Q4 2023 Cornerstone Building Brands Inc Earnings Call
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the cornerstone building brands fourth quarter 2023 lenders call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to be.
Ask a question during this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star One again I would now like to turn the conference over to motion Ziad, Vice President Finance and Investor Relations. Please go ahead.
Thank you Regina good morning, and thank you for investing in cornerstone building brands are prepared remarks include comments from Rose Lee President and Chief Executive Officer, and Jeffrey Li 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 cost savings.
The risks are described in detail in the company's SEC filings the.
The company's actual results may differ materially from the anticipated performance or results expressed or implied by these forward looking statements.
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 a percentage of net sales.
So for my 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 financial measures and other related information in the SEC filings.
Our non-GAAP financial measures are not intended to replace the presentation of the comparable measures under U S. GAAP.
Please note, we will be referencing our investor presentation on the investor side 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 rose.
Thank you Moshe.
Good morning, everyone and thank you for joining us today.
Starting on slide four.
Our 2023 financial results demonstrated our ability to effectively manage through dynamic market conditions across all business segments.
Im, especially proud of our team for further strengthening our company during this downturn.
Through steadfast adherence to our operations and sales excellence initiative.
Embodied in our cornerstone building brands business system CBS.
We've achieved a significant net cost takeout milestones realizing $86 million.
On the or improvement.
This achievement is a testament to our focused efforts in improving our plant safety quality delivery and productivity as well as supply chain efficiencies, while executing strong pricing discipline.
Last year, we focused on advancing our company by Systematizing, how do we make our product and serve our customers in each of our reporting segments.
While continuing to advance the adoption of our cornerstone production system Cps.
<unk>, which is rooted in lean principles.
Also made key investments in automation and digital transformation that are essential to our company's future growth.
Despite a challenging macroeconomic environment across most of our markets.
We delivered solid results.
Net sales were $5 4 billion.
A 16, 6% decrease versus prior year, and adjusted EBITDA was $745 million, a six 8% decrease versus prior year.
Adjusted EBITDA margin expanded by 146 basis points, driven by cost takeout initiatives.
Earlier.
This margin expansion reflects our progress in improving our operations as well as quality and delivery capabilities in servicing our customers.
Turning to slide five.
Our fourth quarter results were in line with our expectations and a market environment that remains challenged.
Net sales decreased 13, 5% versus prior year, while adjusted EBITDA of $149 million was down 13, 2% versus prior year, mainly on lower volume.
Jeff will cover the segment results, but overall adjusted EBIT margin of 11, 7% was flat versus prior year.
We manage our costs as demand remains softer than prior year and continued to lean into our customer centric culture by working closely with our customers to ensure they see us as their partner of choice for creating mutual value.
Turning to slide six.
First we've taken focused actions to advance our strategy, ensuring we target the most promising opportunities for accelerated growth.
At the forefront of our priorities is the cornerstone production system as the foundation for realizing operational excellence, along with our unwavering commitment to sales excellence.
Furthermore, we are systematically building out an extensive innovation pipeline.
This encompasses new product strategic partnerships and advanced technologies, all designed to keep us at the forefront of our industry.
We've made significant investments in our factories upgrading the work environment for our operational colleagues.
Our automation investments create a safer work environment and enables our empowered workforce to produce higher quality products more efficiently.
Such initiatives form the pillars of our growth strategy and reflect our proactive stance in a dynamic market landscape.
Demand for aperture solutions has remained soft while the demand curve for surface solutions is beginning to flatten out.
Despite these market pressures, we successfully managed to offset inflation through strategic pricing actions.
Our commitment to sales excellence continues to be a pivotal part of our strategy, which will allow us to gain organic share in a dynamic market environment.
By focusing on deepening customer relationships and sales excellence processes were.
Positioning ourselves to capture increased market share as demand stabilizes.
Turning to our surface solutions segment, we're not merely content with desktop presence and vinyl siding.
We're expanding our product portfolio and investing in new expertise to become a comprehensive portfolio of solutions provider.
Execution of this strategy will enable us to become a one stop solutions provider.
Our suffice offerings for our customers.
Turning to our shelter solutions segment, we've been effectively managing the steel spread which is crucial for maintaining our profit profitability in volatile markets.
By closely monitoring and adjusting to steel price fluctuations, we ensure that our margins remain healthy.
But we've also advanced our one shelter our strategy. This holistic approach is key to streamlining our operations and enhancing customer service by providing integrated solutions under one umbrella.
In terms of demand, we're seeing a mixed landscape, while there was a softer demand for our pre engineered metal buildings. This has been partially offset by increased demand for our components and metal roofing. These.
These products have shown resilience, indicating the strength and adaptability of our diversified portfolio now.
Now I would like to turn the call over to Jeff.
Thank you rose starting on slide seven.
Rose just shared how we performed versus the prior year I'd like to provide a little more color on our earnings.
Despite sales being down approximately 14% versus the previous year, our pricing discipline and supply chain efficiency and manufacturing productivity helped to offset lower volumes and inflationary impacts.
Adjusted EBITDA of $149 million was down just over 13% versus prior year.
This decrease was primarily driven by lower volume of $68 million and higher SG&A of $12 million, partially offset by net price over inflation of $21 million and net manufacturing productivity of $35 million.
Yeah.
Turning to slide eight.
Let's take let's take a closer look at the performance in each of our business segments, starting with shelter solutions net sales were down 22% in the fourth quarter settling at $381 million versus the same period last year.
Driven by 17, 4%.
Excuse me lower volume and four 7% lower price because of lower steel cost.
The decrease in volume was largely attributed to our long cycle pre engineered metal buildings business.
That was partially offset by stronger demand for components as well as our metal roofing product offering.
As a reminder, demand in our shelters business typically lags our residential markets by about 12 to 18 months and we expect it to be soft in the bag, we expected it to be soft in the back half of 2023.
Adjusted EBITDA of $54 million was unfavorable by $53 million or about 49% versus prior year.
The decrease was mainly from lower volume impact of $34 million and volume price impact of $15 million with SG&A being flat to prior year.
Adjusted EBITDA margin of 14, 2% in 2023 versus 21, 9% in 2022 was a combination of strong record prior year performance.
Typical seasonality and impact of lower mix as pre engineered metal buildings had lower volumes versus other products within shelters.
We are very proud of the transformational changes that enabled our shelter solutions segment to finish the full year 2023 results of $322 9 million in adjusted EBITDA.
And adjusted EBITDA margin of 19, 4%.
As we have discussed on these calls in the past we expect the shelter solutions segment adjusted EBITDA margins to normalize in the mid teens on a full year basis.
Turning to slide nine.
The aperture solutions segment fourth quarter net sales of $587 million were 13% lower than prior year.
Primarily driven by the lower volume of 15, 9%.
This was partially offset by favorable price over inflation of two 5%.
We continue to experience inflation in labor and key commodities in our price discipline allowed us to deliver favorable favorable price over inflation. Despite these inflationary pressures.
Adjusted EBITDA of $76 million was slightly higher than prior year, driven by net price over inflation of $9 million and net manufacturing productivity of $25 million.
This was partially offset by lower volume impact to $30 million.
The aperture solutions segment also benefited from our focus on operational excellence.
Through our cornerstone production system, we delivered process improvements enhanced automation through strategic Capex and completed overall continuous improvement initiatives that delivered significant cost savings.
In our efforts to advance the aperture solutions segment, we strategically augmented our manufacturing processes with the integration of automated glass lines. This.
This significant enhancement in our automation infrastructure, not only elevates our product output, but also drives down labor expenses further furthering our competitive advantage.
As a result, we are better positioned than ever to serve as the partner of choice in the marketplace, a testament to our commitment to operational excellence and customer satisfaction.
This strategic this.
This strategic move underscores our confidence in the sustained growth and profitability of the aperture solutions segment.
Yeah.
Turning to slide 10.
Our surface our surface solutions segment demonstrated remarkable resilience in this challenging year.
Showcasing the potential for growth and opportunity within this segment.
With fourth quarter net sales of $303 million. This segment was slightly down approximately 1% versus the prior year, primarily driven by unfavorable price of about 2% and lower organic volumes of one 4%, which was partially offset by two 7% increase in.
Our acquisition of Mac in Canada.
Adjusted EBITDA of $58 million in surfaces was up $33 million versus the prior year, primarily due to the favorable price over inflation of $28 million and $13 million of manufacturing productivity.
Again, the result of our focus on operational excellence and strategic Capex investments.
This was partially offset by lower volume impact of $4 million. The U S siding business EBITDA margins with within surface solutions have also significantly improved since March 2023, as higher priced inventory worked its way off the balance sheet in Q1 of 2022.
Our commitment to the expansion of our surface solutions business is underscored by our strategic investment in high speed Extruders.
At selected manufacturing sites.
This initiative to enhance our automotive capabilities is leading to a significant increase in product output, while simultaneously reducing labor costs.
Such advancements bolster our position as a preferred partner for our customers, reflecting our dedication to improve efficiency and delivering value.
Moving to slide 11.
This slide captures the essence of our untapped potential and the substantial progress we still aim at achieving to.
To recap in 2023, we realized $86 million in cost savings. Thanks to the cornerstone production system highlight in the left hand side, you can see our pipeline of yet to be realized synergies and cost savings totaling $96 5 million as of year end 2023.
Our unwavering commitment to operational excellence has equipped us with a robust pipeline of opportunities to optimize labor hours reduced scrap lower freight cost and enhanced procurement processes.
Leveraging this momentum we are actively exploring additional savings opportunities within our manufacturing operations aiming to further our cost savings achievements.
Turning to slides 12 and 13.
In the fourth quarter, our unleveraged free cash flow reached 220 million experiencing a decrease of $11 million compared to the prior year, primarily due to the reduction in adjusted EBITDA and higher Capex spend due to one time strategic investments.
We remain committed to investing in initiatives focused on growth excellence and cost reduction.
Which we're confident will yield the highest returns for our stakeholders.
While ensuring adequate liquidity with $1 4 billion of availability as of December 31, 2023.
In January of 2024, we paid a dividend on our common stock in the aggregate of $231 6 million, which was used to redeem all 195 million shares preferred units of parent held by <unk> Holdings.
This dividend payment was completed on January 24, 2024.
Our dedication to a balanced capital allocation strategy remains unwavering, ensuring continued investment in operational sales and growth excellence or.
Our focus is on the diligent execution of our cost reduction and automation initiatives alongside driving revenue growth.
We are equally committed to maintaining a disciplined approach to strategic acquisition opportunities, while prioritizing debt repayment.
This strategy underscores our commitment to sustain to sustaining and enhancing value for our stakeholders.
And now I'd like to turn the call back to rose for some concluding comments.
Thanks, Jeff turning to slide 14.
On our journey to be a premier building accretions provider, we have clearly identified our strategic choices.
We have established leadership positions in our chosen segments shelter aperture and surface solutions.
A large operational scale breadth and depth of channel partnerships and a strong product and brand portfolio enables us to create superior and differentiated value with our customers.
We are continuing to advance cornerstone building brands business system, resulting in our ability to serve our customers more cost effectively with stronger service and quality levels, while creating a safe and inclusive work environment for our employees.
We're investing in our future by prioritizing organic growth, while cultivating a strong pipeline of inorganic opportunities. For example, we recently announced the purchase of eastern architectural systems Eas.
At quarter in Fort Myers, Florida.
Specializes in impact resistant windows and doors, primarily serving the Florida repair and remodel market. This strategic.
<unk> acquisition expands our impact resistant product offering.
Creases, our presence in the Florida region, and strengthens our ability to serve our customers with new product footprint and knowledgeable experts.
The acquisition is expected to be accretive through margin expansion and market share growth.
We're also expanding our portfolio of new technologies to accelerate value creation through manufacturing process automation business process, Digitization and sales excellence tools and systems, all which will increasingly adopt AI enabled capabilities.
We have improved our quality service and cost capabilities and strengthened partnerships with our customers we.
We are making visible progress in our journey to premier we're not yet there, but we have the right strategy and team in place and we're making the right investments where.
We're laser focused on building operational excellence sales excellence and growth excellence capabilities to serve our customers, which will in turn get us to our goal of premier.
Operator, we would now like to open the call for questions.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad. Our first question will come from the line of Andrew Casella with Deutsche Bank. Please go ahead.
Hey, guys. Thanks for taking the question so I wanted to ask.
Here we are.
In March and I know folks are trying to figure out what your outlook is for for the year I know in the past I think we're indicating that you thought the <unk>.
And environment, we'd be down kind of low single digits, if I remember correctly, but just curious if you could.
Date us on your thoughts are now around new <unk> in R&R and commercial and then any comments you can make on the first quarter as far as what you're seeing trend wise, if it's similar to kind of what youre seeing in the fourth quarter.
And then any kind of bookends around sales or EBITDA, if you could possibly provide that thanks.
Yeah, our outlook for 2024 relative to when we were together lets say last year, it's a little bit more positive than in the fourth quarter last year with that said our start to the year is.
Slower than we would have anticipated I think as much as I don't like the weather arguments January did see weather patterns.
That had been Darryl bye bye.
Slower in order intake rates.
We anticipate for the year is that certainly housing driven by single family housing starts and new construction should see stronger activity and we are preparing for that as the warmer weather and the season comes into play here in the coming weeks and certainly as we go into April we anticipate that.
R&R will continue to be.
Volatile certainly not as strong as we would like in the first half and perhaps hopefully getting a little bit stronger in the second half.
And as we talked about in the light non residential like commercial it lags in terms of generally lags by about 12 months and we anticipate that that will be.
Sorry for the much of the duration of the year. So all of that put together, we think the year is going to be something.
In the flat to low single digit type of a year that we're looking at.
Got it that's helpful. And then just as far as the cash flow walk for 24, if you could kind of give us some.
Guidance around Capex cash taxes, and working capital and then certainly I know you're continuing to kind of get these costs out of the system, the 92 million or any kind of onetime restructuring charges related to that thank you.
Yeah happy to do so so as we typically do we like to give a little bit of guidance when it comes to our capex and cash taxes.
Capex too.
$200 million, we spend inside of 2023, if you go back to 2022 is about $166 million in at around $115 million for 2021. So we have kind of ramped up our capex over the last three years very intentional for us as we drove automation throughout the organization as we continue.
To drive.
Better work environment for our employees inside the manufacturing operations and just create an environment that could retain those employees and attract those those employees. So a lot of investment that's been put in place as we look at 2024, we anticipate it's going to probably be closer to 2022 levels. So kind of that $1 50 160 level.
And monitor it depending on how things progressed throughout the year.
We continue to find big opportunities.
To automate and to take cost out within the businesses and so we don't want to restrict those we want to continue to make those investments we've seen the benefit of those as you can see our margins have expanded even with significant lower volumes in 2023, we had margin expansion so prepares us for a rebound.
To come which is really our intent right now so thats the capex side.
When we look at interest expense.
You can calculate that but it's going to be right around $300 million, depending on where interest rates move right now it feels like it's favorable.
A favorable type of environment, where should get better for us and.
So that should that should hopefully be the outside edge of the interest expense that's out there and then with regard to cash taxes.
Estimate probably around $100 million to $140 million worth of cash tax for 2024.
And Theres, just a lot of things that kind of move in there with the Nols.
Especially with some of the acquisitions that we've made et cetera. It gives us the ability to have an effective rates are slower from an accounting perspective that 28% rates, probably not a bad rate to use.
But from a cash tax perspective, I'd estimate probably about $100 million to $140 million of cash tax the difference being some of the new laws that are being put in place in particular around 163, J, which is the interest rate limitations. If those laws move through that's obviously has a positive impact for us and there.
Therefore, the range that we're kind of estimating out there could improve.
And then sorry do you have any views on working capital of one time cost outs if possible.
Yes, so working capital in particular, we're expecting a little bit more growth in the back half of the year versus.
The first half of the year, and therefore, usually puts a little bit more.
Use of working capital as the revenues grow.
Our typical seasonality around working capital as a heavy use inside the first half and then it does have positive sources of cash coming in the back half. We don't think that changes, but we do think that because of the growth trajectory that we do think will happen inside the back half as rose mentioned recovery inside the residential market.
<unk> and likely some potential recovery inside the commercial markets as they lag the residential side and interest rates coming back into a more.
Normal level, we think that some of those investments might start backup so based on those assumptions there might be a slight working capital use.
Inside of the year with a little bit more heavy inside the first two quarters, and then third and fourth quarter being kind of flat to up as we come to an overall slight use of cash.
When it comes to one time expenses cash items, it really depends right. It depends on acquisitions in particular and any divestitures that we make we aren't envisioning right now any divestitures and acquisitions, we're always going to be looking at acquisitions and so depending on the size and scale of those.
Theres typically fees and different types of things, we need to do to get those completed so those are to be seen.
Got it that's really helpful. And then last question for me.
Kind of a two parter on capital allocation, so first sorry.
Sorry, if I missed it did you disclose how much you paid for Eas and then the second question is.
Certainly we saw the dividend in January I think if I remember correctly, the holdco notes become.
Become callable in July.
Trying to think about how you're prioritizing your use of cash flow and if that holdco notice is on the priority list or if it's kind.
Kind of go back to paying down debt or any kind of color you could share on that would be great.
Yeah happy to happy to answer that we don't typically disclose the purchase price, but youre going to get into any way with our cash flows here. So we spent about $150 million on eas on the purchase price.
With regard to the Holdco notes they are callable.
July of 2024.
Right now we don't have any intentions of calling those I can't speak on behalf of <unk>, who really controls that but they haven't noticed notified us that that's their intentions.
We like the favorable rates that are that exist with those holdco notes and so unless they call. Those we don't intend to pay those at this point.
Okay, great. Thanks, so much for taking the questions I'll get back in the queue.
Your next question comes from the line of James Taylor with Bank of America. Please go ahead.
Hey, Jeff and Rose how are you.
Doing great James.
Maybe just one follow up in terms of the outlook for 'twenty four.
Can you just give us some color on sort of what the pricing environment is like I guess by segment I recognize.
And shelter, it's somewhat dynamic around steel prices, but what are you seeing in terms of pricing for.
For Windows and siding.
Yeah, as you might imagine because the the.
The market.
Profile is still volatile there are pockets of pricing pressures.
<unk>.
The.
Focus for us is to strengthen their customer engagement to make sure that our pricing fairly reflects not just the product, but the services that we provide so we have been able to implement surgical pricing increases in areas, where we felt that we were not positioned.
Appropriately and in general we are able to hold our pricing gains that we've realized.
Yes.
And through the past.
Quarters are we starting to continue to have inflationary pressures in certain areas like labor is still a high priority area for us to make sure that we continue to have high quality labor. So combination of all those things if I were to sum it all up on the residential side, we're largely holding price, but managing dairy.
Tightly the pricing pressures that is out there in the marketplace in a software environment and then on the shelter side as we all I'll review the results. It is very highly tied to the steel price fluctuation and so they approach there is to make sure that we are dynamically managing.
Pricing introductions in the marketplace that we either underway upward to weigh down that way.
Manage the spread between the steel price our acquisition price and the market price that we realize that we have been able to do that quite well as demonstrated over the last few years.
Very good and maybe just one more sort of a little bit longer term sort of outlook.
Outlook.
I think the outlook for 'twenty four is still a little bit up in the air and may be different by segment, but.
When you think about all the actions you've taken from automation and other cost outs like.
How should we think about what the sort of.
Margin potential is when we get back to a more somewhat more normal demand environment, whether that's the back half of 'twenty four 'twenty five.
How should we think about what the sort of run rate margin potential is for the business.
Yeah, we are obviously a strong believer in the long term health.
Value creation of our business.
Macro condition wise I mean, I think we all realize that pent up underlying demand based on demographics and growth of household different people to your calculations differently, but in terms of underserved housing needs.
From $2 million to $4 million last 4 million house.
Housing starts is how different people characterize it so under that favorable market condition.
With all the ongoing improvement work that we're doing I think in our surfaces segment historically demonstrated.
The margin levels of roundly, 20%, plus or minus and we're going to continue to scale that through the portfolio work that we mentioned little bit earlier.
In the shelters solutions segment, we talked about the volatility because of the steel price and on a long term basis.
It is a lot of neat mid teens margin business is our view with the ongoing improvements that we will make the biggest opportunity for improvement we have faith in our <unk> business, and that's where a lot of the automation and lot of the efficiencies are being realized and that will continue so a business that's been historically.
12% ish type of business, we think it has the potential to get to be a.
Higher teens op margin business and that's what we're working towards over a number of years. So if you put all that together, we think cornerstone building brands as a portfolio is about a high teens business and that with the scale of the business that we have in the diversified offerings that we have it puts us right on par with our.
Peer set who are operating at our scale.
At a high teens margin profile.
And the only thing I'll add to that too is 2023 really set us up nicely to capture the benefits as the volume returns.
And EBITDA stayed fairly flat right. So it gave us we were able to offset a lot of that with.
With manufacturing efficiencies, which we haven't captured all of those yet as rose just mentioned primarily inside of apertures.
And some of the pricing actions that were put in place in 2023 was an important year for us to demonstrate that prices in particular within windows can stay higher even though the volumes.
Came down and we saw that right. So volumes dropped our pricing remained flat to up and enabled us to offset the inflation. So it positions the company really nicely as we go into hopefully what is growth mode.
And to take advantage of that volume return at the fall through leverage rates that typically this company sees between that 20% and 25%. So that gives US then if that $1 billion were to come back and we pick up those volume Leverages. It really does it does put those margins as rose said inside that debt.
Debt.
Mid to high teens for the company overall with apertures, leading that way and surfaces in shelters kind of maintaining where they are at a little bit of slight decline in shelters as we discussed.
Okay very good thanks, guys.
Yes.
Your next question comes from the line of Joshua Gonzales with Apollo. Please go ahead.
Hi, just a couple of questions.
Looking from <unk> to <unk>.
I guess kind of the change in margin profile is that mostly just driven by operating leverage and seasonality.
It's two things let me start and then rose has anything she can follow up on that so Q3 is our typically one of our best quarters right and then Q4 starts to seasonality followed by Q1, right. So Q4 and Q1 being the softest as most most manufacturing building products companies are whats.
Different this year is really the year over year performance in shelters and if we think about shelters as as a company or as a segment for us.
Last year Q3, and Q4 were record quarters for that segment in particular, so very strong performance coming out of shelters this year.
They didn't return to normal levels, there certainly where we anticipate those to be moving back down to that mid teens as we discussed in the fourth quarter, but a lot of that comes down to some of the mix also within shelters so shelters exists.
Pre engineered metal buildings, it exists of components and metal metal residential roofing or the three main divisions within that and pre engineered metal buildings saw the softer.
Decline inside the fourth quarter on a year over year basis, which is where all that value add engineering work goes into play and it has a higher a higher margin profile. So it was a little bit of the mix combined with seasonality and just have strong performance inside of shelters that drove that that difference between Q3 and Q4.
Okay. Okay, and then last question I don't I don't think I have the volume numbers for four Q of last year, but you guys did say flat to low single digits.
Going forward on a volume basis.
Imagine year over year changes to be relatively flat for the three divisions are.
You're talking about EBITDA for the fourth.
No just volume volume trends for all the three different divisions. It looks like we might be lapping the largest declines in I'm just want to confirm that.
The tough comp or the easy comps when they start kind of flowing through.
Yeah. So.
As we discuss a little bit what we anticipate is that.
We will see some firming up and new construction in our residential business is as we progress through the year uncertainty.
Hi, seasonality months, but as we've already stated.
The year has started out softer than we anticipated and so that lapping characteristics that you are mentioning I think we will see it hopefully more into as we go into the second quarter versus the first quarter.
And again with a view, but pharma or new construction and <unk>.
Farmer R&R coming into existence as they go into the second half.
And all that to say, it's about maybe a flat to low single digits. So we're not anticipating a significant year on year growth volume growth on the shelter side, certainly because of its own characteristics and the lagging nature to residential we anticipate that Jeff.
Just about all of 2024, perhaps with little bit of exception on day end of the year to be a soft year for us.
While we're managing to margin profile relative to steel price, which we have no way of predicting how it will behave.
And Josh just to just as a reminder of some of those numbers that are out there. When you look at our surfaces segment, new construction makes up about 50% and the other 50% obviously goes into R&R. When you look at apertures, it's about 60% new construction 50, excuse me, 40% R&R.
Oh, Okay. Okay, great. Thank you.
Our next question will come from the line of Brian <unk> with Baird. Please go ahead.
Good morning, Rose and Jeff a couple of questions for me first off can you just remind us what the current balances on that Holdco notes.
$4 50, roughly I think is the current balance right around that Hasnt hasnt accrued by much so it's around $4 50.
Okay and the rate on that is like $2, 99%, if I remember correctly.
Greg.
Auto is.
Investments with the company.
You broke out in Alaska, a lot about the automation.
Just what inning do you think you're at in terms of the automation investments Youre, making.
Yes, I mean, our automation really has.
Several priorities one is we're looking for automation opportunities, where we can create more labor efficiency with the macro environment of late we're always been challenging in AR and also because of the seasonality of our business. The more we can automate.
What is it manually intensive process for example, welding up by window frames.
How we process our glass.
We extrude, our products driven by automation and excavators those are all kind of priorities geared towards.
Efficiencies in our labor.
Second is.
Automation and technology, that's geared towards improving the quality of our products and being able to do that on a consistent basis. So when we change our welding technology in our metals business too.
Laser welding for example that gives us not only efficiencies, but the quality of our wells that are much more consistent so we see automation.
The technologies that we're investing in at the rate that we've talked about it roughly 2.5% to 3% type of range in our capex that that that will be ongoing as we go towards that high teens.
Company margin profile and that will be a large needle moving factors in enabling us to realize that.
P&L profile that we're aiming at.
So I'm hearing correctly, we still have a while to go before automation full has its full impact on the company's business.
For sure because we have.
Various types of.
Our operations in technologies, but largely we have 90 different manufacturing locations of different sizes.
And different capabilities now we will continue to work on harmonizing that as we invest in our one common ERP systems for like businesses as we improve our network optimization, certainly we will optimize the right number of locations for our manufacturing. So that's that's one.
But as we do that we will always be a large footprints multi location company because that's the best way to service, our customers and be close to them and so as we look at our portfolio of operational footprint, we see it as a multiyear journey in terms of thinking to introduce automation.
And also as they continue to scale our business.
We don't know predictably.
How many companies and what acquisition velocity, we will have that for sure. We are always working on a pipeline of bolt on strategically sound acquisition opportunity and one of the opportunities that we look for is as we get stronger in our automation capability can we create value with that acquisition target and if that is.
The case will invest in those acquisition targets to bring them to the level of automation capabilities that we desire and therefore realize the value creation that we Ain't boy.
Got it just two quick ones.
Steel prices cold rolled steel has been really volatile this quarter up sharply now down the last couple of weeks.
Well you are managing that as we think about shelter solutions in the first quarter and then I'll just add this one as well just what are you seeing any other particular notable inflationary pressures in raw materials with left.
Two quarters.
Yes, so in general for shelter solutions as I mentioned with a fantastic job on managing price.
Anytime there is volatility when we see and or anticipate price increase in steel. What we do is we have a very efficient process for introducing price increases that are appropriate and coupled to the steel price dynamics out into the marketplace that we're able to take advantage of that spread improvement as the price increase.
This deal is being realized in the marketplace and on the other side when the steel prices.
Leasing.
Parachute or pricing action. So there we will.
<unk> said all.
Eventually ultimately we have to reduce to correlate to the steel price, but we do it as slowly as possible. So we parachute it down and so regardless of up and down and that's how we've been managing our business and that was indeed the case in the first quarter.
And so.
So while we do that we will realize the margins, but again I think the biggest challenge right now that we've seen in the first quarter, it's really the the volume dynamics and the market being softer than we anticipated.
And then you're seeing any just other inflationary pressures in raw materials last quarter.
Nothing major we see little bit of inflation in glass.
Low very low single digits, and then we see inflation in labor those are the two primary buckets of inflation that we're dealing with and a little bit of MRO and things like that but that's all in line with kind of general inflationary factors, none of our large big purchase materials, PVC or steel or so forth.
We're not seeing inflationary pressures at the moment.
I appreciate all the thoughts thank you.
Again that is star one to ask a question and our next question comes from the line of Jamie Burns with capital for U S. LLC. Please go ahead.
Hi, Thanks for taking the question just on volume sorry, if I missed this earlier, but do you.
Early buy or pre buy programs of the aperture or the services businesses.
Oh.
<unk>.
You were talking about our distributors pre buys.
Alright, great.
Historically.
My history in building materials goes way back answering if you go back couple of decades, there were more pre buy actions, but I think overall the space in the industry has realized.
Kind of.
Artificial way of managing the value chain is probably not the most.
So all that to say that the level of pre buy is really not very prevalent or visible if anything because if our supply chain challenges what our distributors have done is during the supply chain Crunch had bought a lot of products and then when the demand started falling off they've been worse.
Looking to destock and get their inventories to to.
The reasonable level that it should be and actually because of the softer market they've been very slow to buy back and build their inventory. So that's the situation that we've been dealing with so that's a kind of a long way to say that really pre buys is really not that wanted to techniques that are broadly being used.
Alright, great and do you have a sense for distributor inventory levels at the moment.
We got to a point, where there is a.
An element of restocking that needs to take place over the next couple of months.
Yes, I mean, I think our view is that the destocking of our distributors is largely done.
But they are continuing to operate with low levels of inventory.
The challenge is actually back to the manufacturers like us to be ready to supply them as the season comes in and we actually have these.
Explicit discussions with our large in key distributor partners.
The fact that they are carrying low inventory and they have they don't want to build up inventory, but the season is coming so please get ready. So we are in certain cases building some inventory to be better prepared and to make sure that our service times are.
Our at our targeted levels and also making sure that our labor force is ready to be in the season at higher demand levels.
Alright, great.
And then and then on the on the Windows side, you mentioned sort of both.
Yes.
I would say a mixed overall flat pricing environment are there any specific areas, whether its price points or regions et cetera.
Being more significant pressure on price than others.
The pricing pressure is always a combination of kind of the concentration that competitive landscape and what the local demand is so I would say for example in the southeast and in Florida region to demand has always been robust theres always kind of weather to help us in general stills of.
Housing.
In those regions and so there we have been able to maintain price and aligned to the strong demand I think if you go to places like.
Northeast, where there's more competition higher concentration and underlying market activity is not has been has not has been.
<unk> is where we see pockets of pricing.
Pricing pressures.
Certainly.
The nature of this space also is when we when there is new construction and large projects for.
Community development and track home development that is very much a project business. So there is significant pricing discussions that take place, but all that to say largely overall, we have been able to maintain price that we have gained through the last few years.
Standpoint, anything anything to speak of as far as yes.
So the new construction volumes are.
Much healthier good moments it that way, but that's kind of R&R.
That changed your mix.
And as you know call it favorable unfavorable from a margin standpoint.
Yes so.
Housing starts are certainty.
Farming up.
But as you might imagine our product or some of the products that are kind of does that later stages of public construction. So as this starts are increasing it will take us some months to see it and realize that in terms of our.
Shipments to our customers and seeing the product installed.
In homes.
And so.
That lag time is one of the areas and in terms of the mix at Jeff alluded to the mix that we have in new construction and R&R, but in general.
In the current market condition, we will take advantage of servicing the markets that are available whether it is new construction and R&R and for US we anticipate hopefully the second half of Arnaud will come back a little bit better than it is now and so the overall mix profile that we have it will be more or less maintained for the criteria.
Okay and then.
From a just a preference standpoint, or we're just more attractive.
New construction market.
Or R&R market more accrue.
Accretive from a margin standpoint.
In general the R&R market is a more profitable market for us that's where the customers are.
I have more customized need.
Usually driven by the homeowners theyre looking to upgrade their homes, so those spread to be higher quality and higher margin products that we service.
Right. Okay, alright, thank you very much.
And with that I'll turn I'll turn the call back to <unk> for any closing remarks.
Thank you everyone for attending our fourth quarter call and thank you for your continued interest have a great day.
That will conclude today's call. Thank you all for joining you may now disconnect.
Please wait the conference will begin shortly.
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