PGT Innovations, inc (PGTI) Q3 2021 Earnings Call Transcript

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PGT Innovations, inc (PGTI)
Q3 2021 Earnings Call
Nov 11, 2021, 10:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to PGT Innovations Third Quarter Earnings conference Call.

[Operator Instructions]

I'd now like to turn the conference over to PGT Innovations Interim Chief Financial Officer, Brad West. Please go ahead, sir.

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Thank you. Good morning, everyone, and welcome to the PGT Innovations Third Quarter 2021 Investor Conference Call. On the Investors section of our company website, you will find the earnings press release issued earlier today as well as the slide presentation we have posted to accompany today's discussion. This webcast is being recorded and will be available for replay on the company's website.

Before we begin our prepared remarks, please direct your attention to the disclosure statement on Slide 2 of the presentation as well as the disclaimers included in the earnings press release and our SEC filings that discuss forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2021 financial performance outlook and the potential future impact of the COVID-19 pandemic on our business. Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. Additional information on factors that could cause actual results to differ from expected results is available in the company's most recent Form 10-K and 10-Q. Additionally, on Slide 3, note that we report results using non-GAAP financial measures, which we believe provide additional information to help investors compare 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'm joined on this morning's call by Jeff Jackson, PGT Innovation's CEO and President. We will take your questions after delivering our prepared remarks. I will now hand the call over to Jeff.

Jeffrey T. Jackson -- President and Chief Executive Officer

Thank you, Brad and good morning everyone, and thank you for joining us on today's call. Let me first begin by welcoming our 460 new team members to PGT Innovations family from our recently closed Anlin acquisition. Anlin Windows & Doors is a key part of the western expansion and represents an exciting addition to our growing Western Windows operations. During this call, we will discuss key points around the acquisition.

Now, let me continue with key takeaways from the third quarter. On Slide 4, sales grew 26% from the prior year period to a record $300 million. This includes organic growth of 14% and $25 million in sales from Eco Window Systems, which we acquired this past February. Third quarter sales benefited from solid growth across all our core markets, especially strong revenue growth in our western region as the order entries we reported in prior year quarters translated into higher third quarter product shipments. The California market has gained momentum since COVID restrictions were lifted and the Texas and Arizona markets showed continued strength as well. Earlier this year, we opened up another Skye Walls retail showroom in San Diego to support the repair and remodeling market. While relatively small, the traction gained by Skye Walls in both Anaheim and our new location in San Diego is representative of the overall growth in our western region.

Overall, Western sales were up 29%, mainly driven by the production builder up 51%. We also continued to see strong demand in our southeast region across both our new construction and repair and remodeling channels. Our recent New South acquisition also continued to see strong demand growth with sales up 92%. The price increases that we have communicated over the past couple of quarters began contributing additional topline in September as we continue to work through our backlog. While we only get a partial benefit in Q3, these price increases are expected to be fully in effect in Q4 and in future quarters, providing additional benefit to our fourth quarter margins.

As you have likely seen, aluminum spot prices have dramatically increased throughout the year, including 16% during the third quarter alone. Approximately 60% of our sales are aluminum products. Our hedging program provided some relief, but our uncovered portion continues to be impactful going into the fourth quarter, and we expect this to continue into 2022. As a result of the cost increases as well as many other cost increases we have experienced in glass, hardware, vinyl and supplier based surcharges, we announced a 3% surcharge in our Florida operations that took effect at the beginning of November, which will help offset some of these expenses.

Additionally, we announced another 6% to 12% price increase for new orders beginning November 1 that will impact our results in the beginning of February 2022. You will also see that both labor and material cost headwinds were reflected in our Q3 results. For example, increased base wage rates and retention bonuses impacted this quarter as we prioritized retaining our experienced team members who have made our success possible throughout this pandemic. While these cost headwinds contributed to lower margins year-over-year, margins improved sequentially from Q2, reflecting price initiatives, our focus on cost management and improvement in our operations. We anticipate more normalized operations and margins in Q4 and heading into 2022, where we will have capacities more in line with robust demand we continue to see in housing over the past 15 months.

I am proud of the ongoing dedication and resiliency of our employees, our dealers and distributors, who continue to do an outstanding job of servicing our customers despite ongoing challenges. In particular, we continue to increase output to meet customer demand by training the recently added employees, integrating new equipment, expanding new facilities and diligently responding to COVID-19 related challenges, such as supply chain disruptions.

In terms of new and expanded facilities, our new Fort Myers production facility began 24/7 operations in June and continues to increase output. Earlier this year, we leased a new warehouse facility in Southeast Florida to improve our fulfillment capabilities and free up capacity to accommodate increased production. This past quarter, we also invested in increased production capacity in our Venice, Miami and Tampa facilities. As a result of these initiatives, average lead time in our southeast business unit has decreased several weeks, now ranging from 9 to 15 weeks depending on the product. Even with improved lead times, we continue to experience strong demand. Accordingly, even though our shipping revenue has increased, our backlog today sits at $365 million, roughly in-line with the $372 million in backlog at the end of June. We have also added cutting capacity at our Eco glass operations during the quarter, which allows us to service more of our internal needs, reducing our reliance on our outside glass supplier, who continues to struggle to meet our needs, and providing margin improvement from the vertical integration. Our year-to-date accomplishments and investments are expected to position PGT Innovations to drive continued growth and margin improvement by helping us to increase our output, decrease our lead times and meet expected strong demand for the remainder of the year and through 2022.

Turning to Slide 5, we have more detail on order entry. During the third quarter, our order entry in the southeast business unit was solid and consistent with the demand we saw all year. However, it was down 8% when compared to the third quarter of 2020. In October, we saw an increase in orders, both sequentially and compared to prior year. At Western, order entry was up 31% as we saw continued momentum in recoveries in California, Arizona and Texas. Our recent acquisitions, New South and Eco continue to achieve impressive demand growth. For the third quarter, retail orders at New South Windows Solutions totaled $37 million, an increase of 46% year-over-year. We are nearing the completion of our second year with New South. We believe that the acquisition would allow us to expand into the direct-to-consumer channel and improve our marketing environment for our business as well. The order growth we have seen over the past 18 months has proven that to be true.

Additionally, the returns from a financial perspective have also been realized. In 2019, just prior to closing the acquisition, New South had four legacy stores generating approximately $55 million in sales and an EBITDA of about 15%, and three stores that they just opened up in 2018 and in 2019. Today, New South has seven legacy stores, projected to generate $120 million in revenue and an 18% EBITDA. In addition, we have opened up three stores in 2020, which will generate $18 million in revenue in 2021, with EBITDA margins beginning to consistently shift in the teens. In 2021, we have opened stores in New Orleans, Charlotte and Raleigh. As a reminder, it generally takes about 12 months to consistently turn a profit at a store and a total of 18 months to start to see the high-teens EBITDA that legacy stores enjoy. We have made significant strides in the quarter, and we continue to grow our capacity to position PGT Innovations to be able to meet this robust demand.

On Slide 6, we have provided information on our newest acquisition, Anlin Windows & Doors, which closed in late October. This acquisition supports our strategic framework for profitable growth by expanding our market presence in the high-growth West Coast region. We have seen very strong growth trends in this part of the country, similar to the trends we continue to see in our southeast region. In fact, Anlin experienced sales growth above 30% in the trailing 12-month period ended Q3 2021 compared to Q3 2020. Anlin is a top regional brand for vinyl replacement windows and doors and is a great fit for our existing Western Window Systems brand, which is a leading provider of aluminum products for the new home construction market. This acquisition allows us to better serve both markets with a broad product portfolio and expanded sales network.

Since we acquired Western in 2018, we have been working on ways to get their innovative indoor/outdoor living products into the R&R channel. Anlin's existing R&R customers should provide an immediate boost to the Western products within that channel. Additionally, between Western's high-end vinyl sliding glass door and Anlin's complete vinyl window offering, we believe we now have a very strong and complete and robust vinyl platform offering that can service both the new construction and R&R markets out West. Anlin will operate under PGT Innovation's Western business unit, and I'm very pleased that Anlin's top leadership will remain with the company. Anlin's experience leadership will help ensure seamless integration of our capabilities, which is now underway.

Slide 7 summarizes our strategic operational framework as we seek to create long-term value for shareholders while servicing our customers and communities. Our first pillar is consumer-centric innovation, bringing products to market that offer the features, the performance and value demanded by builders and customers for today's market. Driving innovation in future sales requires us to keep our finger on the pulse of consumer preference insights. This is highlighted by our acquisition of Anlin, bringing a new complete vinyl platform to our western region customers. Our second pillar is recruiting and retaining talent in a tight labor market. We have increased headcount by approximately 1,500 team members in 2021 to date. This is more than a numbers game. We need employees in specific geographic areas with the right skill sets who want to excel, who want to work for us as an employer of choice and grow their careers. We attract and retain such talent through proactive communications, appropriate compensation packages, including long-term incentive programs and emphasis on workplace safety and a culture where employees know they're appreciated. To that end, we have seen improvement in retention numbers in our organization over the past several months and we are seeing areas of improved capabilities as well. Work still needs to be done since demand continues to be strong, but progress is apparent as illustrated by September being our best month of the quarter in terms of both sales and margin.

Our third pillar is investing in the business. This year, we have been especially focused on increasing our manufacturing capacity and capabilities to scale our operations to meet the anticipated growth in demand over the long-term. For example, procuring critical vinyl and glass equipment has been an ongoing challenge but our multi-pronged strategy to manage materials has minimized disruptions. This has allowed us to increase capacity through the back half and into 2022.

Our fourth pillar is allocating free cash flow to achieve profitable growth. This has included finding the right strategic, accretive acquisitions, investing in new product and development and production capacities, and paying down debt.

Now I'd like to turn the call back over to Brad to review our results in greater detail. Brad?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Thank you, Jeff. Turning to Slide 8. We reported net sales of $300 million for the quarter, a 26% increase over the prior year quarter. This includes 14% organic growth from all of our legacy businesses, including substantial growth within our New South business, which continues to increase orders and installations. From a channel perspective, our repair and remodel sales benefited from two recent acquisitions, both of which focus mainly on Florida [Phonetic] market. In the third quarter, our sales breakdown finished at 59% R&R and 41% new construction. Our organic R&R sales grew 8% during the quarter, and organic new construction sales grew 22% from the strength of our legacy brands.

Gross profit for the quarter was $104 million, a 20% increase from prior year quarter, reflecting increased sales, partially offset by cost headwinds from labor and materials, as Jeff previously discussed. Third quarter gross margin was 34.7%, a 180 basis point decrease from the prior year quarter. The decline was impacted by increased investments in direct labor expense, mainly caused by the increased headcount and corresponding training costs and increased wage rate and overtime within our operations as we continue to compete for labor in a tight market. In our western markets, we continue to see labor expense improvement, which partially offset this impact. Inflationary pressure on materials also impacted our margins negatively during the quarter. This was mainly a result of the cost of aluminum, which from a cash perspective was up 69% in Q3 compared to the prior year. We were hedged for 75% of our needs during the quarter, which mitigated some of this impact. Going forward, we are hedged at similar prices on 70% of our needs for the remainder of 2021.

Selling, general and administrative expenses for the third quarter increased by 39% compared to the prior year quarter, primarily reflecting higher selling costs as a result of increased sales and increased amortization expense related to recent acquisitions. We did also see an increase in distribution costs as we work to expand our southeastern operations, which we expect will begin to normalize as efficiencies are gained. These costs include $1.0 million each in Anlin related acquisition costs and in COVID related costs during the quarter.

Our adjusted EBITDA was $43 million. We recorded debt extinguishment costs of $25.5 million related to the refinancing of our notes and repayment of our term loan during the quarter. These costs were excluded from adjusted EBITDA but did result in a GAAP net loss before taxes during the quarter. Our recorded tax benefit in the quarter came in at 31.9%, higher than our normal expected full year modeling assumption of 25% due to a change in our statutory rate as a result of an active lower Florida state corporate income tax. We reported adjusted net income of $15.8 million or $0.26 per diluted share in the third quarter of 2021 compared to $18.1 million or $0.31 per diluted share in the third quarter of 2020.

Turning now to our balance sheet on Slide 9. During the quarter, we successfully refinanced our debt and positioned ourselves to subsequently complete the acquisition of Anlin in October. We completed a private offering at 4.375% senior notes totaling $575 million due in 2029 and used proceeds to redeem our $425 million, 6.75% senior notes due 2026. We paid $54 million outstanding on our existing term loan credit facility and partially fund the purchase price for Anlin. This new note provides a favorable long-term rate for our debt structure and lowers annual interest costs. Our term loan agreement was amended to extend its term to 2024 and provides borrowing up to $180 million. On October 25, we borrowed $60 million to help fund the purchase price of Anlin. Pro forma for the acquisition, we had total liquidity of $132 million, including cash of $58 million and $74 million of unused capacity on our revolver. After giving the effect of the acquisition, as of October 25, 2021, we had a pro forma net debt to trailing 12-month adjusted EBITDA ratio of approximately 3.3 times.

Next, on Slide 10, we have updated our historical net debt and leverage ratio to show how these have changed across a number of transactions. With our strong cash flow, we intend to maintain our past history of paying down debt after acquisitions.

On Slide 11, I would like to discuss PGT Innovations' anticipated capital allocation priorities. Our first priority is to find internal investment opportunities and projects we expect to increase capacity, drive margin growth by reducing expenses or by increasing revenues through product enhancements. Another important priority is our commitment to maintain a strong balance sheet and conservative capital structure by paying down debt after acquisitions. Our goal generally is to maintain a conservative leverage profile between 2 times and 3 times net debt to EBITDA. And we expect to deleverage in the quarters ahead to get back to this target range as we've consistently done in the past.

Finally, we used capital for strategic acquisitions that are expected to be accretive and generate strong returns over the long-term. We look for opportunities that would allow us to expand into new regions, channels or products such as Anlin, or that would give us access to technologies, enhanced manufacturing or supply chain capabilities, such as our past acquisition of Eco. We will continue to work to integrate our newest acquisition and carefully evaluate other possible acquisition opportunities as part of our overall strategic plan while focusing on delevering as we have done in the past.

Turning to Slide 12. Our performance continues to track as anticipated. Our EBITDA margins improved 190 bps from Q2 to Q3, and we anticipate further improvement in Q4 of approximately 150 bps. Finally, sales in Q4 will likely be similar to Q3 as price increases take further hold and revenue from two months of Anlin will offset the impact of typical holiday shutdowns we see in November and December.

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

Jeffrey T. Jackson -- President and Chief Executive Officer

Thanks, Brad. I'll conclude with a summary of why I'm very excited about our future and why we believe PGT Innovations creates long-term value for our shareholders. We are a national leader with strong brands, which have been further boosted by recent acquisitions. Our products are in growing categories in the fastest-growing regions in the US. We have a long history of providing customers with innovative products to meet their challenging needs. Our continuous improvement of operations is how over time we can drive long-term margin expansion. The overall economy is facing some challenges from the strong demand growth and supply chain challenges, and we continue to build upon existing programs to improve efficiency and gain the required capacity.

Lastly, we have a comprehensive strategy that we are striving to execute to create long-term value for our shareholders and customers. At this time, let me begin the Q&A. Operator?

Questions and Answers:

Operator

We'll begin the question-and-answer session.

[Operator Instructions]

First question comes from Phil Ng of Jeffries. Please go ahead sir.

Phil Ng -- Jeffries -- Analyst

Hey guys, congrats on a really solid quarter in a challenging backdrop. I mean, Jeff, I know your stock took a hit last quarter on some of these transitory issues, but it was really great to see you guys get in front of that, especially on the labor front.

Jeffrey T. Jackson -- President and Chief Executive Officer

Thanks Phil.

Phil Ng -- Jeffries -- Analyst

So I guess my question for 2022, it sounds like you've made some great progress unlocking more production capacity and as your labor gets a little more scaled up. But looking out, how much increased production do you think you'll be able to unlock? And I know you're making strides on the lead times. Do you expect that to be more normalized next year?

Jeffrey T. Jackson -- President and Chief Executive Officer

I do think lead times will continue to be extended. However, I do see us continuing to bring them down. We've increased capacity on various lines, sliding glass doors, frames, our vinyl line. We added a third vinyl line. We're currently adding production capacity to our WinGuard single hung line. So we've increased our production capacity at least 20%. So right now, I'd say from a production standpoint, we can produce more than we can ship out of this -- out of the warehouses. So I'm feeling very good as we look into 2022 because I think we'll continue to see double-digit growth into 2022.

Phil Ng -- Jeffries -- Analyst

That's super. And then, I was curious from a production and labor standpoint, how are you guys set up on the west side just because certainly, orders have picked up pretty nicely. Are you pretty well positioned there as well?

Jeffrey T. Jackson -- President and Chief Executive Officer

Yes. I think Western, yes, they had an incredible third quarter with their orders up 31% or so. And with the Anlin acquisition, to be honest with you, once we get that Western brand into that R&R market, which we've been trying to do, Anlin has -- is 95% R&R. So that dealer base is hungry for a vinyl platform within it. So I definitely see Western continuing to scale into 2022. We're actually looking at expanding the facility there, leasing more space in Arizona but -- as we speak. So we continue to have more capacity available, but we do think we're going to see significant growth into 2022, especially if California stays open. Quite frankly, California and Texas are those major markets for Western. Arizona, Utah, all those growing markets. So as long as -- barring COVID type of disasters happening again in 2022, we feel very optimistic about our Western expansion strategy.

Phil Ng -- Jeffries -- Analyst

Got it. And then, Jeff, you announced a surcharge, I think, in the southeast and then price increases. So I was just curious, have your competitors matched? And with the pricing that you guys have out there already, that's going to roll through a little more fully next year. Do you expect your margins to be pretty normalized, call it, 1Q 2022? Because I know it's a very, very dynamic inflation environment right now.

Jeffrey T. Jackson -- President and Chief Executive Officer

Yes. Inflationary costs are hitting everyone. We did have most of our competitors -- actually, all of them, I think, have taken up pricing over the year and in into the fourth quarter, there was a recent announcement about a couple of weeks ago of a competitor taking pricing as well. So we do see matching of price increases. We have not seen a competitor match like a surcharge. That is the first time for us. And it's not something we're going to keep on there long-term. Quite frankly, we just had a big increase in our glass cost and aluminum cost in the last three months. And the timing of the pricing, our backlog is up so high. It's doubled at PGT, for instance, over the last year. So with that backlog, it's just hard to recognize immediate offset sales price increases. That's why we implemented that 3% surcharge. Just to kind of bridge us until our pricing does take effect. But we do feel like margins will normalize next year. Again, absent aluminum cost. That's the one thing that's on our radar to really keep a watch on. 60% of our sales are aluminum. And quite frankly, aluminum has increased a lot this year. And if you look at different forecasts, it has -- it's continuing to go up next year. So we're going to monitor that closely. But absent that, we think our pricing will normalize our margins and also the amount of extra leverage we're going to get on production throughput will also help normalize the margins into 2022.

Phil Ng -- Jeffries -- Analyst

Got it. Got it. And just one last one for me. Brad, you usually give us some color on how hedged you guys are. Any color on 2022 for aluminum. How you're hedged? And how should we think about the step-up from a cost standpoint? And some of the other materials that you guys do use, PBC, I've heard has been quite tight. Has that impacted your vinyl window? And certainly, there's been a lot of reports out there of glass being a little choppy. How are you guys kind of positioned in terms of getting glass to support all this growth when we think about 2022?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Yes. The -- starting with aluminum, Phil, we obviously had a pretty nice program in place that helped us out in 2021. As we head into 2022, we are putting in some coverage as we speak. The aluminum has dipped in the last couple of weeks that has given us some opportunity. So I would say we are in a better position today relative to where we were, call it, three or four months ago for 2022, but it is still going to be one of the meaningful impacts that our price increase is designed to overcome. In terms of the other items like vinyl, obviously, those vinyl costs have similarly been affected. They don't quite have the same market-based pricing structure that aluminum does. So -- and accordingly, it's not really hedgeable. But we have seen an increase in vinyl costs and resin costs that has affected us, basically, not to the same degree as aluminum but both glass and vinyl and even hardware have gone up in pricing for us. And I think as we head into next year, some of those are more a little bit more contractual. Some of them we can negotiate and some of those opportunities to get extra supply and vendors who are willing to and wanting to work with us as a way to cement in some of that supply helps us on the pricing side as well. So aluminum tends to be the one that is the one that we have to focus on the most, but we definitely are seeing impacts in the other categories as well.

Phil Ng -- Jeffries -- Analyst

Okay, thanks a lot guys.

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Thanks.

Operator

Thank you. And the next question is from Ken Zener of KeyBanc. Please go ahead.

Ken Zener -- KeyBanc -- Analyst

Good morning everybody.

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Good morning Ken.

Ken Zener -- KeyBanc -- Analyst

You guys are really continuing to expand your footprint out of the southeast. If you think about the Western Windows three years ago coming on, I guess.

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Yes, end of 2018.

Ken Zener -- KeyBanc -- Analyst

Yes. And that was metal, more new. And it's a big deal, obviously, getting squarely into California. Can you talk about, I guess -- and I apologize, I was just trying to see the last transcript. But was Anlin in your prior guidance for FY '21?

Jeffrey T. Jackson -- President and Chief Executive Officer

No. It was not, Ken. Yes, that was last guidance we gave us in August, and we announced the acquisition in September. So it was not.

Ken Zener -- KeyBanc -- Analyst

Yes. So I think you guys talked about 8.5 times pre synergies on $126 million. So can you talk about -- does -- the guidance stayed the same, you guys acquired, it's not that much. I assume there's some initial cost headwinds, etc. But could you maybe just talk about how you think that vinyl is affecting your cost curve versus the aluminum out West? And really in terms of synergies, how the Anlin plant and the Phoenix plant are working together because you guys are clearly rolling out a lot of M&A out West. And I'm just trying to understand your synergy concept between the plants? Thank you.

Jeffrey T. Jackson -- President and Chief Executive Officer

Yes. Great questions. If you look at this year, it's not going to impact -- you're talking a couple of months worth of Anlin results. If anything, I guess, help us offset -- from a sales standpoint, offset the traditional Thanksgiving and Christmas slowdowns. Now we're going to add a little bit of Anlin sales for a couple of months. So that will be positive. From a cost standpoint, it's actually from a vinyl window standpoint, they're considered a medium to high-end vinyl window, and their margins are, at a minimum, mid-teens, we've seen increases from there, actually. So we were able to get some good cost synergies also in the form of supply, mainly around glass and vinyl. There's been some good cost synergies. So even though we paid 8.5 time pre, actually the number is something south of that. If you look at marrying the two brands together, we really are going to marry the channel. So for instance, I've mentioned earlier, getting that aluminum product of Western that indoor/outdoor living into that R&R channel. That's going to be key and contribute to, we think, tremendous growth, getting Anlin's vinyl window ultimately into that new construction arena. If you remember, Western has a vinyl sliding glass door, Western does not have a vinyl window. So we had to third-party that out with a joint agreement with another vinyl window supplier for the new construction bills we do out west. So this will, ultimately, once we recomputed that window somewhat, it will ultimately allow us to have a complete package for the new home construction market. And I'll remind Western's production builders is up 51% in the quarter. So we are seeing tremendous growth there, and we think we've now got a balanced portfolio between aluminum and vinyl, and now a complete product portfolio within those two framings, within both aluminum and vinyl. And we're in both R&R and new construction markets now. We think Anlin was a win-win, basically, and it will lead to tremendous growth for us in 2022. In terms of margins in vinyl, look, like I said earlier, Anlin is about a mid-teens to higher EBITDA player. And I think we'll be able to leverage PGT's vinyl platform as well to maybe even get some more synergies as we continue to expand and grow the brands.

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Hey Jeff, I just want to add to that, that I know Anlin is set up to get some margin accretion just through additional volume. And they definitely have capacity to grow with their existing footprint, which would help them start to improve their margins just on the absorption side.

Jeffrey T. Jackson -- President and Chief Executive Officer

That's a very good point. Anlin's is only operating really one shift right now, and it has capacity to add two shift. And it has capacity to add a full second shift. They may not -- they have a skeleton crews at nights for basically cleanup, if you will, but they do not have two functioning shifts, just one. So there's lots of opportunity for capacity expansion.

Ken Zener -- KeyBanc -- Analyst

Yes. Very full answer there, Jeff. Just drilling down one more level or two, if you don't mind. Vinyl windows out of Clovis, vinyl doors out of Phoenix. I mean, is that -- you're going to have two different shipments to clients? Is that how you're thinking about that execution? And does that vinyl synergy, if you will, between the two manufacturing plants. Does this supersede what you had thought to be kind of a retail -- you're thinking about retail pre-COVID. And I don't think California is going to close down, by the way, again. That was my second question.

Jeffrey T. Jackson -- President and Chief Executive Officer

Okay. Yes. For now, yes, they will be cross-docking because of our doors being made -- vinyl doors being made at Western. In the future, not-so-distant future, we will be making those doors also in Anlin. Like I said, we got plenty of capacity to be able to do that, to add a line within the Anlin footprint. And then also, obviously, another shift, if needed, as demand increases. So that's kind of the goal. Long-term is to be able to make more of Western vinyl products in Anlin and have dual capabilities for that line.

Ken Zener -- KeyBanc -- Analyst

Thank you.

Operator

Thank you. And our next question will come from Michael Rehaut of J.P. Morgan. Please go ahead.

Margaret Wellborn -- J.P. Morgan -- Analyst

Hi, this is Maggie on for Mike. Thanks for taking my questions. First, just on gross margins during the quarter. Can you quantify the impact that the labor and raw material headwinds had and then also the contribution from price?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Yes, I can. For the most part, I mentioned we were down 180 bps. We actually saw year-over-year improvement in material costs because of basically some mix factors and also some growth that we saw in some of the other high-margin items and some scrap improvements like out in Western. But -- so the pricing impact was not as robust because it came in September. So most of that improvement is coming from mix and scrap. But we did see basically a 200 bps negative on the labor side as we are still in the midst of July and August, training the employees, hiring employees and some of the increases that we had in wages to compete before the pricing kicked in. So basically, I guess, the answer I would say is material was a little bit better and most of the job came on the labor side.

Jeffrey T. Jackson -- President and Chief Executive Officer

Yes. And I just want to add to that. It did come on the labor side, but as Brad alluded, we are training those -- all the employees who made an investment in the second quarter higher. And we have seen improvement as the quarter went on. So being -- September being a 16.5% EBITDA quarter for us. So we have improved, and we will continue to see that improvement into the fourth quarter.

Margaret Wellborn -- J.P. Morgan -- Analyst

Got it. Thanks. And then, second, with the Anlin acquisition, it seems that some of the growth focus has shifted to the west. But within the southeast over medium or longer term time frame, can you talk about the growth opportunities that you're still seeing there, particularly as you start to see the benefits of increasing your capacity? Are there any markets or channels or products where you see particular opportunity for growth or even any internal targets for annual New South store openings or markets that you're looking at for '22 there?

Jeffrey T. Jackson -- President and Chief Executive Officer

Yes. I mean, I'll start with New South since that's where you ended. I mean, New South, we saw tremendous growth. Sales and use for the New South retail were up 92%. And like I mentioned in my comments, we've now opened -- we have seven legacy stores, and they produced $120 million of sales, roughly an 18% EBITDA margin. So we love that trend. All right. We love what we've been able to do with that brand and the marketing surrounding it. So much so we're continuing to open up new stores. They won't necessarily be in Florida, obviously, with our 2020 stores being in Charleston, Pensacola, Houston. 2021, we're looking into New Orleans. We signed a lease there, Raleigh and Charlotte. And then, Atlanta is close on the heels, 2021, probably 2022. So we feel that the expansion of these stores is going to continue to grow our business from a brand standpoint, both in the southeast and feel very strong about it. And we're actually going to open up some more stores in Texas. I think we opened up Houston, if you recall, in 2020, but our plans are to continue to open up stores in the major areas within the Texas market. The idea is you open up those stores and then you advertise very heavily in those markets and you leverage that advertising among all the stores. And like I said, it's working very well in our legacy stores. In terms of organic growth here, just in the, call it, the legacy brands, we are experiencing growth, especially if you look at both CGI brands and PGT brands, it's been more of an operational execution issue. It's not a growth challenge. We've got, as you know, our backlog, even today. Our backlog as of today is approximately $390 million. And so, we are experiencing great growth in that total company -- but we are experiencing great growth across brands. And with the added capacity and better execution, we think they'll fuel that growth into 2022.

Margaret Wellborn -- J.P. Morgan -- Analyst

Got it. Thank you.

Operator

Thank you.

[Operator Instructions]

Our next question comes from Keith Hughes from Truist. Please go ahead.

Keith Hughes -- Truist -- Analyst

You had talked about gross margin sequential improvement, I think you're meaning from the third to the fourth. As you look into next year, given some of the pricing, do you think that gross margin would improve even more as we get to the first half of the year?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

I think that's a true statement, Keith, because we do have the price increases that we've announced plus the price increase that we just announced. I would say our operations are becoming more efficient. So as sales goes up, we'll start to get some nice leverage there. So I do think you'll see some sequential margin improvement that continues on the Q1 and Q2 next year. Obviously, we'll keep an eye on the aluminum market and some of the things that are a little bit out of our control at this point based upon where they're at, I think we're set up well for margin improvement in the first half of next year.

Keith Hughes -- Truist -- Analyst

Okay, thank you.

Operator

Thank you. Next question is a follow-up from Ken Zener from KeyBanc. Please go ahead.

Ken Zener -- KeyBanc -- Analyst

Hey guys, just a follow-up on that prior question. When you're talking about gross margin sequentially, Brad, are we talking 4Q to 1Q? Or were you saying year-over-year?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Yes. Ken, I was talking about sequentially. As we've been making the improvements and capitalizing on investments that we've made and most of our thought processes have been again in that sequential improvement that we're looking for.

Ken Zener -- KeyBanc -- Analyst

Can you talk to -- you haven't given an explicit number for 4Q. Did you for gross margin?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

I did not. I mentioned that from an EBITDA perspective, we would be up 150 bps sequentially over Q3. I can just -- I guess, potentially anticipate your question, Ken, I think most of that improvement will come from gross margin.

Ken Zener -- KeyBanc -- Analyst

It is your anticipation. Let me ask you this then, because if I look at 2000, let's say, '17, 2018, first half, first second half without me trying to put details to those years. Gross margins, traditionally for your business. And I don't know if this was because of the Florida versus the West, were lower in the first half of the year versus the second half of the year, generally speaking. Is that a seasonal pattern that has changed in your business given the expansion out West? Or is that a -- whatever created that dynamic, is that a reasonable pattern to assume in FY '22?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Some of that was, let's call it, seasonal, if you will. First quarter has traditionally historically started off more slow than it has and then subsequently progressed throughout the year. But we don't see that right now. Given the backlog we're sitting on, as we continue to improve our operations, we think we're going to change that historical, what you're referring to, Ken, as a lower margin -- gross margin in that first quarter. And you've got to also account Western. Western's margins are significantly better than 2017 what we had in 2018, we bought that in August. So what you really had them there either. So you got to put Western in there, too. Their gross margins are significantly more. And also New South, they have -- their gross margins are significantly more. So the mix has changed historically. And given the robust backlog we're sitting on, we think we're going to leverage good in the first quarter, whereas in the past, maybe it was a little slower coming into the January time frame. Once you get through IBF, you usually started kicking in. So we think it's going to be robust at the gate.

Ken Zener -- KeyBanc -- Analyst

Yes. And if you don't mind, I just want to get this out there. It seems like if you're up 150 [Phonetic] EBITDA, Brad, in the fourth quarter, you're seeing favorable price, favorable gross margin trends, and we think about the world sequentially because of these acquisitions and the absence of seasonality to some extent. It seems like that 150 number you talked about in 4Q could easily be construed as the expansion, perhaps, rate next year or would people be too misunderstanding some form of SG&A to come to that conclusion?

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

No. I mean, I think as EBITDA margins would improve because of SG&A absorption, like you mentioned, as we increase our sales. So I just -- I mean, I think it's a pretty decent starting point going into 2022. And it's generally our policy and we typically give guidance around 2022 in February, which we'll do again this time and we've had a chance to see Anlin for a few months and be able to give a more thoughtful guidance going into next year for 2022 at that call. But yes, I mean, we certainly will have SG&A improvement as well. We've talked in calls in the past about distribution as one of the investment points and Jeff mentioned the warehouse is one of the investment points as well. Both typically tend to be SG&A costs. So the opportunity for improvement is in that category as well going into next year.

Ken Zener -- KeyBanc -- Analyst

Thank you, guys, for your patience.

Operator

Thank you. This concludes our question-and-answer session. I'll go back to Mr. Brad West for closing remarks. Please go ahead.

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Thank you. And first, I want to thank all the veterans out there on this Veterans Day, and thank you for your service. We look forward to speaking with everyone next quarter. Take care.

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Brad West -- Interim Chief Financial Officer & Senior Vice President of Corporate Development and Treasurer

Jeffrey T. Jackson -- President and Chief Executive Officer

Phil Ng -- Jeffries -- Analyst

Ken Zener -- KeyBanc -- Analyst

Margaret Wellborn -- J.P. Morgan -- Analyst

Keith Hughes -- Truist -- Analyst

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