Q2 2020 Cornerstone Building Brands Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the cornerstone cornerstone building brands second quarter 2020 earnings calls.
This time all participants are in a listen only mode. After the speakers presentation, there will be a question and answer session.
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I'd now like they have the conference over to your speaker today, Tina Beskid VP of finance and I are thank you. Please go ahead morning. Thank you for your interest in cornerstone building brands.
Joining me today, our Jim Metcalf, Chairman and Chief Executive Officer, Unjustly Executive Vice President and Chief Financial Officer. Please be reminded that comments regarding the company's results and projection may include forward looking statements that are subject to risks and uncertainties.
These risks are described in detail in the Companys FCC filings earnings release in our Investor presentation. The Companys actual results may differ materially from the anticipated performance or results expressed or implied by these forward looking statement.
In addition management will refer to certain non-GAAP financial measures you will find a reconciliation of these non-GAAP financial measures and other related information in the earnings release and Investor presentation located in the Investor section of our website. Please note we will be referencing our investor presentation throughout.
Today's call.
Today's call is copyrighted by cornerstone building brands, we prohibit any use recording or transmission of any portion of the call without our expressed advanced written consent.
Throughout this presentation management May also referred to pro forma financial results such pro forma results give us back to the completed acquisitions as if such acquisitions were consummated prior to the periods presented.
On August nine 2020, the company detected a ransomware attack impacting certain operational and information technology systems and immediately launching investigation notified law enforcement engage the services, especially <unk> legal counsel and other incident response professionals as of today, we have or.
Covered many of our critical operational data and business system. Although the company is in the early stages of assessing the incident based on the information currently known we do not expect the incident to have a material impact on our business operations or financial condition. The company carries insurance, including cyber insurance, which we believed to be.
Commensurate with our size in nature of our operation.
With that I would like to turn the call over to Jim.
Thank you Tina good morning, and I appreciate you joining us today.
The cobot 19 pandemic merge with unprecedented challenges yet the cornerstone building brands team rose to the occasion and delivered solid operational and financial results.
Rooted in our core values and cultivated by or safe work environment. Our team served our customers kept each other safe drove structural improvements and strengthen the financial health public company.
Challenged with a significant decline of market demand, we took advantage of our national footprint.
Product breadth and deep customer relationships to provide uninterrupted service and high quality products to our valued customers.
Leveraging our continuous improvement culture, our team was able to deliver $50 million some cost savings from structural improvements and effective near term expense management.
Overall, we have improved our profitability even in these turbulent times.
We delivered adjusted earnings of 34 cents per diluted share.
Approximately 15% adjusted EBITDA margins, which is 830 basis points better than the same pro forma period last year.
And for the fifth consecutive quarter, we have delivered margin expansion in each of our business segments.
As a leading manufacturer of exterior building products in North America, we are uniquely position to maximize our business model and manage through this current environment.
As an essential business all of our manufacturing facilities distribution centers and installation services, we're operating throughout the quarter.
I will turn to slide four.
We continue to focus our operating ball on three key areas.
The health and safety of our employees.
Servicing our customers.
Maintaining a strong financial position with a keen eye on liquidity and capital discipline.
The health and safety of our employees remains our number one priority.
We've taken extraordinary measures and invested in practices that help cap our employees safe at work in.
And many of these policies and practices have been deemed best in class by local assessors and actually been used by other companies.
Now turning to slide five.
We are committed in a cornerstone value proposition.
We are strategically positioned to serve the residential commercial and repair and remodel markets.
Knowing the important role that are building solutions play and the growth and prosperity of the customers we serve.
Well the broad portfolio complimentary products that we will continue to expand through innovation.
Like line extensions and strategic acquisitions.
In fact during the second quarter, we successfully integrated the acquisition of query masonry incorporated.
Query is a leading installer of manufacturing stones linear in northern California.
It is an excellent strategic fit for our company.
Moving to the 30 installation hubs located strategically throughout the country and strengthening our position in the cladding market.
In fact, we're the only Nashville turnkey provider of stone solutions.
The service offering provides our customers with expert installation from our train Craftsman, a dedicated project manager on site and a vertically integrated value proposition.
We're also excited about the opportunities. The addition of Cleary brings across our builder in contractor networks in particular to cross sell our stone cladding and installed services into our commercial buildings business.
We are focused on operational excellence across our enterprise.
As we began to feel the effects of covert 19 on our business in late March we responded with speed and intensity to combat the impact of this crisis and capture maximum benefits during the recovery.
We accelerated cost and productivity initiatives that structure, we transformed the company's cost structure.
A few examples of our cost actions include plant rationalizations across our footprint.
Rightsizing, the organization and automating our manufacturing processes.
And our Toledo, Ohio Windows facility, we commissioned a fully automated glass line, replacing 20 year old equipment, doubling capacity and improving productivity by 50%.
With the continued tightness in the labor market investments in manufacturing automation will transform the way work gets done a cornerstone building brands.
We remain committed to delivering between 80 and $100 million of year over year structural cost benefits in 2020.
Reducing leverage is another important priority for the company and we continue to make progress towards that goal.
During the second quarter, we reduce net debt by $44 million and improve liquidity by 35 million.
We also generated $49 million a free cash flow during the second quarter and expect to continue to generate strong free cash flow the rest of the year.
We're in a much better position from a both earnings and capital structure that we were one year ago.
Our improved cost structure and liquidity place us in a good position to take advantage of the improving market sentiment.
This includes making balance investments in key growth categories to ensure we are deploying our capital to areas that we can drive the greatest long term returns for our shareholders.
I will turn to slide six.
We began to see momentum within the residential repair and remodel markets new residential construction declined sharply in April as covert 19 triggered stay at home orders and rising unemployment claims.
April housing starts were more than 25% lower than the previous year.
Over the last few months as stay at home orders have been lifted U.S. housing activity has rebounded.
Housing starts improved sequentially in June starts were only 4% lower than a year ago.
Repair and remodel activity has also shown resiliency driven by robust demand from home remodeling.
Our siding in Windows segments have benefited from this positive rebound.
For the month of June savvy, net sales were 1% higher than pro forma your prior and the window segment was only down 2.5% versus the prior year.
These results were significant improvement from the start of the quarter as April sales were down 21, and 28% respectively.
Additionally, the delay completion of new home construction from children placed restrictions, resulting in increasing backlog.
Since April booking dollars in backlog have increased sequentially every month.
At the end of the second quarter backlog within siding in Windows segments were 55, and 40% higher than last year, representing record levels for both segments.
And while we're encouraged by these improvements the marketplace still remains uncertain.
We are cautiously optimistic about it continued improvement in U.S. housing interest rates are at historic lows in demand for housing exceeds available supply.
However, rising covert 19 infection rates and the potential pullback of reopening plans weigh on consumer confidence levels and a potential for further rise in unemployment.
As we look at our commercial business on slide seven.
The impact from Cobot 19 on the nonresidential market has been mixed.
Approximately 30% of pro forma net sales are from our commercial products with differing degrees of exposure.
Our highly differentiated product portfolio, such as engineered buildings components insulated metal panels wall systems, those enable us to serve several low rise commercial markets.
Unfortunately, uncertainties brought on by the pandemic caused our customers across all commercial end use markets to defer capital spending negatively impacting demand for our products during the second quarter.
Commercial construction activity is slowly improving end market demand remains varied however, some positive spots do exist.
One end use market, we have a significant participation in his warehouses approximately 25% of the commercial segments. Net sales are for serving this end use market, which is generally positive from the strength of E commerce.
Our average daily bookings are slowly improving.
And our backlog is low single digits better than last year based on our current visibility, we do expect third quarter demand to improve sequentially for the commercial business.
Turning to slide eight.
We continue to believe that cornerstone building brands is a compelling investment for the long term.
We are relentlessly committed to our customers and creating great building solutions.
Our broad portfolio products and vast manufacturing network provides us with a unique strategic advantage in a diversified set of end use markets.
New residential repair and remodel commercial and manufactured housing.
We have great opportunities to expand and strengthen our existing customer relationships by providing integrated solutions tailored to each one of these channels and optimizing our capital deployment to create long term shareholder value.
Our disciplined culture is committed to delivering sales growth and margin improvement by focusing on operational excellence every single day.
We know that these challenging times like these will require swift and decisive actions to preserve our financial strength and ensure sound liquidity.
Our leadership team has executed with speed to improve cash generation lower cost and accelerate operational improvements.
These actions are rooted in our strategy to make cornerstone building brands, a lean more agile customer focus company that positions us to continue to deliver profitable growth.
Now I'd like to turn the call over to Jeff Who's going to walk through some of the financial results for the quarter.
Jeff.
Thanks, Jim and good morning, everyone.
The cornerstone building brands business model is built on a strong culture of continuous improvement and proven execution of our strategic priorities.
During the quarter, we took decisive action to align our cost structure with declining volumes and safe guard and liquidity.
I'm pleased to say that these actions helped cornerstone prove its resilience and deliver solid financial results. Despite the challenging environment caused by Koby 19 pandemic.
Starting on slide 10, net sales for the second quarter were down 17% from pro forma prior year.
Merrily as a result of lower demand across all segments due to the cobot 19 pandemic.
As Jim mentioned for most of our businesses April was the low point.
As stay at home orders were lifted and safety measures implemented on job site demand began to recover resulting in sequential improvement in may and June.
We delivered an adjusted EBITDA margin of 14.7%.
Highest margin in our company's history with an increase of 130 basis point improvement versus prior year.
This improvement reflects our success in effectively managing decremental volumes through near term expenses.
While executing on structural cost savings initiatives.
We were able to favorably impact manufacturing operating costs and lower as she anyway.
Our team's focus on executing our strategy of operational excellence has resulted in year over year adjusted EBITDA margin expansion for the fifth consecutive quarter.
Overall, we have strengthened cornerstones low cost operating model and enhanced our financial flexibility, which are critical for our company's ability to grow earnings over the long term.
Although we had adjusted EBITDA margin expansion of 130 basis points, we did see reduced demand for higher margin products in the commercial segment driving negative mix of approximately $14 million that is included in the price and mix net of inflation.
We continue to see net price of inflation across all our business segments.
Now, let's look at our business segment results.
You will note that the presentation of our segment performance now includes adjusted EBITDA measures, which we believe will be useful to investors. As these measures are representative of the company's performance and provide improved comparability of results.
As mentioned earlier.
Sex of the Cobot 19 pandemic resulted in lower demand across all segments. However, each of our segments responded with adjusted EBITDA margin expansion for the fifth consecutive quarter.
Turning to slide 11.
The Windows segment generated 14.2% adjusted EBITDA margin on $428 million of net cells.
Which is a 140 basis point improvement on a 15.8% decline in revenue versus prior year.
Positive net price and mix combined with cost discipline were the main drivers of margin improvement.
The pace of recovery within the U.S. has been significant.
In April the Unfavorables Netsols variance to prior year was over 28% while in June the variance was less than 1% strong retail volume from state and local reopenings combined with repair and remodel volume for do it yourself projects drove the recovery during the quarter.
Volumes continue to be strong moving into the third quarter, requiring our plans to quickly ramp up operations.
We have implemented some wage adjustments to help facilitate those efforts.
Turning to slide 12.
Deciding segment generated 22.2% adjusted EBITDA margin.
On $285 million in that cells, which is 170 basis point improvement on 10.4% decline in revenue versus prior year.
Cost discipline combined with net price and mix over inflation were the main drivers of this improvement.
Similar to windows, the pace of recovery within siding with strong.
Our siding business has a larger participation in the repair and remodel markets in both the U.S. and Canada.
Within our U.S. siding business April net sales were down 23.1% to prior year, while in June net sales were favorable 5.7%.
We experienced the same dynamic within our Canadian siding business April net sales were down 20% and June net sales were up 4.9%.
We continue to see strong demand in our siding business and our cautiously optimistic about the market recovery and positive momentum in the residential end markets.
Moving onto the commercial segment on slide 13.
Net sales in the second quarter of 2020.
$371 million or 22.7% lower than the same period last year.
While demand dropped as a direct result of the slowdown in construction activity steel prices also dropped pressuring average sale price per ton.
We were able to effectively manage this spread dynamic which resulted in an immaterial impact to adjusted EBITDA.
Despite the $14 million mix.
I mentioned previously we generated 15.2% adjusted EBITDA margin for the quarter, which was 10 basis point improvement over the prior year the fifth consecutive quarter of margin enhancement for this segment as a result is strong execution around effective cost management.
The structural improvements achieved within the commercial segment offset the negative mix impact realized from the shift towards smaller less complex projects.
Overall, the low rise nonresidential markets are stable and have not experienced the rapid pace of recovery that exists within the residential end markets. However, we continue to see improved bookings over the second quarter.
Since the business environment and market conditions under Cobot 19 are still fluid and evolving we will remain flexible and adjust our near term responses as necessary to preserve our solid financial performance.
Turning to slide 14, I would like to make some comments about our balance sheet and liquidity.
We generated free cash flow of $49 million in the second quarter 60 million dollar improvement.
Over prior year, primarily from effective working capital management and lower cash taxes.
Capital reductions generally provide a counter cyclical benefit in downturns like the current one enhancing our cash flow and liquidity.
We have focused on both aligning working capital with volumes as well as structurally improving it for the future as evidenced by the 1.5% point improvement in primary working capital as a percentage and that sells over prior year.
We expect to continue to generate strong cash flow over the rest to 2020.
We're anticipating a cash benefit of $50 million from favorable working capital improvements.
In addition, we are reiterating our expectation to reduce structural cost by 80 million to $100 million in 2020.
We remain committed to our strategic priorities of improving our customer experience operational excellence and strong financial performance.
While managing cost in generating additional cash are important areas of focus we've not lost sight of the need to continue to invest in the business for the long term.
We remain committed to innovation and investing in new product offerings and process automation that will generate profitable growth in the future.
We anticipate the full year 2020 capital spend will be approximately $85 million.
In the area attacks, we are taking advantage of co bid related government stimulus programs to defer certain payroll and income taxes to later in 2020 or in some cases into 2021.
Additionally provisions within the Carex will allow the company to deduct higher interest expense for income tax purposes that would have been previously disallowed.
We expect these actions coupled with the impacts of improved demand to have a net cash tax benefit of approximately $10 million in 2020.
We ended the quarter with approximately $483 million of unrestricted cash on hand, and $146 million excess availability on our asset base revolving credit facility.
We believe our liquidity is sufficient to weather the economic uncertainty related to the ongoing impact of the co bid 19 pandemic, while providing the company the flexibility needed to continue to execute our growth strategy.
Turning to the third quarter outlook on slide 15.
We recognize that there is still uncertainty around the ongoing impact of the pandemic.
However, we believe we have enough visibility confidence in our operations and cost structure to cautiously provide guidance under the following assumptions.
That momentum continues within the residential markets and nonresidential markets remained stable.
We expect the consolidated net sales for the third quarter will be between 1.160 billion and $1.240 billion and adjusted EBITDA to be between 170 million and $195 million.
We plan to stay disciplined on price drive profitable growth and capture additional cost savings positioning us to generate year over year margin expansion again next quarter.
Turning to slide 16, our priorities to build an even stronger company protect the health and safety of our teammates and serve our customers position us to deliver strong operational and financial results.
Our team successfully execute against these priorities in the second quarter, despite the challenges and uncertainty created by the Cobiz 19 pandemic.
We are proud of the continuous improvement culture, we have created and believe the proactive measures. We are taking will strengthen the long term fundamentals of our company.
Now I'd like to turn the call back over to Jim for some closing remarks.
Thank you Jeff.
The safety of our employees is our number one operating principle and transparent communication has been a top priority.
I'd like to acknowledge and thank our employees working in all of our manufacturing plants and throughout our entire organization for their unwavering dedication and commitment to serving our customers and adhering to our safety guidelines.
As we continue to successfully navigate the challenges brought on by the Cobot 19 pandemic our actions remain rooted in strategy.
We are committed to innovation and investing in new product offerings that will generate profitable growth in the future, which is a key element of our strategy.
While managing costs and generating additional cash are important areas of focus we have not lost sight of the need to continue to invest in our business for the long term.
We fully intend to emerge from this pandemic and even stronger company better positioned for success and long term profitable growth.
This ends our prepared comments and now we'd be happy to take your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound our hash key please standby, while we compile the Q any roster.
Your first question comes from Lee Jagoda with CJS Securities. Your line is open.
Hi, good morning, and congrats on the results.
Thank you very quickly.
So I guess.
We started last quarter with you're giving us the sort of April down mid Twentys and then earlier on the call you gave us some clarity on how June shaped up on the residential side can you talk about.
The commercial side in June and then and then also just by segment trends you're seeing in July.
Yes, let me give you a couple of global comments, and then I'll turn it over to Jeff July the trends continue to be strong strong backlog in July folks on the residential side and we're starting to see.
Stabilization on the commercial side.
Look at the commercial bookings and backlog as I said that the the backlog is so low single digit for commercial and we're seeing sequential improvement in our back our bookings from from the second quarter. So we feel.
The that the commercial business has stabilized overall market has stabilized we feel.
Steel costs have also stabilize even though at low levels and we on the commercial side.
We're still cautiously optimistic about the third quarter and margin expansion continues to be.
A focus that we have in the business.
And we as you as you think about the month agenda itself you can see from the change in July it it has significantly improved.
The month of June was down about 25% for the commercial segment.
Got it okay.
And then.
Just following up on on the commercial side, you've been you've done a really good job.
Holding on to price.
Excluding the mix issues that you've seen.
In the face of both lower raw materials and soft demand.
How should we think about this I guess pricing over the next couple of quarters, just given the demand environment and.
Would you continue to expect EBITDA margin expansion in commercial in Q3.
That is our focus as margin expansion price has been under really under pressure most of this year and we've as you mentioned, we have a pretty good track record of balancing price and volume with the fluctuation in cost that we've seen really over the last five quarters. So.
Pricing, we feel has has stabilized even though at a low level and we're very focused not only on balancing price and volume to expand our margins, but really focus on our plant efficiencies and also costs out in the commercial business we've.
We delivered the organization, we figure we've lowered the over.
Breakeven of the commercial business and we're really focused on margin expansion into this quarter.
Okay. One last one for me and I'll hop back and just on the residential side as it relates to pricing.
In Q1, I think you had mentioned you put in around a 5% price increase and we were waiting to see what would ultimately stick just given the environment. We were entering into any update on what actually has stuck and what you expect for the rest of the year.
We put in a price increases not residential business late first quarter that really took effect in the late in the first quarter in really impact in the second quarter. So.
We've been we've been pleased with our price performance on the residential side again, we think thats a core competency that we have as cornerstone and with the the strong volumes that were seeing.
Pricing is pretty solid at this point.
That's great I'll hop back in queue. Thanks, very much thanks Lee.
Your next question comes from polio Romero.
Nobody until your line is open.
Hey, Good morning Hope you all are well.
Good morning.
Because my first question is just on the backlog I know you mentioned backlog for siding in Windows were up 55, and 40% year over year can you just talked to the mix in that backlog.
From a good better best perspective for both siding and Windows.
Yes, if you look at our overall residential business. The mix is about 50, 50, new rez versus repair and remodel where the siding business has a heavier.
Percentage on the repair and remodel market.
Okay.
Got it and.
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I guess you mentioned on the commercial side, you're 25% of your of your sales.
Our coming from the warehouse end market, which continues to be strong.
Could you maybe give us a sense of of your in market breakout at the moment I mean warehouses, maybe compare to office retail manufacturing.
Yes, that's that's a great question.
One of the one of the advantage as we talk a lot about diversification of the overall cornerstone portfolio of.
Repair and remodel new commercial commercial and new residential we haven't talked a lot about the diversification we have in our commercial business, we actually participate in each one of the end use markets that are five stories are below right now as we said warehouse is strong with the data centers and ecommerce that's.
Right now, making up about 25% of our business, but we stay really close to our customers on whatever end use segment it shows growth or potential our customers really gravitate to that right now it's the warehouse data centers.
Where there's a mix you aren't seeing.
A big assist us a strong strong demand on office and retail so the the advantage we have in our commercial business. We don't have one of these end use segments that were.
Completely focused on.
Or it's it's really our base business. So we're really spread out anything it's five stories are under and our customers stay close to what are the growth opportunities along with that you know theres a trend.
People have started talking about with cobot 19 of going out to the suburbs and with getting now the urban centers and we think that also a long term plays well with our diversification of our commercial business where.
Smaller commercial business five stores or below our will be could be built around suburban areas.
Understood. So your baby.
Maybe sticking more to five storey them below and less yes, there may be more nimble.
Able to adjust your business.
Not necessarily tied to the one set of getting market.
Absolutely that's that's very well said and that's why we think that's a that's a.
Great advantage for us.
Okay, and I guess, just last one for me to hop back to Windows.
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I have dealers rebounded there.
And you know can you maybe speak to the strength, you're seeing that channel in July.
Yes, our customers are quite busy there, where we really watch you know the inventory levels of our customers as you know uncovered 19 customers kept inventories very tight.
With with the rebound in commercial.
It hasn't been inventory rebuilt.
It's been flowing through we also follow the point of sales for a lot of our retail customers, which has been quite a strong and continues to be a very robust as we speak so cost our dealers and customers are flowing through the product.
The only the only areas that we're probably a few months. It goes when job sites were being stops are those have opened up and right now it's a it's very positive.
Great. Thanks for taking the questions and good luck in the back half the year. Thank you.
Your next question comes from Richard Kus with Jefferies. Your line is open.
Hey, guys. Thanks for taking my question. So just to talk a little bit more about the commercial business in the backlog there one of the things you mentioned in your comments is that you kind of moved from a negative mix standpoint to some of the lower complexity type business. As you look at your backlog that you guys have if that's something that persists in the backlog and then.
What does it take to get some of that.
Better higher margin business back.
Well that the higher margin business really if you. If you look at that it's more on the I MP business are insulated metal panels business, which has gone from.
Higher end architectural business, which has slowed and those jobs have been paused, even at the architectural level two jobs like cold storage, which.
Has has shown growth within the I am piece segment and that that is a that is a price mix the price and product on the high end.
Architectural is much higher than than the cold storage also we're seeing from me building standpoint to lower complexity buildings, which are basic warehouses lower complexity buildings, which accommodate come at a lower a lower price point in the segment. So it's.
It's really the the overall demand we need private capital spending to start up again, which will which should should help and really there's still a lot of unknowns there there as well.
Okay Gotcha, and then just in terms of backlog itself, how far does that extend out and then is it really hard to have visibility later this year, because obviously some of the indicators on the commercial side.
Great for a long period of time there.
During this last quarter. So I think people are concerned that maybe late this year early next year, you hit a bit of a soft spot how do you guys view that.
We view depending on the complexity the building your Wheeler complexity buildings, you know you're looking at 90 to 120 days.
Okay Gotcha, and then last question for me on the cost takeout side of things you guys did a great job in the quarter. It looks to me from the bridge that you've got about $45 million.
Cost take out there how much of that benefit that you ended up getting an EBITDA represents permanent cost takeout versus some of the more temporary items.
Yes, that's a great question, we've been focused on both.
Obviously with the uncertainty inside of Q2 and even the forecast going forward is there's just a lot of.
Uncertainty in the marketplace, we've been making sure that we're managing both the structural side permanent reductions and also those near term expenses for liquidity purposes in particular, and so as you look as you look at Q2 about 50 50 or that was kind of split between structural and near term expenses and as we look forward.
Sure it into Q3 in Q4 as volume comes back as we talked about last time, we would expect some of those near term expenses to come back as well, which would be very positive thing right in even as Jim mentioned insight as some of the conversations around.
Labour and some of the issues that we're having with labor right now we have gone out and increase some of our.
Our wage expenses for our employees to make sure that we keep the retention there. So some of those near term expenses are coming back into the company as we predicted and that's a good thing is volumes are coming back the structurally we we've taken out those.
Year to date on structured cost out we've taken out $50 million, so far inside the company and.
Thats coming through a lot of different initiatives that are in place with automation.
Coming through some of the plant closures in the footprint rationalization that we've gone through and there's still more to come rights. There's some other projects that were working on right now.
That's perfect. Thanks, a lot guys appreciate it.
Again, it is star one on your telephone keypad, if he would like to ask a question.
Next question comes from Matthew Bouley with Barclays. Your line is open.
Good morning, Thanks for taking the questions.
I wanted to ask about.
Backlog acceleration in Windows and siding.
I hear you mentioning.
Potentially some labor issues, there I guess I guess are their production issues overall, better sort of preventing you from fulfilling orders there and maybe if you could reconcile that large backlog acceleration the up 40, and 55% kind of with the with the revenue guidance for a year on year because.
Fine.
In Q3, thank you.
Yes. Thanks. Thank you for the question really it gets down to very.
To knock that backlog down it's very simple, it's bringing in the labor of there is as Jeff just mentioned we have.
Labor shortages, we put in initiatives, we talked about the wages we've put in.
Internal marketing retention bonuses of recruiting we're very aggressive up about bringing bringing the labor in our biggest area is our windows business of having the appropriate labor so knocking those big backlogs down really really equates to bringing back.
The labor with is quick turnaround that is why also we've talked a lot about automation automation is critical because.
This labor shortage is not going to to end in the very near future. So our strategy is to invest a.
Large percentage of our Capex budget to automate not only our windows plant, but our siding plant in commercial plan because.
Just overall manufacturing, bringing bringing back the hourly employees at this time has been very difficult. The the cares act and some of the.
Some of the government stimulus package was.
Impacted that.
Some just the could 19 overall.
Issue has impacted but we are extremely aggressive of getting as much labor back because we can and have put in the appropriate measures to do that but really it really that knocking at backlog. The headline is we get the labor we can ship the backlog.
Just a follow up a little bit on that as well as we kind of came into the months of April in March and April we were we were putting the brakes on right, we're really slowing down things.
In anticipation of what might come with the sudden shutdown type of scenario and then as we get into the May June timeframe in particular in our residential businesses window inciting it just completely reversed right and so we went from putting on the brakes to stepping on the gas and trying to get as much much production as we can it's not a capacity is.
You from manufacturing when it comes to equipment. It is that labor component, the Jim talked about and that's that's.
All all effort right now put in place to make sure that we have that and we've seen some improvement there some of the actions that we've taken with the wage increases in modifications of hiring practices et cetera have allowed us to increase that and to get more wage or more.
Valued employees back into the organization.
Got it that's that's very helpful color.
And then secondly.
You know just I guess, it's kind of a segue from that but also on the Q3 guide.
Yes, you are guiding the margin expansion EBITDA margin expansion.
But with gross margins, perhaps down at the midpoint and correct me if I'm wrong.
And I hear you that that theres going to need to be some cost coming back into the system, but clearly that margin guide is suggesting that there's a fair bit of SGN a.
You know control into the quarter. So maybe if you could just put a little more color around SGN, a dollar expectations, what what costs are coming back and kind of what level of confidence is there that the SGN a side is really going to drive the EBITDA margin uptick. Thank you.
Yes, Matt Let me, let me take that question a couple of things right. When you look at it on a year over year basis.
We are seeing a slight.
Tick down inside the gross profit margins, but on a sequential basis. They continue to move up and as we thought about that on the low end of our EBITDA.
Margin range, it's still a 50 basis point improvement versus prior year and on the high end, it's 150 basis point improvement it shows that volume.
Benefit that we get as a company as volumes come back in the operating leverage that we have around that.
We are being very cautious on SGN expense right. We want to make sure. We don't know with Theres still lot of uncertainty and we want to make sure that were.
Acting appropriately until we can fully see your way through this pandemic and so because of that we are keeping a lot of the.
Controls very tight around the rest DNA spending when it comes to new hires or or wage inflation those type of things travel obviously is down.
The maybe the things we can really control, we want to make sure that we keep debt.
Under control so we feel good about the guidance that we put out there which is margin expansion and we have a little bit of pressure inside of our commercial markets.
With the steel spread but we are continuing to see margin enhancement, even with that inside of our commercial business with some of the SGN a and other things that that we're doing to make sure we.
Maximize the profitability for the company.
Okay. Thanks, Jeff Thank you Jeff.
Your next question comes from Lee Jagoda from CJS Securities. Your line is though Ben.
Hi, sorry about that Tom just two quick follow ups.
One with regard to backlog.
I appreciate the percent increase.
Dynamic and and I guess color. There can can you just give us the dollar backlog in windows siding and commercial.
That's one of the here.
We're grabbing the Dan.
I guess, what while you're looking for that probably an easier question.
The tax guidance, you gave a $10 million benefit is.
A little bit lower than you gave previously is that just because of the increased financial performance.
That's correct Lee is it's a combination of a couple of things actually we've got.
Higher expectations, obviously on on.
Earnings.
From the expectation that we had last quarter is as we look good.
The second half of 2020, and it's got some benefits in there as well from the cares AG and in particular, the 163, Jay which is the interest rate limitation move from 50% to 30% and so it allows us to take a little bit more advantage of that so the combination of those two things.
One offsetting but obviously the the increase in the forecast being most of that that drop.
And it is too early to tell what 2021 looks like from a tax standpoint.
It's too early.
Okay.
Leap Lee what we're still looking that dollar amount just you know the the back the backlog that we set on residential side with the.
The windows So 40.
And sightings plus 55%.
We said low single digits on the commercial backlog.
And we will get you the dollar amount.
Yes, and post that we can post correct.
And that's and those those percentages are year over year as of the end of Q2.
Yes, okay.
Okay, Yes, the dollar amount will be great and I'll get for it once you post thank you.
You're welcome.
There are no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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