national footprint with a focus on niche-building products and brands that yield strong margins and significant cash flow. We also consider debt reduction and share repurchases in our capital allocation process, and we will consistently assess our options to drive shareholder return.

Turning to Slide 5. We had finished the first half of the year by reporting solid results for the second quarter, growing revenue, gross margin and profitability as compared to the prior year quarter. Despite a decline in sales in our legacy business following last year's significant growth rate, we were able to control costs and maintain gains we have achieved in operational efficiencies to deliver a solid bottom line, achieving an adjusted EBITDA of 20.6%. At Western Window Systems, we continue to grow sales by double digits, despite the California housing starts headwind through our continued market penetration in the indoor/outdoor living space and increasing sales in the commercial and multifamily channels.

Turning to Slide 6, I will discuss our macroeconomic factors affecting our business and overall performance in the geographies we compete in. In our legacy repair and remodeling business, we continue to overlap last year's significant growth rates, predicting this year's R&R growth rate has been proving a challenge, given the level of storm activity over the past two years. Builder -- disaster building materials spending in 2019 is down both domestically and internationally and is projected to remain well below last year levels.

In Q2 of 2019, we saw a decline in R&R sales of 8% versus the prior year quarter that mainly reflects a tough comparison with the 30% growth year-over-year in Q2 2018. Recall that last year's performance included a favorable sales impact of heightened awareness in the aftermath of Hurricane Irma. We are expecting similar R&R sales in Q3 as compared to Q2 of 2019.

I would like to add in the Southeast states, outside of our core Florida market, we were seeing double-digit growth due to our strategic focus in selling impact products outside of Florida, in part driven by the awareness from Hurricane Michael, whose path stretched from Florida all the way north to Maryland, placing some 30 million people under a hurricane or tropical storm watch or warning along the way.

We are continuing our efforts to increase awareness of the benefits of our products in the Florida Panhandle and other markets that have not traditionally been core markets for us. In our legacy new construction business, Florida single-family starts through June are approximately 51,000, which is tracking to be a full year total lower than the 105,000 we initially forecasted in February. Year-over-year starts were down 3% in Q2, following an 18% growth in Q1.

Our Q2 legacy new construction sales were up 1% versus prior year. Overall, we're seeing growth from our strategic initiatives to grow corporate builder impact product adoption, which is being offset by a decline in the custom projects versus prior year. We expect overall trends to continue in Q3.

In our Western business unit, we saw sequential improvement in the California market versus Q1 when the region experienced a significant decline in housing starts. Despite the continued decline in its core market of California versus prior year, Western delivered a 10% growth in sales in Q2 of 2019 as compared to the prior year period.

We are focused on expanding the footprint through increasing market penetration and product innovation. We're seeing healthy growth in several of Western's other core markets, including Texas, Arizona, Utah and Nevada. The Southwest and Texas regions are two of the healthiest housing regions in the country.

Over 40% of Western's sales in the second quarter were in the highly desirable markets of the Southwest region and Texas. We are also expanding Western's custom product footprint into emerging markets, such as Maryland and Illinois, with dedicated sales teams focused on these growing markets. Additionally, as mentioned earlier, we are driving growth in both multifamily and commercial projects.

I will now turn the call back over to Sherri to discuss the financial results in more detail. Sherri?

Sherri Baker -- Senior Vice President and Chief Financial Officer

Thank you, Jeff. Turning to Slide 7, for the second quarter, we reported net sales of $199 million, which included $162 million of legacy split sales, reflecting a 5% decline in our legacy business versus the prior year quarter, driven by the decline in repair and remodel channel. Second quarter sales included the contribution of $37 million from Western Window Systems, reflecting 10% growth in sales for Western versus the prior year quarter. This is testament to the strong demand for our products in the Western business unit as this growth was achieved against the headwind of the California market.

Gross profit for the second quarter was $73 million, an increase of nearly $13 million versus the prior year quarter and gross margin increased to nearly 37% of sales, a 1.3 percentage point increase from the prior year quarter. This improvement is driven primarily by gross margin accretions from Western Window and strong operational execution at our PGT legacy business.

Selling, general and administrative expenses increased by $11.4 million to $44 million in the second quarter. Adjusted SG&A increased by nearly $11 million to $42 million -- $44 million [Phonetic] with a majority of the increase attributable to the addition of Western Window Systems.

Adjusted EBITDA for the second quarter of 2019 was $41 million or a margin of 20.6% versus adjusted EBITDA for the second quarter of 2018 of $34 million or 20%. This marks a 60 basis point improvement in adjusted EBITDA as a percentage of sales, driven primarily by accretion from Western Window Systems.

Our tax rate for the quarter came in at an effective tax rate of 23%, which was below our guidance estimate of 26%, driven primarily by excess tax benefits of $600,000. Our tax rate guidance for the full year remains 26%, excluding discrete items.

In the quarter, we reported GAAP net income of $17 million or $0.29 per diluted share versus $22.5 million or $0.43 per diluted share in the second quarter of 2018. Adjusted earnings per share for the second quarter of 2019 was $0.32 versus $0.41 in the same quarter last year, with the reduction mainly driven by the significant excess tax benefits in the prior year quarter and 7 million additional shares in the quarter as a result of our September 2018 equity issuance.

Next, with respect to our aluminum coverage program, we have contracted approximately 80% of our estimated aluminum needs for 2019. Our coverage is only for the LME portion of the total cost at an average price of $0.96 per pound. This does not include the delivery cost, which today is approximately $0.18 per pound.

Looking into 2020, we have contracted approximately 12% of our full year estimated aluminum needs at an average LME price of $0.85 per pound. As always, we will continue to monitor tariffs and trade environment effects on aluminum pricing, and as appropriate, adjust our coverage program and pricing strategy.

Turning now to Slide 8, we will discuss our balance sheet highlights. We ended Q2 with net debt of $295 million, down from $334 million in Q1 of 2019. This decrease was primarily facilitated by positive free cash flow in the quarter. On an all-cash netted basis, we maintained a net debt to trailing 12-month adjusted EBITDA ratio of 2 times pro forma for the Western Window Systems acquisition. As you can see on this slide, we have a proven track record of delevering.

Next, turning to our capital allocation priorities on Slide 9. Our first priority for capital allocation is internal investment in strategic projects that we expect to fuel our growth and that we believe are core to our ability to drive future shareholder value. We expect to continue to support our product portfolio by making investments in the advertising and marketing programs that have proven beneficial to our growth.

Our next priority for capital is strategic acquisitions that would allow us to expand into new geographies or other building products that would generate strong margins.

Our next priority is our commitment to debt reduction and maintaining a strong balance sheet. We finished the quarter with a cash position at $84.5 million and our net debt was approximately 2 times trailing 12-month adjusted EBITDA, pro forma for the Western Window acquisition. We expect to maintain a conservative leverage profile, with a range of 2 times to 4 times net debt to EBITDA in the absence of any additional large acquisitions.

Another priority is executing a share repurchase, if and when we believe our stock price, market conditions and other factors we believe to be relevant make that a prudent use of capital. We put an authorization in place in May of this year for the potential repurchase of up to $30 million.

For the full year 2019, we are updating our financial guidance as shown on Slide 10. This reduction in guidance is largely a result of legacy R&R market demand being lighter than expected in 2019, following significant full year growth of 34% in 2018. We remain focused on driving net sales in emerging markets and expanding our product portfolio to partially offset these recent market trends in addition to continuing our strong focus on controlling costs as evidenced by our improvement in adjusted EBITDA margin.

For the full year 2019, PGT Innovations now expects to finish in the following ranges: net sales of $740 million to $765 million, an increase of 6% to 10% compared to 2018; adjusted EBITDA of $137 million to $145 million, an increase of 8% to 14% compared to 2018; and adjusted net income per diluted share of $0.90 to $1. Our assumptions for depreciation and amortization, interest expense, effective tax rate and stock compensation remain unchanged.

And now I would like to turn the call back over to Jeff for some closing thoughts. Jeff?

Jeffrey T. Jackson -- Chief Executive Officer and President

Thanks, Sherri. Before we take your questions, I would like to close by reviewing the elements of our investment thesis on Slide 12.

First, we are a national leader and have strong brands in our growing categories of premium impact-resistant products and indoor and outdoor windows and doors. Second, we intend to maintain our advantage as an innovation leader in our industry by investing in research and product development as well as hiring and retaining top talent.

Third, we plan to continue our focus on improving operational efficiency that is driving additional margin expansion. Fourth, we're excited and are executing on our strategy, which we believe will create long-term value for our customers and shareholders. And finally, we believe our diversified product portfolio and the broad geographic markets we serve will better position us to capture future profitable growth in both the new construction and repair and remodeling channels.

I remain excited as ever before about the possibilities for our family of brands and employee team members.

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


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Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We will now take our first question from Keith Hughes of SunTrust. Please go ahead. Your line is open.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. First question on Western is you've had a really strong start to the year. Sorry, there's a lot of background noise on the call, but you started off really strong to the first half of the year. In your guidance, what do you assume Western looks like at the fulsome of the comp?

Sherri Baker -- Senior Vice President and Chief Financial Officer

We expect it to be very similar to what we've been seeing so far for the first half. So call it that low double-digit growth from a sales perspective.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

So what would that double-digit growth -- what would that make the legacy Florida business?

Sherri Baker -- Senior Vice President and Chief Financial Officer

So legacy Florida business in Q2 was down 5%. I think what we are seeing, both from a repair and remodel perspective and new construction, we are saying that we expect very similar performance in the back half with, I'd say, maybe one exception. You have to also keep in mind that Q3 for us is the toughest comp from a repair and remodel perspective and you saw that on the slide that we have. You're comping 56%, so you will see a tougher comp in Q3 with a slight decrease from that or major decrease in that from Q4. But we're expecting very similar overall mix in the back half that we saw in Q2.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And then within Western, as you look at that double-digit growth, how much of that would be coming out of existing markets, and specifically, California and how much out of new markets will be the relative growth rates?

Sherri Baker -- Senior Vice President and Chief Financial Officer

So, right now, we saw in the quarter, so let's back up. So in Q1, you saw a 20% decline year-over-year in California. In Q2, it was down 4%. So from what we're seeing from a housing start perspective, from a permit, we expect something similar, that we still expect a decline in California, so call it somewhere in the 5% to 10% range for the balance of the year. And with the offset getting us to that, call it, 10% growth in the back half being offset in those other markets, specifically areas like Texas, Arizona, Nevada, we're seeing really, really strong double-digit growth in those areas and we will continue to focus on that.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you.

Sherri Baker -- Senior Vice President and Chief Financial Officer

You bet.

Jeffrey T. Jackson -- Chief Executive Officer and President

Welcome.

Operator

We will now take our next question from Michael Rehaut of JP Morgan. Please go ahead. Your line is now open.

Maggie Wellborn -- JP Morgan -- Analyst

Hi. This is actually Maggie on for Mike. My first question is just on the expected cost synergies from Western. I think in prior quarters, you had pointed to $8 million and you could start seeing benefits by the end of 2019, the beginning of 2020. I was wondering, given all the updated guidance, is this number still tracking and when do you expect to see the benefits?

Jeffrey T. Jackson -- Chief Executive Officer and President

Hey, actually -- yes, those numbers are actually still tracking as guided. Even in the second quarter, we did receive some of those cost benefits, almost $2 million in our second quarter here. So everything is on track and in line to produce the synergies we previously guided to.

Maggie Wellborn -- JP Morgan -- Analyst

Okay. Great. And second, you pointed to strength in the corporate builder program in Florida. And I was just wondering if you could kind of quantify that growth, give us an idea of how that's doing a little bit more specifically?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. What we found is we've been able to expand on the contracts we already -- the relationships we already have and actually opened up a few more on the corporate builder standpoint. The slowdown in new construction has been more in that special project regional builder. There's not as many high-end homes that those individuals are doing now. But the other builders, more like the Toll Brothers and whatnot, they are expanding and our relationships there had won over in both impact penetration and having them adopt impact window versus standard window. And that's the positive mix we actually saw increasing in new construction sales we saw in the quarter versus the overall Florida housing market was actually down in the quarter.

Maggie Wellborn -- JP Morgan -- Analyst

Okay. Thank you so much.

Operator

We will now take our next question from Phil Ng of Jefferies. Please go ahead. Your line is now open.

Maggie Grady -- Jefferies -- Analyst

Good morning, guys. This is Maggie on for Phil. Going back to Western, I think you called out some commercial and multifamily end markets are seeing growth. Could you just talk about some of the moving pieces there? I know that's traditionally been more of a new construction, single-family environment. And then maybe touch on the roll-out of the 3700 series and what the customer response there has been?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes, I'll take a couple of those. First of all -- or lastly, our 3700 series has been an incredible hit. Obviously, we want to address a little bit different of a market, more the mid-range to lower-end homes. And we've had some great pickup and great reception for the 3700 series. In terms of commercial, we actually were very limited in commercial when we initially purchased Western. They just hired a director to run that channel. And since then, they've added over $2 million in sales just this year alone in commercial-related projects. And they're typically the hotel or restaurant-type projects that you're looking at that the product fits really well in.

Maggie Grady -- Jefferies -- Analyst

Got it. And in light of the 3700 series kind of targeting that lower price point, is there any mix impact within Western that we should be mindful of going forward?

Jeffrey T. Jackson -- Chief Executive Officer and President

Not really within products. The 3700 series, from a margin perspective, is just as robust as their other product lines. Mix within channels, maybe. Commercial tends to be -- actually, the commercial areas we're playing in actually tend to be a little bit more healthy, so it's a positive mix from that end. But the volume program is, if you look within, they basically have two channels they participate in, the custom and, let's call it, volume channels.

And the custom channel is up for them but the volume channel is down and we can typically leverage nicely in the volume channel, so that's -- I would say the mix is may be slightly negative for that, mainly because, from a custom standpoint, just the word custom, everything you produce there is to order and to spec. And so it takes a little bit more time operationally to produce a custom-made product versus what's sold into that volume channel. So there is a little bit of a negative mix within those channels.

Maggie Grady -- Jefferies -- Analyst

Okay, got it. And then moving to the legacy markets, I know in the past you've talked about R&R gross margins are pretty significantly higher than new construction. So the margin performance in the quarter was pretty strong considering the mix down in R&R. So could you talk about the magnitude of that headwind and what some of the offsets in the quarter were and how we should think about that going forward?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes, a couple of us will comment on that. But I do want to say that kind of goes to the fact that from an operational standpoint, our company's never ran better. Our on-time delivery metrics, our direct labor percentages, our scrap, any -- all operational and quality metrics are tracking better than they ever have. So even though the sales miss on top line, we were able to margin down and not let that mix impact us as much as historically it would have. So across all our plants, from Hialeah here in Venice, to Orlando, to Arizona, all the plants are operating exceptionally well right now from a performance standpoint, which has helped actually drive the increase in the 60 bps of EBITDA we reported. You want to give any detail?

Sherri Baker -- Senior Vice President and Chief Financial Officer

Yes. And just to give you a little bit of numerical support on that. So the R&R to new construction mix on a gross margin basis is about a full percentage point. So that's really what Jeff is articulating, is you have a combination of the operating efficiencies that we're seeing that Jeff just talked about and pricing that we're seeing and then, obviously, the Western Windows accretion is really what's driving that 1.5% gross margin increase year-over-year.

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. From a unit standpoint, again, there's been a little bit of a mix headwind in the R&R channel and our impact versus non-impact. But from a unit standpoint, we're tracking roughly the same amount of units companywide and we're doing it with about 200 less folks. So our operations is really humming right now.

Maggie Grady -- Jefferies -- Analyst

Got it. Great color, and thanks, guys.

Operator

We will now take our next question from Joshua Wilson of Raymond James. Please go ahead. Your line is open.

Joshua Wilson -- Raymond James -- Analyst

Good morning, and thanks for taking my question.

Jeffrey T. Jackson -- Chief Executive Officer and President

Good morning.

Sherri Baker -- Senior Vice President and Chief Financial Officer

Good morning.

Joshua Wilson -- Raymond James -- Analyst

I wanted to ask about the legacy business some more. Besides looking at the tough comp last year, it looks like growth has also slowed on a two-year basis. Are there any other dynamics in the market besides tough comparison that might be driving that?

Jeffrey T. Jackson -- Chief Executive Officer and President

I guess, if you look back like we had on Slide, what, 6?

Sherri Baker -- Senior Vice President and Chief Financial Officer

Yes.

Jeffrey T. Jackson -- Chief Executive Officer and President

Was this -- yes, you can see the quarterly legacy, if you will, growth rates. You can see the spike from Hurricane Irma. So our R&R business basically pulled in, in '18, pulled in some of the '19 growth as we get into '19 and you'll see that. So I don't -- a negative 8% in the second quarter, we're going to see similar trends in the back half. We do think it will stabilize, and ultimately, our R&R business, in particular from a growth rate, will once again meet the historical norms of that 10% to 12% growth.

Sherri Baker -- Senior Vice President and Chief Financial Officer

Yes, the only other thing I might call out is something that Jeff highlighted earlier on the call and that's just what we're seeing from an overall market perspective is just that pretty significant decline in disaster recovery spend is actually down over 40% year-over-year. So that would be the only other thing that I might highlight from a macro perspective.

Joshua Wilson -- Raymond James -- Analyst

And what sort of pricing trends are you seeing in the legacy business?

Sherri Baker -- Senior Vice President and Chief Financial Officer

So we took two pricing actions last year. We took one in April and one in August. We have not executed anything incremental this year, so I'd say you're seeing probably flat versus what you would have seen after those two price increases. And please note that with that pricing increase in August and we talked about this on our last call, we do see some acceleration of orders prior to those price increases, so that will be another factor that is playing into the Q3 overlap.

Joshua Wilson -- Raymond James -- Analyst

And as the market deals with these tougher comparisons in the pull forward, are your competitors getting more aggressive with price?

Jeffrey T. Jackson -- Chief Executive Officer and President

We haven't really necessarily seen that in marketplace. I'm going to be honest with you. Obviously, there's different brands in our dealers and so you hear different things within the market. And the main area that's down has been vinyl. If you look at our mix, our R&R mix is geared toward the vinyl arena and our new impact WinGuard vinyl line is really what's down year-over-year. Our aluminum line is busy and solid. The aluminum products are growing. So our competitors that participate in those kind of products are also down. And really, no pricing pressures has been brought to market as a result. From an aluminum standpoint, there's actually been some price increases.

Joshua Wilson -- Raymond James -- Analyst

Got it. Thanks.

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes.

Operator

We will now take our next question from Truman Patterson of Wells Fargo. Please go ahead. Your line is open.

Truman Patterson -- Wells Fargo -- Analyst

Hi. Good morning, guys. Thanks for taking my question.

Jeffrey T. Jackson -- Chief Executive Officer and President

Thanks, Truman.

Truman Patterson -- Wells Fargo -- Analyst

Hey. So it sounds like despite some of the R&R revenue outlook being lower than the higher margin, you guys are really offsetting it with improved productivity. But jumping on to your sales guidance, it implies a couple of percent revenue decline in the back half of the year. It seems like Florida repair and remodel will remain pretty challenging in the back half of the year. Could you just further elaborate on the market? Is it truly a hangover from Hurricane Irma for your impact-resistant products? Or are you seeing just a general roll in the R&R market? And then can you just give us an update of your full year expectation?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. No, Truman, I truly believe it's just a hangover from a lot of growth during hurricane period. A lot of awareness was created, a lot new people in Florida over the last few years, and all of a sudden, in '18, we were swamped in producing product. We did increase capacity as a result of that and we're benefiting from that increased capacity, that technology and our labor rates are down and our margins have actually improved year-over-year. So if you look at the core market itself from an R&R standpoint, I do think it's solely just pull-through from that hurricane.

Truman Patterson -- Wells Fargo -- Analyst

Okay. Okay. And then also it's a little surprising and nice to hear that despite aluminum coming down, your competitors aren't really cutting pricing at all.

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes, we really hadn't saw any pressure on the pricing. I will tell you, even as a point of reference, our top 50 customers, with the exception of one in our top 50, all of those individuals are up -- most of them double digits. So it's the bottom layer customers that aren't as busy as they were. And what's that told us internally is, demand was so high last year, all of our major dealers and distributors, they were slammed, they were full. And so the lead times were out. So the customer, the end user had to go down a layer to smaller dealers in the market who also carry our product.

So you had a year of where not only our largest 50 top customers were just slammed and busy, the lower level sales volume customers were also busy. You're just not seeing that this year. You still see the top 50 busy and they're sharing the load. I mean, there were up, I don't know, 9% on average, our top 50. So it's all coming from kind of the lower tier dealers who, again, got a lot of pull-through from that hurricane to keep them busy.

Truman Patterson -- Wells Fargo -- Analyst

Okay. And then a final one for me is just on M&A. You have a healthy balance sheet. I guess, how are you guys thinking about this? Are you looking to digest the Western Window System acquisition a little bit longer? And then you also brought up topical expansion into new niche products. I guess, how far down the rabbit hole, if you will, are you looking at some of these other products outside of windows and door systems?

Jeffrey T. Jackson -- Chief Executive Officer and President

You know, right now, we're still focused on windows and door systems in terms of that next acquisition. We are probably more focused out of state for that next acquisition as well, and we've looked at several different opportunities. Integration of Western is actually, in my opinion, ahead of schedule, sales are growing, synergy -- cost synergies are there, our management team is in place, and actually, we've added to it. We kicked off the R&R initiative by hiring a leader for that drive, and we're developing marketing materials and identifying targeting markets within -- to start within California to expand into the R&R market for Western. So all that, given it's been not even a year, is really ahead of schedule.

With that said, we are wanting to continue the integration process. We got to get on consistent platforms and we're looking across mixes to get some sale synergies, all of that still going and under way. But if the right opportunity came up from a leverage standpoint, from an internal resource standpoint, we're ready for it. I'm just going to be extremely picky on whatever we do end up buying.

Truman Patterson -- Wells Fargo -- Analyst

Okay. Thank you.

Operator

[Operator Instructions] We will now take our next question from Alvaro Lacayo of G.research. Please go ahead. Your line is open.

Alvaro Lacayo -- G.research -- Analyst

Good morning, Jeff and Sherri, and then thanks for all the detail provided on the presentation.

Jeffrey T. Jackson -- Chief Executive Officer and President

Good morning.

Alvaro Lacayo -- G.research -- Analyst

So the question regarding the legacy business and the repair and remodel piece, I tend to agree that it's a hangover from the sheer strength of demand that you had last year. But my question for you, Jeff, in terms of when you see that normalizing, would that normalize into next year or just because of the amount of demand that you saw, could that overhang continue into the year after? And any conjecture that you're seeing in the market would be helpful there?

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. Again, based off what we're seeing in some other initiatives that we do have in place to address growth, I do not see the R&R market continuing, if you will, its decrease into 2020. I think this year, we all hoped it would just be flat. Quite honestly, we had for years of really robust growth, two hurricanes hit Florida, first time in 15 years. So we've learned a lot from this season, if you will, of hurricane activity. But as we go through '19, I think what we're going to find, we're going to draw a base year and have a good base year to then grow off of.

We just had our Board meeting yesterday and we reviewed initiatives, really targeted R&R vinyl area. And those initiatives generate sales anywhere between the low of $44 million to a high of roughly $90 million. Again, in different initiatives, whether it's setting up distribution, new ways to get to the market or new enhancements or tools to help our teams sell the product.

So, I am very optimistic about 2020 in terms of '19 stabilizing and then 2020, we'll get back onto a growth into the R&R channel. I don't how robust that's going to be because obviously we're going to have a bigger base we're growing off of. But I do think anywhere between, say, 5 percentage points growth in the R&R market in 2020 would be something we would strive to achieve and see.

Alvaro Lacayo -- G.research -- Analyst

All right. Thanks. And for the rest of SG&A, just to be clear, you benefited $2 million from synergies out of the $8 million. And you intend be at a run rate of 8% by the end of the year. And then secondly, I remember last year, you spoke about stepping up marketing spend to take advantage of awareness from recent hurricane activity. Did that ad spend stay elevated or has that come in? And how much was that specifically?

Sherri Baker -- Senior Vice President and Chief Financial Officer

Yes. So one thing to clarify, that $2 million of cost synergies is actually in COGS, not in SG&A, so you're really looking more on the direct material side. So that's where you're going to see that benefit. From a marketing spend, we will continue to invest marketing spend for the most part. From a legacy business, it's essentially flat versus a year ago, but then we do have incremental spend in Western, so that would be on top of that. And we will continue to invest in that because we think that staying in the marketplace and reaching those end consumers and how we reach them, particularly really starting to look at things even on a digital platform perspective are really important for us to invest in.

Alvaro Lacayo -- G.research -- Analyst

All right. Thanks.

Operator

We will now take our next question from Ken Zener. Please go ahead. Your line is open.

Ken Zener -- KeyBanc -- Analyst

Good morning, Jeff, Sherri, and Brad.

Jeffrey T. Jackson -- Chief Executive Officer and President

Hey, Ken.

Sherri Baker -- Senior Vice President and Chief Financial Officer

Good morning.

Brad West -- Senior Vice President, Corporate Development and Treasurer

Good morning.

Ken Zener -- KeyBanc -- Analyst

I'm going to have more than one question here because I want us to take a step back. It really seems to me like the big picture here is, obviously, you had a lot of growth, which you guys revised your guidance. And to be explicit, Sherri, it sounds like you're saying 8% down for remodeling versus the up 34% last year and if you can be explicit around your new construction forecast.

But the big picture is you had a lot of growth last year, mixed up your margins and you actually executed very well, which was in contrast to some of the hiccups you guys had in prior years and now you're guiding down rev yet you're holding margin. Again, operating very well. And I think that's really the big picture as I think, but could you just talk about those top line comps that you're giving specific for R&R and new revs, just so everybody's clear about what you're saying?

Sherri Baker -- Senior Vice President and Chief Financial Officer

Yes. No. You bet, and thank you for the question. So we actually think for R&R in particular, it's probably we're in the 10% to 15% range. And I'm doing a range intentionally because, obviously, it's coming out a little different than we initially expected, so I'm ranging it. But a big chunk of that is literally because if you look on that bar graph, we're overlapping in Q3 56% growth from the prior year in addition to some incremental backlog that we had that year. So call R&R 10% to 15%. We believe new construction is going to be probably flat to a year ago for a lot of the things that Jeff had talked about. So those will be the two metrics that I'm considering in the guidance.

Ken Zener -- KeyBanc -- Analyst

Excellent. And then again, your guys' margins have been excellent and you're still holding them despite these revisions. So I think that's really a big picture as far as I'm concerned. But now looking at Western Window, I know there's been -- you were calling out California starts. But just so everybody is clear, can you contextualize how much California is? I mean, is it about a third of Western Windows? I mean just to give some magnitude -- Jeff, you might have said it if I missed it.

Sherri Baker -- Senior Vice President and Chief Financial Officer

No, I'll take that. So, California is, call it, roughly 40%. It does change a little bit percentage wise, depending on what you're seeing Q1 versus Q2, but in Q2, it was roughly 40% of the business, but you then quickly have Texas and Arizona that are really number two and number three, and that's substantially probably, call it, 60% to 70% of the business just in those three states.

Ken Zener -- KeyBanc -- Analyst

Excellent clarification. Now I apologize, the last piece, as we look at what the R&R story legacy will look like, not only in 2020, but beyond that. I think in your slides in the past, you talked about up near 20% penetration in Florida and the clients tend to ask me, well, what is that for Southern California because you're -- Southern Florida because you're excluding places like Orlando? Could you talk to the penetration in the served markets, if you will, so we can get a better sense of that R&R?

Jeffrey T. Jackson -- Chief Executive Officer and President

The served markets within Florida, is that what you're talking about, Ken?

Ken Zener -- KeyBanc -- Analyst

Yes. Yes, because I think you guys have 20% penetration in Florida Windows, which obviously suggests there's a long ramp for...

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. No. What we said historically is basically if you look at the impact market -- or the market in Florida, roughly 20%, 25% had impact protection of the entire market. Another 18% to 20% had shutter protection and really roughly 50% of the market had no protection and was a potential opportunity. We internally have always said our kind of market share, the impact market within those windows and doors was in that 60% range, 65% market share/penetration of that amount. So does that add some color to what you're asking?

Ken Zener -- KeyBanc -- Analyst

It does, it does. And then maybe -- and then I apologize for all these questions, but I think this is a very interesting time. The aluminum versus vinyl you mentioned in the R&R. Jeff, can you -- is that a price -- I mean, metal, more expensive homes; vinyl, less expensive; vinyl, more new. Can you talk to what that is telling you about the consumer's appetite or purchasing power or something? I'm not sure what that means. Thank you very much.

Jeffrey T. Jackson -- Chief Executive Officer and President

No, not really. There's not a dramatic price difference between vinyl and aluminum. There's some benefit difference between the two, obviously, vinyl being more thermal driven and having better ratings. But it's really segment driven is the R&R segment. When people come in to Florida and repair or remodel their homes, they'll typically take out old aluminum non-impact window because Florida at one time was 90% aluminum market, if not more. So R&R gears naturally toward vinyl as people move into Florida and they're replacing the old aluminum non-impact or impact products. So there's not really a price differential between the two.

Brad West -- Senior Vice President, Corporate Development and Treasurer

Yes, this is Brad. Ken, I'll just add to that. I think the areas that were most affected by the -- where Irma came on shore last year were more vinyl-driven markets. I think the acceleration last year that we saw as a result of Irma wasn't surprised that it was a little bit more R&R vinyl-driven. Our Miami market, which tend to have R&R a little bit toward aluminum, did not have quite the acceleration that, let's say, our Tampa or Naples markets were right where the storm hit.

Ken Zener -- KeyBanc -- Analyst

Okay. Thank you very much.

Jeffrey T. Jackson -- Chief Executive Officer and President

You're welcome.

Operator

We will now take our next question from Joshua Wilson of Raymond James. Please go ahead. Your line is open.

Joshua Wilson -- Raymond James -- Analyst

Thanks. Just a couple of follow-ups here. First, in the past, you've given your backlog, both to legacy business and Western Windows. Could you provide us that number again as it was at the end of the quarter?

Jeffrey T. Jackson -- Chief Executive Officer and President

Sure. Do you have it, Sherri?

Sherri Baker -- Senior Vice President and Chief Financial Officer

Yes, I do. So the backlog in Q2 was $76 million if I back out the Western piece. So call it the core legacy PGT is $63 million in the quarter.

Joshua Wilson -- Raymond James -- Analyst

Got it. And then we've talked around pricing and a few other trends but could you talk about where your market share has been trending? There has just been several moving parts and then some new entrants as well. So what your outlook is for your market share would be helpful as well.

Jeffrey T. Jackson -- Chief Executive Officer and President

Yes. I think our market share -- yes, I think based off, again, our top 50 dealers being up year-over-year, our market share continues to gain. We're definitely not losing market share in our best estimates to the Florida market. In Western, we obviously are penetrating into that -- those new markets and gaining share. But considering the R&R market being down, our top 50 still being up, we think they dominate that market, and we still think our market share is robust and healthy.

Joshua Wilson -- Raymond James -- Analyst

Thanks. Good luck with the next quarter.

Jeffrey T. Jackson -- Chief Executive Officer and President

You bet.

Sherri Baker -- Senior Vice President and Chief Financial Officer

Thank you.

Operator

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

Sherri Baker -- Senior Vice President and Chief Financial Officer

Thank you, everyone. We really appreciate you joining us on the call today. We look forward to talking to you next quarter. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 47 minutes

Call participants:

Sherri Baker -- Senior Vice President and Chief Financial Officer

Jeffrey T. Jackson -- Chief Executive Officer and President

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Maggie Wellborn -- JP Morgan -- Analyst

Maggie Grady -- Jefferies -- Analyst

Joshua Wilson -- Raymond James -- Analyst

Truman Patterson -- Wells Fargo -- Analyst

Alvaro Lacayo -- G.research -- Analyst

Ken Zener -- KeyBanc -- Analyst

Brad West -- Senior Vice President, Corporate Development and Treasurer

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