Q3 2021 Cornerstone Building Brands Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the cornerstone building brands third quarter 2021 financial results conference 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. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to Tina.
Vice President of Finance and Investor Relations. Thank you. Please go ahead.
Thank you good morning, and thank you for your interest in cornerstone building brands.
Our prepared remarks include comments from Jim Metcalf Executive Chairman Rose Lee, President and Chief Executive Officer, and Jeff Lee Executive Vice President and Chief Financial Officer and were recorded in advance of the call. Unfortunately Roche is not feeling well is not with US This morning, Jim and Jeff will take your question.
At the end of the prepared remarks, 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 in the company's SEC filings earnings release, and our Investor presentation. The companies Act.
Results may differ materially from the anticipated performance or results expressed or implied by these forward looking statements. Throughout this presentation management may also refer to pro forma financial results such pro forma results give effect to completed acquisitions and divestitures and if as such transactions work.
Consummated prior to the periods presented finally 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 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 with that I would like to turn the call over to Jim.
Thank you Regina good morning, and thank you for joining us.
Before we review our results for the quarter.
I'd like to welcome Rosalie to our call.
Rose joined Us as President and Chief Executive Officer, and has an impressive broad based career with extensive experience in building materials.
Her deep knowledge of the industry and proven leadership make her the right person to execute our long term strategy.
Rose and I are aligned on our strategy to deliver long term profitable growth and value creation for our stakeholders.
As executive Chairman I look forward to working with rose our leadership team and the board and our continuing commitment to driving returns for our shareholders.
Now, let's turn to the third quarter results on slide three.
The third quarter was another strong quarter for cornerstone building brands as we navigated the headwinds from rising commodity costs freight challenges and labor disruptions.
In response to this dynamic inflationary environment, our teams disciplined price actions drove record sales for the second consecutive quarter.
Pro forma net sales grew approximately 20% over the prior year and were up 15% compared to a strong 2019.
These results represent our third consecutive quarter of year over year double digit net sales growth.
Third quarter pro forma adjusted EBITDA of $182 million increased 4% and 8% over 2020 and 2019, respectively.
Raw material and labor shortages persist driving up the cost to serve our customers and limiting shipments.
We are navigating these challenges and remain focused on our service value proposition.
<unk>, our customers position as a partner of choice.
Okay.
In the quarter, we completed the divestitures of the insulated metal panels and roll up door businesses as well as the acquisition of Cascade Windows.
These strategic actions resulted in a more focused business portfolio strengthen our residential market position.
Improved our financial flexibility and fuel value creation.
As a result, we reduced our net debt leverage ratio to three seven times, approximately one and a quarter turn better than the third quarter of last year, we remained.
Discipline on balancing our capital deployment and advancement towards our Delevering goals of two to two five times.
To wrap up my comments I want to thank the cornerstone building brands team for many different backgrounds and experiences serving our customers every day.
It continues to be a privilege to serve this company and its shareholders and I'm grateful to have the opportunity to work with such talented people.
I am so proud of the tremendous accomplishments, we are making as a company.
Now I'd like to turn the call over to rose.
Thank you Jim.
Good morning, everyone.
I'm very happy to join cornerstone building brands, a company with deep customer relationships strong brands and operating scale.
We are a company focused on partnering with our customers and creating value for our stakeholders.
Jim on behalf of our 20000 colleagues.
I want to thank you for your leadership over the past three years and I look forward to working with you in your role as executive Chairman.
Since joining the company two months ago I have learned a great deal from visiting our site talking to our colleagues customers and shareholders.
Turning to slide four.
I would like to share with you my first use of our aspiration, our core strength and lever for value creation.
We will work diligently every day towards becoming a premier exterior building solutions company in North America in the eyes of our customers employees and all stakeholders.
We have three core capabilities, we will continue to strengthen as we pursue our aspiration.
First our multi material scale advantage manufacturing footprint enables us to service our customers efficiently and cost effectively.
Second.
Our in depth channel partnerships enable us to meet the needs of our end customers through their preferred channels.
Stuart.
Each of our brands deliver a differentiated value proposition, which is matched to the varying needs and preferences of our diversified customer segments.
These three core capabilities are foundational to our competitive strength.
Which enabled resiliency in our business.
Provides meaningful differentiation from our competitors and are integral to our continued growth and success.
In order to maximize our core capabilities and create profitable growth.
Oh cool on three P value levers.
First we are implementing a comprehensive approach to increasing efficiency and driving year over year, a sustainable improvement in our manufacturing sites.
The cornerstone production system is anchored by proven lean concepts that drive standard manufacturing processes across our sites where safety is paramount.
Learning is encouraged and supported.
Continuous improvement is expected of our employees.
Next is our expansive innovation engine.
This value creation lever refers to revenue opportunities from new product applications business models and partnership.
Our innovation will include digital technologies and tools that will strengthen our connection to our value chain partners and end customers.
We will look to partner with companies who have novel solutions.
And allergy and complementary capabilities.
We will use agile method to speed up our innovation and time to market for a new solution that is to act fail fast and hard.
Finally, our ongoing portfolio optimization work will enable us to look for opportunities to accelerate our growth in innovation by bringing new businesses that are logical bolt ons into the cornerstone building brands family.
In addition, we will continuously examine their portfolio at market and our capabilities and ball and divest those businesses, which we are no longer the basket.
Okay.
In this context, turning to slide five.
I'm excited to share that cornerstone building brands had entered into a definitive agreement to acquire Union corrugated company.
Headquartered in Fayetteville, North Carolina.
You see it as a leading provider of metal roofing roofing components and accessories.
The majority of the UCC business serves the 2 billion residential metalworking market, which expands our offerings in this attractive space.
Meta roofing is a low maintenance and environmentally sustainable solution that is experiencing growth in many regions.
We expect the transaction to close during the fourth quarter.
And I look forward to welcoming UCC colleagues to the cornerstone building brands family.
Turning to slide six.
Our immediate priorities are focused on executing our core strategy of profitable growth.
Operational excellence.
And disciplined capital deployment, while driving towards becoming a purpose driven premier exterior building solutions company.
We are hyper focused on improving our operations to mitigate as much as possible, our current labor and supply chain challenges.
We are investing in experienced leaders and subject matter experts and manufacturing and supply chain.
We are creating lean to work systems manufacturing processes and methods that will enable a step change in our productivity.
Our automation efforts, which we have discussed on previous earnings calls is an important dimension of our productivity gains.
And of course investment in our employees through training programs and kaizen events will enable us to sustain our gains and strengthen our culture of continuous improvement.
Second.
We are focused on accelerating our growth your market penetration pursuing bolt on acquisitions and product innovation.
We plan to augment our innovation pipeline with new product applications services and business model.
Finally, we're committed to maintaining financial discipline and expect to reduce our net debt leverage ratio by three quarters to one turn next year.
Now I would like to turn the call over to Jeff.
Thanks, Ross and good morning.
Starting on slide eight pro forma net sales for the third quarter were a record $1.428 billion.
20% higher than pro forma prior year, and our third consecutive quarter of double digit sales growth.
The growth was driven by favorable price actions across all segments in response to the rising commodity cost and other inflationary impacts.
Demand for our products was strong during the quarter and we continue to experience favorable pace of incoming orders across all our products.
U S housing activity remained strong.
With third quarter housing starts averaging approximately $1 6 million units on a seasonally adjusted basis.
In addition, repair and remodel spend remained positive supported by rising home equity low interest rates and an aging inventory.
As a result, our near term and long term outlook for the residential markets remains positive and we are well positioned to capitalize on these market trends.
Momentum in the nonresidential construction demand continues to be favorable.
The architectural billing index reported that the pace of billings growth remains a post recessionary highs.
Additionally, the September score of $56 six was one of the highest reported this year.
Our long term outlook for the commercial business is also favorable.
The market for nonresidential construction typically lagged housing cycles by 18% to 24 months.
Furthermore, nonresidential construction is supported by private and public capital spending interest rates government funding and consumer demands.
Like many others in our industry, we have been impacted by constraints in raw materials and labor slowing the pace of recovery.
As a result volume for the quarter was essentially flat compared to the strong third quarter of 2020, which also had one additional fiscal day.
We generated $182 million of pro forma adjusted EBITDA.
4% higher than the pro forma prior year with all segments contributing with favorable price and mix net of inflation.
Across all our segments, we continue to incur increased commodity freight and labor costs production.
Constraints for commodities, such as PVC resin and steel and aluminum have resulted in supply shortages and cost increases.
In response, we raised prices across our portfolio, we expect price and mix to remain favorable offsetting these continued cost impacts for the remainder of the year and expect favorable benefit into 2022.
We incurred.
Manufacturing inefficiencies for various reasons, including disrupted plant production schedules due to the labor shortages and supply constraints and pandemic related absenteeism.
Nevertheless, we are taking steps to make our plants more competitive through our investments in automation wages and our employees work environment.
As Jim mentioned, we completed the insulated metal panels and roll up door business divestitures and acquisition of Cascade Windows.
Portfolio optimization is an essential component of our growth strategy.
We believe we have meaningful opportunity to lead within our key product categories enhancing our position in large deep markets.
Overall, the third quarter was a strong quarter for us I'm proud of our team's outstanding job in successfully managing through the dynamic market environment and capitalizing on our strong market conditions.
Now, let's look at our business segment results.
Turning to slide nine.
The Windows segment third quarter pro forma net sales were approximately 12% higher than pro forma prior year and pro forma adjusted EBITDA was $53 million as compared to $78 million in the same pro forma period as mentioned along with the positive market momentum we are navigating the industry.
Wide labor challenges, which have impacted a few key facilities and our delivery fleet.
Our commitment to our customers is very important to us as a result, we have incurred additional costs such as overtime and premium freight to serve our customers and strengthen our long tenured relationships across the channels we serve.
In addition, we continued to make substantial investments in automation technologies to improve our production and logistical efficiency enhancing our position as a cost effective producer.
Turning to slide 10.
The siding segment's third quarter net sales were approximately 11% higher than the prior year.
Primarily driven by the favorable price and mix of 19%, which more than offset lower volumes due to raw material and labor constraints during the quarter.
Adjusted EBITDA was $75 million, which is solid earnings generation given the strong prior year comparison.
The siding segment also faced manufacturing challenges from supplier allocations of PVC resin and COVID-19 related absenteeism.
However, our team has remained focused on serving the customer while navigating these demand driven challenges.
We continue to invest in the siding segment, we intend to drive organic growth through product innovation, and new product development and attractive adjacent product lines.
Moving on to our commercial segment on slide 11.
Yeah.
Pro forma net sales in the third quarter of 2021 were $450 million approximately 45% higher than the same period last year, driven by disciplined price actions to mitigate rising steel costs.
Order momentum remained strong for buildings and components. However, raw material shortages are constraining volumes in this business, we remain on allocation from our suppliers limiting our output levels similar to the second quarter.
Also to meet the demands of our customers we have purchased steel on the spot market, which carries a higher cost.
The commercial segment reported record pro forma adjusted EBITDA of $86 million.
Approximately 91% higher than the prior year and margin expansion of 470 basis points.
We have been effectively managing the impacts of rising steel costs.
For the quarter price and mix outweighed inflation by $49 million due to the rapid response by the team. We expect these positive dynamics and the impacted margins to continue in the near term.
We have taken actions to advance our strategy within the commercial segment as discussed we completed the divestiture of the insulated metal panels and roll up door businesses.
Additionally, we have entered into a definitive agreement to purchase Union coordinating company.
We have developed a broad multichannel distribution platform covering an extensive network of wholesale and specialty distributors independent dealers architects builders contractors and big box retail relationships, serving residential and low rise nonresidential construction markets.
This platform will position us to further our growth in large deep markets maximizing our financial performance.
Turning to slide 12.
We are focused on investing in the core businesses through capital expenditures organic growth initiatives and inorganic opportunities, which we believe will deliver the highest returns for our shareholders.
We anticipate the full year 2021 capital spend to be between $90 million and $110 million.
Additionally, we are focused on positioning for growth with an emphasis on deleveraging our balance sheet.
As a result of our higher earnings and strategic actions, we have accelerated our net debt leverage reduction and finished the quarter at three seven times.
We expect that our leverage ratio will be between three two times and three five times by the end of 2021.
We have demonstrated our commitment to a balanced capital allocation strategy and expect to reduce our net debt leverage ratio by an additional three quarters to one turn next year.
Turning to slide 13.
I would like to make a few comments about our guidance.
We expect net sales to be between $1.425 billion and $1 billion $475 million.
An approximate 25% increase versus pro forma prior year at the midpoint from positive price and mix.
We anticipate strong market momentum within the residential and commercial end markets to remain.
We expect adjusted EBITDA to be between $170 million and $185 million the.
The midpoint of our outlook implies an adjusted EBITDA margin of 12, 2% and anticipates inflationary costs offset by price in dollars.
Our third quarter performance demonstrates our commitment to serve our customers and remain disciplined to navigate unusual times.
We believe that many of the actions taken in the third quarter position cornerstone building brands for continued success for the remainder of 2021 and into 2022.
And now I'd like to open up the call for questions.
Okay.
Ladies and gentlemen at this time, if you would like to ask a question. Please press star one on your telephone keypad again Thats Star one to ask a question, we'll pause for just a moment to compile the Q&A roster.
Just a reminder, that unfortunately rose is not feeling well and it is not with US. This morning, So Jeff and Jim will take your questions.
Your first question is from the line of Lee <unk> with CJS Securities.
Hey, good morning, Jeff and Jim and Hope Hope Rose feels better soon.
Thank you Lee and good morning.
So just starting with the UCC acquisition can you give us any more color around EBITDA margins purchase price potential synergies and then I know you referenced residential roofing in the remarks, but it's going in the commercial segment. So any color you can share on that also.
Surely let me just make a couple of comments first we're really excited about the acquisition and just kind of step back we've talked about these large deep markets, we want to participate in and the commercial components market in general is about a $4 billion overall market, where we have the number one position.
Currently.
In the components business. This acquisition as we said gives us access to the high growth residential metal roofing.
Which is about a $2 billion market, but it also UCC is 25% commercial as well so it's not all residential it's about 75% <unk> and 25% commercial.
What it also does it leverages the core competencies from the legacy MTI and our commercial business.
Expanding our metal footprint and it allows some efficiencies and it gives us a really complements our current manufacturing footprint with the addition of UCC. So we're really excited about that and what I'll do is turn it over to Jeff and he'll he'll go through some of the numbers.
Great Good morning Lee.
So a couple of comments around the financials themselves, we reported a $250 million revenue top line for the business.
We haven't specifically gone out with some of the EBITDA margins, but let me give you a little bit of guide around that are our expectation right now pre synergies for that business is kind of a low to mid double digit margin.
We do anticipate that we'll get about 30% to 50% of synergy benefits of EBITDA from that acquisition as well and when you think about the purchase price on that we haven't disclosed that.
As we go forward into the fourth quarter and some of the pro forma as we put together all this information will become available, but if you think about our last couple of acquisitions that we've made with Cascade and prime and going back because the recent bolt on acquisitions those have ranged anywhere between a mid single digit to kind of a high single digit mulch.
People on those businesses and this would fall within that as well. So hopefully that gives you the details that you needed and Youre looking for.
Yeah, that's all very helpful.
Can we switch over to the commercial margins in the quarter and obviously they were very strong and it looks like you're benefiting from a a widening spread in a rising steel environment can you talk about the sustainability of that and if there was anything atypical this quarter that may normalize next quarter.
One of the things we've done and we've talked about it over the last year is as you know lead the commercial market lags residential market by 18% to 24 months we've seen.
Strong strong backlog in fact, our backlog in commercial was up almost 50% versus last year, we're seeing strong demand. So that 18 to 24 months really is playing right. Now. We are also also in the organization, we centralized our pricing.
With with the organization to make sure that we were staying ahead of price over inflation of this rising steel costs, which is really an anomaly over the last few years. So.
We're really we're really excited about.
Maximizing our profitability, but as you know the margins are were at historic high margins.
If you look at this business, it's probably a mid teens business as you go forward and we will always focus on improving that but by delayering. The organization taken a lot of costs out maximizing the price focus focus on the portfolio. We think this business is a much different business than it was.
24 months ago.
Yes.
Let me add let me add a couple of comments to that as well.
Just looking at the quarter itself, we did see our volume go up and about 2% in volume on a tonnage basis within the commercial segment and just going back and reminding kind of the history around this business as we kind of entered into Covid. We saw a 20% drop in revenue the kind of sustained through 2020, and then it started to recover.
Inside of 2021, and then as we expect to do with the recovery of the residential markets in this flight to the suburbs combined with the commercial our commercial business that really resides in the suburbs. We expected about 18 to 24 months, we start to see that recovery as Jim mentioned and that backlog is increasing too so increase in volume which is very.
Encouraging for us as a company the backlogs are rising within that business and then just to go back as well and talk about the history of our commercial business back.
Back in 2019 on a pro forma basis right.
It takes the <unk>.
Divestitures out our pro forma EBITDA margin was about 12%, we increased that 19% to 20 to about 13% and a lot of that just as a reminder, was the actions that we took place to simplify the business and take out some of the de layering within the organization and then we had a lot of price.
Discipline that we also put into place within the organization.
The combination between those two drove the benefit from 19% to 20 of about 100 basis points and as we move into 2022, we're continuing to see those benefits as volumes coming back getting the volume leverage on that organization combined with the pricing discipline is really is whats sustaining some of those margins and so as we as we kind of look at <unk>.
Finishing this year.
We're going to be in that mid single digit EBITDA margins that Jim talked about 2021, a double digit excuse me double digit margins for 2021, and Phil feel like that is a number that we're going to continue to push forward on with the price discipline that we have in place to high backlogs as we go into 2022.
Got it and if I could sneak one more in just on the windows margins.
Is this the bottom for Windows margins, obviously, you telegraphed the issues Youre seeing but I guess one is at the bottom and two if it is what is the slope of recovery look back look like getting back to where we were and then beyond that.
Yeah, Let me, let me address that one as well first quarter, we had 11, 5% EBITDA margins within our Windows segment second quarter. We're at 12, six and as you see with this quarter were $8 six so a drop off inside the third quarter a lot of that due to the.
The manufacturing efficiencies as we serve our customers with higher over time, just the labor constraints that are in place the shortage of labor freight expenses and making sure we continue to hit as many customer.
Okay.
Customer expectations as we can the fourth quarter right now we have coming back to kind of more of the first and second quarter margin levels. So that 11%, 12% is what we expect so.
A lot of work to do inside that business, we're not claiming that.
We're.
At the point now, where we think we've got all the history behind us, but we're going to continue to make efforts. We've made a lot of investments in wages, we've increased significantly the wages within our facilities. We've continued to enhance the workplace environment for our associates as well and we've put additional management in place over the top to make sure that we have.
Got great supervision over those facilities as well and that combination of those investments that we've made plus that combination of new management. We believe we will continue the momentum into the fourth quarter and into 2022 and just to add one more comment on that we're continuing to invest inside the manufacturing efficiency and process.
This is within the organization when it comes to lean manufacturing kaizen events, six Sigma type of disciplines and practices within the within that business, which we do think as we move into 2022, we're going to bear some of the fruits from that and start to increase the margins for that business.
Great I will hop back in queue, thanks very much.
Yeah.
Your next question is from the line of Kurt Yinger with D. A Davidson.
Great. Thanks, and good morning, everyone.
I just wanted to start off on the M&A appetite I mean, you've done a commendable job deleveraging the balance sheet.
But theres a lot going on in terms of integrating deals divestitures in just the core business trying to manage through the supply chain challenges and maybe better leverage the demand backdrop. So I was hoping you could just talk a bit more about why M&A still seems like a big focus at this stage and how we should think about your.
At the tighter or pipeline looking into 2022.
Now let me just make a couple of comments and I'll turn it over to Jeff We continue to evaluate our portfolio and we want to take actions where resulted in a more focused and simplified portfolio, but we're also looking at growth and value creation and we talk about those deep markets. The UCC acquisition as an example.
That the integration I think our track record of integration.
Really three years ago, and the acquisitions that.
Have occurred this year.
Our integration processes.
Worked out extremely well we have a dedicated team on that we also look we also look at a balanced portfolio.
Residential commercial and repair and remodel.
Opportunities and we have a we have a financial discipline that we believe we don't overpay for any of these it's also really important that.
We look at organic growth as well it isn't just M&A its organic growth as we said in our prepared comments of of new products. For example, our patio door expansion in our windows business expanding our portfolio in our siding business. So it is not just its a balanced portfolio. If you look at our capital.
Our capital deployment first and foremost as we've talked about that leverage.
We'll have two to two five times and we've made great progress over the last few years on leverage that's our first priority investing in M&A.
Our second priority and then investing in automation as Jeff indicated, particularly in our windows plants.
About half of our capital.
Our capex is for automation in Windows, but also investing in.
Organic growth opportunities are expanding our product lines again back into these high growth deep markets, where we can be number one or number two.
And Curt just to add onto a couple of comments on that as well.
We can't control when the when great businesses come to market.
And in this case UCC was a business that we felt like is very strategic for us. It gives us that deep market and the opportunity for us to grow inside those markets and we've got a nice right to win inside that business with our competencies around manufacturing of metals. The channels that we support on both sides of the commercial and residential side.
And so it's just a really good fit for us as an organization and I'd like to go back to kind of the comment around the leverage ratio. We've been very successful in the leverage ratio taking it from the end of 2019, five three times down to four nine times in 2020, and then we committed to three quarters to one turn reduction in 2021.
And we've exceeded those those expectations commitments that we made in light of M&A activity and divesting activity and so it is very much on our minds, it's very much a priority for us to continue down that.
That path of deleveraging the company and committed to another three quarters to one turn reduction by the end of 2022 and that puts us back in our target of that two to two five times. So we feel like we've got to continue down the path of exercising on all fronts, a very balanced approach when it comes to investing right. So we.
You can get the growth investing inside of our Capex and other things. So we can get the benefits on the margin side and continue to work down our leverage and so we're trying to exercise all of those at the same time.
Got it okay.
I guess, just a clarification point on the leverage targets does that include.
I guess, what's assumed for the UCC deal in terms of this year's.
3.2 to three and a half and then the three quarters to one turn production for next year.
Yes, Kurt I'll take that question as well so the guidance that we've put in place does not include UCC from either the sales gross margins EBITDA or net leverage ratio that we don't know when it's going to close.
We're anticipating right now sometime in the fourth quarter. So we don't know if thats going to be late in the fourth to early in the fourth or anticipating a close in the fourth but as we think about 2022 leverage ratio and that three quarters to one turn reduction.
Do anticipate that it will be included inside that.
In that guidance and as you think about the EBITDA that comes on plus the purchase price for this business.
It will put us in a position where it has a very small impact on the leverage ratio just with the combination and the way that we're buying that that business.
Got it okay. That's good to hear.
And then just looking across the business I mean, there's a lot going on with supply chain raw materials and labor as you look forward I was hoping you could maybe walk us through your expectations around which pressure points might be alleviated over the next one to two quarters versus what areas, you think will kind of be.
Persistent into 2022.
Kind of mainly as it relates to that.
That's going to impact your own production volumes.
Yes.
A couple of comments.
We're tight supply we've talked about raw materials were type suppliers, we've talked on steel PVC resin and aluminum those are really the three big categories.
Steel costs are at historic highs and with the.
The macro data that we see we don't see any immediate change in steel cost.
<unk> supply is slowly getting better, though we're working very closely with our suppliers to manage demand and I think that's one of the advantages of cornerstone, having a very large procurement team that works very closely with them. We're also seeing some progress on on labor.
The U S windows has the biggest.
Labour opportunity I'll say in <unk>.
Since the second quarter, we've increased our head count about 10%. So we're starting to see some slow progress there and that's really big.
Are the actions that Jeff alluded to a few minutes ago, there's not a silver bullet on this it's a it's really a local ground game that we're working with our select plants to get labor. So we're starting to see some progress there.
On the commercial side, it's not as much a labor issue, it's more raw materials as well as siding. So if you look at this labor.
We have actions in place, we're slowly making progress, but it's let's say, it's a long cut as we get into next year.
And just going back to slide eight and looking at the walk the EBITDA walk on the quarter itself, obviously, the big area of opportunity is the manufacturing productivity and that's the area that we're really putting a lot of focus on rate, that's where the investment has gone in and I'll put some numbers around broad levels, when we put $50 million plus in wages into.
To the 2021, a year to increase our wages as a company for our hourly workforce and that was specifically to make sure we retain the best employees inside the industry and attract the best employees. So we've done a lot of a lot of investment inside that area, but it's really attacking that manufacturing productivity area and I think we've got some.
Great actions in place.
It won't recover completely as we go through 2022, it's going to take US some time with all the demand that's on the company and expected demand inside of 2022 with the carryover of backlog and the continuation of favorable economics. We expect this is going to be a little bit more difficult to claw our way through that but we would expect to.
See sequential improvement inside of our manufacturing productivity as we move forward.
Got it Okay. That's helpful and just last one for me on the sales outlook, the 25% pro forma growth any color in terms of what's assumed within that between volumes and price mix.
Yes.
Think about Q3 as a good guide for Q4 and with the.
With the high <unk>.
Comparable to prior year.
And with the constraints, we have on supply right now we're running as fast as we can from our manufacturing productivity or a manufacturing capacity perspective, now it's not machine capacity. It's labor capacity those types of things that are constrained right now, but as we look at the fourth quarter and look at the third quarter.
We expect them to be very similar so the volumes the volumes are going to be fairly flat to very high fourth quarter last year, and we're going to continue to see a lot of pricing side of the fourth quarter to offset the commodity inflation that we've experienced.
Okay, Alright, well I appreciate all the color and good luck here in Q4.
Thank you.
Your next question is from the line of Julio Romero with Sidoti <unk> Company.
Okay.
Hey, Jim Hey, Jeff Hey, Tina Good morning, Good morning, good morning.
Starting on the window side.
Are your lead times for Windows, right, now and how does that compare to say.
Lead times at this time last year or beginning of year or.
So however, you want to talk about that and maybe when do you see that that delta start to narrow.
Right now our lead times are about three to four times, our ideal lead times. The key really is consistency so even with longer lead times, we're very focused on being consistent in communicating with our customers of what that lead time will be and then the customers can plan accordingly.
As I mentioned that the backlog if you look at the historic levels across all segments and Windows. The backlog is is up about 85% year on year.
It gets back to what Jeff was just talking about on the Windows side. It's.
It's not our installed capacity, we have enough installed capacity to meet demand demand continues to be very strong and it really gets down to that labor that labor factor that we just we just talked about.
Starting as I said we.
Improvement in the third quarter of about 10% on a windows business, so really kind of focused on lead.
Lead times lead times can vary by geographic area, but again thats something that is first and foremost on our windows keen to get those down but also being consistent is the most important thing for our customers at this point.
Yeah, and whose got it got.
Got it just to add a few comments on that as well.
We are expecting that lead times will improve as we get into 2022 in particular as the supply chain constraints right. There's just been a crazy amount of of constraints coming into this year with the storm in the first quarter of this year inside of Texas.
And continued pressures across the board so as those move through as those improve as we get the wages and the.
The turnover within the manufacturing sites more in line with with what we've had historically, we should expect to see those lead times improve and we're starting to feel like some of those constraints are starting to lighten up as we move into the back half of the third quarter and as we move into the fourth.
Got it that's helpful and I guess, the 10% increase in head count and the window should definitely help.
Pretty immediately but.
Jeff I think you mentioned earlier that you expect the fourth quarter segment margins for Windows to kind of look closer to what they did in the first half and that's obviously very encouraging but I'm wondering if you had any overarching challenges in the third quarter that you can kind of.
Be more granular on.
That will only stay in the third quarter right.
It was at over time was it inefficiencies or fright and I guess.
What gives you the confidence that it doesn't.
Yes, the margins do improve in the fourth quarter.
Yeah, just just looking at our Windows business in the third quarter. So we did get price over inflation, we had a slight increase in volumes and so both of those are positive.
What drove the inefficiencies or the lower margins inside the third quarter really resulted from the manufacturing inefficiencies that took place specifically the wages in particular or excuse me. The hourly workforces will drive that the labor constraints that we're seeing and just to put it in perspective, if you've got aligned that require.
<unk> 15, 16 people or even 30 people to run and you ended up with 25, we ended up with 13 people showing up you can still run the line. It's not like you cant run the line with a couple of short people or a few less people, but it does put a lot more pressure on the throughput of those lines and so thats what.
We are experiencing as you expect a full line to show up on Monday morning, and you end up with short staff and you continue to run through those and so the inefficiencies that come with that the overtime that comes with that the freight expenses, we're doing less and load shipments to satisfy customer demands and get as much product to our customers as we can.
When combined with just the overall freight expenses right now with truck drivers I'm sure you've heard this across the industries, but shortage of truck drivers and those types of things are driving higher expenses as we're looking to ship our products. So those are the two big ones would be the labor constraints in the freight within the quarter.
Something just to add on Jeff's comments of what what we're doing different leaves we have.
Focused or focused plan approach will be brought in subject matter experts.
Looking at <unk>.
Continuous improvement.
This isn't a broadbrush windows issue, we know where the opportunities are to improve we brought in some talent from the outside both from a manufacturing leadership, but also a continuous improvement we're doing Kazan.
At these plants. So there has been and as Jeff said, the wages $50 million of additional wages. We put in it's also simple things like making sure your break rooms, and restrooms are in great shape, the environment around there and welcoming those new employees. So this is an all hands on deck, it's very.
Focused approach so I think that's something different than that.
We've turned up the heat on that too to get us from one quarter to the next of what Jeff was talking about from a margin standpoint. So this is one of our top if not our top priorities and we know what the issues are and we have the right. We have the right subject matter experts on it.
Understood and then just last one for me would be.
You talked about a lot.
Thing into automation dwell is expanding product lines and a lot of organic opportunities.
The Capex guide of $90 million to $100 million.
I think it looks it looks on the surface at least are relatively low.
If you can just talk about opportunities.
Maybe going beyond 'twenty, one right what does Capex look like.
In the outer years.
Yeah Julio the.
Capex guide that we provided at $90 million to $110 million is not a result of desire.
The result of our ability to get equipment from the manufacturers right now on just the supply chain disruption on that on that.
Our original equipment manufacturers.
The projects are still the same projects, we have a lot of opportunity inside of automation, we have a lot of opportunity to just simplify some of the lines that we have in place and so we will continue down that path.
<unk> orders inside of Q3, and Q4 to continue to move forward.
With within within our business.
And just last of all with that as we kind of think about 2022 and forward. We've always had that two to two and a half.
Percent guide that's out there of revenue and we think Thats, we think thats very appropriate for this business keep in mind about 1% of our capital is maintenance and just kind of keeping the lights on and keeping things in decent shape and then the other one to one 5% comes in cost out and growth opportunities and so we've moved that up as a comp.
As we've seen more and more opportunities for us to invest that capital and get a nice return on that on that capital.
Great. Thanks, very much taking the questions.
Your next question is from the line of Matthew Bouley with Barclays.
Hi, This is Ashley Kim on for Matt This morning.
I guess just my first question is on the free cash flow can you elaborate more on what drove the use of cash in the quarter.
Are you having to keep more inventory due to supply chain issues or anything along those lines that we should be aware of.
Yes, Ashley I'm really glad you asked the question because I want to make sure. It's clear on everybody's mind here. There is if you look at our free cash flow for the quarter, it's roughly a use of cash of about $200 million.
Now we've also got underneath that a lot of investing activity around the divestitures and proceeds from the divestitures and the acquisition information, but theres a little bit of mismatches just the way the financials are put together so the proceeds of cash it inside the investment opportunity and you can see that in the cash flow statement, but the.
Cash tax paid in the quarter is actually up inside of the operations and so just to kind of put some numbers around that.
$200 million of roughly $200 million of use of cash on free cash flow, including the capex of roughly 27% and then if you take the estimate or not yes, maybe with the payment for tax taxes on the divestitures was about $208 million and then theres about another $22 million on fees.
On those divestitures.
And lawyers and accountants and those types of things as we had the the strategic.
<unk> initiatives around those divestitures and acquisitions and so if you kind of back those out you end up with a positive $30 million worth of free cash flow and then to add to that as well we did invest inside the quarter.
In our steel business in the commercial business in particular with some of the rising steel costs.
Some orders in advance to try and take advantage of some discounts with the strong demand that we're seeing inside of our commercial business. We wanted to make sure that we could secure as much supply as we could within within the quarter and so we've increased our our working capital inventories in particular within our commercial business. So all in all we had a good <unk>.
When it came to free cash flow that tax component in particular really kind of skews. The way you look at the operating cash flow and the free cash flow, so hopefully that clears things up.
Yes. Thank you. Thank you for that detail and then just my second question just going back to the <unk> acquisition.
Given the residential exposure are there any revenue synergies maybe the distribution expansion that you are trying to capture with that acquisition or are the synergies mostly on the cost side.
No. That's a great question and you hit the nail on the head we're really excited about those opportunities with the multichannel approach. It is it is residential a lot of our large customers that we have relationships on the residential side.
Either the distributors.
Box retailers are big.
Distributors of metal roofing. So this gives us an opportunity to use those customer relationships that we have we've talked about cross selling in the past I think this is a great opportunity for us to to really grow our business. That's why we're really excited about it and again. This is just not a residential play this also.
<unk> to our footprint of our components business, which we have.
The number one position as I mentioned earlier, and a and a $4 billion market. So yes, there are synergies both on.
Procurement and rationalization of facilities, but most importantly, we're really excited about the the.
Top line opportunities we have in this high growth high growth business and Ashley just just to make sure. We're clear on kind of the comments that we've made so I indicated there is 30% to 50% of <unk>.
Purchased EBITDA and synergy savings that we anticipate with this acquisition those are all outside of what Jim talked about on the growth side. So the 30% to 50% of the synergy savings from an EBITDA and most of those come from purchasing and they come from.
Some of the things that we've identified specifically within the business and then the upside on top of that is the growth piece that Jim referenced with our deep relationships with our channel partners.
Great. Thanks for taking the questions and good luck on the quarter.
Thank you. Thank you.
There are no further questions are there any closing remarks.
Yes. Thank you everyone for joining our third quarter call as we indicated it was a strong quarter and we are very excited about our outlook look forward to your continued interest and have a great day.
This concludes the cornerstone building brands third quarter 2021 financial results Conference call. Thank you for your participation you may now disconnect.
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