Cornerstone Building Brands Inc. Q1 2023 Earnings Call
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morning my name is Chris and I'll be your conference operator today. At this time I'd like to welcome everyone to the Cornerstone Building Brands Q1 2023 Lenders Call.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If you'd like to ask a question during this time simply press star then the number one on your telephone keypad To withdraw your question, please press star one again
Thank you. Jason Uthi, Senior Vice President, Finance and Investor Relations. Let's begin.
Thank you. Good morning and thank you for investing in Cornerstone Building Brands.
Our prepared remarks include comments from Rose Lee, President and Chief Executive Officer, and Jeffrey 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.
Such forward-looking statements in this presentation include, but are not limited to, the impact of several projects and initiatives, which management expects will lead to synergies and cost savings.
The risks are described in detail in the company's SEC filings. The company's actual results may differ materially from the anticipated performance or results expressed or implied by these forward-looking statements.
Finally, management would refer to certain non-GAAP financial measures.
Specifically, in this presentation, we refer to adjusted EBITDA, adjusted EBITDA margin, defined as adjusted EBITDA as a percentage of net sales, and pro forma net debt leverage, which are non-GAAP financial measures.
You will find a reconciliation of adjusted EBITDA and adjusted EBITDA margin, non-GAAP financial measures and other related information in the SEC filing. Our non-GAAP financial measures are not intended to replace the presentation of the comparable measures under US GAAP. Please note we will be referencing our investor presentation on the investor site throughout the program.
Good morning, everyone, and thank you for joining us today.
Starting on slide four, I'm pleased overall with our first quarter results in an environment that remains dynamic. We're going to start with the first quarter results in an environment that remains dynamic.
We're focused on managing our costs in the downturn while continuing to work closely with our customers and making investments for our future.
Volatile macroeconomic conditions and slowing demand continued in the first quarter, and our top line decreased 18% against a strong comparison in the prior year.
Organic volume was down 16%, slightly offset by pricing actions.
Overall, price net of inflation was favorable.
Manufacturing productivity was flat for the quarter, but we are seeing sequential positive momentum.
Our supply chains are stable and our hourly workforce retention has improved.
Adjusted EBITDA of $141 million was a 27.2% decrease versus prior year, mainly from lower volume into quarter.
JEFL covered the segment with additional details, but overall it is a margin of 11%, with 140 basis points lower than prior year. This decline is mainly from our residential businesses, especially the surface solution segment, as high-priced inventory works its way off the balance sheet.
We were pleased to see our US Citing Business EBITDA margins within our Surface Solutions segment return to high teens in the month of March.
Turning to slide five.
We continue to effectively manage price and have seen most labor and material availability challenges subside. Overall residential market demand for both aperture and surface solution segments remain lower and we continue to take appropriate actions by channel and by region to optimize earnings while meeting customer demands.
Strong margins and shelter solutions segment in the first quarter continues to demonstrate our effective pricing management processes and tools.
Over the past two years, we have seen steel costs move in dramatic ways, and the team has done an excellent job in optimizing the cost-price differential. We're making good progress in advancing our cornerstone production system and sales excellence capabilities.
Our focus remains on managing through the down cycle and preparing the company to meet demand as the market recovers.
We believe the overall economic fundamentals of the industry support favorable mid to long-term growth.
As such, we continue to make significant investments in both CapEx and human capital.
In the past year, we have further strengthened our leadership talent with dynamic and proven leaders joining our company.
Colleen Pritchett has joined the company as the president of the Aperture Solutions US.
And Melissa Jones has joined as president of the Surface Solutions US.
Colleen joined Cornerstone Building Brands in August of 2022 from Hixcel Corporation, where she served as President of America's Aerospace. And Melissa joined in July of 2022 from Pentair, where she served as Group President of Commercial Water Solutions. dot com.
We have already seen their positive impact and are excited to accelerate our company's progress under their leadership.
Finally, we have positioned the company with ample liquidity. Jeff will provide more details about our recent actions to strengthen our balance sheet and advance our capital allocation strategy. Now I would like to turn the call over to Jeff.
Thank you, Rose, and good morning, everyone.
Starting on slide six, net sales of $1.3 billion was down approximately 18% versus the previous year. This comprised of 15.4% from organic volume, 3.5% impact from divestiture, and 3.5% from organic volume.
which was partially offset by a 1% increase in price.
Our volume decline was from lower market conditions, primarily in our residential businesses.
As Rose mentioned, we continue to be disciplined in our pricing actions as we continue to see inflation on labor and some other commodity costs.
Overall price was able to offset inflationary input cost in the quarter. Adjusted EBITDA of $141 million was unfavorable $53 million, or approximately 27% versus the prior year. This was mainly from lower organic volume of $70 million.
and impact from coil coating's divestiture of $14 million.
This was partially offset by net price over inflation.
and unfavorable manufacturing productivity of 4 million resulted from specific sites and lower overall volume across the Aperture Solutions segment.
Turning to slide 7. The shelter solution segment first quarter net sales of 406 million was approximately 24 percent lower than the same period last year and comprised a 10.3 percent unfavorable divestiture impact, 9.7 percent impact from lower price with lower steel costs,
and 3.6% lower organic volume.
Adjusted EBITDA was 83 million, resulting in a lower year-over-year impact of 6 million, or 6.9 percent.
Impact of the coil coating divestiture in the prior year quarter resulted in $14 million.
as well as unfavorable organic volume of 8 million.
This was partially offset by effective price management.
even with volatile steel costs in the quarter, resulting in a favorable $12 million impact and supported a strong 20.5% EBITDA margin.
Favorable year-over-year net manufacturing productivity with efforts to automate and focus on continual improvement also contributed to a positive $4 million.
Turning to slide 8.
The Aperture Solutions second and first quarter net sales were approximately 14 percent lower than prior year, primarily driven by the lower volumes of 23.4 percent and small foreign exchange impact of 1 percent, partially offset by favorable price and mix of 10.1 percent.
we continue to experience inflation in labor and key commodity costs, which have been met with higher prices.
Adjusted EBITDA of $65 million was 21.3 percent lower than the prior year from lower volumes of $43 million.
partially offset by price and mix over inflation of $39 million.
The Aperture Solutions segment experienced an improved supply of raw materials, but as mentioned previously, had a few specific locations with unfavorable impact in manufacturing inefficiencies of 10 million. The SG&A was higher as we invested a strength in sales and marketing capabilities.
Turning to slide 9. The surface solution segment first quarter net sales of 269 million was approximately 19% lower than the prior year, primarily driven by lower volumes of 17.4% and 17.3% lower.
Unfairable price mix of 1.4% and a small impact to foreign exchange.
Adjusted EBITDA of 26 million was down 30 million versus prior year due to the softening volume impact of 19 million, as well as price and mix not fully offsetting inflation of unfavorable 15 million.
Higher price resin cost in the quarter drove the variance.
As anticipated, the higher cost resin did work its way off the balance sheet by the end of the first quarter of 2023. As Rose mentioned, we did see the U.S. siding business EBITDA margins return to the high teens in the month of March and continue to improve in the month of April .
we continue to invest in the surface solution segment and have added high speed extruders into certain manufacturing locations.
The result of automation has demonstrated higher product output and lower labor costs.
supporting the favorable net manufacturing productivity during the quarter.
Turning to slide 10.
On the left-hand side of the slide, we show our pipeline of unrealized synergy and cost savings of $115 million as of July of 2022.
On the right-hand side of the slide, we are showing our unrealized synergy and cost savings pipeline as of the end of the first quarter of 2023. The main difference is the real-life synergy savings from acquisitions as we continue to integrate those businesses. We continue to maintain a strong savings pipeline of approximately 150 million dollars.
raw material input stabilized and we return to a more normal state of production.
Turn to slides 11 and 12.
We have positioned the company with a solid liquidity position.
In the first quarter, we were able to deliver unlevered free cash flow of $75 million.
down versus the same quarter in the prior period due to lower adjusted EBITDA and some use of cash from primary working capital. Investments to support a stronger second quarter and higher steel costs in our shelter solution segment drove the investment and overall working capital.
We continue to invest in our core business through capital expenditures and organic growth initiatives. We continue to invest in growth and cost-out initiatives that we believe will deliver the highest returns for stakeholders while maintaining proper liquidity.
We remain committed to our balanced capital allocation strategy to invest in cost-out and automation initiatives, revenue growth initiatives, remain disciplined on strategic acquisition opportunities as well as paying down debt.
And now I'd like to turn the call back to Rose for concluding comments. Thanks, Jeff.
like to turn the call back to Rose for concluding comments. Thanks, Jeff. Turn to slide 13.
We have established leadership positions in our chosen segments, shelter, aperture, and surface solutions.
large operational scale, breadth and depth of channel partnerships, and strong product and brand portfolio enable us to create superior and differentiated value with our customers in our chosen spaces.
We are advancing our capabilities in cornerstone building brand's business system, CBS , which will enable us to serve our customers more effectively with strong service and quality levels.
while creating a safe and inclusive work environment for our employees. We're investing for our future with priority toward organic growth while cultivating a strong pipeline of inorganic opportunities.
For example, we continue to invest in manufacturing automation to make our plants more efficient and produce higher quality products.
market share. We're making solid progress towards strengthening our cost position, growing our pipeline of businesses, and becoming the partner of choice for our customers and remaining a disciplined capital allocator for our shareholders. Operator, we would now like to open up the line for questions.
Thank you. And as a reminder, if you would like to ask a question, please press star then one on your telephone keypad.
First question is from Terence Balkaren with Diameter. Your line is open. Hey guys, really nice to talk to you again. Thanks for taking my questions.
So just a couple from me on the wind in the windows segment I guess have you fully realized all the glass cost increases? Just based on how your contracts are set up as we think about the flow through.
Yeah, indeed we are seeing some escalation of glass prices for our aperture and it's in the cost that we're realizing at the moment, but on a four-year basis, we are seeing the increase that we estimated.
Okay, and then in the siding business, I think you said that the margins returned to high teens in March. I guess one is that, did I hear that correctly? Two, just curious like how low the margins got then in January and February because obviously average was much better.
And then does that imply that the D stock is over for the second quarter? So The high teens margin that we realized in the first quarter was specifically to for our vinyl fighting segment within our shelf Surface solutions on that reporting cycling has number of other product platforms as well that experience
as well as matching the cost of our inventory with the product that we produce, we are realizing the margin expansion that we have shared.
expect to continue to increase that trajectory. And indeed, in the last quarter, last quarter last year, as well as early part of this year, we saw significant margin compression in that particular final segment.
Got it. But so does it, I guess in terms of sort of a de-stocking that we had seen in vinyl sightings at least as a category, is that sort of behind us?
For the most part, the de-stocking in the channels for the vinyl segment is complete a complete post for their assessments, length stFA.
And then in the shelter segment, so can you give us a sense of what the book to bill ratio looks like and just how the backlogs are trending and maybe a sense of what the mix of projects look like? Thank you.
I'll give you a sense of that. Within our shelters business, keep in mind there's really three separate businesses. We've got the pre-engineered metal buildings business, which is a long-cycle business. Then you've got the components and the metal residential roofing business that are much more short-cycle businesses.
For us, long cycle business means more like six months, and the short cycle businesses could be anywhere between a week or two weeks to a couple of months. And so it really depends on the mix that's coming in. We've experienced a couple of things as we kind of came into the year in particular. Throughout 2022, the metal residential roofing business looked very similar.
2022 and as they came into 2023, we are starting to see a little bit of pullback in particular on the larger projects inside a pre-engineered building. So the booking rates are down inside that part of the business. A lot of it could just be timing and weather related and seasonality, but it's also we think to come.
segment traditionally follows residential or lags residential between 12 and 18 months.
And so as we think about the downturn in the residential businesses starting really in 2022, the beginning of 2022, the mid January and kind of June of 2022, we did expect the shelter's business would start to see some of the impact of the commercial application that lives inside the residential space.
inside of 2023. So early days on that, it's a little bit up and down depending on the week or the month that you're looking at bookings. It's not a consistent flow one direction or the other, but we are seeing some softness inside the building space.
Okay, that's helpful. And then just last for me on the networking capital.
It looked like accrued expenses were down pretty sharply in the quarter. Just curious what drove that and if part of it is cash taxes would just love some help sort of understanding what we should model for cash taxes going forward. Yeah it's a good question. So keep in mind a lot of the short-term incentive pay gets paid out inside the first quarter of 2023.
In addition to that, we also had some of the take private expenses that were paid out. So that's the main driver of the accrued liabilities inside of the first quarter came from the short term and also that take private payments that went out. As we think about cash tax for the year, let me get some notes here real quick.
We estimate that probably the 28% rate is the right estimate for the company. The 21% typically plus 5% on state taxes is how we model things. We had a little bit of loss of deferred tax.
A lot of abilities out there to push our state tax a little bit higher than 5%. And that's why we say 28%. Probably the right way.
Thanks a lot.
The next question is from Al Nicholson with McCabe Shields. Your line is open.
The next question is from Paul Nicholson with McKay Shields. Your line is open. Hi. Thanks for taking my question.
I was just just curious about
the kind of margin trajectory and the cost savings plans that you guys are implementing. You know, what do you see, because I do see some Windows companies out there that have margins still in the high teens or in the low 20s even, what...
What do you think, I realize that may be a stretch for this company, but what is your kind of ultimate goal? And you know, do you think that kind of
closing down different product lines or shifting up your product mix, is that going to be part of the equation to kind of improving the margins over time?
Yeah, our Aperture business, our Windows business, which is the largest business unit in our portfolio, has the greatest amount of up-site opportunity in terms of margin expansion. As you probably realize, it's a business that has come together with a number of different acquisitions, and we have.
a lot of upside opportunities as we continue to harmonize and introduce efficiencies, both in our factories as well as how we conduct our business. We have been running the business roundly around 12% margin, and right now in the current quarter because of the volume decline.
and the headwinds we've seen a little bit of compression. But as we introduce our production system and as those ways of working take hold in our factories, as we continue to invest in our workforce and retention and the acquiring of more skilled labor force is improving.
Certainly, over time, we expect that we have several basis points of improvement. Let's say, roundly in the high teens is kind of the objective that we have in mind that we will build over time to realize the margin for this difference.
Now I'll add a couple of comments on top of that as well just looking at it by segment the the shelters organization of the shelter segment typically Ran around 12 percent margins 11 12 percent margins. If you look at 22 in particular we finished inside of the
17% range and we finished the quarter quite strong as well inside the first quarter. As we mentioned on previous calls, we don't anticipate that to sustain. We think that the mid-teens is probably appropriate for the margins within that shelter space. Now, nice improvement, right? To think about going from 11-12% margins historically.
In our surface solution business, that business has run a long time in the range of 19 to kind of 23 percent. And we think that business kind of maintains and stays at that level. Right now we've been running, as we mentioned, inside the months of April and May kind of in that high 19, low 20s.
And so we think that business kind of maintains. There's probably some operational efficiencies we gain through automation that might change those slightly, but that business is gonna primarily stay where it is today. And then as Rose mentioned, the biggest opportunity is inside of Aperture's as we continue to take the efficiencies through the cornerstone production system. So...
We see it, you know, one of the things as we look across the businesses, the Aperture's solution segment is really where the biggest opportunity for us to make margin expansion and all of the tools and the efforts that are in place or being put in place are in motion at this point. Thanks very much.
Great, and then just one last quick one for me. I'm curious about the competitive
the kind of competitive dynamics. I mean you can talk broadly you don't have to go
segment by segment, but just do you feel that you know competitors with respect to pricing are acting rationally? Are some competitors, you know, cutting prices significantly as the market gets more challenging or how would you characterize the environment? Thanks. I think broadly all
Like us, our competitors are experiencing the kind of more sticky inflationary factors, one might say, whether it's labor or raw material, etc., because we as manufacturers are not experiencing any sort of significant inflation. The cost structure that we have to make the products in general, I think, are...
are what it is, definitely relative to history at a higher cost level. On the demand side, certainly as we're all experiencing the downturn in both new construction and remodeling on the residential side, quite dynamic because of...
more recent due to very few existing homes being available for sale. The construction is realizing a little bit more of a positive outlook that we've been reading about and being discussed in the marketplace. Getting the down market certainly in select projects and select customer opportunities.
we are feeling some level of cost down pressures. But I think in general, all the different suppliers are managing through that, and it's part of our job to make sure that we're receiving fair value for the solutions that we're providing. So I would say it varies somewhat by region, and also certainly by channel and certain projects.
in general the inflationary factors that everyone's realizing seems to be there as part of how we're conducting business today.
Thanks very much. That's all for me.
The next question is from Nicholas Paschalides with LCM Asset Management. Your line is open.
I appreciate you guys holding the call and taking the questions. Let's just start on the service solutions business.
Just making sure I heard that right. You're running at 19 to 20% even margins in April .
and just trying to understand what drove the improvement again. Yes, so as Rose mentioned, within our surface solution segment is our US siding business, right? And that's the business that traditionally runs that 19 to 24 percent EBITDA margin rate. There's also our stone business.
that's in that segment as well. But the comments specifically around the US siding business that was running in the high single digits to low double digits, kind of 10, 11% margins through the fourth quarter and into the first couple months the first quarter have returned.
back to their historical rates, which is that 19 to 24 percent. The reason behind that was high priced vinyl resin.
So we got Resin that kind of came in. We buy this by the train load, basically, and so we had too much inventory as Resin went the other direction and our negotiations were favorable. We ended up with high-cost inventory on our balance sheet. So that worked its way through the P&L in the fourth quarter and, in particular, the first couple months of the first quarter.
Yeah, I don't know if I'd think about them as combined. I think about them separately, right? So the surface solution segment getting back to more normal state of margins and the shelters business returning to kind of that mid-teens, kind of that 15% that ran.
at 17% last year and historically around at 12. We think that's going to get back to the 15. But it depends, right? There's a lot happening inside that space with volumes in particular on that light commercial business in our shelter segment that we're going to have to continue to watch throughout the year.
So far this year it's been performing nicely, but we anticipate, as we mentioned, it's going to lag those residential markets. And think about fire stations and libraries and Costco's, right? Those are the things that are end applications for that business. So as that residential moved into the suburbs, the
in 2020 and 2021, it took some time for that commercial business to catch up. And so as things are slowing down in the residential space, we would expect that the commercial business will also lag that by that 12 to 18 months. And so right now it's more of an anticipated decrease than what we're actually filling in the first quarter. regulators are able to take 10 minutes to couldn't spend. And then that very next quarter will return and drive a vehicle, Sold sex addiction,
Okay, great. Thank you for the color there. And then, if we could just talk about Q2 and then the full year, would you be able to quantify what you expect volumes to be in Q2 and for the full year and just the cadence of the overall margins for the business?
on Q2 for the full year. That'd be also helpful. Yeah, I mean, we can hear some comments on how we're seeing on a more qualitative basis. Certainly, as we've shared in the first quarter, we've realized all the headwinds and the...
certainly new construction headwinds that we're all experiencing. It depends on the day as all the different factors are coming into play every day. Our current view is that certainly we'll see some seasonality. The second and third quarter are the higher seasons, more activity.
And so on a sequential basis, we think there will be more activity, certainly in the construction, but hopefully more doing remodeling as well.
If we look at the total year first half versus second half.
If anybody's crystal ball, but right now we're running our business and have a view that it's not going to be significantly different in terms of end demand. And so we're being judicious in conserving our costs and putting all the appropriate things in place as the headwinds continue. So that's how we're seeing the year, which is, I would admit, somewhat different when we were finishing last year and as we were putting it.
are
Our two segments that primarily service the residential space, the shelters, excuse me, the surface solutions and the aperture solutions, mix on R&R and new construction are a little bit different. So inside of our surface solutions business, it's about 60% RMR and 40% new home construction.
And then inside of the Aperture's solution, it's 60% new home construction and 40% RMR. And so that does cause some change with just what we're hearing. There's a lot of speculation right now that the decline for 2023 for new home construction is improving. It's still a decrease, but it's improving.
And we are seeing some of that. So within our surface solutions segment is our manufactured stone business, which we get a nice feel for what's coming at us through the large new home construction builders. And we have seen the order rate pick up quite a bit inside that space.
for us and then turn into revenue.
and then turn into revenue.
Okay, thank you. Thanks for the detail there. And just lastly, do you expect margins to stay above 10% for the full year still, or do you expect it to be lower now that you're seeing some weakness in the second half of the year?
Qualitatively, again, because of the higher season in the second and third quarter, we expect as we manage prudently that there will be improved margins that we'll realize. And then classically, the last quarter and the winter season.
we're dealing with higher fixed costs relative to the volume that we will see at that point in time. Okay, thank you. That's all for me. The next question is from Andrew Casella with Deutsche Bank. Your line is open.
Hey guys, thanks for taking the question. I guess, can you talk us through a bit on how you're thinking about liquidity? So you guys ended the quarter about 1.4 billion. Obviously, it seems like a very high number, more than you need to operate. So just curious if you have an update on just how you're thinking about, you know, capital allocation. I know you bought some bonds back in the first quarter. You're just curious if that's still a priority.
And then as far as, you know, I know we talked previously about Acetel proceeds and how you were thinking about utilizing those if you have an update for us. Yeah, let me, so the first quarter we did end our liquidity at 1.4 billion dollars. I'll give you the breakdown just so you understand it. 379 million dollars that came from cash on the balance sheet at the end of the quarter.
There is roughly 1.1 billion dollars sitting inside the the ABL Facility that's out there. We've also got Some LC letters of credit that offset that which basically makes that of just just at about a billion dollars And so that's how the liquidity gets formed
We are in a good position. We'll continue to be conservative when we think about cash flow management through uncertain times to make sure that we are investing in the company. We don't want to shortchange the investments around cost takeout and growth initiatives and prepare ourselves for the recovery.
So one of the things that's important to us is we not only manage through the downturn, but we manage for the recovery. When it does come back, we can service our customers. We can make sure that we can hit the volume projections as they come. And as we start to hear some of the positive momentum inside the new home construction space, we want to be prepared for that....specifically to bonds...
We've been opportunistic. We had on the back of our mind, there's the asset sell sweep from the divestitures that we made. And so as we thought about paying back debt to the bank group, we wanted to make sure that if there was an opportunity for us to be opportunistic we could pay back some of that debt at a discounted rate we did.
It feels like that might be slipping away as the bonds prices have been increasing over the last couple of months, but we'll continue to always look at that and make decisions on a case-by-case basis that's out there. But right now as we look at our capital spending and as we look at the cash flow forecast for the year.
We're not anticipating a big or any at this point asset self-sweep cash proceeds to go back to pay down debt. So based on the forecast, that's kind of the projection that we have for liquidity. We'll continue to maintain strong liquidity as we go forward. Now, we'll always look at opportunistic acquisitions that come around. You know, right now our focus has been on bolt-on type acquisitions that are strategic in nature.
that allow us to either increase geographical presence or strategic capabilities within our space. And it wouldn't rule out, you know, game-changing type of acquisitions, but the focus right now has been on more of those bolt-on type acquisitions.
Got it. And just to confirm, so the takeaway is the assets held proceeds, you do not expect there to be a bank debt pay down with those just to confirm.
At this point, based on our projected EBITDA that we have, and there's still a lot of two more quarters to go, two and a half quarters to go before we can really put a nail in that. Based on the projections that we have in front of us, we are not anticipating an asset sweep at the end of the year. Okay, got it. That's helpful. I wanted to go back to your volume comment. It sounded like to me you were...
I guess in line with the comments you had made, does that mean you're anticipating mid-teens declines in the second half, or that's gonna look just more flattish? Because I know the comps were a little bit easier. Yeah, what we're seeing in terms of, it varies. So as Jeff was talking about, we are seeing...
For example, noticeable uptick in the incoming in our stone business, as one example. Some of the other segments of our businesses, we continue to see a comparable level of headwinds, you know, anywhere from, depending on the segment, let's say, high single digits down to...
20, low 20-ish down in terms of volume that we're experiencing. Again, we're experiencing, as we go into the spring months here, although at an absolute basis lower levels, we do anticipate that it will be somewhat better as people are building more and...
doing more to their homes and the light commercial construction. But our current anticipation is that that little bit of uptick sequentially that we'll see in the second quarter relative first quarter will remain at that level in the third quarter and then come back on the first half to second half basis.
we are managing our business that it is kind of an overall flat-fiche type of a profile. Okay, got it. And then the final question for me, thanks again. Just wanted to go through the Cash Flow Walk for the year. If you could just update us on everything about CapEx. I think you'd given us the cash tax rate.
Previously, I think you had said there would be an opportunity working capital. So if you could just give us some of those bookends, that'd be helpful for the model. Yeah, absolutely. So the major drivers as we think about 2023, CapEx, our anticipation right now is about $140 million worth of care.
number as well. As we think about the cash position, cash taxes, we look at the full year and we look at some of the
Benefits that are in there we expected to be about 20 million dollar use of cash.
So not a high cash tax expense coming out this year. And then cash interest expense is about just under $300 million.
So we anticipate a benefit of about $50 to $100 million worth of primary working capital and so specifically accounts receivables, accounts payables, and inventories. And as we think about
Last year we also had a nice benefit inside of 2022 over 2021. So continued benefit inside of the working capital for the year. A lot of it's going to depend on the volumes, again, and in particular steel costs. Our shelters business, if you think the first quarter We're going to sell secretary funds. We're not going to make any Success any longer than our condition. We're early on We're not going to make any Success any longer than our condition. We're not going
we realized deflation from steel cost on the P&L, but if you look at the steel index, it was going up. In fact, it almost doubled in the first quarter from December till the end of March. And so it does have, because of the long cycle, the six-month cycle on that business, it does have a use of steel.
of cash in particular as we're seeing inflation. And so it does have some timing in fact. That's why that range of kind of 50 to 100 makes sense in our mind.
Great, thanks so much. I'll get back in the queue. The next question is from Richard Gus with PGIM. Your line is open.
Hey, thanks for taking my questions. So just first for me if we can step back into the shelter solutions business just from a margin standpoint you kind of talked about what you're seeing in terms of steel.
You know, how should we expect the normalization of margin into the mid teens to progress there as you think about the remainder of 2023 and a look into 2024, you know, what needs to happen here? How much if your prices come down relative to lower steel prices and then how much of that normalization is going to be driven, you know based upon volume.
So, as the strong margins that we realized in the first quarter of 20% plus, as we said, is not a sustainable level.
as we put in strong pricing management capabilities as a function of the cycle. So we have short cycle business, mid long cycle businesses. So the way we go about adjusting price relative to steel and our ability to put that out in the marketplace and react quickly has improved significantly because of the tools and processes.
In addition, relative to history, we worked on, of course, optimizing our cost structure of the business and the efficiencies that we realized in our factories and we continue to do so. Having said all that, certainly our ability to expand the spread over steel price, we
is greater when the steel price is in an upward trajectory because everyone is seeing that the indexes are being released, the spot price market, et cetera. So we are able to stay ahead of the curve. It compresses when the steel price is coming down and as you might imagine, because of the different cycles of the business.
the amount of compression and the speed of compression is different for the different lead time segments that we have. So as we're monitoring the dynamics of the steel market, we anticipate and we're starting to see it already that steel prices have reached its peak and it's starting to decline. And so because of that, we're going to see it decline.
Even with the lower cost structure, we anticipate that the margin that we realized in the first quarter will not be possible because the compression will take place and we will have to make adjustments to prices as it comes down. We anticipate more normal levels for the businesses mid-teens level.
And so we're enjoying a high level right now, so we see our business normalizing towards that 18th level as we progress throughout the year and as the steel prices continue to reduce as we see the world today.
And Richard, just a couple add-on comments as well. Still, volatility, still cost volatility isn't new to the company, right? This has been going on now for multiple years, really started in the site of 2018. What we thought at that time was volatile turned out to be a small.
a small bump compared to what we really saw inside of 2021, 2022, and now 2023. But one thing that's really important is our ability to manage through the cycle has been proven now for multiple years. So we've been able to get price over inflation.
inside this segment by managing those, as Rose mentioned, our prices in particular and being very, very disciplined around inventory management, especially as we kind of hit those inflection points at the top and you start to see the steel costs start heading back the other direction.
which is what we're seeing right now. So it is a well-run organization. They have a lot of weekly calls and daily calls where they talk about what's going to happen in pricing. It's not something you go out with a list price a few times a year. This is actually very dynamic, where each job has been quoted based on current steel cost, etc. So that's a general definition of this solution.
But again, the takeaway for me that I'm trying to leave is we've been in a very volatile steel market now for some time and we've managed nicely through that.
Got it. And you know I guess my follow-on is just like the steel prices you know the trajectory overall I know is lower but you know you noted yourself have arisen over the course of the past quarter. Is your expectation that that normalization happens quickly like within this next quarter or is it something that gradually happens as we move through the year? I don't know. It's our comment is it's pretty dynamic steel prices one of those.
that throughout it will start happening in the second quarter and throughout the third quarter as well and we'll see what our normal line is. Richard, we don't get into a lot of detail around this but we have the short cycle business and long cycle business they do have a tendency to have some offsets.
So in an inflationary environment, our short-cycle business has a benefit, and in a deflationary environment, our short-cycle business has headwinds. And then for the long-cycle business, it's the opposite. And so if you look at it by division, which we don't show the divisions that are out there.
Understood. Okay. And then just in the Aperture business, you know, I think when you guys originally marketed this deal you were talking about something, correct me if I'm wrong, hundred million dollars worth of manufacturing inefficiency that that business had taken that you thought you were going to get back out of that business. How much of that have you gotten back to this point? Where does that stand? How much of your cost save initiatives have
apply to that business and what's the pacing in the realization of those cost saves in getting that manufacturing productivity back up.
Richard, are you specifically talking about the shelters business or overall? No, the windows business. The apertures business, yeah. So a couple things, maybe I'll start and then Rose can add some comments on as well. We have seen positive as a company, we have seen the momentum and the benefits from the Cornerstone production system show up inside of our surfaces business and our shelters business.
We've seen progress inside of our aperture business, but it hasn't been as fast as we've anticipated. And so although the momentum is heading in the right direction for us on the manufacturing inefficiencies, we still have a couple of sites that have been stubborn in our ability to change those as fast as we would like.
basically, since we marketed the deal. The good news is that those savings are still real. Those opportunities are still in front of us, and so we just have to continue to execute. A lot of change has been put in place, a lot of investment around people and resources and processes to make sure that we get after those savings.
And so we still believe in the benefits that will come from that, but we have not seen a lot of benefit hit the P&L yet from the Aperture Solutions segment.
And to add a little bit more, I mean the negative unfavorable 10 million net productivity that we realized the first quarter for Aperture Solutions. Because of the work that we're doing, we anticipate that those numbers will decrease and get us a point of net positive. This is the most labor intensive segment for us.
And so part of the delay in achieving the type of improvements that we would like is because of what we experienced in terms of employee churn and therefore then the retraining and so forth. And so as the labor force is stabilizing and as we're putting in more elements of our production system, we anticipate and what we're looking towards is net productivity gains that should be entitled to in this business unit.
Okay and what do you think the total dollar value is of the opportunity for that business? Well as I said we run this business with some improvements relative to when the business are put together. Let's say we demonstrated 12% even the margin capabilities and as we put in these improvements over time now it's a multi-year journey.
we think we should be running this business at a high teams level, let's say, roundly 17%, 18%. So it's quite a bit of spot points roundly that's in there that we're working towards achieving. Got it. And that comes out of the cost initiatives and productivity savings, not that that improvement doesn't come out of improved price cost spread, is what you're implying? Most of that improvement will come with running our factories more efficiently, and that's what we're trying to do.
achieved, but given the view of how the supply-demand and the building material industry will unfold, the opportunities gain a lot more relative to what we have. Other than small adjustments and surgical moves, we don't think there's a significant pricing lever out there in the near future. Got it. Okay, understood. And then maybe last one for me.
just in terms of that $120 million of unrealized synergies and cost saves that you guys are talking to, how much of that becomes realized in 2023?
Yeah, the way we think about that chart in particular, the way we measure our cost savings and synergy savings is they have to have begun, so it means that they've started the savings process and that they finish within 18 months. So
You know, looking at that, you would say the two thirds of it will be inside of 2023 and there could be a third of it that comes inside of 2024. Got it, understood. Thank you very much.
The next question is from Brian Derubio with Baird. Your line is open. Good morning. A few questions for you. Just outside of steel and glass, what other war materials are you experiencing inflationary pressures on lately?
Those are probably the glass is inflationary, steel was inflationary, now it's reducing.
Just about all our other raw materials are either stable and the one that we've been benefiting from in terms of different factors is our PVC resin, which is a big raw material for us and that has reduced in cost and it seems to be kind of stabilizing in that reduced state.
Not a raw material input, but our labor cost is persistent as well. And as you might recall through the pandemic and stretching into 2021 and even 2022, we had quite a labor inflationary impact for the company. We didn't slow down, we wanted to make sure we don't...
that we contribute towards maintaining a stable workforce. And so we had a nice increase for the labor workforce this year as well.
Okay what is labor as a percentage error cost of goods? About 10% roughly. Okay that's helpful with that. Then switching gears just on the competitive front you know you have some competitors that have expanded capacity you've got a weakening demand environment.
in our view, the end market in terms of whether it's new construction activity or remodeling that's driven by new homeowners buying homes and so forth. I think the current macroeconomic indicators are saying that it's not going to be as strong as we would all like. I think it's a little bit different. The current view is that on a sequential basis new construction is seeing a little bit more favorable outlook.
because the existing home sales are lower than what we anticipated. So overall for the residential home building market, I think it's a little bit up and a little bit down, and that's the consensus at the moment.
Okay, and then as you mentioned about liquidity and potential M&A, I guess where do you feel comfortable taking liquidity to if an M&A opportunity presents itself?
Well, it's always a difficult question, right? It depends. The answer is it depends on the market, it depends on where we're at in the cycle, and it depends on our outlook and the certainty around the outlook. But to give you a sense of how we look at running the company, we like to target kind of one to two times EBITDA as a whole.
a good way to think about liquidity. Now, we can certainly go closer to one when we feel good about the outlook in front of us. We like to stay closer to two as we have uncertainty in the marketplace and depending as well on kind of the acquisition itself and how strategic the acquisition is. So it really just depends.
Now, just to add on to that a little bit as well, we probably need in cash just to run the company $100 to $150 million comfortably on the balance sheet just to make sure that we've got the working capital and that we've got cash that's needed inside of different foreign countries, Canada and Mexico in particular. And so just to manage that appropriately, kind of that $100 to $150 million is a comfortable position. There's more ???-
That's helpful, thank you. And then final question for me just pertains to the synergies and cost saves. Is there a certain level of volume that you're assuming in order to achieve that? You know, put it another way, if volumes don't pick up, will those cost savings be achieved you know, probably in 25 versus 24, just trying to get a sense of the sensitivity there.
Yeah, it's a good question. The synergy projection is in line with our volume projections right now. And so as Rose mentioned, we've kind of expected that we've been experiencing kind of the mid-teens, kind of 10% to kind of high teens decrease in volume inside of our residential businesses. And so our forecast kind of reflects that, and the synergy benefits also reflect that type of volume declines.
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