Q4 2020 Cornerstone Building Brands Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to cornerstone building brands fourth quarter 2020 earnings call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
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I would now like to hand, the conference over to your speaker today, Tina Baskett, Vice President of Finance and IR.
You may begin.
Good morning, and thank you for your interest and cornerstone building brands.
Joining me today are Jim Metcalf, Chairman, and Chief Executive Officer, and Jeff Lee Executive Vice President and Chief Financial Officer.
Please be reminded that comments regarding the company's results and projections may include forward looking statements that are subject to risks and uncertainties. These risks are described in detail and the company's SEC filings earnings release, and our Investor presentation. The company's actual results may differ materially from the anticipated.
Weighted 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 and the earnings release and Investor presentation located on the investors 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.
This presentation management May also refer to pro forma financial results such pro forma results give effects of completed acquisitions and this such acquisitions were consummated prior to the periods presented with that I would like to now turn the call over to Jim.
Thank you Tina and good morning, and thank you all for joining us.
As I look at where cornerstone is today I'm incredibly proud of our team.
The accomplishments and what was truly an unprecedented year.
Decisive actions that took place at the start of the pandemic not.
Only allowed us to operate safely and serve our customers they've.
And they've made cornerstone a stronger company and well positioned for 2021.
We delivered strong fourth quarter results.
Rounding out the year with record performance, despite a very challenging market environment.
We saw widespread improvement across the business.
Fourth quarter net sales for the window and siding segments combined were approximately 4% higher than the prior year and average daily sales and our commercial business.
We're three 5% higher as compared with the third quarter.
Furthermore, we maintained cost discipline, which drove our seventh consecutive quarter of adjusted EBITDA margin expansion across all of our segments.
The fourth quarter performance demonstrates our team's ability to consistently deliver strong results despite difficult challenges.
It shows our dedication towards the partner of choice for our customers.
And the importance of a strong portfolio of brands.
A national footprint and ultimately why we continue to be a market leader.
We have entered 2021, a leaner and more agile company eager to serve our customers and capitalize on the recovery and our markets.
Moving on to slide four.
The actions we took in 2020 has strengthened cornerstone and are positioning us for growth.
While we needed to act swiftly to address market challenges, we never wavered from our strategic roadmap.
Keeping a keen eye on the future.
And we did this while maintaining the safety and wellbeing of our employees as our number one priority.
With innovation is a core value, we launched several new products during the year and both the residential and commercial markets.
These included our laminated brands 1100 series and Windows.
A new laminated colored vinyl window and western Canada.
Our duo pro gutter production product and siding and.
And as part of our IMT product offering first of all H plus and commercial.
These product additions enhance our already diverse product portfolio.
Driving organic growth through innovation is an important part of our strategy as we continued to provide a value proposition for our customers.
We strengthened our market presence and the fast growing segment of residential cladding and stone market with the strategic acquisition of Cleary masonry and northern California.
This acquisition expanded our turnkey stones and near solution and brings new opportunities across the builder and contractor networks to cross sell into the commercial buildings business.
We also took the opportunity to accelerate transformational actions that already we're underway.
These included Delayering, the management structure within the commercial business getting the leadership team closer to the customers and improving our market leadership positions. For example, our team and Canada did a tremendous job and their transformational effort to improve market position and achieved record.
Third results and 2020, a complete turnaround.
Continuous improvement is a core competency throughout all of our segments at cornerstone.
And 2020, we delivered over $110 million per structural cost savings exceeding our original targets.
We made investments and talent processes and equipment that are positioning us to be the cost advantage manufacturer and our markets and to achieve long term growth.
As a result of these investments we have also increased production capacity and are better positioned to capture the growth and service our customers.
And our ongoing effort to reduce cost and position the company for growth, we've taken approximately $250 million of structural cost out of the company since the merger contributing to the 260 basis point margin expansion.
All of these actions stemmed from the commitment of our dedicated associates.
A team comprised of many backgrounds.
Each adding a unique and valuable contribution to our success.
To support the growth and opportunities and our organization.
And advanced our talent development efforts through many initiatives.
Some examples of the launch of our talent success model and the creation of a diversity equity and inclusion Council who.
Whose focus is on fostering a work environment that is inclusive and equitable for all of our employees.
Our purpose is to deliver building solutions that have a positive impact on the customers and the communities we serve.
We are deeply committed to transparency and continued improvement of our policies and practices with a shared purpose in mind.
Contributing to the communities, where we live work and play.
To increase our communication about our efforts in these areas.
We have recently launched the environmental social and governance hub on our website and and invite you to take a look at it.
All of our actions and the fourth quarter and throughout 2020 have resulted and improved financial results.
And financial flexibility.
We wrapped up 2020 with strong free cash flow lower.
Lower net debt and record liquidity.
We are evolving as an organization positioning for growth.
And looking forward to delivering strong performance from 2021 and beyond.
And let's look at slide five and I'd like to share some thoughts on the markets we serve.
Residential markets continue their strong recovery and the fourth quarter as U S housing starts averaged $1 6 million units, which is an 11% sequential improvement.
Single family starts improved by approximately 20% quarter over quarter.
Single family units represent approximately 80% of residential construction, which is up from 67% a year ago.
Single family housing is an important and used market for us as it can.
Apprises about 30% of our net revenues.
The fundamentals are strong and this market.
And <unk> permits are at the highest level and the post COVID-19 preference for larger single family homes, coupled with the consumer preference to shift away from the urban to suburban living are favoring our business.
We expect to benefit from the strong growth and housing for the first time and entry level buyers.
As our products per well suited for this segment of the market.
The repair and remodel market continues to show consistent growth with tailwind continuing into 2021.
Fundamental drivers remained solid with increasing home equity.
Aging inventory and consumer access to capital spending.
The repair and remodel market tends to be less cyclical than new construction.
Particularly for exterior building products that are exposed to the elements and where maintenance is less likely to be deferred.
Our participation in this market also positions us well to capture growth.
And the first quarter, we are seeing a strong pace of incoming orders from the rapid residential recovery.
The pace, coupled with industry wide labor shortages has led to extended lead times and growing backlogs.
Our operation teams are focused on overcoming these challenges and solidifying our service position as the partner of choice for our customers.
We've completed market studies and improved our recruiting and retention efforts by increasing employee wages and benefits at our manufacturing facilities.
These actions are resulting in positive momentum.
Since the third quarter, we have increased our hourly head count by over 1000 associates.
We still require additional labor capacity, but we're also leveraging our national network.
Flexible manufacturing capabilities.
And our investments in automation and two.
To produce and deliver high quality products, we're efficiently for our customers.
Maintaining price discipline to offset inflation impacts is another key competency for cornerstone.
This is important such along with the positive market momentum, we are experiencing increasing commodity costs across the board.
And with careful consideration, we've announced price increases and both windows and siding as we expect inflation to continue throughout 2021.
Now, let's turn to slide six.
Private and public capital spend drives the demand and the commercial end markets.
As I mentioned earlier, we saw sequential improvement and our commercial business from the third to the fourth quarter.
As we move into 2021.
We anticipate the commercial segment will remain steady, but theres still some uncertainty.
The impact of COVID-19 is still very much president and this sector and it continues to influence decisions about the type and the timing of projects.
We also look and a number of indicators when formulating our sentiment, including Dodge and the architectural index.
The first quarter incoming orders had been higher than last year with a significant increase and metal components, which has a shorter order to delivery terms.
We believe that the increase could be and pull forward and demand due to rising steel costs, and we will monitor as we move into the second quarter.
As I mentioned price discipline is a core competency and we've been increasing our prices within the commercial business to offset the rapid impacts of rising steel costs.
By comparison in 2018, we saw a 25% increase and steel costs and a nine month period from trough to peak.
For 2021.
We currently expect steel cost to rise from the low point and the fourth quarter of 2020.
Two AP that may be more severe over a shorter period of time.
Through our price discipline, we have demonstrated that we can effectively manage this environment.
Looking forward, we believe we are positioning for growth and the commercial segment.
Our low rise building applications are central to grow and suburban areas and that.
Demand typically lags new home construction starts by 18% to 24 months.
So we continue to navigate this and market by remaining close to our customers and strengthening our relationships with our value proposition.
Now, let's turn to slide seven.
We are excited about the growth opportunities ahead of us and 2021 and our key priorities.
Dancing our growth strategy and.
Elevating the customer experience.
Operating with excellence and maintaining our financial discipline are positioning us for sustainable growth and success.
We are continuing to advance our growth strategy by investing in innovation and targeted acquisition opportunities and.
And a well defined product innovation process that is centered on reducing complexity offering better performing products with a focus on labor savings.
We remain focused on elevating the customer experience, we pride ourselves on maintaining strong customer relationships delivering and.
And exceptional service and being the partner of choice.
And 2021, we remain committed to addressing lead time challenges and continuing our focus on operational excellence across our businesses.
We are increasing efficiencies and product output and we're making additional investments and automation and capacity increasing projects with approximately 50% and U S windows.
Throughout all of our efforts, we are committed to maintaining financial discipline and reducing our net debt leverage ratio by three quarters to one turn is paramount to higher earnings generation.
By staying focused on our priorities, we expect to deliver long term value to all of our stakeholders.
Before I turn the call over to Jeff I'd like to take a moment to recognize and thank our dedicated team.
As I reflect on how we came together to support each other and our customers.
I've never been as proud of the team as I've done over the last year.
Our team remains flexible and focused on our customers and our performance is a direct reflection of that commitment.
I am encouraged by the momentum we've seen at the start of 2021 and excited for the opportunities ahead.
Now I'd like to turn the call over to Jeff who will walk through the financial results.
Jeff.
Thanks, Jim and good morning, we continue.
And to deliver strong financial performance with another quarter of year over year margin expansion.
The resiliency of our brand portfolio and the actions we have taken throughout 2020 demonstrate our relentless drive for exceptional results.
We have strength and cornerstone and low cost operating model and enhanced our financial flexibility, which are critical for our company's ability to growth over the long term.
Starting on slide nine.
We generated $1.191 billion and net sales during the fourth quarter, approximately 5% lower than pro forma prior year.
The decrease in net sales was primarily driven by our company's 445 weeks.
Fiscal calendar.
There were three fewer ship days and the fourth quarter of 2020 as compared to 2019 adjusting.
Adjusting for those differences and days net sales were about flat to last year.
We delivered an adjusted EBITDA margin of 13, 3% and increase of 40 basis points from pro forma prior year.
This improvement reflects our success and effectively managing through a volatile raw material environment.
Across all our segments production constraints for commodities, such as PVC resin and steel and aluminum has driven steep cost increases.
During the third quarter of 2020, we began announcing price increases across our product portfolio, which was earlier in the cycle than typical.
We remain steadfast to our guiding principle of maintaining price discipline to more than offset inflationary impacts.
Our quick actions resulted in positive price net of inflation for the quarter demonstrating the value of our unique business model servicing both the residential and nonresidential and markets.
We were able to favorably impact manufacturing operating costs and lower SG&A.
Consistently delivering on on our cost savings initiatives.
We have generated year over year, adjusted EBITDA margin expansion for seven consecutive quarters.
Our priorities to serve our customers maximize our unique business model and protect the health and safety of our teammates resulted in strong operational and financial results.
For the year pro forma net sales were $4 6 billion.
Down six 5% from pro forma prior year with most of the declines coming from softer addressable markets for low rise commercial construction as a result of the uncertainties driven by the COVID-19 pandemic.
On a full year basis, the commercial segments net sales were down 14, 2% as compared to 2019 and better than the 17% market decline.
We participate and a diversified mix of low rise nonresidential building applications, and our flexible manufacturing footprint positions us well to service our customers.
Adjusted EBITDA was an all time high of $609 million and increase of two 6% over prior year and adjusted EBITDA margin was 13, 2% a.
And a 120 basis point improvement versus prior year.
We delivered cost savings of approximately $113 million throughout 2020, which was $13 million more than target.
We reduced cost and many areas of the businesses, including material sourcing.
<unk> and back office rationalizations process, and labor savings from automation and many others.
We expect about $20 million of these savings initiatives to carryover into 2021.
Operational excellence is fundamental to our business model and market leadership position.
The opportunities to transform our cost structure and improve the way we work are plentiful.
So far we have completed 21 automation transformations and believe there are over 90 more opportunities and the pipeline with payback periods of two years or less on average.
As such we expect to deliver 75 million to $80 million of operational improvements in 2021 with approximately 80% of those savings targeted in and cost of goods sold.
Additionally, we do expect that approximately 20 million to $30 million of near term costs will return to support the improved market conditions.
Now, let's look at our business and business segment results.
Turning to slide 10.
Net sales to the residential end markets through our windows and siding segments were 66% of total pro forma 2020, net sales and <unk>.
Mix between new construction and repair and remodel is about equally split.
We are proud of the leadership position cornerstone holds and these markets and believe it is a testament to our national presence the quality products, we produce the service, we provide and the relationships we have with our customers.
We are committed to investing in these businesses and further strengthening our leadership position.
Overall financial performance from this segment were strong.
Fourth quarter net sales were approximately three 5% higher than prior year with approximately 2% driven by price and one 5% from demand and.
Adjusting for our fiscal calendar.
And average daily run rates, our volume was up approximately 7% versus prior year.
Remaining focused and disciplined on consistent execution. These segments generated record earnings during a very challenging environment delivering seven consecutive quarters on year over year adjusted EBITDA margin expansion.
Positioning towards long term growth, we have made significant new product and capital investments in these segments with the expected payback payback of less than two years.
And we plan to continue investing.
71% of the allocated capital expenditures for these segments are focused on growth continuous improvement and automation projects.
Coupled with investments start in 2018 machine capacities and our Windows segment will have increased by over 12% by the end of 2021.
While we believe we have enough installed capacity to meet the needs of the recovering residential end markets. We are focused on the future and being the partner of choice for our customers.
During the quarter order momentum was strong as wholesale and retail demand outpaced prior year driving higher ship volume.
The pace of recovery within these segments has been strong from the positive fundamentals and the new construction and the repair and remodel markets.
As mentioned along with the positive market momentum, we have experienced increase in commodity costs.
Maintaining price discipline to offset the inflationary impacts has been a key competency for cornerstone.
We have announced several price increases across our portfolio to stay ahead of the rising cost.
We remain optimistic about the market recovery and positive momentum and the residential end markets and expect that to continue throughout 2021.
Moving onto our commercial segment on slide 11.
Net sales and the fourth quarter of 2020 were 386 million or 19, 2% lower than same period last year.
The decrease is primarily a result of the slowdown and commercial construction activity from the impacts of COVID-19 low.
Low rise nonresidential market remained stable with slight improvements and some areas are.
Our bookings have been positive to prior year at the start of 2021 and backlogs are beginning to increase.
Similar to our residential businesses, we are experiencing a rapid rise in commodity cost, namely steel.
We have demonstrated our ability to navigate and similar environments over the years most recently in 2018.
Within the commercial segment price is set at the time the quarter, enabling us to pass through higher costs.
While passing through higher cost generally protects gross profit it may have the effect of diluting margins in this segment.
The commercial segment has been able to deliver seven consecutive quarters of year over year margin enhancement as a result of strong cost management and structural improvements to de layer the organization.
Since 2018, the structural improvements achieved within the commercial segment effective spread management through price discipline and quick and decisive actions resulted in 240 basis point of adjusted EBITDA margin expansion.
These actions more than offset the negative mix impacts realized from the market shift towards smaller less complex projects.
Turning to slide 12, I'd like to make some comments about our balance sheet and liquidity.
We generated free cash flow of $227 million during the year.
A 109% improvement over prior year.
Primarily from lower interest expense cash tax expense and capital spending coupled with higher earnings generation.
We expect to generate strong cash flow during 2021, as we remain focused on financial discipline and strong operational and execution.
While maintaining costs and generating additional cash are important areas of focus we have not lost sight of the need to continue to invest and our business for the long term.
And we remain committed to innovation and investing and new product offerings and process automation that will generate profitable growth and the future.
We anticipate that full year 2021 capital spending will be approximately two 5% ourselves.
As a result of our profitable growth focus on operational excellence and targeted capital deployment towards balance sheet deleveraging.
We have reduced net debt leverage by a half turn over 2019 to four nine times adjusted EBITDA.
We remain committed to our capital allocation strategy, which includes investing organically and high return projects deleveraging to a target of two times to two five times net debt and investing and strategic inorganic opportunities in key adjacencies.
During the year, we took actions to improve the company's financial flexibility.
We ended the year with $1 3 billion of liquidity, including 674 million of unrestricted cash on hand.
Our strong liquidity position provides a meaningful opportunity to advance our strategic priorities for growth.
Turning to the first quarter of 2021 outlook on Slide 13, we expect consolidated net sales to be between $1 billion $195 million and $1 billion $240 million and adjusted EBITDA to be between 110 million and.
And $125 million.
I would like to remind you that our company's fiscal quarters are based on a 445 week calendar <unk>.
As such there are three fewer ship days and the first quarter 2021 as compared to 2020.
We have included a schedule of our fiscal days in the appendix of this presentation, which will also be posted on our website.
And now I'd like to open the call up for questions.
At this time, if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question comes from Lee Jagoda with CJS Securities.
Your line is now open.
Hi, good morning.
On the lately.
So Jeff just starting with the Q1 guidance I assume.
The guidance ranges were negatively impacted by the abnormal weather and parts of the country that typically would you see that kind of weather can you speak to how much if at all that shifted those ranges to the downside and and.
How much of the headwinds you would expect to make up and the.
Balance of the quarter.
Yes, good morning I appreciate your question so.
So as we think about.
The.
Weather impacts mainly inside of the Texas area, we estimate, it's probably a $15 million impact on revenue and about $5 million impact on EBITDA and <unk>.
Just to elaborate on that just a little bit further on.
Our manufacturing locations did see a couple of days.
Chuck down and particular inside those regions, where we were impacted just from the freezing weather.
But our supply chain, probably got a little bit more impacted and the manufacturing locations themselves, we're working through that.
But that 15% to $5 million range is probably what we're estimating right now and that does include we have included that in our guide for Q1. So the guide that we put out there is.
<unk> and those type of switch that situation and it is still pretty fluid, but for the most part all of our manufacturing operations are up and running and we're working through some of the supply chain without disruption.
Got it and then.
Just looking at both the volume growth that you would expect particularly on the residential side and 2021, and then layering on top of that the increased raw material pricing how should we think about.
But working capital use assumptions as part of the free cash flow outlook and 'twenty one.
Working capital for US is a focus of the company. It's been something that's been a guiding principle for us and you might recall early in 2021 and late 2019, we talked about $100 million reduction of working capital as a goal for the company, we suspended that guidance and as we kind of get it.
And to the Covid Q2 timeframe of 2020.
But for 2020, we actually were able to take down as a percentage of sales.
And our primary working capital from 16, 3% and beyond to about 15, 9%. So improvement inside of 2020, and we expect to continue that into 2021 as an organization and we're still committed to getting to $100 million reduction.
Got you so.
All else equal working capital.
Should come down as a percentage of sales but.
And absolute dollars I assume it goes up.
It does leave.
We do anticipate growth inside of 2021 and with that comes and normal.
And our expectation from receivables and inventories to service our customers, but that debt reduction and that percentage is probably the best way to think about how we're thinking through the working capital itself.
And as.
We anticipate the revenues for 2021 and apply that percentage on working capital. The primary working capital, we think Thats a good way to think about it and do expect that to improve in.
Inside of 2021.
Okay, I will hop back in queue and let others.
Thanks.
Our next question comes from Julio Romero with Sidoti Your line is open.
Hey, good morning.
Good morning.
I was hoping to ask about lead times and the residential segment should they continue to be relatively longer than usual and when do you see that reverting to demand.
Yes, <unk>. This is Jim yes, we have obviously, we said we have extended lead times and our residential business on.
Backlog as well and.
Some of the things we're doing on the lead times.
It's really the consistency of delivery and the communication to our customers.
And as we said and the last couple of calls we've invested in 18, and 19, 2018, and 2019 and capacity and in fact, and our Windows business. We've had about 12% increase and capacity we've talked about automation, but a lot of that is is really capturing the recovery. We've also.
Our realigned our footprint, we have a national footprint of our windows facilities, we've realigned and revitalized our and reevaluate evaluated our footprint. So we can ship out of area to take care of it could lead times. So we are.
And we stay close to our customers.
We think it's very important to have consistently times, even though they are long we have a very focused as Jeff said, two 5% of our capex.
Half of that is going to be into our windows business, we're continuing to put and new lines.
Our <unk> hundred series is our most popular window line, we put that and numerous plants.
To get additional capacity.
Through our customers. So our lead times are extended but it's the consistency of the lead times and the communication to our customers and the key is we believe we're investing into our business over the last couple of years, but we're going to continue to invest to capture the recovery and thats going to be the really the key is we really want to capture this.
Residential recovery and we're putting investments behind that.
Okay.
Wanted to dig a little deeper on the impact of steel specifically to your commercial segment and you talked about on the prepared remarks about setting price at the time of order and Amy.
And it keep gross profit dollars generally steady.
Just trying to think about how to steal affect your shorter term.
And businesses and from <unk>.
Could you give us a sense of those to cross correct.
Yes, that's a great question. Thank you.
Started to announce price increases and steel in the fourth quarter and our building businesses, we said with priced at order, but some of those on longer lead times. So we implemented price increases in the fourth quarter to be in fact effective into the first quarter and we'll start seeing those late in the first quarter, but are quicker.
Term business, we talked about our components business that gets priced on a weekly basis and sometimes on the order basis. So.
And that that order rate is very strong.
We are pricing, we put out numerous price increases and some parts of our commercial business.
We've implemented three or four increases in the quarter and our guiding principle has been and will continue to be is to offset inflationary on steel.
We look ahead, a few months on steel costs, and we anticipate where steel costs are going and we want to price ahead of that so we feel that we have really the processes in place we have a centralized pricing desk, we use analytics.
On on different types of customers on shorter term on our components business versus our longer lead time building business and we feel that we have a good process as Jeff said.
And through 2018.
We went through a very rising market with the tariffs.
And this is a very different market because in 2018 the.
Steel industry was ahead of other commodities, so a lot of our business our metal building business.
And two alternative suppliers either.
Alternative construction practices I E lumber.
Till the concrete and we really follow where the steel metal building industry is now and if you look at where commodity prices have gone and other areas, we feel as an industry and as a metal building business. We are also competitive with other types of construction, which is really important as we price our.
And because we price our business.
Going forward.
Okay.
Just last one from just on.
Capital allocation you ended with a pretty solid cash balance and I think your slide deck alluded to debt paydown.
I don't know if you could help us with Takeda and so debt pay down.
And when should we expect to.
See some deployment towards debt paydown.
Yes, I'll take that question. So we did have a strong cash flow generation and in 2020 $227 million worth of free cash flow, which was an improvement of 109% over and over 2019, so strong cash flow generation and the year and a lot of that was simple.
The COVID-19 related activities as we reduced our our capex from.
The first guide of two to two 5%, we dropped that down to $85 million to make sure. We understood what was happening within within liquidity and just the uncertainties inside of COVID-19 pandemic.
And as we look at as we look at 2021.
We are expecting to have that three quarters to one turn reduction in.
Inside of our net debt leverage ratio and we've been successful with that and so in 2019 were able to take that down about three quarters.
Our return and 2020, we're able to take that down about a half turn and then right now our guidance three quarters to one turn and say a 2021 and it's going to be a combination as Jim said and inside of his comments.
And a lot of that comes on our earnings generation that we expect inside of 2021 combined with the working capital initiatives that we just talked about as well as the company and so it is delivering on on all of those objectives that we have and the strategies that we have in place for the company and we should see that come down throughout the year.
Very consistently with what we've seen in prior years as EBITDA on a quarter over quarter basis continues to improve.
Okay. So.
The leverage ratio ticked down.
Throughout the year.
But should be a combination of earnings growth along with that.
Net production.
That is correct.
Okay, great. Thanks for taking my questions.
Our next question comes from Matthew Bouley with Barclays. Your line is now open.
Hey, good morning, Thanks for taking the question.
I wanted to ask about the cost savings.
$75 million to $80 million, you've got planned this year.
What I'm really curious about is kind of the mechanics.
A year, where youre planning to take as much cost out but.
On the other side you are talking about investing for growth and wanting to be.
And the right places, particularly the captured residential demand so.
If you can get into that maybe some of the elaboration on the details like what level of cost, where you're taking out cost and how do you kind of balance that with needing to reinvest and certain areas. Thank you.
Yes, Matt let me address that one.
So we do have a guide of $75 million to $80 million worth of cost out for 2021, and just as a reminder, if you go back to the merger we were able to take out approximately $250 million worth of cost over the last couple of years and so it's a core competency. It's a it's a real process driven organization.
Right now there is focused around cost out without jeopardizing service without jeopardizing quality to our customers. In fact, just the opposite as we think about cost out we think about how do we improve our service levels.
And by doing things such as automation and the speed that we were able to produce some of the some of the products through automation and the quality that comes out from those those things are helping us with our service levels are helping us with our capacity they are helping us to make sure that we're keeping our customer first and foremost in our mind is where we're thinking.
Through these.
We are excited about the opportunities these are detailed projects.
They are across all of our different facilities within cornerstone.
And their project owners and have been identified and Theyre running these individual projects and there. There are combination. Some are some are labor focus when it comes to automation and some of the material focused and making sure that we're getting the right value for our proposition is a national provider and is one of the largest purchasers of different commodities.
Get benefits from that and some are just continued structural.
Cost out when it comes to looking at our manufacturing sites through on <unk>.
Safety and <unk> deficiencies and the footprint Thats out there as well and we've done a combination of all of those over the last couple of years, but again, we don't look at it in a vacuum we really look at our customers first to make sure that we can service them appropriately and the cost out there and as is additive to that and not not something we would takeaway.
And.
Got it okay. Thank you for that detail Jeff.
Second one back on the commercial side.
Just given it's such an unusual.
Scenario, where steel is inflating, but its in the backdrop of choppy nonresidential demand and I heard you mentioned.
And that there could be some potential for pull forward going on and the shorter cycle businesses.
And you talked about being competitive with other types of construction.
So my question is.
Should we think that there is risk for any sort of further impact to volume as a result of all this inflation do you find that.
Your dealer network.
And customers on the engineered building side are they willing to accept the types of necessary price increases and this environment.
And when you have such a choppy demand backdrop. Thank you.
Yes. Thank you for the question Great question first and as we said the market and steady, but we still have this COVID-19 impact and that will be the really the catalyst getting that behind us for spending.
Really the backdrop that we really look at is the lag with residential 18 to 24 months. So that is really central to the commercial business.
Follow the new go into new suburban areas, but again, it's 18 to 24 months. So youre looking at the back half of the year for per that lag.
We did see order intake strong as we said, but we do believe some of that is the pull forward.
On with steel costs going up but also with our pricing our customers are trying to get ahead of our price increases.
So we think that also could be some risk on the back half of the year. So we are cautiously optimistic it's steady it's not where it was last year, we're going to have better comps as you get into the back half of <unk>.
This year, but again and Youre still looking we will not be a 2019 levels.
Even if the.
The market and our business is.
And up low single digits, you are still down 15% from 2019, so the comps may look better, but it's still a very choppy market. We're also getting getting conflicting information. The architectural index is still weak Dodge.
<unk> is showing some positive signs so it's still a it's still a choppy market from a customer standpoint, we really track our job cancellations.
And we follow that on a weekly basis right now.
First quarter intake is ahead of last year and if you recall the first quarter of last year was a pretty strong quarter. So again, we don't want this to be a false positive we think it could be some pull through and we're still very cautiously optimistic it.
It could be better than last year, but it's still <unk>.
We're still focused on that lag of 18 to 24 months is really when the market will start showing some some health.
Understood I appreciate the detail on all of those questions. So thanks and good luck in the quarter.
Thank you Evan.
Our next question comes from Richard <unk> with Jefferies. Your line is open.
Hey, guys good morning interest.
Focus on the steel piece of this commercial business Mega just one more time coming out and maybe a little differently.
The price increase and I appreciate that you guys are pushing them out there and the last question was basically thanks and.
Non res or a little bit soft so are you having success getting that stuff through.
I guess could kind of go a little bit further on that do you expect your pricing to be able to fully offset the steel cost, but you are the increases that youre seeing in 2021.
That has been our guiding principle to offset inflation as we have our processes in place.
2018.
We have a central pricing desk, we have a look ahead of where steel costs. They are growing so pricing now on where we anticipate steel costs.
Rising steel costs as I mentioned earlier, we started announcing in the fourth quarter as we saw steel prices coming from the trough.
And really rapid rates.
We have a really a great procurement and supply chain group, we have subject matter experts and non only steel, but PVC resin that that are very close to our steel suppliers. We look at the <unk> on a daily basis, seeing where the costs are going and we want to stay ahead.
Of.
The rising steel costs on our pricing.
We've been there before and we've been successful and as Jeff said, we have our processes and subject matter experts on this and so our guiding principle is yes.
Offsetting inflation is our objective.
And rich just to add a little bit as well and when you look at the guide that we put together for Q1 on a year over year basis are our EBITDA margins and our gross profit margins were both favorable which is.
The estimate and forecast that we have in place right now for Q1, and we are and that inflationary environment right and so it is showing the guidance we put together showing that we are.
Able to pass those through to our customers and and get that value proposition that we offer.
Yeah. It was impressive given the input cost increases were saying I guess, Mike My follow up is.
How long before those higher steel costs that you saw a trough in Q4, and let me start to move up rapidly deals really start to impact you in Q1 or is that something where you're really staying on <unk>.
It really depends on the commercial business and our components business. It's a quick turning business. So that that is and in Q1, where we're building is a longer range, which could be late Q1 early <unk> impact.
Got it okay, that's very helpful.
And then maybe lastly from me I know you guys got some cares act benefit on tax day in 2020.
Do you think about that changing.
From a cash standpoint, as we look at 2021.
Yes, I appreciate the question on that and it's a good question.
We did get a benefit in 2020 of about $20 million just from the delayed payments on some of the payroll tax half of that will return in 2021 and the other half of that returns in 2022.
<unk>.
Got it I really appreciate the responses thanks guys.
Yes.
As a reminder, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question comes from Kurt Yinger with D. A Davidson your line is now open.
Great. Thank you and good morning, everyone.
Good morning, I just wanted to start on the growth side and was hoping maybe you could put a little more color behind what youre focused on.
Our go to market or innovation perspective here in 2021 and kind of specifically within siding.
New product opportunities to maybe help.
Low <unk>.
Share leakage away from vinyl.
That's a great question and as we said, we're really pivoting to to grow the business and we're very excited about the growth initiatives, we have growth initiatives and each one of our businesses, you mentioned siding, which I'll address and the second Windows I mentioned in my prepared comments as well as on our and our commercial business. We think there's some great.
Opportunities there as well, we've been very robust new product development pipeline.
We have and innovation center that looks at products that will be introduced in the next year or so and as Jeff said a lot of those have two year and less paybacks.
And we're really excited about our go to market strategy, we've introduced some products this year.
And 2020 and.
Turn to our siding business, we are really and we believe we are the only manufacturer really investing back into the siding business, we're investing and additional capacity, we talked a little bit about windows, but we're addressing capacity increases and efficiencies and our siding business. We're really excited about that and we're also excited about.
<unk> new products, we have some test markets that are being held right now for two of our new products, we arent prepared to elaborate today on but we're really excited to talk about them and the future. We're getting some wonderful feedback from our contractors from our distributors.
It is we have a we've invested and a new plant and Rocky Mount North Carolina, which is just starting to run test products. So we're pretty excited about that and we will be able to elaborate a little more when when we're on.
Ready to have an official product launch.
But we're excited about the siding business.
It had a record year last year and my hats off to the entire siding group they had record performance.
They have a strong backlog now we're taking care of our customers and what's great about our siding business, we do business with every customer every large customer that you know.
We're really really excited about reinvesting back in our siding business and it is a growth business and we feel that there is a.
There is a good better best and this business and we want to be all three of those so we're very excited about what we're doing inside and on windows were continuing to grow our capacity there we want to capture the recovery and we think that where we're putting investments as we said half of our investments are going into U S. Windows.
Along with that.
Looking at brands.
Consolidated brands and siding, we're very focused on brand consolidation also on our commercial and our stone business, we've consolidated brands.
And we're also putting together things to make it easier to do business with customer portals E. Commerce. So it isn't just the.
The product introduction. It's also we've learned and this COVID-19 environment that technology is going to be extremely important as we go forward and this is what our customers expect so our customers are excited about the siding business, we're really excited and we truly think it as a growth business.
Great.
That's great I appreciate the color.
And then on the 12% and capacity increase and Windows you talked about I'm curious, how you think about kind of your effective capacity utilization right now and the potential to improve that as hopefully COVID-19 moves into the rearview and and perhaps.
You are able to add bodies on the labor side I mean, what would you is there.
Would you kind of referenced as a capacity utilization number and where you think that could go or where it would normally be.
Yes, that's a great question and really the key right now is the staffing as we talked about we've now added over 1000 physicians and our windows business we.
Invested and our 500 line.
And different parts of the country. So we put in the the nameplate capacity, but we still.
We still need to have additional staffing and thats really the key we have we've increased our wages. We have a very focused we have a third party debt.
Shifting us of getting additional labor.
Our very focused we brought and talent from from the outside we have a gentleman by the name of Jim Kappler, who is leading our operations from from an overall standpoint, and he is working with the individual business unit leaders to really accelerate the staffing. So we can capture the recovery.
It is the automation is one side, but also we still have some work to do on on the staffing.
And Curt just add a couple of comments to that as well we continue to invest inside of our capacity now and what's interesting about these programs and these initiatives. They are not only adding capacity, but theyre, taking cost out and so when you look at some of the things like the automated glass lines.
And you look at the assembly lines and things like that that we're putting in place. It really is an opportunity for us to make product more efficiently and and better quality for our customers and at the same time, it's adding some of the capacity and but specifically around your question as we think about 2021 we.
And we don't really have a machine capacity issue and it goes back to what Jim says, it's us getting the ability to get our labor into the manufacturing sites and to produce it and we've got a lot of great actions that we're moving forward on that.
Every region every business is a little different and as we get signals from our different customers. We continue to invest in those regions specifically to meet the anticipated demand that's coming up when you look at our national presence. When you look at our national footprint, we really have the ability to service the demand that we see coming and it's right.
Now for 2021.
And we've even look beyond that and say if we if demand continues to be stronger inside 2021 can we service that demand and our machine capacity is there. So again regional we have to be very specific by product and by region, but we feel good about where we're at and as we see those signals coming in from customers, we're going to be.
Investing appropriately to make sure that we have the regional capacity as well for those customers.
Got it okay. That's helpful.
And just my last one on the Q1 outlook I think here in Q4 on the residential side you talked about.
Two points of price and a point and a half of volume as we look at.
The expectations for double digit growth. There is there a good way to think about that split between volume and price.
So we've incorporated that and our guide and just just to kind of go back a little bit to the fourth quarter.
And remind you of the fiscal days and so when you look at on a daily run rate was higher than that it's about 5% higher on the daily run rate in the fourth quarter. So the demand and the eight 5% growth on a year over year basis that we're talking about right now is a combination between residential and commercial.
With this more stable environment side, and commercial and a stronger environment side of residential.
But our guide incorporates right now the combination between volume and price and inflation and we feel good about the guidance that we have and placed the midpoint that's out there right now.
It does again have margin expansion for us as a company and it is it is update and 5% on the on the mid point on the revenue side. So we're excited about the growth that we're seeing.
Got it Okay, and I guess is it fair to say that price will probably be a little bit more than that.
And a 2% benefit from.
And the announcements you made in Q3 and additional actions start to flow through.
Early in the year or is that something thats more on the back half weighted.
Yes, so two things on that one.
We have the same fiscal.
Fiscal days in Q1, as we did in Q4 and three less days right and it's a little bit ironic that escalated it shakes out and so when you look at just the volume itself on a year over year basis, you have to take that through those three days into consideration and our guide incorporates that so our 88, 5% growth on a daily rate is actually much higher from a <unk>.
<unk> perspective because of that.
The days component and so yes, if you go back and look at the price announcements that we've made and the steel prices or steel costs that are growing.
And that are rising right now we are pricing out in front of that now keep in mind, a couple of things one we have backlog.
And inside of our residential businesses and our commercial businesses and so those backlogs where price due to different price point and so those will come into the first quarter and and our pricing starts to catch up inside of the end of the first quarter and the beginning of the second quarter, but again as Jim mentioned, we get out in front of that and out of our typical cycle. So typically inside.
<unk> of our residential businesses, we would have price increases and the first quarter and because of the inflation that we saw coming out as we got in front of those and get our price our price announcements out early but that backlog is going to continue to bleed into our business and.
And the first quarter until we get the prices up from that so hopefully that answers your question around that but we feel we feel really good about our positioning and what we've been able to do as a company with the price and the inflation that's coming at us.
Got it okay that makes sense.
<unk> and all the details and good luck here and the rest of the first quarter.
Thanks Kurt.
And again as a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
And there are no further questions in queue. At this time I will now turn the call over to Tina basket for closing comments.
Thank you everyone for joining us here. This morning, we really appreciate your interest and cornerstone building brands. We are excited about what 2020 one has to offer us this year and if you have any questions. Please feel free to reach out to me hope you have a great day and thanks again.
This concludes today's conference call you may now disconnect.
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