Cornerstone Building Brands, Inc.
Q2 2020 Earnings Call Transcript

Published: 12 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Cornerstone Building Brands Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Tina Beskid, VP of Finance and IR. Thank you. Please go ahead.

[Tina Beskid:]

Good morning and thank you for your interest in Cornerstone Building Brands. Joining me today are Jim Metcalf, Chairman and Chief Executive Officer; and Jeff Lee, Executive Vice President and Chief Financial Officer. Please be reminded that comments regarding the company's results and projections may include forward-looking statements that are subject to risks and uncertainties. These risks are described in detail in the company's SEC filings, earnings release and our investor presentation. The company's actual results may differ materially from the anticipated performance or results expressed or filed by these forward-looking statements. In addition, management will refer to certain non-GAAP financial measures. You will find a reconciliation of these non-GAAP financial measures and other related information in the earnings release and investor presentation located in the Investor section of our website. Please note, we will be referencing our investor presentation throughout today's call. Today’s call is copyrighted by Cornerstone Building Brands. We prohibit any use, recording or transmission of any portion of the call without our expressed advanced written consent. Throughout this presentation, management may also refer to pro forma financial results. Such pro-forma results give effect to the completed acquisition as if such acquisitions were consummated prior to the periods presented. On August 9, 2020, the company detected a ransomware attack impacting certain operational information technology system and immediately launched an investigation, notified law enforcement and engaged the services of specialized legal counsel and other incident response professionals. As of today, we have recovered many of our critical operational data and business systems. Although the company is in the early stages of assessing the incident based on the information currently known, we do not expect the incident to have a material impact on our business, operations or financial condition. The company carries insurance including cyber insurance, which we believe to be commensurate with our size and nature of our operation. With that, I would like to turn the call over to Jim.

[Jim Metcalf:]

Thank you, Tina. Good morning and appreciate you joining us today. The COVID-19 pandemic emerged with unprecedented challenges. Yet, the Cornerstone Building Brands team rose to the occasion and delivered solid operational and financial results. Rooted in our core values and cultivated by our safe work environment, our team served our customers, kept each other safe, drove structural improvements, and strengthened the financial health of the company. Challenged with a significant decline in market demand, we took advantage of our national footprint, product breadth, and deep customer relationships to provide uninterrupted service and high-quality products to our valued customers. Leveraging our continuous improvement culture, our team was able to deliver $50 million in cost savings from structural improvements and effective near-term expense management. Overall, we have improved our profitability even in these turbulent times. We delivered adjusted earnings of €0.34 per diluted share and approximately 15% adjusted EBITDA margins which is a 130 basis points better than the same pro forma period last year. And for the fifth consecutive quarter, we have delivered margin expansion in each of our business segments. As the leading manufacturer of exterior building products in North America, we are uniquely positioned to maximize our business model and manage through this current environment. As an essential business, all of our manufacturing facilities, distribution centers and installation services were operating throughout the quarter. Now turning to Slide 4. We continue to focus our operating model on three key areas, the health and safety of our employees, servicing our customers, maintaining a strong financial position with a keen eye on liquidity and capital discipline. The health and safety of our employees remains our number one priority. We've taken extraordinary measures and invested in practices that have kept our employees safe at work and many of these policies and practices have been deemed best-in-class by local assessors and actually been used by other companies. Now turning to Slide 5. We are committed in a Cornerstone value proposition. We are strategically positioned to serve the residential, commercial and repair and remodel markets knowing the important role that our building solutions play in the growth and prosperity of the customers we serve. We have a broad portfolio of complementary products that we will continue to expand through innovation, product line extensions, and strategic acquisitions. In fact, during the second quarter, we successfully integrated the acquisition of Kleary Masonry, Incorporated. Kleary is a leading installer of manufacturing stone veneer in Northern California and is an excellent strategic fit for our company, adding to the 30 installation hubs located strategically throughout the country and strengthening our position in the cladding market. In fact, we're the only national turnkey provider of stone solutions. This service offering provides our customers with expert installation from our trained craftsman, a dedicated project manager onsite, and a vertically integrated value proposition. We're also excited about the opportunities the addition of Kleary brings across our builder and contractor networks, in particular, to cross-sell our stone cladding and installed services into our commercial buildings business. We are focused on operational excellence across our enterprise. As we began to feel the effects of COVID-19 on our business in late March, we responded with speed and intensity to combat the impact of this crisis and captured maximum benefits during the recovery. We accelerated cost and productivity initiatives that structurally transformed the company's cost structure. A few examples of our cost actions include plant rationalizations across our footprint, right-sizing the organization, and automating our manufacturing processes. In our Toledo, Ohio windows facility, we commissioned a fully automated glass line, replacing 20-year-old equipment, doubling capacity, and improving productivity by 50%. With the continued tightness in the labor market, investments in manufacturing automation will transform the way work is done at Cornerstone Building Brands. We remain committed to delivering between $80 million and $100 million of year-over-year structural cost benefits in 2020. Reducing leverage is another important priority for the company. And we continue to make progress towards that goal. During the second quarter, we reduced net debt by $44 million and improved liquidity by $35 million. We also generated $49 million of free cash flow during the second quarter and expect to continue to generate strong free cash flow the rest of the year. We are in a much better position from both earnings and capital structure than we were one year ago. Our improved cost structure and liquidity placed us in a good position to take advantage of the improving market sentiment. This includes making balanced investments in key growth categories to ensure we are deploying our capital to areas that we can drive the greatest long term returns for our shareholders. I'll turn to Slide 6. We began to see momentum within the residential repair and remodel markets. New residential construction declined sharply in April as COVID-19 triggered stay-at-home orders and rising unemployment claims. April housing starts were more than 25% lower than the previous year. Over the last few months as stay-at-home orders have been lifted, US housing activity has rebounded. Housing starts improve sequentially and June starts were only 4% lower than a year ago. Repair and remodel activity has also shown resiliency driven by robust demand from home remodeling. Our Siding and Windows segments have benefited from this positive rebound. For the month of June, Siding net sales were 1% higher than pro forma year prior. And the Windows segment was only down 2.5% versus the prior year. These results were a significant improvement from the start of the quarter as April sales were down 21% and 28%, respectively. Additionally, the delayed completion of new home construction from shelter-in-place restrictions resulted in increasing backlog, since April bookings dollars in backlog have increased sequentially every month. At the end of the second quarter, backlog within Siding and Windows segments were 55% and 40% higher than last year, representing record levels for both segments. And while we're encouraged by these improvements, the marketplace still remains uncertain. We are cautiously optimistic about a continued improvement in US housing. Interest rates are at historic lows and demand for housing exceeds available supply. But however, rising COVID-19 infection rates and a potential pullback of reopening plants weigh on consumer confidence levels and a potential for a further rise in unemployment. As we look at our commercial business on Slide 7, the impact from COVID-19 on the nonresidential market has been mixed. Approximately 38% of pro forma net sales are from our commercial products with differing degrees of exposure. Our highly differentiated product portfolio such as engineered buildings, components, insulated metal panels, wall systems, those enabled us to serve several low-rise commercial markets. Unfortunately, uncertainties brought on by the pandemic caused our customers across all commercial and these markets to defer capital spending negatively impacting demand for our products during the second quarter. Commercial construction activity is slowly improving and market demand remains varied. However, some positive spots do exist. One end-use market, we have a significant participation in is warehouses. Approximately 25% of the commercial segments net sales are for serving this end-use market which is generally positive from the strength of e-commerce. Our average daily bookings are slowly improving and our backlog is low-single-digits better than last year. Based on our current visibility, we do expect third quarter demand to improve sequentially for the commercial business. Turning to Slide 8. We continue to believe that Cornerstone Building Brands is a compelling investment for the long term. We are relentlessly committed to our customers in creating great building solutions. Our broad portfolio of products and vast manufacturing network provides us with a unique strategic advantage in a diversified set of end-use markets with new residential, repair and remodel, commercial and manufactured housing. We have great opportunities to expand and strengthen our existing customer relationships by providing integrated solutions tailored to each one of these channels and optimizing our capital deployment to create long-term shareholder value. Our discipline culture is committed to delivering sales growth and margin improvement by focusing on operational excellence every single day. We know that these challenging times like these will require swift and decisive actions to preserve our financial strength and ensure sound liquidity. Our leadership team has executed with speed to improve cash generation, lower cost, and accelerate operational improvements. These actions are rooted in our strategy to make Cornerstone Building Brands a lean, more agile, customer focused company that positions us to continue to deliver profitable growth. Now, I'd like to turn the call over to Jeff who's going to walk through some of the financial results for the quarter. Jeff?

[Jeff Lee:]

Thanks, Jim, and good morning, everyone. The Cornerstone Building Brands' business model is built on a strong culture of continuous improvement and proven execution of our strategic priorities. During the quarter, we took decisive action to align our cost structure with declining volumes and safeguarded liquidity. I'm pleased to say that these actions helped Cornerstone prove its resilience and deliver a solid financial result despite the challenging environment caused by COVID-19 pandemic. Starting on Slide 10, net sales for the second quarter were down 17% from pro forma prior year primarily as a result of lower demand across all segments due to the COVID-19 pandemic. As Jim mentioned, for most of our businesses, April was the low point. As stay-at-home orders were lifted and safety measures implemented on job sites, demand began to recover resulting in sequential improvements in May and June. We delivered an adjusted EBITDA margin of 14.7%, the highest margin in our company's history with an increase of 130-basis-point improvement versus prior year. This improvement reflects our success in effectively managing decremental volumes through near-term expenses while executing on structural cost savings initiatives. We were able to favorably impact manufacturing operating cost and lower SG&A. Our team's focus on executing our strategy of operational excellence has resulted in year-over-year adjusted EBITDA margin expansion for the fifth consecutive quarter. Overall, we have strengthened Cornerstone’s low-cost operating model and enhanced our financial flexibility, which are critical for our company's ability to grow earnings over the long term. Although, we had adjusted EBITDA margin expansion of 130 basis points, we did see reduced demand for higher margin products in the commercial segment, driving negative mix of approximately $14 million that is included in the pricing net of inflation. We continue to see net price of inflation across all our business segments. Now, let's look at our business segment results. You will note that the presentation of our segment performance now includes adjusted EBITDA measures, which we believe will be useful to investors and these measures are representative of the company's performance and provide improved comparability of results. As mentioned earlier, the effects of the COVID-19 pandemic resulted in lower demand across all segments. However, each of our segments responded with adjusted EBITDA margin expansion for the fifth consecutive quarter. Turning to Slide 11. The Windows segment generated 14.2% adjusted EBITDA margin on $428 million of net sales, which is a 140-basis-point improvement on a 15.8% decline in revenue versus prior year. Positive net price and mix combined with cost discipline were the main drivers of margin improvement. The pace of recovery within the US has been significant. In April, the unfavorable net sales variance to prior year was over 28%. While in June, the variance was less than 1%. Strong retail volume from state and local reopenings combined with repair and remodel volume for do-it-yourself projects drove the recovery during the quarter. Volumes continue to be strong moving into the third quarter requiring our plans to quickly ramp-up operations. We have implemented some wage adjustments to help facilitate those efforts. Turning to Slide 12. The Siding segment generated 22.2% adjusted EBITDA margin on $285 million of net sales which is a 170 basis point improvement on 10.4% decline in revenue versus prior year. Cost discipline combined with net price and mix over inflation were the main drivers of this improvement. Similar to Windows, the pace of recovery within Siding was strong. Our Siding business has a larger participation in the repair and remodel markets in both the US and Canada. Within our US Siding business, April net sales were down 23.1% to prior year while in June, net sales were favorable 5.7%. We experienced the same dynamic within our Canadian Siding business. April net sales were down 20% and June net sales were up 4.9%. We continue to see strong demand in our Siding business and are cautiously optimistic about the market recovery and positive momentum in the residential end markets. Moving on to the Commercial segment on Slide 13. Net sales in the second quarter of 2020 were $371 million or 22.7% lower than the same period last year. While demand dropped as a direct result of the slowdown in construction activity, still prices also dropped pressure in average sale price per ton. We were able to effectively manage the spread dynamic which resulted in a immaterial impact to adjusted EBITDA. Despite the $14 million mix, I mentioned previously we generated 15.2% adjusted EBITDA margin for the quarter, which was 10-basis-point improvement over the prior year, the fifth consecutive core of margin enhancement for this segment as a result of strong execution around effective cost management. The structural improvements achieved within the Commercial segment offset the negative mix impact realized from the shift towards smaller, less complex projects. Overall, the low rise nonresidential markets are stable and have not experienced the rapid pace of recovery that exists within the residential end markets. However, we continue to see improved bookings over the second quarter. Since the business environment and market conditions under COVID-19 are still fluid and evolving, we will remain flexible and adjust our near-term responses as necessary to preserve our solid financial performance. Turning to Slide 14. I would like to make some comments about our balance sheet and liquidity. We generated free cash flow of $49 million in the second quarter. A $60 million improvement over the prior year primarily from effective working capital management and lower cash taxes. Working capital reductions generally provide a countercyclical benefit in downturns like the current one, enhancing our cash flow and liquidity. We are focused on both aligning working capital with volumes as well as structurally improving it for the future, as evidenced by the 1.5% point improvement in primary working capital as a percentage of net sales over prior year. We expect to continue to generate strong cash flow over the rest of 2020. We are anticipating a cash benefit of $50 million from favorable working capital improvements. In addition, we are reiterating our expectation to reduce structural cost by $80 million to $100 million in 2020. We remain committed to our strategic priorities of improving our customer experience, operational excellence and strong financial performance. While managing cost and generating additional cash for important areas of focus, we have not lost sight of the need to continue to invest in the business for the long term. We remain committed to innovation and investing in new product offerings and process automation that will generate profitable growth in the future. We anticipate the full year 2020 capital spend will be approximately $85 million. In the area of tax, we are taking advantage of COVID-related government stimulus programs to defer certain payroll and income taxes to later in 2020 or in some cases into 2021. Additionally, provisions within the CARES Act will allow the company to deduct higher interest expense for income tax purposes that would have been previously disallowed. We expect these actions coupled with the impacts of improved demand have a net cash tax benefit of approximately $10 million in 2020. We ended the quarter with approximately $483 million of unrestricted cash on hand and $146 million of excess availability on our asset base revolving credit facility. We believe our liquidity is sufficient to weather the We believe our liquidity is sufficient to weather the economic uncertainty related to the ongoing impact of the COVID-19 pandemic while providing the company the flexibility needed to continue to execute our growth strategy. Turning to the third quarter outlook on Slide 15, we recognize that there's still uncertainty around the ongoing impact of the pandemic. However, we believe we have enough visibility, confidence in our operations and cost structure to cautiously provide guidance under the following assumptions. That momentum continues within the residential markets and non-residential markets remain stable. We expect to consolidate net sales for the third quarter will be between $1,160 million $1,240 million and adjusted EBITDA to be between $170 million and $195 million. We plan to stay disciplined on price, drive profitable growth, and capture additional cost savings, positioning us to generate year-over-year margin expansion again next quarter. Turning to Slide 16. Our priorities to build an even stronger company, protect the health and safety of our teammates and serve our customers, position us to deliver strong operational and financial results. Our team successfully executed against these priorities in the second quarter despite the challenges and the uncertainty created by the COVID-19 pandemic. We are proud of the continuous improvement culture we have created and believe the proactive measures we are taking will strengthen the long-term fundamentals of our company. And now, I'd like to turn the call back over to Jim for some closing remarks.

[Jim Metcalf:]

Thank you, Jeff. The safety of our employees is our number one operating principle and transparent communication has been a top priority. I'd like to acknowledge and thank our employees working in all of our manufacturing plants and throughout our entire organization for their unwavering dedication and commitment to serving our customers and adhering to our safety guidelines. As we continue to successfully navigate the challenges brought on by the COVID-19 pandemic, our actions remain rooted in strategy. We are committed to innovation and investing in new product offerings that will generate profitable growth in the future, which is a key element of our strategy. While managing costs and generating additional cash are important areas of focus, we have not lost sight of the need to continue to invest in our business for the long term. We fully intend to emerge from this pandemic an even stronger company, better positioned for success, and long term profitable growth. This ends our prepared comments and now we'd be happy to take your questions.

[Operator:]

[Operator Instructions] Your first question comes from Lee Jagoda with CJS Securities. Your line is open.

[Lee Jagoda:]

So, I guess, we started last quarter with you giving us the sort of April down mid 20s and then earlier on the call you gave us some clarity on how June shaped up on the residential side. Can you talk about the Commercial side in June and then also just by segment trends you’re seeing in July?

[Jim Metcalf:]

Yes. Let me give you a couple global comments and then I’ll turn it over to Jeff. July, the trends continue to be strong, a strong backlog in July both on the residential side and we're starting to see stabilization on the Commercial side. If you look at the Commercial bookings and backlog, as I said, the backlog is low-single digit for Commercial and we're seeing sequential improvement in our back - our bookings from the second quarter. So, we feel, Lee that the Commercial business has stabilized. The overall market has stabilized. We feel steel costs have also stabilized even though at low levels. And we, on the Commercial side, we're still cautiously optimistic about the third quarter and margin expansion continues to be a focus that we have in the business.

[Jeff Lee:]

Lee, as you think about the month of June itself, you can see from the change in July, it has significantly improved. The month of June was down about 25% for the Commercial segment.

[Lee Jagoda:]

And then just following up on the Commercial side, you've done a really good job holding on to price, you know, excluding the mix issues that you’ve seen in the face of both lower raw materials and soft demand. How should we think about this, you know, I guess pricing over the next couple of quarters just given the demand environment? And would you continue to expect EBITDA margin expansion in Commercial in Q3?

[Jim Metcalf:]

That is our focus, our margin expansion. Price has been under, really under pressure most of this year. And as you mentioned, we have a pretty good track record of balancing price and volume with the fluctuation in cost that we've seen really over the last five quarters. So, pricing, we feel has stabilized even though at a low level. And we're very focused not only on balancing price and volume to expand our margins, but really focus on our plan efficiencies and also cost-outs in the commercial business. We've de-layered the organization. We feel that we've lowered the overall breakeven of the commercial business, and we're really focused on margin expansion into this quarter.

[Lee Jagoda:]

Okay. One last one for me and I'll hop back in. Just on the residential side as it relates to pricing. In Q1, I think you had mentioned you put in around the 5% price increase and we were waiting to see what would ultimately stick just given the environment we were entering into. Any update on what actually has stuck and what you expect for the rest of the year?

[Jim Metcalf:]

Yes. We put in price increases in our residential business late first quarter. That really took effect late in the first quarter and really, impact in the second quarter. So, we've been pleased with our price performance on the residential side. Again, we think that's a core competency that we have as Cornerstone. And with the strong volumes that we're seeing, pricing is pretty solid at this point.

[Operator:]

Your next question comes from Julio Romero from Sidoti & Co. Your line is open.

[Julio Romero:]

I guess my first question is just on the backlog. I know you mentioned backlog for siding and windows were up 55% and 40% year-over-year. Can you just talk to the mix in that backlog maybe from a good, better, best perspective for both siding and windows?

[Jim Metcalf:]

Yes. If you look at our overall residential business, the mix is about 50/50 new res versus repair/remodel where the siding business has that heavier percentage on the repair and remodel market.

[Julio Romero:]

And I guess you mentioned on the commercial side, 25% of your sales are coming from the warehouse end market which continues to be strong. Could you maybe give us a sense of our end market breakout at the moment? I mean warehouses maybe compared to office, retail, manufacturing?

[Jim Metcalf:]

Yes. That’s a great question. One of the advantages, we've talked a lot about diversification of the overall Cornerstone portfolio of repair and remodel, new commercial and new residential. We haven't talked a lot about the diversification we have in our commercial business. We actually participate in each one of the end-used market that are five stories or below. Right now, as we said warehouse is strong with the data centers and e-commerce, that’s right now making up about 25% of our business. But we stayed really closed to our customers and whatever end-used segment shows growth or potential, our customers really gravitate to that. Right now, it’s the warehouse data centers where there is a mix. You aren’t seeing a big, a strong demand on office and retail. So, the advantage we have in our commercial business, we don’t have one of this MU segments that were completely focused on or it’s really our base business. So, we’re really spread out on anything that’s five stories under and our customers stay close to what are the growth opportunities. Along with that, there's a trend that people have started talking about with COVID-19 and going out to the suburbs and with getting out of the urban centers, and we think that also a long term plays well with our diversification of our commercial business where smaller commercial business, five stories or below will be - could be built around suburban areas.

[Julio Romero:]

Understood. So, you may be sticking more to five stories and below unless you may be more nimble and able to adjust your business not necessarily tied to one specific end market.

[Jim Metcalf:]

Absolutely. That’s very well said and that's why we think. That’s a great advantage for us.

[Julio Romero:]

Okay. And I guess just last one for me to hop back to Windows, have dealers rebounded there and can you maybe speak to the strength you’re seeing in that channel in July?

[Jim Metcalf:]

Yes. Our customers are quite busy. They're - we really watch the inventory levels of our customers. As you know, COVID-19 customers kept inventories very tight with the rebound in commercial. It hasn't been an inventory rebuild. It's been flowing through. We also follow the point of sales for a lot of our retail customers which has been quite strong and continues to be very robust as we speak. So, our dealers and customers are flowing through the products. The only areas that were a problem a few months ago is when job sites were being stopped. Those have opened up. And right now, it's a very positive.

[Operator:]

Your next question comes from Richard Kus with Jefferies. Your line is open.

[Richard Kus:]

Thanks for taking my question. So, just to talk a little bit more about the Commercial business and the backlog there. One of the things you mentioned in your comments is that you've kind of, you know, moved from a negative mix standpoint to some of the lower complexity type business. As you look at your backlog that you guys have, is that something that persists in the backlog? And then what does it take to get some of that, you know, better higher margin business back?

[Jim Metcalf:]

Well, the - in a higher margin business, really, if you look at that, it's more on the IMP business, our insulated metal panels business, which has gone from higher end architectural business which has slowed. And those jobs have been paused even at the architectural level to jobs like cold storage, which has shown growth within the IMP segment. And that is a price mix, the price and product on the high end. Architecture is much higher than the cold storage. Also, we're seeing from a building standpoint, the lower complexity buildings which are, you know, basic warehouses, lower complexity buildings which come at a lower price point in the segment. So, it's really the overall demand. We need, you know, private capital spending to start up again, which will - which should help and really, there's still a lot of unknowns there as well.

[Richard Kus:]

And then just in terms of the backlog itself, how far does that extend out? And then, is it really hard to have visibility later this year because, obviously, some of the indicators on the commercial side weren’t great for a long period of time there during this last quarter? So, I think people are concerned that maybe late this year or early next year, you hit a bit of a soft spot. How do you guys view that?

[Jim Metcalf:]

Depending on the complexity of the building, the lower complexity of the building, you’re looking at 90 to 120 days.

[Richard Kus:]

And then, last question for me on the cost take-out side of things, you guys did a great job in the quarter. It looks to me from the bridge that you got about $45 million cost take-out there. How much of that benefit that you ended up getting an EBITDA, represents a permanent cost take-out versus some of the more temporary items?

[Jeff Lee:]

Yes. It's a great question. We've been focused on both. Obviously, with the uncertainty inside of Q2 and even the forecast going forward is there was just a lot of uncertainty in the marketplace, we've been making sure that we're managing both the structural side permanent reductions and also those near-term expenses for liquidity purposes in particular. And so, as you look at - as you look at Q2, about 50/50 of that was kind of split between structural and near-term expenses. And as we look forward into Q3 and Q4, as volume comes back as we talked about last time, we would expect some of those near-term expenses to come back as well. It would be a very positive thing. Right? And even as Jim mentioned, inside of some of the conversations around labor and some of the issues that we're having with labor right now, we have gone out and increased some of our wage expenses for our employees to make sure that we keep the retention there. So, some of those near-term expenses are coming back into the company as we predicted and that’s a good thing as volumes are coming back, as structurally, we’ve taken out those. Year-to-date on structured cost out, we’ve taken out $50 million so far inside the company and that’s coming through a lot of different initiatives that are in place with automation. It’s coming through some of the plant closures in the footprint rationalization that we’ve gone through and there’s still more to come, right? There's another projects that we're working on right now.

[Operator:]

Your next question comes from Matthew Bouley with Barclays. Your line is open.

[Matthew Bouley:]

Thanks for taking the questions. I wanted to ask about that backlog acceleration in windows and siding, and I hear you mentioning potentially some labor issues there. I guess, are there production issues overall that are sort of preventing you from fulfilling orders there and maybe if you could reconcile that large backlog acceleration, the up 40% and 55% kind of with the revenue guidance for a year-on-year decline in Q3. Thank you.

[Jim Metcalf:]

Thank you for the question. Really, it gets down to very - to knock that backlog down. It’s very simple. It’s bringing in the labor. As Jeff just mentioned, we have labor shortages. We put in initiatives. We've talked about the wages. We put in internal marketing, retention bonuses, recruiting. We're very aggressive about bringing the labor in. Our biggest area is our windows business of having the appropriate labor. So knocking those big backlogs down really, really, equates to bringing back the labor with this quick turnaround. That is why also we talk a lot about automation. Automation is critical because this labor shortage is not going to end in the very near future. So, our strategy is to investing a large percentage of our CapEx budget to automate not only our windows plant but our siding plant, the commercial pant because just overall manufacturing bringing back the hourly employees at this time has been very difficult. The CARES Act and in some of the - some of the government stimulus package was impacted that. Just the COVID-19 overall issue has impacted it, but we are extremely [technical difficulty] we get the labor, we can shift the backlog.

[Jeff Lee:]

And Nat, just to follow up a little bit on that as well. As we kind of came into the months of April - March and April, we were putting the brakes on, right? We're really slowing down things in anticipation of what might come with the sudden shutdown type of scenario. And then as we get into the May-June time frame in particular in our residential businesses, window and siding, it is completely reversed, right? And so, we went from putting on the brakes and stepping on the gas and trying to get as much production as we can. It's not a capacity issue for manufacturing when it comes to equipment. It is that labor component that Jim talked about. And that’s all effort right now put in place to make sure that we have that. And we've seen some improvement there. Some of the actions that we've taken with the wage increases and modifications of hiring practices, et cetera have allowed us to increase that and to get more wage or more value to employees back into the organization.

[Matthew Bouley:]

And then secondly, just I guess it’s kind of a segue from that but also on the Q3 guide. Since you're guiding the margin expansion - EBITDA margin expansion but with gross margins perhaps down at the midpoint and correct me if I'm wrong. You know and I hear you that there's going to need to be some cost coming back into the system but clearly that margin guidance suggesting that there's a fair bit of SG&A control into the quarter. So, maybe if you could just put a little more color around SG&A dollar expectations. What costs are coming back and kind of what level of confidence is there that you know the SG&A side is really going to drive this EBITDA margin uptick? Thank you.

[Jeff Lee:]

Yes Matt, let me take that question. A couple of things, right? When you look at it on a year-over-year basis, we are seeing a slight downside to gross profit margins. But on a sequential basis, they continue to move up. And as we thought about that on the lower end of our EBITDA margin range, it's still a 50 basis point improvement versus prior year. And on the high end, it's 150 basis point improvement. It shows that that volume benefit that we get as a company as volumes come back and the operating leverage that we have around that. We are being very cautious on SG&A expense, right? We want to make sure we don't know - there's still a lot of uncertainty and we want to make sure that we're acting appropriately until we can fully see our way through this pandemic. And so, because of that, we are keeping a lot of the controls very tight around our SG&A spending when it comes to new hires or wage inflation, those type of things. Travel obviously is down maybe the things that we can really control, we want to make sure that we keep that under control. So, we feel good about the guidance that we put out there which is margin expansion and we have a little bit of pressure inside of our commercial markets with the steel spread, but we are continuing to see margin enhancement even with that inside of our commercial business with some of the SG&A and other things that they were doing to make sure we maximize the profitability for the company.

[Operator:]

Your next question comes from Lee Jagoda from CJS Securities. Your line is open.

[Lee Jagoda:]

Just two quick follow-ups. One with regard to backlog, I appreciate the percent increase dynamic and, I guess, color there. Can you just give us the dollar backlog in Windows, Siding and Commercial?

[Jim Metcalf:]

Just one minute here, we’re grabbing the data.

[Lee Jagoda:]

And I guess while you’re looking for that, probably an easier question, the tax guidance you gave of $10 million benefit is a little bit lower than you gave previously, is that just because of the increased financial performance?

[Jim Metcalf:]

That's correct, Lee. It's a combination of a couple of things actually. We've got higher expectations, obviously, on earnings from the expectation that we had last quarter as we look at the second half of 2020. And it’s got some benefits in there as well from the CARES Act, and in particular the 1639(j) which is the interest rate limitation move from 50% to 30% and so it allows us to take a little bit more advantage of that. So, the combination of those two things, one offsetting, but obviously, the increase in the forecast being most of that dropped.

[Lee Jagoda:]

And is it too early to tell what 2021 looks like from a tax standpoint?

[Jim Metcalf:]

It's too early Lee.

[Lee Jagoda:]

Okay.

[Jeff Lee:]

Lee, we're still looking that dollar amount, just the backlog that we set on the residential side, we - the windows sub 40% and sidings plus 55%, we said low single digits on the commercial backlog. And we will get you the dollar amount and post that.

[Jim Metcalf:]

We can post that correct.

[Lee Jagoda:]

And those percentages are year-over-year as of the end of Q2?

[Jeff Lee:]

Yes.

[Lee Jagoda:]

Yes. The dollar amount will be great and I'll look for it once you post it. Thank you.

[Jim Metcalf:]

Yes. You're welcome.

[Operator:]

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.