PGT Innovations' (PGTI) CEO Rodney Hershberger on Q4 2017 Results - Earnings Call Transcript

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PGT Innovations, Inc. (NYSE:PGTI) Q4 2017 Earnings Conference Call February 20, 2018 8:30 AM ET

Executives

Brad West - SVP and CFO

Jeff Jackson - CEO and President

Analysts

Michael Eisen - RBC Capital Markets

Jeremy Hamblin - Dougherty & Company

Keith Hughes - SunTrust

Operator

Good day and welcome to the PGT Innovations Inc.'s Fourth Quarter 2017 Earnings Conference Call.

All participants will be in a listen-only mode. [Operator instructions] After today's presentation, there will be an opportunity to ask questions. [Operator instructions] Please note this event is being recorded.

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

Brad West

Thank you, Nichole, and good morning everyone. Welcome to PGT Innovations' 2017 fourth quarter and fiscal year conference call. I am Brad West, the company's CFO, and I'm joined today by Jeff Jackson, our CEO and President.

This morning, we are pleased to provide our 2017 fourth quarter and fiscal year results as well as an outlook for 2018. We also have posted a presentation on the quarterly results to the Investor Relations portion of our website.

Before we begin our formal comments, I'd like to remind you that today's remarks contain forward-looking statements that fall within the meaning of the Private Securities Litigation Reform Act of 1995, including our 2018 financial performance outlook. These remarks involve risks, uncertainties and other factors that could cause actual results to differ materially. These factors are detailed in the company's earnings press release and in the Risk Factors section of our 2016 annual report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statements.

You should also note that we'll report our results using non-GAAP measures, which we believe provide additional information for investors to help facilitate the comparison of past and present performance. A reconciliation of these non-GAAP measures to the GAAP counterparts is available in the Investor Relations section of our website.

Now, I'll turn the call over to our CEO, Jeff Jackson. Jeff?

Jeff Jackson

Thank you, Brad, and good morning everyone. Thanks for joining us for today's call.

PGT Innovations delivered another solid year of growth and execution as we finished 2017 with a strong fourth quarter. I'm incredibly proud of our team’s accomplishments.

We achieved impressive results, captured increased demand and grew our market share gaining momentum each month after hurricane Irma hit in September. Irma was a massive hurricane hitting our home state of Florida causing damage and disruption across our entire core market. Reports we have received from homeowners and customers confirm that our industry-leading products performed as promised, protecting life and property against this powerful storm.

This is a testament to our commitment for over 37 years to produce high-quality products that are tested to meet some of the most stringent standards in the nation. For the full year of 2017, we delivered sales of $511 million, adjusted EBITDA of $84.1 million and adjusted earnings per diluted share of $0.61. This reflects sales and adjusted EBITDA growth of more than 11% and EPS growth of more than 15%.

Our adjusted EBITDA margin fell in line with prior year as gains from strong sales and improved operations were partially offset by normalized incentive compensation, brand mix and increased marketing investment of over $1 million made to capture heightened awareness post Irma.

Over the course of the year, our team significantly increased efficiencies at our Venice plant, and our Miami plant produced at its highest output in its history. Both of these improvements allowed us to meet the surge in demand we experienced in the fourth quarter from maintaining our lead times and without an increase in our backlog levels.

As we previously announced, we began the transfer of production of our PGT branded door glass to Cardinal in the fourth quarter. We are pleased this initiative has progressed as planned and is substantially complete with final steps expected to be finished during the first half of 2018. Another major strategic initiative is the construction of our new lease production facility in Miami.

We expect to begin production in this new 330,000 square foot facility by the end of first quarter of 2018, and are excited about the additional production space and flexibility this facility provides us. During the second half of the year, we also saw a return to an inflationary environment in which we experienced margin pressures from rising cost of aluminum, glass, fuel and wages. We were able to offset these pressures with price increases that we announced during the year.

We believe our ability to raise prices while continuing to gain share is a testament to the competitive advantage we have built over our company's entire history. Our [ten-year] brand equity continues to be driven by our team’s relentless focus and our customers and the continuous innovation of industry-leading products, both of which had built a loyal and broad distribution base.

Our 2017 results demonstrate that our teams remain focused on long-term vision and strategic priorities. In 2017, we continued to improve our financial strength by delivering free cash flow of nearly $34 million. This enabled us to prepay $40 million in debt during the year, including a $20 million voluntary payment in the fourth quarter. We have consistently executed on our strategy to delever after acquisitions as shown in our net debt to adjusted EBITDA ratio at the end of 2017 of 2.2 times, down 35% from early 2016.

We ended 2017 with solid liquidity, including cash on hand of $34 million. We believe the strength of our balance sheet demonstrates our ability to make sound strategic capital allocation decisions, provides us with flexibility to support our future operational needs and invest in future growth opportunities.

In the fourth quarter, we delivered sales of $134 million, increasing more than 22% over last year. We believe the initial awareness of this benefit of impact product caused by hurricane Irma and our related marketing investment generating a meaningful boost in sales for the quarter. Feedback from our customers is that our advertising strategy was a success and is driving consumers into their place of business asking specifically for PGTI products. We plan to continue our marketing efforts and expect this will continue to help drive sales growth into 2018.

During the quarter, we also grew our adjusted EBITDA by 41%, which resulted in adjusted EBITDA margin of 17.2% compared to prior year 14.9%. This increase in margins reflects the operational improvements made over the past 12 months, leverage on our additional sales and a mix shift towards the repair and remodeling. Sales into repair and remodeling market was 63% and new construction 37%. These factors also drove adjusted EBITDA growth in the quarter of 80% compared to the fourth quarter of 2016.

In summary, we believe PGT is well-positioned to capture an increased share of heightened demand from impact-resistant products from one of America's strongest markets. Our brand and product positioning remain strong, and we believe the momentum we have built sets us up for continued success in 2018. I'm very proud of our teams continued – to execute against our strategy of profitable growth and disciplined capital allocations.

Now I would like to turn the call over to Brad to discuss the financial results for the fourth quarter of 2017 in more detail, and give the 2018 outlook. Brad?

Brad West

Thank you, Jeff. We reported sales of $134.1 million in the fourth quarter, an increase of 22% compared to last year. We were able to achieve this result through our team’s planning for and response to Irma, which enabled us to satisfy increased post- Irma demand. On Slide 8, we give you a breakdown of net sales for the quarter.

Our increase in overall impact sales of 25% includes increases in sales of our vinyl impact products of 38% and of our aluminum impact products of 20% compared to last year. This growth was driven by solid demand for our vinyl WinGuard products, which grew 43% versus last year. Our vinyl impact growth highlights the shift in our markets towards energy efficient products and our ability to design attractive and innovative windows and doors to meet those needs, including our PGT vinyl WinGuard products.

Since 2014, those vinyl WinGuard products have grown at an annual compound rate of 35%. Now please turn to Slide 9, and I will briefly cover a few income statement items. For the fourth quarter of 2017, our gross profit was up $11.4 million and our gross margin increased 320 basis points versus last year.

Our gross margin benefited from increases due to higher volume, improved operating effectiveness and a favorable mix of sales. Gross margin in our fourth quarter was impacted by WinDoor costs related to changes in senior management and costs associated with transitioning to new glass suppliers for WinDoor. Last year's fourth quarter included product line relocation costs related to planned manufacturing efficiencies strategy and thermoplastic system [glass] start-up costs.

After adjusting for these items, gross margin was 32.5% compared to 29.5% last year, an increase of 300 basis points. With regards to aluminum, we have seen meaningful increases in the per pound market cash price of aluminum since the beginning of the year from $0.87 per pound at the start of 2017 to $1.11 per pound at the end of the year and $1.15 per pound as of today. After considering the effects of our active forward buy programs, this had a negative impact of 70 basis points on our gross margin in the fourth quarter, though as previously mentioned, we increased prices to cover those inflationary costs.

As of today, we are covered for approximately 36% of our estimated needs during the remainder of 2018 at an average delivered price of $1.03 per pound, which compares to $0.97 per pound average price in 2017. Going forward, we may increase our coverage to forward buy contracts or other hedging products as we see fit.

Selling, general and administrative expenses were $26.4 million in the fourth quarter, an increase of $5.6 million from last year. This increase was driven mainly by $2 million of additional accrued incentive compensation costs, $1 million of additional investment in advertising initiatives, $1 million of additional distribution costs due to higher sales, and $400,000 of additional depreciation expense and higher capital spending in recent years. The remaining increase was due to higher costs from higher sales.

2017 stock compensation expense included in SG&A was $1.9 million and our estimate for 2018 for that same stock compensation expense is $2.5 million. Interest expense in the fourth quarter was $5.3 million, slightly higher than last year. During the quarter we made a $20 million voluntary prepayment of borrowings, which resulted in a non-cash write-off of deferred lenders fees and discount of $909,000 as additional interest expense. This charge offsets the savings generated over the prior year from our debt repricing we completed in February 2017, which resulted in a 1 percentage point decrease in the margin portion of the interest rate and lower debt levels from previous repayments.

Depreciation and amortization was $5.2 million compared to $4.2 million last year. Consistent with our expectations, fourth-quarter depreciation and amortization expenses were higher due to higher depreciation and increased capital spending in recent years.

We recorded a tax benefit of $9.1 million in the fourth quarter. This amount includes a non-cash accounting adjustment of a benefit of $12.4 million relating to the effect of the Tax Cuts and Jobs Act on our net deferred tax liability. Excluding this adjustment, our income tax would have been $3.4 million in the fourth quarter at an effective income tax rate of 29.8%. This compares to $1.5 million and 26.2% in the fourth quarter of last year.

Tax expense in the fourth quarter of 2017 has been reduced by $677,000 of excess tax benefits and was reduced by $543,000 in job credits last year in the fourth quarter. Excluding these benefits, our effective tax rate would have been 35.9% in each quarter. Because of the recently enacted Tax Cuts and Jobs Act, which decreases corporate tax rates [indiscernible] section 199 manufacturer’s deduction, we are expecting to have an effective tax rate for 2018 of approximately 26%.

We recorded net income of $20.3 million, or $0.39 per diluted share for the fourth quarter of 2017, versus $4.1 million or $0.08 per diluted share in the fourth quarter of 2016. After adjusting for the impact of the Tax Cuts and Jobs Act, WinDoor management and glass supplier transition costs, and the non-cash write-off of lender fees and discount of voluntary prepayment of debt, as well as some additional Irma recovery costs, adjusted net income for the quarter was $9.4 million or $0.18 per diluted share, which increased from $5.0 million and $0.10 per diluted share last year.

This increase was primarily the result of sales and improved operations in the fourth quarter of 2017 versus last year. Adjusted EBITDA for the fourth quarter was $23.1 million, or a margin of 17.2% compared to EBITDA of $16.3 million or 14.9% last year. Both adjusted net income and adjusted EBITDA were affected by the same factors that benefited gross profit and gross margin, including increases due to higher volume and improved operating effectiveness.

A reconciliation of our non-GAAP financial measures to their GAAP equivalents have been included in our earnings release for your reference. Now please turn to Slide 10, for a discussion of balance sheet items. We ended 2017 with a cash balance of $34.0 million, which decreased $5.2 million from the end of 2016. We did use $40 million of cash during the year to voluntarily prepay debt. We also invested $17.8 million in capital expenditures for the year funded by cash from operations.

Free cash flow for the quarter was nearly $34 million. Our free cash flow in 2017 did benefit from temporary release on estimated tax payments even with those Florida businesses affected by hurricane Irma. Therefore in January 2018, we made an estimated federal income tax payment of $9 million, which actually related to 2017.

Our net leverage was 2.2x at the end of 2017, a decrease from our post WinDoor acquisition net leverage of 3.4x in early 2016. We intend to continue our focus on maintaining a strong balance sheet that should give us flexibility to make further investments and fund future needs.

At this point, I would like to turn the call back over to Jeff for the 2018 outlook and some closing comments. Jeff?

Jeff Jackson

Thanks Brad. Looking ahead, Florida’s economic factors that impact our business are in very good shape. Housing starts are growing steady, but still well below what we believe the market can support. Starts in the fourth quarter and full year of 2017 both grew by 10% with more than 85,000 single-family starts in 2017.

As we have previously said, we think Florida’s population can support single-family housing starts of up to 120,000 per year. Builder confidence rose in the fourth quarter with the National Association of Builder's confidence finishing the year at 74 points, a record high. We expect 2018 sales to be between 550 million and 575 million, representing an increase between 8% and 13% versus last year.

We expect sales at this level will generate consolidated adjusted EBITDA of between 95 million and 105 million, representing an increase between 10% and 22%. Beginning in 2018, the company is updating its reporting of adjusted EBITDA to exclude non-cash stock-based compensation expense. This adjusted EBITDA amount and percentages increase given above reflect this change.

Therefore 2018 comparison periods will also be adjusted to reflect this change. We are targeting adjusted net income per diluted share in 2018 of between $0.81 and $0.98, which assumes 52 million weighted average diluted shares outstanding. We are targeting free cash flow of between 59 million and 67 million in 2018, reflecting our expectations for strong growth and capital discipline. This includes $25 million of cash proceeds to be received in 2018 from finalizing the sale of certain glass plant assets to Cardinal that we will use to further deleverage.

Our free cash flow target for 2018 also includes the impact of an estimated federal income tax payment of $9 million for 2017 that we made in January of 2018. Before taking your questions, I want to say to the entire PGT family, our customers and our shareholders thank you for your support. PGTI is a great place to work and we remain focused on generating value for our shareholders.

At this time, we would like to turn the call over to the conference operator to begin the Q&A portion. Nichole, first question please?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Michael Eisen of RBC Capital Markets. Please go ahead.

Michael Eisen

Good morning gentlemen, and congrats on a great quarter. Just wanted to start off on the – wanted to start on the increased marketing spend, over the past few quarters, and you guys talked about increasing these spending efforts in upcoming year because that had a good presence at the builder show earlier last month. I just want to know first off have you guys gotten any big feedback and indicators that this marketing is being often increase awareness of the product and kind of how should we think about the trajectory of SG&A going into the next year with this into effect?

Jeff Jackson

Yes, we have gotten some very solid feedback from both our dealers and just the average customer. All three brands were highlighted in our marketing TV advertising in the promotions. They are targeted through this specific markets that they are in. So the feedback both across our both customer base and the average distributor has been very positive. We do have some of those spends in the first quarter. Brad can highlight some of that for you. I see it developing throughout the year quite frankly it depends on the storm season that we have in 2018. We will run additional advertising before the storm season just to remind everyone of our products and benefits of having them but overall it's been a success. We did do by the way, a focus group study on this particular commercial we ran and we received the highest ratings that that particular company had ever done in terms of focus groups and feedback.

Brad West

I will just add on to that Michael. On the SG&A side I will see that side that show is in the first quarter and just like last year we will have little bit higher of an SG&A spend in the first quarter. It's percent related to the rest of the year. But we did in [indiscernible] in the fourth quarter and awareness of the storm and I think we are likely to continue that like that said so for full year perspective, I think you should see SG&A be somewhat normal. Just be mindful on the first quarter it's a little bit heavier.

Michael Eisen

That's helpful and then thinking of that increase awareness of the product and the effects of the first few big storms that hit the coast, when we are thinking of seasonality going into 2018 and kind of the pace of sales throughout the year should we expect any change in kind of historical norms because you see stronger first half of the year than usual? How should we think about the cadence there?

Brad West

Yes. Last year we had a couple of interesting anomalies that creates in different [complexes] storm in the third quarter creates an easy comp for us this year in the third quarter and the first quarter also last year started off a little bit slower. So first quarter this year has little bit of uneasier comp. I think the second and fourth quarters obviously we had a really strong fourth quarter in 2017. So those will be the tougher comps this year. Again I think the guidance we gave for the full year kind of plays out but you should see Q1, Q3 have a little bit easier comps than Q2 and Q4 giving the tougher comps this year.

Michael Eisen

Super helpful. Appreciate it guys. Good luck.

Jeff Jackson

Thank you.

Operator

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

Unidentified Analyst

Good morning Brad, Jeff. This is Josh filling in for Sam. Thanks for taking year questions and congratulations for the quarter.

Jeff Jackson

Thank you Josh.

Unidentified Analyst

Clarification question. You said your backlog was unchanged so it was $50 million at the end of fourth quarter.

Jeff Jackson

Yes.

Unidentified Analyst

Okay and then what gross margin are you assuming in your guidance?

Jeff Jackson

Well. Again that's going to change by the quarter but we are probably going to improve our overall EBITDA metric this year by a good [indiscernible] midpoint of range is somewhere around 100 [indiscernible] I think you are going to see some of that in gross margin and some of that in SG&A.

Unidentified Analyst

Okay and can you give us a sense of how January and February will be trending?

Jeff Jackson

We could talk – February that was not closed yet, but like I said last year if you look at the months the way month laid out from year-over-year comparison of this 5%, 6% 20% that's January, February, March. So we start off the year with pretty good growth in January but again it was but relatively easy comp and then March will be different more difficult comp. So I think for the full year you see what the full guidance is but the first quarter is going to be one of the stronger year-over-year growth quarters.

Unidentified Analyst

Thank you.

Jeff Jackson

You are welcome.

Operator

Our next question comes from Alex [indiscernible] please go ahead.

Unidentified Analyst

Thank you. Good morning gentlemen. Very nice quarter.

Jeff Jackson

Thanks Alex.

Unidentified Analyst

Couple of questions. First, can you touch a little bit upon the competitive environment of Florida? It sounds like fact that you have got some raw material price inflation you are getting some price increases out there, so I suspect a competitive environment is moderate at the moment and then secondly, as it relates to the Miami facility I believe you said it's going to begin production in 1Q can you kind of talk about the timeline of that facility kind of getting up to 100% run rate kind of capacity. How many quarters will it take and so on. Thank you.

Jeff Jackson

Sure. I think in terms of the competitive environment it's actually fairly strong. But you got to remember we target that middle to upper end market and so from that perspective we dominate. The lower builder grate, [indiscernible] windows we don't really compete in that market yet. So there is still competition and it's more regional based in Miami obviously a little bit of market you have local players there. From the national footprint you really don't have a ton of competitors but that's where the nd competition will come into play. So as we look at the competition it really depends on what market you are talking about. So assuming high end new home construction starts in their higher end homes we are going to dominate that. If homes starts are more towards the lower end we are going to have to fight for that and generally speaking given our strong R&R market and our ability to get more volume out of that way we don't like to play in that area. So competitions there just depends on the region and the product line. In terms of Miami our plans is to move in at the end of this quarter is to over – the actual physical move itself would take place over about a four weeks period. We don't have to get out the new building any time soon so we are not pressured from that end and as we move we will move sections at a time. For instance, shared service admin will be weak move, the door line will be another weak, the window line etc. So we will take our time moving over about three, four week period and then in terms of full up and running production capacity I mean our second quarter is a busy quarter for us for CGI, so we expect to be producing however, it will take a couple of quarters just to run through all day the new launches being in the new facility. So I would expect minor, again minor headwinds from that new facility for the first, second, third quarters by the end of the third quarter it should be cranking and up and running with no issues at all.

Unidentified Analyst

And lastly your balance sheet modestly under-leveraged. Can you talk a little bit about acquisition strategy and how that might play it to the mix 2018? Thank you?

Jeff Jackson

Yes sure. And thank you for the questions. As we looked, we acquired two companies one in 2014 we deleveraged. We acquired another one in 2016 we deleveraged. So as we look at capital allocations we are very disciplined on that and we look at opportunities that will be accredited to our both our gross strategy in terms of getting ultimately out of the state as well as the impact we will have on our EBITDA margins. We do not want to be a commodity-based window company. We will target high end acquisition opportunities with strong EBITDA margins. So as we look to that strategy I think 2018 there is going to be some opportunities. We still are busy here in Florida given the impact of [indiscernible] demand here. So it's plenty of robust growth in the Florida market you will see in 2018 and again as 2018 goes from acquisition standpoint we will be looking but we are very selective when we do look.

Unidentified Analyst

Very helpful. Thank you.

Jeff Jackson

Thank you.

Operator

[Operator Instruction] Our next question comes from Jeremy Hamblin of Dougherty & Company. Please go ahead.

Jeremy Hamblin

Good morning, Guys. Congrats on excellent results and execution.

Jeff Jackson

Thank you, Jeremy.

Jeremy Hamblin

I wanted to ask a high level question. Kind of looking back over the last decade, I think maybe 12 years or so since the last real hurricanes impacted Florida. And just get a sense of I think there is maybe questions about how short lived when you have an event like this with a significant storm that impacts a wide area within your predominant selling markets.

In the past, could you speak a little bit to kind of a carry through effect of having a storm roll through and is it just a very short term bump like what you see in Q4 or can you speak to is there a lasting impact of you're going through and doing actual R&R business to repair damaged homes. And then, there is kind of this halo effect of raised awareness and the increased marketing that you did to help with that.

Can you just speak a little bit to that?

Jeff Jackson

Yes. I will share some thoughts here, Jeremy. Because really it's been it was 12 years that heard of fared without a category of -- significant category storms hitting the state. The last one was October 2005, literally three weeks before I started here.

So, we're kind of treading on to new water. It's our first major storm to hit us. The sheer demand and we've also been able to capture that demand as a result of our sales, you can, reflected there has been strong. That demand, that awareness is still there. One thing that's unique about Florida is the dynamics that make it for people who want to move down our population growth and new folks that literally come down to Florida without ever experiencing hurricane.

So, there is this constant kind of renewing of the market base, if you will, for us. And given the repairing modeling that those individuals typically do, I think is going to be sustained growth trend for us with that awareness factor. So, that's why we decided to also invest in marketing efforts to just try to push that as well along with our brands and be more of a end consumer kind of tip of the tongue when you think of impact product, you think of us.

If you really look, Florida is growing in population; you got about 70+ million; baby boom is going to be retiring over the next several years; a lot of them moving into Florida. Its code driven; I think that's the one thing that that in our favor is regardless of hurricanes, we still grew.

If we look 2012 to 2017 before the hurricane, I don’t have the averages, we had to grow brought up our teams over like 20% topline growth or less four or five years before hurricane. So, I think the hurricane just adds again that dynamics of awareness. It helps drive the R&R market stronger and it pushes builders to do the right thing in terms of when they build new homes and that is all for impact product for their consumers.

Jeremy Hamblin

Great color, thanks for that. I wanted to switch gears here and talk a little bit about aluminum pricing you mentioned that we've seen this move higher. I think you guys just took another price increase of 3% to 7% here in for orders beginning in February. As I look around the marketplace, your competitors are all raising price as well I think due to the demand surge.

And Brad, I think you mentioned that in Q4 gross margin impact from high aluminum cost was about 70 basis points. Can you give me a sense of a would you potentially raise prices again because we've seen a lot of your competitors raise price twice in the last six months.

And then kind of the second part of the question is what type of lift from the price increase are you getting in terms of the benefit for gross margins versus this kind of offset I think on the aluminum side. I think you mentioned you have 37% of your needs covered at this point but you're now at a $1.11 per pound on delivered cost.

Can you just add a little more color to that, Brad?

Brad West

Yes. And Jeremy, the price increase that we announced or that I just wanted to in fact was actually announced towards the end of last year when the price of aluminum was actually lower than it is now by probably $0.04 to $0.05; it's actually a $1.15 right now, Jeremy. And the price increases probably announce and was closer to a $1.10.

So, the question is would that potentially allow us or give us the opportunity to raise prices again as we go towards end of this year. It certainly, a possible; given the price of aluminum where it's bad, it has been -- it has spiked quite a bit in the last four weeks. And so, it's very likely that you could see a price increase as we get to the middle of the year if it sustains this way.

It just stands right now part of our EBITDA range that we gave in this guidance. It is in part because of the uncertainty around aluminum costs and at a $1.15 it's pretty high so as you compare to last it and it does affect our margins. So, I would say the original price increase that we put out was obviously we it's comfortable with its ability to stick because of the competitive environment.

But I do think that it has mostly inflationary cover and not EBITDA margin growth mindsets to it. And as aluminum continues to go up from here, then we'll likely probably have to consider another price increase.

Jeremy Hamblin

Okay. So, as I look at the full year guidance then, and let's take the $1.15 per pound, what is the drag from current aluminum cost given your hedging program versus the price benefit? What's kind of the net impact to gross margins as it stands today?

Brad West

At a $1.15, I would say probably 20 bips.

Jeremy Hamblin

20 basis point drag or benefit net?

Brad West

That -- drag.

Jeremy Hamblin

Okay.

Jeff Jackson

And again, Jeremy, like Brad said, we may take an usual step of targeting aluminum price product increase just to cover that. We're comfortable where we're at pricing wise; we're comfortable with the margins; we're comfortable with our ability to still take share and be more of a premium price product given all the services we do try to offer on top of what a normal competitor would.

But with that said, if aluminum prices stay where they're at, our net uncover position less hedges, it will be somewhat of a headwind to margins and we could look at taking spot prices for the aluminum products only to cover that headwind.

Jeremy Hamblin

Okay. Well, you mentioned in the presentation deck, some pretty extraordinary growth in our Vinyl Winguard line. And I know as we look back, there has historically been a gap in the margins that you generate on that product line versus your aluminum line. How much of that gap close now that you have a higher level of total delivered sales on the Vinyl products.

And in terms of thinking about the gross margins for 2018, it sounds like you're implying some improvements and I imagine a lot of that is just a sales leverage. But is some of that because you're getting a better productivity out of your Vinyl lines? Any color on that would be helpful.

Brad West

Yes, Jeremy. Last year, we definitely saw some improvement on efficiencies and Vinyl Winguard was one of the lines that benefitted from that. We targeted some LABOR improvements to go on top of the material cost improvements when we launched our product.

And I think while we're always striving to do better, I think we kind of got through our targeted goals last year on the LABOR side for that margin for that product. So, I think going forward in this year the margin improvement that we're seeing is coming mainly from higher sales leverage like you mentioned, also the fact that there we're going to continue to improve our efficiencies and it's not really so much about the Vinyl Winguard.

I think we've pretty much achieved that one.

Jeremy Hamblin

Okay. Last question is on capital allocation. So, you have some pretty impressive free cash flow guidance in here. You've already made some pay downs. It looks like you've got another $25 million coming from the closure of the sales of those door glass processing assets.

In terms of thinking about capital allocation moving forward, how are you prioritizing let's say debt repayment versus share buybacks?

Jeff Jackson

Yes. I think Jeremy, what we demonstrated over the 12 years I've been here is our ability to deleverage. So, in terms of priority, it would be around debt repayment versus the say share buyback at this point and also again, looking to investing growth.

So, Brad had mentioned, you guys had discussed the Vinyl lines for example. Technology is changing and we're investing in the technology within our plans to make them more safe, more efficient and we'll continue to do that with our capital as well as gain growth opportunities outside the state in terms of potential acquisitions.

As we demonstrated with our prior two, we tend to de-lever after wait, make sure we got our quote decks in a row and then we'll look again. And I think that's kind of the stage if I had to say 2018 more in is we're looking for that next opportunity also out of state for a potential bolt-on brand acquisition, so.

Jeremy Hamblin

Great. Thanks for taking my questions, guys. And wish you the best for continued success this year.

Jeff Jackson

Thanks, Jeremy.

Brad West

Thanks, Jeremy.

Operator

Our next question comes from Keith Hughes of SunTrust. Please go ahead.

Keith Hughes

Thank you. Most of my questions have been answered. But one, just industry-wide question. You talked about M&A for yourself. We saw a pretty good sized transaction on the window players announced a month or so ago.

So, I guess 1) just do you feel like that has any impact on you? And 2) Do you feel like in the window space are we starting to see M&A activity pick up or that kind of while?

Brad West

Yes. I think a couple of thoughts there, Keith. Impact on us, they did set a multiple for building products, not necessarily windows. Because I think their window business is much different than our window business. There they play to the middle-to-lower end of the market, we're middle-to-the-higher end of the market. So, I think window company like ours commands a much bigger premium in terms of a multiple.

There the acquisition, again you're referring to however that set some kind of a multiple to be considered for acquisitions into the future. I think as you look at what we will look at, again like I'd mentioned earlier with Jeremy, we're going to look at something that's accretive to our margins or can be within the first year and also is in line with technology.

PGTI Innovations is what we are going to be about bringing new products in market; something that's not your everyday cut and dry window and door. So, those companies tend to be out there. I think the activity is definitely heightened. I personally saw more deals this year at least coming my way or at least from bankers to industry leads than I did in '17.

So, I do think most of them were smaller players unlike the bigger one you're referring to. And they range in that say sales of $30 million to sales of a $150 million type topline companies that I've seen. I think you continue to see that in '18 definitely.

Keith Hughes

So, when you look at acquisitions, something that what hits your sweet spot, would it be something in that $30 million $40 million $50 million range? Would you be willing to do more if there was one out there?

Brad West

Again, if it makes sense, I do not want to change the niche strategic direction that we've set as a team to be a different to high end window and door company. Granted big, over $0.5 billion in sales now but concentrated in one state. So, that's the drive to try to get a similar PGT type company, PGTI type company outside the state, similar profile.

If it was bigger more than that, the range you had mentioned will be looked at of course. Yet, because those opportunities don’t they don’t come along often; we would look at it. My number one focus for the shareholders, the shareholder return and what we do with the capital and the share capital we generate from the assets we deployed.

So, the dynamics, the return, all that has to add up to create more value for our shareholders before we move forward on any kind of size, the small or large acquisition.

Keith Hughes

Okay, thank you.

Jeff Jackson

Thanks, Keith.

Operator

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

Jeff Jackson

I'll thank you for joining us today. We look forward to speaking with you next quarter. And don’t hesitate to call if you have any questions. Thanks again.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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