Feb 26, 2015
Executives
Brad West - Chief Financial Officer Rod Hershberger - Chairman and Chief Executive Officer Jeff Jackson - President and Chief Operating Officer
Analysts
Josh Wilson - Raymond James Bob Wetenhall - RBC Capital Markets Greg Palm - Craig- Hallum Capital Judy Merrick - SunTrust Ken Zener - KeyBanc Jeremy Hamblin - Dougherty Rob Hansen - Deutsche Bank
Operator
Good day, ladies and gentleman and welcome to the PGT Inc. Fourth Quarter 2014 Earnings Conference Call.
At this time, all participants are in a listen-only mode. Later, there we will be a question-and-answer session and instructions will follow at that time.
[Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Brad West, Chief Financial Officer.
Sir, you may begin.
Brad West
Good morning, everyone and welcome to PGT’s quarterly and fiscal year end investor conference call. I am Brad West, CFO and I am joined today by Rod Hershberger, our Chairman and CEO; and Jeff Jackson, President and COO.
This morning, we are pleased to provide an update on both our fourth quarter and year end results as well as an outlook for the first quarter of 2015. Hopefully, everyone has had a chance to review our earnings release issued yesterday.
Before we begin, let me remind everyone that today’s conference call may contain statements concerning the company’s future prospects, business strategies and market outlook. Such statements are considered to be forward-looking.
These statements do not relate strictly to historical or current facts. Rather they are based on our current expectations and are subject to risks and uncertainties.
Actual results may vary materially from those contained in the forward-looking statements. Please refer to our press release, our most recent Form 10-K, and other documents filed with the SEC.
We undertake no obligation to publicly update or revise any forward-looking statements. A copy of our press release is posted on the Investor Relations section of our corporate website at www.pgtindustries.com.
Included in the press release are the unaudited, condensed, consolidated balance sheets and statements of operations prepared in accordance with GAAP and adjusted information, which was quantitatively reconciled to GAAP. Our company uses non-GAAP measurements as key metrics for evaluating performance internally.
A detailed explanation of these non-GAAP measurements can be found in our press release, which was included as an exhibit to our Form 8-K filed with the SEC. These non-GAAP measurements are not intended to replace the presentation of financial results in accordance with GAAP.
Rather we believe these non-GAAP measurements provide additional information for investors to facilitate the comparison of past and present performance. We will provide an overview of our performance for the fourth quarter and year ended January 3, 2015.
After our prepared remarks, we will have ample time to address any questions you may have. With that, let me turn the call over to our President and Chief Operating Officer, Jeff Jackson.
Jeff?
Jeff Jackson
Thanks, Brad and good morning, everyone. 2014 was an exciting year for us at PGT.
Highlights include consolidated sales of $306.4 million, our highest sales level since our IPO year of 2006; the acquisition of CGI, a strong high-end impact brand in our core market; an increase in our employees up to 1,900 folks versus 1,400 last year; and completion of Phase 1 of our glass plant capacity expansion. We have been the leading manufacturer of impact resistant windows and doors in Florida for many years.
The acquisition of CGI increases our leadership position in the impact resistant window and door industry and strengthens our ability to compete against national suppliers. With its base operation in Miami, we strengthened our presence and increased our market share for the impact resistant window and door in Florida to approximately 60%.
In the fourth quarter of 2014, 79% of our sales were from sales of impact resistant products, growing 19% over the fourth quarter of last year, while sales of non-impact resistant products represented 21% growing 6%. Also in the quarter 60% of our sales were from the repair and remodeling market, up 7% over the fourth quarter of last year, while sales into the new construction market represented 40% and grew 33% over prior year.
In keeping with the production innovation that has helped us achieve our place as the leading manufacturer and supplier of impact resistant windows and doors, on January 20, we unveiled our new vinyl WinGuard line at the IBS Show in Las Vegas. Our new vinyl line WinGuard couples a safety of an impact resistant window with a design flexibility of vinyl.
And our EnergyVue vinyl line is our new non-impact offering designed to meet or exceed the tougher energy code requirements of tomorrow. Also with the addition of CGI, we added 200 employees to our PGT family.
We are proud of all our dedicated hardworking employees and thank everyone for their commitment to making PGT a success and a great place to work. We also completed the first phase of our glass capacity expansion and ramped up our operation during the fourth quarter.
The new glass processing facility gives us approximately 100,000 square feet of additional manufacturing space, where we are cutting and tempering glass. In the first half of 2015, we will add more equipment that will increase our insulating and laminating capacities.
We faced some tough challenges during the startup phase that negatively impacted our gross margins as the cost to ramp up our glass capacity was at the high-end of our estimates. But we began to see some of the benefits of processing our own glass as we reduced our dependence on outsourced glass.
While we are continuing to add and train employees, we are confident the majority of those operational challengers are behind us and we are looking forward to taking full advantage of the operating leverage that producing our own glass will provide. In fact, we have increased our overall glass capacity by approximately 25% since the third quarter of 2014.
Looking forward into 2015, we have already had an indication of improved performance based of our January 2015 results. This improvement, which includes better scrap and labor results as well as a substantial January sales increase over prior year, has led to a promising start for 2015.
With that, I will turn the call back over to Brad who will review the results in the fourth quarter and fiscal year in greater detail.
Brad West
Thank you, Jeff. As Jeff mentioned, we reported sales of $84.7 million, up 33.6 % over prior year with organic sales growing to $72.0 million, up 16.1% covers in our highest fourth quarter sales from 2005.
For the full year 2014, sales finished at $306.4 million, which represents a 28% increase and adjusted EBITDA came in at $46.3 million, which was an increase of 22.5% and are 15.1% of sales. Breaking down our sales drivers compared to 2013’s fourth quarter, we have WinGuard sales of $52.2 million versus $44.7 million, an increase of $7.5 million or 16.8%; vinyl non-impact sales of $9.4 million versus $8.3 million, up 13.3% over prior year; aluminum non-impact sales of $6.3 million versus $6.2 million, up 1.6%; PremierVue sales were $1.9 million versus $1.4 million, an increase of 35.7% over prior year; architectural system sales of $2.2 million versus $1.4 million, an increase of 57.1%; and CGI sales were $12.7 million.
Gross margin dollars increased $4.5 million or 21.6% over the fourth quarter 2013 after adjusting for costs relating to the ramp up of the capacity. However, our adjusted gross margin of 29.6% decreased as a percentage of sales by 3.6% compared to the same period last year in part related to an extra week of fixed cost due to the 53-week year in 2014.
Our margins are also impacted by inefficiencies related to the ramp up of capacity and higher aluminum costs. The shift in mix towards new construction and vinyl sales impacted margins as well.
Offsetting these factors was the beneficial effect of reduced reliance on outsourced glass, higher volume and the addition of the CGI. To quantify these factors, our decreasing gross margin as a percentage of sales of 3.6% was driven by increased material cost from scrap and efficiencies due to the ramp up of capacity by 140 basis points, the extra week of fixed costs with no sales due to the 53-week fiscal year by 120 basis points, employee and other related costs in connection with higher sales and higher healthcare cost by 120 basis points, an increase in the cost of aluminum extrusion by 120 basis points, and a shift in mix towards new construction and vinyl products reduced margins by 90 basis points.
These factors were offset by cost savings of reduced purchases of outsourced glass by 60 basis points, impact of higher volume by 50 basis points, and the addition of CGI by 120 basis points. Our new glass facility is specifically designed to increase our internal capacities for finished glass units.
We estimate that this initiative will improve our margins on average by 2 percentage points in 2015. However, the actual impact will vary from quarter-to-quarter based on top line sales and our internal capacities which will increase with the installation of our laminating equipment towards the end of the second quarter.
With regard to aluminum, our average delivered cost of aluminum was approximately $1.13 per pound during the quarter, all comprised of stock purchases as our aluminum hedges are all considered to be ineffective. This compares to an average delivered price of $0.91 per pound during the fourth quarter of 2013.
This represents a 24% increase in the average price per pound of aluminum since last year, which we estimate had a negative impact to material costs of approximately $800,000 in the quarter. As of today we are covered for approximately 57% of our estimated need to the fourth quarter 2015 at an average price of $1.10 per pound as the current delivered cash price today is $1.04 per pound.
We leveraged revenue growth during the quarter to reduce adjusted selling, general and administrative expenses as a percentage of sales to 18.2% compared to the adjusted 22.2% in the fourth quarter 2013. Our selling, general and administrative expenses were $15.4 million after adjusting for the acquisition costs, an increase of $1.6 million from the fourth quarter 2013.
Included in SG&A expenses for the quarter are CGI expenses of $2.9 million. Highlights within our SG&A include a decrease in amortization expense of $1.6 million, a decrease of – an employee related costs of $0.6 million offset by an increase of $1.3 million in selling and distribution costs, consistent with higher sales.
With the acquisition of CGI, we required certain amortizable intangible assets which will increase our SG&A due to higher amortization expense. This is a non-cash increase in SG&A which we estimate will total approximately $3.6 million in 2015 or approximately $900,000 per quarter.
Interest expense was $3.2 million compared to $1 million in the fourth quarter of 2013. This increase from prior relates to the higher outstanding debt level as a result of the refinancing.
Depreciation and amortization in the quarter was $2.4 million compared to $2.7 million last year. Going forward, as a result of the acquired intangibles our depreciation related to the new glass plant quarterly depreciation and amortization expense is expected to be approximately $2.6 million.
Our tax expense in the fourth quarter was $1.2 million and represents an effective income tax rate of 29.7%. And we finished the year with a tax rate of 37.1%, which is lower than the statutory rate of 38.8%.
This rate is lower than the statutory rate due mainly to the impact of the Section 199 domestic manufacturing deduction. We recorded $519,000 of tax expense in the fourth quarter of 2013, which represented a true up of the estimate of annual broker earnings made in the 2013 second quarter when we released our deferred tax asset by valuation allowance.
Going forward, we expect to record tax expense at an effective rate between 37% and 38%. Also from a cash perspective, we currently estimate our tax affected federal operating loss carry forwards to be approximately $6.1 million substantially all of which were required in the CGI acquisition.
We had net income in the fourth quarter of $4.2 million or $0.08 per diluted share versus $5.9 million or $0.12 per diluted share in the fourth quarter of 2013 after adjusting for the expenses related to the acquisition, debt refinancing and the new glass facility. The adjusted net income in the fourth quarter of 2014 includes the impact of $2.3 million in tax expense from operations.
Adjusted EBITDA was $12.1 million for the fourth quarter of 2014 compared to the adjusted EBITDA of $9.5 million in the fourth quarter of 2013. Included in adjusted EBITDA for the fourth quarter 2014 was $2.9 million of EBITDA from CGI.
Excluding CGI, adjusted EBITDA decreased $362,000. A reconciliation of net income and EBITDA which I have just discussed has been included in our earnings release for your reference.
We ended the year with the cash balance of $42.5 million, which is up $12.3 million from the end of 2013. Our cash growth was achieved despite capital spending of $19.3 million mostly from the glass plant expansion and all the CapEx was funded by $22.3 million from cash from operations.
We anticipate consolidated capital spending requirements in 2015 to range from $15 million to $18 million as additional glass equipment is required to service the increasing consolidated sales. And current with the acquisition of CGI we financed our existing debt into a new senior secured credit facility on favorable terms consisting of a $200 million term loan and a $35 million revolving credit facility.
This new facility gave us the ability to make this key acquisition and gives us access to funds for future written capital growth if needed. With $42.5 million of cash in hand our current net leverage is 2.7 times.
During the first 7 weeks of our first quarter we have seen direct labor and scrap improved by approximately 0.3% and 1.0% of sales respectively compared to the fourth quarter. This in part helped to improve our January consolidated gross margin to finish at 32.3%.
For the first quarter of 2015 we anticipate our quarter-over-quarter growth to continue both organically and through our acquisition of CGI and estimate that consolidated sales will range between $90 million and $93 million. We believe this first quarter sales estimate include sales to customers that accelerated their orders from the second quarter as a result of our first in quarter 2015 price increase.
Given our current sales mix and improved operational performance we anticipate first quarter of 2015 gross margin to range from 31.5% to 33.0%. Additionally, we are near the end of our new ERP system cutover and expect shipments within our new system to begin to ramp up in the second quarter.
Although many months of testing have been done in anticipation of the switch temporary inefficiencies may occur. At this time, I will turn the call over to our CEO, Rod Hershberger for summary remarks.
Rod Hershberger
Thank you, Brad. 2014 was a great year for PGT.
The acquisition of CGI expanded our impact product offering and added another market leading brand to our portfolio. By acquiring a manufacturing facility in Miami, we also strengthened our presence in a critical impact resistant market and added approximately 200 employees to the PGT family.
We invested in additional infrastructure particularly in the building of a new glass processing facility to reduce dependence on outsourced finished glass units. Our two year ERP implementation is nearing completion with a relatively low risk product by product cutover.
And we have increased our marketing capabilities. We continue to outpace our underlying markets in terms of top line growth and while proud of all that our dedicated and success driven employees accomplished in 2014, we are even more excited about our potential for success in 2015 and beyond.
We are off to a solid start in 2015. As Brad mentioned, we saw some sales pulled in, we think that was about $6 million worth driven by our price increase and we will see that continue to flow as we go through the year.
Our new glass facility is up and running and we are in Phase 2 which entails adding laminating and insulating equipment to further capitalize on the efficiencies that it will provide. We have continued to invest in our employees as we have implemented strategic initiatives in training and development.
We are eager to see the impacts of these initiatives and believe additional opportunities exist to lower our operational costs and leverage them with incremental sales. We continually demonstrate our commitment to innovation by introducing new exceptionally designed products to the window and door markets.
Most recently with our new vinyl WinGuard and EnergyVue vinyl, these products have been well received by the industry and are designed to exceed the most stringent of impact resistance in energy saving codes and standards in the country and provide an array of sizes to satisfy the customers ever increasing demand for larger windows and doors that can still get the impact and energy job done. I am thankful for the dedication and effort put forth by all of our employees who have worked hard to help us realize our strategic initiatives.
With that I will conclude and we will be happy to answer your questions about our results or the recent acquisition. Shannon, if you could get the first question, please.
Operator
Thank you. [Operator Instructions] Our first question comes from Sam Darkatsh of Raymond James.
You may begin.
Josh Wilson
Hi, this is Josh Wilson filling in for Sam. Thanks for taking my questions.
Rod Hershberger
Hi, Josh.
Brad West
Hi Josh.
Josh Wilson
Could you quantify how much of organic growth is baked into the first quarter guidance?
Brad West
Just one second Josh, our consolidated sales estimate of $90 million to $93 million I have to do a range on that because I am taking that consolidated. It’s probably a range of in the mid-20s.
Josh Wilson
Mid-20s organic growth?
Brad West
Yes.
Josh Wilson
Okay.
Rod Hershberger
Josh, you have realized part of that is pulled in, we did a price increase. So we had some customers take advantage of that price increase in order a little bit ahead.
So that drove a little bit more organic growth also.
Josh Wilson
That makes sense. And regarding the gross margin guidance what could push you to one end of the range or the other especially what might cause you to go below what you already did in January?
Brad West
We have issues like mix, which has a new construction and R&R component to it and aluminum and vinyl component. The cost of aluminum is quite variable at the time.
And then also while we have seen some great trends in the operations coming from hiring a lot of people in the last half of the year and also ramping up our capacity this year, that’s something that we want to continue to see sustained. So, those are the three factors.
Josh Wilson
And did I hear you right that there were no sales in the extra week?
Rod Hershberger
That’s correct.
Josh Wilson
Good luck with the first quarter.
Brad West
Thanks, Josh.
Rod Hershberger
Thank you, Josh.
Operator
Thank you. Our next question is from Bob Wetenhall of RBC Capital Markets.
You may begin.
Bob Wetenhall
Hey, guys. Nice way to cap off a strong year.
I wanted to get your thoughts what are you seeing in terms of demand from both new residential construction activity and repair and remodel spending levels in the Florida market?
Rod Hershberger
On the new construction side, I will jump in a little bit on that, Bob. On the new construction side, we haven’t seen I know some parts of the nation are seeing a little bit weakness and there is – we really haven’t seen that in Florida.
There is a little bit of maybe a drawdown, because labors are hard to find. Some of the big builders are slowing down maybe just a hair, because they are struggling to find good labor, but not from a demand point of view.
So, we think new construction remains pretty strong. Just kind of as a reminder to everyone, our housing starts have been down so low and last year they were in the $55 million, $56 million range, which is about half of what is sustainable and what our number has been based on our population over the last 20 years taken out the bubble.
So, we think that can continue pretty strong. On the R&R side, it’s a little harder to look into that market and really get a good feel for it, but we have seen it continue to grow.
People tend to invest in product that will save them money on their insurance rates. Insurance is a pretty high cost here in the coastal areas in Florida in particular, but in every coastal area.
So, if they can invest in their house, improve it, and save money on the insurance, we think that’s a driver that, it won’t make it grow, we don’t think it’s going to grow in double-digits, but we think maybe that mid low to mid single-digit area is probably a good guess for us.
Bob Wetenhall
On the pricing side, I think you are talking about price action at 3% to 7%, house realization of your price increase, and if you could also just touch on the expected contribution in 1Q from the CGI acquisition?
Brad West
So, the price increase was – 3% to 7% range was based upon products. We are just now starting to see that in play, because orders went up through January 15 so with our lead times we are just now starting to see that in the first quarter.
It’s been received pretty well and I think we are probably going to realize, I would guess around 2% at this point in time and maybe better, but we will considerably stick to 2%. I am sorry the second question was about?
Bob Wetenhall
It was just about CGI, what are you looking to get revenue wise in your guidance?
Brad West
Right. So, the range of $90 million to $93 million includes a CGI range of roughly $11 million to $12 million.
Bob Wetenhall
Got it. And just one last final, you guys have done a great job of building up the PP&E and it sounds like you are going to be able to source all of your glass needs internally.
How do we think about the timing of incremental costs and at what point in the year do you get to a position where if your sales are above $55 million in a quarter, you can source that internally? And how do we think about the impact as we move through the year on gross margin?
Thanks a lot and good luck with the quarter.
Brad West
Yes, Josh – Bob, how we look at that really is a step up in investment. We kind of look at it in two ways, the top glass is made being the first.
We make custom glass here and we can make that better we think than any of our third-party supplier and is at a lower cost. The standard what we call the rack glass is what we will continue to buy from our third-party.
And obviously, depending on demand times we may have to buy custom glass. Again, that will be dictated by sales, but our goal is to ultimately make the majority of our custom glass in-house.
So, we’ll always have a percentage of our glass needs from a third-party, the rack standard stuff. That percentage will probably range in the – anywhere from a 15% to a high of 20% of our needs in any given month or quarter, again volume dependent, which brings me that top of growth we will see.
If we continue to see a strong R&R market, which we think we will, we think the R&R market will stay in that, like Rod said mid to upper single-digits, but the new construction market is now obviously becoming a bigger part of our sales as well. That’s where you typically can see the standard kind of sizes of glass we will be ordering.
So, in terms of a step up in investment, as I mentioned, we are continuing to invest. We hired 19 people this week.
We hired 15 people last week. So, that investment is still going on in the wake of the volume we are seeing coming at us.
And both the IG and laminating investment should be complete and up and running by the back half of this year. And after that, we will just have, it will all be volume-based and what we can do in type of volume that’s coming at us.
Bob Wetenhall
Understood. Thanks and good luck.
Brad West
You bet.
Rod Hershberger
Thanks Bob.
Operator
Thank you. Our next question comes from Steve Dyer of Craig-Hallum Capital.
You may begin.
Greg Palm
Hey, it’s Greg Palm on for Steve. Congrats on the good results and guidance guys.
Rod Hershberger
Thanks, Greg.
Brad West
Thanks, Greg.
Greg Palm
It looks like Q4 CGI results came in ahead of expectation. So, can you first talk about that?
And then sort of big picture, it’s been almost half a year since you acquired CGI. So, I was wondering if you could update us on sort of our expectations for cost and revenue synergies, what has exceeded expectations so far kind of what kind of synergies are still out there.
Any color would be helpful?
Brad West
The margin and results that we have seen from CGI since the acquisition have actually pretty much been in line with our expectation and we have been very happy with the acquisition. As it turns out the products and the sales team and everything has just been integrated really, really well with us and it’s worked out great.
In terms of what we expect for synergies going forward, the back half of this 2015 is when we should start to see some of those operational efficiencies come into play. We have already seen some of the SG&A efficiencies.
And what we expect is that when we get to 2016 we should see an annual number of about $4 million to $5 million, which is pretty much in line with what we thought when the acquisition was completed.
Rod Hershberger
Hey Greg, one of the big drivers I think when we talked about synergies is Jeff just talked a lot about the glass plant and the additional infrastructure that we are putting in place there with laminating and IG. At current time, CGI buys all the glass from the outside and they have got a great supplier, same supplier that we use as a third-party source for our glass.
And depending on how sales grows this year, we will have an effect on how that synergy works, because their supplier is good, it’s not something that we have to do, it’s something that we want to do when we want to make sure that we do it at the right time with the right spend to make sure our glass operations are really operating efficiently before we start make that cutover. So, sales will drive some of those decisions as well as capacity and we will give you update as we go through the quarters about what that’s doing to sales wise and the ability of our glass plant to handle their needs also.
Greg Palm
You feel like you are getting any positive impact just from putting their products in your current distribution sort of partners and vice-versa?
Rod Hershberger
Yes, what we have done is we are not necessarily taking all their products and putting it in our customers, because – and we are not necessarily taking all of our products and putting it in their customers. We are very selective at how we go to market.
We spend a lot of time talking about how we market the product correctly, who gets what, and how we separate, because they both have their own brand name. And it’s important to maintain that brand name.
I mentioned a little bit that we have added some marketing capabilities. We are really focusing on making sure that we manage our market channels really well, so that we take advantage of some of the strengths that CGI brings to the table, which are really good on the high-end on their estate line and some of the strengths that PGT brings to the table from their volume and just from the reputation out on the field by making sure that we differentiate that a little bit and make sure they go into the right markets.
Jeff Jackson
Yes, if I would add kind of the – it’s been almost 5 months now kind of the three things we really drove in that acquisition. It would be first getting CGI more presence on the West Coast.
We are trying to expand that distribution and had worked outside South Florida, Southeast Florida in particular. So, we made a concerted effort to do that.
We have stopped competing against each other in our core market in Southeast as much obviously with less affected pricing positively. And I think thirdly, we are trying to complete the CGI door line and there is a lot of good door initiatives out there that the CGI product line needed enhancing on and offering for.
And we are really driving that into their distribution network. So that’s been kind of the top three areas we have really focused on during the first 5 months.
There is more to come. And all of those three areas have delivered positive results so far.
Greg Palm
That’s good color. Last one for me, you continued to post growth well above sort of new construction growth rates in the state and it was obviously really strong again in Q4, can you may be talk about sort of what are the underlying drivers, what’s the biggest driver of that and kind of how you see that sort of evolve throughout 2015?
Rod Hershberger
I think we have been pretty consistent for the last 5 years at least 6 years talking about our value proposition and how important that was complete on time delivery, high quality product and customers appreciate that. And as the market gets busier, sometimes people are willing to spend a little bit more for their product knowing it’s always going to be there on time, it’s going to be great quality, we are going to take care of any issues that are out there, because the project will be on time and delaying projects has a much higher cost than buying a little bit less expensive window.
And we believe that for a long time, we have talked about that, we talked about it in 2011 and 2012 where sales – where the new construction markets started picking up and we weren’t seeing some of those sales because it was very price driven. But it’s a core belief that we have.
And it’s a core belief that we stick by and we are really seeing that payoff now.
Brad West
And I will also add in most of the analyst reports I have read and actually in talking to the builders themselves, in the Florida market builders are getting pricing and it’s going up. So they are able to stick pricing and that pricing typically comes with better product sources and better offerings of which impacted is one of those.
And we are having more and more people opt for that upgrade if you will when they get their choice. And that’s been very positive momentum for us.
Greg Palm
Thanks for the color and good luck going forward.
Operator
Thank you. Our next question is from Keith Hughes of SunTrust.
You may begin.
Judy Merrick
Thanks. This is Judy in for Keith Hughes.
Just a follow-up on the earlier question where you kind of gave your normalized view of buying external rack glass, where are you guys now and quickly heading into like the second quarter and kind of the peak season or are you guys kind of at that point now in your internal capacity?
Brad West
Well, we have added – we have increased our internal capacity over 25% since last year. And where we are at is it really depends on the actual week sales we get.
Unfortunately its not all of nice in levels, so we are not going to take say that we do hit 90 to 93 ish, but we can’t take that and divide it by 13, it comes in weeks, so we will get a $8 million week and we will get $6 million week. And we have to hold through our lead times.
So all of that flows through in dedicating how we handle it internally versus going to a third-party source, which as we mentioned in – I think in the last conference call we have negotiated a very favorable agreement with our supplier, our long-term supplier Cardinal in that. And so when we do go to the third party source versus say last year and the prior years the pricing there has improved substantially.
So really internal capacity is dictated by the volumes we see coming out as we will produce all the custom work internally we can and then at worst case have to form that out depending on volume.
Judy Merrick
Okay. Thanks.
And before you had given the 2015 CapEx target of $8 million to $10 million for equipment over-maintenance, can you repeat what you said on the call about your CapEx target for 2015?
Brad West
Yes. We had mentioned that it’s going to be $15 million to $18 million and that’s going to include spending some additional money in the glass capacity for that laminating line that Jeff had just mentioned as well as the insulating line.
Just basically we had done Phase 1 of the glass plant expansion last year and then incremental cost this year will be if you will, Phase 2.
Rod Hershberger
And also don’t forget we did buy a company so this CapEx associated with our new acquisition of CGI too, so that’s not the historical standalone PGT CapEx has been impacted because of our acquisition.
Judy Merrick
Okay, got it. Thanks guys.
Operator
Thank you. Our next question is from Ken Zener of KeyBanc.
You may begin.
Ken Zener
Good morning, gentlemen.
Rod Hershberger
Good morning.
Brad West
Good morning.
Ken Zener
Brad I think it was you that referred to or Jeff, the 2% benefit in 2015 from new capacity I believe that’s what you talked to say, could you just confirm that you said that. And is that actually a reasonable increase that we should assume from the fiscal 2014 gross margin just so we have some perspective on how the leverage is going to flow through quarterly given the volatility we saw in the back half of ‘14?
Brad West
Yes. The average is 2% for the entire year, but it is worth noting that it’s in the first quarter and the second quarter that we will not be able to get as much benefit because that laminating line that is being installed doesn’t get installed to the end of second quarter.
So it’s going to be a better number in the back half the year than it will in the first half of the year for that reason.
Ken Zener
So the 200 basis points, I mean you are getting obviously increased volume, one would think there would be some volume efficiencies above and beyond your cost leverage, is it reasonable given that about 30.5% gross margin in fiscal ‘14 that you’re saying 200 basis points plus for the full year?
Brad West
For the impact of the glass operations, yes.
Ken Zener
Wouldn’t it will be reasonable to assume you get volume leverage on top of that as well?
Brad West
Yes, well that 2% includes if you will the whole impact of bringing the glass in-house and versus the impact of what we are paying for the outside glass in the previous years.
Ken Zener
Okay.
Jeff Jackson
Yes. Keith – Ken just to add a little bit to that.
That 2% isn’t glass related for the entire year, that 2% will include leveraging up inefficiencies as well as making our own custom glass in-house. Now, it will increase once we get all the laminating and finish getting the IG line that’s currently installed, we are starting to run that now and install the laminating line over there.
And if you look into next year, it would be a 2% kind of standalone just for that stuff. But this year no, there is going to be some leverage in that 2% as well.
Rod Hershberger
Yes. And there is going to be – it’s going to always be impacted slightly by product mix and by new construction versus R&R.
And we think we have a good handle on what that’s going to be, but there is no way we are going to sit and tell you exactly how that mix is going to run out through the year. We expect there is a code change that’s been announced for June.
That will affect some of the product mix as we get through the year and it’s a hard number to predict how that changes our product mix.
Ken Zener
Understood. It seems to me obviously you guys faced structural headwinds is volume and outsourcing, so as you come out of here I just want to make sure we all understand your volatility you think might happen, so far for example in 2Q, now to get ahead of ourselves, but are there natural drags given the guidance that you gave in 1Q of 31.5% to 33% are there things we should be aware of when we are considering the second quarter that would be a drag or should it kind of be flat within that range that you gave us or will that get the glass benefit?
Rod Hershberger
Yes. The range that we gave you will be made up of different drivers in the second quarter.
In the second quarter you are going to get more of a leverage, fixed cost leverage driver in that range, because from a glass standpoint if volume increases in our second quarter which historically has. And its custom glass, we are going to make as much as we can in-house.
But since we are not totally up and running for our custom side yet, we will have to form some of that out, so that would be a hit those incremental sales –we are not going to see that flow through that we would if we produced it in-house. So that could be a little drag offset by fixed overhead leverage.
I think right now from what we see and that’s why we gave first quarter guidance for the first time in our margins. Given the investment we made in the fourth quarter, we were going to make sure everyone was clear, we are comfortable in first quarter that 31.5% to 33% and things go right in the first 7 weeks we had a phenomenal 7 weeks.
We just got to close after 6 weeks and we will obviously close in the upper end of that range. We are not yet ready to give any kind of range for the second quarter because it will be made up of different drivers.
Ken Zener
Understood. I just – I mean you structurally can interpret down source, so that’s useful.
Just going out to ask you now, if I look at the fourth quarter, the SG&A dollars of 15.8%, I kind of model the 7% variable cost, which gets you to close to 10% fixed SG&A. Would that be appropriate number to look at ‘15 on?
I am just trying to understand how the relationship of fixed SG&A and your rapid sales growth will leverage that line item?
Brad West
In the fourth quarter, we had a couple of things that I think worth pointing out to the first quarter. As a reminder in our first quarter, we always had a customer event, we had one last year and we are going to have it again this year, which will run about $600,000 of higher SG&A cost in the first quarter relative to the fourth quarter.
Additionally, in the fourth quarter in part because of the results that we had seen, we did not accrue bonus in the fourth quarter of 2014 and obviously in 2015 we are accruing bonuses again. So, those two impacts will have the first quarter SG&A dollars as well as whatever sales and volumes we are going to assume are going to be higher than what they were in the fourth quarter.
Ken Zener
Okay. And then given the change in oil, you discussed your long-term relationships on the glass side being beneficial, could you talk about specifically with resins, vinyl the new products, the decline in oil, how you are thinking about that supply chain in terms of cost obviously aluminum you discussed the hedges, but if we could have an understanding of how oil and your profiles might be impacted by deflation?
Thank you.
Brad West
Resin and the cost of resin as it relates to our suppliers is impacted by the price of oil, but maybe not as much as you might think, there is quite a bit of impact that go into that number. We have seen a slight drop because of the result of oil and what we call the CDI metric that helps set the pricing for resin.
But as a reminder, we did sign a new supply agreement with Royal last year, our new vinyl product, which is also kind of resets our price. So, as a result of that, you will see some benefit for the oil price, but it was really going to show up more for us in the cost of fuel within our own fleet and the drop in diesel price.
Ken Zener
Thank you.
Operator
Thank you. [Operator Instructions] Our next question is from Jeremy Hamblin of Dougherty.
You may begin.
Jeremy Hamblin
Good morning and let me add my congratulations and it feels like you are turning the corner on your operational efficiencies. I wanted to ask a question on another cost line item and that’s on aluminum.
So, in terms of why you are seeing the spike higher in costs, because we are not really seeing that on the spot side of the commodity itself. Can you just talk a little bit about the potential surcharges that you guys are seeing from suppliers on the aluminum side or kind of how that’s transpired over the last several months and how we should be thinking about that moving forward?
Brad West
Sure. Jeremy, the cost of the aluminum is really made of LME component as well as the Midwest premium, which is why we refer to it as a delivered price in my comments.
And that delivered price that Midwest premium component if you will is really what’s fluctuated. At the beginning of 2014 that was running about $0.11 per pound and at the end of 2014 it jumped all the way to $0.24.
So, yes, while there wasn’t as a big of a fluctuation in the LME during the year, that’s what we saw a lot of that fluctuation. And right now, it’s at $0.22, so it has tick back a little bit since the beginning of the year, but it’s still running quite higher than it ever has been.
In terms of how to predict that going forward, there is a lot of unknowns about why – where it’s at. And we have no kind of indication of what’s going to do in the future, but it’s obviously something we consider when we think about how we lock in our prices in the future.
We now have to consider Midwest premium as well.
Jeremy Hamblin
When you – just to elaborate that on a little further is this partly caused by there has been stress placed on the system, obviously there has been the problems on the West Coast ports, which everybody has been looking for alternative routes to get various products across the country whether by rail or truck or boat. Is that part of when you talk to suppliers?
Is that part of why we are seeing the spike in the Midwest premium?
Brad West
I think there is lots of factors, but if you read the reports and you see the kind of the remarks out there, it’s really kind to hard to pinpoint the increase. And there is not a lot of supply and demand or factors that really supported which is kind of reason why a lot of people expected to drop even though we haven’t seen that drop yet.
So, I don’t know that you can pinpoint just one thing like that, Jeremy.
Jeremy Hamblin
Okay. And I think you said in your comments it was a 120 basis point drag in Q1 – I am sorry in Q4?
Brad West
That’s correct, Q4 over Q4 of last year.
Jeremy Hamblin
And in terms of that drag that’s embedded in your guidance for Q1, what are we assuming for aluminum?
Brad West
Well, yes, we can’t really get into the specifics on that. Our range includes all the factors and that’s what we’ll stick with as our gross margin range.
Jeremy Hamblin
Okay. But can I assume that it’s going to be more than 50 basis point impact just from that on a year-over-year basis?
Brad West
To be honest with you, Jermey I don’t know exactly what that number is and the price of aluminum is still fluctuating right now.
Jeremy Hamblin
Right.
Brad West
So in the middle of the quarter, so.
Jeremy Hamblin
Okay. Let me just ask a question then on the glass, the plant expansion and once you have that lamination line complete at the end of Q2, the internal revenues that you could support not obviously including CGI, but kind of your legacy business, would that amount to about $325 million on an annual run-rate, is that in the ballpark?
Jeff Jackson
That will be dependent on what type of revenue we are looking at, new construction versus R&R in others words custom glass or stock glass, but yes, I see as being able to support an annual run-rate of approximately $320 million.
Jeremy Hamblin
Okay. And so then if you were to move forward and potentially be able to supply CGI’s product as well as continuing to grow the underlying business, should we be thinking about additional expansions of cutting and tempering capacity as well as another lamination line at some point maybe late 2015 into 2016?
Jeff Jackson
No, I don’t think not from a laminating standpoint, I was speaking of more PGT. So, when we bring on CGI, we will also add their custom volume in as well.
And again that can be all set by some of the rack and stock stuff we do in terms of the volume on the line itself. We will offset that by shifting more of our rack stock qualities to our supplier.
But we will not at this point, this year bring on another laminating line. The next thing we would probably look to bring on if we decided to do that would be tempering.
Right now tempering capacity can be at a strain or stress point, because you really temper all the likes to a certain degree. So, that’s probably the next kind of expansion and that’s not the next probably next year at this point.
Rod Hershberger
Yes, the other thing that we think we will see Jeremy is the code change that’s happening half way through this year as the code change on energy more so then any structural. It will drive additional inflating glass need and so you know we’re going to be watching or we got an insulating line coming in.
But we’ll be watching the capacities of our insulating lines really closely also because that will – we do a lot of insulated glass right now, we still do some mono CGI probably does a little more mono than insulating and so we’ll have to watch the drivers there.
Jeff Jackson
Yes, we just turned on – like Rod mentioned we just actually turned on last week our fourth automated insulating line and it’s in our new facility. And so we are starting to get volume off that one.
Jeremy Hamblin
Okay, great. And then last question would just be on the new vinyl product, I am assuming that in Q1 considering you just launched it, you’re not really seeing anything in terms of the new vinyl product.
When do you think that we should get a sense for how well that product is taking off. It sounded like the reception at the International Builder Show was pretty strong for that product, but can you give a little more clarity around that the new vinyl line?
Jeff Jackson
Sure. We just – we actually had a soft launch with a solid number of our customers just several weeks ago and it was well received.
We had all our products displayed in various samples and various options from bronze to the wood grain finish to the traditional light and both non-impact and impact. And the feedback we got from I want to say it was 20 or so of our.
Rod Hershberger
Yes, a little over 20.
Jeff Jackson
Customers, a little over 20 was incredibly strong. They are very excited about the program and we are starting obviously to sell it through those dealers.
With the hard launch coming just in the next about week and a half beginning of in the March, beginning March. So, the hard launch is right on the heels of our soft launch.
We are expecting it to revolutionize this industry. I mean we really put a lot of technology advancements in this product line.
We reengineered it to take internal cost out so the margins – over time the margins will replace those of aluminum as the aluminum lines obviously start to get impacted by the energy code changes. And we actually anticipate long-term it will be a better margin product for us.
So really high input from our customers and very positive so far.
Jeremy Hamblin
Great. And so that sounds like that can be a meaningful contributor both to sales as well as margin moving forward and may be in the second half of the year?
Jeff Jackson
Yes. I would say definitely sales in the second half of the year, again like any new product we got to get through the rough ends if you will of running it and put it through our system – the margin piece I would say probably fourth quarter impact definitely next year.
But there will be a transition from the old vinyl WinGuard to the new vinyl WinGuard all of that has to take place. So there is a lot to go on in the next 6 months to 8 months before we really see the full benefit of it.
Jeremy Hamblin
Great. Thanks for taking my questions and good luck for the year.
Rod Hershberger
Thank you, Jeremy.
Operator
Thank you. Our next question is from Rob Hansen of Deutsche Bank.
You may begin.
Rob Hansen
Thanks. I just wanted to ask kind of related to the last question on vinyl what is the kind of sales level that you need to kind of unlock the value, so your margins are kind of equal to aluminum?
Rod Hershberger
Well, in essence we just need to, first of all replace the volume if you will of our current old WinGuard that’s a strong, our current WinGuard I should say, I keep saying our old WinGuard. But our current WinGuard is a strong volume contributor.
The margins just aren’t obviously as much as we want them. That will take place that kind of cannibalization that transition will take place over the next 2 months to 3 months.
And as long as we get that type of volume of our new line, we are going to start seeing the margin benefits and flow through. The incremental change in the industry going to vinyl will just add to that.
Rob Hansen
And in terms of handling that demand, right I would assume, the employees that put together these windows, is there any learning curve going from aluminum to vinyl in that regard?
Rod Hershberger
There is a learning curve when you go from aluminum to vinyl and there is real small maybe a tweak of that learning curve going from the existing vinyl to the new vinyl. Its there are a few things that are slightly different.
So we will take our existing folks that are really good at vinyl and they are being cross trained on the new product line. So won’t be the learning curve of having to be used to cutting and assembling an aluminum window which is quite a bit different than cutting and assembling putting together all the parts of a vinyl window.
But we will be able to transition the existing employees into the new product line as the old product line drops off and the new one ramps up we will just be moving employees back and forth between the lines.
Brad West
Yes, it won’t be a learning curve we experienced like being ramping up our glass.
Rod Hershberger
Yes, it’s not like glass.
Jeff Jackson
Not like that, and we currently have like Rod said vinyl employees that are not going to doing the old SpectraGuard old WinGuard they are not going to be doing the new vinyl platform. So we think we have got a lot of good dedicated employees that are already trained to do that.
Vinyl right now is I would take a guess 30% of our sales Brad, I could see that with the driving in the industry the change we are seeing the codes that are coming our way, I could see that being 50% of our business next year as we continue to grow into that area.
Rob Hansen
Great. And could you quantify the go forward of demand that you kind of talked about?
Brad West
Yes, we mentioned on the call we estimated about $6 million.
Rob Hansen
$6 million got it, okay. And then last question is just on the price increases – what I guess where are you getting the – where are you pricing, seeing the highest price increases, is it CGI, WinGuard or your kind of regular vinyl products through normal windows.
Brad West
Both.
Rob Hansen
Kind of just difference between them if there are any?
Brad West
Well first off it was just a price increase on our CGI business I mean I’m sorry PGT business that we talked about last time. The 3% to 7% was on the PGT side of the business only and we’re seeing it across the board, obviously our door offerings are very popular.
So, but we haven’t gotten any relatively minor pushback on – with anything on windows or doors. So it’s been pretty much across the board we’ve been able to recognize that benefit.
Jeff Jackson
And it wasn’t straight, I mean it wasn’t like our WinGuard line went up 2% and our vinyl line went up 7% or something like that, it was selective products inside those product lines and we look at them, it was more like a surgical type deal then it was across the board and it’s been well-received. The only, I wouldn’t even say pushback but the only negotiation factor we’re involved in some longer ongoing projects where we had locked in prices and as those projects come to an end, customers will take some of those price increase but we’ll honor the price for the project which will drag on for in some cases three, four months.
Rob Hansen
Got it. Sorry, one other one is what – I think you’ve mentioned in the past doors were like 40%, obviously that’s changed with CGI.
What is that figure now?
Jeff Jackson
You know, Brad?
Brad West
Yes, with the acquisition of CGI I don’t think it is changed all that much to be quite honest with you. I mean, the CGI’s percentage of the total consolidated sales is not necessarily high enough to drive that kind of change and they do offer windows and doors.
So I don’t know that that number would have changed materially.
Rob Hansen
Got it. Thanks.
Operator
Thank you. I’d now like to turn the call back over to Mr.
Bradley West for closing remarks.
Brad West
Thank you for joining us today and we look forward to speaking to you again next quarter and if you have any further questions, please don’t hesitate to call. Have a great day.
Operator
Ladies and gentlemen, this concludes today’s conference. Thanks for participation.
Have a wonderful day.