Q3 2020 Cornerstone Building Brands Inc Earnings Call
Hi, Peter.
[music].
Ladies and gentlemen, thank you for standing by welcome to the cornerstone building brands third quarter 2020 earnings Conference call.
This time, all participants are in a listen only mode.
It is because presentation there will be a question and answer session to ask a question during the session. The press star one telephone.
The bar that's news conference is being recorded.
Require any prudent course starts you will I would now let's turn the call over to <unk>.
When you add it back.
Ritchie <unk> Brad.
Good morning, and thank you for your interest in cornerstone building brands.
Joining me today are Jim Cowan, Chairman and Chief Executive Officer, and jumps me Executive Vice President and Chief Financial Officer. Please.
Please be reminded that comments regarding the company's results and production may include forward looking statements that are subject to risks and uncertainties.
<unk> are described in detail in the company's <unk> filings earnings release, and 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 energy.
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.
Please note, we will be referencing our investor presentation throughout todays call.
Today's call is copyrighted by quarter. Some building brand, we must do that any use recording or transmission of any portion of the call without our express advanced written consent.
This presentation management may also refer to pro forma financial results.
Pro forma results can affect the complete an acquisition as this stuff acquisitions were consummated prior to the periods presented with that I would like to turn the call over to Jim.
Thank you Tina.
Good morning, and thank you for joining us this morning.
We hope you and your families are healthy in space.
Cornerstone building brands is committed to our customers and creating great building solutions for the communities we serve.
That's cold is maintained pandemic continues to create uncertainties, we remain deeply rooted in our core values.
Safety is a central part of our culture and we are focused on taking the actions necessary to ensure the health and safety of our employees.
Now I would like to turn you to slide three.
Two years ago, we former company with a strong foundation of a business model that emphasizes commitment to our customers.
We've developed a well defined business strategies focused on driving profitable growth.
Leveraging operational excellence across our businesses and preserving our strong capital allocation framework.
We operate our business with an ongoing commitment to sustainability.
From waste recycling and reuse programs to build long lasting energy saving products and systems.
We believe every home and building we create positively contributes to the community where people live work and play.
We are confident that our strategy will deliver long term value to both our customers and to our shareholders.
Now moving to slide four.
We delivered strong results for the third quarter of adjusted earnings of 31 cents per diluted share and an all time high of 15.8% adjusted EBITDA margin. This.
This is a 160 basis points better than the same pro forma period last year on 5.5% lower net sales.
This is the sixth consecutive quarter, we've demonstrated our ability to generate year over year margin expansion, while navigating market volatility and the many other challenges brought on by corporate banking.
As the largest manufacturer of exterior building products in North America, we've established leading market positions in many of our core product categories.
Our ability to maximize their business model remain discipline on price and focused on operational excellence across our enterprise contributed to $155 million of free cash flow during the quarter, which is the best performance we've delivered so far.
As we have mentioned previously reducing leverage is key and we continue to make crop as towards that goal.
During the quarter, we reduced net debt by approximately $150 million and improved our leverage ratio by close to full term on a year over year basis.
We completed a $500 million bond offerings that enhanced our liquidity profile and strengthened our financial position.
Our improved cost structure and liquidity positions us to take advantage of the improving market sentiment.
This includes making balanced investments in growth categories to ensure we are deploying our capital that drives the greatest long term returns for our shareholders.
For example, in our North Brunswick, New Jersey was as planned.
We have installed two new automated vinyl window line, increasing our capacity by approximately 20% for our largest product line.
Investing back into the business is vital to strengthening our customer relationships and supporting their growth in the market.
The investments like these also create long term value for all of our stakeholders.
Now, let's turn to slide five.
We continue to see strong momentum within the new residential and the repair and remodel markets.
US housing activity rebounded sharply in the third quarter supported by a growing preference for single family homes in less urban areas.
On a seasonally adjusted basis single family starts improved by over 15% compared with the third quarter of 2019.
Additionally, single family permits and new home sales increased approximately 20 and 40% respectively.
Repair and remodel momentum also remains strong driven by a robust demand from the do it yourself market.
Our siding Windows segment have benefited from the positive rebound.
During the quarter average daily bookings were over 20% versus prior year levels.
But the rapid pace of this recovery coupled with industry wide labor shortages have resulted in increased backlogs and extended lead times.
At the end of the third quarter backlogs within siding in the Windows segments were strong representing record levels for both segments.
We are working diligently to ramp up our staffing to maximize our installed capacity to meet the current and future market demand for our customers.
We are encouraged by the continued improvement in us housing.
Interest rates are at historic lows and demand for housing exceeds the available supply.
Partially as a result of COVID-19, our business is benefiting from a broad increase in demand for housing as consumer preferences shift away from the urban living into suburban single family homes, where our products are more prevalent also.
Also we expect to continue to benefit from the strong growth in housing for first time in entry level home buyers as we believe our products are particularly well suited for this segment of the housing market.
The repair and remodel market tends to be less cyclical than new construction.
This is also positive for cornerstone because exterior building products are exposed to the elements and maintenance is less likely to be deferred.
With the strong market demand and increasing costs in raw material labor and transportation we.
We have announced price increases across our residential businesses.
We do remain cautious however of the rising coated maintain infection rates and the potential pullback of the reopening plans, which are weighing on consumer confidence levels as well as the potential for further rise in unemployment.
As we look to our commercial end markets on slide six the impact from COVID-19 under non residential end use markets has been significant.
Non residential construction spending is tied to private and public capital spending patterns.
Interest rates government funding.
And consumer demands.
Our participation in this end market.
Focus primarily on low rise building five stories are below served to partially mitigate the impact of the housing cycles on our business.
Commercial construction activity has been slow to rebound, but does remain stable.
Our average daily bookings remain soft through the prior year, but is slowly improving with construction activity.
As we remain focused on managing our price with fluctuations in steel costs, which have been increasing to pre pandemic levels, we have announced price increases across all products in our commercial businesses.
Low rise commercial markets are stable with slight improvements in some areas like data centers warehouses.
In cold storage facilities, which do make up about 25% of our commercial segment.
2021 is still uncertain and dependent upon capital spending commodity prices and consumer confidence.
Low rise building applications are central to growing suburban areas and the demand for commercial construction typically lags the housing cycle by 18 to 24 months.
Now, let's turn to slide seven.
Our business model emphasizes commitment to our customers and operational excellence.
This is supported by strong procurement.
Vertical integration and engineering capabilities across our extensive manufacturing footprint.
While leveraging our strong customer connections.
Our broad portfolio of products and vast manufacturing network enables us to participate in a diversified set of end markets. This.
This provides us with a unique strategic advantage.
We see great opportunity to expand and strengthen our existing customer relationships by providing integrated solutions tailored to each channel and optimizing our capital deployment to create long term shareholder value.
The underlying fundamental factors are favorable that will drive long term growth across the markets in which we operate.
Our business is well positioned to benefit from the broader societal and population trends favoring suburban regions as employment and living preferences shift.
Our disciplined culture is committed to delivering sales growth and margin improvement from a focus on operational excellence.
We accelerated cost automation and productivity initiatives that structurally transformed the company's cost structure.
We have structurally reduce cost by approximately $75 million through the successful execution of these savings initiatives.
We do remain committed to delivering between 80 and $100 million of structural cost benefits. This year, yet preserving the fundamental elements of our business that provides a value proposition for our customers.
We have further invested in talent with the appointment of Jim Kepler as executive Vice President of operations.
Jim has over 30 years experience, leading manufacturing and supply chain operations for large diverse organizations.
Im excited to welcome Jim to cornerstones leadership team, where he will play a vital role in accelerating our manufacturing and operations strategy.
Now I'd like to turn the call over to Jeff who is going to walk through some of the financials.
Thanks, Jim and good morning, everyone.
We continue to deliver strong financial performance with another quarter of year over year margin expansion.
On an adjusted basis, we generated net income of $39.4 million or 31 cents per diluted share an improvement of 4% over the same pro forma period last year.
Starting on slide nine the decrease in net sales was primarily driven by lower volumes.
As Jim mentioned, the pace of recovery within the commercial segment is slower than what we are experiencing in the residential businesses.
During the quarter and mentioned on our last earnings call, we were subject to a ransomware attack, which impacted our ability to ship product for several days during the quarter.
While we were able to recover many of our critical operational data and business systems in just a matter of a few days the windows segment was impacted the most.
We delivered an adjusted EBITDA margin of 15.8%.
A new all time high an increase of 160 basis points from pro forma prior year.
This improvement reflects our success in effectively managing lower volumes and near term expenses, while executing on structural cost savings initiatives.
We were able to favorably impact manufacturing operating costs and lower as you may.
Our teams focus on executing our strategy of operational excellence has resulted in year over year adjusted EBITDA margin expansion for the sixth consecutive quarter.
Overall, we have strengthened cornerstones low cost operating model and enhanced our flyer financial flexibility, which are critical for our company's ability to grow earnings over the long term.
Now, let's look at our business segment results.
Overall financial performance from the segments were strong.
Remaining focused and disciplined.
We not only had margin expansion as a company, but delivered six consecutive quarters of year over year adjusted EBITDA margin expansion in all segments.
Beginning with the Windows segment on Slide 10, net sales of $501 million were slightly lower than prior year, primarily due to loss ship days from the ransomware attack I mentioned previously.
We estimate about five to seven days of product shipments were pushed out of the quarter and contributed to our higher backlogs.
In spite of that challenge, we continue to see favorable price and mix net of inflation and increased profits from our near term and structural cost out initiatives.
Adjusted EBITDA was an all time high of $71 million, an increase of 9.4% over prior year.
Additionally, adjusted EBITDA margin was 14.1%.
Which was 130 basis point improvement versus prior year.
We continue to see strong demand from the positive fundamentals in the new construction and repair and remodel trends.
We remain optimistic about the market recovery and positive momentum in the residential end markets and expected to continue into the fourth quarter.
Turning to slide 11 this.
The siding segment generated 24.6% adjusted EBITDA margin on $322 million of net sales.
Which is a 270 basis point improvement on a 2.2% decline in net sales versus pro forma prior year.
During the quarter order momentum was strong as wholesale and retail demand outpace prior year driving higher volume.
However, price impact from lower aluminum costs and shift in product mix offset the volume.
Cost discipline combined with structural cost improvements also contributed to the strong year over year margin expansion.
Similar to windows, the pace of recovery within siding with strong we remain optimistic about the market recovery and positive momentum within residential end markets and expected to continue into the fourth quarter.
Moving onto our commercial segment on slide 12.
Net sales in the third quarter of 2020 were $404 million or 13.1% lower than the same period last year.
While demand dropped as a direct result of the slowdown in construction activity.
Fuel prices also dropped resulting in a lower average selling price per ton.
We were able to effectively manage the spread dynamic, resulting in approximately $6 million of favorable price net of inflation with adjusted EBITDA.
Adjusted EBITDA margin for the quarter was an all time high of 17.4%, which was 180 basis point improvement over prior year, and a 220 basis point improvement sequentially.
The commercial segment has been able to deliver six consecutive quarters of year over year margin enhancement as a result of strong cost management and structural improvements to simplify the organization.
The structural improvements achieved within the commercial segment offset the negative mix impacts realized from the market shift towards smaller less complex projects.
Overall, the low rise non residential markets are stable and trending at similar levels experienced during the third quarter.
Since the business environment and market conditions under COVID-19, our steel fluid and evolving.
It is difficult to predict what the ongoing impact may be.
So we will remain flexible and adjust our near term response as necessary in order to preserve our solid financial position.
Turning to slide 13, I'd like to make some comments about our balance sheet and liquidity.
We generated free cash flow of $155 million in the third quarter.
$87 million improvement over prior year, primarily from lower interest expense.
Cash expense and capital spending.
Coupled with higher earnings generation.
We expect to generate strong cash flow in the fourth quarter 2020, as we remain focused on financial discipline and strong operational execution.
We are reiterating our expectation to reduce structural costs by $80 million to $100 million in 2020.
While managing costs of 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 remain committed to innovation and investing in new product offerings and process automation that will generate profitable growth in the future.
We anticipate that full year 2020 capital spending will be approximately $85 million.
In the area of taxes, we are taking advantage of Colgate related government stimulus programs to defer certain payroll and income taxes to later in 2021 or in some cases into 2022.
Additionally provisions within the cares Act will allow the company to deduct higher interest expense for income tax purposes that would have been previously disallowed.
We expect these actions coupled with the impact of improving demand to have a net and net cash tax benefit of approximately $8 million than we expect to receive in the first quarter of 2021.
During the quarter, we issued $500 million of senior unsecured notes bearing interest at 608 per year and mature in January of 2029.
The proceeds were used to repay debt under the asset based lending facility and cash flow revolver as well as some transaction fees.
As a result of the transaction, we improved the company's financial flexibility and increased liquidity.
Ending the quarter at $1.3 billion, including 628 million of unrestricted cash on hand.
As a result of our profitable growth focused on operational excellence and targeted capital deployment towards balance sheet deleveraging, we have reduced net debt leverage by 0.9 turns over the prior year to 4.9 turns as compared to 5.8 turns in the same period last year.
Turning to the fourth quarter of 2020 outlook on slide 14.
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.
Momentum continues within the residential markets non residential markets remain stable and we remain in essential business.
We expect to consolidate net sales for the fourth quarter will be between $1 billion $135 million and $1 billion $200 million and adjusted EBITDA to be between $145 million and $160 million I.
I would like to remind you that our company's fiscal quarters are based on a 445 week calendar.
As such there are three less shipping days in the fourth quarter 2020 as compared to 2019.
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 15, our financial results demonstrate our relentless drive for exceptional results.
Our priorities to serve our customers maximize our unique business model and protect the health and safety of our teammates position us to deliver strong operational and financial results.
Our team successfully executed against these priorities in the third quarter. Despite many challenges.
We are proud of the continuous improvement culture, we have created and believe the proactive measures. We are taking will strengthen the long term fundamentals of our company.
And now I'd like to turn the call over to Jim for some closing remarks.
Thank you Jeff.
As Jeff just mentioned, we are committed to delivering strong operating and financial results through these unprecedented market conditions and our near term outlook continues to improve.
We have taken a number of actions to significantly reduce leverage and strengthen our balance sheet with a keen focus on our customers.
We remain committed to the care and safety of our employees, our customers and our enterprise as we provide building solutions where people live.
Work and play.
Now, we'll open up the call for any questions you may have and again, we appreciate your interest in cornerstone building brands.
Ladies and gentlemen.
Kim Please press Star then the number one on your telephone keypad.
Got a pause for just a moment to public unit roster.
Your first question comes from we cant go into with JMP Securities. Your line is open.
Hi, good morning.
Accordingly.
So just starting with the price increases on the residential side.
How should we think about those in terms of when they were announced versus when we should be modeling that they are realized.
Great. Thank.
Thank you for your question as as we've talked in the last couple of quarters price discipline is really a core competency that I I believe we have put into cornerstone not only in the residential side, but the commercial side.
As we just mentioned we've announced price increases.
Across the board both in siding and our windows on the resin specifically to your question those were put in the market.
This quarter, the fourth quarter, and we expect to be realizing those as we get into the first and early second quarter of 2021.
Okay and then.
As I look at.
Housing starts in the projections for 2020.
You guys are still obviously lagging that on the on the new residential side.
And there are significant pent up demand record backlogs et cetera can you just remind us sort of a lag between the starts and when youre product gets sold and.
On the backlog how far out does your current backlog and visibility kind of get you.
Given how strong its been.
Great on online.
On those on the lag we typically lag the starts of residential starts anywhere from 90 to 120 days now thats been the historic.
Metric, we're kind of in an unprecedented time here. So we may even have a little longer lag when it gets back to the backlog you are talking about and the amount of demand that we're seeing as.
As you know we really took.
Decisive action in March and April.
When COVID-19 hits and then we had a sharp rebound on residential so you made with even see a little longer lag on the backlog on or around the housing starts to when we when we if it hits our businesses. If just as reminder, you have windows siding and stone really are on the.
The back end of the construction cycle when you when you build a build a home speaking of our backlog as we said it's at historic levels now both from primarily Windows has a strongest backlog siding has a very strong backlog and we're expecting that to be worked out hopefully late first quarter early second quarter.
Okay, well the maybe just add a couple of comments on that as well one of the things that we saw inside a third quarter. In particular was the windows are the ransomware the hit the company and it was it impacted all of our different segments, but in particular, it really had an impact on our windows segment.
And we estimate the timing of that right. We don't we don't think that we lost a lot of orders, but the timing of that is going to push it increased our backlogs in the pushed it into fourth quarter, which will probably continue into the first and second.
But the impact on that to about a week's worth of shipments. So when you look at the Windows business in particular and you adjust for that right. It's about a 5% impact on the windows.
The windows business. So we actually feel really good about our performance within our Windows segment and that was just something we had to overcome as a company. We did very nicely and we're able to overcome that quickly.
Okay that makes sense one more for me ill hop back in the queue here just in terms of labor availability obviously.
Obviously, that's like the pain point in supply chain can you talk about how much additional labor you need to add to catch up with the current levels of demand and what you're doing on the LIBOR rate side to try to attract some new talent.
That's that's been a big challenge, obviously, it's industry wide.
And we're working diligently to overcome this.
Really since July we've we've increased our hourly headcount about 13% to 14% we.
We aren't there yet you know where it takes time to get them trained and integrated and we really want to do it particularly in this environment in a very safe.
And responsible way with COVID-19, so it's that has taken a little longer but well. That's that's an action that is important for us that safety of our employees. So.
We're still working diligently we have we have a recruiting.
Outside recruiting firm.
We have all hands on deck and its still an issue, but we're making we're making progress and we think our lead times right now our two to two and a half times are ideal lead times, but we anticipate to get that back in line sometime during the first first half of 2021.
All sounds good thanks very much.
Your next question comes from eating alone now with Sidoti and company. Your line is open.
Hey, good morning, everyone.
Good morning Julio.
On the ransomware attack and the five to seven days due to the sales get made up in the fourth quarter or or do label labor constraints et cetera kind of toggle how much you can make up.
And should we think of that more as kind of a lost sale that makeup.
Yeah, Julio it's a it's a good question.
The pushout of sales that I referenced from the third quarter into the fourth.
It's it's really customer specific as we kind of look at each one of those we don't believe that we lost a lot of revenue. We think it's really just timing as the push now with the increased backlogs just because of the the recovery that we that we saw really inside the third quarter, which continues into the fourth quarter as well as growth that we're expecting in the fourth quarter.
On a date daily basis, it's hard to catch up right. So we have the backlog and you got a lead times, it's hard to catch up that revenue in that short period of time.
But we do believe we will get it right. It's just a matter of timing.
Communicated very.
Effectively with our customers around the the incident itself and so they were aware of it and they plan forward Accordingly, and so we think that it's just timing.
Where if you look at the third quarter results with that ran somewhere that just talking about you look from a topline basis us windows would be up about 6%.
Year on year.
Yes, that's helpful.
I guess on the free cash flow I guess your guide.
I think implies slightly lower working capital benefit in the fourth quarter than the maybe in the prior year is there anything notable there and.
Do you expect kind of that.
Benefit to come from from inventory or with receivables or payables play more liberal in the fourth quarter.
Yes, the kitten cash flow has been interesting for 2020.
You know the pandemic, it's caused some shifts in timing and let me talk a little bit more about that if you look at 2019 first half right. Our operating cash flows. The company was a use of cash of about $30 million and if you look at our first half for 2020 were up 67 million. So a source of cash of 60.
$7 million the real driver behind that is working capital right and so in the first half of 2019, we had to use of cash of about 90 about $89 million and then as we came into the first half of 2020. It was a source of cash of four so we got almost $100 million swing in cash flow.
Gross.
I think is a combination of what we've been able to do as a company from a.
A management perspective, and also just the timing with the pandemic. So typically we see our third and fourth quarters are second and third quarters be higher than our first and fourth but this year was kind of interesting you saw that big drop inside the second quarter and so that caused the receivables in particular.
We have a source of cash and then as we come back now with our growth rates coming in higher we have the use of cash. So it's a complicated question. When it comes to how cash flows are flowing this year. However, as I step back and look at it one of the things we did put priority on our customer service and the levels that we have.
Within the company and we backed off a little bit and that's that $50 million guide that we had on working capital down to the $25 million Guide, we'll still see improvement we won't see as much improved because we're putting more focus on our customers, making sure we get the service requirements and we get down those lead times in the backlog that's in place.
One thing to note Bill Julio as you think about our working capital as a percentage of sales.
13 month average if you will if you look at the end of 2019, we finished at 16.3% and right now we're about 15.9%. So we have improvement on working capital and expect that to continue to improve just not quite at the levels that we originally expected with the pandemic.
Understood I appreciate the comprehensive answer I guess, just my last question I guess, a follow up to that would be.
I guess, maybe stepping back from the fourth quarter and looking towards 2021, which you kind of expect working capital to continue to be.
A benefit and 21.
Yes, as Jim had talked about in in previous quarters. There is an opportunity for us we don't think the opportunities anything less than it was the beginning of this year. We've taken some of that benefit. We think it will continue we talked about a $100 million over a two year period, and we'll pick up 50 will pick up $25 million benefit this year and we would expect.
Next year to be back to that $50 million commitment, but the opportunity still exists.
Got it thanks, very much all back into queue.
Your next question comes from Kurt near with D.A. Davidson. Your line is open.
Great. Good morning, everyone and thanks for taking my question.
Kurt.
Darren.
Looking ahead, how do you guys think about the volume for debt trajectory of your residential businesses relative to the underlying markets. I mean, obviously the cost side has been a priority as of late but how does what looks like a really healthy residential backdrop, perhaps change your philosophy or approach.
For those businesses.
Yes. Thank you Thats, a great question and really our philosophy has not changed.
We're very focused on taking care of our customers operational excellence deleveraging our balance sheet. We are we've been very consistent on that and we will continue to do that you know our goal as we look into next year is really we want to outperform the market with their value proposition, we think not only on the come.
Actual side, but Oh, all of cornerstone, but I'll just focus on the commercial side since that was your question. We have leading brands we have customer we deal with every major customer in each segment the.
The big box retailers, new residential repair and remodel. So we have a customer reach that I believe sets us apart from our competition, our national footprint as well as our innovation and new product development. So our overarching goal has not changed we feel with with operational excellence and.
Getting our balance sheet in order as we've been talking about our goal is to get our leverage to two to two and a half times when as we index has indicated we are making progress in our commitment to our shareholders on that but really our goal as we our value proposition is vast.
We have leading brands in windows and siding.
We deal with every one of the large customers and we think we're really hitting our stride as we get into 2021 and our goal is to outperform the market.
Got it thanks for that.
Just on the Q4 guidance could you talk about some.
Some of the big drivers that you think about.
Going from the low end to the high end and then realizing you have less shipping days than perhaps a tougher comp on the commercial side.
Do you expect the year over year trend.
The topline in the residential segment today continue to improve or.
Do you think throughput manufacturing is still going to be.
And impediment to that.
So Kurt as we think about the fourth quarter in our guide in particular right. So we have a billion won 35 on revenue to a billion too and it puts the overall comparison versus prior year at kind of the.
7% to 2% down on revenue now keep in mind that does have those three.
Less days from a fiscal perspective, if you adjust for that we're kind of more flat to growth rates, we had growth that's coming in in particular in our residential businesses. When you think about the daily run rate that we're seeing we have growth coming in in both sightings and windows, but that year over year comparison, because the days kind of takes it.
Back down a bit and then as we talked about our commercial business in particular being stable with the run rates that we have so we don't see the market really improving much we don't see a declining.
We've been around that 15% decline in the commercial business, we think thats, probably appropriate as we think about the fourth quarter as well.
As as we talked about the operations in particular, we're making improvements right. So we were able we added added.
Quite a few individuals into cornerstone inside of Q3, and we will get the benefit to those as those employees get trained and as we start to move into production inside of our residential businesses and on the commercial side, we've been very very diligent around making sure that we have the right cost structure to support the volume that we have so we felt we filled.
Good about our position as we come into the quarter and again, we're going to build that growth rate from a volume perspective were feeling that growth inside of our residential businesses, but we've been really working hard to make sure that we've got the the operational effectiveness to make sure. Our costs are in line, but more importantly to service the customers and to to start bringing back debt.
That that backlog and.
Lead times in particular.
Now we are projecting margin enhancement again for the fourth quarter right and Thats really it's it's one of the guiding principles that we have as a company. It's something that we think is a core competencies as we looked at our structural cost down the ability that we have and we guided to that $80 million to $100 million worth the structural cost out.
In the company, we realized $75 million of that year to date.
So coming into the fourth quarter, we feel really good about our position there and the things that we put in place and then near term expenses is also something that we guided to that 40 to 60 on the year and we have we been able to achieve a lot of those savings we've allowed some of those costs to come back in the residential business.
In particular as the volumes have increased and those are things such as.
The conditions and things like that for the sales folks a travel starting to pick up a little bit on the residential side is a meeting more customers. We're starting to see some of those expenses variable compensation come back into the into the forecast, but still expect us to be bent.
Benefit inside of 2020, and some of that benefit carrying over into 2021.
Got it okay Thats very helpful and then.
Just lastly on the siding business, yes, some of your non vinyl peers.
Posted some pretty strong growth numbers that I'm just curious how do you think about the risk there was substitution, perhaps away from vinyl and from a new product or marketing perspective, how might you look to combat that going forward.
Great. That's a that's a great question, we're really excited about our siding business. We are the only manufacturing industry is actually that's reinvesting back in the business.
And new products that we are or will be a really announcing next year, where we're in the midst of building a new plant in North Carolina.
We.
We have all the large customers as I talked in the one of the earlier questions about the customers our siding business.
Does business with every major customer there is.
70% of our siding business in the US is really repairing remodel. So we had a very unique value proposition in our siding business. We believe that we see as a growth business if regional as well as very strong the mid Midwest the northeast.
But we're also getting into areas where.
The darker colors and.
It's a hotter climate, we have a we have a new product called solar defense, which is a great product that we've introduced in the market that has.
Has a great success our product also it is has ease of installation. So when you look at 70% of our business our siding business is.
Repair and remodel and the average age of a home right. Now is 40 years old. So we're very busy as you can see our backlog that we just talked about and we're really excited about the growth of our siding business with new products coming into the market our customer reach we have great customer relationships.
And really with our footprint on repair and remodel of a 40 year old home.
We believe that there's there's going to be a great 2021 for our siding business.
Got it Thats helpful. Okay. Appreciate all the details gentlemen, I'll turn it over.
Again, I pray minor to ask a question.
Jonathan the number one telephone keypad. Your next question comes from Mackie Lee with Barclays. Your line is open.
Good morning, Thanks for taking the questions.
On Windows.
Yes, one thing we've been hearing that.
That window supply broadly has been one of the tighter.
Building products across the spectrum, let's this residential recovery and of course I hear you about the impact of the ransomware, specifically in the quarter, but maybe you could speak a little bit about the capacity increase.
The timing of how that ramps how quickly you can ramp that and if there is anything else. Besides the labor issue that it would take to work through that windows backlog like it.
Yes, great year, Matthew let me just step back where really different company than what you've you've historically seen in the windows business, We've consolidated atriums Silverline ply gem and we have a broad network.
We really professionalized, our manufacturing with automation.
SLP, we were looking at better sales forecasting.
So we we really put a platform that we.
We want to be the best service provider for our customers.
Mentioned, we deal with all the large homebuilders.
Big box retailers as as well as the large distributors, but.
But weve also we need we know this labor issue is not going to go away.
We're as we mentioned, we're we're we're adding labor, we're getting them into into the mix here, but.
But we believe really it's automation, we have 21 automation projects completed to date.
Some of them did slow up because of COVID-19, and if you just step back on a window line.
Typically a window line has approximately 30 associates on a window aligned.
With the automation, which is anywhere between three and $5 million of capital we.
We can go from 30 associates down to approximately 16.
So that is obviously, it's a little less than a two year payback, but if you look at just from a productivity standpoint, it will allow us to to get more throughput out of the out of the plants also with the recent investments we've made that we mentioned it.
North Brunswick, we're looking at approximately 350000 units that will be coming out of that and if you look at the the average home has anywhere from say 12 to 15 Windows per average home you can do the math there. So there is an additional capacity coming coming out.
Our our fastest growing product line, which is our 1500 series a lot along with that is it continuing to get labor into the into the business. So we're working a few fronts automation are these new window. These 1500 lines, but also getting getting the appropriate associates.
Trains safely in.
In into the operations so.
We're going to work through this backlog as we mentioned, we hopefully will have things done.
In normal state by late first quarter early second quarter, and as we continue to put more automation and get better on our SLP process and also as I mentioned, we booked were bringing in talent. That's been there that it's been there done that another industry. So this is not going to be a.
Continual issue for US we're honest this is our core competency we know how to do this and we are going to continue to satisfy our customers.
Got it thanks for that color Jim.
Second one.
On the margin guide.
For Q4.
It does look like you mentioned the EBITDA margins are higher year over year at the midpoint, but.
But it does seem like the gross margin as guided down year over year, and clearly steel is inflating I hear you that you're lifting prices and the commercial segment is is that mainly the driver or what else is kind of pushing those gross margins down in Q4.
Yes, so a couple of things around that.
We are seeing the SG in a in particular some of those costs are coming back that I talked about those near term expenses that we put on hold and we call them near term expenses just for that reason right. We put them on hold and some of those expenses are coming back now inside the fourth quarter and intentionally right that's going to enable us to.
For example.
Increased wages for our direct labors inside of there the cost of goods sold so that we have been a more competitive wages out there. We can retain employees via we are seeing an increase in sight as steel costs.
And we put the price increases in effect for that as well typically that's a good thing for US right as we think about steel costs going up it gives us the opportunity to.
It gives us the opportunity to increase our prices as well our margin, sometimes get a little bit more compressed with that but we make more margin dollars on that and so it is something that we look at and also just got some mix within the businesses, depending on which segment selling more or less and that's driving some of that as well, but again.
You said it is an improvement as we look at the EBITDA as a percentage of sales, we see margin expansion inside the quarter.
Got it.
Thank you guys.
Okay.
Okay fair enough further questions carefully time participating in cornerstone building brands third quarter 2012 earnings Conference call. This concludes todays call you may now disconnect.
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Okay.
Okay.