PGT Innovations Inc (PGTI) 2020 Q4 法說會逐字稿

Good morning, and welcome to PGT Innovations Fourth Quarter and Full Year 2020 Earnings Conference Call. (Operator Instructions) Please note, today's event is being recorded. I'd now like to turn the conference over to PGT Innovation's Interim Chief Financial Officer, Brad West. Please go ahead, sir.

Thank you, and good morning, and welcome to PGT Innovation's Fourth Quarter and Year-end 2020 Investor Conference Call. On the Investors section of the company's website, you will find the earnings press release with our fourth quarter and full year 2020 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 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 related to forward-looking statements. Today's remarks contain forward-looking statements, including statements about our 2021 financial performance outlook and the possible impact of the COVID-19 pandemic on our business going forward.

Those statements involve risks, uncertainties and other factors that could cause actual results to differ materially. Additionally, on Slide 3, you should also note that we report results using non-GAAP financial measures, which we believe provide 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'm joined on this morning's call by Jeff Jackson, PGT Innovation's CEO and President. After our prepared remarks, we will take your questions. I will now hand the call over to Jeff for opening remarks.

Thank you, Brad, and good morning, everyone, and thank you for joining us on today's call. I'm very proud of what our team at PGT Innovations accomplished in 2020 despite unprecedented challenges caused by the COVID-19 pandemic. Our solid fourth quarter results topped off an extraordinary year for 2020. We grew both organically, taking market share and by key acquisitions.

We ended our year with a record sales number of $883 million and adjusted EBITDA of $150 million, driving our net leverage to 2.1%. We accomplished all of this while keeping the safety of our over 3,000 team members at the forefront of our actions. I'm humbled by their dedication to continue to deliver quality products and service to our dealer partners.

Turning to Slide 4. I will begin with key highlights for the quarter. We achieved strong sales growth, illustrating the strength of demand in the markets we currently serve and our ability to service that demand. We continued our history of innovation in product designs and investing in advertising and marketing initiatives. We did all this while maintaining our focus on protecting the health and safety of our employees and their families, our customers and our communities.

Last month, we completed the purchase of a 75% ownership stake in ECO Enterprises, which will help us achieve our strategic objectives as we look forward to continued profitable growth.

We financed this transaction at an attractive rate of capital while well within our targeted leverage ratios. We achieved solid fourth quarter and full year results despite impact of the pandemic, and strong demand for our products continued through year-end and into 2021.

In the fourth quarter, sales improved 27% versus the fourth quarter of last year driven by strong demand in our Southeast business unit and sales contribution from NewSouth, which we acquired in February 2020. Overall legacy organic growth, excluding NewSouth, was 11%, reflecting continued strength for our products in the Florida markets and other Southeastern coastal states.

We are well positioned for continued growth as we most recently announced an exclusive agreement with The Villages in North Florida. The Villages is the largest real estate development in the U.S. and has over 125,000 homes. This deal is expected to increase our market share in North Central Florida as they are currently adding over 3,000 homes a year.

There are several factors that drove the demand in 2020, and we have seen these trends continue into 2021. We are seeing strong order entry growth, which has driven backlog to a record high of $200 million as of the end of 2020. We are optimistic this growth in order entry will continue throughout 2021 as the COVID vaccine is rolled out and the markets fully reopened for business. As most folks now spend considerably more time at home and many have more disposable incomes because they are spending less on travel, leisure, dining out and other costs, COVID has driven higher investment in home upgrades. We expect the trend of working from home and the shift in disposable income trends will continue for much of 2021.

Additionally, we'll continue to see the benefit from the U.S. population shift from colder, high tax climates to more favorable regions in our footprint, including Florida, Arizona and Texas.

While we did not have a direct hit on our core Florida market, we believe we also benefited from a record hurricane season. This past season witnessed increase in media coverage, which increased consumer awareness of the need for our NPAT products. Our investments in marketing also continue to play a positive impact on our growth. To further increase both awareness and demand, we apply data-driven approach to generate leads and use digital marketing to capture the at-home audience during 2020.

We also leveraged partnerships with the leaders in the building materials space across our broad network of dealers. We can attribute growing demand for our products to our portfolio of well-known and trusted brands, which meet end customer needs.

The sales contribution from NewSouth was $28 million in the fourth quarter of 2020, driven by strong growth in the direct-to-consumer Florida residential market. As a reminder, we acquired NewSouth in February 1, 2020. Integration of NewSouth into our operations has resulted in a record level of production capacity, and we expect continued future growth from NewSouth existing retail locations and additional store expansion outside of Florida in 2021. We opened 3 new showrooms in 2020 and expect to open 3 additional showrooms this year. Since acquiring NewSouth, we've been further developing our presence in the direct-to-consumer channel in Florida and in other coastal states.

We have also been growing and developing our internal creative teams to further enhance our ability to drive product and brand awareness through a mix of traditional advertising and digital channels. This continued marketing efforts and additional NewSouth store openings in 2021 will enhance our ability to capture market share.

We drove solid gross profit improvement of 40% driven by leverage from strong sales growth, accretion from NewSouth and ongoing investments in operational efficiencies and improvements in direct labor and distribution at our Western Window Systems facility this year.

Adjusted EBITDA margins for the company increased 110 basis points. This improvement was the result of excellent operational performance across all our facilities and by leveraging operational efficiencies achieved with increased sales and diligent cost control.

Looking ahead into 2021, while we still see margin pressures in our first quarter similar to our fourth quarter, we expect full year margins to again exceed prior year comparisons due to continued organic sales growth, opening new markets and plans to exit less profitable lines of business at NewSouth.

Now turning to Slide 5. While 2020 had its share of challenges, we continue to focus on our framework of profitable growth and execute our strategic plan to create long-term value for shareholders while servicing our customers and communities. Our first pillar is maintaining our focus on customer-centric innovation by bringing products to market that offer the performance and value our customers desire.

We continue to improve upon our innovative market strategies that have enabled us to gain insight into further demand that is now driving our sales in the R&R market as consumers are spending more times in their homes.

Our second pillar of attracting and retaining talent is particularly relevant in the current labor market where the stresses of COVID-19 pandemic and other factors have increased hiring challenges across many industries throughout the U.S. Our long-term success depends on attracting and retaining dedicated employees with the right skill set, and we work hard to maintain a safe workplace and culture where employees know they're appreciated and rewarded.

Our third pillar is investing in the business to grow our manufacturing capabilities, continually improve operations, lower operating cost, maintain high-quality levels and meet the demand increases over the long term.

Over the past several quarters, we have focused on operational improvements at our Western Window Systems facility. This focus puts us in a good position to take advantage of improving demand in the markets we serve by Western as 2021 demand is up 17% for the first 7 weeks. We are also deploying systems and best practices in our newly acquired operations at NewSouth and ECO enterprises, which leads me to our fourth pillar. Allocating free cash flow to support profitable growth, which could come in the form of acquisitions as we recently have done, investing and growing the business or paying down debt, all with the end goal of driving shareholder value and consistent with our past execution.

Turning to Slide 6. I'm excited to say, last month, we closed the acquisition of 75% ownership in Florida-based ECO Windows Systems and its related companies, which we are calling ECO Enterprises. We are very excited to have the team from ECO join PGT Innovations as we believe this transaction will accomplish several objectives.

First, the ECO acquisition is expected to allow us to expand and diversify our product portfolio lines in the high-growth commercial market. The long-term secular trends behind the strong growth in Florida's multifamily market are expected to continue. And together, we are better able to expand our presence in that market.

Second, ECO produces all its value-added glass in-house and has significant production capacity. Sourcing glass is an ongoing challenge in our industry. And by vertically integrating more of our glass supply, we expect to lower our material costs; incrementally improve our production capacity; and over the long term, enhance visibility into and control of the supply chain.

Third, ECO extends our residential footprint in Southern Florida with a highly incremental dealer network that our legacy business generally has not served, and we believe ECO's aluminum impact-resistant product line is very complementary to our existing product portfolio.

So in summary, ECO is a very good strategic fit for us, and we expect the acquisition to be accretive in 2021.

Let's discuss backlog. Excluding NewSouth, our total backlog increased by 131% versus the prior year driven primarily by strong order entry in our Southeast business unit, production capacity impacts from social distancing and other measures implemented to protect the health and safety of our employees and glass and other supply chain disruptions related to the COVID-19 pandemic. Backlog has been impacted by some extension of our lead times as our operations teams work to meet rising demand. To ramp up production capacity of our Florida-based operations to meet the robust demand and to address the growing backlog, we've recently implemented a 7-day schedule to continue to ramp production capacity. But to be clear, we will continue to do everything in our power to promote our employees' health, and safety is our top priority.

We expect to incrementally increase production into 2021 and address the strong organic sales growth we anticipate in Florida and return the current robust backlog to normal levels later this year. Looking forward, we expect the momentum to continue. We believe 2021 will continue a strong new construction market and a robust repair and remodeling market.

We have already begun to see sequential improvements in sales in our Western Windows Systems core markets, including California, and our pipeline into our Southeastern markets continues to grow.

We expect continued benefits from our operational improvements, including our efforts to reduce shipping expenses, increase capacity and expand into more vertical integration within our supply chain that we are currently implementing.

To wrap up, while 2021 was certainly a challenging year, it also highlighted our company's earnings power and the strength of our core markets. Throughout these uncertain times, our employees have shown a consistent determination to support our customers, communities and each other, which help make our 2020 results possible.

In closing, I would like to thank our employees for their extraordinary efforts. We look forward to delivering growth and servicing our customers in the years ahead.

Now with that, I'll turn the call back over to Brad to review the results in greater detail. Brad?

Thank you, Jeff. Turning to Slide 7. For the quarter, we reported net sales of $222 million. To break this down further, sales rose 16% versus the prior year quarter in our legacy Southeast business unit, primarily consisting of Florida. In our Western business unit, sales decreased 11% versus the prior year due to pandemic-related market softness in California and the sales lift from several large commercial projects in the fourth quarter 2019. However, exiting the quarter, we saw year-over-year growth in Western's orders, and we have seen that growth trend continue into 2021.

Looking at fourth quarter sales by channel. In repair and remodel, we saw sales growth of 14% year-over-year excluding NewSouth, and we expect continued sales growth in the R&R channel in the first half of 2021.

In the new construction channel, organic sales for the fourth quarter were 7% higher than the prior year period. This was largely driven by legacy Florida sales, where Q4 sales were up 16% as compared to the year ago period due in part to our improved sales and marketing strategy.

Selling, general and administrative expenses for the fourth quarter increased by roughly $16 million compared to the prior year quarter, primarily reflecting the addition of NewSouth SG&A following its acquisition on February 1, 2020. Excluding NewSouth, SG&A improved by 10 basis points versus the prior year as leverage from sales growth more than offset incremental investments in advertising and marketing.

Direct labor as a percent of sales decreased by approximately 30 basis points as we continue to benefit from investments in operational enhancements and efficiencies at Western. We also realized savings from improvements to reporting and dashboarding systems, which boosted efficiencies in labor resources and production line workflows.

Additionally, we are on track to achieve projected cost savings at an annualized run rate of approximately $3.5 million as a result of the closure of our Orlando plant and the consolidation of its operations into our Venice and Tampa manufacturing facilities.

Gross profit for the quarter was $79 million, a 40% increase, reflecting increased sales and reduced manufacturing costs. Adjusted EBITDA for the quarter increased 37% to $33 million compared to an adjusted EBITDA of $24 million for the prior year quarter.

Our effective tax rate for the quarter came in at 20%. We reported adjusted net income of $11 million or $0.18 per diluted share in the fourth quarter of 2020 compared to $6 million or $0.10 per diluted share in the fourth quarter of 2019.

We are always striving to better manage costs while balancing our goal of running lean operations with the need to provide a high level of customer service, including reasonable lead times. Our backlog provides a degree of visibility, so we are constantly monitoring order entries and evaluating sales trends. While we are currently working toward expanding production, we expect to maintain the flexibility to manage our cost structure in the event our demand outlook changes.

Turning now to Slide 8. For the full year, we reported sales of $883 million, an 18% increase from full year 2019. This included $94 million of sales contribution from NewSouth. Organic sales, excluding NewSouth, were up 6% driven by a 9% increase in our legacy Southeast business, which is offset in part by 6% decrease in full year sales in our Western business.

Gross margin for 2020 grew to 36%, primarily as a result of operational efficiencies and leverage across our portfolio from Western Window Systems, along with the accretion from NewSouth. Adjusted EBITDA for the year was $150 million or 17.0% of sales. Adjusted earnings per diluted share was $0.97 for 2020 compared to $0.82 in the prior year. Additionally, while not included in PGT Innovations results, ECO posted a strong year in 2020, including similar strong sales growth and finishing the year with sales of approximately $85 million.

Turning now to our balance sheet. We ended the year with net debt of $319 million. Our only significant near-term debt maturity is our term loan of $54 million due in late 2022. As of year-end, we had a total liquidity of $176 million, including a cash balance of $100 million and $76 million of unused capacity on our revolver. Subsequent to the year-end, we issued $60 million of 6.75% senior notes due in 2026. This debt was issued at a premium of 105.5. Our pro forma net debt to trailing 12-month adjusted EBITDA ratio as of the full year 2020 was approximately 2.5x.

Next, on Slide 10, we show our historical net debt and leverage ratio to highlight our track record of deleveraging following the completion of acquisitions. As you review Slide 11, I would like to discuss PGT Innovation's capital allocation priorities. One important priority is to find internal investment opportunities and projects we expect to drive margin growth by reducing expenses. We also look for opportunities to increase revenues whether that is by product enhancements or higher production.

Another important priority is our commitment to maintaining a strong balance sheet and a conservative capital structure by paying down debt after acquisitions. Our goal generally is to maintain a conservative leverage profile within a target range of 2.0 to 3.0x net debt-to-EBITDA absent any large acquisitions.

Finally, we use capital for strategic acquisitions that are expected to be accretive, generate strong returns or allow us to expand into new regions, channels or products. We believe that our recent NewSouth and ECO acquisitions met these criteria, and we will continue to evaluate other possible acquisition opportunities as part of our strategic plan.

Moving on to Slide 12. For full year 2021 guidance, we expect net sales in the range of $1 billion to $1.075 billion, an adjusted EBITDA of $175 million to $194 million. This guidance includes a full year of the contributions of NewSouth and a partial year period estimate for ECO, which closed on February 1.

For your reference, we have included additional modeling assumptions on the left-hand column of Slide 12 that are embedded in our 2021 guidance estimates, and they can assist you with your calculation of our estimated results.

Let me also update you on our aluminum coverage program. As of today, we have contracted approximately 65% of our estimated aluminum needs for 2021. Our current coverage inclusive of Midwest premium is $0.94 per pound, whereas current market pricing is near $1.14. We have seen a steady rise in aluminum prices following a period of depressed pricing that was due in part to the COVID pandemic. Our coverage program helps to mitigate these aluminum cost pressures. Otherwise, we are not currently seeing any meaningful inflationary pressure on material costs.

I'll conclude with a summary of why I'm excited about the future of PGT Innovations and how we believe we can create long-term value for our shareholders.

We are a national leader in growing categories with strong brands, which have been further bolstered by recent acquisitions. We have a history of delivering innovative products, and we intend to maintain our industry leadership through R&D, making the right acquisitions and hiring and retaining the best talent.

We have significantly improved our operational efficiencies with a continuous improvement mindset that can help us drive long-term margin expansion. We are striving to execute a comprehensive strategy to create long-term value for our shareholders and customers. And finally, we believe our outstanding product portfolio will help us continue growing profitably.

At this time, let us begin the Q&A session.

(Operator Instructions) Today's first question comes from Phil Ng with Jefferies.

This is Maggie on for Phil. Yes, I just want to just start on the full year guide. I guess backing out ECO and a month or so of NewSouth, I'm getting to kind of that mid to high single-digit organic growth. Can you talk about the different assumptions baked in there between the segments and maybe the end markets?

Sure. Yes. And that math makes sense. Really, if you look at Western, which is experiencing strong organic growth, as I've mentioned in my comments, year-to-date up 17% so far. And also PGT, we're definitely up here at our local Venice facility in our Florida-based brands. Our backlog actually has increased to $250 million as of today. So we are experiencing strong organic growth.

That mix is probably more slated to the R&R -- I mean, to the new construction market, which can have some margin impact to a certain degree. But if you look across our brands, we do see that upper growth that you suggest if you back out the acquisitions. And we're pretty comfortable in what we're seeing so far.

Okay. And just to clarify, that 17% growth you mentioned in Western, is that order rates or sales?

That's order rate at this point. But like Jeff mentioned, the backlog is strong across all of our portfolio of brands, NewSouth included. So our confidence in their growth comes from very strong demand.

Right. Right. And then the past few quarters, you've talked about some of those bottlenecks extending lead times. And that's definitely been a topic of discussion across the industry. But how are you thinking about the timing of some of those labor and material bottlenecks easing and getting back to more normalized lead times?

Well, as you look across, again, our organization, we continue to have that ebb and flow from COVID impact our operational efficiencies. We continue to do what's right on the line, doing the social distancing, spreading out. And that's limited our capacities to a certain degree. But demand, like Brad said, demand is up strong 30% year-over-year so far this year. And that -- we see that trend kind of continuing.

So those -- COVID has presented challenges here at PGT. It's also presented challenges at our suppliers. Supplier performance in Q4 was similar to that of Q3. I'm hoping that's going to improve in Q1. We've already seen some glass supply improvements in Q1. They have some ways to go but definitely have made an improvement in their trend. But many of our critical suppliers continue to set labor constraints. Surging demand across the industry is the main factor of their slow to delivery or their performance to us, and we've even had some allocate capacities.

So what we're doing to kind of combat that, if you will, if you look at like glass, for instance, glass is about 40% of our direct material spend. We brought on ECO, and we think the glass capacity we're adding internally via vertical integration is going to help eliminate some of our needs there. And if you look at, say, aluminum, which is about, call it, 30% of direct materials, we've added some additional extruders. We've onboarded some additional extruders to try to make up any allocation issues or any shortfalls there.

So we're looking across our supply chain to add -- onboard more support to it. And obviously, we're looking, and as we demonstrated, at vertical integration to try to shore up some of our other needs in that supply chain itself. So we feel that will have benefit definitely as we move into 2021.

Yes. And I would add that generally speaking, we're making a lot of adjustments as we try to navigate this COVID situation. But I would also add to the fact that, just generally speaking, we feel that demand is increasing for products in Florida for impact-resistant products. A lot of these things are just general long-term increases in capacity to support what we think will be continued growth, including adding some vinyl manufacturing capacity because vinyl growth has been very, very strong for us. So these are all things that we're doing to be able to keep up with the demand.

Our next question today comes from Josh Wilson at Raymond James.

First, on the topic of the backlog, could you give us a sense of where your lead times stand today versus last quarter and versus what you would call normal?

Yes. That's going to change based off location. Western is normal lead times. There are 2 weeks for their corporate builder program, and their custom is anywhere from 6 to 10 depending on the product ordered. So Western is actually, from an operational standpoint, in line.

It's really the lead times have extended here in the Venice location, and mainly just because of the sheer demand. We onboarded a lot of new corporate builders. And as I mentioned, we signed up The Villages, which is a significant win for us.

And so as a result, we've -- Brad alluded to earlier, we're adding -- currently adding vinyl capacity. We've got equipment on order. There's been some extended lead times on that equipment, quite frankly, as the industry in general is experiencing that. But we do have plans in place to increase capacity, especially on our vinyl lines. But we're literally going to move our on-site warehouse.

For those who have been here at PGT, you know we store all our finished goods here in the center of the manufacturing facility. We're going to turn that into production space. And you'll see that change happen over the next, I'd say, call it, 2 quarters as we extend our warehousing. We'll have a warehouse on the East Coast by April, and we'll start shipping finished goods directly from the line into that warehouse, and we'll take that warehouse space, and we're going to start adding capacity.

So those are some of the things we're doing to improve those lead times. But lead times here in Venice, I would say, again, depending on what bucket you're in, and we have corporate builders, we have the R&R buckets in different categories even among those buckets. But in general, our lead times are anywhere from 7 to 10 weeks for the corporate builder. And the R&R side can be 15 up to 20 depending on what you're looking at in location and product.

So we are -- like I said, we're not comfortable with those lead times. Backlog is now $250 million, but we are shipping out more product than we ever have out of this facility, and we've got actions in place to continue that ramp-up as we see demand continuing to stay strong.

Got it. And there's a variety of crosscurrents in terms of cost inflation and bringing in the acquisitions. So could you give us a sense of what you're assuming for gross margin year-on-year as the year progresses, how much it may be up or down year-on-year in each of the quarters?

Yes. So Josh, great point there. We add a price increase at the beginning of the year of roughly to 7% to 9%. But because of the lead times that Jeff just mentioned, most of those price increases will not start positively affecting our margins until we get to basically the middle of the second quarter into the back half of the year. So we are expecting to see some margin pressure in the first quarter as we navigate these changes.

Year-over-year, we'll probably be down a good amount, even potentially 200 bps on gross margin. I think we'll make that up in SG&A. So our EBITDA percent will probably be pretty close to in line on the fourth quarter but down year-over-year.

The rest of the year, we will see gross margin improve as the price increase kicks in. And as these changes that Jeff talked about start to kick into place, and that's how we get to the guidance for the full year.

Yes. I'd just add to that. We are comfortable in knowing our EBITDA margins are going to improve year-over-year. We've already -- we've got action plans in place, and we can see that coming. What we have is cost that we hadn't offset by the price increase, quite frankly. And that pricing, like Brad said, starts roughly in June of this year.

Wage inflation, wage pressures, we put in a substantial increase in wages during the fourth quarter. We're probably going to even have some more of that in the first quarter of this year as we fight the labor market and try to add talent -- tenured talent. We feel that the operational efficiencies we've achieved in the past was based off a tenured workforce. And we've been able to deliver substantial improvements in gross margin in the past.

We will get back to that, but we've got to get a stabilized workforce for the demand we're seeing. And that puts pressure on wages. But we will be able to cover those, like Brad said, in pricing later on in the year.

Our next question today comes from Keith Hughes of Truist.

Just want to talk about the acquisition that you just closed a little bit. I know they have a commercial initiative. Can you just talk about how big their business that is? And what's sort of the plan to get that ramped up?

Yes. Keith, the commercial side is not a very big component of ECO at this time. They have a lot of products that are actually approved and developing it currently and then a lot of products that are currently waiting for approval.

So the pipeline of potential robust portfolio on the commercial side is there. We signed a couple of large jobs, quite frankly, over the last several weeks. And we do expect good growth in that commercial -- multifamily commercial segment with ECO. But of the sales of ECO we bought in 2020, small, very small, immaterial piece was commercial. It was mostly residential and it was a different dealer network. As we said, it's a very incremental dealer network to our current one that ECO sells through.

And so the big upside for 2021, the year we're in, is to launch all these products and start landing some good commercial jobs. I think we're in great shape to do.

Okay. And what's your outlook on mix for the year? Is it -- given how strong demand is at this point, are you seeing a shift -- let me ask it this way. We've seen another business as you shift towards the lower end sort of housing, but it's really not your market per se. What is your perspective on mix?

Well, okay, I'm going to let Brad give you the detail numbers. I'm going to give you what's happening. What we're seeing here, especially in Florida, is we're seeing both markets come to a peak. R&R is up 14% for us. New construction is up 16%. And the Florida market itself isn't up that much. So we're taking share, which is a great problem -- opportunity, I should say, to have.

So that mix has been skewed more towards new construction at this point. But as we add capacities to our facility here, as I said earlier, those capacities will be more dedicated to the R&R business. So I think you'll see that mix shift during 2021 back to more R&R -- more even between R&R and new construction. But right now, yes, new construction has been more the dominant growth and more of the dominant mix as we speak.

For the full year of 2020, new construction was 46%, and R&R was 54%. So we've seen as high as 60% R&R in periods in the past. We've seen 50-50 when you go back even before the downturn of 2008. But I will say that we've seen very meaningful growth in both sectors.

And our opportunity to grow is in both sectors, and the acquisition of -- the acquisition of NewSouth is an R&R play, right? And then our Venice facility and some of our CGI brands have been focused some on the new construction as well. So I think we're set up well to grow on both categories.

So right now, it's hard to predict because we're kind of playing in both markets and doing well in both. So -- but I do know that right now new construction has been very strong and growing faster in the past. Maybe R&R was the stronger of the 2, and now they're both just very strong. And we got to navigate both those channels and that we're set to do well.

Our next question today comes from Michael Rehaut with JPMorgan.

This is Maggie on for Mike. First question is on NewSouth. Obviously, you saw continued pretty strong order growth in 4Q. I was wondering if you could give us an idea of how the 3 new stores that you opened in 2020 are performing versus the existing stores. And also, as you look to 2021, what is the timing on the 3 additional stores that you're planning on opening?

Yes. Maggie, when -- basically, when NewSouth opens up a store, I'd say there's probably roughly a year of getting the marketing in place, getting the sales force in place and really kind of establishing a presence in that space. So I'll answer the second part of your question first. The timing of the new stores in 2021 are basically probably 1 in the second quarter, 1 in the third quarter, 1 in the fourth, something like that. I would not expect to see any meaningful increase in the sales for those stores this year, just because they'll be in their first year.

For the stores that opened last year, we had some good results as we got towards the back half of the year, as you would expect. Some of the stores were affected a little bit by -- obviously, COVID has its impact on any store's ability to open robustly. But our store in Pensacola started seeing some nice demand towards the end of the year. Our store in Charleston, which was the first opened, saw some really nice demand at the end of the year. And then Houston was the last store to open up, is starting to see some nice momentum here in the first quarter this year.

So I guess I would argue that the NewSouth growth that we saw in 2020 was obviously mostly from the legacy stores in the Florida stores. We saw a very strong, meaningful growth across their original stores. And we started seeing some momentum in the new stores in 2020. And I think we'll see even more in 2021 from those stores.

Okay. And second, another question on ECO. As you think about its growth, could you talk about the potential to expand ECO through the rest of your Southeastern footprint, maybe outside of just the Southern Florida market, where it's stronger right now and the other end markets kind of throughout the rest of your footprint?

Yes. I mean we look at ECO in several different ways. One, the commercial side of the business. We've got to develop that more. Obviously, I mentioned the various products that are going to be coming out, some already out, some in the pipeline. And we've got to develop relationships in both from the install as well. So that whole piece can be leveraged outside of Southern Florida. We plan on leveraging the commercial side of the business over the entire state. And we're currently actually bidding projects or in the process of bidding projects in Northern Florida, for instance.

On the residential side, that's going to probably remain a Southern Florida -- South Florida residential window just because of the dealer base its sold through. And there's a lot of growth potential within that dealer base and the population that serves.

And then on the glass side, I mean, that's going to be incredible for us in terms of shoring up supply there on the impact market and on the IG, insulated glass, side as well.

So we kind of view ECO in 3 different buckets. Probably to your question, the most leverageable state-wide would definitely be the commercial. And we think, ultimately, we even can take the commercial outside of the state of Florida.

(Operator Instructions) Today's next question comes from Ken Zener with KeyBanc.

A lot of stuff going on. What strikes me just this ECO glass and [locking] glass capacity, vertical integration, it just brings me back a few years, when new glass was a big part of your strategy in terms of how you communicated around gross margin because cost inflation. If you've got the glass cost down, your gross margin would go up. Is this so small I shouldn't worry about it in terms of the ECO glass? Was that kind of a side comment? Or is this really between the 2 large glass suppliers? Is this really what you see as needed given where that high fixed cost business is supplied today?

No. Ken, great question. I'd say maybe a little bit of both. If you look at the actual adding in this capacity, it's going to be significant for us, especially on the impact side of the equation. We were severely strained with impact glass. I don't want to underestimate that. For the 9 months in 2020, I mean, it was tough. And so to have that ability in-house, to do that yourself if needed is an incredible asset.

Now if you recall, the reason we sold some of our glass equipment back in 2017, we did that because we needed production capacity. We needed production labor, okay? We're still -- we're not adding glass capacity here in Venice. It's in Miami, and Miami is just a different labor market.

So there, we can add production labor, we could add glass labor. It's not as big of an issue. So we view it both geographically strategic as well as long-term benefit to margins.

Fascinating. It's like squeezing a balloon here. Can you maybe talk about, I mean, to the extent you feel comfortable, like what type of capacity within the larger perspective this could help you? Because I mean that really was an interesting dialogue or a narrative in the past. So the fact you're jumping back in, given a wider production footprint where there's more labor capacity. I mean it all makes sense. But is this like 10%, 20%? Or you don't need to give an answer, but I mean, give us a sense of the material input cost or capacity.

It's probably -- in terms of added capacity, it's probably capacity by 50%. We'll be able to basically service CGI out of that facility, the majority of CGI; CGIC, our storefront operations as well as ECO. Now ECO is growing. We didn't have quarterly growth rates yet. We will next quarter. We're going to give more color around ECO. But I can assure you, they're seeing similar trends that we've quoted here for PGT.

So ECO is growing. And this is not what we're in business to do, but they also sell glass to other parties. So that's a piece of it as well. So that can be utilized.

Great. Extruder, my memory was this also gets -- and I apologize to kind of go into these bigger pictures amid all the good execution you're doing. But it's -- I think it's kind of tactic, strategic in the sense that you're a much larger company now. Extruding. You guys, when you redid your whole vinyl, you switched over to, I believe, to a solo supplier on that extrusion that you're buying on your now unique profiles. I hear the word extrusion a couple of times. Could you expand on that? It sounds like when you were saying lines, I wasn't sure -- you haven't bought extruders have you? And what are we seeing in terms of the extrusion profiles? Is there any issue, capacity, pricing issues that you'd like to talk to?

No, I'll speak in general. Brad can comment. We haven't bought any vertically integrated in the extrusion. There's basically 2 types, right, aluminum and vinyl, is where we get our profile. So what we've done because aluminum got squeezed during this whole COVID thing, we've onboarded some more suppliers. It's just as simple as that. We've increased our base of supply options, which is a good thing, okay?

Vinyl, we don't use just one. We've never just used one. Now we do have a majority relationship with a particular vinyl extruder. But Western has a vinyl extruder that they use. NewSouth had one -- has one. We have one. We mean the PGT legacy brands has one. So we have multiple options on the vinyl side as well.

Yes. And just to add, Ken. When I said earlier that we're adding additional vinyl manufacturing capacity, I was referring to capacity to make vinyl windows, not extruding.

Yes. Yes. It would have been like -- interesting. West -- out West, the initiatives you've taken to get into R&R, which is a huge untapped market for you out there, not untapped, but large upside, has -- in '20, you faced right, production windows, which were -- got stock, but highly efficient versus more custom. Could you talk about the initiatives that given COVID to grow that business? I know you guys talked about opening some storefronts as well as where we are on the production transformation of Phoenix to handle production windows versus more customized R&R stuff.

Well, I'll speak in general about some growth initiative, and I'll let Brad comment on any kind of return around in margin and whatnot, which has been incredible. In terms of growing the business, we are trying to expand the R&R presence within our Western brand. And historically, Western has been a new construction platform, having multiple national contracts with Toll Brothers and the like. We're going to expand on that national contract by adding a full product offering as a means to have the whole house package.

We've also opened up Skye Walls, which is a retail store concept targeted to the R&R market, again, targeting to expand in the R&R market. We opened up our first store in Anaheim. We opened up our second store in San Diego. And as California has eased restrictions and come onboard again with business, those stores are starting to experience some good traction. So those are a couple of initiatives that we have going on from a growth sales standpoint. Do you want to comment on the turnaround?

Yes. Yes. So Western really started making some major improvements in their focus and basically on their manufacturing labor and distribution and basically how they got the product to their customers and all that. And what we really saw is over the course of the year, they started making quite a bit of large improvements on their gross margins and EBITDA flow. In fourth quarter alone, the Western business was up 400 bps in direct labor and distribution costs compared to where they were in fourth quarter of last year.

So the Western team did a fantastic job and has made, obviously, a pretty material impact on PGTI as well by doing that. So we're excited about what they're able to do going forward. And obviously, it means they now have the base in which to grow. As they get more demand and things start to recover and return out west, they're in a great position to handle that growth.

Ladies and gentlemen, this concludes the question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Thanks, everyone, for joining us on our call today, and we look forward to talking to you next quarter. Take care.

We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.