Q2 2023 Cornerstone Building Brands Inc Earnings Call

making those investments now around the automation, making sure that we have good footprint, rationalization when it comes to optimizing the logistics that we have as a company, and making sure that we have a well-run facility that becomes more and more important, which is the cornerstone.

Speaker 4: Our volume decline was driven by lower market conditions across all segments in the quarter. As Rose mentioned, we continue to be disciplined on our pricing actions as we continue to see inflation in labor and some commodity costs. Overall price was able to offset inflationary input costs in the quarter. Adjusted EBITDA of $239 million was unfavorable $8 million or approximately 4% versus the prior year. The decline was mainly from a lower organic volume of $91 million and the impact from the coil coatings business divestiture of $11 million. This was partially offset by net price and mix over inflation of $56 million as well as favorable manufacturing productivity of $25 million.

Speaker 5: Good morning and welcome to the Cornerstone Building Brands Q2 2023 Lenders Call. Please note that this call is being recorded. All lines have been placed on listen-only mode at this time. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at this time, please press star followed by the number 1 on your telephone keypad.

part of the cornerstone business system, but in particular the cornerstone production system. So we're excited about the momentum that the company has. A lot of momentum as you saw inside the second quarter, in particular in Aperture's, as those manufacturing efficiencies showed up inside the P&L.

And a lot of that comes back to just the running of the businesses more efficiently, but also some of those investments that have been made in the past around the automation.

Speaker 5: Ruthie, Senior Vice President of Finance and Investor Relations. Please go ahead.

Speaker 4: 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.

Okay, just to clarify that, so on slide 10, we've got the 96 million and a half of that is

manufacturing. So that would include some benefits of automation.

Correct. That's right. In fact, the way we think about those manufacturing that productivity is taking all the efficiencies and inefficiencies, right? There's a lot of things that are happening within a manufacturing location. Some things that are going well, some things that may not be going so well, but the net benefit is, for example, on slide 8.

Speaker 4: They 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 cost savings. The risks are described in detail in the company's SEC filings.

Speaker 4: 45 million, was approximately 27% lower than the same period last year, and comprised of 10.7% lower organic volume, 9.5% impact from the coil coders divestitures.

with our Aperture Solutions segments of $15 million positive impact to our operating hearings or in this case, our adjusted EBITDA. Okay, great, thank you.

Speaker 4: The company's actual results may differ materially from the anticipated performance to results expressed or implied by these forward-looking statements.

Speaker 4: and 6.2% impact from lower price with declining raw materials and still cost.

Speaker 4: Finally, management will refer to certain non-GAAP financial measures. Specifically in this presentation, we refer to adjusted EBITDA, adjusted EBITDA margin, defined as adjusted EBITDA as percentage of net sales, pro forma net debt leverage, unlevered free cash flow, and primary working capital, which are non-GAAP financial measures. You will find a reconciliation of adjusted EBITDA and adjusted EBITDA margin non-GAAP finance.

Speaker 4: Lower volume is primarily from the long cycle pre-engineered metal building's business.

Your next question comes from Paul Nicholson with McKay Shields. Your line is open.

Speaker 4: partially offset by demand from components and our metal roofing products.

Hi, thanks for taking my question and congrats on a strong quarter. I just had one question just on your siding services business.

Speaker 4: Adjusted EBITDA was 106 million, resulting in a higher year-over-year impact of 8 million, or 8.3%. The impact of the coil coating's divestiture in the prior quarter was approximately 11 million, as well as unfavorable organic volume of 22 million.

So I see it looks to me like you're passing on some of the raw material deflation to your customers in the form of lower prices.

Speaker 4: were more than offset by effective price still spread management of $28 million to support a strong 23.8% EBITDA margin.

you know, when I look at James Hardy's results, for example, I see that they're still raising prices. Can you just talk about, you know, I know market share in that business has been challenged. Can you just talk about the competitive dynamics that you're seeing and inciting and if those...

Speaker 4: Favorable year-over-year net manufacturing productivity with efforts to automate and focus on continual improvement also contributed a positive $4 million, while tighter SG&A spending contributed $8 million.

price decreases are kind of helping you hold hold the line at all. Thanks. Yeah, in our siding business, historically, it's a vinyl siding is a highly rationalized segment. There are few major competitors at Pearson. And so

Speaker 4: Turning to slide eight.

Speaker 4: The Aperture Solutions segment first quarter net sales were approximately 17 percent lower than prior year, primarily driven by the lower volumes of 22.2 percent and small foreign exchange impact of 0.5 percent.

The normal dynamic is when the major raw material is PVC resin and when PVC resin prices increase, we're able to pass on that increase plus some to our customers and through the channel. And then when the resin price decreases, we kind of parachute down.

Speaker 4: This was partially offset by favorable price mix of 6%.

number of months, a couple quarters. And so what you're seeing is a little bit of that impact as well. You mentioned Jane's party, but where fiber cement is positioned in terms of as an exterior cladding solution versus vinyl siding is really at a different midpoint?

with fiber cement being much higher. So they would have their own dynamics in terms of their pricing actions. But for us, as we continue to make sure that we maximize the value that's recognized for our products, working with our channel partners.

Speaker 4: primarily driven by lower volumes of 14.3%, and unfavorable price mix of 5.6%. Adjusted EBITDA of $61 million was down to $18 million versus the prior year due to the softening volume impact of $20 million, as well as the slight price mix not fully offsetting inflation for an unfavorable impact of $2 million. This was partially mitigated by favorable manufacturing productivity of $3 million.

but a compression that you're seeing is really driven by the dynamics of the PVC resin of the inflationary factor. And Paul, just add a reminder, I know you're aware of it, but our surface solution segment's made up of our US siding business. It's also made up of our stone business, the manufactured stone. And then we've also got Canada, so it's not just US business.

Speaker 4: As previously noted, we did see the U.S. siding business EBITDA margins return to the high teens percent. We continue to invest in surface solution segments and have added high speed extruders into certain manufacturing locations. The result of automation is demonstrated higher product output.

Our stone business continues to have some pressure on it. And the orders and the backlogs seem to be coming up as the new home construction bill continues to move forward. But we're doing a lot of things as we think about the right manufacturing environment that we want to have for our employees and the footprint that we have as well as the pricing there. But some of the drop that you're

Speaker 4: lower labor costs supporting the favorable net manufacturing productivity experienced during the quarter.

coming also from our stone business.

our stone business.

Great, very helpful, thank you.

Your next question comes from Andrew Casella with Deutsche Bank. Your line is open.

Hey, guys, thanks for taking the follow up. I just wanted to ask real quick on the unrealized synergies of 96 million. Can you just remind us again the cadence of when you're expecting to realize though and then any one time cost to achieve and how those should be allocated across the following quarters or years? Thank you.

Speaker 4: We have positioned the company with a solid liquidity position. In the second quarter, we were able to deliver unlevered free cash flow of $151 million, down versus the same quarter in the prior year due to lower adjusted EBITDA and some use of cash for investments. Specific investments in laser and automated steel cutting to support shelter solution segments drove the investment in overall capital. We continue to invest in growth and cost-out initiatives that we believe will deliver the highest returns for stakeholders while maintaining proper liquidity.

I will take that one. It is on slide 10 if you are following on the deck itself. The way we calculate this is we look at

projects that have started.

That will finish our continued to roll through our P and L over the next 12 months or projects that have been identified. That will start within the next 6 months that will also continue to roll forward for 12 months. So there is you kind of think about that 96M dollar range. It was higher.

Speaker 4: We remain committed to our balanced capital allocation strategy to invest in cost out and automation initiatives, revenue growth initiatives, and to remain disciplined on strategic acquisition opportunity as well as pay down debt.

as we had some of the acquisitions and the synergy benefits that came in from the acquisitions. But it kind of normalizes typically around this 96 kind of $100 million range. But we would anticipate that these savings will come forth over the next 18 months, most of it probably within the next 12, and then the projects that continue to move forward between now and the end of the year.

Speaker 4: And now I'd like to turn the call back to Rose for some concluding comments.

will also kind of roll forward for 12 months. The investment is already baked into the CapEx, and in particular if there are resources on SG&A, et cetera, we've got those built into our forecast. But a lot of these, if you kind of look at the breakdown of these, for example, manufacturing improvements, which makes up 51% of the 96 million, a lot of those would be associated with CapEx, but also with just the Cornerstone production system as we get more efficient.

We're investing for our future with priority toward organic growth while cultivating a strong pipeline of inorganic opportunities. For example, we recently announced the purchase of back metal architectural. Headquartered in Saint-Hubei, Quebec, MAC Metal Services serves the North American residential and commercial markets with high-end steel siding and roofing products. The acquisition of MAC Metal Architectural extends our leading exterior portfolio with value-added, premium aesthetic design and durability solutions for our customers. MAC products have been experiencing high growth in the residential market and we have the opportunity for channel expansion through Mitten's 3000-plus account across Canada.

And as we do Kaizen events, they're not necessarily driven by investments, they're just on process improvements. And then if you look at freight and logistics, there's not a lot of investment that's required for freight and logistics. We do have a software and kind of an initiative that's going to roll out over the next couple of years that we think we can get a better control around the freight itself.

But this 23% that you're looking at here is much more around just managing that pipeline with our carriers and our internal trucks in particular to make sure you pick up those savings. And then if you look at material procurement, very little investment required for us to go after those.

Cornerstone Building Brands expects the acquisition to be accreted through margin expansion, market share growth, and manufacturing leverage. We also continue to invest in manufacturing automation to make our plants more efficient and produce higher quality products.

Lot of these are design changes or the things that we're doing within the operations in order for us to pick up those savings So again, the capex includes the investment in particular to pick up the 96 million Okay, got it. So just to make sure I understand this so every you know, the quarter is going forward

We're investing in process digitization and customer facing technology platforms.

The idea is that you're going to continuously kind of add into this bucket and then the old products will roll off and you're anticipating that this will always kind of be in the 90 to $100 million range with the expectation that at any given time a little bit more than 50% is probably a 12 month target and then the whole thing is over 18 months.

We're equipping our sales teams with processes and tools to engage more deeply with our customers and capture market share.

That's generally correct and I'd say as we do acquisitions for example of MAC we would expect that there's some synergy benefits that would come in from that acquisition that can move that range up. But as a company we continue to always identify new initiatives. It does move, sometimes it's greater so right now freight's been higher than it has been in the past. —oway hoy tus

Operator, we would now like to open up the line for questions. Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Andrew Casella with Deutsche Bank. Your line is now open. Hey, guys. Thanks for taking the questions, and really nice quarter. I guess what I wanted to dive into first is the margin performance by segment and then just thinking through, I guess, some of the commentary you've made in the past. So on the commercial business, I think you had said in the past that you expected kind of a

savings as we just make our plants more efficient.

Okay, all right, thanks again.

Your next question comes from Josh Anderson with Northwestern Mutual. Your line is open. Your line is open.

Hi, thanks for the time. Quick one to start, given your comments on the differing outlook for remodel versus new construction, wondering if you could provide a quick refresher for where Arner versus new mix, satin aperture and surfaces for the quarter.

wanted to address the window segment where your margins, I think, hit around 15%. I think in the past you've said those numbers are more normalized in the low teens, but just curious if this feels more like a structural shift higher in margin profile or if this was just kind of a one-off or due to some opportunistic price cost or pricing. Yeah, thanks for the question, Sandra. I'll share some comments and then ask Jeff.

Yeah, so our Aperture Solutions is about 70% new construction and 30% remodel. Our Surface Solutions on the whole is about 60% remodel and 40% new construction. Jeff mentioned some of the segments...

do with our improved capabilities in how we dynamically manage pricing in the marketplace. What weíre experiencing is continued favorable spread relative to the field price and the price captured in our inventory position. Also, as weíve shared in the past, our commercial business or shelter business lags the residential down to about 12 to 18 months.

would quantify. And so the implication of that is certainly in our aperture business, for example, we are seeing, again, as we mentioned, stronger demand profiles coming from new construction.

And the only thing I'll add to that is if you break down our surfaces business a little further into our siding, it's much more focused around. So, US siding and as I mentioned before, we got stone inside of that segment as well. When you look at US siding, it's probably more closer to that 70-30 mix on.

business that the volumes will start to decrease. And so our anticipation is that as we go towards the end of the year and go into early part of next year, we will start seeing more of the reduction in the price cost spread.

On remodel versus new construction. Okay, thank you and then.

Another question on the commercial margin, trying to square together the outlook for a weaker environment, given the lag from residue construction with what sounds like more of a normalization towards the mid-teen margins.

And the more normalized levels that we will reach over some time period, we anticipate is in the mid-teens range. On the windows side, I think what we're seeing is certainly one, even in a very big down market we have been able to hold our price.

you view this more as a normalization of demand in the commercial business or do you feel comfortable that even in a pretty weak commercial demand environment you'd be able to sustain kind of mid-teens margins pretty comfortably.

And in addition, what our bridges show is that we are able to now see traction in our operational improvements. And so we realize the benefits of that in the second quarter. And so we anticipate that we will continue to improve our operational cost position, and that should help us continue our journey towards what we anticipate over the longer term period.

Yeah, I mean.

normalization in the sense that we live in a cyclical space in general. So as we're just like we've been experiencing on the residential side, the down cycle, we expect a volume and demand wise, particularly in our engineered metal buildings segment.

mid to high team type of margin levels that we're aiming for the aperture business. I'll just add a couple of comments on that as well, Andrew. So going back in history, recall the commercial business kind of ran at that 10 to 12 percent margin rate. And we talked about real structural changes that have been made within our commercial segment.

that we will have those levels of volume gaps relative to where we would like it to be. And so in that context, with the new capabilities that we've installed in our pricing management, and also leaning out this structure for more streamlined operation of our business in general.

our shelter segment that allows us to have more sustained margins. So it's nice to see the improvements that were made, the restructurings that were made to solidify some of those margins. As Rose said, we don't anticipate those will stay up in those levels, but a significant change from the..

In the lower volume scenarios, we anticipate that we would normalize to the mid-teens levels, even in that more challenging context.

the 10 to 12% up into that mid-teens that Rose talked about. And then on the windows side, agree as Rose said on the pricing actions that were taking place in the cornerstone production system that has some real momentum around it. And as we think through right now, the margins being where they're at, the mix is changing.

Okay, that's helpful. And then lastly, within commercial, you mentioned a couple times the kind of softness you're seeing on the engineered side would be helpful if, to the extent you have visibility, could expand a bit on what types of projects maybe are holding up better, which ones are starting to see the weakness.

Yeah, within our building segment, we segment the business further. We have very high complexity engineer metal buildings that have long lead times due to our engineering and design. And then on the other screen, what we call much simpler buildings that have shorter cycles and are simpler to construct and fewer parts and pieces. That's where, like I said, we are thunderous at times, so that's a great insight. It's a good insight to make on what works at risk and what's going on all the time. Then the GM has all these solutions.

space is still uncertain. Right? There's a lot of a lot of things that are moving forward in some regions and other regions, they seem to be slowing down. And that pandemic certainly caused some some timing dynamics that are taking place. So as we work through the market itself, it does feel like right now that the momentum is towards

The new construction build, which does have some lower margins and so we're anticipating that. You know, that will change our mix profile some as we move into the next couple quarters.

tends to be bigger capex, more financing perhaps, and larger scale construction. And so I think it's reflective of the more challenging general macroeconomic environments and...

Okay, that's really helpful. And then on the last call, I think you guys had said you were planning for kind of the second half to be essentially flat to the first half as far as demand is concerned. Just curious if you could update us on your thinking as it stands today. I know the 10-year and mortgage rates are kind of all over the place, but if you could kind of help us think through how you're into

large outlays of monies that people are more cautious with, given the ongoing debate around recession or not, and financing rates, etc. So I think it's logical that we are seeing the challenge demand in that particular higher end of our engineer metal building segment.

participating either, you know, revenue or EVA.CADENCE into the second half, that'd be helpful. Yeah, I think there's two things that will take place here. Certainly we're seeing more signs of the, as Jeff was just saying, in terms of new construction having a little bit firmer demand profile.

Does that complex segment, does that skew at all towards, you know, whether it's industrial or any other segment of real estate?

We do pre-engineered metal rings, for example, like large manufacturing for complex storage systems. So it's less so particular verticals, but more in the type of construction that is needed in a given vertical.

We also saw most recently in the last couple of weeks in terms of the record levels of bank loan rates. So although we are seeing the more positive signs, it's unclear in terms of the rate at which the housing new construction will improve. Certainly as we realize, there is pent-up demand.

All right, thank you. There are no further questions at this time. With that, I will now turn your call back over to Jason Uthi for closing remarks.

reconstruction having learned from our base. Also already shared the remodeling segment is a little bit less certain and we are seeing kind of

Thank you everyone for attending our second quarter call. Thank you as well for your continued interest and have a good day

This will conclude today's conference call. You may now disconnect.

similar level of inactivity, if you will, that we saw in the first half. So I think combination of those two elements will see market conditions that are about the same, maybe slightly improved as we continue construction. And then of course we also have the seasonality in the winter months as we go into the last quarter.

Please wait, the conference will begin shortly.

I'll just add a couple more comments on that as well. So keep in mind, second half of 2022 is when we started to feel the decline inside of the order rates, in particular in our residential business, our surfaces and our aperture segments. And so the comparisons get easier as we come into the back half on a year-over-year basis.

And on the opposite side, and this is why we see kind of a little bit of a flattening inside of the first half versus the second half. So momentum inside the residential businesses as we kind of come into the second half with the new construction. And then on the shelter side we had record comps last year, record performance.

inside of our shelters organization. So those comparisons become much more difficult as we come into the second half. So as those two balance each other off, it does have an effect that gives us a more neutral impact from a volume perspective as a company, but very different bisectment.

Okay, got it. And then I'm putting a question for me, as it relates to the acquisition you mentioned, Mac Medal, is it possible to share what you spent and how to think about either the revenue or multiple associated with that? And then the second part of the question would be, just as you think again, you guys have a ton of liquidity. I think you bought back about 25 million of bonds.

I will again, you're trying to toggle between the two and I guess what the priorities are now with the bonds trading a bit better relative to where they were a few months or four years ago.

Yeah, I'll comment on the Mac side and then Jeff Gold, take us through kind of our tap allocation at first. But yeah, we're very excited about the Magical Edition. It's a very interesting business with the innovative product portfolio. We have not publicly disclosed the purchase price.

increasing presence that we will together enable in Canada, but also offer committees in TNUS. What we can share is that their sales in Canadian dollars for the training 12 months was around approximately 50 million Canadian dollars. And just on the cash flow side. So as we talked about on the last call.

We're not anticipating an assets suite payback on debt because of some of the things that we've done. And just as a reminder as we go back there, we did purchase UCC back in 2021, December of 2021. We also purchased Cascade in August of 2021.

And then we have the Mac purchase now that's also coming to the families, Roce, they were very excited about that. So we kind of combine those with the CAPEX investments that we've made and anticipate that we're going to make. Right now we feel like the investments that were sold are being replenished with some of the investments that we're making back into the business.

Just specifically around some of the cash flows, as we think about 2023, the CAP-X we still think will be in line around that two and a half percent of revenue. We've talked about that in the past. Our cash taxes are a little bit interesting just because of the dynamics between some of the divestitures and acts.

compared to prior years, they had some of the dispositions of assets inside those. So not a big outflow of cash tax, but somewhere between $25 and maybe $100 million worth of cash tax for the year. And then if we think about the MAC acquisition, as Rose mentioned, we didn't disclose publicly the purchase price.

But that should then get us to a nice position as a company that could continue to maintain a lot of liquidity that we still have. So we finished out the quarter with $1.4 billion worth of liquidity as a company and the MAC acquisition is roasted in line with the other.

companies that we purchased for the size, which is very much just a bolt-on acquisition for us. So it puts us nicely in a position to continue to feel good about our liquidity position, and the ability for us to continue to invest appropriately on CapEx and other things within the organization to move things forward.

All right, perfect. Thanks so much. I'll get back in the queue. Your next question comes from Joshua Gonzalez with Apollo. Your line is open.

Hi, great quarter.

Some general questions, I've heard from other companies that the second half order cadence in Windows seems to be a little bit better than they would have expected. I guess any comments on kind of third quarter and what you guys are seeing going forward.

Yeah, I think it's a little bit of what we alluded to before. We are seeing reasonable level of higher demand in our new construction driven market opportunities. We are also seeing some variation across the different regions. For sure.

East has continued to be a stronger market and some parts of West as well. So seek on a sequential basis. Yes, the new construction is stronger and we are also seeing bit higher bookings and demands and the rest of it is continues to be moderated.

Okay. And then just kind of you guys kind of talked about.

at the end of the year on a price-cost basis and then –

showing up more in the beginning of next year, but you're also seeing pretty good trends in the new Regis. Should, and just broad strokes, should we kind of expect these to, I guess the new Regis to kind of more than offset some of the commercial to clients next year, or how do you guys kind of put some takes of how to think about?

What you guys are seeing for next year. Yeah, we anticipate that in our shelter business, the margin compression, the price cost spread reduction, compression because of that spread reduction, as well as because of the lag in the commercial segments.

the volume decline that will come along with it. We will anticipate that. We will see signs of that in the fourth quarter and as we go into next year and for some duration in the next year. How much will that be and is that, how does it compare to the improvement that we anticipate in the next year?

that Jeff used kind of on a neutral basis given the portfolio that we have. I think it is one of the attributes of our business that we have a portfolio business that are more give us the ability to have more consistent overall company performance because of the cycle differences that exist in our portfolio. So we would anticipate.

It's good to see activity on the commercial side. Are you guys seeing a lot of opportunities to buy things in commercial or are there any other areas that might be more active going forward?

We have a pretty clear road map for where we see opportunities for tuck in sort of M&As for all of our lines of businesses in the commercial side and the shelter side because of the growth areas in our.

metal components business and our metal roofing business, MAC happens to be just a right one where we cultivated the relationship and we were able to consummate a very nice coming together, so to speak. But in all of our segments, we continue to build our pipeline.

in the process of replenishing along with those channel partners. Also lag to the US markets. So we did see an inventory build through our channel partners as we came into 2022 that's worked its way through the channels. Canada has a little bit more of that still inside their channel that they're gonna work through over the next six or seven months. We anticipate that they'll work through that. And then inside of our shelters organization, we have a very different business, right? Components, we've got metal residential roofing and we've got the buildings piece. And so each one of those had different characteristics that we're kind of working through independently, but nothing that surprises us, right? So the metal residential roofing business is tracking very close to our residential business. We actually have a nice backlog sitting inside of our components business right now. And then in our buildings business, which is the more high complexity, highly engineered business, we are starting to see some of that decline.

where they had those record comps back in 2022. And so as we kind of work through those record comps and those comparisons, combined with that slowdown that Rose just mentioned on the lag, in particular between the residential business and the commercial business, which is about a 12 month lag. We've seen that over multiple cycles, right? So the residential business has, they lead the commercial business by about that 12 month lag. And so the good news is, as we start to see some of that new construction come back.