Cornerstone Building Brands, Inc.
Q4 2020 Earnings Call Transcript

Published: 4 Mar 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to Cornerstone Building Brands Fourth Quarter 2020 Earnings Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Tina Beskid, Vice President of Finance and IR. You may begin.

[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.

[Jim Metcalf:]

Thanks, Tina. Good morning and thank you all for joining us. As I look at where Cornerstone is today, I’m incredibly proud of our team, the accomplishments and what was truly an unprecedented year. Decisive actions that took place at the start of the pandemic not only allowed us to operate safely and serve our customers, they made Cornerstone a stronger company and well positioned for 2021. We delivered strong fourth quarter results rounding out the year with record performance, despite a very challenging market environment. We saw widespread improvement across the business. Fourth quarter net sales for the Window and Siding segments combined were approximately 4% higher than the prior year and average daily sales in our Commercial business were 3.5% higher as compared with the third quarter. Furthermore, we maintain cost discipline, which drove our seventh consecutive quarter of adjusted EBITDA margin expansion across all of our segments. The fourth quarter performance demonstrates our team’s ability to consistently deliver strong results despite difficult challenges. It shows our dedication towards the partner of choice for our customers, the importance of a strong portfolio of brands, a national footprint and ultimately why we continue to be a market leader. We have entered 2021, a leaner and more agile company eager to serve our customers and capitalize on the recovery in our markets.

[Jeff Lee:]

Thanks, Jim, and good morning. We continue to deliver strong financial performance with another quarter of year-over-year margin expansion. The resiliency of our brand portfolio and the actions we have taken throughout 2020 demonstrate our relentless drive for exceptional results. We have strengthened Cornerstone’s low cost operating model and enhanced our financial flexibility, which are critical for our company’s ability to grow over the long-term.

[Operator:]

Our first question comes from Lee Jagoda with CJS Securities. Your line is open.

[Lee Jagoda:]

Good morning. So Jeff, just starting with the Q1 guidance, I assume that the guidance ranges were negatively impacted by the abnormal weather in parts of the country that typically wouldn’t see that kind of weather. Can you speak to how much if at all that shifted those ranges to the downside and how much of the headwind you would expect to make up in the balance of the quarter?

[Jeff Lee:]

Yes, Lee, good morning. I appreciate your question. So as we think about the weather impacts mainly inside of the Texas area, we estimate it’s probably a $15 million impact on revenue and about a $5 million impact on EBITDA. Now just to elaborate on that just a little bit further, our manufacturing locations did see a couple of days of shutdown in particular inside those regions, where we were impacted just from the freezing weather. But our supply chain probably got a little bit more impacted than the manufacturing locations themselves. We’re working through that. But that $15 million to $5 million range is we’re estimating right now. And that does include – we have included that in our guide for Q1. So the guide that we put out there is reflective of those types of that situation, and it’s still pretty fluid, but for the most part, all of our manufacturing operations are up and running and we’re working through some of the supply chain without disruption.

[Lee Jagoda:]

Got it. And then just looking at both the volume growth that you would expect, particularly on the residential side in 2021, and then layering on top of that the increased raw material pricing. How should we think about the working capital use assumptions as part of the free cash flow outlook in 2021?

[Jeff Lee:]

Working capital for us is a focus, as a company, it’s been something that’s been a guiding principle for us. You might recall early in 2021, in late 2019, we talked about $100 million reduction of working capital as a goal for the company. We suspended that guidance as we kind of get into the COVID Q2 timeframe of 2020. But for 2020, we actually were able to take down as a percentage of sale our primary working capital from 16.3% beyond about 15.9%. So improvement inside of 2020 and we expect to continue that into 2021 as an organization that we’re still committed to getting the $100 million reduction.

[Lee Jagoda:]

Got you. So all else equal working capital should come down as a percentage of sales, but in absolute dollars, I assume it goes up?

[Jeff Lee:]

It does Lee. We do anticipate growth inside of 2021. And with that comes the normal expectation from receivables and inventories to service our customers, but that reduction – that percentage is probably the best way to think about, how we’re thinking through the working capital itself. We will – as we anticipate the revenues for 2021 and apply that percentage on working capital, the primary working capital, we think that’s a good way to think about it and do expect that to improve inside of 2021.

[Lee Jagoda:]

Okay. I will hop back in queue and let others ask a few. Thanks.

[Operator:]

Our next question comes from Julio Romero with Sidoti. Your line is open.

[Julio Romero:]

Good morning. I was hoping to ask about lead times in the residential segment, do they continue to be relatively longer than usual? And when do you see that reverting to the mean?

[Jim Metcalf:]

Yes. Thank you, Julio. This is Jim. Yes, we have, obviously – we said, we have extended lead times in our residential business, our backlog as well. And some of the things we’re doing on the lead times, it’s really the consistency of delivery and the communication to our customers. As we said in the last couple of calls, we’ve invested in 2018 and 2019, 2018 and 2019 in capacity. In fact, in our Windows business, we’ve had about a 12% increasing capacity. We’ve talked about automation, but a lot of that is really capturing the recovery. We’ve also realigned our footprint. As you know, we have a national footprint of our Windows facilities. We’ve realigned and revitalized our – reevaluated our footprint. So we can ship out of area to take care of lead times. So we stay close to our customers. We think it’s very important to have consistent lead times, even though they are long. We have a very focus – as Jeff said, 2.5% of our CapEx, half of that is going to be into our Windows business. We’re continuing to put in new lines. Our 1500 Series is our most popular Window line. We put that in numerous plants to get additional capacity out to our customers. So our lead times are extended, but the consistency of the lead times and the communication to our customers and the key is we believe we’re investing into our business over the last couple years, but we’re going to continue to invest to capture the recovery. And that’s going to be really the key as we really want to capture this residential recovery. And we’re putting investments behind that.

[Julio Romero:]

Okay. I wanted to dig a little deeper on the impact of steel specifically to your commercial segment. Like you talked about in the prepared remarks about setting price at the time of order and aiming to keep gross profit dollars generally steady. I’m just trying to think about how does steel affect your shorter term businesses in commercial? If you could give us a sense of those two cross strength there?

[Jeff Lee:]

That’s a great question. Thank you. We started to announce price increases in steel in the fourth quarter. And our buildings business, as we said, it’s priced at order that some of those are longer lead times. So we implemented price increases in the fourth quarter to be effective into the first quarter. And we’ll start seeing those late in the first quarter, but our quicker term business, we talked about our components business that gets priced on a weekly basis and sometimes on the order basis. So that order rate is very strong. We are pricing. We put out numerous price increases in some parts of our commercial business. We’ve implemented three or four increases in the quarter. And our guiding principle has been, and will continue to be, is to offset inflationary on steel. We look ahead a few months on steel costs and we anticipate where steel costs are going, and we want to price ahead of that. So we feel that we have really the processes in place. We have a centralized pricing desk. We use analytics on different types of customers on shorter term on our components business versus our longer lead time building business. And we feel that we have a good process. As Jeff said, through 2018, we went through a very rising market with the tariffs. And this is a very different market, because in 2018, the steel industry was ahead of other commodities. So a lot of our business, our metal building business went to alternative suppliers, either alternative construction practices, i.e. lumber, tilted-up concrete. And we really follow where the steel metal building industry is now. And if you look at where commodity prices have gone in other areas, we feel as an industry and as a metal building business, we are also competitive with other types of construction, which is really important as we price our business going forward.

[Julio Romero:]

Okay. I guess just last one, just on capital allocation, you ended up with a pretty solid cash balance, and I think your slide deck alluded to debt pay down. I don’t know if you could help us with the cadence of that pay down, when should we expect to see some deployment towards debt pay down?

[Jim Metcalf:]

Yes. I’ll take that question. So we did have a strong cash flow generation in 2020, $227 million worth of free cash flow, which was an improvement of a 109% over a 2019, so strong cash flow generation in the year. And a lot of that was some of the COVID related activities as we reduced our CapEx from the first guide of 2% to 2.5%, we dropped that down to $85 million to make sure we understood what was happening within liquidity and just the uncertainties inside a COVID-19 pandemic. As we look at 2021, we are expecting to have that 3/4 to one turn reduction inside of our net debt leverage ratio. And we’ve been successful with that. And so in 2019, we’re able to take debt down about 3/4 of turn. In 2020, we’re able to take debt down about 0.5 turn. And then right now our guide is 3/4 to one turn inside of 2021. And it’s going to be a combination, as Jim said inside of his comments. A lot of that comes on our earnings generation that we expect inside of 2021 combined with the working capital initiative that we just talked about as well as a company. And so it’s delivering on all of those objectives that we have in the strategies that we have in place for the company. And we should see that come down throughout the year, very consistently with what we’ve seen in prior years as EBITDA on a quarter-over-quarter basis continues to improve.

[Julio Romero:]

Okay. So the leverage ratio takedown throughout the year, but should be a combination of earnings growth along with debt reduction.

[Jim Metcalf:]

That is correct.

[Julio Romero:]

Okay, great. Thanks for taking the questions.

[Operator:]

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

[Matthew Bouley:]

Good morning. Thanks for taking the questions. I wanted to ask about the cost savings the $75 million to $80 million you’ve got plan this year. What I’m really curious about is kind of the mechanics of a year where you’re planning to take this much cost out, but you’re – on the other side, you’re talking about investing for growth and wanting to be in the right places, particularly to capture this residential demands? So if you can get into maybe some of the elaboration, the details, like what level of costs, where are you taking out costs and how do you kind of balance that with needing to reinvest in certain areas. Thank you.

[Jim Metcalf:]

Yes, Matt. Let me address that one. So we do have a guide of $75 million to $80 million worth of cost out for 2021. And just as a reminder, if you go back to the merger, we were able to take out approximately $250 million worth of costs over the last couple of years. And so it’s a core competency. It’s a real process driven organization right now that is focused around cost out without jeopardizing service, without jeopardizing quality to our customers. In fact, just the opposite as we think about cost out, we think about how do we improve our service levels by doing things such as automation. And the speed that we are able to produce some of the products through automation and the quality that comes out from those. Those things are helping us with our service levels. They’re helping us with our capacity. They’re helping us to make sure that we’re keeping our customer first and foremost in our mind, as we’re thinking through these. We are excited about the opportunities. These are detailed projects. They are across all of our different facilities within Cornerstone and their project owners have been identified and they’re running these individual projects. And there are combinations. Some are labor focused when it comes to automation, some are material focused, making sure that we’re getting the right value for our proposition as a national provider and as one of the largest purchasers of different commodities. We get benefits from that. And some are just continued structural cost out when it comes to looking at our manufacturing sites through safety and just efficiencies and the footprint that’s out there as well. And we’ve done a combination of all of those over the last couple of years. But again, we don’t look at in a vacuum. We really look at our customers first to make sure that we can service them appropriately. And the cost out then is additive to that not something we would take away.

[Matthew Bouley:]

Got it. Okay. Now, thank you for that detail, Jeff. The second one back on the commercial side, just given it’s such an unusual scenario where we’re steel is inflating. But it’s in the backdrop of choppy non-residential demand. And I heard you mentioned there could be some potential for pull-forward going on in the shorter cycle businesses, when you talk about being competitive with other types of construction. So my question is, should we think that there’s risks for any sort of further impacts to volume as a result of all this inflation? Do you find that your dealer network and customers on the engineered buildings side? Are they willing to accept that the type of necessary price increases in this environment, when you have such a choppy demand backdrop? Thank you.

[Jeff Lee:]

Yes. Thank you for the question. Great question. First as we said, the market is steady, but we’re still has this COVID-19 impact. And that will be the – really the catalyst getting that behind us for spending. Really the backdrop that we really look at is the lag with residentials 18 to 24 months. So that is really central to the commercial business. Follow the – go into new suburban areas, but again, it’s 18 to 24 months. So you’re looking at the back half of the year for that lag. We did see the order intake strong. As we said, but we do believe some of that is the pull forward with steel costs going up, but also with our pricing. Our customers are trying to get ahead of our price increases. So we think that also could be some risk on the back half of the year. So we are cautiously optimistic. It’s steady. It’s not where it was last year. We’re going to have better comps as you get into the back half of this year. But again, in a year still looking, we will not be at 2019 levels. I mean, even if the market and our business is up low single digits, you’re still down 15% from 2019. So the comps may look better, but it’s still a very choppy market. We’re also getting – you’re getting some flicking information, the Architecture Index is still weak, Dodge is showing some positive signs. So it’s still a choppy market. From a customer standpoint, we really track job cancellations. We follow that on a weekly basis. Right now our first quarter intake is ahead of last year. And if you recall, the first quarter of last year was a pretty strong quarter. So again, we don’t want this to be a false positive. We think it could be some pull through, and we’re still very cautiously optimistic, can be better than last year, but it’s still – we’re still focused on that lag of 18 to 24 months is really when the market will start showing some health.

[Matthew Bouley:]

Understood. I appreciate the detail on all those questions. So thanks and good luck in the quarter.

[Jim Metcalf:]

Thank you.

[Operator:]

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

[Richard Kus:]

Hey guys, good morning. Just to focus on the steel piece of this commercial business maybe just one more time coming out maybe a little differently. The price increases, I appreciate that you guys are pushing them out there. And the last question was basically things in non-res are a little bit soft. So are you having success getting that stuff through? I guess, to kind of go a little bit further on that. Do you expect your pricing to be able to fully offset the steel costs that your – the increases that you’re seeing in 2021?

[Jim Metcalf:]

That has been our guiding principle of offset inflation. We have processes in place. Since 2018, we have a central pricing desk. We have a look ahead at where steel costs are going. So pricing now on where we anticipate steel costs – rising steel costs. As I mentioned earlier, we started announcing in the fourth quarter as we saw steel prices coming from the trough at really rapid rates. We have a – really a great procurement supply chain group. We have subject matter experts in not only steel, but PVC resin that are very close to our steel suppliers. We look at the CRU on a daily basis seeing where the costs are going, and we want to stay ahead of the rising steel costs on our pricing. We’ve been there before and we’ve been successful. And as Jeff said, we have processes and subject matter experts on this. And so our guiding principle is yes, offsetting inflation is our objective.

[Jeff Lee:]

And Rich, just to add that a little bit as well. When you look at the guide that we put together for Q1 on a year-over-year basis, our EBITDA margins and our gross profit margins are both favorable, which is the estimate and forecast that we have in place right now for Q1. And we are in that inflationary environment, right? So it is showing – the guide that we put together is showing that we are able to pass those through to our customers and get that value proposition that we offer.

[Richard Kus:]

Yes. It was impressive given the input cost increases we’re seeing. I guess, my follow up is, how long before those higher steel costs that you saw trough in Q4, and then really start to move up rapidly? Deals really start to impact you in Q1 or is that something where you’re really seeing that more in Q2?

[Jeff Lee:]

It really depends on the commercial business and our components business. It’s a quick turning business. So, that is in a – in Q1 where we’re buildings is a longer range, which could be a late Q1, early 2Q impact.

[Richard Kus:]

Got it. Okay. That’s very helpful. And then maybe lastly for me, I know you guys got some CARES Act benefit on taxes in 2020. How do you think about that changing from a cash standpoint as we look at 2021?

[Jeff Lee:]

Yes. Appreciate the question on that. And it’s a good question. We did get a benefit in 2020 of about $20 million just from the delayed payments on some of the payroll tax. Half of that will return in 2021 and the other half of that returns in 2022.

[Richard Kus:]

Got it. I really appreciate the responses. Thanks guys.

[Operator:]

Our next question comes from Kurt Yinger with D.A. Davidson. Your line is open.

[Kurt Yinger:]

Great. Thank you and good morning, everyone.

[Jim Metcalf:]

Good morning.

[Kurt Yinger:]

I just wanted to start on the growth side and was hoping maybe you could put a little more color behind what you’re focused on from a go-to-market or innovation perspective here in 2021. And kind of specifically within siding new product opportunities to maybe help slow some slip share leakage away from vinyl.

[Jim Metcalf:]

That’s a great question. And as we said, we’re really pivoting to grow the business. And we’re very excited about the growth initiatives. We have growth initiatives in each one of our businesses. You mentioned siding, which I’ll address in a second. Windows, I mentioned in my prepared comments, as well as in our commercial business, we think there’s some great opportunities there as well. We have a very robust new product development pipeline. We have an innovation center that looks at products that will be introduced in the next year or so. As Jeff said, a lot of those have two year or less payback. And we’re really excited about our go-to market strategy. We’ve introduced some products this year or in 2020. I’ll turn to our siding business. We are really in – we believe we’re the only manufacturer really investing back into the siding business. We’re investing in additional capacity. We talked a little bit about windows, but we’re addressing capacity increases in efficiencies in our siding business. We’re really excited about that. And we’re also excited about new products. We have some test markets that are being held right now for two of our new products that we are prepared to elaborate today on, but we’re really excited to talk about them in the future. We’re getting some wonderful feedback from our contractors from our distributors. We’ve invested in a new plant in Rocky Mountain, North Carolina, which is just starting to run test products. So we’re pretty excited about that. And we’ll be able to elaborate a little more when we’re ready to have an official product launch. But we’re excited about the siding business. It had a record year last year, my hats off to the entire siding group. They had record performance. They have a strong backlog now we’re taking care of our customers. And what’s great about our siding business, we do business with every customer – every large customer that you know. We’re really excited about reinvesting back in our siding business, and it is a growth business. And we feel that there’s a good, better, best in this business. And we want to be all three of those. So we’re very excited about what we’re doing in siding. On windows, we’re continuing to grow our capacity there. We want to capture the recovery. And we think that we’re putting investments – as we said, half of our investments are going to the U.S. windows. Along with that, we’re looking at consolidated brands in siding. We’re very focused on brand consolidation also in our commercial – in our stone business, we consolidated brands. And we’re also putting together things to make it easier to do business with customer portals, e-commerce. So isn’t just the product introduction, it’s also, we’ve learned in this COVID environment, that technology is going to be extremely important as we go forward, and this is what our customers expect. So our customers are excited about the siding business. We’re really excited and we truly think it’s a growth business.

[Kurt Yinger:]

Great. That’s great. I appreciate the color. And then on the 12% capacity increase in windows, you talked about. I’m curious how you think about kind of your effective capacity utilization right now, and the potential to improve that as hopefully COVID moves into the rear view and perhaps you’re able to add some bodies on the labor side. What would you – would you kind of referenced as a capacity utilization number and where you think that could go or where it would normally be?

[Jim Metcalf:]

Yes. That’s a great question. And really the key right now is the staffing, as we talked about, we’ve now added over 1,000 positions in our windows business. We’ve invested in our 1,500 line in different parts of the country. So we put in the nameplate capacity, but we still need to have additional staffing and that’s really the key. We’ve increased our wages. We have a very focused – we have a third-party that’s assisting us of getting additional labor. We are very focused – we brought in talent from the outside. We have a gentleman by the name of Jim Keppler, who’s leading our operations from an overall standpoint. And he is working with the individual business unit leaders to really accelerate the staffing so we can capture the recovery. Automation is one side, but also we still have some work to do on the staffing.

[Jeff Lee:]

And Kurt, just to add a couple of comments to that as well. We continue to invest inside of our capacity. Now what’s interesting about these programs and these initiatives, they’re not only adding capacity, but they’re taking cost out. And so when you look at some of the things like the automated glass lines and you look at the assembly lines and things like that that we’re putting in place, it really is an opportunity for us to make product more efficiently and better quality for our customers. And at the same time, it’s adding some of the capacity in. But specifically around your question, as we think about 2021 we don’t really have a machine capacity issue. And it goes back to what Jim says, it’s us getting the ability to get our labor into the manufacturing sites and to produce it. And we got a lot of great actions that we’re moving forward on that. Every region, every business is a little different. And as we get signals from our different customers, we continue to invest in those regions, specifically to meet the anticipated demand that’s coming up. When you look at our national presence, when you look at our national footprint, we really have the ability to service the demand that we see coming at us right now for 2021. And we’ve even looked beyond that to say, if demand continues to be stronger inside 2021, can we service that demand and our machine capacity is there. So again, regional, we have to be very specific by product and by region. But we feel good about where we’re at. And as we see those signals coming in from customers, we’re going to be investing appropriately to make sure that we have the regional capacity as well for those customers.

[Kurt Yinger:]

Got it. Okay. That’s helpful. And just my last one on the Q1 outlook. I think here in Q4, on the residential side, you talked about kind of 2 points of price and 1.5 of volume. As we look at the expectations for double digit growth there, is there a good way to think about that split between volume and price?

[Jeff Lee:]

So Kurt, we’ve incorporated that in our guide. And just to kind of go back a little bit to the fourth quarter, I want to remind you of the fiscal days. And so when you look at it on a daily run rate, it was higher – it’s about 5% higher on a daily run rate in the fourth quarter. So the demand – the 8.5% growth on a year-over-year basis that we’re talking about right now is a combination between residential and commercial with this more stable environment side of commercial and a stronger environment side of residential. But our guide incorporates right now, the combination between volume and price inflation. We feel good about the guidance that we have in place, the midpoint that’s out there right now, does again it have margin expansion for us as a company. And it is up 8.5% on the midpoint on the revenue side. So we’re excited about the growth that we’re seeing.

[Kurt Yinger:]

Got it. Okay. And I guess, is it fair to say that price will probably be a little bit more than a 2% benefit as some of the announcements you made in Q3 and additional actions start to flow through early in the year? Or is that something that’s more kind of back half weighted?

[Jeff Lee:]

Yes. So, two things on that. One, we have the same fiscal days in Q1 as we did in Q4, three less days, right? And it’s a little bit ironic that that’s the way that it shakes out. And so when you look at just the volume itself on a year-over-year basis, you have to take those three days into consideration and our guide incorporates that. So our 8.5% growth on a daily rate is actually much higher from a volume perspective because of the days component. And so, yes, if you go back and look at the price announcements that we’ve made, and the steel prices or steel costs that are going that – are rising right now, we are pricing out in front of that. Now, keep in mind a couple of things. One, we have backlog inside of our residential businesses and our commercial businesses. And so those backlogs were priced at a different price point. So those will come into the first quarter, and then our pricing starts to catch up inside of the end of the first quarter and the beginning of the second quarter. But again, as Jim mentioned, we got out in front of that and out of our typical cycle. So typically inside of our residential businesses, we would have price increases in the first quarter. And because of the inflation that we saw coming at us, we got in front of those and got our price announcements out early. But that backlog, it’s going to continue to bleed into our business in the first quarter, until we get the prices up from that. So hopefully that answers your question around that. But we feel really good about our positioning and what we’ve been able to do as a company with price and the inflation that’s coming at us.

[Kurt Yinger:]

Got it. Okay. That makes sense. Well, appreciate all the details and good luck here and the rest of the first quarter.

[Jeff Lee:]

Thank you.

[Jim Metcalf:]

Thanks, Kurt.

[Operator:]

And there are no further questions in queue at this time. I’ll now turn the call over to Tina Beskid for closing comments.

[Tina Beskid:]

Thank you everyone for joining us here this morning. We really appreciate your interest in Cornerstone Building Brands. We are excited about what 2021 has to offer us this year. And if you have any questions, please feel free to reach out to me. Hope you have a great day. And thanks again.

[Operator:]

This concludes today’s conference call. You may now disconnect.