Q3 2019 Earnings Call
Greetings, ladies and gentlemen, and welcome to the cornerstone building products third quarter 2000, <unk> earnings Conference call. At this time all participants are in listen only mode. A question answer session will follow the formal presentation.
If anyone should require operator sits in front of conference. Please press star zero and your telephone keypad.
I would purchase introduce your host Darcey Matthews.
Vice President Investor Relations. Thank you you may begin.
Good morning. Thank you for your interest in cornerstone building brands joining me today for the call or Jim <unk>, Our chairman and Chief Executive Officer, Jeff Lee, Our Chief Financial Officer. Please.
Please be reminded the comments regarding the company's result.
Projections may include forward looking statements that are subject to risks and uncertainties.
These risks are described in detail in the Companys, that's used to filing earnings release, and our investor presentation.
Companies actual results may differ materially from the anticipated performance or results expressed or implied by these forward looking statements.
In addition, that's what we 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, an investor presentation located in the Investor section of our website.
Please note that we will be referencing our investor presentation throughout todays call.
During this presentation management may also refer to pro forma financial results.
First the former results give it back to both the change in the company's fiscal calendar.
As well as the recently completed acquisitions, the ply gem and environmental Stone works.
I think ply gem's acquisition of Silverline, if such acquisitions were consummated prior to the periods presented.
This morning, Jim will provide an overview of our consolidated results.
An update on the progress of the key strategic initiatives, we're working on and then share some of the trends we're seeing in our end markets.
And Jeff provided detailed discussion of our consolidated and segment results provide an update on our merger synergies and cost initiatives, but your guidance for the fourth quarter before we take your questions and now if I could turn the call under control.
Thank you Darcy and I appreciate everyone, taking the time this morning for call.
Overall, we're very encouraged with her third quarter results, we continue to execute on our strategic operational and financial objectives of achieving margin expansion across our business segments.
Despite sluggish year over year market demand.
We are focused on improving our customers experience with our expanded product portfolio for the residential repair and remodel in commercial markets.
Providing quality service delivering on time, and then fall is a critical component to expanding our customer satisfaction.
During the quarter, our consolidated net sales were approximately $1.3 billion.
We achieved gross profit of 310 million or 24.1% of net sales and.
In adjusted EBITDA of $181 million.
Our adjusted EBITDA margin expanded by 230 basis points from the third quarter, a 2018 pro forma results.
This was accomplished with pricing discipline and product mix, while recognizing the benefits from our cost initiatives and integration of our recent acquisitions.
From a balance sheet perspective, our focus on cash flow generation combined with a stronger seasonal NPAC resolved it and they pay down of net $50 million of our ABL facility during the quarter.
Reducing our net debt leverage from 6.2 times to 5.9.
As we've mentioned in pre prior calls reducing our leverage is a key priority for the company and we're making progress on this important front.
Working capital is another key area of opportunity for the company.
With teams established across our organization focused on inventory management and accounts payable, we're making good strides to improve our working capital metrics.
As we mentioned during the second quarter call, our working capital as a percent of sales are approximately 17%.
If you will recall every half percentage improvement generates about 25 million for further debt repayment, well or could be reallocated to other areas of investment.
Turning to slide three of our Investor presentation, we remain focused on three strategic priorities.
Strengthening the core.
Extending our reach.
And growing strategically.
With these priorities, we expect to gain further margin expansion.
Whatever strong cash flow generation and drive profitable growth with our customers.
These priorities are supported by our ongoing cost initiatives.
Merger synergies and a disciplined capital allocation strategy.
Strengthening our core business is critical to our success.
We have delivered margin expansion through the first nine months of the year and we have additional opportunities to drive towards a leaner organization and execute on cost reductions throughout our business.
With the continued tightness in the labor markets. We are focused on investments in manufacturing automation continuous improvement initiatives and lean six sigma implementation throughout our organization.
Six Sigma and continuous improvement are areas that are legacy commercial segment had invested in and we are taking those learnings across the entire cornerstone organization.
We remain on track with respect to the merger synergies and cost initiatives that we've discussed with you previously.
We now expect to realize Merck merger synergies and cost initiatives of over $100 million this year.
One example is on the commercial engineered in drafting front, where we have standardized software consolidated locations and expanded our service offerings to our customers to improve the overall experience.
Jeff will provide a more in depth summary of our progress with these initiatives in a few minutes.
In terms of our second priority extending our reach.
This builds on our core as we're focused on delivering integrated solutions to our customers with a broader cross selling opportunities, while ensuring a superior level of customer service.
We have strong builder distributor architect and retail customer networks because of our combined companies.
Our customers are requesting a broader portfolio of its exterior building solutions and we will leverage our comprehensive product offering.
Product innovation and brand to provide them superior solutions.
We see a great opportunity to expand and strengthen our existing customer relationships, giving the breadth of our product offerings and innovation pipeline.
Regarding our third priority growing strategically.
On this front, we had meaningful opportunity for organic growth through product innovation and product line extension.
This is an area, where our legacy residential business.
Has made investments in once again, we are leveraging this knowledge across our broader organization.
For example, what our innovation center, we're working with our customers to better understand their needs such as ease of installation and labor savings.
We're also leveraging our insulated metal panels and siding technologies to create product offerings for both the commercial and residential siding businesses.
Along with that were fostering a culture of energy innovation at cornerstone building brands with an innovation challenge where employees across the organization are actively contributing and identifying creating the next set of breakthrough opportunities.
We're making balancing investments in key growth categories in cost out initiatives to ensure we are deploying our capital to areas, where we believe it will drive the greatest long term return for our shareholders.
Right.
Before I turn the call over to Jeff I'd like to make some brief comments on the overall market.
On the residential side, we expect expect to see positive growth in the fourth quarter with orders coming in at a pace favorable to the pro forma prior year.
On the repair and remodel from equity values in homes continue to trend positively, enabling homeowners to spend on home improvement activities, such as replacement windows and refurbishing their homes siding.
The indicators for new construction in our and our continued to indicate low single digit growth for the remainder of this year.
On the commercial front, we've seen some improvement on a sequential quarter basis supported by an increase in backlog in order rates.
We still do anticipate the fourth quarter volumes to be down in the mid single digit Grange versus pro forma 2018.
This is consistent with the trends we've seen much of the year in our addressable low rise commercial market demand.
I want to wrap up by turning to slide four.
On a consolidated level.
We are experiencing approximately an 8.7 decline in sales in the quarter.
Within the residential segments. The declines are primarily due to weaker new starts earlier in the year, which impacted our business with a typical lag of 90 to 120 days over the last few quarters.
We've been disciplined on pricing and have also rationalize some business to increase the profitability of our residential portfolio.
You can see the results in both gross profit margin and adjusted EBITDA margin expansion during the quarter for residential business.
On the commercial side, we continue to hold market share as supported by our industry Association information.
With the decline in overall market demand, we have emphasized pricing and margin initiatives to enhance the profitability of our commercial business.
Today, our balanced exposure to new residential repair and remodel into commercial markets provide greater stability for our overall business, which was a key strategic underpinning for the merger of almost a year ago.
Now I'd like to turn the call over to Jeff Who's going to walk through some of our financial results Jeff.
Thank you, Jim I'm going to discuss our consolidated and segment results.
Ill provide an update on their cost initiatives and merger synergy efforts and then we'll discuss our adjusted EBITDA guidance for the fourth quarter.
I will conclude by walking through the key puts and takes on our anticipated cash will for the year.
As a reminder, with the change in the company's reporting periods and be affected the merger I'm going to discuss both GAAP and pro forma figures for the third quarter of 2018.
As presented in our Form 10-Q that was filed earlier. This morning, our third quarter 2019 sales for the company were approximately 1.3 billion compared to 549 million in the reportable period ended July 2018.
Our third quarter, our third quarter gross profit was 309.8 million with gross profit margins or 24.1%.
Adjusted EBITDA for the period of 180.8 million compared to 63.5 million in the reportable period ended July 29 2018.
The primary driver for the year over year change in third quarter sales gross profit and adjusted EBITDA is the inclusion of ply gem Silverline and environmental stone works in our results.
As you turn to slide five sales in the third quarter 2019 were 1.3 billion.
The decrease in 2019 third quarter sales versus pro forma 2018.
Is driven by lower volumes, primarily in our commercially window segments, partially offset by price discipline and mix.
Our third quarter 2019, adjusted EBITDA was 180.8 million compared to pro forma 165.5 million in 2018 for an increase of 9.2%.
We captured favorable price and mix net of inflation improved our manufacturing productivity and realize meaningful merger synergies and cost initiatives of 30 million in the quarter.
In addition, each of our segments realize sequential increases in volume from the second quarter two the third quarter 2019.
I will now review the result of our three business segments, beginning on slide six.
In our window segment sales for the third quarter were 504.3 million as compared to pro forma third quarter 2018 sales of 539.9 million.
The decrease was driven primarily by low volumes within the market year over year.
Partially offset by price discipline and product mix.
Gross profit margins in the third quarter of 2019 was 19.5% up 150 basis points on a pro forma basis as a result to price discipline and product mix net of inflation integration synergies and cost initiatives.
As a reminder of Windows products go on on a home approximately 90 to 120 days after the start of construction.
Therefore, the market softness that we saw at the end of the first quarter ended beginning of the second quarter were reflected in our third quarter results.
New construction starts began to improve at the end of the second quarter and continue into the third quarter, which should benefit our windows volume in the fourth quarter.
Turning to slide seven to our siding segment.
Sales for the third quarter were 315.8 million.
Which which was relatively flat with the pro forma prior year.
Our third quarter 2019, gross margin was 28.7% up 180 basis points compared to the pro forma prior year as a result of positive price discipline and product mix net of inflation combined with the benefit cost initiatives.
As we look at slide eight.
Commercial sales for the third quarter 2019 were 464.9 million.
Decreased from 550.7 million in the pro forma third quarter of 2018.
The decrease was primarily driven by lower tonnage volume on an overall softer addressable market for low rise commercial construction.
For the quarter gross profit margins were 26% up 370 basis points pro forma year over year, driven by price discipline and mix net of inflation combined with cost initiatives.
In both constant dollars backlog in the commercial segment increased in both the year over year period and sequentially.
Turning to slide nine.
We are ahead of schedule and have line of sight to realize over 100 million of merger synergies and cost initiatives in 2019.
We are presenting more detailed information on these crucial components in two buckets.
The merger synergies category includes synergies on various deal savings to date, including DMC I apply Jim merger, the two windows acquisitions, and the environmental Stone works transaction.
For 2019 year to date, we have realized 36 million in merger synergies with another 17 million expected in the fourth quarter to achieve our annual target.
The three big areas driving these synergies, our sourcing and materials SGN, a reductions and plant rationalizations.
Many of these initiatives will carry over into next year and there are still some remaining initiatives that will commence in 2020.
Our cost initiatives include.
The legacy NCR imply Jim initiatives. This started prior to the merger.
We have realized 36 million through the first three quarters of the year and are expecting to achieve an additional 12 million a further savings in the fourth quarter.
The key drivers are these initiatives are process in labor savings from automation.
Continuous improvement and lean activities within our segments, leveraging transportation savings with our larger combined spend as well as engineering and drafting offshoring and the commercial segment.
In 2018, we captured 25 million and year to date 2019, we have captured 72 million with line of sight to achieve over 100 million for the year.
We still believe that our original guidance of 185 million.
Over the cumulative three years will be achieved.
The investment to achieve our 2009 teen in 2020 merger synergy and cost initiatives is expected to be 40 to 50 million cumulatively across 2019 and 20.
Turning to slide 10, I'd like to make some comments about our balance sheet and liquidity.
The second half of the year typically generate stronger cash flow as working capital shifts from being a use of cash to a source.
As we completed the third quarter, we experience working capital improvement as expected.
Furthermore, the increase in adjusted EBITDA combined with the pay down on the ABL facility resulted in a net debt to trailing 12 month adjusted EBITDA improvement from 6.2 times at the ended the second quarter to 5.9 times.
In the third quarter, our net debt improved 68 million and we paid down in that 50 million in our ABL facility. We expect our net debt to improve another 45 million in the fourth quarter driving our leverage ratio in the range of 5.6 to 5.7 times at year end.
Turning to slide 11, our year to date adjusted EBITDA was 424.7 million.
When added to our guidance of approximately a 135 to 150 million for the fourth quarter. Our full year adjusted EBITDA is anticipated to be in the range of 560 to 575 million.
The key drivers for the year remain as follows capital expenditures to be into 2.5% of cells or 120 million.
Cash interest of around 242 million and our cash taxes to be in the 58 million range exclusive over $25 million GRA payment that will be made in the fourth quarter.
2019 contains two cash uses that will not repeat in 2020, including the $25 million GRA payment and the additional interest payments of approximately 16 million associated with our entry into interest rate swaps.
Thats, a total of 41 million interest and tax cash this year will not recur in 2020.
As you see on this slide if you back out M&A debt financings and repayments are ongoing cash flow was very strong in Q3 83 million and is 36 million positive year to date, we expect these figures to be strong again in Q4.
Consistent with our prior guidance fourth quarter volume is expected to expand and load.
Single digits for our residential businesses and a mid single digit contraction for our addressable markets in low rise commercial construction.
Based on these market expectations, we expect to achieve our adjusted EBITDA guidance for the fourth quarter.
And now I'd like to turn the call over to Jim for some closing remarks.
Thanks, Jeff.
At the start of the year, we highlighted our focus on improving our free cash flow with an increased emphasis on working capital improvement.
Prioritizing, our capex investment to maximize customer satisfaction and providing solid returns on those investments.
As mentioned in our last quarterly call. We are concentrated on a capital allocation framework, which is designed to achieve our goal of debt reduction, while preserving financial flexibility to pursue our growth strategies.
Reducing leverage continues to be a priority for the company and I'd like to reiterate reiterate our goal to achieve a target leverage ratio of approximately two to three times adjusted EBITDA. Additionally, our efforts to improve our working capital are generating results, which will further.
Enhance our ability to de lever our balance sheet.
In summary, we continue to find new ways to take advantage of our size and scale identify avenues for growth across our product portfolio and execute on our plans to realize synergies across the entire enterprise.
We continue to build on our culture of safety integrity teamwork and innovation.
To drive operational excellence and execute our vision to be the leading exterior building products company in North America.
This includes making balanced investments in our key growth categories to ensure we are deploying our capital to the areas, where we believe it can drive the greatest long term returns for our shareholders.
We appreciate your time this morning, and now we'll open up the lines for questions.
Thank you, ladies and gentlemen, if you'd like to ask a question. Please press star one I know telephone keypad.
Police toll indicate your line is the question Q you My first start to if you'd like to remove your question from the Q.
So do you think speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
No what please let me pull for questions.
Our first question comes from the line of Matthew Foley with Barclays. Please proceed with your question.
Hi, This is actually Kristina chew on for Matt Hum data points that we've seen this quarter and on the non rise side have been on choppy and noting that you're expecting a mid single digit contraction in commercial in the fourth quarter do you have an indication in your backlog of light commercial might look like and.
Early 2020.
Well. Thank you just just to reiterate the addressable market that is for the commercial business five stores are less typically 500000 square feet and we've we've had about the last year of double digit decline in demand and we're starting to see that.
Dissipate as we said earlier.
What we're looking at the backlog is right now our backlog is around the mid single digit backlog and there is a lag there obviously, depending on the complexity of the building the lag can be anywhere from.
30 to 60 days, all the way up to four months, depending on the type of the building.
Okay got it understood and can you also provide some more color into Fourq you in full year guidance. Just what are some of the puts and takes that might get you to the higher the low end at the guide and then what is expected to incrementally improve in Fourq you.
Yes, let me address that went.
So we think about the fourth quarter versus 2018.
We provide the range of $135 million to $150 million of EBITDA.
That's about $6 million to $21 million over last year. The main drivers as we've mentioned previously or higher volumes within the residential and that mid single digit contraction is going to commercial markets. However, with the things that we control as we meet some of our CRO customer service levels maintain our price discipline manufacturer.
The productivity and then the merger and cost initiatives savings are the things that really drive the fourth quarter two could lead to meet our expectations as we though as we outlined.
Got it thanks for taking my question.
Thank you.
Next question comes from the line of leads are Gonna with CJS Securities. Please proceed with your question.
Hi, good morning.
Accordingly.
So if I start with a commercial segment I look at the quarter down call. It mid teens can you just parse out volume versus price in the quarter, and then with fuel prices likely down year over year in Q4 can you talk about.
How your current inventory position matches up with your you know with the expectations for demand and how you priced products given that dynamic.
Yes, let me talk about some of the.
Some of the components within the third quarter itself. So as we looked at just reconciling the the sells itself you look at last year and be in $551 million itself. This year coming out at roughly.
$465 million itself, it's primarily a volume drop so if you take that 15% dropped 13% of that's coming in from volume and we got a little bit a contraction in price now keep in mind, we did see to high school price increases in the back half of last year, and we've seen steel prices come down.
At the first half of this year. If you look is we've typically talked about this spread within the commercial business and look at the third quarter. In particular, we continue to see positive spread in the business. So our net economics, which is our pricing mix and our inflation combined is a positive $12.4 million.
So if you look at EBITDA on reconciling those components, we did see that that volume fall through down to EBITDA of about 21, and then we saw the benefit come in from net economics of 12.4, and then we have the cost initiatives that are really make up the difference on that.
And then can you talk about the expectation in Q4 volume and price.
Yes, so we do as we talked about we do see the mid.
Single digit contraction, it's split between kind of the price and volume and again, it's really more of the dynamic between.
The steel fluctuations as that continues to move down we don't we're not seeing margin contractions rights. So again as you look at the spread across the business, we see positive economics inside fourth quarter, and we do expect to see the benefit between cost initiatives manufacturing productivity being positive.
Okay and then just one quick question on the cost synergies, obviously, you're you're doing a great job well ahead of expectations for this year and you reiterated the hundred 85 million dollar a total goal is that to say that the 15 or so million got pulled forward or is there really more room and as we model. This should we just.
I assume that's at the end of this there'll be either another round or or more given that it's exceeding your internal expectations.
Yes, it's a great question, so $185 million just to make sure that we all have the same numbers, we realized about $25 million. The savings in 2018, we're expecting to be around that $100 million for 2019, which will leave $60 million in 2020.
Now every year. This company if you look at the legacy ply Gem and then Sai business, we have cost out initiatives and so thats not going to slow down as we move into 2020 and with that the numbers around those have been between 40 and $50 million range. Historically, we think that will continue into the future not only 2020, but as we continue into the the fuel.
Two years as well so we will see.
Some of the merger synergies start to conclude as we get into 2020, but the ongoing cost out initiatives through lean six Sigma continuous improvement automation those types of things will continue to move forward in 2020 and beyond.
Great. Thanks very much.
Thank you.
Our next question comes from the line of Rubin Gardiner with Seaport Global Securities. Please proceed with your question.
Thank you good morning, everybody.
[noise] murdered.
So.
I guess can we can we maybe dig into the puts and takes on the free cash flow front, a little bit. It looks like you may be reduced reduced your outlook, there a little bit and and you know from looking at the components it looks like Capex.
Interest in cash tax all came in.
Came in some so you know there was some positives there where were they offset to a result in the in the free cash flow God coming in looks like about $30 million.
Yeah. So moving just make sure we're talking about the same numbers I think you're referring to the full year cash flow versus a quarter itself.
Yes, the full year I mean last quarter I think you guided to the back half Dan 130 to 150.
Now if I'm doing the math correctly I think that's that's maybe.
25 to 30 million, a lower than that and what am I doing it right.
That's correct.
So I'd say two things on that we did come in about on expectations for cash flow on the third quarter, we did see some softening in the markets in particular.
Across our commercial business the carries into the fourth quarter. So when you take that $30 million to $50 million reduction in the guidance that we gave inside of the second quarter the full year cash flow.
That is that's primarily about half of that comes in from EBITDA and the other half comes in from working capital and noncash tax or non EBITDA expenses and I would say that the non EBITDA expenses that are coming in there are onetime in nature of the our cash but they will go away as we go into 2020, we do see.
Causative working capital inside the fourth quarter, it was a little bit less than we anticipated with the lower volumes.
But we do have positive working capital inside that quarter.
[noise], Jeff and by lower volumes, meaning your inventory is going to be higher than you wanted to be exiting the year is that what you're implying.
Thats correct, if we think about the lower volumes, we have backlogging still in different components within our business with that anticipation and so we weren't able to get as much inventory out as we would have liked although if I think about the fourth quarter, we saw $20 million to $23 million worth of positive working capital inside the third.
Third quarter ends I think about the fourth quarter, it's going to be a higher number closer to the 40 45 number. So we will see benefit coming in from working capital just not quite at the higher levels that we anticipate last quarter.
Okay, and then so maybe help us with since this year's kind of been funky in terms of Oh, working capital and onetime items can you maybe provide us with what kind of a normalized free cash flow profile looks like as we head into 2022, so people can.
In investing in understanding of how the deleveraging past gonna look like as we move into next year.
Yeah, Let me, let me walk through the components of cash.
And let's start let's start with consensus EBITDA from next year is kind of a way to start right, we're not giving guidance on EBITDA for next year at this point, but let's take a a point that is out there in the public markets on consensus which is 616.
So if we take the $660 million of EBITDA, we expect to have about a $125 million worth the capex.
They would be cash taxes of about $60 million.
And cash interest to 230.
And then I put in about $10 million worth of.
Other expenses that would be.
Segments to EBITDA and then we put in the extra $25 million roughly for the cost to realize some of the synergies. So if you. If you take all those together you can see the benefit that we will have on a year over year basis inside of our cash or cash available to pay down debt.
Okay, and you Didnt mentioned working capital I know that come up quite a few times on the call. Today can you can you talk about you know Jim mentioned, you're at 17% a a sales where do you think you can get into how quickly and maybe some examples of how you're able to do that in and the benefits to cash flow and that's that's it for me. Thanks.
It Rubin, just perhaps a major focus of working capital 17% as at the high end, we feel there's some opportunities there.
Particularly on the inventory side on our siding business.
We're really focused in on on on inventory reduction.
Also on payables and we aren't printed any any guidance out there, but we feel that.
Where the focus that we've had in the first year of the merger as we're coming up have really been on the costs out in the synergies and some other things that we're hitting on this 185, so the 185 as Denny.
Really top priority now we're digging into the to the working capital and we think there over the next.
Year or so there could be you know at least $100 million of working capital that we can release, but we're very focused on getting that to a level that.
Is acceptable with some of our peers.
Okay. Thank you.
Thank you. Our next question comes from the line of Sam Mcgovern at Credit Suisse. Please proceed with your question.
Hey, guys I just wanted to follow up on that prior question that I just want clarify did you say 100 million of working capital release, and and if so over what timeframe.
Yes, so I'd say couple of things $100 million is our areas that.
We have looked at within the business do we think in particular, we can address.
The timeframe, we're still working through we're going through a sales operating planning process to make sure that we've got consistency across our businesses as that process becomes more and more ingrained within the business. We should start to have a much better indication of how quickly we can pull that out and and how much we can pull out right.
Should we think theres at least $100 million there, but as we get through that we'll be able to determine how much exactly that could be so I would say that you know as we think about the next couple of years to $100 million feels very comfortable over the next two years.
And is it quickly we can pull in those processes. The faster we can take some of that that working capital out.
Okay, Great and then you know with regard to the free cash flow that you sort of enumerated earlier.
You mentioned your prepared remarks, it primarily sort of a debt repayment in other areas of interest how do you think about where you want to put that money is is it primarily debt repayment are you looking at acquisitions or you do have the ability and are you looking at the potential for dividends or buybacks for that for the equity.
You know as we've been saying really since the merger.
Focus on our balance sheet has been a as a priority for us and we still heavy target of getting to two to three times as we said over the next few years of debt to EBITDA, but along with that we want to have a balanced approach to look at investments both on an organic side on new product innovation.
And we're investing in our product pipeline and our sidings and our Windows business also in our IP business.
But also we will look at acquisitions that make strategic and financial sense that don't go into the phase of our overall financial strategy.
[laughter].
Okay got it thanks, so much I'll pass along.
Thank you. My next question comes from the line of Richard Kus Jefferies. Please proceed with your question.
Hey, guys. Good morning, Q4 last year was pretty soft quarter I think overall just in residential housing markets can you talk a little bit about why you still expect low single digit growth. This year I thought maybe it would be a bit better.
No. We're really looking we're really looking at the lag as we talked about and are prepared comments and particularly in single family. We have about 120 day lag and if you look at if you pull the lagged forward for the third quarter a it's the the overall single Sam.
It was down about 7%, but particularly in two areas in the Midwest in the northeast.
We are areas that we have a big footprint.
Were down double digits on from a lag basis, so where we were.
That was the demand we had in the third quarter.
If you look at the fourth quarter lag.
We're looking the consensus.
Go family is about a 1% which in the Midwest is up about four so theres been a big change from.
From that lag factor. So if you look back a year ago housing.
Housing starts were were were going the wrong way, we're working on 120 day lag now and and that's where we come up with our sink single digits.
For our fourth quarter low single digit approach for our residential business.
Okay I see.
And then to follow up on Sam's question about capital allocation can you guys talk a little bit about the M&A pipeline, how it looks for you right now in.
Particular product areas, where you might be focused on some thanks.
[noise], we obviously don't talk about specific to M&A, but we do we do look at the overall opportunities and as we've said that our strategic to us.
That's where we can add to our portfolio that are really critical to our customers. So.
It's one of those things that we have a very.
Diligent process to make sure that we don't overpay, but also that.
Acquisitions that would come into our portfolio that would really provide value to our overall customers.
We're really looking at both from a residential and commercial side.
What products that we can add to our portfolio, but not get way out of our swim lane.
Alright, thanks very much.
Thank you. Our next question comes from online fill movie with D.A. Davidson. Please proceed with your question.
Good morning, Thanks for taking my questions.
Right, though.
Jim maybe that we've talked about single if im a little bit any expectations for the multifamily sector. As you guys move into 2020, and I guess, how large of a portion of your business is that now.
We look at the same the single family as of the larger proportion of the residential business, it's broken down about 60 40.
Okay, and then I guess any any expectations for multifamily as we move or is that having pretty similar to what you're seeing on the single family side. Yeah. I think it's pretty similar we're looking at low single digit.
Particularly with the lag I was calling not single family but.
The overall housing starts will be low single digit we're just really mirror, we aren't being the we aren't being the the industry and you know forecasters here. We're just looking at what consensus is and what we're seeing.
From.
The the individual.
Oh groups that that look at housing.
Got it got it Okay, and then I guess I mean funny I talked about I guess, if I could just if I could just add to that what we're really focused you know as a company on what we can control.
The demand will be the demand we're focused on our you know taking costs out delivering on the synergies that we talked about earlier are focusing on innovation and and continuous improvement in our plants. So what we really taken the approach here over the last year's let's focus on what we can control the market demand.
The market demand and we want to take care of our customers and continue to grow the business.
But we're going to continue to have a margin expansion and that's really aren't aren't really are our keep our key objective here is grow our margins and the market will do with the market does.
Understood and then I guess just from a synergy perspective, obviously, putting you're talking about the cost synergies and the progress you guys are making that which is good to see.
But I would have you seen any benefit from a sales standpoint as you guys have gotten deeper into this transaction are you seeing kind of revenue synergies pop up that maybe you weren't expecting or just any color there.
Yes, that's a great question as we talked a few times on little bit today about cross selling and that that really a was not a top priority coming with the merger. We really wanted to focus on the integration of the company's as you as we indicated we added a few acquisitions here, we were really focused on.
The cost out in the synergies and the commitments that we made to the street, but now we are now in the phase that we're really looking at what are some of the opportunities for.
Cross selling and having that larger portfolio to our customers, that's including stone cladding Nadeau roofing and Windows just just to name a few and we're in the early stages of this but this we have we've had some good reactions from our customers and I've talked in previous calls on our metal buildings business.
Yes, where we make we manufacture about 12000 a year the average by out is anywhere between five and $6000 and those key buyouts, our windows man doors and products that we make so.
We think theres some great opportunities for our stone business on our commercial on our commercial buildings. The teams are already working together on that.
We've we've started to pick up some jobs nothing of significance, but we think long term. There's there's some nice opportunities here just to just a couple of facts, if we leverage our product lines with our customers are residential metal roofing market is about a half a billion dollar market and we.
Have a very very low percentage of that market very small single digit. So we're leveraging our residential relationships with our large retailers and the large distributors that are now part of the portfolio to really expand our footprint here. So it's early.
But our team is focused our environmental stone team and our commercial team are working really well together on mutual job leads and we think as as the year unfolds in the 2020, we'll be able to talk a little more about some early wins, but it's early but.
But there is some great opportunities there and our customers that we've talked to are really excited about the expanded portfolio because a lot of our large residential distributors are also in the commercial business and now they have one place to call a one stop shopping which really is a lot of our competitors don't have that advantage.
Great. Thanks.
Thank you, ladies and gentlemen at this time there no further questions I would like to turn it back to management for closing comments.
On the Controllables, we really focused on sitting down with our large customers in presenting cornerstone with <unk> enhanced product portfolio, a extremely focused and proud of margin expansion across the board and quite frankly, some pretty try and markets, particularly our commercial market.
Reenergizing are innovation pipeline.
For some of our our legacy businesses and last but absolutely not least is focus on our balance sheet and getting our debt levels to that two to three times over the next few years.
There's obviously there was a pause in demand in the first half and it was more than a positive in the commercial business and this the the seasonality really got push back this year, but as I said, we are not going to focus as much on the demand is what we can do is on our controllables. So we have a institutional.
Knowledge in foundation, a balancing price and volume to maximize earnings in spite of demands I, we've put processes in place for our pricing, we really focused on providing.
Providing value for our customers. So we're going to continue to focus on her controllables. We still have work to be done about the <unk> organization is very focus on maximizing the shareholder value for for all of you and we really appreciate all those.
Support we've had in the market so with that will close we'll close the call and we appreciate the time you've spent with US this morning.
Thank you, ladies and gentlemen, Okay say sound a conference you may disconnect Caroline's. This time, thank you for your participation.