Q4 2019 Earnings Call
Greetings and welcome to the cornerstone building brands fourth quarter 2019 conference call. At this time all participants are they listen only mode. A brief question and answer session will follow the formal presentation.
Anyone should require operator systems during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
Now my pleasure to introduce your host Tina Beskid, Vice President Finance and Investor Relations. Thank you you may begin.
Good morning, and thank you for your interest in cornerstone building brand. Joining me today are getting Mad Catz, Chairman and Chief Executive Officer, Unjustly Executive Vice President and Chief Financial Officer. Please be reminded that comments regarding the company's resulting projections may include forward looking statements that are subject to risks and uncertainties.
These risks are described in detail in the Companys I see see filing earnings release in our Investor presentation. The company's actual results may differ materially from the anticipated performance or results expressed or implied 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 probably the any use recording or transmission of any portion of the call without our expressed actually gets written consent.
Throughout this presentation management may also refer to pro forma financial results.
Pro forma results gives effect to both the change in the company's fiscal calendar as well as the recently completed acquisitions, a ply gem and environmental stonework, including ply Gem's acquisition Silverline as if such acquisitions were consummated prior to the periods because that's it.
This morning, Jim will provide an overview of our consolidated results and discuss key market trends. The Japanese provided detailed discussion of our consolidated and segment results as well as guidance for the first quarter of 2020.
She will be taken at the end of the prepared remarks with that I would like to turn the call over to Jeff.
Thank you came and good morning, and I appreciate everyone. Joining us. This morning, [laughter] 2019 was a solid year for cornerstone building brands, we perform well both operationally and financially. So we're disciplined focus on delivering results for our shareholders and our customers.
Our team not only maintained a sharp focus on financial and operating performance.
They did up while dressing the changing market conditions during the year.
And our first year as the leading exterior building products company North America, we're uniquely positioned to serve the residential commercial and repair and remodel markets.
We set up the company and a very purposeful way knowing that the important role that are building solutions play and the growth and prosperity of the communities in the customers we serve.
We made significant progress on key initiatives throughout the year.
As a core competency the company established price discipline to offset inflationary pressures and material labor and freight.
Leveraging our continuous improvement culture, our team was able to deliver $110 million in strategies and cost savings.
$10 million more than a target we set for the year.
Including the merger certainties from last year, we have permanently lowered the operating cost structure of our business by over $135 billion.
Overall, we've improved our profitability.
We delivered 130 basis points of adjusted EBITDA margin expansion over 2018 pro forma results with margin expansion in each of our business segments to stop despite sluggish year over year market demand, particularly in the first part of the year.
We have successfully integrated the silverline.
Atrium and environmental Stone works acquisitions.
These acquisitions were value enhancing for us.
Reinforcing our leadership position in Windows, and providing the company with a significant share in the fast growing cladding market, whose stones in there.
We gained manufacturing scale broaden our distribution network and provided or customers with another exterior building product solution.
Our customers have expectations from their business partners to provide a broad set of building solutions and we plan to leverage our comprehensive product offering.
Our product innovation, and our strong brands to exceed those expectations.
Reducing leverage is an important priority for the company.
In 2019, we made progress towards that goal ending the year with net debt to pro forma adjusted EBITDA of 5.4 times.
This is about a quarter turn better than our third quarter guidance, we gave to you.
Turning to fourth quarter results consolidated net sales were approximately $1.2 billion.
We delivered gross profit of $288 million or 23% of sales and adjusted EBITDA of approximately $159 million, which exceeded the top end of our guidance range.
Our windows in siding segment benefited from the rebound in U.S. homebuilding, while the commercial markets began to show improvements during the quarter as demonstrated by the significant increase in the tonnage backlog.
Additionally, our ongoing commitment to automation investments and lean manufacturing is lowering our cost base and driving operational excellence across our entire organization.
As we look to 2020 on slide four.
We see the momentum continuing as the market fundamentals are positive.
Residential market indicators show growth opportunities for both our window in siding segments.
Single family housing starts artists are expected to grow approximately 4% to 6% this year.
We believe that growth in housing starts coupled with more modest home price appreciation will also be beneficial for our repair and remodel activity.
For the Windows inciting segments about 50% of our sales are driven by single family starts with the other 50% coming from repair and remodel.
Also our sightings windows products typically our installed on the home 90 to 120 days following the started new construction.
We're also encouraged by the positive indicators for our commercial segment after a soft demand in 2019.
Our products and building solutions are used across a variety of building types within the low rise non residential building space.
Some projects often involve architectural and engineering design that occurs approximately nine to 14 months prior to construction starts.
Architectural activity was positive throughout most of 29, king, giving us confidence that we will see growth and 2020.
As you know steel is an important raw material for us and we believe steel cost will be relatively stable, which should help minimize material pricing volatility.
As a result, we expect the low rise nonresidential market will improve approximately 1% to 2% over 2019.
Now turning to slide five.
It's been a remarkable journey over the last 12 months building a company. We are today a company focused on creating a long term value for our shareholders our customers employees and the communities where people live work and play.
We see great opportunity to expand and strengthen our existing customer relationships by providing integrated solutions tailored to each channel.
We have a broad portfolio of complimentary products that we will continue to expand through innovation product line extension and strategic acquisitions.
We are keenly focus on operating with excellence across the enterprise.
With the continued tightness in the labor markets, we are investing in manufacturing automation transforming the way work gets done.
And optimizing our capital deployment to create long term shareholder value.
Additionally, we seen an opportunity to leverage and improve our combined working capital utilization, which will further enhance our free cash flow generation and help delever the balance sheet.
Now I'd like to turn the call over to Jeff Who's going to walk through some of our financials.
Jeff.
Thank you Jim good morning to all the fourth quarter results exceeded our guidance and the actions taken through 2019 that Jim just discussed.
Coupled with improving market sentiment have a set up for an improved 2020.
Starting on slide seven net sales for the fourth quarter $1.2 billion down 1.8% from pro forma 2018.
New construction starts began to improve in the second half a 20018.
And as expected the improvement benefited windows volume in the U.S. during the fourth quarter.
Pricing mix were favorable by $22 million over the pro forma fourth quarter 2018.
Offsetting the residential market favorability the commercial segment recorded 9.7% lower net sales in the same quarter last year.
Which was below our expectations.
However, overall market demand for components declined late in the quarter, Andy insulated metal panels dividend Division experienced project delays from weather and other factors related to job site readiness.
Compared to the third quarter 2019, the commercial segment net sales increased 2.8%.
Due to strong order rates, an increase backlog as low rise commercial construction market continues to improve.
For the year pro forma net sales were $4.9 billion down 4.2% from pro forma prior year.
With most of the declines coming from softer addressable markets for low rise commercial construction.
We were able to capture a $187 million, a favorable price and mix across all segments.
As we continue to position cornerstone building brands as both the market and industry leader in the exterior building products.
Looking forward, we expect first quarter 2020, net sales to be about 1% to 2% higher.
And pro forma first quarter 2019.
With most of the increase coming from volumes in the window segment.
We plan to remain disciplined around price.
We have already announced price increases for our windows in siding products to offset inflationary impacts.
Within the commercial segment, we price to capture the value, we bring to the market as well as pass through volatility for steel cost.
The average cost is still was lower in the second half a 19 as compared to the first half and has stabilized into the first quarter of 2020.
This dynamic will have an unfavorable price effect year over year.
As such we expect the average selling price per ton to be approximately 2% lower than first quarter 2019, offsetting the favorable impact of improved volume.
On the right hand side to slide we outlined net sales by end market and product.
As you can see cells in the residential end markets through our windows inciting segments.
Were 62% of total pro forma 2019 net sales.
Well the mix between new construction and repair and remodel is about equally split.
Window sales made up almost 40% of our total pro forma 2019 cells with vinyl siding and buildings contributing 20, and 15% respectively. We are proud and leadership position cornerstone holds in these markets and believe it is a testament to the quality products we produce.
The service, we provide and the relationships we have with our customers.
As you turn to slide eight fourth quarter, adjusted EBITDA was approximately $159 million or 12.8% in itself.
Which was 9 million or 7% more than the top end of the guidance range.
We delivered 270 basis points of adjusted EBITDA margin improvement.
Our disciplined approach around continuous improvement and lowering our overall cost structure generate approximately $38 million, our synergies and savings.
Which more than offset the effects of lower volume and higher SGN costs.
Favorable price mix in the Windows in siding segment.
Coupled with favorable spread per ton in the commercial segment generated $26 million of price and mix none of inflation.
For the pro forma full year, we generated 582 million of adjusted EBITDA or 11.9% over pro forma 2018, a margin improvement of 130 basis points.
We delivered synergies and cost savings of approximately $110 million throughout 2019 $10 million more than targeted.
We believe about $25 million of these savings initiatives will carry over into 2020.
We reduced cost in many areas of the business, including material sourcing plant and back office bought back office rationalizations process and labor savings from automation and many others.
Going forward, we will report savings net of cost as we continue to embed continuous improvement into our culture.
We are committed to delivering an additional $60 million of savings in 2020 from similar initiatives, achieving a total of $195 million over the cumulative three year period, beginning in 2018.
Now, let's look at our business segment results, starting with Windows on slide 10 for the fourth quarter Windows net sales were $496 million.
5% from pro forma fourth quarter 2018.
The increase was primarily driven by favorable selling prices and mix across the us in Canada.
Higher volumes in the U.S. were offset by declines in December single family housing starts in Canada.
Windows gross margin for the fourth quarter 2019 was 19% up 200 basis points on a pro forma basis as a result, the price discipline favorable product mix net of inflation and realize cost savings.
We are excited about our commitment towards automation within this segment. During 2019, we started projects in our North Brunswick, Lithia Springs, and Toledo plants investing over 16, and a half million dollars with the payback of about two years.
Additionally, the calorie windows manufacturing team achieved a score of 98% on its certificate a recognition safety audit overall injuries were reduced 37% in 2019 compared to the prior year.
Warranty costs were down 62% in 2019 versus 2018 and down 82% versus 2017. These are just a few examples of how we are delivering on our commitment to operational excellence.
Turning to slide 11.
Siding segment net sales for the fourth quarter were approximately $271 million, 1.4% higher than pro forma prior year, which was equally driven by volume price and mix.
Favorable U.S. demand for siding products was offset by declining market conditions in Canada.
We are proud to announce that our mitten product was named supplier of the year in our first year partnership with group BMR.
Gross profit margin for the fourth quarter was 25.4% up 110 basis points compared to the pro forma prior year, primarily as a result of benefits from cost initiatives cornerstones commitment to quality was evidenced in our U.S. siding business, where 2019 warranty claims were down 11%.
Compared to 2018, representing the lowest claims rate in the past five years.
We're very excited about the recently announced Cleary acquisition. We expect this acquisition will enhance our overall pro forma adjusted EBITDA margins as a company and will contribute to lowering our net debt leverage.
Moving onto the commercial segment on slide 12.
Net sales in the fourth quarter of 2019 were $478 million.
Decrease from approximately $529 billion in the pro forma fourth quarter 2018.
The decrease was primarily driven by lower tonnage volume on overall softer addressable markets for low rise commercial construction and steel cost impacts.
Although 2019 was a difficult year in the addressable market industry data supports that we maintained and strengthened our market share position.
For the quarter gross profit margins were 26.2% up 380 basis points from pro forma year over year, driven by favorable spread combined with cost savings.
In both tons in dollars backlog and commercial segment increased year over year by 25, and 15% respectively.
Turning to slide 13, I'd like to make some comments about our balance sheet and liquidity.
We generated strong operating cash flow of approximately $230 million during the year as a result to higher earnings and improve working capital management.
After capital spending 2019 free cash flow was $109 billion.
For 2020 or capital spend outlook is expected to be approximately 2% to 2.5% of cells.
We reduced our net debt, we reduced our net debt to pro forma adjusted EBITDA ratio to 5.4 times, a quarter turn better than our third quarter results at the ended the year, we had $639 billion of liquidity between our available borrowings with the BLM cash.
Remain focused on deleveraging the balance sheet and expect to improve the net debt leverage ratio annually by three quarters.
Let's turn to one term.
Including the accounting for the just announced Cleary acquisition.
Looking ahead to 2020 on slide 14.
We expect consolidated net sales to improve 1% to 2% over pro forma first quarter 2019.
Healthy single family starts and positive trends in repair and remodel are expected to drive mid single digit volume growth in the windows and citing segments.
In the commercial segment, we expect lower steel costs to offset increases in tonnage volume from higher backlog, resulting in a net sales to be flat to prior year.
We expect first quarter adjusted EBITDA to be between 75 million and $90 million.
Higher volumes in the Windows inciting segments, combined with price discipline and cost savings more than offset material input and employee related expenses in the quarter.
For the commercial segment.
Higher volumes combined with favorable spread management and savings initiatives will also offset cost headwinds.
We have been monitoring the Corona virus situation closely we believe our supply chain exposure is limited and do not anticipate major disruption.
However, there remains a lot of uncertainty around the direct and indirect impacts it may have.
For the full 20 for the full year 2020, we have outlined some additional guidance on this slide we anticipate a strong cash flow years, we continue to focus on improving earnings and lowering working capital as a percentage of sales. We expect to continue to build on the success. We achieved in 2019, we plan to stay.
Disciplined on price drive profitable growth and capture additional $60 million. The savings. Additionally, we plan to generate $50 million of cash from focus on working capital improvements and improve the net debt to adjusted EBITDA leverage ratio by another three quarters to one term and now.
Now I'd like to turn the call back over to Jim.
Thank you, Jeff and as we wrap up we'd like to say, we're in a much better position from both an earnings and capital structure than we were a year ago.
Our improved cost structure and liquidity place us in the good position to take advantage of improving market conditions in 2020.
This includes making balanced investments in our key growth categories to ensure that we are deploying our capital to the areas, where we believe it will drive the greatest long term returns for our shareholders.
As Jeff mentioned, we announced this week the acquisition of Cleary masonry incorporated Cleary is a leading installer of manufactured stone veneer and northern California.
This is an excellent strategic fit for our company, enabling us to strengthen our position and the fast growing segment of the cladding market.
We're also excited about the opportunity. The addition of Cleary brings us for our builder in contractor networks, and particularly the potential to sell our stone cladding and installed services into our commercial buildings business.
Cornerstone building brands is relentlessly committed to our customers and creating great building solutions.
Our disciplined culture is committed to delivering sales growth and margin improvement from a focus on operational excellence every day.
We appreciate your time this morning, and this ends our prepared remarks and now we'll turn it over to your questions.
Thank you I'll now be conducting a question and answer session.
I'd like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is another question Q. You May proceed start to see like some of your question from the Q for participants using speaker quitman, maybe necessary to pick up your hands at the four pressing the star Keith. Please ask one question and one follow up question and then re queue for.
Many of the shell one on the plays and we pull for your question.
Our first question comes from the line of Leach Voda CJ Securities. Please proceed with your question.
Hi, good morning.
Hey, good morning.
Starting with the spread dynamics and the commercial segment obviously.
A lot of progress on the margin side, almost 400 basis points of gross margin is there to parse out how much of the 380 basis points was.
A benefit of all the cost savings activities and how much of the 80 basis points was.
Related to the spread activities in Q4.
Yes. Good morning I appreciate the question. So the 380 basis point improvement we saw in the commercial segment was result of really three things right. So we had lower volumes in the in the quarter itself, we had the margin spread and we had the synergies and cost out benefits. So the.
The cost out and synergy benefits that we receive basically offset the volume component, which left us with the spread and so those three things those three things are three items combined make up the 380.
Okay.
And then is there way as it relates to your Q1 guidance.
Quantify the headwind from higher wages and incentive comp on a year over year basis in Q1, that's impacting the Q1 forecast and then.
A headwind anniversaries during 2020.
Yes, great question as we as we think about 2020.
There are headwinds come again, specifically around employee related expenses.
It's it's.
Mainly coming in from variable compensation as we think about.
The components around that the the impact is going to be spread fairly even across the year.
And we believe it's about a $30 million impact on year.
Okay, I will hop back in queue. Thank you.
Thank you. Our next question comes from the line of Sam Mcgovern with Credit Suisse. Please proceed with your question.
Hey, guys. Good morning, just with regards to the credit I noticed you guys lowered or sorry, reduce the higher end of the leverage target two two and half times from two to three times what changed in terms, you're thinking about the leverage that should be on this business do you think that there should be less leverage on this business over the course of cycle or has your out.
Look improve in terms of the free cash flow on EBITDA that you expect to generate over the next years.
Yes, good morning, Sam So good question on leverage ratio, we do expect that three quarters. The one turn inside of 2020, and we're excited we're actually able to deliver that three quarters turned in 2019, we continue to make that a priority for us as a company as we move into the into the future years and would like to take that leverage.
Ratio down into that two to three times as mentioned via the changes is not necessarily a philosophy changes much more just thinking through the cycles and the timing and as we get into you know the the difference in cycle itself. We may have a different opinion when it comes to how much leverage we want to carry on this company.
Obviously at the bottom of the cycle you are much more comfortable de leverage and as you get towards the top of the cycle you'd want to have less leverage and so as we kind of think through those scenarios. We're still very comfortable that two to three times is appropriate for this company and thinking through you know, making sure we have enough liquidity and ability to do things, we'd like to do from a cost.
Scale perspective, and also from a growth initiatives.
Okay got it that's helpful. And then with regards to 2020 guidance that you guys provided it looks like you'll generate substantial free cash flow. This coming year, how do you think about the priorities for deployment.
Is your M&A pipeline look like a certain opportunities for additional capex beyond the two two and half percent and then and then thoughts on debt reduction.
You know that's that's a great question.
Priorities there have been very consistent where we've been the last 12 months as Jeff just said, we really focused on our leverage our debt leverage of that three quarters to one turn a year and we have not given up on that.
As we indicated on the Cleary acquisition, we will look at acquisitions that are have a strategic fit and make financial sense that Cleary acquisition is a it.
Hit both of those and as digestible, obviously capex, our big focus on Capex, Oh, we said in the prepared comments as automation those are great projects. For example on a typical window line. There is about 30 associates and with minimal capex between three and.
$4 million of capital. We can go from 30 associates to 16, which not only helps us with labor shortages, but also helps us with quality service and safety. So.
The balance sheet.
Focusing on Capex, particularly on that 2% to 2.5% that we talked about.
With the big focused on automation and then.
Strategic acquisitions that make financial and strategic sense of the company. So that's those are our priorities.
Okay, great. Thanks, so much I'll pass along.
Thank you. Our next question comes from the line of Andrew to Salah with Deutsche Bank. Please proceed with your question.
Hi, guys. Thanks for taking my question I'm, just wondering review a couple other synergy number so.
When the steel was first originated I think you guys had total planned synergies of 185, so it sounds like you're taking that target up to 195.
And then you know as we think about the 60 million to be realized in 2020 any any view on when that's supposed to come in and if you could break that down between kind of the gross profit line item and kind of overheads NSG night.
Yes. Good morning, so as we think about cost initiatives, we did take our guidance up to 195 again, just reminding everybody $25 million benefit coming in 2018 $110 million realized in 2019, and then to $60 million coming inside 2020.
We also mentioned in the script, there's about $25 million worth the carryover savings coming in from synergies and the remaining is spread basically by quarter throughout the year on on projects that were initiated last year in the first and second quarters and projects that were now just beginning to initiate.
And that will get some benefit as we go into third and fourth quarters that will carry obviously into 2021.
When it comes to the split between manufacturing and SGN, a it's about a 60 40 split.
60% is 2019, 60% inside of manufacturing and 40% inside of SGN, a as we move into 2020, it's about 80% in manufacturing and 20% and SGN a.
Got it that's helpful. And then as we think about 2020, just overall I know you guys are providing first quarter guidance, but just given.
This quarter as far as its contribution for the year is relatively low to the other nine nine months any additional color you can help us of with as far as seasonality or how to think about additional price cost momentum I know you guys had a big number in this past quarter as we kind of growth for the rest of the year.
You know just.
The seasonality typically as you know the second and third quarter are the stronger quarters, one thing that will be coming through our we talked on the commercial side about the backlog.
That has a mine to 14 month.
Lag. So if you look at the backlog that we saw starting really in the third quarter of 2019 that'll start feathering in as we as we look at mid part of the year, then you'll get into seasonality of the residential business as well.
Alright, great. Thanks, so much looking back in there.
Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Please proceed with your question.
Hi, good morning, Thanks for taking my questions I have a two parter on a window segment.
Number one you mentioned that there was an expansion of strategic relationships with retail can you elaborate a little bit on those retail expansion.
And then secondly, just more broadly talking about the automation side of things you know we've seen challenges with others from your competitors around automating windows, given some of that kind of inherent labor component.
Required in that business and kind of the need for accurate demand forecasting and so forth can you speak a little bit about why automating and windows will work for cornerstone.
And how you're kind of balancing the required customer service levels there like it.
Great. Thank you.
First of all we're really excited about our windows business, but just kind of step back and look at where we were a year ago I mean, we've successfully integrated.
Silverline atrium and ply gem windows, So was really three acquisitions that.
As Jeff just alluded to we got the cost synergies, we integrated plants, we put sales forces together and and really you know have that behind us and I'm really proud of the.
The job that the Windows team has done and really had $40 million of synergies that.
Came out of the business.
We're really focused not only on route nuke residential, but also repair and remodel Oh thats, a big part of the business and we feel growing growing that part of the business makes sense with with our with our partners in retail and we have a partners and retailers are very key to us.
It's about service and you bring that you talk about service, we're very focused on on time, and then full we've done a really nice job of servicing our retail as well as our other customers. So.
We're excited about that side of the business. When you talk about automation. These are these are projects that we're taking bites added as Jeff said, we're we're we're rolling out in three plants are these are small projects. These are not stopping the line other $3 million to $4 million of capital.
It's proven technology, we've seen where mistakes of the made in the industry and we've done a lotta research it takes a cause engineering upfront.
Having a focus group and the key is we could roll this out probably on paper faster, but we're going to go slow to go fast to make sure. We don't have any service issues.
And in light of it is timing you have to pass some of the projects because we don't want to be putting automation and when we come up to seasonality that we talked about in the earlier calls. So it is a go slow to go fast the key is servicing our customers.
All of our customers and we believe as we go forward we can roll this out over the next three years with no disruptions.
Got it okay. Thank you for that Jim and then secondly on the residential guide you're talking to 4% to 6% a single family housing growth for the full year you know obviously some of the data coming through and what you're seeing out of the homebuilders suggests that the market growth.
Could be north of that at least over the first half of the year before normalizing. So I guess, they're question is how does that really play into your guide are you assuming a potential stronger start to the year or you guys kind of embedding that 4% to 6% every quarter through 2020. Thank you.
As we talk we do have a 90 to 120 day lag on housing starts for our residential business.
But that is that's a number that we would rather be fairly conservative we don't want to.
No.
Have a number that does not come through.
We could if it is something greater than that we can be prepared from a service standpoint in a staffing standpoint.
But that's just looking at a lot of the consensus.
That is really not our number that's looking at consensus number that we've been we've been saying.
And also if you look at our resi business only 50% as I mentioned is a new residential that other 50% goes and repair and remodel and the retail business.
Got it thank you for the details.
Thank you once again as a reminder, if he would like to ask a question. Please press star one on your telephone keypad for participants using speaker equipment, maybe necessary to pick up your hands that before pressing the star Keys. Our next question is a follow up from Lee Jagoda with CJS Securities. Please proceed with your question.
Hi, I'm just a couple of more here. So can you on the citing side of the business talk about the revenue split between the U.S. and Canadian market and maybe touch on the end market outlooks, you're seeing in Canada.
Yeah, we all handle this question.
If you look at our total revenue. This is total cornerstone revenue CAD and makes up about 6% of our of our.
Our revenue inside of the company.
Specifically around siding windows, It makes up about 10% revenue in each of their respective segments. So it is meaningful for us it's about $300 million in total revenue as a company and to talk a little bit about the Canada market right now it has been very very slow in to take.
They are in Western Canada, and we saw a lot of that that decline inside of 2019.
We have seen a little bit a life coming back you candidate as of recent including maybe the last a couple of months of of 2019, but in particular, the first quarter as this team up there feels pretty good about where things are moving forward. So we're cautiously optimistic right now about Canada and I think is we get more.
Months underneath this will feel a little bit better about momentum is there.
Okay, and then switching gears to ask <unk> is there any.
I have a view of SGN as a percent of sales for 2020, and then longer term.
Goals in terms of a percent of cells, but as you know should get to overtime.
Yes. So 2019 asked you know is about 12.8% of cells.
As we move into 2020 as we talked about there are some of the headwinds in particular around the.
Employee related expenses. So as we think about 2020, we are going to see that increase I mentioned, it's roughly $30 million coming inside the best DNA on that variable component cost.
And the range that we're in today is actually in line.
At even top tier if you will as you look at some of our peer companies that are out there. So we feel good about our our proposition around our service model now having said that we are looking at a lot of opportunities.
In the company to find to how we can optimize and become more efficient as a company. So we don't think that this is.
The level, we'd like to be out we think theres more opportunity there.
But again I want to emphasize that it's not an area that we're way out of whack on as a company, but we do feel good about no real opportunities that are still in front of those to take advantage of those two larger companies as they come together, how do we become more efficient and more lean.
As one company and we're in the process of making that happen.
I just want to make sure I get this right you are expecting <unk> as a percentage of sales increasing 2020 based on some of those cost.
That is correct, yes, okay.
Oh.
And then on the DNA side it looks like your DNA jumped up in Q4, I assume that's somewhat related to the fact that your capex is running in excess of kind of core depreciation is this the new level or for the drop back down in Q1.
So a lot of it comes with the timing as we deploy capital inside of the the operations inside of 2019 in particular as we're getting ready to take advantage of some of the cost savings for 2020, a lot of that capital was his has begun to got deploying side of the latter part of the year I don't.
No that's necessarily a new a new level that we're setting I think it's more timing in the year you know for the projects that we're trying to get into place to make sure we get the benefit.
Okay and then just one last one for me you mentioned your growth rate.
Q1 revenue, which I assume includes the full impact.
Sure.
Engineered stone works a year ago can you just give us sort of the pro forma Q1 of 2019 revenue that you're basing before cast off of.
Yeah, you're talking about in total revenue dollars, yes, yes about first quarter of 2018, excuse me 19 was ability and 81.
A billion 81 perfect that's it for me.
Thank you. Our next question comes from the line of Rueben Garner the benchmark company. Please proceed with your question.
Thank you good morning, everybody.
Let me Logan.
A clarification first on the working capital comments, the $50 million a source of cash. This year is that a net number I'm in other words net of any uses of a working capital you'd need from the business growing or steel inflation or any other items of 50.
Million dollars isn't that towards the cash this year.
Yes, let me answer that question. So we are about 16, just a little over 16% of primary working capital right. So it's it's receivables inventories and payables as we think about working capital as a percentage of cells.
What we intend to do is dropped that down to a full percentage from 16, three if you will down to 15.3, and so you multiply that times other revenue of 5 billion, that's where the $50 million comes into play if you look at on a on a cash flow statement, it's going to be slightly less than that because of just the growth that.
Is required for us to pick up the.
The benefit on receivables being higher as as we're getting higher revenue inside the company that's about 30 million.
From a.
Working capital percentages 50.
Perfect. That's very helpful. Thank you and then the automation benefits that you're talking about.
In the Windows business are those if I guess correct me if I'm wrong I think those are outside of the 195 million and kinda cost synergies in savings that you guys have outlined or are you expecting any benefits. This year from those initiatives or is that more of a kind of 2021 and beyond.
The cost effort.
No you.
Those are first of all those are outside of the 195 and you'll see those mostly rubin into 2021.
The biggest.
Time lag on that is ordering of equipment.
I believe it or not this equipment to lead times anywhere from nine to 12 months equipment has been ordered were as Jeff said, we're putting in plants now but.
That impacts as we said it's about a two year payback. So a majority of that will be next year.
So we're going to keep feathering, we'll keep feathering in automation as we said on the earlier call. We want to make sure. We service our customers we have the bandwidth to do it and we'll be putting in additional equipment in the back half of the year that will be feathered in.
Later on into 2021.
Great. Thank you congrats on the then to 2019 and good luck this year.
Thank you we appreciate that.
Thank you ladies and gentlemen, we have reached the end of our question and answer session and the conclusion of today's call. Thank you for your participation. You may disconnect. Your lines now and have a wonderful day.
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